Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 29

Act Section 36 provisions regarding expectations
about the behaviour of dominant firms trading in
markets governed by competition law.
The New Zealand High Court ruled in 1992 7
that Telecom's use of ECPR prices did not consti-
tute a breach of Section 36 of the Commerce Act.
As Section 36 prevents monopoly pricing only
when used with the intent of restricting, prevent-
ing or eliminating competition in a market, the
Court deemed that setting interconnection prices
above marginal cost to recover 'Kiwi Share' costs
did not of itself constitute restriction, prevention
or elimination of competition. However, when
Clear contested the decision, the Court of Appeal 8
found in 1993 that Telecom could not lawfully
charge an interconnection price that included a
component of monopoly rent (i.e. the only legal
interconnection price was marginal cost exclud-
ing the 'Kiwi Share' costs). The consistency of
the Court of Appeal decision with the contention
that Telecom alone must bear the 'Kiwi Share'
costs, and the deleterious effect that the decision
would have upon efficient entry incentives and
the ultimate ability to deliver upon the universal
service social objective, caused some dismay in
both economic and policy circles (Blanchard,
1995). That the decision also appeared contrary
to the signals of government intentions in the
'Kiwi Share' obligations themselves gave rise
to comments from some quarters of the Court of
Appeal's apparent judicial activism in coming to
the conclusion that it did.
Telecom then appealed to the final arbiter, the
Judicial Committee of the Privy Council of Great
Britain 9 . The case was heard in 1994. The Privy
Council decision argued that Clear's Section 36
case rested upon showing that Telecom had used
its dominant position for the purpose of prevent-
ing, deterring or excluding competitive conduct.
As Telecom had set its prices to Clear on the basis
of opportunity cost, it was deemed to be behav-
ing exactly as would any firm in a competitive
market, so the appeal was upheld. Further, it was
held that the application of the ECPR would put

Clear in a position to compete out over time any
monopoly profits obtained by Telecom, and that,
if they were not competed out, the Government
had the ability to introduce price controls under
Part IV of the Commerce Act. Moreover, the Privy
Council found that Clear had not demonstrated that
Telecom's prices included monopoly rent, above
that necessary to meet the social obligations of
the 'Kiwi Share' (Blanchard, 1995).

Recourse to Political Strategising

Whilst from a legal and commercial perspective,
the Privy Council resolution gave clarity and ul-
timately resulted in a significant number of new
entrants participating in the market on the basis of
ECPR-based interconnection contracts (Howell,
2007:26-7) considerable residual resentment re-
mained, both amongst Telecom's competitors and
some parts of the (voting) public. Having failed to
outmanoeuvre Telecom either in the market or via
the courts, a group of competitors, led by Clear
and the Telecommunications Users' Association
of New Zealand (TUANZ) 10 , began lobbying
politicians for the introduction of industry-specific
regulation whereby interconnection prices would
be set by a regulator rather than relying solely
upon negotiation between the firms concerned.
Telecom countered by lobbying for the retention of
the existing competition law-based arrangements.
In the short-term, the contesters' lobbying
efforts were not rewarded. In an inquiry in 1995,
The Treasury and Ministry of Commerce found
no reason arising from the 1991-94 court cases
to change either the Commerce Act or the 'Kiwi
Share' arrangements. The Minister endorsed
the inquiry's recommendations (MoC/Treasury,
1995). In the long run, however, a sympathetic
ear was found in the Parliamentary opposition
(predominantly members of the social democratic
Labour Party), many of whom had opposed both
the privatisation of Telecom and its initial sale to
a consortium of American 11 firms (although the
consortium sold 724.5 million shares (a majority)