TSO changes overdue
October 1st, 2009 at 9:00 am by David FarrarI doubt there has ever been a better (or worse) case of unforeseen consequences that the former Telecom Kiwishare, now known as the Telecommunications Service Obligation.
It had the best of motivations – to protect rural New Zealanders whose phone lines could be deemed uneconomic by requiring Telecom to still provide them with flat rate local calling at at an inflation adjusted price cap.
The first failure has been the price cap. The cost of telecommunications has dropped massively over two decades. But guess what happens if you have a law that says Telecom can increase line rentals by no more than the rate of inflation. Well not only do they not drop prices, almost every year without fail they increase line rentals by the rate of inflation. A price cap becomes a price target.
The second failure was its effect on competition. It not only kept competitors from offering services to rural NZ, it made them fund Telecom for its so called “uneconomic” customers. Tens of millions of dollars went from struggling competitors into Telecom.
So after years of discussion, we’ve finally had decisions to make changes, by Steven Joyce. They are:
Currently Telecom receives approximately $70 million per annum largely to compensate it for supplying local service to rural customers. This money is sourced from the industry via the TSO levy which is paid by market participants (including Telecom which contributes approximately 70%) on a market share basis.
Mr Joyce says he is concerned by the lack of transparency around where this money is spent and whether rural customers are benefiting from it.
“The existing TSO levy has been in place since 2001 and has been a source of considerable controversy within the industry. A recent review of the TSO had identified that the current methodology for assessing how much the TSO commitment was costing Telecom a year was flawed.
The current TSO levy methodology counts the costs Telecom incurs but does not include the full range of benefits Telecom derives from the TSO.
The government is proposing to change the methodology for how much Telecom is compensated for uneconomic customers. By counting both the costs and the benefits of the TSO it is likely that the TSO levy will reduce to zero for the foreseeable future.”
The non inclusion of benefits was a cause of considerable angst for the competitors who paid $21 million a year to Telecom. This decision has near universal support.
However the telcos are not getting to keep all the money they used to pay:
“We’re proposing to fund the $300 million rural initiative through a combination of direct government funding and revenue from a more transparent and effective industry levy than the current TSO levy.”
The government will provide a direct contribution of $48 million and further interim funding of up to $52 million. The remaining funding will be sourced by replacing the existing TSO industry funding with a more transparent contestable industry-wide mechanism that focuses on developing rural telecommunications.
The new telecommunications development levy to replace the TSO levy would look to recover around $50 million per annum over the next six years – about $20 million less than is currently the case.
“When the government tenders for the provision of rural broadband it will be an open and competitive process, with full transparency on where the money is spent,” says Mr Joyce.
So around 70% of the old levy will still be collected, and used to fund rural broadband. This part is less than popular with the telcos, but very popular with Federated Farmers.
A more purist model would be to have the Government fund rural broadband development directly (if one accepts there is an economic gain in doing so), but the model announces is quite cunning because competing telcos are still pretty happy to be funding $15 million a year to a fund which is contestable and will actually increase broadband infrastructure, than $21 million a year to Telecom merely to maintain the status quo.
Telecom of course does not do so well as it used to collect $21 million for doing basically nothing, and paid $49 million to itself for the same thing. It will now pay around $35 million to the Government for the contestable fund. Some consolation to Telecom, is that they are in the best position to win most of the tenders for using the funds.
The Herald reports:
Vodafone chief executive Russell Stanners said it was time for reform of the TSO.
“The TSO regulation was introduced with the best intentions but has become a millstone around the neck of the industry.”
Telecom said it had been part of an industry-wide push to secure reform of TSO arrangements.
“This reform is long overdue and needs to be based on principles of contestability, transparency and technology neutrality,” Telecom chief executive Paul Reynolds said.
“It is equally important that any subsidies applied to fund services to uneconomic customers are borne equally by all consumers, and not just Telecom’s.”
Federated Farmers welcomed the plan but said it was approaching it cautiously until more details were known.
Pretty much everyone agreed on the need for reform, and most will say this is going in the right direction.
The Telecommunications Industry Group (TIG) said the plan amounted to a $252 million industry tax.
“The Government has just replaced one form of taxation with another, in an industry where prices are dropping, margins are tight and customer expectations are increasing,” said TIG chief executive Rob Spray.
They are right, except of course it is replacing what was an even higher $350 million industry tax. It is a move in the right direction with both a dropping of the amount levied, and a change in what it is used for.
Economist blog Progressive Turmoil, blogs favourably on the decision, and has a neat little graph too.
Tags: Steven Joyce, Telecom, TSO
October 1st, 2009 at 9:16 am
The Kiwishare was always a socialist sop to idiocy and should never have been included.
What I think would be best (in view of what century we are living in) would be to phase out unnecessary phone lines altogether, have the national broadband entirely wireless.
A wireless internet system along with use of cheap cellular telephones is what a ‘First World’ country would do and if the State stopped sticking its beak into the Telecommunications industry this is what would eventuate.
Instead the State wants a broadband network running off telephone lines (oh so last century) because the people making these decisions are ignorant about these matters and just assume that makes sense when it doesn’t.
‘Landlines’ quickly becoming about as relevant as typewriters and I fully expect about the year 2020, after billions of dollars in expenditure, the penny will drop and everyone realise what a cockup the whole thing was and they will have to start over (spending further billions of other people’s money)
http://www.nightcitytrader.blogspot.com
Vote:October 1st, 2009 at 9:19 am
Just get the state’s damn nose out of the whole thing. This whole idea that folk who live in the country are “entitled” to the same service at the same cost as someone living in the city is a nonsense.
Vote:October 1st, 2009 at 9:21 am
Why are city people expected to subsidise rural telephones OR broadband?
Buying property in rural areas is considerably cheaper than in cities, and the country people will almost certainly have a much bigger house and property. Those savings could be used to pay for their own telecommunications.
But if the subsidy continues… I’d like to see rural properties taxed so that city properties can be subsidised so that a house in central Auckland will be no more expensive than one in Dannevirke or Eketahuna.
Vote:October 1st, 2009 at 9:34 am
Indeed. And Telecom can ‘manufacture’ so-called uneconomic customers by transferring cost from profitable areas to unprofitable ones. This was an accounting slight-of-hand only. Eg Hawera district really never had 100+ lines maintenance staff and a raft of infrastructure engineers but basing their employment there allowed that district to become “uneconomic”.
Vote:October 1st, 2009 at 9:47 am
An additional problem with “kiwishare” is that it required that the entire country be offered free local calling.
Without any ability to charge based on usage, Telecom had to include all costs in the line rental fee (so, as DPF describes, they charged as much as they could for it).
So, in addition to the general fact the economic customers subsidize uneconomic ones from an infrastructure perspective we have also had light users subsidizing heavy ones. As a city dwelling, light user I was paying an inflated line rental to cover the costs associated with both rural line costs and usage by anyone who natters on the phone all day because ‘it’s free’.
Only in recent years has there been an escape route: ditching the landline and going ‘mobile only’. All the same, we need to allow Telecom to charge for both local and long-distance calls so that usage faces price signals and the line rental reflects only infrastructure cost.
Vote:October 1st, 2009 at 9:48 am
That’s the problem with the “business knows best and will save the world” model. Businesses will try to reduce competition where possible (thereby destroying the first axiom of free market theory, and will act cynically if necessary to maintain any advantage they have (or will try to price fix with the other few operators). Mind you, some say the state is the problem? But the state has to do something to change the existing situation, before Telecom had a monopoly. What to do… ? NZ Post seems to work as an idea, why can’t we have a phone company that operates in that way?
Vote:October 1st, 2009 at 9:56 am
I’m not sure you’re argument is valid Camryn. Once the infrastructure is installed, surely it doesn’t matter how long someone talks for…? As long as the automated system is robust enough, it shouldn’t matter whether I pick up my phone or not. I can’t imagine there’s a bandwidth cap that we’re likely to reach on local calls?
Of course, there’s maintenance but you either maintain the network or you don’t. We used to have free local calls, don’t see why it should suddenly become such an expensive proposition now — mind you, I’ve got no idea about how much we pay now on average to how much we used to pay in relative proportion of income. I feel like I spend too much on basic communication these days… (anyone got some stats?)
Vote:October 1st, 2009 at 10:21 am
Another fine example of limp-dick decision making. Everyone accepts that the thing is principally flawed, but they’re all happy to “move in the right direction”. If you know what the proper endpoint is, then implement it, full stop.
Vote:The state MUST get out of these things. There’s plenty of technology available to have every farmer and rural householder that wishes to be connected to broadband so connected (by self installed wires, co-operative wired projects, co-operative non-wired projects, satellite, whatever) . Taking away these semi supported half-solutions that disturb the market will increase offerings and decrease their price. The fact that Joyce is unwilling to take a principled decision shows that he is a statist, as is also clear from many of his other initiatives, from booze to cell phones. If we really want to move forward we should get rid of Joyce first.
October 1st, 2009 at 10:42 am
For such a person in favour of market solutions why are there double standards for Farmers. The reason internet to them is apparently in need of subsidy is because it is not profitable. The answer is simple, take away market restrictions and let the farmers choose, better internet which will cost more or crap internet.
Fail to see why we need to keep subserdising the farmers, we do that enough in regards to environmental polution and now the carbon thing.
Vote:October 1st, 2009 at 10:45 am
DPF wrote:
That’s wrong. The only thing that would drive down line rentals is technological competition (e.g. voice-over-IP via cable, mobile etc). The local loop is, in most cases, a permanent natural monopoly. If Telecom have set line rental increases in line with the Kiwishares, then it’s a safe bet that had there been no KiwiShare, prices would have increased faster. You can’t get around the monopoly of the local loop, hence why most countries (and belatedly NZ) have forced this off the encumbent Telco to prevent them stifling competition on the services which come across it.
Some people above have said the government should get the hell out and let business do it’s thing. Problem is Telecom was a monopoly. The best type of business, for a business. If it was allowed a free run in 1987 it would have done everything in its power to shut out competition. And it would have worked. E.g. Vodafone: Can we please route our calls to your network? Telecom: Piss off. Build your own landline system.
I’m not saying that KiwiShare is a good thing now, but it served a purpose at one time. I think one of the biggest failings is that it’s creators didn’t foresee the internet. ‘Free’ dial-up access probably did NZ more harm in the long run as it stunted the growth of broadband.
Someone above mentioned having a wireless system. Have you seen how Woosh is doing?
The government should have forced Telecom to unbundle 15 years ago. We got there in the end though.
Vote:October 1st, 2009 at 10:57 am
Bollocks you lot up there!
The government needs to be a part of the solution otherwise broadband service/quality comms would never get out to the 400,000-odd kiwis that live in Rural areas yet somehow contribute around 40% of NZ’s GDP.
Having worked for a certain very large Comm’s company in New Zealand for many years, I know just how unprofitable it was to that company to maintain or improve servicing to rural heartland areas and they would not have done so had they not been obligated.
The government is their to ensure that rural NZ does get a fair deal – not so the farmers wives can browse online shopping (thats hugely sexist, sorry), but to ensure that the biggest part of our economy retains every possible competitive advantage possible.
Well done Steven J on a good plan of action.
Vote:October 1st, 2009 at 3:36 pm
“The government needs to be a part of the solution otherwise broadband service/quality comms would never get out to the 400,000-odd kiwis that live in Rural areas yet somehow contribute around 40% of NZ’s GDP. ”
Why dont they spend some of their 40% of GDP on doing it themselves. The reason it is unprofitable is because they (being the rural community) as always expect a free ride.
Vote: