Tom Chignell: Passing on savings from mobile rates proves to be a very good call

The banking system has been in the news quite a bit lately. Local banks have raised interest rates for long-term loans, despite the Reserve Bank lowering wholesale interest rates to all-time lows.

The Reserve Bank Governor, Alan Bollard, has called on the banks to "pass on" these savings to its customers, something that's apparently falling on deaf ears.

The problem that faces the Reserve Bank is that it cannot directly set the retail rates banks use so it must tackle the wholesale market and strongly urge banks to do the right thing.

This is a good thing because we don't want a state-appointed governor deciding what price a bank can charge in the market any more than we want MPs fixing the price of butter.

These decisions are best left to the business selling the product and to the consumer buying the product. Too expensive? Shop around and find a better deal.

The telecommunications industry faces a similar issue in the guise of the Commerce Commission investigation into mobile termination rates.

Termination rates are the price telcos charge each other to recover the costs of terminating calls without billing the customer directly. In New Zealand it is the calling party who pays. That is, if you call me, you pay for the call.

However, if you've called me, you're paying your telco for the call and I'm not paying my telco anything despite my telco incurring costs for delivering that call.

So the telcos have worked together to introduce termination rates. They share the income from the call to cover their costs. If you call me from your landline, your telco gives my telco so many cents per minute. My telco covers its costs and doesn't charge me for using the network.

The Commerce Commission believes the rates which the telcos charge each other for termination are too high and that because of that, new telcos can't come into the New Zealand market.

It has recommended to the Government that termination rates from fixed networks to mobile networks be dropped dramatically, something it believes would lead to a drop in the retail rate we pay to call mobile phones from land lines.

The Government of the day rejected that recommendation because the commission is facing the same problem the Reserve Bank faces: it cannot set the retail price, only the wholesale price. It simply has to hope that the fixed line telco will do the right thing and "pass through" savings to the customer in the form of cheaper calls to mobile phones.

Unfortunately that isn't a given. In Australia, the fixed line incumbent Telstra has passed on only 25 per cent of the savings. In effect, regulation has taken money off the mobile phone companies and put it in the pocket of the fixed line phone companies with no gain for the customer.

In New Zealand the Government rejected the Commerce Commission's recommendation for one reason: Vodafone and Telecom offered to reduce the termination rate by less than the commission wanted, but to sign legally binding documents that would guarantee every cent saved by the reduction would be passed to customers. The Government could see that a guaranteed pass through of 100 per cent beats out an uncertain pass through of an uncertain amount.

We are two years into the deed and termination rates have been reduced each April.

The savings amount to $21 million in 21 months and that money has been saved directly by customers.

Why did we offer to do this? In the five years the deed was supposed to run Vodafone would reduce its termination rate from 20c per minute to 14c per minute, saving customers an estimated $90 million.

Lower prices mean people use the service more often and everyone wins. What we don't want is to lower rates, see competitors pocket the difference and customers lose out.

Vodafone has offered to extend the agreement with the Government by another three years. By the end of that period we will have passed through $215 million in savings directly to customers.

Pass through works well for the very people the commission is there to help: the customers.

* Tom Chignell is Vodafone's general manager of corporate affairs.