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Background Information On Telecom Prosecution

Background Information

The Commerce Commission

The Commerce Commission is an independent quasi-judicial body and is not subject to direction in its enforcement and regulatory control activities. It has responsibility for enforcement and regulatory control under a number of general and specific regulatory regimes set out in the: Commerce Act 1986, Fair Trading Act 1986, Electricity Industry Reform Act 1998, Telecommunications Act 2001, Dairy Industry Restructuring Act 2001 and Credit Contracts and Consumer Finance Act 2003.

Commerce Act investigation into alleged anti-competitive behaviour
Many businesses, for example banks, operate from multiple sites within New Zealand (and often overseas) and need to regularly securely transmit large volumes of data between these sites and/or establish a permanent private network amongst them. To meet this need, telecommunications companies offer such businesses a variety of high-speed data transmission services.

On or about 1 December 1998, Telecom introduced new pricing for its retail high-speed data transmission services (termed “Streamline”), and in March 1999 Telecom introduced new wholesale pricing (termed carrier data pricing (“CDP”)). Through CDP, Telecom provided and continues to provide other telecommunication service providers competing with Telecom with two wholesale data service options:
a) The ability to resell Telecom’s retail high-speed data transmission services (both dedicated and switched). Through CDP, Telecom offers other telecommunications service providers its retail end-to-end high-speed data transmission services for re-sale;
b) Access to dedicated data tails in Telecom’s network in order to supplement the other telecommunications service providers’ own network and, thereby, provide retail high-speed data transmission services.

The Commission alleges that the manner in which the service option in (b) above is provided, and the way in which it is priced has the effect that in almost all circumstances the price charged by Telecom for access data tails required by other telecommunication service providers to supplement their own network:
a) Exceeds the price charged by Telecom to the telecommunication service provider for an “end to end” data service, when provided for re-sale;
b) Exceeds the comparable retail price charged by Telecom for provision of comparable data services;
c) Exceeds the price Telecom charges itself for access to the data tails;
d) Exceeds the sum of Telecom’s direct incremental cost and opportunity cost of supplying access to the data tails.

Since 26 May 2001, section 36 of the Commerce Act prohibits persons who have a substantial degree of market power in a market from taking advantage of that position for various purposes, including preventing or deterring competitive conduct by others. Prior to 26 May 2001, the prohibition under the Commerce Act was use of a dominant position.

The Commission alleges that Telecom was dominant and has a substantial degree of market power. While alternative network infrastructure has been developed in selected areas, Telecom still owns and operates the only nationwide telecommunications network in New Zealand.

Telecommunications Act: Commission’s recommendations on Local Loop Unbundling
Under section 64 of the Telecommunications Act 2001, the Commerce Commission is required to undertake a review into whether access to the unbundled elements of Telecom’s local loop network and access to the unbundled elements of, and interconnection with, Telecom’s fixed Public Data Network should be regulated. The Commission completed its review and made its recommendations to the Minister of Communications in December 2003. The Minister is now considering the recommendations and is expected to make a decision in May 2004.

The Commission considered issues related to the regulation of data tails in its Review of Unbundling of the Public Data Network, as data tails are part of that network.

In the review, the Commission found that access to data tails was a major ‘bottleneck’ feature of the market for the provision of high quality committed bit rate services to corporates and other large users. Outside of the areas where there was competing network infrastructure, the Commission determined that competition was limited and that there were likely net benefits to unbundling parts of the Public Data Network.

Despite these issues, the Commission did not recommend to the Minister of Communications that access to unbundled elements of Telecom’s fixed Public Data Network (relating to data tails) should be a specified or designated service. The Commission’s decision was influenced by Telecom presenting an Unbundled Partial Private Circuits service offer that has the potential to adequately address the Commission’s current issues concerning access to data tails without regulation. Though the Commission was not satisfied that the offer was suitable in its current form, it decided that opportunity should be allowed for industry negotiations to result in an enhanced service that will promote further competition in that market. Should such an outcome fail to eventuate by June 2004, the Commission considers that it would be appropriate to re-evaluate the merits of regulated unbundling of a data tails or partial private circuits service at a long-run incremental cost price.


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