The Commerce Commission made an error in law in the way it set the levies for Telecom's unprofitable rural phone services, the Supreme Court ruled yesterday.
In a unanimous judgement, the Supreme Court decided the antitrust regulator got it wrong in the way it interpreted the Telecommunications Act to set the now-defunct Telecommunications Service Obligation by not incorporating new technology, including mobile networks, in its methodology.
That meant the commission overvalued the net costs to Telecom, to which rivals had to contribute, for providing phone services to remote locations. The requirement was imposed when Telecom was sold by the government in 1990 and was known as the Kiwishare obligation.
Vodafone New Zealand, which faced the biggest cost under the TSO, and Telecom reached an out-of-court settlement in August in the seven-year dispute, but the regulator requested a decision as other parties not privy to the proceedings would be affected by the determination.
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"The commission erred in law by failing to adjust its model to take account of mobile technology, where an efficient service provider would use it," Chief Justice Sian Elias said in the judgement. "It did not therefore eliminate 'unavoidable' incremental costs."
Judge Peter Blanchard said the commission's original error in setting its valuation methodology was compounded when it couldn't accommodate new technologies, and it "should have reappraised the situation and concluded that it must not continue to use a model which even Telecom's counsel, in his submission to us, described as a flawed model".
The regulator needs to remodel its methods so it can properly make TSO determinations in the 2008/09 and 2009/10 years for the benefit of other parties, such as TelstraClear, Judge Blanchard said.
Judge Andrew Tipping said the commission committed an error of law by correctly interpreting the meaning of "net cost", but misapplying that interpretation.
"I consider the commission must have misinterpreted the statutory definition of net cost when it allowed Telecom the benefit of valuing its existing assets on an 'as-new' or 'cost of replacement' basis," Judge Tipping said. "By doing this the commission failed to reflect the reality that the assets were not new and that they did not require replacement."
In effect, that let Telecom pass on the cost of depreciation when that wasn't a real cost, Judge Tipping said.