New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited
Beginning in June 2008, the High Court of New Zealand (the Court) heard a case brought by New Zealand’s Commerce Commission (the Commission) against Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited (collectively, Telecom). The Commission alleged that Telecom used its dominant position in the telecommunications industry to achieve an unlawful and unfair advantage over other firms engaged in data transmission. Specifically, the Commission alleged that over a period beginning on 1 December 1998 until late 2004, the wholesale price charged by Telecom to other telecommunications service providers (TSPs) for access to data tails was so high, relative to Telecom’s retail price, as to cause a price squeeze. The Commission thus argued that Telecom's action violated the Commerce Act (the Act) since Telecom used its dominant position in the wholesale market for data tails to set wholesale prices and other terms and conditions at a level that would prevent or deter TSPs from competing in the relevant retail market and deter those TSPs from competing in the wholesale market for ‘backbone’ transmission services. (See Box 1.)
Box 1: The New Zealand Commerce Act
The Commission alleged that Telecom had violated s. 36 of the Commerce Act. During the period in question (December 1, 1998 – late 2004), s. 36 was amended. From December 1, 1998 until May 25, 2001, s. 36 read as follows:
36. Use of dominant position in a market – (1) No person who has a dominant position in the 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.
From May 27, 2001 onward, s. 36 provides as follows:
36. Taking advantage of market power –
(2) A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of –
(a) restricting the entry of a person into that or any other market; or
(b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) eliminating a person from that or any other market.
The key issues in contention in the case were whether Telecom used its position of dominance and, if so, whether its position of dominance was used for one or more of the prohibited purposes outlined in the Act.
To determine whether Telecom "used" its position of dominance, a causal link had to be established between the impugned conduct and the dominance or market power. The Court applied a counterfactual test to determine if this causal link existed:
"The causal link between dominance and the impugned conduct is shown by the counterfactual test. That requires, in the context of this case, an examination of whether Telecom acted in a way in which a hypothetical firm, not in a dominant position but otherwise similarly placed, would have acted...Telecom has acted in a way in which it could not have acted if it had not been dominant, it will have used its dominant position... in cases where the conduct in issue concerns the pricing of a dominant vertically integrated provider of network infrastructure and services, an economic model is employed. The application of that model in the market in which Telecom operated is at the heart of this case.”
In essence, the counterfactual test required considering whether the prices charged by Telecom were no greater than the prices it would have charged if it was not-dominant and active in a hypothetical competitive market. If this counterfactual test suggested that Telecom would have charged the same prices, then Telecom would not have “used” its market powers. The Court applied an economic analysis in this counterfactual test that used the "Efficient Component Pricing Rule" (ECPR) (see Box 2). The ECPR model identifies pricing that permits efficient entry by competitors. In this case, the Court found multiple violations of the ECPR. The Court then applied the counterfactual test and considered whether a non-dominant firm that was otherwise in the same position as Telecom would have offered data tails to rivals at above ECPR prices. Based on this counterfactual test, the Court was satisfied that Telecom had, in fact, used its dominant position.
Box 2: The Efficient Component Pricing Rule (ECPR)
The Court gave the following background to the ECPR:
“ECPR was specifically devised in order to address the problem of how to price network access in markets dominated by a single vertically integrated provider of network infrastructure and services. The seminal article on ECPR is William J. Baumol and J. Gregory Sidak, “The Pricing of Inputs Sold to Competitors”, (1994) 11 Yale Journal on Regulation 171. It identifies the objective of ECPR as to price access in a manner that compensates the incumbent for properly incurred costs, including profits foregone, while at the same time ensuring that the price of access is sufficiently low so as not to deter entry. A price set in accordance with ECPR will permit efficient entry by ensuring that an entrant’s costs will not exceed those of the incumbent. A price which exceeds it will be harmful because it impedes efficient entry.”
See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 45.
After establishing that Telecom did “use” its dominant position, the Court considered whether Telecom used its dominant position for the purpose of achieving a proscribed purpose under the Act. The Commission alleged that Telecom used its dominant position to prevent or to deter other persons from engaging in competitive conduct in the market, specifically,
- To prevent or deter existing or potential TSPs seeking access to Telecom’s data tails from competing in the retail market, and
- To deter existing or potential TSPs from competing in the national wholesale market for backbone transmission service.
The Court noted that “purpose” can be established in two ways. First, it can be inferred from the effects of the use of a dominant position since a person can be assumed to intend to cause the direct effects of his or her actions. Second, purpose can be established by direct evidence of what the conduct was intended to achieve. Thus, Telecom would have used its dominant position for the purpose of achieving a proscribed purpose under the Act if there was either evidence that the conduct had actually produced anti-competitive effects or direct evidence that the impugned acts were intended to produce anti-competitive effects.
The Commission pointed to four matters as direct evidence of an anti-competitive purpose.
- Telecom’s delay in introducing Carrier Data Pricing (CDP). On February 1, 1999, Telecom introduced new retail pricing called Streamline. This pricing was introduced quickly and covertly in order to sign up customers as fast as possible before rivals became aware of what was happening. CDP, an approved pricing offer for wholesale customers, was not made until March 31 and was not finalized until August 31. The Court agreed that the way in which the new Streamline pricing was introduced, juxtaposed with the delay in introducing CDP, suggests that Telecom sought to exploit the opportunity to secure an advantage over its rivals, even though the advantage would be relatively short-lived.
- Telecom’s “network of choice” strategy. One of Telecom’s acknowledged objectives associated with developing Streamline retail pricing and CDP was to create incentives for rival TSPs to view Telecom as the “network of choice”. Telecom sought to encourage rivals to use Telecom’s network for access rather than build their own, competing networks. The Commission argued that Telecom’s ultimate objective was to prevent rivals from becoming “true competitors” who could compete on pricing and service. The Court, however, was not persuaded that the “network of choice” strategy was designed to achieve an anti-competitive purpose.
- Acknowledgements by Telecom that its philosophy was that there should be no price competition between rival TSPs. The Commission pointed to evidence that Telecom’s pricing strategy was designed to prevent price competition between Telecom and rival TSPs. Telecom’s response was that in data transmission, it was not providing an essential component, but a data circuit and was therefore entitled to price accordingly. The Court, however, noted that where rival access networks do not exist or are not economic to build, then access to Telecom’s network is a necessary input into the sale of data services.
- The absence of evidence from those responsible of the purpose of CDP. The Commission pointed to the fact that Telecom had failed to call evidence that an ECPR analysis had taken place or to explain why such an analysis had not been conducted. The Commission suggested that a negative inference should be drawn by this failure to call evidence. The Court held that while one inference that could be drawn from this absence of evidence was that Telecom intended its CDP to be non-complaint with ECPR, this was not the only possible inference that could be drawn. Accordingly, the absence of evidence could not be used as direct evidence of an anti-competitive purpose.
Ultimately, the Court did find that Telecom had used its dominant position for the purpose of achieving a proscribed purpose under the Act. The Court pointed to the foreseeable effects of charging high prices for wholesale tail circuits, as well as the manner in which CDP was implemented as the basis for its conclusion. The Court held:
"In our view, the readily foreseeable effects of pricing two-tail circuits to TSPs above ECPR and, in many cases, above retail prices, is sufficient to support an inference that Telecom used its dominance for the pleaded purposes. The way in which Streamline and CDP were introduced and the statements of those responsible for their introduction are consistent with a strategy on the part of Telecom to deny rival TSPs access to data tails at prices that would permit them to utilise and develop their own networks for the purpose of data transmission."
In terms of remedy, the Court determined that the Commission was entitled to seek declaratory and pecuniary relief only in respect of Telecom’s acts after March 18, 2001. Relief for Telecom’s actions prior to this date was statute-barred due to the expiry of relevant limitation periods. With respect to declaratory relief, the Court made the following statement:
“Telecom used and/or took advantage of its dominant position/market power from 18 March 2001 until late 2004 (when Telecom introduced a UPC service) for the purposes of deterring potential or existing competitors in the wholesale market for backbone transmission services and the retail market for end-to-end high speed data transmission services.”
The issue of pecuniary penalty was reserved for separate consideration.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at paras. 3-4.
 The first issue to be determined in a case involving allegations of abuse of dominance is whether the person alleged to have abused its dominant position is, in fact, in a position of dominance. In this case, it was readily established that Telecom was indeed in a position of dominance. Thus, the Court focused on the next two issues, which were more contentious.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 11.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 136.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 142.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 151.
 See New Zealand Commerce Commission v. Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited at para. 188.