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

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...