The Kiwi share created when Telecom was privatised is annoying Telecom’s competitors. They are obliged to contribute each year to Telecom’s costs of subsidising a basic residential service to uneconomic customers and Vodafone doesn’t agree with the manner in which these costs are calculated because mobile phone coverage gets minor consideration.
In March 2007, the Commerce Commission determined contributions payable for the 2003-2004 year and Vodafone appealed. It challenged the methodology used to determine Telecom’s losses, claiming more significance should be given to the possibility of using mobile phone technology instead of long lengths of copper wire to service distant customers.
The Court of Appeal did not overturn the Commission’s method of calculation but signalled that changes might be needed in future annual calculations given the rapid introduction of new technology.
On privatisation, Telecom was required to continue free local calling and a capped line rental for all residential customers. With a proportion of residential lines uneconomic, Telecom sought to recover some of its losses with a cross-subsidy from interconnection charges with competitors.
Resulting litigation over interconnection charges led to an agreement with government and a process for Telecom to recover from competitors the cost of subsidising uneconomic residential customers.
It is not for Telecom to decide the size of the subsidy. The Commerce Commission annually obtains information from Telecom and then assesses what would be the net costs incurred by an efficient telco in providing the subsidised service.
For the 2003-2004 year calculation, the Commission used Telecom’s existing core fixed wire network as the starting point. Vodafone’s complaint was that the Commission should have included in its starting point existing mobile phone towers. Vodafone said failing to take mobile technology into account overstated the net cost incurred by Telecom and increased the subsidy claimed.
Vodafone v. Telecom – Court of Appeal (2.12.09)
12.09.005