The Commerce Commission has released its telecommunication service obligations (TSO) determination covering the 2007/08 year for Telecom's local residential telephone service. The final TSO cost is $72.1 million.

The final TSO cost has increased from the amount calculated in the draft determination, which was $70.7 million. This change has largely been due to a change in the weighted average cost of capital (WACC) used between the draft and the final determinations. In the draft, the Commission used a WACC of 6.8 per cent. This was revised upwards to 6.9 per cent in the final determination.

The TSO cost for 2007/08 has increased by $10.7 million from the TSO cost for 2006/07. One reason for the increased TSO cost is the increase in WACC from 6.3 per cent in 2006/07 to 6.9 per cent in 2007/08. The risk free rate is a factor used in the calculation of WACC and in 2007/08 this rate increased to 7.6 per cent from the 6.8 per cent that was used in 2006/07 TSO cost calculation.

Under the TSO, Telecom is obliged to provide certain local residential telephone services to residential customers who may not otherwise be provided with those services at an affordable price. The Commission calculates the net cost of those services, which are met by the telecommunications industry.

The total cost for 2007/08 will be shared between Telecom, TelstraClear New Zealand Limited, WorldxChange Communications Limited, Vodafone New Zealand Limited, CallPlus Limited, Compass Communications Limited, Teamtalk Limited, Woosh Wireless Limited, Airnet NZ Limited, Orcon Internet Limited and 2degrees Mobile Limited. The total cost is shared in proportion to their liable revenues. Telecom bears approximately 67 per cent of the TSO cost, Vodafone bears 26 per cent, TelstraClear 6 per cent and 1 per cent is shared between the remaining companies.

A copy of the Commission's final determination will be available by 1pm on 7 October 2009 on the Commission's website www.comcom.govt.nz under 2007-2008 TSO Determination.  

Background

The TSO Deed for Telecom's Local Residential Telephone Service Obligations is a TSO instrument under Part 3 of the Telecommunications Act and is the successor to the Kiwi Share. The TSO was established by the Crown to facilitate the supply of certain telecommunications services to groups of end-users within New Zealand to whom those services may not otherwise be supplied on a commercial basis or at an affordable price.

The Commission administers this TSO Deed by:

  • monitoring compliance with the TSO Deed by Telecom;
  • determining the net cost faced by Telecom of complying with the TSO instrument during the financial year in accordance with the Telecommunications Act;
  • determining which companies qualify as 'liable persons'; and
  • determining the apportionment of this net cost among the liable persons and Telecom.

The 'liable persons' are companies whose networks are interconnected with Telecom's PSTN and who provide telecommunications services to end-users through their public switched telephone networks (PSTN).

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.

The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time.