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Commission releases key TSO documents and cost

Telecommunications Act: Commission releases key TSO documents and cost model

The Commerce Commission today released two additional documents relating to the calculation of the cost of the telecommunications service obligations (TSO). The Commission has also released a second cost model to interested parties.

Network Access Manager Osmond Borthwick said that the release of the documents was part of a continuing consultative process leading up to the release of the Commission's Draft Determination on the TSO in June.

Today's documents are the Commission's paper on the TSO Weighted Average Cost of Capital (WACC) and a report by economic consultants DotEcon on Quantification of Intangible Benefits of the TSO. Last week the Commission released a series of separate reports on Telecom's TSO net cost calculation, prepared by Amos Aked Swift (NZ) Limited. In April, the Commission released the first of its cost model and also an analysis of Telecom's TSO model.

All documents are available on the Commission's website,

Overview of TSO Weighted Average Cost of Capital (WACC) Paper The Commission's TSO WACC paper sets out the Commission's preliminary positions on cost of capital issues in relation to the TSO. The cost of capital is an important component of estimating the cost of the TSO. It is the cost of the funds invested in the network and non-network assets needed to supply TSO services.

The Commission intends to use a WACC of 6.0% for the purposes of estimating the net cost of the TSO in its draft determination. In comparison, for its estimation of the net cost of the TSO, Telecom used a WACC of 11.2% plus a 2% increment for factors not captured by the traditional cost of capital calculation. The Commission is not at this stage persuaded by the arguments for such an increment, but is continuing to examine this issue, which will be addressed in the Commission's draft determination.

The Commission originally specified a WACC of 8.2% when requiring Telecom to calculate the net cost of the TSO. The Commission has since refined its analysis of the key factors, and has adjusted the figure accordingly.

There are a range of factors that explain why the Commission's estimate of the appropriate WACC is lower than Telecom's. These include the Commission's view that:

* the business of serving fixed line residential phone customers is a very stable business with a low risk similar to an electricity lines business;

* the funding mechanism for the TSO whereby the cost is shared amongst the industry provides an element of insurance to the TSO business; and

* the risk-free rate used in the cost of capital calculation should be based on the 12-month NZ Government stock rate to reflect the regulatory period rather than based on government stock rates with much longer terms that match Telecom's asset lives.

The Commission will calculate a separate WACC for use in setting the final (TSLRIC) price for its Telecom-TelstraClear interconnection determination.

The Commission used international benchmarking to set the initial interconnection price in November 2002. A review at the request of both parties will see the Commission use TSLRIC for setting the final price.

Overview of DotEcon quantification of Intangible Benefits In its calculation of the cost of the TSO, Telecom engaged external consultants to assess the value of the intangible benefits Telecom derived as a result of being the TSO provider. These intangible benefits were estimated at around $3 million per annum.

The Commission engaged London-based economic consultants, DotEcon, to analyse the work of Telecom's consultants. DotEcon recommends that the Commission make some adjustments to Telecom's figures to estimate the intangible benefits relevant to its TSO cost calculation. Lower intangible benefits to Telecom are likely to result, although the final impact on the TSO cost will depend on a range of other factors being considered by the Commission.

Overview of CPNZ Model

The Commission has previously indicated its will utilise two models in its TSO cost modelling. The model released today is known as CostPro New Zealand. In April, the Commission released the Hybrid Cost Proxy Model (HCPM) developed by the US Federal Communications Commission to calculate the key parts of the incremental cost of serving commercially non-viable customers.

The CostPro New Zealand model deals with the remainder of the TSO network elements which are not represented in the HCPM model, such as core switching, core transport and transmission and concentration systems. The model will be used to calculate the incremental switching, transport and concentration costs of serving commercially non-viable customers.

Process from here

* Interested parties can make written submissions to the Commission on both the intangibles and WACC papers by 13 June. The Commission will consider these submissions in preparing its TSO Draft Determination.

* The Commission will hold a workshop on the HCPM and CPNZ models on 4-5 June.

* The Commission expects to release its draft determination on 27 June. Submissions on the draft determination will be due on 25 July and a conference on the draft determination will be held on 11 - 15 August.


Section 86 of the Telecommunications Act 2001 states:

The Commission must make reasonable efforts to do the following things not later than 120 working days after the end of each financial year of a TSP under a TSO instrument:

(a) prepare a draft determination of the matters set out in section 88:

(b) give public notice of the draft determination:

(c) include in the public notice the closing date for submissions, which must not be later than 20 working days after the date of giving public notice.

Under section 88 the draft determination must include (amongst other things) the net cost to the TSP of complying with the TSO instrument during the TSP's financial year.

Section 90 of Telecommunications Act states: The Commission must make reasonable efforts to do the following things not later than 40 working days after the closing date for submissions under section 86(c):

(a) prepare a final determination of the matters set out in section 92:

(b) give public notice of the final determination:

(c) give a copy of the determination to all liable persons in relation to the TSO instrument.

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