'Pure' ISPs should incur TSO costs says Vodafone

ISPs could end up paying a proportion of the telecommunications service obligation costs incurred by Telecom, if a suggestion from Vodafone is taken up by the regulatory authorities.

ISPs could end up paying a proportion of the telecommunications service obligation costs incurred by Telecom, if a suggestion from Vodafone is taken up by the regulatory authorities.

A thread of argument at hearings on the Commerce Commission's draft determination last week explored whether "pure" ISPs, those who regard themselves as dealing with data rather than voice, might still be liable for a TSO payment under the Telecommunications Act's definition of liable parties. (TSO calculations require other telecomms companies to pay Telecom for the estimated 51,000 commercially non-viable customers it has on its books.)

Vodafone suggested that PCs which typically terminate ISP connections could be argued to be telephone instruments, since they are capable of transmitting and receiving in voice frequencies, and that the internet or the user’s connection to the internet could be judged to be interconnected with the public-switched telephone network. These factors identify liable parties under the act.

In the draft determination, only Ihug among ISPs is reckoned liable, as it openly provides telephone service. Users of other ISPs, however, operate voice-over-IP links.

Inclusion of ISPs could see Telecom having its share of the TSO expense reduced, and a charge being loaded on to those who, it could be argued, enable Telecom’s lines to be used for voice more efficiently than Telecom does.

Vodafone also argued for inclusion of international telephone carriers with a business in New Zealand. It said they qualify under the definition, but have been left out of Telecommunications Commissioner Douglas Webb’s draft assessment, released in June.

TSO cost displays the same unpredictability and sensitivity to small factors as the butterfly-affects-weather illustration from chaos theory, according to some of the non-Telecom representatives at the talks. Presenters from both TelstraClear and the Business Roundtable suggest the calculations are so uncertain that the commissioner has been set an impossible task.

There was a good deal to say on the crucial effect of the “weighted average cost of capital” – the cost to Telecom of borrowing money to keep service alive to “uneconomic” subscribers without charging them a disproportionate fee.

WACC is at bottom unquantifiable since it depends on the course of markets, which are fundamentally dependent on the subjective actions of investors, says the Roundtable.

According to the commissioner, WACC is around 6%, while Telecom prefers to work with a figure of 11.2% plus a 2% margin to compensate for “additional risks and constraints” arising from the TSO regulations.

The commissioner, on the second round of assessment, applied 8.4%. This difference accounts for a large proportion of the gap between Telecom’s revised assessment of $408 million a year and the commission’s $38.84 million for the period from December 2001 to June 2002 ($73.45 million annualised).

TelstraClear brought another influential “butterfly” into the calculations, by questioning previous estimates of the cost of digging trenches to accommodate cables.

The gap between its expert’s estimates and Telecom’s, which relied on input from its own contractors, could make as much as $20 million difference to the TSO cost, TelstraClear's representatives suggested.

Commissioner Webb, who said he had hoped to see an end of TSO submissions by August 16, was compelled to extend them to examine further material put forward by TelstraClear on this and other points.

He declined to give Computerworld an estimate of the time scale for his final determination.

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