Panel session debates TSO profits and losses

A healthy debate about the costs of Telecom's local line obligations enlivened the panel discussion that wound up the first day of the telecommunications summit.

A healthy debate about the costs of Telecom's local line obligations enlivened the panel discussion that wound up the first day of the telecommunications summit this week.

TelstraClear’s manager of industry and regulatory affairs, Grant Forsyth, produced a graph extracted from Telecom’s own evaluation of telecommunications service obligation costs in September 2000, in which Telecom conducted an analogous exercise to John Small’s. Small, director of the Centre for Research in Network Economics at the University of Auckland, produced a report for the Telecommunications Inquiry in 2000, which said there was a direct benefit from regulating the telecommunications industry. Small spoke at the Itanz-sponsored summit in Wellington this week.

Telecom’s graph is more complex than Small’s straight-line sketch, but seems to substantiate the nub of his argument, that the profit Telecom makes from profitable users far outweighs the costs imposed by uneconomical users.

Telecom says that as part of current TSO calculations it is working on an updated version of that graph, which may show an increase in uneconomic users from, for example, a growth of long-term dial-up internet use.

Small says he does not expect Telecom to run as a non-profit organisation. “It has many, many other businesses on which it makes substantial profits,” he says. His calculations pertain only to the basic phone and data service.

Forsyth notes that Telecom quantified the cost of the original kiwi share obligation at $178 million a year, not taking account of the profits at the other end. This figure he describes as “entirely implausible”. If the cost were rated at zero, or adjusted to zero by raising line rental the scheme would not be efficient or fair, he says, since there will be some rich people in the rural areas who make high and sophisticated use of telecommunications, and some poor and basic urban users. The latter under this scheme would be subsidising the former, simply because their geographical areas were profitable.

Forsyth took up Small’s point on the distortionary nature of flat-rate internet access, saying this had been a major driver behind the growth of internet use in New Zealand, and should not be too strongly discouraged.

The kiwi share scheme has been “a dismal failure” from the rural point of view, says John Pask, general policy manager of Federated Farmers. “The infrastructure … is inadequate to sustain voice connection in areas often close to [towns], let alone isolated areas ... services to the rural community have effectively been frozen at 1990 levels.”

There is a strong argument for contestability in TSO provision, Pask says, “so that competing players who can provide services of better quality or at a lower price than Telecom are encouraged to do so". This they would do with the latest technology, rather than being limited to Telecom’s historic infrastructure.

The process of evaluating the TSO should be accurate and transparent, Pask adds.

In reply to Forsyth’s point about rich rural users, Pask suggests that rural broadband developments will inevitably be funded by “the community”, which means essentially by local authorities from rates. Farmers with large landholdings (presumably the more successful ones) will pay a larger proportion of these rates, he notes.

A suggestion was made from the floor for “demand-side” subsidies, taxing well-off telecomms users and providing a subsidy, analogous to an accommodation grant, to those poorly served, so they could pay the higher price of rural services run at a profit. Panel members regarded the idea favourably.

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