4. Interconnection Agreements
4.1 Interconnection Agreement Disclosure Requirements
41. Disclosure of agreements on interconnection play a valuable role in fostering competition by informing the market about the terms and conditions for access to Telecom's network struck between Telecom and its competitors. The regulations currently require the publication of the full text of any Telecom interconnection agreement (excluding details relating to the location of physical links for service delivery between networks) at Telecom's principal offices in Auckland, Wellington and Christchurch. The information must be published within 30 days of the end of the quarter in which agreement was reached.
4.2 Compliance
42. Telecom has met its obligations under this requirement.
4.3 Proposed Disclosure of Telecom's Kiwi Share Obligation Costs
43. The Ministry considers that additional information needs to be disclosed for the interconnection information disclosure element of the regime to work more effectively. The most significant additional information required relates to the costing of the Kiwi Share obligation, a component of interconnection pricing; this additional information is discussed in this section. Further additional information requirements are identified in section 4.4.
44. When Telecom was privatised, the Crown retained ownership of a single share known as the Kiwi Share. This share imposes certain obligations on Telecom in relation to residential telephone services. In particular the KSOs require Telecom to:
- maintain a local free-calling option for all residential telephone customers;
- limit the rate of residential telephone rental price increases so that the pre-GST standard rental will not increase in real terms;
- ensure that the line rental for residential (telephone) users in rural areas is no higher than the standard residential (telephone) rental;
- continue to make ordinary residential telephone service as widely available as at the date of adoption of the (Kiwi Share) Articles; and
- not increase residential directory assistance charges faster than the rate of increase in the CPI.
4.3.1Issues Raised by the KSO
45. These KSO obligations may result in Telecom supplying some customers (possibly those customers in sparsely populated rural areas) at a loss. It is possible that Telecom would not serve those customers (at those prices) but for the obligation. Whether or not this is correct is difficult to ascertain. Although the costs of supplying these customers are higher, such customers also tend to make more long-distance calls and tend to be the recipients of long-distance calls from other telephone users. Telecom's other business activities, therefore, benefit from the ubiquity of its local loop network.
46. The Privy Council1 upheld the decision of the previous courts that Clear and other telecommunications operators (telcos) that interconnect with Telecom should make a contribution towards the costs imposed upon Telecom as a result of the KSO. However, this left undefined the methodology that should be used to estimate the costs of the KSO, and the means of verification.
47. The problem of estimating the costs is complicated by the presence of common costs and economies of scope. Any estimate of the KSO costs would depend upon the methodology for sharing out the common costs between Telecom's businesses. Furthermore, once these costs are estimated, they must still be shared or "allocated" amongst the telcos in the industry.
48. It is currently not possible for telcos to verify whether Telecom's KSO-related access charges are reasonable. This hinders the facilitation of competition by risking: (i) delays in negotiating access agreements; and (ii) entrant telcos being competitively disadvantaged relative to Telecom if they are over-charged by Telecom. The re-negotiation of interconnection arrangements for a number of telcos are due to commence during 2000. Provision of information on the KSO losses by a transparent methodology may assist in the resolution of these new agreements.
49. The Ministry, therefore, proposes recommending that Telecom be required to disclose each financial year a range of information on the KSO.
4.3.2 Proposed Disclosure of KSO Information
50. Telecom would be required to disclose any losses incurred in complying with the KSO, including details of: (i) the amount of the losses that are attributable to each component of the KSO; and for each of these components, (ii) the amount of the losses that are attributable to individual customer groups.
51. For the purpose of calculating any losses (and the origin of these losses) incurred in complying with the KSO, losses are defined as circumstances where the incremental cost of supplying a customer (or group of customers) is more than the incremental revenue and/or benefits (both direct and indirect) arising from supplying that customer (or group of customers).
52. Telecom would also be required to disclose the way it recovers the KSO losses, including: (i) the sources (internally and externally) that Telecom recovered these losses from; (ii) the amounts that Telecom recovered from each of these sources; and (iii) the components of any charges (internal or external) that Telecom uses to recover these losses from.
53. In defining KSO costs it is proposed that a working definition for the costing of the KSOs include all residential telephone lines. Strictly speaking, new residential telephone lines outside of the area of coverage prevailing at the introduction of the KSOs are not part of the obligations. However, such a strict definition is probably unworkable. Other services included within the coverage of the KSOs are: residential directory services, directory listings and emergency call centres supporting emergency telephone numbers.
4.3.3 Methodology for Calculating Losses
54. The calculation of the net cost of Telecom's Kiwi Share obligations must take account of both costs and revenues. The costing approach is to be forward-looking, rather than based on historical cost accounting principles. The method must, as far as possible, keep any administrative burden and related costs to a minimum and be based on objective, transparent procedures.
55. The following principles would be followed in the calculation of Telecom's KSO costs2:
- The cost of the KSOs is the unavoidable net losses incurred by an efficient operator in providing the KSO-mandated services to the customers or groups of customers required.
- The net cost calculation must be based on objective, transparent, non-discriminatory and proportionate procedures and criteria.
- The net cost calculation should identify the cost, less revenues and associated benefits of providing services covered by the KSO to a customer or group of customers. In particular:
- In the case of existing customers, the cost of providing service should only include the incremental costs less associated revenues, i.e. the net cost that the operator can avoid by withdrawing service (i.e. disconnecting) from "non-viable" customers3. Such a calculation is to include loss of directory revenues in the case of large groups of "non-viable" customers. "Non viable" refers to customers where the total direct and indirect revenue for the operator (calculated as set out above) is less than the cost of providing service to that customer.
- In the case of new customers, (whether in an area where the network has already been built or in an area where service has yet to be extended), the same approach in principle should be adopted4.
- In all cases a reasonable5return on the incremental capital employed in providing service to non-viable customers should be allowed. The assessment of incremental revenues and associated benefits should include:
- connection (i.e. a one off revenue for installation), rental and call revenues paid by customers or groups of customers (i.e. direct revenues);
- the call revenues paid by all commercially viable customers, when calling "non-viable" customers (i.e. indirect revenues, including revenues from freephone services and shared cost services);
- the replacement call revenue, which should be estimated and set against the incremental direct revenues that would be lost if service were withdrawn from non-viable customers. 6
- When calculating net cost, a quantification of the intangible benefits of being New Zealand's only universal service provider, an implicit requirement of the KSOs, should be added on the benefit side;
Although all the benefits of being a universal service provider may not be precisely quantifiable, it should be possible to establish benchmark estimates for the categories identified below, given that such estimates are not uncommon in business valuations. Any such valuation must, however, clearly identify the basis for calculation and any assumptions made. These benefits include the following: - enhanced brand recognition (vis-à-vis competitors);
- universal coverage in the area of ubiquitous operation (i.e. comparatively lower costs than competitors in extending network to new customers);
- life cycle value of particular customers or groups of customers. Life cycle value refers to the fact that a customer who is uneconomic today may become profitable in the future. For example, a "non-viable" young family may become profitable to serve over time as family income begins to rise and the children start using the phone. This means that there is a certain value for an operator in providing service to that customer in the short-term given the revenues generated over the customer's lifetime;
- marketing benefit of accessing a full range of telephone usage data.
- The net costs of emergency services, directory services, directory listings and the provision of special equipment or services must be identified separately;
In the case of emergency services, a distinction must be made between the obligation to provide free emergency calls, which is implicitly required of all operators (so that each bears its own costs) and the obligation on one operator to provide an emergency call centre, with trained staff, to handle emergency calls at a national or regional level. The net cost of such a call centre is recoverable under the KSOs.
Where such services are provided at prices which result in the total incremental revenues (if any) not covering the total long-run incremental cost of service provision, the net cost incurred should be added to the cost of universal service. - No account may be taken in calculating the net cost of the KSO of obligations which are outside its scope other than those specifically included, for example:
- the cost of implementing specific measures required for purposes of public security;
- compensation and/or refund payments (or administrative and other costs associated with such payments) made to users as a result of failure to meet specified service quality levels; and
- the cost of replacement and/or upgrading of telecommunications equipment in the course of normal network modernisation.
56. Telecom would be required to publish its calculation of its KSO costs twice yearly in conjunction with the publication of its financial statements under the financial information disclosure regime. The calculation must also be audited in conjunction with the financial statements. Telecom would also be required to disclose the full methodology used for calculating the above information (including any models used).
57. Telecom would also be required to retain all data, including calculation models and associated documentation, for at least seven years.
58. Overall, this information on the KSO will facilitate analysis of Telecom's claim that it is making a loss on the KSO, and the reasonableness of the KSO-specific access charges that it imposes on its competitors.
4.4 Further Additional Information
59. In conjunction with some interconnection agreements, separate operating agreements and side letters have been entered into between Telecom and other operators. These agreements and letters have not been published as they are not technically part of an interconnection agreement. This situation potentially creates significant uncertainty for operators attempting to negotiate new interconnection agreements with Telecom. It is therefore proposed that any operating agreements, side letters and associated documentationof any interconnection agreement must be disclosed. This should impose minimal compliance costs.
60. The current requirements mean there can be delays of up to four months before an interconnection agreement is published. Such delays can create uncertainty for operators attempting to negotiate new interconnection agreements with Telecom during this period. Therefore, it is proposed that the disclosure of heads of agreement and interconnection agreements be required within 15 working days of the completion of an agreement. This should not impose any additional compliance costs.
61. At present Telecom is required to make hard copy interconnection agreement information available at its principal offices. Such a requirement can lead to problems in ensuring availability beyond the immediate quarter following disclosure. It is therefore proposed that interconnection agreements be made available for inspection at Telecom's Head Office and at a site on the Internet maintained by Telecom in a suitable widely accessible electronic format for the life of the interconnection agreement. The present requirement for an updated disclosure of current interconnection agreements every two years would be removed. This proposal should impose minimal compliance costs.
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