The Commerce Commission today published its summary and analysis of Telecom's regulatory financial statements for the year ending 30 June 2010.  As a result of its analysis, the Commission concludes that the regulatory financial statements are unreliable for regulatory purposes.  

Part 2B of the Telecommunications Act 2001 requires Telecom to publish financial statements and other information about its network, wholesale and retail business activities and services in a form determined by the Commission. These statements should provide useful information to the telecommunications industry about the operation and behaviour of Telecom.

The Commission considers that Telecom's valuation of key assets is overstated, and in particular, that Telecom's access network is overvalued by over a billion dollars. This overestimation has a flow on effect throughout the regulatory financial statements and undermines the reliability of the information.

"In valuing its assets, Telecom is required to use processes which are objectively justifiable and reasonable," said Dr Ross Patterson, Telecommunications Commissioner. "However, Telecom has not satisfied the Commission that its 2009/10 trenching discount factors are objectively justifiable and, in particular, that they reflect economies of scale. As a consequence, a number of costs, including the cost of providing rural phone lines - for which Telecom has reported a loss - are likely to be substantially overstated."

The Commission proposes to consult on a range of changes to the requirements for 2010/11 and on whether Telecom should be required to re-publish its 2009/10 regulatory financial statements to address this overestimation issue.

You can view the summary and analysis report of Telecom's regulatory financial statements for the 2009/10 year on the Commission's website at: www.comcom.govt.nz/accounting-separation

 

Background

The access network is the part of Telecom's fixed network which connects end customers to the rest of the network. It includes the cables and most of the trenches laid in cities and residential areas.

Trenching is the process of laying telecommunication cables underground.

The December 2006 amendments to the Telecommunications Act 2001 introduced new information disclosure requirements which include the accounting separation of Telecom. These regulatory reporting requirements are different from, and in addition to, Telecom's annual statutory reporting requirements (such as the Annual Report).

Under Part 2B of the Act, the Commission must require Telecom (as defined by section 5 of the Act) to prepare and disclose information about the operation and behaviour of its network, wholesale and retail activities as if they were operated as independent or unrelated companies. The Act gives the Commission discretion to determine what information Telecom must provide, including the methodologies to be used in preparing the information. The information to be disclosed may include, among other things, cost information, asset valuations and non-financial performance measures.

The regulatory financial statements include reports for each of four Services Groups specified by the Commission which define Telecom's business activities and generally align with Telecom's operationally separated business units:

  • The Access Services Group includes the activities of Chorus.
  • The Wholesale Services Group includes the activities of Telecom Wholesale but excludes international activities.
  • The Retail Services Group includes the activities of Telecom Retail and Gen-I, including all of telecom's mobile assets and services.
  • The Other Services Group includes the activities of the international business group and overseas operations, including AAPT and Southern Cross.

The Commission's regulatory reporting requirements were issued on 17 May 2010 following consultations with Telecom and other interested parties.