3. The TSO Framework
55. The agreed Kiwi Share service requirements between the Crown and Telecom were converted into a Telecommunications Service Obligations (TSO) instrument under the TSO regulatory framework established in December 2001. The TSO regulatory framework is designed to address user needs for meeting social objectives.
56. A TSO instrument established under the TSO framework appoints a TSO Provider to supply certain telecommunications services subsidised through an industry levy. A TSO instrument is essentially a form of licence to supply certain telecommunications services under the auspices of the TSO regulatory framework.
57. Under a TSO instrument a TSO Provider is engaged to supply a telecommunications service or services that are not expected to be available on a commercial basis, or at a price that is considered by the Minister to be affordable to end users.
58. Section 70 of the Act provides that the Governor-General may, by Order in Council, declare a contract, arrangement or understanding between the Crown and a TSO Provider to be a TSO instrument. The Minister of Communications has a duty to consult with the telecommunications industry and other interested parties on the proposed service requirements to be covered in any new TSO instrument. A TSO instrument is declared on the Minister's recommendation after agreement is reached with the TSO Provider.
3.1 TSO Criteria
59. A TSO instrument must identify the group of end users to whom the service must be supplied, the geographical area within which the service must be supplied, and the retail price at (or below) which the service must be supplied. The TSO instrument must also set out criteria to enable the standard of the service supplied by the TSO Provider to be objectively evaluated.
3.2 TSO Charges
60. A TSO charge applies for compensating a TSO Provider for fulfilling the requirements of the respective TSO instrument. A TSO charge can either be specified or unspecified in the TSO instrument.
61. A TSO charge can be partial or full compensation to the TSO Provider for services supplied under the TSO instrument, depending on whether any sales revenue generated by the TSO Provider (from service charges paid by customers for retail services supplied under the TSO) is attributed as compensation.
62. The proportion of a TSO charge payable by liable telecommunications service providers ("TSO liable persons") is applied as an industry levy.
63. The applicable TSO charge in respect of a TSO instrument is either:
- prescribed (where the applicable rates for calculating the TSO Charge are of specified amount set in the TSO instrument); or
- derived (where the applicable rates for calculating the TSO Charge are of unspecified amount in the TSO instrument).
3.3 Local Residential Telephone Service TSO Deed
64. The Local Residential Telephone Service TSO Deed is an agreement between the Crown and Telecom Corporation of New Zealand Ltd, together with Telecom New Zealand Ltd, (Telecom) covering the supply of a local residential telephone service.
65. The original Kiwi Share, or Kiwi Share Obligations (KSO), agreement for local residential telephone service is part of Telecom's company constitution, and is enforceable by the Crown as the holder of the Kiwi Share. A profile explaining the Kiwi Share Obligations is presented as Annex A.
Commencement Date: 19 December 2001
Type of TSO Instrument: Deemed TSO
TSO Provider: Telecom New Zealand Limited
Type of TSO Charge: Derived TSO Charge (charge amount unspecified in the TSO instrument)
66. An update to the Kiwi Share Obligations, the "TSO Deed for Local Residential Telephone Service" (Local Service TSO Deed), was agreed in December 2001. This agreement was deemed a TSO instrument by the Telecommunications Act 2001 and is referred to as the "new KSO".
67. Section 71 of the Act provides that both the original KSO and the new KSO are deemed to be TSO instruments. The Act also provides that, while the new KSO is a deemed TSO instrument, the original KSO does not have effect. However, in the event that the new KSO ceases to be a deemed TSO instrument, then the original KSO applies.
68. The Kiwi Share requirements for local telephone service do not specify any arrangement for Telecom to be compensated for compliance. Prior to the Local Service TSO, Telecom had the discretion to recover the cost for meeting its Kiwi Share obligations through whatever mix of charges it considered appropriate.
69. With the establishment of the TSO regulatory framework, the manner in which Telecom was compensated for supplying local residential telephone service was prescribed in the Telecommunications Act.
3.4 Relay Service TSO Deed
70. A TSO instrument1 has been established for telecommunications relay services to meet the communications needs of people who are Deaf, hearing impaired and speech impaired. The services were launched in November 2004 and include Internet web access to the relay system.2
Commencement Date:9 July 2004
Type of TSO Instrument: Declared TSO
TSO Provider: Sprint International New Zealand
Type of TSO Charge: Prescribed TSO Charge (charge amount specified in the TSO instrument)
71. As stated in the Terms of Reference for the TSO review, the Relay TSO Deed is not included in this review as this TSO instrument was the subject of a review in 2006.
3.5 TSO Determination – Charge Calculation and Allocation
72. The Commerce Commission is responsible for calculating the charge applicable for TSO instruments (following a prescribed process in the Telecommunications Act), and allocating these charges to liable telecommunications service providers (TSO liable persons).3 The Commission publishes a determination on an annual basis for each TSO instrument, with the determination including an assessment of the TSO Provider's performance against specified service measures.
73. In respect of each TSO instrument, the TSO Provider and each liable person must provide certain information to the Commission, within 60 days after the end of the financial year of the TSO Provider, to enable the Commission to determine the amount payable by all TSO liable persons and the proportion allocated to each of them.
74. For a specified amount TSO, the TSO charge is calculated from the specified amount that is set out in the TSO instrument. For an unspecified amount TSO, the TSO charge is calculated based on the net cost to the TSO Provider for supplying services under the TSO instrument. The Telecommunications Act defines "net cost" as the unavoidable net incremental costs to an efficient service provider of providing services required by the TSO instrument to commercially non-viable customers.
75. To calculate the TSO levy payable by an individual liable person (for a TSO instrument having either a specified amount or an unspecified amount), the Commission applies the respective formula set out in the Telecommunications Act. A liable person's share of the TSO levy is allocated in proportion to its share of total industry revenue for PSTN related telecommunications services. The contribution to a TSO levy by the TSO provider is determined by whether the TSO Provider has TSO qualifying revenue.
76. A TSO Provider and liable persons can dispute the Commerce Commission's determination on the TSO instrument and appeal to the High Court on points of law. Provision also exists for regulations to be made that provide methods for calculating the revenue generated by the TSO Provider and liable persons, and also for calculating the net cost of a TSO instrument.
3.6 Payment of TSO Levy
77. A TSO levy is applied to the telecommunications industry for each TSO instrument. The TSO levy is applied on an annual basis to recover the TSO charge for the respective TSO instrument as determined by the Commerce Commission.
78. The Telecommunications Act provides that each TSO liable person must pay to the TSO Provider its contribution to the TSO levy (plus interest owing from the end of the financial year until the date on which the Commission finally determined the levy amount payable).
3.7 The Need for the TSO Framework
79. The government telecommunications objective when the TSO framework was established was to ensure the delivery of cost efficient, timely, and innovative telecommunications services on an ongoing, fair and equitable basis to all existing and potential users.
80. The fundamental focus of the TSO framework is to ensure the supply of particular telecommunications services, on certain terms and conditions, that are considered essential for meeting government objectives, and which would otherwise not be commercially supplied.
81. The TSO framework has three basic features:
- Enables the supply of certain telecommunications services which otherwise are not expected to be commercially available at an affordable price; and
- Enables levying of the telecommunications industry to recover the subsidisation cost for the supply of TSO services.
- Enables control of the user prices for TSO services supplied.
82. TSO requirements can cover how applicable user charges are set for TSO services, and such charges may have the effect of subsidising particular groups of users to a greater or lesser extent. Under the TSO framework any subsidisation cost deficit for the supply of TSO services is levied on the telecommunications industry.
The TSO Framework
3a. How important is the KSO/TSO framework as a component of the overall regulatory regime of New Zealand for telecommunications services?
3b. How effective has the TSO framework been in achieving the government's telecommunications objective of ensuring the delivery of cost efficient, timely, and innovative telecommunications services on an ongoing, fair and equitable basis to all existing and potential users?
3c. Would other policy mechanisms be more appropriate than TSO instruments to achieving the government's telecommunications objective going forward?
3d. What are the strengths and weaknesses of the TSO framework?
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