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• 30 June 2005 Report
• 30 June 2004 Report

Methodology Issues

93. The use of representative "baskets" of telecommunications services is a widely accepted method of benchmarking the price of key telecommunication services between countries. An internationally recognised method of benchmarking a number of telephone services has been developed by the OECD that is based on an internationally agreed demand pattern as opposed to any one country's pattern.

94. The relative accuracy of benchmarking methodologies, such as the OECD tariff basket comparison methodologies, is limited by the following factors:

• the basket of services used to benchmark relative performance of each OECD country may not be representative of the typical average user demand within a country;
• they adjust imperfectly for the differing prices across countries of inputs to local services by using a suitable exchange rate, such as a purchasing power parity exchange rate;
• they do not readily take into account the effects of network density including scale and scope economies;
• they do not readily take into account productivity differences between countries that are outside of the control of telecommunications industry managers and regulators;
• some services may not be directly comparable (such as different speed broadband Internet access services);
• the methodologies do not provide uncertainty bounds for assessing the reliability of the resultant rankings.

95. In comparing prices between two countries, the two primary methods that are typically used are Purchasing Power Parity (PPP) and some form of longer term averaged Monetary Exchange Rates (to average out the influence of non-trade related factors). This report uses the OECDPPP rates as they focus on the relative purchasing power of non-traded telecommunications services and avoid problems involved with real exchange rates which can be driven by a range of factors unrelated to the price of goods and services. This issue is discussed in the Argo report.³⁵

Service Provider Input

96. Subsequent to producing the 2003/2004 benchmarking report the Ministry sought comment, from the major telecommunication service suppliers, Telecom, TelstraClear and Vodafone.

97. In reply Telecom and Vodafone expressed a range of concerns about the report. Their main concerns were about the accuracy of the benchmark results, the limitations of the benchmarking methodology, the importance of tailoring comparative performance measures to recognise New Zealand's unique features, and the need to take into account other important factors in assessing comparative performance.

98. To help ensure that New Zealand's comparative benchmark performance is accurately assessed, in December 2004 major service providers were:

• informed that the Ministry would consider the use of alternative benchmark methods, in addition to the standard OECD approach, where it can be shown that the alternative approach better assesses relative performance by taking into account an important local feature that is not generally present in other OECD comparison countries;
• invited to supply relevant data in respect of services where they considered that the standard OECD basket of services comparison methodologies or other benchmark approaches were inaccurate and lead to misleading results.

99. Telecom and Vodafone provided a range of data to the Ministry which has been taken into account in producing this report.

100. In June 2005 Telecom also took part in an OECD TISP Secretariat sponsored meeting where OECD country telecommunications service providers provided information on telecommunications services with the objective of improving the OECD benchmarking methodology that will be used to assess relative performance in 2006.

The NZIER May 2005 Report on Telecommunications Pricing in New Zealand

101. Telecom commissioned NZIER to critique aspects of the Ministry's 2003/2004 Benchmarking Report. The NZIER report Telecommunications Pricing in New Zealand: A Comparison with OECD Countries, May 2005, is available on the NZIER web site.

102. In summary, the key conclusions of the NZIER report are:

• New Zealand's customer profile for telephone usage is unique and differs from the standard customer profile used by the OECD.
• In this report we develop a New Zealand specific customer profile for typical residential and business customers, and apply other OECD telephone charges to the New Zealand calling pattern.
• Applying New Zealand's unique customer calling profiles to OECD price regimes (Teligen™ November 2004) and using Telecom's November 2004 tariffs we find that New Zealand's customers have telephone price regimes which are less expensive relative to most other OECD telecommunication companies.
• New Zealand's ranking among OECD countries for telephone tariffs improved significantly compared against MED's findings as a result of applying:
  • correct and up-to-date prices for New Zealand;
  • capped calling rates for national telephone calls; and
  • New Zealand's specific customer calling profile.

Response to the NZIER May 2005 Report

103. The Ministry was not provided with an opportunity to comment on the NZIER May 2005 report prior to its completion. Following publication of the report the Ministry commissioned ARGO Telecom Management Consultants B.V. to critique the NZIER report. The Argo report's key conclusions were:

• In general we believe that the MED report, using data based on the OECD/Teligen benchmarking methodology remains a valid comparison based on sound principles. We do not believe that all of the changes proposed by NZIER can be supported in an international comparison, as they will disproportionately favour New Zealand at the expense of other countries.
• We believe that NZIER's revision of the model is flawed in several areas and cannot support the conclusion that New Zealand's telephone pricing is less expensive relative to other OECD countries. Updating the revised model with current New Zealand data while not updating the data from other countries is inappropriate. It assumes no movement in the prices in those countries and accordingly negates the validity of any subsequent findings.
• In summary, we recognize that there remains opportunity for disagreement regarding the OECD/Teligen methodology. There is scope for revision of the methodology which continues to be made at forums represented by all OECD countries and operators willing to participate. Frequently re-running the model with current data from all countries remains sound practice. However, we believe that many of the changes proposed by NZIER cannot be justified. We also believe that the existing June 2004 MED report is based on sound OECD/Teligen methodologies, correct data available at the time and is a valid comparison of international telecom pricing among the OECD countries.