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Vodafone calls for radical change to the TSO

Media Release
14 April 2008

Vodafone calls for radical change to the TSO

Vodafone is calling on the Government to modernise the Telecommunications Service Obligation (TSO) by making it contestable and open to a range of technologies.

“The current method of providing basic phone service through a legislated private monopoly is out of date and doesn’t meet the needs of the rural sector” says Vodafone’s General Manager of Corporate Affairs, Tom Chignell.

Twenty years ago when the original Kiwi Share was established there was only one provider in the market. Today at least 70% of the so-called “non viable” customers are within the coverage of either Vodafone's or Telecom's mobile networks, or both. These networks can be used to deliver a better service than many rural customers currently receive.

Now there are many providers and most of the TSO services can be delivered by other technologies such as mobile and satellite.

“The TSO should be technology neutral so customers have the choice of how the service is provided. They should not have to be tied to a copper line if they can get a better service on another network,” says Chignell.

The intention of the TSO policy is to ensure that all New Zealanders have access to affordable basic telephone services but in effect the current arrangement does the opposite.

It pushes up the price of home lines in towns by force-feeding a landline calling package that does not suit many families. Increasingly, a number of households now use pre-paid mobiles as a cheaper alternative. In effect, these customers are forced to subsidise much wealthier Telecom landline customers who happen to live in rural areas.

“Rather than use a 20 year old regulation to prop up Telecom’s increasingly creaky rural copper network as the only way of reaching these customers, we should be thinking much more creatively about innovative ways of serving rural customers,” says Chignell.

Increased competition and a new technology neutral approach to delivering telephone services will help to drive greater investment and an improvement in services. Continuing with the current approach will only exacerbate the problems associated with Telecom’s underinvestment in its rural network.

“When Vodafone invests in rural areas we also have to subsidise Telecom, our biggest competitor, in those areas through the TSO. If all providers can compete to provide rural customers with the basic services on a level playing field, those customers will be much better served and the number for whom a subsidy is required to remain “economic” will shrink dramatically,” says Chignell.

There may also be a role for the Government and industry in funding the installation cost of satellite dishes for the most remote residential customers who would otherwise find the commercial service unaffordable.

Vodafone has also welcomed the report released last week by the Telecommunications Carriers Forum (TCF) which is currently reviewing the best way to provide basic residential telephone service.

“The TCF’s report is a very useful contribution to the debate around TSO reform” says Chignell.

“As a member of the TCF we will work closely with government to get a technology neutral TSO standard and an approach that gives customers choice, promotes investment and is transparent.”

Key Facts:

The Telecommunications Service Obligation is shared between eight telecommunications providers and is paid each year to Telecom to supply the TSO service.. The most recent draft total cost was $78.3 million for the 2005/06.

The Kiwi Share was part of the Telecom articles of association and agreed before privatisation. Arguably, therefore, the cost of the TSO (or the Kiwi Share as it was then) was built into the original asking price for Telecom when it was initially sold by the Government in 1990.

Subsequently, there were long-running disputes between entrants and Telecom in the 1990s over the amount of the interconnection price that was devoted to so-called "Kiwi Share losses".

Accordingly competitors are understandably annoyed at now also having to pay a levy to Telecom towards any losses associated with the TSO. Especially when Telecom retains the rights to be the monopoly provider, there is no contestability of the industry funding for TSO and the more successful entrants are the more they have to pay Telecom under the current TSO arrangements.

At current Commerce Commission calculations, Vodafone will pay a total of $75.7 million plus interest over five years to Telecom. For that amount Vodafone could have built its own network out by an additional 33% providing much greater coverage to rural New Zealand.

Vodafone estimates that around 70% of the “commercially non-viable customers” are in fact already covered by more than one network provider – casting doubt on just how “non-viable” they actually are.

Telecom’s investment in the rural network has been less than the TSO subsidy it receives each year. Minister of Communications David Cunliffe told the Digital Summit conference in November that “It is fair to say Telecom's average net new investment on rural lines in the recent past has therefore effectively been negligible” (

The cost of providing coverage to these commercially non-viable customers is increasing, despite the cost of telecommunications falling over the same period.

The TSO ensures that 95% of households covered by the TSO receive at least 14.4kbit/s internet access speed and the remainder receive at least 9.6kbit/s. This level of service is less than customers of Vodafone’s GPRS network receive today and much less than what is possible on 3G mobile, wireless and satellite services.

The three major TSO requirements are: free local calling for all households covered by the obligation; the cost of line rental should not increase by more than the cost of living in any given year and rural customers must be charged at the same rate as urban customers.


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