Appendix F: Legal Issues
As outlined above, the Privy Council:
- concluded that the use of the BW rule for pricing interconnection services provides for competitive parity and enables Clear and Telecom to compete on a level playing field in the area in which they are to be competitors. It was considered that the application of the rule would put Clear in a position to compete out over time any monopoly profits obtained by Telecom;
- held that Telecom was not acting anticompetitively in seeking to charge its opportunity cost since that is what it would have charged in a fully competitive market.
- noted that Clear had not established that Telecom's charges would be so high that Clear would be prevented from entering the market at all;
- on the question of monopoly profits, considered that while the BW rule may allow network owners to recover any loss of monopoly profits through their prices for access, the Government could introduce price control under Part IV of the Act. Alternatively, monopoly profits could be competed out.
Discussion of the Decision
In order to prove a contravention of s.36 it must be shown that there is a firm with a dominant position in a market which has used its position for the purpose of preventing, deterring or excluding competitive conduct. The Privy Council found that Telecom had not 'used' its position, as its behaviour was no different from the behaviour of a person in a perfectly competitive market. By charging its opportunity cost, Telecom had behaved as an ordinary competitor would.
Experts Views On The Decision
Officials have discussed the legal implications of the decision with a number of lawyers with expertise in the Commerce Act jurisdiction. A range of views have been expressed. One is that the decision narrows the test in s.36 of using a dominant position in a market to such an extent that it is now impossible for firms seeking access to a network to be successful in a s.36 action. Under this view the Privy Council is taken to have concluded that a firm can only be using its dominant position in a market if the use is such that only a dominant player could undertake it. That is, it is conduct that would not be undertaken in a competitive market. New Zealand courts have recognised previously that behaviour that could be undertaken by a small market player could be a breach of s.36 if undertaken by a dominant player with the requisite anticompetitive purpose.
A corollary of this view is that the approval of the BW rule means that a monopolist will always be able to charge its full opportunity costs, even if that price includes a proven element of monopoly profits and is therefore higher than the price that could be charged in a competitive market.
A contrary view is that on the facts before it, the Privy Council's decision can be considered a broadly orthodox approach to s.36. Even proponents of this view, however, consider that the Privy Council decision can be criticised for its reasoning.
In addition to concerns about the economic aspects of the BW rule as approved by the Privy Council officials have the following concerns:
- The decision could be taken as narrowing the 'use' test in s.36. The judgment has been interpreted as meaning that if a dominant player acts as a non-dominant player could have, no 'use' of a dominant position has occurred. This is the thrust of the opportunity cost argument (any price that is opportunity cost based is acceptable, as that is what is charged in a competitive market). However, the Privy Council also considered that 'if the terms Telecom were seeking to extract were no higher than those which a hypothetical firm would seek in a perfectly contestable market, Telecom was not using its dominant position'. The terms were not proved to be higher than those which a hypothetical firm would seek in a perfectly contestable market in this case.
Doubt has been created, however, as to the absolute level of price that will be acceptable. It is argued that any opportunity cost price will be acceptable, even if it contains a large proportion of proved monopoly profits (and is therefore higher than could be charged in a competitive market). - For there to be a contravention of s.36 a person must be shown to have the purpose of restricting, preventing or deterring another person from entering a market. The Privy Council held that Telecom had that purpose. However, it also considered that Clear could enter and compete in the local telecommunications market and this was material to its decision that Telecom had not contravened s.36. This leads to an apparent internal inconsistency in the reasoning the Privy Council used.
- The Privy Council referred to the fact that Clear had failed to establish that it would be altogether prevented from entering the market. As stated above, s.36 requires that the use of a dominant position by a firm be undertaken for the purpose of restricting, preventing or deterring another party from entering the market. It has been suggested that, by focusing only on 'preventing', the Privy Council has raised the evidential burden on plaintiffs. It may be that the Privy Council used the term 'prevent' as shorthand for 'restrict, prevent, deter'. It seems unlikely that future courts will be able to ignore the other two elements of the statutory test on the strength of this decision.
The Port Nelson Case
One decision of the High Court has considered s.36 in the light of the Privy Council decision. The 245 page judgment of McGechan J. in Commerce Commission v Port Nelson Ltd was released on 2 June 1995. The facts are complex, and the decision will take some time to fully analyse. The Court noted that the Telecom v Clear decision had been criticised, but did not criticise the decision itself, simply stating that the decision is 'binding in law, whatever its validity in economic theory'.
Among other things, Port Nelson Ltd was dominant in the market for tug services and required persons using its tugs to also engage its pilots. McGechan J., considering the commercial context and the purpose for the requirement (to prevent or deter competition by another company) found that a breach of s.36 had been established.
In relation to an allegation that a 5% discount (across wharves and other services when all services were used) was a breach of s.36 McGechan, J. noted:
"as has been said before, and as the Privy Council has recently made clear, even a monopolist is allowed to compete: a firm in a dominant position does not 'use' that position (within s.36) by acting in a way that a firm not in a dominant position, but otherwise in the same circumstances, would act."
The 5% discount was held to be 'normal competition' and therefore not a breach of s.36. Similarly McGechan J. held that Port Nelson did not contravene s.36 by reducing its minimum pilotage charge to $100. Both were held to be a breach of s.27.
The decision does give some comfort that the courts will be able to use s.36 effectively against anticompetitive behaviour by dominant firms. Some concerns remain. Further decisions will be necessary to establish whether the test for 'use' has been significantly narrowed.
Policy Implication Of Telecom v Clear
Our conclusion is that the New Zealand courts will continue to be able to apply s.36 in a manner that is consistent with the competition objectives of the Act. The BW rule allows a monopolist to price access by starting at final product price. This level could include an unquantified level of monopoly profits that could intentionally drive the price so high that competition was deterred. However, it is apparent that s.36 may not serve the Government's policy objectives in respect of access pricing because it is very difficult to prove to a court's satisfaction that prices include monopoly profits.
Officials consider that the mere fact that there is uncertainty as to how the New Zealand courts might interpret the decision is not sufficient reason to amend s.36. Our view is that (subject to the recommendations elsewhere in this paper) the Government should wait to see how the courts interpret the decision and legislate only if it subsequently proves necessary in order to meet the policy objectives of the Act.
The decision does, however, cause a problem. There is a quite different perception of the decision among some owners of natural monopolies. The decision has given the BW rule credibility and it is evident that there are network owners who consider that the decision allows them to charge interconnection prices that include any level of monopoly profits without fear of challenge under s.36. However, while it is true that monopoly pricing is not prohibited outright by s.36, it remains open to the courts to continue to apply s.36 to monopoly pricing in appropriate circumstances. Monopoly profits are only relevant to s.36 to the extent that they contribute to the charging of an interconnection price that is intentionally so high that the competitor will be restricted, prevented or deterred from competing. In such a case, monopoly pricing could breach s.36.
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