$100 Million Annual Telecom Kiwi Share Subsidy

$100 MILLION ANNUAL TELECOM SUBSIDY FOR 200,000 CUSTOMERS UNDER KIWI SHARE OBLIGATION

Telecom estimates it currently spends $100 million subsidising more than 200,000 customers by around $450 each a year through its Kiwi Share Obligation.

Telecom Government and Industry Relations Manager Bruce Parkes said the calculation has been made as part of Telecom's obligations under the Telecommunications (Information Disclosure) Regulations 1999.

This early estimate, which shows the KSO costs Telecom in the order of $100 million a year, has been provided to the Ministerial Inquiry into Telecommunications ahead of the 30 September statutory deadline, in the public interest to assist the inquiry process. It is contained in Telecom's submission commenting on the Panel's draft report .

Mr Parkes said Telecom remains committed to the Kiwi Share contract between Telecom and the Government, struck in 1990 when Telecom was privatised and covering the pre-Internet voice telephony services then available. Telecom believes the KSO needs updating for the rapid changes in technology and market conditions which have occurred since.

"Telecom is not suggesting an increase in rural phone access prices, despite it costing significant amounts of money to provide rural customers with phone services.

"A large portion of the KSO costs are caused by monthly line rentals that do not cover the provision of local access to residential consumers in unprofitable areas, even when additional revenue streams such as tolls are added."

Telecom's early estimates show that services provided from 116 of Telecom's 500-plus telephone exchanges are uneconomic.

He said the magnitude of the cost highlighted the need for the Inquiry to consider how best the costs should be borne.

"A number of submissions to the Inquiry have agreed that other telecommuncations companies which want to connect to the loss-making rural network should pay a share of the costs. We thought the figure would assist in the policy debate as to how these costs should be fairly shared within the industry."

Mr Parkes said the Kiwi Share Obligation means some Telecom residential customers subsidise others.

"The cost of providing telephone service to rural communities is very high. At one extreme, four rural exchanges cost $242 per customer per month to supply service."

"Having one price that covers the whole country no longer works in a fully competitive market which the Inquiry's draft report has recognised.”

Mr Parkes said the loss and the current cross-subsidisation went to the heart of the dilemma of how to provide the infrastructure needed by rural communities in the online age.

"Given Telecom already makes a substantial loss on the provision of rural services, we do not think it is fair or sensible to require Telecom to spend hundreds of millions more to ensure our entire network can deliver the Internet."

Mr Parkes said not only should the whole telecommunications industry be involved in the costs of providing such services, but New Zealand should avail itself of the entire range of developing technological solutions. "Relying on existing copper line technologies alone would be inadequate and would short-change rural people," he said

The methodology used is that mandated under the regulations and Telecom has consulted with international experts responsible for estimating the costs of meeting universal service obligations in several other countries.

The estimates have been calculated using an economic model which divides the estimated costs of the KSO into two parts - access lines and traffic carried. Telecom has offset the net cost of providing access lines with the net revenues derived from traffic, less the cost of carrying those calls.

ENDS

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