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COMMERCE COMMISSION V TELECOM CORPORATION of NEW ZEALAND LIMITED and Anor HC AK CIV 2000-485-673 [18 April 2008] TABLE of CONTENTS

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COMMERCE COMMISSION V TELECOM CORPORATION of NEW ZEALAND LIMITED and Anor HC AK CIV 2000-485-673 [18 April 2008] TABLE of CONTENTS IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2000-485-673 BETWEEN THE COMMERCE COMMISSION Plaintiff AND TELECOM CORPORATION OF NEW ZEALAND LIMITED First Defendant AND TELECOM NEW ZEALAND LIMITED Second Defendant Hearing: 20-23, 27-30 August, 3-7, 10-11, 18-19 and 24-26 September 2007 Court: Rodney Hansen J Mr MC Copeland Counsel: JA Farmer QC, BD Gray QC, S Glass and JS McHerron for Plaintiff D Shavin QC, JE Hodder, PR Jagose, S Dalzell and H Northover for Defendants Judgment: 18 April 2008 JUDGMENT OF RODNEY HANSEN J AND MR MC COPELAND This judgment was delivered by me on 18 April 2008 at [10.00 a.m ], pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar Date: …………………………. Solicitors: Commerce Commission, P O Box 2351, Wellington for Plaintiff Chapman Tripp, P O Box 993, Wellington for Defendants THE COMMERCE COMMISSION V TELECOM CORPORATION OF NEW ZEALAND LIMITED And Anor HC AK CIV 2000-485-673 [18 April 2008] TABLE OF CONTENTS Introduction [1] Confidentiality [4] Issues [5] Markets Background [8] Market definition [17] Fixed-line retail phone service to residential customers [19] Wholesale network access [22] Retail ISP services for residential customers [26] Wholesale ISP services [27] Dominance [28] Fixed line retail phone services to residential customers [30] Wholesale network terminating access [46] Use of dominance Legal test [55] Development of 0867 service [56] Counterfactual analysis [77] Purpose [91] Commission’s case [93] Stated purpose [97] Inferred purpose [106] Result [114] Introduction [1] The advent and dramatic expansion of the internet during the 1990s caused a revolution in telecommunications worldwide. In New Zealand it provided a further and unexpected challenge to a telecommunications industry that was still adapting to the competitive environment created by the economic and regulatory reforms of the late 1980s. Burgeoning internet traffic greatly added to the pressures on the telecommunications infrastructure and radically changed the commercial environment. This led to the introduction by the defendants (Telecom) in 1999 of its 0867 service which is the genesis of this litigation. [2] The rapid and unforeseen growth in internet traffic had two consequences which the 0867 service was intended to address. The first was a massively increased loading on Telecom’s network. The second was an adverse and growing imbalance in fees payable by Telecom to Clear Communications Limited (Clear) under an agreement made in 1996 which had not anticipated the impact the internet would have on the industry. [3] While there was and is no issue that Telecom was entitled to take steps to address these concerns, Clear and others claimed that in doing so by means of the 0867 service, Telecom acted in breach of s 36 of the Commerce Act 1985 (the Act). They complained to the Commerce Commission that the introduction of the 0867 service involved the use by Telecom of a dominant position for the purpose of preventing Clear and others from engaging in competitive conduct in a market. Clear and other complainants ultimately reached commercial settlements with Telecom. The Commission continued this proceeding, seeking a declaration that Telecom was in breach of the Act and a pecuniary penalty. Confidentiality [4] Some of the information received by the Court is subject to confidentiality orders. Any confidential information referred to in this judgment will be enclosed in square brackets. The confidential information will be included in copies of the judgment distributed to the parties but omitted from any copies accessible to the public. Issues [5] Section 36(1) of the Act (prior to its amendment in 2001) relevantly provided: Use of dominant position in a market (1) No person who has a dominant position in a market shall use that position for the purpose of - (a) Restricting the entry of any person into that or any other market; or (b) Preventing or deterring any person from engaging in competitive conduct in that or any other market; or (c) Eliminating any person from that or any other market. [6] In order to establish a breach of s 36, three elements must be present: a) A person who has a dominant position in the market; b) Who has used that dominant position; c) For the purpose of the matters referred to in paras (a), (b) and (c) of subs (1) Telecom Corp of NZ Limited v Clear Communications Limited [1995] 1 NZLR 385 at 402 (PC). [7] Proof of these elements raises four primary issues for consideration. They are: a) To identify the relevant markets. b) To determine whether Telecom was dominant in any market. c) If Telecom was dominant, to decide whether in introducing the 0867 service it used that dominance. d) If there was a use of dominance, to decide whether it was for an anti- competitive purpose. Markets Background [8] Telecom was established in 1987 as a state owned enterprise to take over the telecommunications network services previously operated by the Post Office. From 1 April 1989 all telecommunication markets had been opened to competition. The process of privatising Telecom was completed by its sale in September 1990 to a consortium for $4.25b. Clear soon emerged as Telecom’s first competitor, commencing business in May 1991. [9] A feature of the telecommunications industry in New Zealand is Telecom’s ownership of the public-switched telecommunications network (PSTN) and associated infrastructure. The PSTN comprises a network of copper wires that connects customers’ premises to local exchanges (the local loop or last mile) and the core network or backbone that connects the exchanges to each other. [10] As a precondition of the sale of Telecom, the government took steps to ensure that private ownership of the PSTN would not adversely affect the price of telephone services to residential telephone users. It did so by means of the Kiwi Share Obligation (KSO), which attached to a share in Telecom, known as the Kiwi Share, held by the Minister of Finance on behalf of the Crown. In 1999 the rights of the Kiwi shareholder were set out in the First Schedule to Telecom’s constitution.1 Those rights could not be varied without the consent of the Minister. They were legally enforceable against Telecom at the suit of the Minister. Among other things, the KSO provided: 1 The KSO ceased to exist in 2001 when, on the passing of the Telecommunications Act 2001, its key provisions were replaced by the telecommunications service obligation (TSO). • A local free-calling option would be maintained for all residential customers.2 • Telecom would charge no more than the standard residential rental for ordinary residential telephone services and, from 1 November 1989, the standard residential rental would not be increased in real terms provided that overall profitability of subsidiary regional operating companies was not unreasonably impaired. • The line rental for residential users in rural areas would be no higher than the standard residential rental (as defined) and Telecom would continue to make ordinary residential telephone services as widely available as at 11 September 1990. [11] Competition in the nascent telecommunications markets began when Clear started offering a toll service. One of its shareholders, NZ Rail Limited, had existing fibreoptic cables running along its train tracks which enabled it to commence business as a supplier of toll services. It was able to offer customers toll services by bypassing Telecom’s core network (known as toll bypass services). Telecom agreed to carry calls from its customers to the Clear network (known as originating access) and from Clear’s network to the customer receiving the call (terminating access). In 1991 Telecom and Clear entered into an interconnection agreement (ICA) under which Telecom agreed to provide Clear with originating and terminating access. [12] In 1996 Telecom and Clear entered into a further ICA which enabled Clear to provide local interconnections as well as toll bypass interconnections. The agreement followed the 1994 decision of the Privy Council in Telecom v Clear which finally determined the basis on which Telecom could charge Clear for local interconnection, that is for connecting calls that originated on one network and terminated on the other network. The ICA provided for payment for terminating (and originating) access. The charges were, however, asymmetric. Clear was required to pay Telecom a higher rate per minute than Telecom was required to pay Clear for terminating access on Clear’s network. 2 By free-calling option is meant that the cost of local calls would be covered by a fixed monthly charge. [13] The charges for terminating access were on a “calling party pays” basis, whereby the network originating the call is paid by the customer making the call, albeit for Telecom by way of the flat monthly charge permitted under the KSO for local calls. The network terminating the call receives no income from the customer making the call. The originating network then passes some of the income received from the calling customer to the terminating network in payment for the termination service provided. The “calling party pays” method of payment is to be contrasted with a “bill and keep” arrangement whereby the originating network keeps all of the income received from the calling customer. [14] Computer owners accessed (and continue to access) the internet through telephone calls to internet service providers (ISPs) who facilitate access to the global network of computers. As one witness described it, ISPs act like a local post office. In the main centres Clear established its own access network, connecting business customers in the central business districts. It attracted a number of ISPs to its network. A feature of ISPs is that they receive a large volume of telephone calls but make virtually none.
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