1. Executive Summary
1.1 Introduction
1. When the Crown privatised Telecom in 1990, the crucial importance of local telephone service for New Zealand households was recognised through "Kiwi Share" Obligations (KSO) that Telecom agreed to at that time. The KSOs require Telecom to ensure the availability and affordability of basic telecommunications services for New Zealanders.
2. The KSOs have enabled New Zealanders to retain a degree of control over a network that generations of public funding had developed. It is unlikely that the privatisation of Telecom would have transpired without the assurance offered by the KSOs.
3. Some elements of the Kiwi Share agreement were re-negotiated during 2001 as part of the Government's review of the telecommunications regulatory environment. The Telecommunications Services Obligations (TSO) regulatory framework was introduced by the Telecommunications Act 2001. Local telephone service requirements in the original KSO were subsumed into the Local Service TSO. The Local TSO reinforces the principles outlined in the original Kiwi Share agreement, as well as updating them to clarify requirements (including recognition of dial-up Internet access) and to set service standards.
4. The TSO framework has two essential features:
- enables the supply of certain telecommunications services which would otherwise not be made available commercially; and
- enables levying of the telecommunications industry to recover the subsidisation cost for the supply of TSO services.
5. The TSO for local residential telephone service is based on Telecom, as TSO Provider, supplying ordinary telephone service under a specific set of conditions. This includes continuing to offer the option of free local calling for residential customers.
6. The Government's 2006 strategic review or "stocktake" of the telecommunications sector identified that accessibility of broadband services for users in rural areas could be adversely impacted by the regulatory reforms. The TSO review was signalled as one of a range of measures necessary to future-proof the regulatory regime to technology change and market dynamics. In particular, the Local Service TSO needs to be updated to reflect increasing expectations for telecommunications access services and to ensure the wider population can benefit from technology enhancements.
7. The TSO review is addressing the following three fundamental areas:
- changes to TSO requirements for the supply of local residential telephone service;
- whether the TSO framework has a role in improving the supply of broadband service in rural areas; and
- changes to the rules and processes of the TSO framework to improve their effectiveness.
1.2 The TSO Framework
8. The Telecommunications Service Obligations (TSO) regulatory framework established by the Telecommunications Act 2001 is the regulatory mechanism which enables services to be made available to supplement the range of services that are commercially available.
1.3 Standards for TSO Local Service
9. The Local Service TSO requires that Telecom makes local telephone service as widely available as it was in December 2001. Households in areas outside this coverage who want telephone service are dependent on Telecom and any other service providers to make service available to them on a purely commercial basis. The discussion document seeks feedback on whether the geographic availability of local telephone service should be extended beyond the current areas where Telecom must make service available.
10. Local telephone exchanges that Telecom uses to provide local telephone service are nearing the end of their economic life and will not be technically supported beyond 2012. Telecom plans to replace these exchanges with Next Generation Network (NGN) capability which involves changing over customer access lines to support telephone service facilitated with digital technologies.
11. The characteristics of local service as defined in the TSO will need to change if NGN capability is to be adopted for TSO local telephone service to reflect the analogue to digital changeover.
12. The current service measures for local service are defined on a national average basis. This level of aggregation means that the offsetting between urban and rural areas can leave some rural areas with poor service, even though the national service standard is met. The discussion document explores the possibility of setting separate urban and rural standards, potentially on a regional basis.
1.4 Compensation for the Local Service TSO Provider
13. Determination of the TSO charge for the annual supply of local service by Telecom has been a drawn out process and contentious for the industry. Many in the industry believe that the compensation Telecom receives does not reflect the economic realities of supplying service.
14. A number of options are presented in the discussion document with the aim of simplifying determination of the TSO charge for local service and ensuring best value for money. These are to:
- stay with a TSO charge of "unspecified amount" and modify the TSO compensation methodology prescribed in the Telecommunications Act for the Commerce Commission's calculation of the TSO Charge;
- make the TSO Charge of "specified amount" as part of the Local Service TSO requirements, mutually agreed between the Crown and Telecom;
- rely only on cross subsidies between TSO Provider customers to fund any cost deficit for the supply of commercially non-viable service without applying a TSO charge recovered through a TSO industry levy; or
- introduce contestability for access to TSO subsidy funding by other service providers for supplying TSO local service in commercially non-viable areas.
1.5 Eligibility and Charging for TSO Local Service
15. Subscription to TSO local service is in principle open to all people who request supply of the service to a residential or household premise, irrespective of whether the service is also used for business purposes. The use of TSO local residential telephone service for business purposes impacts the TSO subsidy cost for local service and raises a fairness issue.
16. The potential for resetting the price cap for line rentals to reflect the commercial viability of areas and real industry cost changes is also explored in the discussion document.
1.6 TSO Local Service and Emergency Call Service
17. The discussion document looks at whether Telecom is the most appropriate organisation going forward to perform the "gatekeeper" role of filtering emergency calls. It also asks how industry standards for emergency call services should be addressed.
1.7 TSO Requirements for Subscriber Access Connectivity
18. Copper cable based (DSL) broadband service is currently available to approximately 93% of New Zealand households. The remaining 7% of households are mainly in rural areas where broadband service is only available using wireless technology such as satellite or, in some locations, terrestrial radio based services, such as through the Kordia Extend network.
19. The New Zealand broadband framework under development will consider how people in areas for which DSL broadband is not economically feasible could have broadband service made available by alternative means. The gap in broadband availability in rural areas could be filled by extending the reach of copper line broadband service or the deployment of other broadband capabilities. The availability gap could be closed through a combination of supply push and demand pull initiatives.
20. The TSO mechanism may have a role in addressing broadband gaps, and the discussion document invites comment on the risks and merits of whether the TSO is the appropriate policy mechanism for this purpose. The TSO framework could be considered a suitable policy mechanism for addressing rural broadband shortfalls if:
- service shortfalls are not expected to be filled by commercial offerings in the medium term;
- the TSO is not expected to impede market entry by alternative service providers or to stifle greater market competition; and
- the subsidisation cost recovered through the TSO levy would not unduly impact on investment incentives.
21. An assessment of the TSO framework in relation to other policy mechanisms for improving rural broadband uptake will be undertaken as part of developing a New Zealand broadband framework.
1.8 TSO Framework Rules and Processes
22. There are a number of issues raised in the discussion document relating to the way that TSO levies are applied to the telecommunications industry.
23. The discussion document seeks comment on how accountability for Telecom compliance with TSO requirements should be assigned to the Telecom Group following operational separation of the Telecom business.
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