New Zealand: Tails, you lose - the Data Tails decision and misuse of market power

Last Updated: 21 July 2012
Article by Troy Pilkington, Chris Bowden, James Every- Palmer and Sarah Keene

The Court of Appeal has its say on Telecom's 'data tails' pricing

The Court of Appeal has dismissed Telecom's appeal against the High Court decision in the Data Tails case.1 It also allowed the Commerce Commission's cross-appeal that the High Court had not in fact gone far enough in the extent to which it had found that Telecom had breached the misuse of market power prohibition in the Commerce Act 1986.

This Alert highlights some of the observations made by the Court of Appeal on the application of the market power prohibition, and in particular, the application of ECPR pricing. The decision provides welcome recognition that provided a vertically integrated supplier genuinely tries to calculate an appropriate ECPR price it will not be lightly overturned, and that such calculations can be difficult. However, the Court of Appeal's finding that complying with ECPR pricing may be insufficient to avoid a breach of the Act, without articulating a clear test to replace the business certainty that ECPR provided, increases risk for both entrants' and incumbents' investment decisions.

Background

Telecom appealed against the High Court's 2009 decision that it had taken advantage of its market power to deter existing and potential competition from telecommunication service providers ("rival telcos") in high-speed data transmission markets. The background to the finding was that in the early 2000s, rival telcos conveyed data between and within major CBD areas either using their own network, or, outside their own network area, over Telecom's local access network. At the relevant time, rival telcos needed to purchase the 'last mile' components - data tails - from Telecom, and package those inputs together with their own transmission to deliver business customers a retail end-to-end high speed data transmission service.

The High Court found that, between March 2001 and late 2004, Telecom had taken advantage of its market power in relation to the relevant data transmission markets to deter competition from the rival telcos. Telecom appealed, and the Commerce Commission ("NZCC") cross-appealed, submitting that the breach should be extended to a greater range of pricing practices, including to the period before March 2001.

Taking advantage of market power2

It was alleged that Telecom had caused a "price squeeze" by setting prices for data tails in the wholesale market that prevented equally or more efficient rival telcos from profitability operating in the downstream market for high-speed data transmission.

The Court of Appeal agreed with the High Court that Telecom was obliged to supply data tails to rival telcos. The central issue was therefore the appropriate wholesale price at which the tails should be supplied. The leading case on vertically integrated companies pricing inputs to rivals is the Privy Council's decision in Telecom v Clear.3 This case established that the economic model known as the Efficient Component Pricing Rule ("ECPR") should be used as guidance to businesses on how to price network access.

Under ECPR, the access provider (Telecom) can charge competitors a price that compensates Telecom for its incremental costs together with its opportunity costs (the profits foregone by not providing the full retail service to the customer itself). This approach has been consistently applied since the Privy Council decision in 1994. The Privy Council thought that any other approach would turn the Court into a price regulator and that the role of constraining monopoly profits was to be fulfilled either by competition over time or else through price regulation under Part 4 of the Commerce Act 1986 ("Act").

The appeal raised a number of general points, each of which provides some useful observations on the application of the ECPR pricing rule:

Ability to price above ECPR: Telecom argued that the Privy Council in Telecom v Clear regarded ECPR as a safe harbour only, not a price ceiling. This meant that while Telecom would not breach the Act if it priced at ECPR, it would not necessarily breach the Act if it was priced above ECPR. The Court of Appeal rejected this argument, finding it "inconceivable" that the Privy Council considered that an incumbent could with impunity charge more than ECPR.4

Ex ante commercial certainty: Telecom argued that that ECPR could not have applied because it was impossible as a matter of practical or commercial reality, at the time it determined its pricing of the relevant tails, to calculate ECPR prices for those tails.5 The Court of Appeal's first response was that it did not find any evidence that Telecom had made a real effort to calculate ECPR prices in advance. It also rejected the submission that ECPR was too difficult to calculate.6 It found the Privy Council's decision in Telecom v Clear envisaged that the calculation of ECPR prices would require a high degree of focus from Telecom, including regular reviews.

The Court of Appeal did, however, demonstrate some sympathy for the difficulties in applying an ECPR price. It described the courts' involvement in this type of analysis as being to create a "philosophical abstraction" that is applied to a practical market price.7 However, it ultimately found that Telecom was a sophisticated company with the capability and organisational structures to at least attempt an estimation of ECPR pricing.8

Helpfully, for future cases, the Court did also hold that it would have been reluctant to second guess a genuine attempt by Telecom to apply ECPR prices, had such an attempt been made.9 This must, however, be read subject to the comments below that compliance with ECPR pricing does not necessarily avoid a breach of section 36.

A comparison of NZ, US and EU approaches to "price squeeze" analysis: Telecom argued that the High Court should have followed the United States approach to price squeeze claims where they are only illegal if the predatory pricing test is also met. This approach can be contrasted with approach taken in Europe, which is significantly stricter on price squeezes.

The Court of Appeal distinguished both the United States and European jurisprudence, primarily on the basis that the cases cited to it addressed industries which were already subject to regulation, so the relevant issue was the interaction between competition law and regulatory regimes. It found this question was not relevant to the instant case, because at the time of the alleged misconduct the pricing of data tails was not regulated.10

The Court of Appeal also rejected the United States approach that a price squeeze claim can only be established through the lens of predatory pricing, that is, the firm with market power must price below cost at a retail level and have a reasonable prospect of recoupment of losses arising from the predatory conduct. The Court of Appeal found that, whilst predatory prices may create price squeezes, not every price squeeze will involve predatory pricing. It found the key issue was the relativity between Telecom's wholesale and retail pricing.11

The Court of Appeal at the same time cautioned against drawing too much assistance from European cases. Unlike in Europe, in New Zealand a firm with a lawful monopoly is not under a general duty to assist competitors, and monopolies have no 'special responsibility' to assist smaller competitors. The Court of Appeal sought to distinguish the European cases (which have been distinguished also by the Privy Council and the Supreme Court in the s36 context) by requiring that price squeezes will only be anti-competitive if they prevent "equally efficient" competitors from "climbing the ladder of investment".12

Application of ECPR to data tails: The Court of Appeal agreed with the High Court that Telecom had priced above ECPR in its 'two tail' pricing scenarios (where Telecom provided data tails at each end of an end-to-end circuit).

It also accepted the NZCC's cross-appeal in relation to 'one-tail' scenarios (where a rival telco self-provided one or more tails and Telecom supplied the remainder). In the High Court, the judge had found that, in setting the price for the 'one tail' scenario, Telecom should be able to recover profit forgone on its entire network, as this was consistent with the ECPR principle that Telecom should be indifferent between supplying itself and supplying a new entrant. The High Court noted that, given the high proportion of fixed costs in the industry, that price was unlikely to give rise to any actual entry. The Court of Appeal disagreed with that approach.

The Court of Appeal emphasised that a key aspect of the Telecom v Clear judgment was that efficient competitors should not be excluded from competing.13 It also found that it was unlikely that Telecom's pricing would allow monopoly profits or inefficiencies to be driven out of the market (short of a rival telco building a ubiquitous network).14 Accordingly, the Court of Appeal concluded that, while Telecom's one-tail pricing was compliant with ECPR, it was still inconsistent with Telecom v Clear in that it excluded entry and allowed a monopoly profit to be earned.

While the Court of Appeal did not expressly set a new test, its approach seems to match that of the Court of Appeal in Telecom v Clear (ie the approach overturned by the Privy Council): the access provider should set the access price by reference to the incremental costs of providing access and a reasonable return on capital employed without regard to the present monopoly. What a "reasonable return" is, that falls short of being a monopoly profit, is a matter of considerable uncertainty in the absence of regulation.

Summary

The Court of Appeal provided welcome recognition that calculating an ECPR price is a particularly difficult undertaking. In reliance on Telecom v Clear, it also held that genuine attempts to price at ECPR should be not be overturned lightly by the courts.

However, the Court's reasons for distinguishing the US case law, under which a price squeeze cannot occur unless pricing is also below cost, were not compelling .15 Its dismissal of the concerns about "chilling" investment by incumbents through price squeeze claims, because chilling investment is also a concern arising from allowing a duty to supply, is similarly unpersuasive.16 Its reliance on the effectively lower European threshold, which is derived from an administrative system governed by the European Commission, where dominant companies have a 'special responsibility' to assist competitors, is an intensely worrying development.

It is also concerning to see the Court depart from the previously accepted proposition established by the Privy Council nearly 20 years ago that ECPR is a safe harbour. This creates considerable uncertainty for companies with high market shares in supplying to downstream rivals - a common situation in New Zealand in our highly concentrated markets. Ultimately, prices above incremental costs are necessary to attract entry into industries with high fixed costs, and certainty around likely return is necessary for entrant and incumbent investment decisions. The Privy Council's approach in creating a safe harbour through ECPR struck a reasonable and workable balance. Tampering now with that safe harbour does very little for market confidence or business certainty at a time when both are needed for proper functioning of markets.

Footnotes

1 Telecom Corporation of New Zealand Limited v Commerce Commission [2012] NZCA 278 ("Decision"). See previous Alerts on the High Court liability and penalty judgments.
2 See our October Alert http://www.russellmcveagh.com/_docs/CompetitionUpdate14October2011_422.html for fuller description of the s36 prohibition.
3 Telecom Corporation of New Zealand Limited v Clear Communications Limited (1995) 1 NZLR 385.
4 Decision, [88].
5 Decision, [92[.
6 Decision, [93]-[95].
7 Decision, [103].
8 Decision, [100].
9 Decision, [101].
10 Decision, [120].
11 Decision, [123].
12 Decision, [124].
13 Decision, [235]-[236].
14 Decision, [238].
15 Decision, [120] and [121]. The distinction suggested, that the US case law cited to the Court only dealt with the situation where a sector-specific regulation was in place, and no such regulation existed in relation to Telecom at the relevant time, is not convincing. Although the relevant data tails were not at that time subject to the Telecommunications Act 2001, other aspects of Telecom's service were regulated, just as in the US authority in Trinko.
16 Decision, [122]. It is equally arguable that while a duty to deal may "chill" investment by incumbents, that concern is ameliorated if the incumbent can charge ECPR and so be assured a full return on its investment if such a duty to deal arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions