Telecom faces a battle to hold onto the subsidies its rivals pay it to service rural New Zealand, with a Government report outlining radical potential changes to the Telecommunications Service Obligation.
Described as "grossly unjust" by the Telecommunications Users Association, the TSO mandates free local calling and basic phone and internet services be offered by Telecom nationwide.
To ensure hard-to-reach customers are included, the industry must chip in to help Telecom cover the cost, which the Commerce Commission found came to $78.3 million last year.
But Telecom's rivals say the method used to make the calculation is flawed and that they should instead be allowed to step in and serve Telecom's loss-making customers using alternative wireless technologies.
The report says this concept of contestability "may be feasible for some areas of New Zealand where there already exists network capability which could be suitably adapted to supply a fixed telephone service equivalent of the Telecom copper cable-based telephone service".
It cites the wireless infrastructure of Vodafone, Woosh and state-owned Kordia as examples of existing networks.
In an equally significant proposal, Telecom may have to commit to minimum levels of investment in its rural access network to keep receiving the TSO payments, with the report citing evidence of long-term under-investment on Telecom's part.
According to consultancy Network Strategies, Telecom's average annual level of rural fixed network investment since 1994 has been "less than half the depreciation allowance for an equivalent efficient replacement network which for assets with an economic life of between 15 to 20 years is estimated to fall between $50 million to $70 million per annum (gross)".
According to the report, 564,000 or around 14 per cent of the population lives in rural regions. Over 100,000 businesses, which last year accounted for a quarter of GDP and two-thirds of exports, are also based in the regions.
Another game-changing idea floated includes using the TSO "to address shortfalls in the coverage of broadband networks", boosting minimum internet access requirements well beyond the dial-up access speed Telecom currently has to offer.
The report also raises the prospect of outsourcing management of the TSO to the private sector to free up Commerce Commission resources and to have TSO contributors make interim payments to Telecom to avoid the nine-month lag between the end of the financial year and the final TSO calculations.
A few aspects of the TSO are non-negotiable - the Government wants to retain free local calling for all New Zealanders and to keep its power of veto when it comes to significant shareholder and company constitution changes at Telecom.
"Pretty much everything is on the table," said Communications Minister David Cunliffe.
Telecoms rivals were unwilling to comment on the document in depth over the weekend as they had yet to digest its contents.
"We applaud the Government for taking such an in-depth look at something which has become such a millstone around the industry's neck," said Vodafone spokesman Paul Brislen. Vodafone's contribution to the TSO last year was calculated at $19.7 million.
The call for submissions for the first time allows the industry to mount its case for changing the regime that has seen several companies forced to write multimillion-dollar cheques to Telecom year after year.
Cunliffe expected rapid action to be taken on the TSO following his office's consideration of the submissions.
REVAMP: WHAT COULD HAPPEN?
* The method of calculating the TSO - altered to take into account Telecom's investment in its rural networks.
* Introduce minimum, mandated service requirements for broadband.
* Introduce contestability - allowing Telecom's rivals to tender for contracts to service rural areas.
* Make the TSO a set fee that's collected by the private sector rather than the Commerce Commission.