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Telecom hits back at proposals for rural phones

Monday November 2, 02:00 PM

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Telecom has hit out at changes proposed by the Government at the way phone services to uneconomic customers are funded under the telecommunications service obligations (TSO).

The company also calculated the costs of the Government's rural broadband initiative (RBI) at up to twice the $300 million proposed in a proposal from the Ministry of Economic Development.

Proposals for the TSO and RBI were published last month as part of the Government's rural telecommunications strategy.

The TSO, the successor to the Kiwi Share, ensures a residential local telephone service is available to rural communities at a price and quality comparable to that available in urban areas.

The cost of subsidising the cost of supplying services under the TSO is spilt between providers on a market share basis.

In its submission on the TSO and RBI proposals, Telecom said that under the government proposal Telecom would continue to provide the TSO services but the industry would stop contributing towards the cost to Telecom of providing those services.

"The TSO proposal appears to be based on a number of flawed assumptions which have led to the erroneous conclusion that there is not a net cost to Telecom in providing TSO services," Telecom said.

"Detailed analysis carried out by the Commerce Commission shows clearly that there is a real and substantial cost to Telecom."

Since 2001, the commission had found the cost to Telecom each year of the TSO to be between $50m and $75m.

The revenue Telecom received from providing TSO services had decreased over time, as competition and technology substitution meant the number of customers buying local services from Telecom had fallen.

At the same time, the cost of making the TSO services available had risen.

"From a policy perspective, it is difficult to see how withdrawing funding for voice services will meet the Government's objective of improving the quality of telecommunication services in rural New Zealand," Telecom said.

The TSO proposal would make the rural areas the Commerce Commission had already identified as uneconomic even more uneconomic.

"The TSO proposal may be superficially sustainable in the short term as many of the costs of the TSO are sunk," Telecom said.

"However, it is likely to create significant and far-reaching problems as assets fall to be replaced in these areas in the next 10 years, but there is no incentive to make that investment."

Telecom suggested an alternative to the government proposal could be to link the TSO with the rural broadband initiative.

Where an RBI provider was chosen for a particular area, that provider would also become the TSO provider in that area, with an obligation to serve all customers in that area to the TSO standard.

Network economics would dictate that any rural broadband network deployed with RBI funding would also be designed to be capable of supporting voice services, Telecom said.

Where a party other than Telecom was chosen to be the TSO and RBI partner for an area, Telecom would have the option of retiring its existing voice infrastructure assets as they came to the end of life in that area.

As for the cost of the RBI, Telecom said its initial assessment suggested at least $500m to $600m would be needed to meet the Government's targets, assuming Telecom used its existing infrastructure.

Without the ability to leverage off existing infrastructure and planned investments, the figure was likely to be significantly higher.

The Government's proposal is for up to $300m to be spent -- most of it from a levy on the telecommunications industry -- supplemented by school, industry and rural community contributions.

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