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TSO Update: Net cost calculation & TSO instrument

TSO Update: Net cost calculation & TSO instrument

The annual process of determining the net cost to Telecom New Zealand Limited of providing local residential telephone services under the telecommunications service obligations (TSO) deed has commenced, with Telecom providing its own net cost calculation for the 2002/2003 financial year.

Telecom is required to provide the Commission with its own net cost calculation not later than 60 working days after the end of its financial year. Telecom's calculation for the period from 1 July 2002 to 30 June 2003 is $215.5 million.

Telecom's calculation is based on the methodology used by the Commission in its 2001/2002 draft determination, with the exception of the weighted average cost of capital (WACC). Telecom used a WACC of 13.1 percent, in contrast to the 6 percent WACC used by the Commission in that determination. The Commission will consider Telecom's calculation in its determination of the 2002/2003 TSO costs.

The Telecommunications Act requires the Commission to determine the net cost of TSO to Telecom, and to apportion that cost across both Telecom and other network operators providing retail services.

The Commission is currently finalising its cost calculation for the 2001/2002 financial year, and expects to complete its final determination in October 2003.

In addition to the net cost of TSO, Telecom is required to provide an annual assessment of compliance with the service quality measures defined in the TSO instrument. The Commission in turn is required to review Telecom's compliance with the TSO instrument, and notify Telecom and the Minister of Communications in writing of any non-compliance by Telecom with the TSO instrument.

Manager of the Commission's Network Access Group, Osmond Borthwick, said the Commission has received Telecom's assessment for 2002/2003 and has concluded that the TSO service quality measures have been met for the period.

"The basic measurement methodology is the same as that for the previous period, involving a number of complex sampling processes and approximations. Accuracy has been enhanced through increasing the number of network devices sampled," said Mr Borthwick

He added that the Commission reserves its position on appropriate measurement methodology for future periods and will require progressive expansion of sampling to improve robustness and adequate levels of reporting on internet "line connect speeds".

Telecommunications Act Background

Section 80 Assessment of compliance with TSO instrument: Not later than 60 working days after the end of each financial year of a TSP under a TSO instrument, the Commission must -

a) Assess the TSP's compliance with the TSO instrument during that financial year in accordance with any process set out in the TSO instrument; and

b) Notify the TSP and the Minister in writing of any non-compliance by the TSP with the TSO instrument.

Section 83 Calculation of net cost and auditor's report must be given to Commission - Not later than 60 working days after the end of each financial year of a TSP under a TSO instrument that does not contain a specified amount, the TSP must provide to the Commission-

a) calculations of the net cost of complying with the TSO instrument during the financial year; and

b) a report prepared by a qualified auditor that includes a statement of whether or not the calculations comply with -

I. any prescribed requirements relating to those calculations; or
if there are no prescribed requirements, any requirements of the Commission.

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