Questions and Answers
What Is the Overall Objective of the Amendments to the Telecommunications (Disclosure) Regulations 1990?
The objective of the amendments is to facilitate the ongoing development of competition in the telecommunications market by disclosing financial and price information about Telecom's local loop and telecommunications services that critically rely on access to Telecom's local loop.
What Are the Key Components of the Existing Telecommunications Information Disclosure Regime?
The key components are the requirements that Telecom publish:
- Twice yearly financial statements for its subsidiary Telecom New Zealand Limited1.
- The price, terms and conditions of prescribed services2 including discounts in excess of 10%.
- The full text of any interconnect agreements excluding information about the physical location of links between the networks.
What Are the Main Information Disclosure Changes and What Do They Seek to Achieve?
They are to:
- Require Telecom to publish twice yearly, separate financial statements for its "local loop" and "other telecommunications services" businesses, prepared on the basis of the avoidable cost allocation methodology and complying with generally accepted accounting practice;
This requirement will provide information about the cost of core parts of Telecom's local loop. Such information is of use to Telecom's competitors in negotiating interconnection prices for access to the local loop, and in the monitoring and enforcement of competition concerns. - Require Telecom to disclose any losses it incurs in complying with the Kiwi Share obligations (KSOs), the way it recovers any KSO losses, and calculate KSO costs in accord with a specified set of principles;
Telecom has said that it incurs losses in complying with the KSOs. The price of interconnection includes a contribution to KSO losses and this requirement will provide relevant information to parties negotiating interconnection with Telecom. - Add Telecom's 0800 service to the list of prescribed services requiring price and discount disclosure, and delete international calls from the list.
This change will put 0800 services on the same footing as national calls which are already a prescribed service (0800 is effectively a national call where the called party pays. International services are now competitively provided, so continued disclosure is no longer necessary. A proposal in the discussion paper to delete leased services from prescribed services has not been proceeded with on the basis that submissions suggested the market was not fully competitive.
Why Is It Necessary to Require Telecom to Disclose More Financial Information?
The current financial statements disclosed by Telecom are primarily used by the share market. In particular Telecom's current financial disclosures do not provide any information about:
- the cost of Telecom's local loop operation which is the critical facility with which Telecom's competitors must interconnect and therefore require information about to ensure pricing of interconnection reflects Telecom's costs. Under current financial reporting requirements all of Telecom's activities (contestable and non-contestable) are bundled together into one set of accounts; and
- the cost of the Kiwi Share obligations, which form part of interconnection pricing.
How Will the Disclosure by Telecom of Financial and Price Information Facilitate the Ongoing Development of Competition in the Telecommunications Market?
The disclosures will:
- provide relevant information to all interested parties and analysts;
- facilitate the negotiation and resolution of network interconnection agreements between Telecom and its competitors. (The Clear-Telecom interconnect agreement expires 1 January 2001. Most other agreements are based on this agreement);
- assist enforcement of the Commerce Act by facilitating public monitoring of Telecom's actions where competition concerns arise.
Why Are These Requirements Being Introduced at This Time?
The initial focus of telecommunications information disclosure has been to provide information on the price of prescribed services and about interconnection agreements. Substantial progress has been made in the development of effective competition in telecommunications markets. These proposals will facilitate the further development of competition by making detailed local loop cost information, including Kiwi Share obligations costs, publicly available.
Telecom Submitted That It Already Has to Prepare Several Sets of Accounts, Including for the US Market in Compliance with the New US GAAP SFAS 131 Reporting Requirement. Why Isn't This Information Good Enough?
The purpose of SFAS 131 is to provide information for capital markets (i.e. to allow industry analysts and shareholders to monitor a publicly listed company's performance). SFAS 131 requires disclosure of the accounts management uses to run the business. This is quite different from a set of accounts for regulatory purposes (which aim to facilitate competition and prevent abuse of market power).
In particular, it is important to have a robust methodology for allocation of costs between activities. Particular problems with SFAS 131 are:
- Local loop reporting;
SFAS 131 would not require separate reporting of Telecom's local loop. In fact, SFAS 131 allows a business to bundle its activities in any way it wants as long as it is consistent with its internal reporting structure. - Accounting methods;
It is essential to have a robust methodology for allocation of common costs between activities. SFAS 131 allows flexibility in the choice of allocation methodology. - Disclosure requirements;
For information disclosure to be useful for regulatory purposes, detailed line item disclosure is required. SFAS 131 does not do this.
Why Should Telecom Be Required to Disclose Accounts For the Local Loop If Any Natural Monopoly Is Being Eroded?
The telecommunications market in New Zealand is increasingly competitive. However, Telecom still faces relatively limited competition in the core local loop area of its operations. Other telecommunication service providers still have to interconnect with Telecom's local loop in order to be able to operate in New Zealand. Financial statements disclosing the costs of the local loop will assist in negotiating interconnection agreements.
Are the Costs of Information Disclosure Reasonable?
The total New Zealand telecommunications services market revenue is of the order of $4,000 million annually, most of which is either competitive or is potentially competitive. Information disclosure provides information which will assist in the negotiation of interconnection agreements, and thus contribute to competitive entry, service provision and lower interconnection pricing, which will in turn lead to retail price reductions. In this context the Government considers the benefits that will flow from the additional information disclosure requirements outweigh the costs.
Are There Any Redundant Information Disclosure Requirements in the Current Regime?
Yes. With the development of extensive competition in international call services in New Zealand it is no longer necessary to disclose the price (including discounts) of international calls and this service will be deleted from the prescribed services list.
What Have Changes Been Made from the Discussion Paper Proposals?
Following consideration of submissions some relatively minor changes have been made to the proposals in the discussion paper. These are:
- Only requiring annual (and not also half-yearly) financial statements to be audited;
- Allowing Telecom to provide improved information for international benchmarking on a voluntary basis, rather than through regulation. Telecom has voluntarily agreed to work with the Ministry of Commerce to put in place suitable arrangements that will support the Organisation for Economic Co-operation and Developments (OECD's) tariff basket comparisons methods;
- Requiring Telecom to publish prescribed services information, KSO losses and costs, and its financial statements (in addition to interconnection agreements) on an Internet web site; and
- Not removing leased services from the list of prescribed services.
How Many Submissions Were Made on the Information Disclosure Regime?
Twelve submissions were received from Telecom, Clear, Vodafone, Global One, Newcall Communications, Teamtalk, New Zealand Business Roundtable, TUANZ, Consumers Institute, Institute of Chartered Accountants (ICA), Coural and the Electricity Supply Association. Most supported the need for an information disclosure regime to apply to Telecom and broadly supported the key changes recommended in the discussion paper. The particular changes made from the discussion paper proposals (as outlined in the Minister's press release) have been made following consideration of the submissions.
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