Chorus Ltd v Commerce Commission

[2014] NZHC 690

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-9923 [2014] NZHC 690

UNDER

the Telecommunications Act 2001

IN THE MATTER OF

an appeal from a decision of the
Commerce Commission

BETWEEN

CHORUS LIMITED Appellant

AND

COMMERCE COMMISSION First Respondent

VODAFONE NEW ZEALAND LIMITED

Second Respondent

TELECOM NEW ZEALAND LIMITED Third Respondent

ORCON LIMITED Fourth Respondent

2TALK LIMITED AND OTHERS Fifth Respondent

INTERNET NZ, CONSUMER NEW ZEALAND AND TELECOMMUNICATIONS USERS ASSOCIATION NEW ZEALAND INC Interveners

Hearing:

17-19 March 2014

Counsel:

D J Goddard QC with A M Peterson and T D Smith for
Appellant
J A Farmer QC with J D Every-Palmer and J L W Wass for First
Respondent
P J Radich with T Thursby for Second Respondent

S E Fitzgerald with C R Shrive for Third Respondent M B Wigley for Fourth Respondent and Interveners No appearance for Fifth Respondents

Judgment:

8 April 2014

CHORUS LIMITED v COMMERCE COMMISSION & ORS [2014] NZHC 690 [8 April 2014]

JUDGMENT OF THE HON JUSTICE KÓS

Index

Introduction ..........................................................................................................[1] Issues for determination ......................................................................................[8] Appeals under s 60 .............................................................................................[10] Statutory framework .........................................................................................[22] Fletcher Inquiry       [23] The Act   [30] Commission’s pre-decision process...................................................................[44] Before the draft determination  [45] Draft determination  [48] UBA conference  [62] Professor Vogelsang’s report  [63] Commission’s Update Paper  [71] Decision appealed ...............................................................................................[83]

Issue 1: Did the Commission in fact adopt the Swedish price as an upper bound, and thereby err in law? .......................................................................[100]

Submissions  [100] Discussion  [108] Conclusion  [119]

Issue 2: Did the Commission in fact fail to consider s 18 other than in the context of price point selection, and thereby err in law?..............................[121]

Submissions  [121] Discussion  [129] Conclusion  [141]

Issue 3: Did the Commission in fact fail to determine what inferences could reliably be drawn from the two benchmarks about the likely cost of

providing the UBA service in New Zealand, and thereby err in law? .........[143]

Discussion  [152] Conclusion  [157]

Issue 4: Did the Commission in fact fail to consider whether a price above

$10.92 would be more consistent with s 18, and thereby err in law? ..........[158]

Issue 5: Did the Commission fail to consider whether a price reduction of this magnitude was consistent with the s 18 purpose, having regard to the limited information available to it about the cost of providing the UBA

service in New Zealand, and thereby err in law? ..........................................[158]

Submissions  [159] Discussion  [165] Conclusion  [172] Issue 6: If “yes” to any of the above, what remedy should be granted? .....[173] Conclusions .......................................................................................................[174] Result .................................................................................................................[180]

Introduction

[1]      Unbundled  bitstream  access  (UBA)  is  a  service  offered  by  Chorus.    It involves carrying broadband traffic back and forth between end users (consumers) and access seekers (service providers) across Chorus’s copper local loop, through its exchange (or a remotely located cabinet), and through Chorus’s data switch.  There it is handed over to (or from) the access seeker’s network.

[2]      Chorus’s pricing for this service is regulated.  The price paid is the sum of two parts:   the unbundled copper local loop price (the UCLL price, $23.52 per month)  and  the  UBA  additional  component  price  (the  UBA  price).1     Until

1 December  2014  the  UBA price  is  grandfathered,  at  $21.46  per  month.    The Telecommunications Act 2001 (Act) requires the Commerce Commission to determine the UBA price.  There are two stages.  First it has to undertake a review of the UBA price using an “Initial Pricing Principle” (IPP).   The IPP is based on international benchmarks.  Secondly, but only if application is made, the price is reviewed using the “Final Pricing Principle” (FPP).  That involves creating a model of the total  service long run incremental cost  (TSLRIC) of providing the UBA service in New Zealand.

[3]      The Commission was to use reasonable endeavours to undertake an IPP price determination by 1 December 2012.  Its process was consultative, involving a draft determination and a conference.  It had its complexities.  Not least because only a small number of benchmarks could be found on which to base the IPP exercise.  The Commission was not ready to release its determination in December 2012.  But that month it released a draft determination.   It suggested a UBA price of $8.93 per month.  The Commission did not issue its final IPP determination until 5 November

2013. That set a new UBA price of $10.92 per month.

[4]      Chorus (and four other parties) have applied for the price to be reviewed using  the  FPP.     In  addition,  Chorus  has  appealed  the  November  2013  IPP

determination to this Court. Appeals are restricted by the Act to questions of law.

1      These concepts are more easily understood if reference is made to the diagram at [31], below.

[5]      In essence, Chorus says the Commission erred in law in adopting the $10.92 figure.   That was the comparable Swedish price, and the highest figure in the benchmark range.  But only two benchmark countries (Denmark and Sweden) had been found to be sufficiently comparable.  Chorus says the Commission wrongly directed itself not to go beyond the benchmark range, thereby treating the Swedish price as a “bookend” for the IPP exercise.  In addition, Chorus says the Commission failed to consider the overall purpose principle, s 18 of the Act, throughout the process.  Rather, it considered it only later on, at the price point selection stage. Chorus submits the Commission failed to determine the inferences that could reasonably be drawn from the two benchmarks about the likely cost of providing UBA service in New Zealand, failed to consider whether a price above $10.92 would be more consistent with s 18, and failed to consider whether a price reduction from

$21.46 to $10.92 per month was consistent with s 18 of the Act.

[6]      The Commission (supported by other respondents and interveners in this proceeding) says that the benchmark selection process was robust and consistent with the criteria stated in the Act.   That process provided the key evidence the Commission could work from.  The Commission did not “bookend” itself.  Rather it stated it was open to adopting a “plausible range” extending beyond the benchmark range.  It considered methods of doing so.  But, the Commission says, there was no reliable evidence available to cause it to move, ultimately, outside the benchmark range.  The Commission says there was nothing unlawful about it giving primary consideration to s 18 at the price point selection stage of the process.  It says that, after balancing all the available (but necessarily limited) evidence, and applying s 18, it selected a price of $10.92.   The Commission says it was not bound to move beyond the evidence, or seek separate connecting evidence to TSLRIC values in New Zealand.  The IPP process was supposed to be a rapid one.  If any party was disgruntled with the outcome, the Act provides the remedy through an FPP-based review.  Chorus has done so, seeking a price increase.  Others have done so, seeking a price reduction.

[7]      The impatient reader may, if he or she wishes, go straight to my conclusions. They begin at [174], below.   Exigency compels early delivery of this judgment.

More time may have altered the expression of my reasons.    But not my overall conclusions, which are clear.

Issues for determination

[8]      The agreed issues for determination are:2

(a)      Issue 1: Did the Commission in fact adopt the Swedish price as an upper bound, and thereby err in law?

(b)Issue 2: Did the Commission in fact fail to consider s 18 other than in the context of price point selection, and thereby err in law?

(c)      Issue 3: Did the Commission in fact fail to determine what inferences could reliably be drawn from the two benchmarks about the likely cost of providing the UBA service in New Zealand, and thereby err in law?

(d)Issue 4: Did the Commission in fact fail to consider whether a price above $10.92 would be more consistent with s 18, and thereby err in law?

(e)      Issue  5:  Did  the  Commission  fail  to  consider  whether  a  price reduction of this magnitude was consistent with the s 18 purpose, having regard to the limited information available to it about the cost of providing the UBA service in New Zealand, and thereby err in law?

(f)       Issue 6: If “yes” to any of the above what remedy should be granted?

[9]      Issues 1 and 2 dominated the appeal.    Issues 4 and 5 in effect merged in argument.

2      The content of this list was developed with counsel at the hearing.  It ultimately reflects terms counsel for Chorus were content with.  Counsel for the Commission dissented slightly from the expression of Issue 5, which had been added by counsel for Chorus, but did not suggest any alternative wording.  I have included the former discrete Issue 6 (“if ‘yes’ to any of the above, was that an error of law?”) within each of Issues 1–5, thus obviating its further inclusion.

Appeals under s 60

[10]     Section 60 of the Act provides that a party to a determination may appeal

against that determination on a “question of law”.

[11]     There was little disagreement before me on the relevant principles applying to appeals of law under Part 2 of the Act.  The governing principles may be drawn from either appeals on questions of law, or judicial review proceedings involving alleged error of law.  As the Court of Appeal of England and Wales observed in E v Secretary of State for the Home Department, it has become a generally safe working

rule that these grounds for intervention are identical across the two streams.3

[12]     An appeal on a question of law is not a general appeal by way of rehearing. It is not a merits review.  A functional merits review for the present determination can in fact be found in s 42 of the Act.  That provides that a party to a designated access service price determination (such as here) may apply for review of the price set in that determination.  In that case, as we shall see, the Commission (which conducts the review) is obliged to approach pricing on a rather different basis.  It has to  build  a  model  which  establishes  what  the  Commission  concludes  to  be  the TSLRIC for the service.  Chorus and four other parties have taken that opportunity in this case.  So there is an appeal (on law, to the High Court) and a merits review (by the Commission), both proceeding concurrently.

[13]     It was common ground before me that this Court may only interfere with a

tribunal’s decision, on a question of law appeal, if it considers that the tribunal: (a)   applied the wrong legal test; or

(b)      took into account matters which it should not have taken into account;

or

3      E v Secretary of State for the Home Department [2004] EWCA Civ 49 at [40]. Applied in Queenstown Lakes District Licensing Agency Inspector v Turnbull Group Ltd [2011] NZAR 554 (HC) at [32].

(c)       failed to take into account matters which it should have taken into account; or

(d)came to a view without evidence, or reached a view which, on the evidence, it could not reasonably have come to.

[14]     Logically those grounds break into two broad categories or “manifestations”. The first is where the tribunal has misinterpreted what is required of it under the statutory framework – i.e., ground (a) above.  The second is where what the tribunal has  done  in  its  fact-finding  function  is  so  misconceived  that  it  constitutes  an unlawful decision – i.e. grounds (b) to (d) above.

[15]     In relation to the first manifestation of error of law – applying the wrong legal test – I bear in mind an important submission made to me by Mr Radich (on behalf  of  Vodafone).    The  point  he  made  was  that  statutory  language  is  not necessarily wholly prescriptive.   There will be a correct interpretation, of course. But that interpretation will often leave open options to a decision-maker.  In which case, judgment is required.4    In the province of criminal law, for instance, statutory language is likely to be relatively more prescriptive.  Economic regulation, on the other hand, is notoriously difficult to prescribe, given the extraordinary variety of business practices, markets and circumstances that fall to be addressed.5   The reality of economic regulation is that statutes present a chart of medium scale at best.  The exact route to be taken is left to the judgment of the navigator, the decision-maker. Usually, as here, an expert tribunal for that very reason.  In such cases, the decision- maker may have an “area of judgment”.6

[16]     In Vodafone New Zealand Ltd v Telecom New Zealand Ltd7  Blanchard J

adopted the observations of Lord Mustill, delivering the advice of the House of

4      Bennion rightly distinguishes between the statutory requirement of a decision-maker to exercise judgment, and the conferral of a discretion:   Bennion on Statutory Interpretation (5th ed, LexisNexis, London, 2008) at 122 – 129.

5      Tanner, “Confronting the Process of Statute-Making” in Bigwood (ed) The Statute:  Making & Meaning (LexisNexis, Wellington, 2003) 49, at 96.

6      As Lord Bingham of Cornill CJ put it in R v Criminal Cases Review Commission ex parte

Pearson [1999] 3 All ER 498, at 523.

7      Vodafone New Zealand Ltd v Telecom New Zealand Ltd [2011] NZSC 138, [2012] 3 NZLR 153 at [54]–[55]; R v Monopolies and Mergers Commission ex parte South Yorkshire Transport Ltd [1993] 1 WLR 23 (HL).

Lords in R v Monopolies and Mergers Commission ex parte South Yorkshire Transport Ltd.  That case concerned the construction of the words “a substantial part of the United Kingdom” in legislation governing the investigation and mergers of transport services. As Blanchard J put it:8

Lord   Mustill   drew   attention   to   the   “protean   nature”   of   the   word “substantial”,  ranging  from  “not  trifling”  to  “nearly  complete”.     He cautioned against taking an inherently imprecise word and “by redefining it thrusting on it a spurious degree of precision”.

Blanchard J went on to approve Lord Mustill’s observation:9

Once the criterion for a judgment has been properly understood, the fact that it was formerly part of a range of possible criteria from which it was difficult to choose and on which opinions might legitimately differ becomes a matter of history.  The judgment now proceeds unequivocally on the basis of the criterion as ascertained.  So far, no room for controversy.  But this clear-cut approach cannot be applied to every case, for the criterion so established may itself be so imprecise that different decision makers, each acting rationally, might reach differing conclusions when applying it to the facts of a given case.   In such a case the Court is entitled to substitute its own opinion for that of the person to whom the decision has been entrusted only if the decision is so aberrant that it cannot be classed as rational: Edwards v Bairstow.

[17]     A similar  conclusion  was  reached  in  an  earlier  Supreme  Court  decision, Unison Networks Ltd v Commerce Commission.10    There legislation required the Commission  to  set  thresholds  for  the  control  of  electricity  lines  companies. Delivering the judgment of the Court, McGrath J said:11

The requirement that it set thresholds could have been lawfully tackled by the Commission in one of two ways.  First, the Commission could have set thresholds which ascertained those companies operating inefficiently and restricted the prices they could each charge by imposing controls.   This would have included individual profit adjustments.   The difficulties in implementing this approach, due to the time it would take and the resources that would be involved in collecting information, made it unattractive. Alternatively, the Commission could seek to set price paths based on the information it had available for the industry as a whole, fine-tuning them through resetting as it became better and more specifically informed. … Both approaches were within the terms of the provisions of the subpart.  The Commission’s chosen approach for the initial and revised thresholds was the latter one and it was lawful.

8 At [54].

9      R v Monopolies and Mergers Commission Ex Parte South Yorkshire Transport Ltd [1993] 1

WLR 23 (HL) at 32.

10     Unison Networks Ltd v Commerce Commission [2007] NZSC 74, [2008] 1 NZLR 42.

11 At [77].

[18]     It follows, then, that statutory language may be imprecise, and decision- makers may have to exercise judgment among options available on the statutory words.  The only question, then, is whether the judgment made was a permissible one, or one open to the decision-maker.

[19]     Where the second manifestation of error of law is involved – error involving serious misconception in the tribunal’s fact-finding function – a “very high hurdle” is involved.12  As the Supreme Court put it in Bryson v Three Foot Six Ltd:13

Provided that the [tribunal] has not overlooked any relevant matter or taken account of some matter which is irrelevant to the proper application of the law, the conclusion is a matter for the fact-finding [tribunal], unless it is clearly unsupportable.

What matters is whether the finding being appealed was a “permissible option” or

“open to” the tribunal.14

[20]    I accept the submission made to me that greater latitude in reviewing the exercise of a tribunal’s fact-finding function will be given where that function involves determination within the tribunal’s particular area of expertise.  That much was acknowledged by the Supreme Court in Unison Networks Ltd v Commerce Commission:15

Often, as in this case, a public body, with expertise in the subject matter, is given a broadly expressed power that is designed to achieve economic objectives which are themselves expansively expressed.   In such instances Parliament generally contemplates that wide policy considerations will be taken into account in the exercise of the expert body’s powers.   The courts in those circumstances are unlikely to intervene unless the body exercising the power has acted in bad faith, has materially misapplied the law, or has exercised the power in a way which cannot rationally be regarded as coming within the statutory purpose.

12     Bryson v Three Foot Six Ltd [2005] NZSC 34, [2005] 3 NZLR 721 at [27].

13 At [25].

14     Piggott Brothers & Co Ltd v Jackson [1992] ICR 85 (CA) at [92]; Lewis v Wilson & Horton Ltd

[2009] 3 NZLR 546 (CA) at [62].

15     Unison Networks Ltd v Commerce Commission [2007] NZSC 74; [2008] 1 NZLR 42 at [55]; see also Major Electricity Users’ Group Inc v Electricity Commission [2008] NZCA 536 at [56]– [57].

[21]     Although that was an observation made in a judicial review challenge, as I have already said the principle applies equally in appeals confined to questions of law.16

Statutory framework

[22]     I turn now to describe the statutory framework, and in particular the relevant provisions  of the Act  (as  amended  by the Telecommunications Amendment Act

2011).  Before doing so, I need to look at the genesis of that legislation.  That was the report of the Ministerial Inquiry into Telecommunications (the Fletcher Inquiry) of September 2000.

Fletcher Inquiry

[23]     The Fletcher Inquiry was established by the Government in March 2000 to consider whether changes needed to be made to the very limited regulatory framework that had applied to telecommunications since the former state-owned incumbent, Telecom New Zealand, was privatised in 1990.   Apart from the Commerce Act 1986, telecommunications services were substantially unregulated. As the Inquiry noted, New Zealand had been one of the first countries in the world to privatise and deregulate telecommunication services at the same time.   Service growth, and some price falls, had occurred.   But this had happened just as dramatically in other countries.  And no other country had taken New Zealand’s approach of almost exclusive reliance on pure competition law to govern access.  As the Inquiry put it, “without exception, [other countries] have opted for industry- specific regulation”.

[24]     The Inquiry issued a draft report in June 2000.  It supported a greater measure of regulation, albeit still “light-handed”, of certain designated services.   Where interconnection was designated, a new regulatory pricing model would be needed.  It noted support “for an international benchmarking (“read across”) approach.17    That was  because  a  cost-based  approach  was  more  complex,  expensive  and  time

consuming.  And it was unlikely to result in agreement, given different views on the

16 At [11].

17     Ministerial Inquiry into Telecommunications, Draft Report (June 2000) at [7.1.1].

large number of assumptions necessary.  The Inquiry saw “considerable merit” in international benchmarking, with New Zealand able to “piggy-back” off cost-based modelling from other countries with similar characteristics to New Zealand.18  As the Inquiry noted in its draft:19

The key advantage of a benchmarking approach is that, because interconnection prices are readily available in other markets, they can be applied quickly and cheaply (relative to cost-based models).

[25]     The Inquiry received submissions.  It then issued a final report in September

2000.  The final report recommended a dual approach: an initial price determination and (if required) a second price review determination.   It recognised that different pricing principles might have to apply, given the short time frame for an initial determination to be given. The report said:20

The  initial  determination  would  ideally  get  sufficiently  close  to  the “efficient” price so that both parties accept the determination and decide not to progress to the (longer and more costly) pricing review determination. Initial pricing principles therefore would need to:

reproduce as far as practicable the likely results of applying the pricing principles that would apply to any pricing review determination; and

have regard to what is practicable to apply within the timeframe for initial determinations (30 working days, or 50 with public hearings).

[26]     The final report went on to recommend the use of benchmarking for the initial determination.  It said:21

The Inquiry recommends using benchmarking for the initial determination, using OECD countries that regulate such services using a TSLRIC type methodology and that do not have a state owned incumbent.  Benchmarks should be adjusted for factors outside the control of the incumbent that materially impact the cost of providing the service, such as differences in customer density and traffic patterns.

The Inquiry notes that a benchmarking approach would give a range of prices that could be ranked from lowest to highest by country or, as in the United States, by operator/state.  A judgement would then be required as to where New Zealand should, at any time, fit within the ranking.  The Inquiry

18     It noted that the benchmarks would need to be amended where necessary for factors in New Zealand different to the benchmark countries, such as differences in regards to customer density and traffic patterns.

19     At [7.1.3].

20     Ministerial Inquiry into Telecommunications, Final Report (September 2000) at [6.4].

21     At [7.2.1].

recommends that this judgement be made by the Commissioner on the basis of his/her best estimate of where New Zealand would fall if a full TSLRIC assessment were undertaken.  This is consistent with the earlier expressed view that the initial pricing principle should be a proxy for the pricing principle to be used in the pricing review determination ....  This is to minimise the difference in resultant prices, both to achieve efficient pricing and   to   reduce   the   likelihood   of   a   party   seeking   a   pricing   review determination.

[27]     A number of inferences can be drawn:

(a)      The initial determination might well be different from the pricing review determination if the latter was sought.

(b)Ideally, however, it would get close to the price expected on review, so that parties would not need to implement that step.

(c)      Benchmarking   (using   OECD   countries   regulating   the   relevant designated service, using a TSLRIC-type methodology, and without a state-owned incumbent) would be used.

(d)      The  benchmarks  would  need  adjustment  for  factors  outside  the

incumbent’s control materially impacting cost of supply.

(e)      Judgment would then be made by the regulator, on the basis of its best estimate  of  where  New  Zealand  would  fall  if  a  full  TSLRIC assessment were undertaken, evidently from within the benchmark range (as adjusted).

[28]    The result would then be a “proxy” for the result in any pricing review determination.  All parties before me on this appeal agree that that principle carried through into the legislation.

[29]     I move now directly to the Act, and the 2011 Amendment Act.22    Counsel advised me that no further extrinsic illumination could be found in the Parliamentary debates.

22     Telecommunications (TSO, Broadband, and Other Matters) Amendment Act 2011.  Herein, “the

Amendment Act”.

The Act

[30]   The  principal  purpose  of  the Act  is  “to  regulate  the  supply of telecommunication services”.   The Act provides for the regulation of “designated services” listed in sch 1.

[31]     One “designated service” is “Chorus’s unbundled bitstream access service” – i.e. the UBA.  Another is “Chorus’s unbundled copper local loop network service” – or  “UCLL”.    How  these  two  fit  together  is  demonstrated  by  a  useful  diagram provided by the Commission:

[32]     To explain: access seekers wishing to offer broadband services using the copper network typically purchase the UCLL service or the UBA service from Chorus.  Both are now regulated under the Act.  When Chorus provides an access seeker with the UBA service, it carries the broadband traffic between the end user and the handover point on behalf of the access seeker.   It provides access to the copper local loop, the exchange or cabinet (including a DSLAM multiplexer) and along the “aggregation path” carrying aggregated DSL traffic from the DSLAM to the handover point (the first data switch that traffic from the end user comes to in Chorus’s network).

[33]     Part 2 of the Act, providing for regulation of designated services, commences with a statement of purpose.  It is set out in s 18:

Purpose

(1)       The  purpose  of  this  Part  and  Schedules  1  to  3  is  to  promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand by regulating, and providing for the regulation of, the supply of certain telecommunications services between service providers.

(2)      In determining whether or not, or the extent to which, any act or omission will result, or will be likely to result, in competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand, the efficiencies that will result, or will be likely to result, from that act or omission must be considered.

(2A)     To avoid doubt, in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services.

(3)       Except as otherwise expressly provided, nothing in this Act limits the application of this section.

(4)      Subsection (3) is for the avoidance of doubt.

[34]     Subsection 2A was added by the Amendment Act in 2011.   The dominant provision remains s 18(1).  The purpose of Part 2 is “to promote competition in telecommunications markets for the long-term benefit of end users of telecommunication services in New Zealand”.    Subsections 2 (focusing on efficiencies) and 2A (focusing on incentives to innovate, and risks faced by, investors in new telecommunications services involving significant capital investment and offering capabilities not available from established services) are specified for the purpose of assisting analysis under s 18(1).  It is common ground that “efficiencies” refer to both static and dynamic efficiencies.   The latter are concerned with innovation, either of existing services or by the introduction of new services.  In balancing those, and in light of s 18(2A), the Commission has said it should give greater weight to dynamic efficiencies, given the Act’s emphasis on promoting competition aimed at end-user welfare over the long term.

[35]   Section 19 of the Act then requires the Commission, in making any determination, to consider the purpose set out in s 18.  The Commission must make

the determination it considers “best gives, or is likely to give, effect to the purpose set out in s 18”.

[36]     So that is how regulation of the designated services under the Act begins.

[37]    Subpart 2 of the Act enables an individual access seeker to apply to the Commission for determination of the terms (including price) on which a designated service (including UBA and UCLL) must be supplied.  Subpart 2A, inserted in 2006, provides for the Commission to instead make a determination of the terms, including price terms, on which a designated service must be supplied to all access seekers. The present decision was made under subpart 2A.  Standard terms for the supply of the UBA service were set by the Commission in Decision 611 (12 December 2007). I  was  told  that  the  price  aspect  of  the  standard  terms  determination  has  been reviewed on a number of occasions since then, the last occasion prior to the present decision being in November 2011.

[38]     Matters were then changed, fundamentally, by the Amendment Act in 2011. That changed IPP from a retail-minus price to a forward-looking cost-based price. The amendment coincided with the structural separation of Telecom New Zealand. Chorus was one of the by-products.  The previous price for UBA access – $21.46 per month – was frozen by the Amendment Act for three years, from 1 December 2011 (separation date) to 1 December 2014.23

[39]     After the three year period, the Act required pricing to be set on the basis of the initial pricing principle (IPP) or (if reviewed) final pricing principle (FPP).  For

UBA service, sch 1 of the Act defines those thus:

Initial pricing principle applicable after the expiry of 3 years from separation day.

The   price   for   the   designated   access service entitled Chorus’s unbundled copper local loop network plus benchmarking  additional  costs  incurred in providing the unbundled bitstream access service against prices in comparable countries that use a forward- looking cost-based pricing method (emphasis added)

23     Amendment Act, s 75; and Act, sch 1, pt 2, sub-pt 1.

Final pricing principle applicable after the expiry of 3 years from separation day:

The price for Chorus’s unbundled copper local loop network plus TSLRIC of additional costs incurred in providing the unbundled bitstream access service.

[40]     Moving, after the three year freeze period, from a price based on retail-minus to a TSLRIC-based price – in effect, the costs of an efficient access provider – was structurally, and potentially economically, a significant change.   The regulatory impact statement provided by the Ministry of Economic Development at the time of the Amendment Act anticipated a drop in UBA pricing.24    Mr Goddard QC, for Chorus, conceded that his client accepted that a price reduction was more likely than a price increase.

[41]     Section 77 of the Amendment Act required the Commission to undertake a review of the UBA price under s 30R to implement the new pricing principles, with effect from 1 December 2014.  Section 77(1) required the Commission to make reasonable efforts to review UBA service standard terms (including price) by 1

December 2012 – a year after separation day.   The exercise, however, proved protracted. The decision under appeal was not issued until 5 November 2013.

[42]   Section 78 of the Amendment Act then provides that a party to that determination may apply for a review under s 42.  In that review FPP, rather than the IPP, is applied.  Section 78(3) requires the Commission to make reasonable efforts to complete that review by 1 December 2014.  As I have said already, Chorus and four other parties have applied for a s 42 review. Albeit with different expectations of the outcome.   It was common ground before me that it would be difficult for the Commission to complete the s 42 review by 1 December 2014.   Counsel for the Commission evinced some optimism.  That did not seem generally to be shared.  If the Commission issues its s 42 review determination by 1 December 2014, the IPP price (the subject of this appeal) will not take effect.   It was suggested to me that

even  if  the  FPP  price  is  determined  after  1 December  2014,  it  is  open  to  the

24     Ministry of Economic Development Regulatory Impact Statement: Regulatory Issues if Telecom

Becomes a Partner in the Ultra-fast Broadband Initiative (March 2011) at [40].

Commission to backdate the effect of the determination to 1 December 2014.25    I

express no view on that proposition.

[43]     Section 53 of the Act provides some guidance as to process to be adopted by the Commission:

Procedure for determinations

For a determination made under this Part, the Commission—

(a)       is not bound by technicalities, legal forms, or rules of evidence:

(b)       may inform itself of any matter relevant to the determination in any way it thinks appropriate:

(c)       must consider all submissions made in relation to the determination and all information and opinions presented or expressed at any conference or public hearing in relation to the determination.

Commission’s pre-decision process

[44]     I turn now to the process the Commission adopted, which Chorus condemns.

Before the draft determination

[45]    As already noted, the present determination was required by s 77 of the Amendment Act.  The Commission was required to determine, using the IPP, a new forward-looking cost-based price to come into effect on 1 December 2014.  The legislation  required  the  Commission  to  use  reasonable  efforts  to  do  that  by  1

December 2012.

[46]   In June 2012 the Commission published a discussion paper.   In it the Commission noted that its proposed approach to benchmarking would involve identifying countries setting forward-looking cost-based prices, identifying services (or service components) similar to the UBA service, and identifying whether the countries were comparable.   If the benchmark service included the equivalent of

UCLL and its cost, that would need to be deducted.  The forward-looking cost-based

25     Telecom New Zealand Ltd v Commerce Commission HC Auckland CIV-2004-404-5417, 8 April

2005 and Telecom New Zealand Ltd v Commerce Commission CA 75/05, 25 May 2006.

price would need to be geographically averaged.  Relativity between the UBA and

UCLL services would need to be considered.

[47]     Submissions and cross-submissions were received in August and September

2012.

Draft determination

[48]     In  December  2012  the  Commission  published  its  draft  determination. Extensive reference to this document was made by counsel for both Chorus and the Commission.  I will, therefore, spend a little time on it.

[49] As the draft determination noted, the IPP – set out at [39] above – had two parts. The first was the UCLL standard price. The second part was the benchmarking element.

[50]     The UCLL price had been updated on 3 December 2012 to $23.52.  The price for UBA would, therefore, be $23.52 plus the additional costs incurred in providing the UBA service determined by the benchmarking exercise.  The Commission noted that the IPP was intended to be a “proxy” for the FPP.  There is general agreement that that direction is correct.   After looking at the definition of TSLRIC, the Commission noted that s 19 of the Act required it to consider the purpose in s 18, and it set that provision out in full.

[51]     The draft determination recorded the Commission had used two main criteria to identify countries to be included in the benchmark set:

(a)      Forward-looking cost-based pricing method: only countries regulating bitstream prices on a forward-looking cost-based pricing methodology would be included.

(b)Comparable  countries:  the  Commission  said  that  “the  country characteristics that are relevant to the cost of providing a wholesale bitstream service must be similar to those of New Zealand”.

In fact a third criterion – service similarity – was also employed.26

[52]     The  Commission  then  identified  31  countries  as  possible  benchmark candidates. That exercise was based on a number of sources, including questionnaire responses received from overseas regulators approach by the Commission.

[53]     The first criterion – forward-looking cost-based pricing method – was broken down further.   The Commission used a four-step filtering process.   The first filter was whether cost-based regulated pricing was used.  That eliminated 20 of the 31 countries.  The second filter was whether countries used a forward-looking TSLRIC methodology  (or  equivalent)  in  calculating  regulatory  price.    That  eliminated  a further five countries: France, Spain, Bahrain and the United Kingdom used a fully distributed cost (FDC) methodology.  The third filter was whether current costs were used in regulated pricing.   Poland used historic cost accounting in determining its TSLRIC based price.   Out it went, then.   The fourth filter was whether the cost model was designed, or expressly reviewed and approved, by the regulator.  Three countries (Switzerland, Greece and Slovakia) did not have regulator-verified models.

[54]    That left three countries that could pass through the four filters: Belgium, Denmark and Sweden.

[55]     Next,  having  looked  at  which  countries  had  forward-looking  cost-based pricing methods, the Commission considered the second criterion – country comparability.  It sought to check whether the countries identified had broadband market characteristics broadly similar to New Zealand.  As the Commission put it, “the size of the DSL markets in these countries is particularly important, as UBA services are provided using DSL”.  It focused on the three countries that had met the first criterion.  Considering both the number of broadband subscriptions and the degree of broadband penetration in the three countries, the Commission was satisfied that all three were suitable as benchmarks for setting the New Zealand UBA service

price.

26 See [56]–[57] below.

[56]     The  Commission  then  applied  a  third  overall  criterion  –  whether  the benchmark services were “sufficiently similar to the UBA service”.   That is not expressly referred to in the IPP.  But it was common ground before me that it is implicit   in   the   IPP   that   benchmarking   comparable   countries   must   involve comparable services.  Here, the Commission focused on the location of the handover point, class of service, speed of service and the technology used to provide it.

[57]     The result of this third criterion analysis was that the Commission found that only Denmark and Sweden had broadly similar UBA services to New Zealand.  But Belgium was different.  In particular, because its handover point was co-located with the  DSLAM.     Reference  back  to  the  diagram  at  [31]  will  demonstrate  the significance of that difference.   The Commission considered whether it could undertake adjustments to allow for the difference in handover point.  But it felt there was “no intuitive and transparent way of determining such an adjustment”.

[58]     The result was the Commission’s draft analysis found that only Denmark and

Sweden had regulated UBA pricing consistent with the IPP.

[59]     The draft determination then considered how to determine UBA price on the basis  of  that  two  member  benchmark  set.    The  Commission  first  undertook  a currency  conversion  exercise.    That  produced  a  Danish  UBA price  (excluding UCLL) of $10.51, and a Swedish price of $7.36.27  The median (which is the same as the mean in a two sample set) was $8.93.  (Had Belgium been included, its bitstream price would have been $6.76, and the mean would have been lower, $8.21.)  The Commission said its favoured approach was to start with that two sample set median of $8.93, and then consider whether there were grounds to deviate from that point

because of expected differences in cost, or to address s 18 concerns such as relativity.

[60]     The Commission then discussed s 18.  It noted that UBA pricing would affect UCLL unbundling in the near term, and might also affect transition to fibre in the medium term.  Should a higher price point than the mean benchmark UBA price be

chosen to encourage investment?  Its preliminary view was not.  The Commission

27     These figures were corrected, for a number of reasons, subsequently. Ultimately the comparable service prices were found to be $8.88 for Denmark, and $10.92 for Sweden.

felt that an adjustment to that price was not required to maintain appropriate incentives for access seekers to invest in copper loop-based services.   The Commission noted the specific matters required by ss 18 and 19, and the complexity of setting such a price to start in two years time.  It sought submissions on relativity between the pricing of UBA and UCLL, implications for investments in those services, whether there were asymmetric economic costs in setting the UBA price too high or too low, the likely impact on incentives to invest in broadband services, whether over copper or fibre, and effects on end users.

[61]    The Commission specifically noted s 18(2A) in its draft determination.  It considered, tentatively, that the issue was the same for both UCLL and ultra-fast broadband (UFB): whether the UBA price encouraged investment and a take-up of competing services that would benefit end users.  The Commission was unclear whether a UBA price higher than benchmark sample mean was likely to lead to investment in new innovative services, over copper or fibre, given access seekers would have an incentive to upgrade to fibre in order to differentiate their services from copper-based ones.  The draft determination concluded, “our preliminary view is that the mean price point best gives effect to the interests of end users”.  So that would be a UBA price of $8.93 per month.

UBA conference

[62]     Submissions and cross-submissions on the draft determination were received in February and March 2013.  A UBA conference was then held in June 2013.   It lasted two days.  Considerations of particular importance at the conference included the robustness of setting the IPP using a two country benchmark set; adjustments and amendments to provide additional robustness; the potential inclusion of other countries in the benchmark set through the relaxation of the benchmarking criteria used by the Commission; comparable service speed; and (particularly important for present purposes) the impact of fibre on the migration from copper, the application of s 18 of the Act, and “the possibility that the price determined could fall outside the benchmark range”.

Professor Vogelsang’s report

[63]     The Commission then commissioned a report from Professor Ingo Vogelsang, an  economics  professor  at  Boston  University  specialising  in  the  regulation  of network industries.  The report (which was produced on 5 July 2013), has a lengthy title:

What effect would different price point choices have on achieving the objectives mentioned in s 18, the promotion of competition for the long-term benefit of end users, the efficiencies in the sector, and incentives to innovate that exist for, and the risks faced by investors in new telecommunication services that involve significant capital investment and that offer capabilities not available from established services?

The  professor  recorded  that  the  Commission  had  asked  him  to  conduct  an independent analysis of the key s 18 economic considerations, when undertaking a price review for UBA, by answering the question forming the title of his paper.

[64]     The approach Professor Vogelsang took (whether of his own initiative, or on instruction,  it  is not  clear) was  that  the Commission  first  had  to  determine the feasible benchmark set, and the resulting range of outcomes, before addressing the s

18 issues. That approach is a point in issue in this appeal.28

[65]     The key point being addressed by Professor Vogelsang was this:  the IPP was unlikely to produce the “true UBA cost” (i.e. the TSLRIC, measured under the FPP). Given that fact, what were the effects of an increase or a decrease in the UBA price compared to the “true UBA cost” in terms of the s 18 objectives?

[66]     As a preliminary point, Professor Vogelsang was clear that the true UBA cost established in a TSLRIC model would be “substantially below” the current UBA retail-minus price of $21.46 per month.  This was, he said, clear from the evidence presented in the draft determination.  And it was clear from his own knowledge of other areas of the world. As the professor put it:

I would have expected a ballpark figure of about NZ$10 per month, based on international data, certainly nothing in the range of the retail-minus price of

$21.46.

28     Issue 2. See [121] et seq.

[67]     Professor Vogelsang proceeded, also, on an assumption (based on the balance of the submissions) that expected true TSLRIC of UBA for New Zealand would lie above the median identified in the draft determination.29    He then noted what he considered to be the highly uncertain nature of adjustments necessary to account for different line densities.   DSL density in Sweden was slightly lower than in New Zealand, but substantially higher in Denmark. As the professor put it:

A clean (econometric) analysis for adjusting the benchmark results to reflect the New Zealand circumstances would be quite complex (including taking care of the adjustments and equipment of network architecture for different densities) and would, in my view, totally defeat the purpose of the IPP.  It would, in my view, be out of proportion and would catapult the IPP both in terms of resource use and time requirement to the same level as the FPP. We therefore do not want to go further into the nitty-gritty of explaining or adjusting the benchmark figures for Denmark and Sweden.  Nevertheless, an adjustment by the weight given to each of the two countries may be warranted.   For example, Sweden may actually be closer in geographic properties to New Zealand than Denmark is.

In conclusion, if the benchmarking shows Denmark with a lower UBA cost than Sweden, but Sweden has lower UBA density than Denmark, then the cost differences between the two countries may well be explained by the differences in density.  Because New Zealand’s density is very close to that of Sweden, the Swedish observation is probably much closer to the true expected value for New Zealand than the Danish observation.  Consequently, a value at the 75 per cent or even 100 per cent mark between the benchmark costs of Denmark and Sweden appears to be justified.

[68]     Professor Vogelsang then undertook an indicative error analysis.   He noted that the probability distribution of the true cost would not necessarily fit in the interval spanned by the corrected Danish costs at the lower bound and Swedish costs at the upper bound.30    Cognitively, the two benchmark observations might define a distribution, but almost certainly the true distribution would extend “well beyond” those points.   That true distribution was probably also asymmetric.   He therefore

suggested a better way of looking at the relevant range was between the Danish price

(as a lower bound) and 150 per cent of the inter-benchmark difference.  This was depicted diagrammatically:31

29     Professor Vogelsang noted a number of submissions (supported by evidence) in favour of a price higher than median, but none for a price lower.

30     That is the correct ordering.   Since the draft determination it had become apparent that the calculated Danish cost was overstated and calculated Swedish cost understated. As noted before, the final determination had Denmark at $8.88 and Sweden at $10.92 (median $9.90).

31     The diagram, which is exactly as set out in the report, appears representative rather than drawn to scale.

[69]     The lower arc thus was the beginnings of what later came to be called the “plausible range”.   The actual UBA cost could not be stated.   But this conceptual exercise helped in providing direction for the optimal price, which was clearly above the “expected value” (in this example, the benchmark range median that the Commission had settled on in the draft determination).

[70]     Professor Vogelsang concluded:

The objectives of ss 18 and 19 are fulfilled by a price certainly not below but possibly above true cost.   In addition, the error analysis indicates that the price should be above expected costs.   Furthermore, the clear value of Chorus’s UBA costs appears to be above the median between the UBA cost of Denmark and Sweden.   Combining these factors justifies a UBA price with the measured UBA cost of Sweden.  Such a price at the 100 per cent mark would still be compatible with the requirement to stay within the benchmarking range.  In my view it could even exceed this value.  Since objective  measures  are  not  available,  these  statements  are  based  on subjective probability assessments.

Commission’s Update Paper

[71]     Professor Vogelsang’s report was attached to an “Update Paper” issued by the

Commission on 13 August 2013.

[72]    It dealt, first, with updates for the Danish and Swedish pricing.  Costs and exchange rates were updated. An error in the Danish benchmark was corrected.  The Commission indicated that it agreed with submitters arguing that a weighted average speed approach should be adopted.  All of this resulted in updated prices of $10.92 for Sweden and $8.91 for Denmark.

[73]     The paper indicated that it would present the Commission’s views on three

matters:

(a)      The option of weighting individual benchmarks most comparable to New Zealand to derive the “most likely forward-looking costs of the UBA service”.

(b)A proposed approach to deriving a plausible range of the forward- looking costs of the UBA service.32

(c)       The application of s 18 to the choice of a price point for the UBA

service.

[74]     The purpose of the paper was to seek further submissions on these points.

[75]     The Update Paper again set out the requirements of ss 18 and 19 (and again set out s 18 in full).   The Commission indicated its continued preference to benchmark only against countries setting their prices using TSLRIC.  That approach had been taken by the Commission in previous determinations for UCLL and mobile termination access services.  Further submissions on that point were not sought.

[76]     The Commission was clearly agonising (as Ms Fitzgerald, who appeared for Telecom  put  it  –  and  I  agree)  over  the  fact  that  it  was  dealing  with  a  small benchmark set.  It recognised that a small benchmark set would increase uncertainty under IPP in determining the price that is an “unbiased estimator” of the forward- looking costs of UBA service. And it would increase uncertainty under the IPP as to

the plausible range of such costs. As the Commission saw it:

32     This was the first reference to the concept of “plausible range”.

This plausible range represents the benchmark range within which the actual forward-looking costs of the UBA service can sit.

As the Commissioner also noted, as the size of the benchmark set increases, the likelihood of the benchmark set encompassing the plausible range increases.  On any view, that must be correct. All counsel at the hearing before me accepted that.

[77]     The Commission sought additional submissions on a further option to deal with the uncertainty.   This option arose from Professor Vogelsang’s advice: the suggestion of weighting benchmarks, where one is believed to be more comparable than others.  In this case, the Commission’s preliminary view was that the weight of evidence suggested that the Swedish benchmark was closely comparable to New Zealand.  It noted that Chorus’s adviser, CEG, agreed that Sweden was the most comparable country to New Zealand.   Other qualitative factors were considered, such  as  the  geography  of  both  countries  and  similarities  in  their  fibre  roll-out

programme.33   The Commission noted that Professor Vogelsang’s advice highlighted

the use of a probability distribution, requiring judgment on the extent of the plausible range. The Commission said:

If this option is adopted, we consider that the most appropriate approach would be to exercise our judgment and decide on the shape and position of the probability distribution that best represents the observed benchmarks.

[78]    But assuming that, for instance, Sweden was the clearly more comparable country, and if its price was adopted as the unbiased estimator, then one end of the plausible range had then to be higher than the unbiased estimator (or Swedish price):

Even a highly comparable benchmark will contain the potential for differences from the forward-looking costs of the UBA service in New Zealand.   It is not plausible that these costs have no possibility of being higher than that benchmark.

[79]     The Commission depicted that visually:

33     Albeit Sweden’s fibre roll-out did not have a government subsidy.

Plausible range where the unbiased estimator is adjusted

[80]     The Commission then moved on to s 18. The Commission said:

Once we have determined the plausible range using the inferred distribution, the Commission then uses s 18 to determine the price point selection within this distribution.

It went on to say:

Our view, supported by parties at the conference is that s 18 can affect our price point selection but cannot move us outside the process set by the IPP. In other words, we can only apply the s 18 purpose within the constraints of the benchmarking framework set out in the UBA IPP.

I do not read that particular passage as suggesting that the price point selection is confined to the benchmark range alone.  The statistical analysis undertaken by Professor  Vogelsang  and  the  Commission  plainly  suggested  the  plausible  range would overlap with, but must be capable of exceeding, the benchmark range.

[81]     In considering s 18, the Commission noted that a key factor in the success of ultrafast broadband (UFB) would be the rate of take-up and demand for services provided over UFB as an alternative to the copper network.  The Commission noted the possibility of harm from incorrectly setting the UBA price below the true (TSLRIC) UBA cost.   That, it said, could harm investment – which in turn could harm competition in the longer term.  It would not promote competition for the long

term benefit of end-users, due to potential loss of dynamic efficiency benefits otherwise resulting.   It would hinder competition through unbundling by Telecom after 1 December 2014.  And it would hinder migration to fibre-based services.  On the other hand, setting the UBA price too high could result in excessive retail broadband prices.  The overall balance, however, lay in favour of overstatement over understatement. The Commission concluded:

We  therefore  consider  that  a  price  point  above  the  median  may  be appropriate to minimise the risk to investment and dynamic efficiency gains in incorrectly setting a price below the “true” UBA cost.

[82]     Ultimately, its conclusion was that taking account of dynamic efficiencies, “a UBA price above the median would best promote competition for the [long term benefit of end-users]”. That benefit is, of course, the focus of s 18(1).

Decision appealed

[83]     The Commission received submissions on its Update Paper in September

2013. The final IPP determination was issued by it two months later, on 5 November

2013.34

[84]     The final determination, plainly, draws heavily on the preceding analysis and consultation process.  Some things are unchanged.  The IPP is intended to be a proxy for the FPP.  Benchmarked countries would be confined to those using a TSLRIC or equivalent model to determine regulated prices.  Other models (such as the FDC models used by France, Spain, Bahrain and the United Kingdom) might be appropriate for benchmarking purposes on a case-by-case basis.   Section 18 can affect price point selection, but cannot move the Commission outside the process set by the IPP.  Section 18(2A) is a reminder that setting the wrong price point for the UBA service may create disincentives to investment, inconsistent with promoting competition.

[85]     The Commission then set its task, through the benchmarking process, as

ascertaining a “plausible range for setting the cost of providing the regulated service

34     Unbundled Bitstream Access Service Price Review [2013] NZCC 20.

in New Zealand”.  It went on:35

Once we have defined the range of plausible prices – which may extend outside the range of observed benchmarks – the IPP requires us to select a price point within that range.

[86]     The Commission did not regard itself as limited to choosing the median of the benchmark range.  It remained of the view that inferring a larger plausible range was conceptually valid under the IPP, particularly where there was a small number of benchmarks.

[87]     The Commission then re-examined the three criteria referred to earlier.

[88]    Forward-looking, cost-based pricing methodology: On further review, the Commission considered that, in addition to the three countries favoured in the draft determination,36  Greece and Switzerland would also meet this criterion.   The Commission was satisfied that their regulators had had sufficient involvement in review or validation of the pricing for those countries to be included.

[89]   Service characteristics: This was the third consideration in the draft determination, but the second in the final determination.  The Commission noted that it was not limited to benchmarking against strictly “similar services”.  But it said that because it was benchmarking the “additional costs incurred” in providing UBA service, it was appropriate to consider similarity or comparability of bitstream services in countries being benchmarked.  Differences in services could mean costs were different from the UBA service provided in New Zealand.  The Commission confirmed  its  indication  in  the  Update  Paper  that  it  would  apply  the  weighted average speed price point for benchmark countries.  The Commission considered relaxing the location of handover point (which had been material in the draft determination in excluding Belgium).  However it considered it could not make a robust adjustment to estimate the comparable cost for the provision of services at different handover location  points.   It therefore made a judgment that it would

include only countries with the same handover point as in New Zealand.   That

35 At [50].

36     Belgium, Denmark and Sweden.

approach would now exclude Belgium, Greece and Switzerland, which had met the first criterion.

[90]     The  net  result  was  that  the  first  and  second  criteria  combined  left  the

Commission with just two benchmarks: Denmark and Sweden.

[91]     Comparable countries: On the third criterion the Commission gave extended consideration to Chorus’s submission that benchmark country prices should be adjusted to take into account differences in line density and accelerated migration from copper due to the UFB initiative.  It did not accept either proposal.  After extended discussion, it considered it was unable to determine the size of the bias for line density differences.  As for the impact of migration from copper, it was not satisfied that any adjustment could be made.   Both adjustments proposed required “significant assumptions and manipulation of data.  Our view is that, given the uncertainty of the assumptions, we are uncertain that the adjustments provide more

reliable benchmarks”.37

[92]     The Commission then moved to its price point selection for the UBA service. For Chorus, Mr Goddard made much of [201] and [202] of the final determination, and I set them out here:38

201In  the  following  sections  we  consider  our  price  point  selection within our two country benchmark set, and our cross-check using an expanded five country benchmark set.  We then set out our decision on the price point for the Basic UBA service.

202To determine our price point selection from within the two country benchmark set, we have started with the median of the benchmark set, and then considered whether we should move above or below the median due to any other additional factors.  The factors that we consider relevant for this price review are:

202.1differences   in   comparability   between   the   benchmark countries and New Zealand; and

202.2   section 18 considerations.

[93]     The Commission then reconsidered the issue of density.  It noted that density differences affected comparability. As a result the median of the benchmark set may

37 At [198].

38     A similar form of expression occurs also at [87], but less was made of that.

not reflect the true or TSLRIC cost of UBA.  It was therefore appropriate to adopt a weighting approach (as recommended by Professor Vogelsang).   The evidence suggested that weighting should be in favour of Sweden over Denmark.   The Commission noted there had been mixed views on that issue.  Vodafone and Chorus, for instance, favoured the placing of greater weight on particular benchmarks. Telecom was contra.  Parties had generally supported using a price closer to the Swedish price.  That was supported by Professor Vogelsang too.  In addition, New Zealand’s population density was much closer to that of Sweden, as was the number of DSLAM sites.  On the other hand New Zealand’s DSL penetration was closer to Denmark’s than Sweden’s.  Giving a 100 per cent weighting to Sweden was not justified.  It would effectively reduce the benchmark set to one.

[94]     The  Commission  then  moved  on  to  consider  s  18  considerations.     It considered the asymmetric impact of error, the potential difference between IPP and FPP pricing.  The Commission re-endorsed the view expressed in the Update Paper (and by Professor Vogelsang) that a price above median was “likely to ensure that s

18(2A) incentives are maintained”. As the Commission put it:

221Our view remains that the negative impacts on competition of under- estimating the forward-looking costs are greater than over-estimating the forward-looking costs.  This implies that we should err on the higher side to avoid the negative consequences of setting a price that is too low.

[95]     The Commission again considered the possibility of adjusting the price point further to account for a potential drop in migration from copper to fibre.   After setting out competing arguments, the Commission considered that further adjustment was not appropriate, given “that the effect of migration on the forward-looking cost of the UBA service is uncertain”.

[96]   After all these considerations were taken into account, the Commission concluded as follows:

240Having considered s 18, our view is that a price point at the top end of our two country benchmark set is appropriate to take into account the comparability of the benchmark countries and asymmetric cost.

241This gives a monthly cost-based price for the additional costs of providing the Basic UBA service of $10.92.

[97]     So that, in effect, was the Commission’s decision.

[98]    There was then a brief (five page) cross-check analysis using an expanded benchmark set.  This brought back into account three further countries: Switzerland, Greece and Belgium.  The pricing range for these countries (duly adjusted) ran from

$6.56 per month (Belgium) to $11.45 per month (Switzerland).  Taking this wider benchmark range into account, the Commission considered a 75th percentile price point appropriate (rather than the, in effect, 100th percentile chosen in the case of the two sample set).  But the result was the same.  The 75th percentile result was, again, the Swedish price (being one below the Swiss), at $10.92 a month.

[99]     The Commission then concluded:

268Our conclusion is that the cost-based price for the additional cost of providing the Basic UBA service is $10.92 per month.  We consider that … this price best gives, or is likely to best give, effect to the purpose of s 18 because:

268.1we systematically applied the IPP in order to reach our best estimate of the forward-looking cost-based UBA price for New Zealand;

268.2setting   a   forward-looking   cost-based   price   promotes competition and promotes efficiencies in accordance with s

18; and

268.3we  have  taken  into  account  s  18  including  s  18(2A)  in adjusting for the long term costs of potentially setting a price below the forward-looking costs of UBA.

Issue 1: Did the Commission in fact adopt the Swedish price as an upper bound, and thereby err in law?

Submissions

[100] One of the “two key themes” in Chorus’s submissions was that the Commission, in its determination, had narrowed the range of inquiry to the benchmark range – Denmark and Sweden – without evidential underpinning that the likely TSLRIC would be so confined.   In other words, it had “concluded that the plausible range for the cost of the UBA service was capped by the Swedish price of

$10.92”.  Mr Goddard used the expression “bookends” to describe what he saw the

Commission  as  having  done.    That  is  a  good  way  of  characterising  Chorus’s

argument.

[101]   Mr Goddard submitted that the Commission proceeded on the basis that the cost of providing the UBA service in New Zealand was no greater than the cost of providing that service in Sweden. Yet the Commission did not articulate any reasons to support that finding, and there was no probative material to support it.   He submitted that that the Commission had failed to ask itself what, if anything, could be deduced from the available benchmarks about the cost of the UBA service in New

Zealand.39    If it had asked itself that question, it could not have concluded that the

cost of providing the service in New Zealand was less than $10.92.

[102]   He submitted, also, that the Commission had treated the “plausible range” as co-extensive with the benchmark range.  Yet it had not defined what that plausible range was, if not a range determined by the benchmarks.

[103] Mr Goddard also made particular capital of the explanation given by the Commission at the beginning of its price point selection discussion, that it was undertaking that selection process “within [our/the] two country benchmark set”. That is seen in the passages at [201] and [202] of the determination. They are set out at [92] above.

[104]   Mr Goddard submitted:

Both the express language of the decision and its overall structure confirm that the Commission adopted a plausible range bound by the two observed benchmarks; directed itself that it must set a price within that range; and proceeded to consider the point within that range that it should select.

[105]   For the Commission, Mr Farmer QC submitted that it did not direct itself that it had to set a price within the $8.88 to $10.92 range.  Its price point selection was conducted with reference to the benchmark set.  But the Commission did not direct itself that it was constrained by that set.  The evidence, demonstrated by the decision itself, the Update Paper and the submissions that parties made to the Commission,

showed the Commission’s view was that it had to choose a price within the plausible

39     A point discussed more specifically under Issue 3.

range implied by benchmark evidence.  Further, that this range could extend beyond the benchmark set.   That was a view the Commission never departed from, Mr Farmer said.  The Commission was not bound as a matter of law to define the parameters of the plausible range.  Nor was it bound to adopt a price point within the plausible  range,  but  outside  the  benchmark  range.    As  Mr  Farmer  put  it,  “the statutory requirement was to set a number, not a range”.

[106]   Mr Farmer noted that neither Chorus nor other submitters were enthusiastic about the suggested basis in the Update Paper on which the plausible range could be expanded beyond the benchmark range.  Chorus had submitted that the number of countries in the benchmark range should be increased.  The Commission’s cross- check   reflected   that   submission.      Other   parties   –   Telecom,   Vodafone   and Mr Wigley’s  clients  –  had  submitted  that  the  price  should  be  set  within  the benchmark range. As Mr Farmer put it:

Given this background, it should not be surprising that there is little discussion in the decision as to why the Commission is focusing on the benchmark range.  It was simply doing what the submitters said it should.

While the Commission did not agree it was constrained to the benchmark range, it was satisfied that a price at the Swedish level gave effect to s 18.  It was, therefore, ironic, Mr Farmer said, that Chorus now attributed the submitters’ views to the Commission, even though the Commission had not accepted them, and then argued that that stance was wrong as a matter of law.

[107]   Counsel for other parties and the interveners supported the Commission’s

submissions on this issue.

Discussion

[108]  I do not find that the Commission wrongfully directed itself to, in effect, “bookend” its determination of the IPP by reference to the Denmark/Sweden benchmark range.

[109]   The  improbable  premise  in  Chorus’s  complaint  is  that  the  Commission,

having:

(a)      obtained Professor Vogelsang’s careful analysis, concluding that a plausible range would almost certainly lie outside the range of the two sample set benchmark range;

(b)recognised in its Update Paper that a small benchmark sample is less likely to contain the true plausible range of the possible TSLRIC FPP outcome;

(c)      recognised there also that taking a weighting approach within that benchmark set meant it was likely to regard the plausible range as extending beyond the range of country observations; and

(d)stated in its final determination that the range of plausible prices “may extend outside the range of observed benchmarks”:-

then forgot those directions and in effect “bookended” itself.

[110]   The Commission, plainly, was entirely conscious that the plausible range for the TSLRIC might extend beyond the benchmark range. That was the very point that Professor Vogelsang had made to it.  It recorded that fact at [50] of its decision.  The Update Paper had applied the same approach.  It beggars belief that having done so, the Commission simply forgot its own injunction when it came to selecting the appropriate price point under the IPP.

[111]   The language in [201] and [202] of the final determination is unfortunate. But in my view those passages must be read in their whole context.  Paragraph [50] of the determination, for instance, could hardly be clearer.   Likewise [51], stating that the Commission cannot be limited to selecting the median in the two sample benchmark set.

[112]   What is more instructive is to look at what the Commission did between [201] and [241] of its final determination, rather than focusing only on the first two paragraphs.  As [202] demonstrates, the Commission started with the median of the benchmark range.  That is standard statistical method.  It is a standard measure of

central tendency, reinforced here by the fact that median and mean were necessarily identical. It then considered whether it should move above or below that median. Read absolutely literally, [201] and [202] might suggest that the Commission could not move beyond the upper bound of the benchmark set. But that approach could not be reconciled with the Commission’s own injunction at [50], and with all the work that had been done in Professor Vogelsang’s report and the Update Paper. As I have said, in context it is inconceivable that the Commission would have regarded the Swedish price as an upper bound.

[113]   The Commission then analyses whether it is appropriate to take a weighting approach to depart from the benchmark median.  It concludes that it is.  It concludes that it should weight the Swedish data point more substantially than the Danish one, because  of  a  far  greater  degree  of  country  and  service  comparability  between Sweden and New Zealand.  The result of that is that the Commission considers it

should “select a price above the median, closer to Sweden.”40

[114]   Chorus sees that observation as a decision to disregard the prospect that true New Zealand cost is above Swedish cost.  I do not read it that way, however.  In my view it is simply saying that the price should be closer to Sweden than the other, Danish data point.  That outcome is achieved as soon as one goes above the median, regardless of how far.  It would remain true if the price chosen was higher than the Swedish price.  The Commission has not yet reached a decision as to the value at which the IPP-based price should be selected.

[115]   Next the Commission goes on to consider s 18 considerations.  As we have seen, it recorded Chorus’s own submission that a price point higher than median was necessary to reflect asymmetric cost.  It accepted that submission.  Both country and service comparability on the one hand, and s 18 considerations on the other, required a result above median.  The Commission also noted submissions from other parties that the price point should be the median, or that the Commission should not go

beyond the benchmark range.41   That seems to show that everyone was aware that a

result beyond the benchmark range was a real possibility.  The Vogelsang report, and

40 At [213].

41 At [226].

the Update Paper, could hardly have left anyone in any doubt.  Certainly, in my view, it did not leave the Commission in any doubt about that.  Finally, as we have seen, the Commission makes a decision as to whether to adjust the price further to account for migration away from copper.  It eventually decides not.

[116]   Finally then, the Commission lands on a number.  I have set out already in this judgment [240] and [241] of the Commission’s decision.42    The Commission’s judgment  was  that  a  price  point  at  the  top  end  of  the  benchmark  range  was appropriate to take into account both comparability and asymmetric cost (s 18 considerations).  That is the first point at which the Commission reaches a numerical determination.  It is $10.92, the Swedish price.  Nothing in the process suggests that

the Commission reached that number because it was the highest number in the plausible range.

[117]  That the Commission reached a number at the top of the benchmark range strongly  suggests  that  it  must  have  regarded  the  plausible  range  as  potentially broader.   That was the very point it made in the Update Paper.43    In a strong benchmark  sample,  with  a  large  number  of  (duly  adjusted)  data  available  as evidence, logic would draw a decision-maker towards the mean or median.  Each is a form of expression of an average across distributed data.  In this case the selection of the upper end of the benchmark range still implies probable data ranging above the selected price point – i.e. a broader plausible range.   That is the lesson from the

diagram reproduced at [79] above.

[118]   Price point selection at the top of the plausible range would be unlikely to be statistically justifiable unless s 18 considerations had profoundly skewed the benchmarking exercise.  Yet here Chorus says s 18 did not skew it enough.  Had the Commission considered that s 18 required it to select a price at the top of the plausible range, surely two things would have happened.  First, the Commission would have defined the upper end of the plausible range.  Secondly, it would have

said that that is where s 18 took it.  It did neither.

42     At [96] above.

43     At [76]–[79] above.

Conclusion

[119]   The Commission has exercised a judgment, as it is required to.  It has done so following a process probably more extensive than Parliament had in mind.   It certainly took longer than Parliament had in mind.  It is worth reminding ourselves that the Fletcher Inquiry, the progenitor of this IPP pricing process, had in mind that New Zealand could simply piggy-back international evidence, and that the result would be a “quick and cheap” process compared to the FPP cost-based modelling approach.  In directing itself to that evidence, I do not find it to have limited the plausible range to the benchmark range.  In other words, it did not “bookend” itself, confining the potential UBA price to the benchmark range.

[120]   I answer Issue 1, “No”.

Issue 2: Did the Commission in fact fail to consider s 18 other than in the context of price point selection, and thereby err in law?

Submissions

[121]   Mr Goddard submitted that s 18 is a mandatory relevant consideration, which must be applied at every point where a material judgment is made that affects the ultimate result.  That would include process decisions, decisions of exclusion of eligible benchmarks, investment in further information gathering, decisions on the range within which a price point would be selected (if there is any narrowing of options at that stage), and selection of the final price point.

[122]   He submitted that the Commission’s failure to consider and give effect to s 18 at earlier stages of its analysis (other than at the selection of the price point) was wrong as a matter of law:

(a)      First, the Commission was required to consider the s 18 purpose provision, and give effect to it, at each stage of its decision-making process.  It had to consider s 18 whenever it exercised judgment about the approach it would adopt, whenever it exercised judgment about how much fact-finding analysis to carry out, and whenever it made any findings on material issues.

(b)Secondly, it was an error of law for s 18 to be brought into play only when the Commission was “well down the track”, having made a number of significant choices about the approach it would adopt, each of which would have material impact on its ultimate decision.

(c)      Thirdly, it was an error of law for the Commission to narrow the scope of its inquiry (and, particularly, the range within which the price would be set – i.e. the subject matter of Issue 1) without considering whether to do so was consistent with s 18.  To do so would result in the Commission failing to turn its mind to whether potential outcomes it ruled out in this way would give better effect to s 18(2A) in particular.

[123]   For the Commission, Mr Every-Palmer submitted that no complaint could be made that the Commission had failed to take s 18 into account.  Plainly it had.  The complaint was really about how it structured its questioning process, and where it gave s 18 an active role.

[124]   Mr Every-Palmer submitted that the price point selection was the appropriate place to give s 18 an active role in the determination.  The prior steps of selecting benchmarks and considering adjustments involved meeting the goal of finding the most reliable estimate for the UBA TSLRIC cost.  And the Commission was well aware of the potential problems of using a two-country benchmark set.

[125]   Neither the IPP nor s 18 required the Commission to “completely avoid” the risk that the IPP price was set below the TSLRIC established on any FPP exercise. Instead the Commission was required to estimate the likely FPP price by benchmarking against comparable countries.  In doing so it had to take into account the risks of erring too high or too low in terms of the impact on competition.  That, said Mr Every-Palmer, was a “very different task to avoiding the risk that the IPP price could turn out to be below the TSLRIC cost”.  The latter would be a task not without difficulty, given that the purpose of the IPP was to set a price while avoiding the difficult task of actually calculating the TSLRIC.

[126]   For Telecom, Ms Fitzgerald submitted that prior to the price selection stage the three primary matters being considered related solely to satisfying the criteria for inclusion in the international benchmark set: forward-looking cost-based pricing method, comparable countries and similar services.   She submitted there was no room for s 18 to have any separate observable effect at these stages of the IPP process. And nor was there any legal requirement for it to do so.  These were largely factual, evidential, statistical matters.   If the Commission was carrying out these steps in accordance with the IPP requirements, it was fulfilling the s 18 purpose by doing so.   Putting that another way, Parliament had decided that the IPP process itself was consistent with s 18.  Judgment will be exercised in completing that process.  But it was driven by a need to establish the most reliable or comparable benchmark data.   To do so must be consistent with s 18.   Conversely, s 18 itself cannot compel the Commission to exercise a judgment based on unreliable, or non- comparable, benchmark data.

[127]   Mr Radich (for Vodafone) and Mr Wigley (for Orcon and the interveners) made similar submissions to Ms Fitzgerald.   Mr Radich submitted that the IPP formula was itself a manifestation of s 18 principles.  It was appropriate for that provision to come into focus at the price point selection stage.  The Commission was entitled to rely on the benchmark pricing (duly adjusted) without further inquiries about how the prices were derived being necessary.

[128]   Mr Wigley submitted there should be clear and careful delineation between decision-making  based  on  cost  attributes  (which  I  take  to  be  a  reference  to benchmark data) and decision-making based on s 18 attributes.  In his submission, Chorus’s approach would incorrectly integrate two separate steps, contrary to the primary objective (being to determine most reliable proxy of TSLRIC).

Discussion

[129]   It is instructive, I think, to look at the analytical structure the Commission derived from the statutory framework, expressed in its final determination. Commencing at [41], it directed itself as follows, under these headings: “We must benchmark against prices in comparable countries that use a forward-looking, cost-

based pricing methodology”; “We must choose a price for the UBA service within the plausible range derived from benchmarking”; “We must determine a geographically averaged price”; and “We must ensure there is no double-recovery of cost in relation to regulated services”.

[130]   Then, turning to s 18 considerations: “Our decision must give effect to the s

18 purpose”; “A forward-looking, cost-based price is likely to give best effect to s 18”; “How we have interpreted the addition of s 18(2A) in the 2011 legislative amendments”; “Relativity”; “Parties may seek a price review of this decision in accordance with the final pricing principle” and “Impact of the regulatory review of the Telecommunications Act 2001 on our determination”.

[131]   As the Commission notes in that structure, its first task in applying the IPP is to identify comparable countries that use a forward-looking, cost-based pricing methodology.  In fact, the Commission opted to give preference to those countries using a TSLRIC model, which gave it, potentially, a range of six countries (Belgium, Denmark, Sweden, Switzerland, Greece and Slovakia).   The legislation did not compel it to limit pricing in that way, but Chorus accepts that it was open to the Commission, given that the purpose of IPP was to provide a proxy for the FPP, to proceed on the basis that only countries using a TSLRIC approach would be treated as relevant benchmarks.  Chorus expressly did not challenge that approach.  To apply that approach was bound to limit the number of potential countries that could form part of the benchmark set.  But the advantage of achieving a proxy for FPP TSLRIC pricing is obvious.

[132]  In my view the Commission cannot be criticised for taking an essentially evidence-based approach to the first step in its analysis.

[133]  There is, in this, a limit to how much adjustment may be made to the international evidence obtained.  It is one thing to filter for forward-looking costing, and for country comparability.   It is another thing then to alter the outcomes for service similarity.  No criticism was made of the Commission for doing so, and in my view none could be made.   That was to ensure that the Commission was comparing service pricing of like service for like.  But the exercise is, in my view, a

relatively objective and logical one, properly involving the three criteria referred to at [51] above and, within the first (forward-looking cost-based pricing), the four filters referred to at [53] above. The result of that exercise would have been a body of evidence before the Commission that was comparable, forward-looking (TSLRIC only), adjusted to compare like service with like, and reliable. It is apparent the

Fletcher Inquiry had such a process in mind.44

[134]   The fact that such a small benchmark set  –  a sample set of two  –  was produced plainly rang warning bells to the Commission.  Its analysis in, and from the time of, the draft determination showed it was amply conscious of that consideration.

[135]   In  my  view  the  statutory  language  is  not  prescriptive  that  s  18  is  a consideration borne into (and interwoven through) the benchmarking analysis to be undertaken by the Commission, at the evidential stage.   Indeed, I can see every reason why it would not be.  That sort of external consideration does not seem to me to form a relevant part of the evidence-gathering exercise.  Rather, it is relevant to what to do with the evidence once it is obtained.

[136]   In this respect the Commission was entitled, in my view, to take the approach it did, and apply s 18 after the point at which the potential benchmarks had been identified.  In directing itself that it must choose a price for the UBA service “within the plausible range derived from benchmarking” the Commission was readying itself for just that inquiry.  The concept of a plausible range, in context (particularly given Professor  Vogelsang’s  work),  anticipated  a  weighted  outcome  either  within  or beyond the immediate benchmark range.

[137]   I therefore agree with the Commission’s observation that:45

[Section] 18 can affect our price point selection but cannot move us outside the process set by the IPP.   In other words, we can only apply the s 18 purpose within the constraints of the benchmarking framework set out in the UBA IPP.

44     At [24]–[27] above.

45 At [50].

It had made that point in the Update Paper and, as I have already said, I do not read that passage as suggesting the price point selection is confined to the benchmark range only.46     In any event, [51]–[53] of the final determination, immediately following the passage just quoted, makes that clear.

[138]  To apply s 18 at the price point selection stage, setting a price within the potentially more expansive plausible range, is in my view consistent with the Parliamentary intent evidenced by the precursory Fletcher Inquiry.

[139] It is also, in my view, an example of the point Mr Radich made, which I have discussed at [15]–[18] above. The statutory language is not entirely prescriptive. A range of approaches were open to the Commission. To apply s 18 at price point selection is a matter of judgment, and in my view not so aberrant that it could be classified as irrational. It was a permissible judgment, open to the Commission to make.

[140]   That the process has been more drawn out than anticipated, meaning practical difficulties lie in the way of completing the s 42 FPP-based price review before

1 December 2014, cannot alter the proper construction of the IPP process set forth in the Act.

Conclusion

[141]   It follows that the Commission has given substantial consideration to s 18, and its judgment to apply s 18 at the price point selection stage of its inquiry cannot in my view be considered to be an error of law.

[142]   I answer Issue 2, “No”.

Issue 3: Did the Commission in fact fail to determine what inferences could reliably be drawn from the two benchmarks about the likely cost of providing the UBA service in New Zealand, and thereby err in law?

[143]   As I have already indicated, Issues 3 to 5 occupied less time in argument.

46     At [80] above.

[144]   Mr Goddard submitted that the Commission had erred in law by failing to ask itself what (if anything) the two benchmarks established about the likely cost of providing the UBA service in New Zealand.  Where there were other cost-drivers not observed or not taken into account in the Commission’s analysis, it needed to take into account the significant limits in information provided by the benchmark about costs in New Zealand, and factor that into its s 18 analysis.

[145] Mr Goddard qualified this argument.   Chorus was not arguing that the Commission must carry out an extensive inquiry into cost relativities between New Zealand and the benchmark countries, when applying the IPP.  It accepted that the IPP process is intended to be a simpler, fast and less expensive process than the FPP process.   But it is not intended to be an “arbitrary or mechanical process”.   If the Commission lacked reliable information about relative costs, it needed to recognise, and take into account in its decision-making process, the uncertainty this entailed about the costs of the service in New Zealand.   That could only be done by proceeding on the basis that the range of plausible costs may lie substantially above the benchmark range.  It may not be possible to identify an upper or lower bound with confidence.   The Commission then needed to squarely address the question where in the plausible range it should set the price in order to best give effect to s 18.

[146]  For the Commission, Messrs Farmer and Every-Palmer submitted that the benchmarks are the primary evidence the Act directs the Commission to consider. The IPP process does not require additional or independent evidential foundation beyond the benchmark.   Having found the benchmark range, weighted the benchmarks to account for observable similarities and differences, and taken into account the s 18 purpose, the benchmarks, forming part of the plausible range, provided sufficiently cogent evidence for the Commission to fix the IPP.

[147]   They submitted that the Commission was not bound to find the benchmarks and then, separately, find connecting evidence to TSLRIC values in New Zealand. That inevitably would involve modelling – not just for New Zealand but also for other jurisdictions.  The IPP process was supposed to be a rapid one.  While a year was permitted under s 77 for the present exercise, determinations under ss 27 and 28

engaged  the  same  IPP  provisions  in  sch  1,  and  the  IPP  price  must  there  be determined within 50 working days after notice.

[148]  The Commission’s submissions were supported by counsel for Telecom, Vodafone, Orcon and the interveners.

[149]  Ms Fitzgerald (for Telecom) submitted that Chorus’s position effectively amounted to a submission that the Commission erred in law by failing to “guess” a price for the service higher than the probative evidence provided by the benchmark data.   The Commission considered, and evaluated, Chorus’s proposed further adjustments for density, and for migration to fibre.   It was entitled to reach a conclusion that these were not adequately underpinned by reliable evidence, and were too uncertain.

[150]   Mr Radich (for Vodafone) submitted that Chorus’s argument would result in the IPP being applied in a manner fundamentally different from any plain reading of the  statute.    It  would  convert  a  quick  and  cheap  process  into  a  complex  and prolonged exercise to establish and control for any underlying differences in cost between the New Zealand UBA service and the benchmark services being compared.

[151]   For Orcon and the interveners, Mr Wigley rejected the proposition that what had been done was “arithmetical and mechanical”.  The adoption of an asymmetric approach, involving weighting, showed that was not the case.  It involved an expert judgment by the Commission which the Court was ill-placed to intrude upon.

Discussion

[152]  I can be brief.  My conclusion on this issue to an extent flows from my conclusions on Issues 1 and 2.  Bearing those in mind, and the further points I am about to make, I do not consider Chorus’s complaint sound.

[153]   The benchmark evidence was what it was.  The benchmarks were based on overseas TSLRIC-derived prices only.  They involved comparable country contexts. They involved comparable services.  That is what the IPP required, both expressly and implicitly.  They therefore provided reliable evidence, to the standard required

by the Act.   Section 18 was then applied as an overlay by the Commission.   An approach I have found to be lawful.  That added (as a result of Professor Vogelsang’s analysis) asymmetry to the analysis, and a recognition that the benchmark range and the plausible range were not necessarily (or in fact) co-extensive.

[154]   In my view, if the Commission had reason to believe either:

(a)       that the benchmark evidence was not reliable, probative evidence; or

(b)the IPP outcome (based on the benchmark evidence, and allowing for consideration of s 18) was nonetheless irrational or likely to produce an outcome at a substantial remove from the likely TSLRIC found under FPP:-

then the Commission would have had a duty to inquire further (and, possibly, re- consult).

[155]   However, that was not the case here.  First, the $10.92 figure adopted by the Commission is, on any view, within the plausible range for the IPP.  Secondly, Professor Vogelsang’s independent advice to the Commission was, as I have set out at [66], that with all his relevant expertise he would have expected a “ballpark figure” of about $10 per month.  Certainly nothing like the prior retail-minus price of

$21.46.   Thirdly, the cross-check analysis undertaken by the Commission with a wider range of countries, drawing back in Belgium, Greece and Switzerland which had been excluded because of their significantly different handover location points, produced a broader benchmark range, running from $6.56 to $11.45 per month. None of this information should have suggested to the Commission that the two sample set was unreliable, or that the $10.92 figure it adopted was irrational or likely to be at a substantial remove from the likely TSLRIC established under FPP.

[156]   Beyond this, the mechanism to correct the IPP lay not in further protracted analysis to produce a more perfect IPP.  It lay in the statutory mechanism, under s 42, to obtain a full pricing review using FPP.

Conclusion

[157]   I answer Issue 3, “No”.

Issue 4: Did the Commission in fact fail to consider whether a price above

$10.92 would be more consistent with s 18, and thereby err in law?

Issue 5: Did the Commission fail to consider whether a price reduction of this magnitude was consistent with the s 18 purpose, having regard to the limited information available to it about the cost of providing the UBA service in New Zealand, and thereby err in law?

[158]   Issue 5, focused on Chorus’s proportionality argument, was for all practical

purposes subsumed into submissions on Issue 4.  I will address them together.

Submissions

[159]   Mr Goddard submitted that the Commission had erred in law by failing to consider whether a price above $10.92 would give better effect to the s 18 purpose provision.  In circumstances where it was plausible for that the TSLRIC of the UBA service in New Zealand was greater than $10.92, he submitted that s 18 required the Commission to “minimise the risk of setting a price below the TSLRIC cost of the UBA service”.

[160]   Mr Goddard submitted that the Commission had reason to expect costs in New Zealand to be higher than costs in Sweden, given the lower population density in New Zealand.  Even if density factors were neutral, there was no reason to think New Zealand costs were less than or equal to Swedish costs.

[161]   Mr Goddard also submitted that s 18, in particular s  18(2A), effectively brings into play a proportionality test.  As he reasoned, the greater the extent of regulatory intervention contemplated by the Commission, the higher the standard of justification required for that intervention.  To put it another way, the Commission needed to consider the major price cut that was contemplated, and reach a high level of confidence that it would not create an unacceptable risk to future investment and innovation.

[162]   For  the  Commission,  Messrs  Farmer  and  Every-Palmer  submitted  that Chorus had contended throughout the process that the Commission should in effect adjust the benchmarks in a way ending up with a range including the current price – i.e. $21.46.  Further, Chorus had submitted the Commission should find that the current price satisfied the IPP.  The Commission was entirely cognisant of those arguments, and actively considered them.   It could not be suggested that they had not.  The Commission also considered Chorus’s proposed adjustments, but rejected them for the reasons given earlier.

[163]   Mr Farmer submitted that neither Chorus nor the other submitters had been enthusiastic  about  the  basis  suggested  in  the  Update  Paper  for  expanding  the plausible range beyond the benchmark range.  Chorus had submitted that the number of countries in the range should be increased.  It also argued that the benchmark data points (no matter what number) should be adjusted to make them more comparable. Telecom, Vodafone, Orcon and the interveners had all opposed IPP price setting beyond the benchmark range.

[164]   It could not be suggested that the Commission had failed to consider setting a price above $10.92.   As part of its fibre migration argument based on s 18(2A), Chorus had submitted throughout that the current price should be chosen.  The possibility of setting a price above $10.92 was a live issue, considered by the Commission throughout the process.

Discussion

[165]   I am satisfied that there is nothing in the Issue 4 complaint by Chorus.   In essence it drives off the complaint considered (and rejected) under Issue 1.  I have found that the Commission did not “bookend” itself, constraining itself to an upper bound of the Swedish price.

[166]   It is also clear that in considering the implications of s 18, the Commission was entirely cognisant of Chorus’s submission that either a larger benchmark range should be adopted, or the existing benchmark range should be adjusted further.  In either case, there is no question that the Commission was aware Chorus was contending for a higher IPP outcome.  The Commission could have been in no doubt

about that.  Likewise, the Commission was aware the price it proposed involved a very substantial reduction from the grandfathered $21.46 price.  Chorus had left the Commission in no doubt about its alarm at that prospect.  In its submissions on the draft determination, for instance, it had warned the Commission about the memory of capital markets for regulatory regimes that cause significant market shocks.

[167]   The simple fact is that the Commission did not accept Chorus’s submissions. It did not agree that a wider range should be adopted (save as a cross-check – and the three additional countries added service dissimilarities, but little alteration to the existing benchmark range).   The Commission did not accept that the further adjustments Chorus contended for should be adopted. As to regulatory shock, the Commission was plainly aware of the submission.  But the new statutory regime was always going to drive a pricing sea-change.  The Commission undertook its task by reference  to  the  statutory  wording,  s  18  in  particular.     It  accepted  Chorus’s submission that that provision required it to favour the risk of overstating the IPP- based price (compared to FPP) to understating it.

[168]  Turning to Issue 5, I need say little about the “proportionality” argument advanced by Chorus.  It was advanced only tepidly in oral submissions.  In part that may be because it is not entirely clear where the argument fell within the notice of appeal.  But putting that point to one side, I have a number of difficulties with the contention advanced by Chorus.

[169]   The first is that it is perhaps more a complaint to be addressed to Parliament, rather than to the Commission or to me.  It was Parliament that defined the IPP.

[170]   Secondly, to the extent that the language chosen by Parliament left choices open to the Commission, s 18 in my view provides the only relevant guidance necessary.  I do not see a broad “proportionality” consideration adding anything useful to it.  Indeed, rather, it may detract from it.  In this case, the parties and the Commission were cognisant that one of the impacts of s 18 was that, as the Commission remarked at [221] of its decision, the negative impacts on competition of under-estimating forward-looking costs were treated as greater than those of over- estimating.

[171]   Thirdly, in light of these observations, it is unnecessary for me to address in any substantial detail Mr Radich’s submissions on proportionality.  Those were, in essence, that the proportionality principle is more relevantly associated with review of administrative action impacting fundamental individual rights, such as rights reflected in the New Zealand Bill of Rights Act 1990, rather than as  a tool to constrain the scope of commercial regulatory action.   I am sympathetic to that submission.  But it was insufficiently addressed by other parties (including Chorus) for this to be the occasion for the expression of any more considered view.

Conclusion

[172]   I answer Issues 4 and 5, “No”.

Issue 6: If “yes” to any of the above, what remedy should be granted?

[173]   Given the negative answers to the issues posed earlier,  Issue 6 does not require a response.

Conclusions

[174] Despite  the  combined  intelligence  and  force  with  which  Chorus’s submissions were delivered, I am left unpersuaded that the Commission erred in law in setting the IPP price for UBA.

[175]   First, I have held that the Commission did not “bookend” itself – i.e. limit the plausible range in which the IPP price could be set to the benchmark range produced by the Danish and Swedish data points.  The Commission was conscious that a plausible range for IPP pricing could (and probably would) exceed the benchmark range.  Expert evidence given to it by Professor Vogelsang made that clear.  Exactly that prospect was then floated in the Commission’s Update Paper.  It was the specific subject of further submissions.   In my view, submitters were plainly aware that a price point above the confines of a more limited benchmark range was a possibility. The Commission, in my view, was also open to that possibility, even though it picked a price point at the very top of the benchmark range.  That itself implied a plausible range beyond the benchmark range.  In setting the price point under IPP,

the Commission exercised judgment.  It did not in fact confine the plausible range to the benchmark range.  There is no basis for me to find that it erred in law in the first respect alleged by Chorus.

[176]   Secondly, I have held that the Commission considered s 18 appropriately, and that it was entitled to focus on that consideration after analysing the international benchmark evidence for price setting comparability, country comparability and service similarity. That exercise, in my view, is evidence-based, and does not require adjustment for s  18  considerations.   Having isolated the relevant evidence,  and having identified its benchmark data, the Commission must then consider what s 18 tells it as to where the IPP-based price should be set, within a plausible range for TSLRIC.     The  Commission  did  that.     This  approach  was  one  open  to  the Commission to take.  It did not err in law in the second respect alleged by Chorus.

[177]   Thirdly, I find the Commission did not fail to determine what inferences could reliably be drawn from the benchmark data about the likely cost of providing the UBA service in New Zealand. This was very much a tertiary argument to the two primary arguments.  Had the Commission had reason to believe that the benchmark evidence was not reliable, probative evidence or that the proposed IPP outcome, based on the benchmark evidence and allowing for consideration of s 18, was irrational or likely to produce an outcome substantially removed from the likely TSLRIC found under the FPP, the Commission would have had a duty to inquire further.  But those were not the circumstances here.  The benchmark evidence was reliable and probative.   The IPP outcome was not evidently irrational, however unpalatable it may have been to Chorus.  The mechanism to correct the IPP price lay not in further protracted analysis to produce a more perfect IPP price.  It lay in the statutory mechanism, under s 42, to obtain a full pricing review using the FPP.

[178]   Fourthly, I find that the Commission did not fail to consider whether a price of $10.92 would be consistent with s 18, or whether a price reduction of this magnitude was consistent with s 18.   The Commission was aware of the scale of price  reduction  involved.     It  considered  Chorus’s  submissions  that  a  larger benchmark range should be adopted, or that the existing benchmark range should be adjusted further, thereby increasing price under the IPP.  But it did not accept those

submissions (other than by the performance of a cross-check analysis involving three additional data points, which did not alter the outcome).

[179]  Finally, in my view the Commission has just done what Parliament has prescribed.  An IPP price based on international benchmarks, reached relatively quickly and cheaply.  Although, in this case with probably far more analysis than either the Fletcher Inquiry or Parliament anticipated.  If the outcome is considered unsatisfactory by some, the answer lies in a s 42 price review.

Result

[180]   The appeal is dismissed.

[181]   The respondents represented at the hearing are entitled to costs.    If these cannot be agreed, I will receive memoranda.

[182]   I am grateful to counsel for the excellence of their submissions.

Stephen Kós J

Solicitors:

Chapman Tripp, Wellington for Appellant

R J Bernau, Wellington for First Respondent

T Thursby, Wellington for Second Respondent

Russell McVeagh, Auckland for Third Respondent

Wigley & Company, Wellington for Fourth Respondent and Interveners