IHUG LIMITED & ANOR V TELECOM & ANOR HC WN CIV-2006-485-1578

IHUG LIMITED & ANOR V TELECOM & ANOR HC WN CIV-2006-485-1578 20 September 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2006-485-1578UNDER Section 60(1)(b) of the Telecommunications Act 2001 and Part 10 of the High Court Rules IN THE MATTER OF an appeal on a question of law from Determination 582 of the Commerce Commission BETWEEN IHUG LIMITED CALLPLUS LIMITED Appellants AND TELECOM CORPORATION OF NEW ZEALAND LIMITED TELECOM NEW ZEALAND LIMITED Respondents Hearing: 13 September 2006 Appearances: M B Wigley and F Campbell for Appellants J D Palmer and L Riddiford for Respondents J S McHerron for Commission Judgment: 20 September 2006 In accordance with r 540(4) I direct the Registrar to endorse this judgment with a delivery time of 2.30pm on the 20 th day of September 2006.JUDGMENT OF CLIFFORD J Introduction[1] On 19 July this year IHUG Limited and Callplus Limited ("the appellants") filed a notice of appeal pursuant to s 60(1)(b) of the Telecommunications Act 2001 ("the Act") against a determination of the Commerce Commission ("the Commission") under the Act, namely Determination 582 dated 12 June 2006.[2] On 6 September the appellants applied for orders: a) Granting leave to adduce further evidence by affidavit, such evidence to be as outlined in an affidavit of John de Ridder ("the de Ridder further evidence"); and b) Requiring, in effect, Telecom to discover: i) The documents and information "redacted" from the enclosures with letter from the Commission to the appellants' solicitors dated 1 September 2006; and ii) The information "redacted" from paragraph 197 of the public version of the Determination (such documents and information together "the Telecom Redacted Data"). [3] I refer to these orders as the further evidence order and the discovery order respectively. [4] The appellant's 6 September 2006 application was made in reliance on Rules 9, 293-320, 715 and 716 of the High Court Rules, and on the inherent jurisdiction of the Court. [5] Each of Telecom Corporation of New Zealand Limited and Telecom New Zealand Limited, as the respondents, filed notices of opposition as regards both the further evidence order and the discovery order. [6] The Commission, although not a party to the appeal, also filed a notice of opposition, but limited its opposition to the further evidence order. In that notice of opposition the Commission recorded that it would abide the Court's decision as regards the discovery order.Background to application[7] Part 2 of the Act provides for the Commission to determine all or some of the terms on which various designated telecommunications services, listed in Schedule 1 of the Act, must be supplied by an access provider to an access seeker. [8] Bit stream access is a wholesale service provided by an access provider to an access seeker to enable that access seeker to provide retail broadband services to customers. [9] Telecom's bit stream access service is a designated telecommunications service. [10] On 10 March 2006 the appellants separately applied to the Commission for determination of the terms of access by them to Telecom's regulated bit stream access service. [11] On 22 June 2006 the Commission issued Determination 582, being its determination of the appellants' applications for access to Telecom's bit stream service. Very much in summary, Determination 582 follows closely the terms of an earlier decision, Determination 568, which had determined the terms and conditions upon which TelstraClear might have access to the same service. The price provided by Determination 582 was in excess of that provided for in Determination 568, the increase being the result of the application of what is, in effect, a consumer price index for retail broadband internet access. [12] The appellants' appeal, which counsel for the appellants Mr Wigley acknowledged in written submissions was principally concerned with the price that had been settled on in Determination 582, is limited by s 60(1)(b) to an appeal on points of law. The legal errors asserted by the appellants in their notice of appeal, although not accepted as constituting legal error by the respondents or the Commission, are that:a) The Commission failed to take into account and/or correctly construe the appellants' cross submissions of 9 May 2006. b) The Commission made various errors in the calculation of the price owed in Determination 582. c) As regards (in effect) the Telecom Redacted Data, the Commission sought and/or used that information when it ought not to have done so, and breached natural justice and/or consultation obligations to the appellants in its use of that information. [13] In points on appeal filed on 6 September, the appellants elaborated on the Commission's alleged errors. Those points on appeal generally restate the issues referred to above, but include the following specific matters: a) The Commission failed to consider properly the appellants "back haul submissions", involving a $1.92 error; and b) The Commission erred by adopting the WARP methodology, or misapplied it, and further erred in using the Telecom Redacted Information without providing that information to the appellants and/or without consulting them about that information. [14] Much of the argument on this interlocutory application reflected, directly or indirectly, issues raised by the respondents and the Commission as to whether or not the appellants' points on appeal do, in fact, raise questions of law. That will, inevitably, be an issue at the substantive hearing of this matter and I do not propose to discuss it – save as is necessary for the determination of this interlocutory application. [15] It is necessary, however, to comment briefly on the substance of the appellants' complaints as to the price set by Determination 582, to provide a context for both the application to adduce the de Ridder further evidence and the application for discovery of the Telecom Redacted Data.[16] As I have recorded above, in Determination 568 the Commission determined the price and other conditions upon which TelstraClear was to have access to Telecom's bit stream access service. As to price, and as required by the Act, the Commission needed to determine an imputed retail price. This price had to be imputed because Telecom does not offer a bit stream access service at the retail level, but offers a bundled service. In order to arrive at the imputed retail price, the Commission needed to remove certain other charges, including what is termed the data transmission charges. [17] Those latter charges were removed by what the Commission described as a linear regression methodology. [18] Having arrived at an imputed retail price, the Commission also needed to provide a methodology within Determination 568 to update over time that imputed price by reference to changes to Telecom's pricing of bundled services. To do this, it derived what was described as the WARP factor. This was, in effect, a price index for retail broadband services. [19] A number of complex and contentious issues arise as a result. [20] The appellants advanced in their submissions and cross-submissions, although not in their original application, an alternative imputed retail price, calculated by Mr de Ridder. This would, relative to the approach taken by the Commission, appear to involve Mr de Ridder recalculating (using the regression methodology in Determination 568 but updated Telecom pricing information) a new imputed price. The Commission had, for its part, decided in Determination 568 that reapplying the regression methodology to a changing Telecom price base over time was not its preferred updating approach, and relied on the WARP factor approach instead. [21] This led to Mr de Ridder asserting that the imputed price should be $22.70 per month.[22] In addition, the appellants' assert that the Commission misconstrued their submissions, particularly by reference to a factor known as "back-haul charges". This should, say the appellants, have reduced the price sought by the appellants by $1.92 to $20.74. [23] In his written submissions on this interlocutory application, counsel for the appellants identified what he called the first head of appeal, mistake as to price, and the second head of appeal, use of the WARP methodology. [24] Under the first head, he referred specifically to the error as regards the back- haul analysis, and concluded:The access seekers contend that the price should be reduced by $1.92 less the discount of 16%.[25] To that extent, he would appear not to assert an error as regards the Commission declining to adopt de Ridder's reworked regression analysis. At the same time, however, and in the context of the use of the WARP methodology, he identified "a price drop of $6" which translates to "$720,000 for every 10,000 customers". Such a price drop implicitly, as I read matters, asserts that the Commission should have adopted the de Ridder regression calculation and was in error not to do so. [26] Against that background I now turn to the two orders sought in these interlocutory proceedings. In doing so, I note that the input information used by the Commission in its WARP factor calculations was asserted by Telecom to be commercially sensitive. Those submissions were accepted by the Commission and, put very simply, the information that appeared in, and lay behind, the WARP factor calculations was not disclosed to the appellants, nor does it appear on the face of Determination 582.The further evidence order[27] At the hearing of this application, I was provided with a draft but unsworn affidavit of Mr de Ridder (a telecommunications economist), essentially setting outthe issues he considers he would be in a position to debate were the Telecom Redacted Data made available to him. No issue was taken at the hearing as to the unsworn status of that draft affidavit, and I have subsequently received the formal sworn affidavit. [28] The debate identified by Mr de Ridder would not appear to go to the accuracy of the information itself, nor even necessarily the correctness of the calculations undertaken by the Commission based on that information, but rather "the appropriateness of the data that has been used and how this might reflect upon the methodology chosen in the Determination" (see [4] above). [29] For example, Mr de Ridder says at paragraph 8 of his affidavit:What is at stake is not just what data has been used but also how the Commission has chosen to use it. Under the umbrella of the legislated "retail minus" approach there are three variants which can be used singly or in combination. Decision 568 for Telstra-Clear relied on a regression model (REG) to isolate and deduct the international transmission component of retail plans. That Decision included an update mechanism (never used because a commercial agreement superseded the Determination) based on measuring the change in a basket retail prices (WARP-I). Telecom has argued that a retail minus price can be arrived at directly using a basket approach (model WARP-II) without recourse to REG. It seems likely, as argued below, that the Commission's application of WARP-I in Decision 582 was executed incorrectly and, more importantly, it is possible that it was a poor choice of model in the circumstances. Again, these are speculative matters. The new data may provide some light on what the most robust model to employ might be.[30] Again, at paragraph 19:Another example of what needs to be tested is the treatment of Discover customers. It appears that effectively they were migrated to GO in December according to an exchange of emails between Telecom and the Commission on 20 and 21 June. These discuss two price points which appear to come from Table 8 of Decision 568 where $39.95 and $35.51 refer respectively to the December 2005 Discover and Go plan prices excluding toll discount, ISP charges and GST. That is, if this correction applies only to the December data supplied to the Commission, it works against the access seekers as "Discover customers were identified and migrated to the Go plan only from 2 April" [email from Sarah Gillies at Telecom to Paul Armstrong at Commission, 21 June]. The effect of this is to artificially reduce the starting WARP price for December and consequently reduce the percentage change from that time to the more recent date (10 June ) chosen by the Commission. This reduced percentage change flows into the reduced price determined by the Commission to the detriment of the access seekers; byhow much we do not know because I would need to see the data to correct the WARP number for December.[31] In my view, Mr de Ridder's affidavit points essentially to a debate as to the merits both of the Commission's methodology and, in that context, to the way in which the Commission used the Telecom Redacted Data. [32] Mr Wigley further submitted, however, that evidence from Mr de Ridder would be useful for the Court in its consideration of the appeal on points of law, particularly to understand the significance of the procedural and substantive errors alleged by the appellants, and the possible remedies the Court might order. [33] Both Telecom and the Commission resisted an order adducing such further evidence, by reference: a) to the limited circumstances in which further evidence is allowed even on general appeals; b) to the more restricted approach taken where, as here, an appeal is on a point of law only; and c) finally, to their submission that the appellants' points of appeal do not raise issues of law. Therefore, there was no proper basis for an order granting leave to adduce further evidence. [34] The position under the Rules is that even on general appeals, the Court will only grant leave to adduce further evidence if "special reasons" exist. For example, if the evidence relates to matters that have arisen after the date of the decision appealed against and that are or may be relevant to the determination of the appeal. It is established that, apart from updating evidence concerning matters which have occurred since the hearing, the power to grant leave is sparingly exercised. InTelecom Corporation NZ Ltd v Commerce Commission [1991] 2 NZLR 557 (CA),the Court warned of the risk of an appeal being transformed into a new trial, with the previous hearing acting as a "dummy run". [35] The position on adducing evidence on an appeal that is limited to questions of law is further restricted. Under the previous version of r 316, further evidence could not be adduced at all in an appeal on a question of law, although the Court's inherent jurisdiction might apply. An example of such a case was Terrace Tower (NZ) Pty Ltd v Queensland Lakes DC [2001] 2 NZLR 388. [36] While r 316 no longer excludes the possibility that new evidence may be adduced in an appeal on a question of law, the general principle that the decision in question will stand or fall on its own record means, in my view, that leave will only be appropriate in very exceptional circumstances. [37] I do not consider that the appellants have established the existence, in this instance, of the very exceptional circumstances required for an order that further evidence be adduced on an appeal on a point of law. The de Ridder affidavit essentially points to a merits debate which Mr de Ridder considers would be facilitated by the discovery to him of the Telecom Redacted Data. Even if the Telecom Redacted Data may properly be made the subject of a discovery order, which is the matter to which I will now turn, that will not in this context be for the purpose of a merits debate, but rather for the consideration of properly raised points of law. [38] In this context I think the Terrace Tower decision can be seen as one made very much on its own facts, where the further evidence sought was as to the meaning of a formula, the legality of which was being challenged. The Court concluded that without understanding the implications of the application of the formula, its consideration of an appeal regarding the legality of that formula would be materially impaired. I do not see that as being the case here, and certainly not on the materials currently before me. [39] Accordingly, I decline the appellants' application to adduce the de Ridder further evidence.The discovery order[40] Determination 582 records the Commission's calculation and use of WARP, for the purpose of firing the imputed retail price, in the following terms:Calculation of the imputed retail price197. The Commission's calculation of the initial WARP, to be used as the 'index' price as at 20 December 2005, is shown in the following table.Table 5: Weighted Average Retail Price Calculation as at 20 December 2005 90Plan Name Speed (down/upstream) Number of customer connections % of total Retail price89(incl. tolls) Contribution to weighted average Go 256/128 kbps [ ] COI [ ] COI $39.95 [ ] Discover 1Mbps/128 kbps [ ] COI [ ] COI $44.95 [ ] Explorer 256/128 kbps [ ] COI [ ] COI $49.95 [ ] Adventure 2 Mbps/128 kbps [ ] COI [ ] COI $59.95 [ ]TOTAL [ ] TCNZRI [ ] COI89 All prices in this table are GST exclusive90 Only Telecom plans which include Telecom toll calling have been used to calculate the WARP, consistent with Decision 568. The inclusion of Telecom plans where the customer did not purchase Telecom toll calling has a negligible effect on the WARP calculation.198. Table 6 shows the current WARP calculation. For the purposes of this determination, information as at 10 June 2006 has been used. 91Table 6: Weighted Average Retail Price Calculation as at 10 June 2006Plan Name Speed (down/upstream) Number of customer connections % of total Retail price92(incl. tolls) Contribution to weighted average Basic 256/128 kbps [ ] COI [ ] COI $29.95 [ ] COI Go 2 Mbps/128 kbps [ ] COI [ ] COI $39.95 [ ] COI Discover 1Mbps/128 kbps [ ] COI [ ] COI $44.95 [ ] COI Explorer 3.5 Mbps/128 kbps [ ] COI [ ] COI $49.95 [ ] COI Adventure 3.5 Mbps/128 kbps [ ] COI [ ] COI $59.95 [ ] COI Navigate 2 Mbps/128 kbps [ ] COI [ ] COI $59.95 [ ] COITOTAL [ ] TCNZRI [ ] COI91 The Commission obtained this information from Telecom by way of a s 98 request.92 All prices in this table are GST exclusive199. The WARP has increased by 0.59% between 20 December 2005 and 10 June 2006. Applying this increase to the imputed price in Decision 568 ($33.18) results in the imputed price of $33.38 in this determination. It is from this imputed price that the avoided costs saved are removed.[41] As is apparent, Determination 582 does not record on its face the data as to the "Numbers of customer connections", "% of total" or "Contribution to weighted average" data used in those calculations. As the tables at paras 197 and 198 ofDetermination 582 record, the Commission categorised that information as "COI", or Commission Only Information. This meant that access seekers did not have the opportunity to see that information. [42] The appellants, in an email from Mr Wigley on 4 August 2006, sought the information redacted from para 197 from the Commission, under the Official Information Act 1982. [43] The Commission responded to that request in its letter of 1 September 2006. [44] The Commission first recorded the information Mr Wigley had sought. It was: a) Telecom customer connection numbers referred to in Table 5 of the Commission's Determination 582, and treated there as Commission Only Information ("COI"); b) Correspondence between the Commission and Telecom concerning the reasons for the COI categorisation (excluding the data itself) whether or not it involves a request by Telecom for treatment of the material as COI or in any other way; c) Copies of the Commission documents lying behind the treatment of the material as COI. [45] I note, at this point, that it would appear Mr Wigley's email only requested under the Official Information Act the customer connection numbers referred to in Table 5, which appears at para 197. Mr Wigley's notice of application for discovery is in the same terms, and does not refer to the information which was used for the purposes of the calculation in the table at para 198. I record I had understood, during the argument of this matter before me, that it was the information which does not appear on the face of both tables that Mr Wigley sought discovery of.[46] In its letter of 1 September, although the Commission acknowledged there was a public interest in making the information redacted from para 197 available – as it would allow the appellants to check whether the Commission's arithmetic was correct in calculating the WARP values used in Determination 582, the Commission decided that the identified public interest in disclosure was outweighed by the need to withhold the information. The Commission did so essentially by reference to the reasons that had originally resulted in that information being given a COI status, and by reference to it being, from Telecom's perspective, highly commercially sensitive information. [47] The possibility of a discovery application being made to provide for disclosure of such information was expressly referred to by the Commission. [48] At the same time, the Commission did disclose to the appellants the correspondence between the Commission and Telecom, and the copies of Commission documents, referred to in [44](b) and (c) above. The disclosed correspondence between the Commission and Telecom showed that, sitting behind the information presented in, but redacted from, the table at para 197 was a range of other information provided by Telecom to the Commission. Furthermore, a number of emails were disclosed, which reflected a dialogue between the Commission and Telecom as regards the proper understanding, and use, of that information. It is this "redacted" information discovery of which is now sought. [49] As I have noted, the Commission did not oppose the appellants' discovery application, but indicated it would abide the order. [50] For their part, the Telecom respondents acknowledged that the Court did have power to order such discovery. My understanding is that the respondents accepted that although: a) No express provision was made for discovery against the respondent or the decision-maker under Part 10 of the High Court Rules;b) General discovery under r 294 would not appear to be available as r 943(3) required a memorandum to be filed pursuant to r 429, and r 429 in turn relates to matters to be considered at a case management conference with swift track proceedings other than appeals; and c) Particular discovery under r 300 was not available as general discovery must have been given before particular discovery can be sought, nevertheless, the Court did have a power under r 9 of the High Court Rules to order discovery in this situation. [51] The respondents' further submission, however, was that as no points of law were identified by the appellants' points on appeal, then discovery in this instance was not justified. [52] In his written submissions, Mr Palmer commented that "When a Court is considering a question of law, the decision under scrutiny would usually stand or fall on its own records. Therefore, it will only be in rare circumstances that further evidence by affidavit or discovery will be relevant to an appeal on a question of law. Telecom submits that no such special circumstances are present here." [53] Mr Palmer then went on to undertake a detailed analysis of the points on appeal in support of his submission that, as none gave rise to any question of law, then just as it was not appropriate for there to be further evidence adduced so neither should discovery be granted. [54] In his submissions, Mr Wigley relied on the de Ridder affidavit, not only in terms of his application to adduce further evidence, but also in terms of his application for discovery. The difficulty I have with that reliance is, as I have noted above, that it seems to me that Mr de Ridder's affidavit anticipates an argument on the, essentially economic, merits as to the way in which the Commission relied on the price set in Determination 568, adjusted its reliance on the WARP factor, to set the price in Determination 582.[55] Having said that it does seem to me unusual, and somewhat unsatisfactory, that in this case the decision on appeal is not, as even Mr Palmer admitted would normally be the case, a complete record on its face. I think it would assist the Court's understanding of Determination 582, and potentially remove areas of ambiguity as to the understandings the parties have of their respective positions, if that information, and the information referred to in the correspondence annexed to the Commission's letter of 1 September but redacted therefrom, was discovered. [56] Further it is clear that, on an appeal limited to points of law, a point of law is raised by a challenge to a decision on the grounds that a finding has been made which is inconsistent with, and contradictory to, the evidence. There is at least an indication on the papers before me – as regards the $1.92 if nothing else – of such a challenge here. Such a challenge may also be reflected in Mr Wigley's reference to "a price drop of $6 translates to $720,000 for every 10,000 customers" (written submissions para 7.3), and the Commission's failure to reach a conclusion on price that would reflect such a price drop. [57] On that basis, and notwithstanding the strongly held views of both the respondents and the Commission that the appellants' points on appeal do not disclose matters of law sufficient to base that appeal, I am of the view that discovery of the information sought showed, in this instance, be ordered. I note my understanding that such information was, in effect, sought to complete the tables which appear at both paras 197 and 198. If that is not the case, then no doubt counsel will at an appropriate time explain that to the Court. [58] I agree, however, that it will be appropriate to limit that discovery to protect the commercial sensitivity of the information in question. In that regard, I note that Mr Wigley submitted a draft confidentiality order, the terms of which were not immediately acceptable to Mr Palmer acting for the respondents. I agree with Mr Palmer that that matter should be left, in the first instance, for counsel to resolve between them. [59] Accordingly I grant the appellants' application for discovery in terms of paragraph 2 of their notice of application of 6 September 2006, subject however toconfidentiality arrangements as agreed between counsel or, failing such agreement, as may be determined by further order of this Court. [60] Costs are reserved. [61] I note, with some hesitation, one final matter. Earlier I referred to the difficult matter of whether the notice of appeal raises questions of law which can be dealt with by way of an appeal under s 60 of the Act. Counsel for both the appellants and respondents made submissions on the extent to which an allegation of breach of natural justice constitutes an appeal "against the determination" on a question of law. This difficulty arises because the grounds advanced by the appellants, particularly those dealing with natural justice, might have been more naturally characterised as grounds of judicial review rather than appeal. This is not to indicate a conclusive view on the degree of overlap between grounds of review and appeal, which will doubtless be canvassed in more detail at the substantive hearing. I simply note that this difficulty would not arise had the appellants proceeded by way of review. Furthermore, judicial review proceedings provide for discovery and affidavit evidence. [62] Were the appellants to apply for judicial review there would of course be questions as to the relationship between those proceedings and the appeal proceedings, but such issues are ones which the Court deals with from time to time in a variety of contexts. I had occasion to consider such issues recently in Blair v Upper Hutt City Council HC WN CIV-2005-485-1961 21 June 2006, and refer to the authorities cited therein. [63] I leave that matter for the appellants to consider. In doing so, and without expressing any considered view on these matters, I can only note that there are longstanding reasons of principle why the courts deal with appeals in a different manner from which they deal with administrative law proceedings. There are substantive reasons to distinguish between the two types of procedures. The argument that, if judicial review proceedings had been taken, various procedural points could have been raised which are not able to be raised on appeal on a point oflaw, is not necessarily in my view going to be a basis for enlarging the approach the courts take to appeals on points of law.Solicitors: ______________________ Wigley & Co, Wellington, for Appellants Clifford JRussell McVeagh, Wellington, for Respondents Crown Law Office, Wellington, for Commission