VODAFONE NEW ZEALAND LIMITED V TELECOM NEW ZEALAND LIMITED CA CA192/2008

VODAFONE NEW ZEALAND LIMITED V TELECOM NEW ZEALAND LIMITED CA CA192/2008 2 December 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA192/2008 [2009] NZCA 565BETWEEN VODAFONE NEW ZEALAND LIMITED Appellant AND TELECOM NEW ZEALAND LIMITED Respondent Hearing: 11 and 12 February 2009 Court: William Young P, Glazebrook and Arnold JJ Counsel: B D Gray QC, A E Ferguson and F C Monteiro for Appellant C M Stevens and J Woolley for Respondent M T Scholtens QC and J B Hamlin for Commerce Commission Judgment: 2 December 2009 at 11 amJUDGMENT OF THE COURT A The appeal is dismissed. B The appellant must pay costs to the respondent and the Commerce Commission for a complex appeal on a band B basis and usual disbursements. We certify for two counsel.___________________________________________________________________REASONSWilliam Young P (dissenting) [1] Arnold J [58] Glazebrook J [138]WILLIAM YOUNG P (DISSENTING)Table of Contents Para No Introduction [1]The statutory scheme [7]The controversy between the parties [11]The High Court judgment [21]Does Vodafone have a right of appeal or only a right to seek leave to appeal? [22]Is there a question of law? [32]Is the proposed Vodafone methodology consistent with the TSO Deed? [35]Was the approach of the Commission erroneous in law? [42]Overview [42]The consistency of the scorched node approach with the Telecommunications Act [45]The application by the Commission of the scorched node approach to the possible use of mobile telephony [49]Was the Commission's approach erroneous in law? [50]Introduction[1] Telecom New Zealand Ltd was privatised in 1989. Initially, its provision of residential line services was regulated only by the Commerce Act 1986 and specific obligations incorporated in its constitution. These latter obligations were known as the Kiwi Share obligations and are discussed in the Final Report of the Ministerial Inquiry into Telecommunications (27 September 2000) ("the Fletcher Report"). The Fletcher Report examined telecommunication regulation in New Zealand and ultimately led to the enactment of the Telecommunications Act 2001 ("the Act"), which now provides the regulatory framework for the supply of telecommunication services in New Zealand. [2] In association with the passing of the Act, the Crown and Telecom entered into the Telecommunications Services Obligations Deed for Local Residential Telephone Service ("the TSO deed") in December 2001. Under the TSO deed, Telecom, as the relevant telecommunications service provider ("TSP") is required tosupply local residential telephone services ("TSO services") at a regulated cost. Under the Act it may recover, from those defined as "liable persons" (namely other telecommunications companies, including Vodafone), a proportionate share of the net cost, as determined by the Commerce Commission in accordance with the Act, of providing TSO services to commercially non-viable customers ("CNVCs"). This case concerns the methods used by Commerce Commission in its determination of cost for the 2003-2004 year. [3] Broadly, the Commerce Commission calculated the relevant cost using a model which treated Telecom's existing core fixed wire network as a given. It did not model the cost on the basis of the existing mobile sites operated by Telecom and its competitors. While the Commission accepted that mobile telephony could meet the required technical standards, it modelled mobile telephony only as an adjunct to Telecom's existing core fixed wire network. [4] Vodafone has maintained throughout that the costs should have been calculated on the basis that an efficient service provider would have used existing mobile technology sites except where new ones were required to meet demand. I will refer to this approach as the "Vodafone methodology". Vodafone submits that by failing to adopt this methodology the Commission has overstated the net cost and therefore overstated the amount that Vodafone and the other liable persons must pay to Telecom. [5] Telecom, on the other hand, supports the Commission's approach and also argued before us that the Vodafone methodology would not be in accordance with the relevant TSO deed. [6] Section 100 of the Act provides for a right of appeal (on points of law only) against determinations of the Commission. Vodafone appealed against the Commission's 2003-2004 determination but this appeal was dismissed by McGechan J on the basis that it did not raise a point of law: HC WN CIV-2007-485-826 18 December 2007. Vodafone now appeals (and in the alternative seeks leave to appeal).The statutory scheme[7] The case falls to be determined under Part 3 of the Act as it was prior to the commencement of the Telecommunications Amendment Act (No 2) 2006. Although significant portions of Part 3 were amended by Telecommunications Amendment Act, the transitional provision for TSO determinations in s 63 of the amending Act makes it clear that these amendments do not apply for the purposes of this appeal. [8] Part 3 of the Act provides for the Commission to issue a final determination (ss 90 – 92) which must be preceded by a draft determination (ss 86 – 88). [9] Sections 83 and 84 provide:83 Calculations of net cost and auditor's report must be given to CommissionNot later than 60 working days after the end of each financial year of a TSP under a TSO instrument , the TSP must provide to the Commission— (a) calculations of the net cost of complying with the TSO instrument during the financial year; and (b) a report prepared by a qualified auditor (the auditor's report) that includes a statement of whether or not the calculations comply with— (i) any prescribed requirements relating to those calculations; or (ii) if there are no prescribed requirements, any requirements of the Commission.84 Considerations for determining net cost(1) Subject to subsections (2) and (3), in calculating the net cost under section 83, preparing a draft determination of the net cost under section 88, and determining the net cost under section 92, all of the following matters must be taken into account: (a) the range of direct and indirect revenues and associated benefits derived from providing telecommunications services to commercially non-viable customers, less the costs of providing those telecommunications services to those customers: (b) the provision of a reasonable return on the incremental capital employed in providing the services to those customers.(2) In preparing a draft determination of the net cost under section 88 and determining the net cost under section 92, the Commission— (a) may choose to not include profits from any new telecommunications services that involve significant capital investment and that offer capabilities not available from established telecommunications services; and (b) must not include any losses from telecommunications services other than services that the TSO instrument requires the TSP to provide; and (c) must consider the purpose set out in section 18. (3) In calculating the net cost under section 83, the TSP must comply with any requirements of the Commission relating to the application of subsection (2)(a) to (c). (4) In this section,—established telecommunications services means telecommunications services that are not new telecommunications servicesnew telecommunications services means telecommunications services that were first provided in New Zealand within 5 years before the commencement of the financial year to which the calculation of the net cost relates.[10] Two other sections are also important, the s 5 definition of "net cost" and the s 18 explanation of the relevant legislative purpose. Section 18 appears in Part 2 of the Act but is relevant to the present exercise because of s 84(2)(c). These provisions are in these terms:5 InterpretationIn this Act, unless the context otherwise requires,— net cost means the unavoidable net incremental costs to an efficient service provider of providing the service required by the TSO instrument to commercially non-viable customers18 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. (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.The controversy between the parties[11] Since the enactment of the 2001 legislation, the Commission has engaged in prolonged examination and consideration of the assumptions on which it should calculate the net cost to an efficient service provider of providing the relevant TSO services to CNVCs. An important issue the Commission had to address was the extent to which its modelling should be based on Telecom's existing infrastructure. [12] At a very broad level, there are two possible general approaches, "top down" and "bottom up". On a top down approach, the Commission would start with the actual costs incurred by Telecom and would then adjust them for any perceived inefficiencies. On a bottom up approach, the Commission would create an engineering model to estimate an efficient cost benchmark for the provision of the services. A completely bottom up model involves a "scorched earth" or "scorched network" approach as it scorches (ie ignores) the entire existing infrastructure. [13] The Commission has adopted, as something of a compromise, what is known as a "scorched node" approach. It has identified exchange service areas ("ESAs") which generally correspond to the historical nodes (switches and points of interconnection) in the Telecom network. It then seeks to identify clusters of CNVCs by comparing the access and switching costs associated with them to thestandard residential line rentals and supplementary income which they generate. In its modelling, the Commission treats the existing core network, including the location of the nodes, as a given (save that a few very small exchanges have been optimised) but the downstream access network is "scorched". The effect is that costs associated with the nodes and the downstream access network are capped by the cost of providing standards-meeting services using optimised technology. This approach is bottom up for the nodes and local access network and top down for the core network. [14] The Commission's willingness to treat the nodes and access network as scorched is primarily relevant as and when new technologies that meet the service requirements specified in the TSO deed become available. [15] The 2001-2002 determination was prepared on the basis of the scorched node approach, with the Commission adopting a wireless technology price cap in identified TSO areas where a wireless solution using multi-access radio ("MAR") was modelled. [16] A similar approach was adopted in the 2002-2003 determination. In this determination, the Commission recognised that a second form of wireless technology, wireless local loop ("WLL"), was capable of providing TSO services at the required standard. So for those clusters of CNVCs for which WLL technology was viable, a WLL cap was imposed. [17] In the determination for the 2003-2004 year, the Commission continued to use the MAR and WLL caps. It also recognised, for the first time, that mobile telephony was capable of meeting the required service standards. So it adopted a mobile technologies cap for areas in which mobile telephony was the most efficient way to provide TSO services. But it did this in a very qualified way, because it assessed costs by reference to the construction of new mobile adjuncts to the fixed wire network (which were constrained by the location of existing fixed wire nodes). It thus ignored the existing mobile networks (including Telecom's).[18] Vodafone's contention is that if the optimisation principles were applied in a technologically neutral way, the pre-existing mobile network nodes would be considered as a potential means of supplying the TSO service. On this basis, the Commission ought to have treated the existing mobile nodes in the same manner as it treated the existing fixed network nodes. [19] I will set out the key reasons why the Commission rejected the Vodafone methodology later in this judgment, see [49] below. For now, it is sufficient to note that the Commission was of the view that the Vodafone methodology was inconsistent with its preferred scorched node approach. [20] I should record that counsel for Telecom sought to defend the Commission's approach on a rather different basis (which they asserted was "implicit") in the decision: (a) An incumbent provider of TSO services to CNVCs would not invest in mobile technology which duplicated the already sunk cost of its access network. (b) On the other hand the entry (or possible entry) of a challenger in a competitive market for the provision of TSO services, using lower cost mobile technologies, would constrain the incumbent's recovery of its past efficiently made investment of fixed wire technology. Such a challenger, however, would be required to build a new mobile network.The High Court judgment[21] In the judgment under appeal, McGechan J dismissed the appeal on the basis it did not raise a question of law. The essence of his conclusion is captured in the following passage of his judgment:[52] The case does not concern pure construction of "net cost" within the s 5 definition, or of ss 18, 85 and 92. Nor does it concern the propriety, as a matter of law, of the Commission's scorched node approach. The issuebefore the Court is the choice between two competing approaches (models) determining the fact of "net cost" within definition. Put another, and probably a more accurate way, the issue is a choice between two different outcomes as to what is "net cost": the Commission's figure, and the figure (unascertained) resulting from the Vodafone way. This is, at heart, a question of fact not law; and moreover is a question of fact to be determined by application of particular expertise located in an expert body, an area into which a Court must be particularly scrupulous not to stray.Does Vodafone have a right of appeal or only a right to seek leave to appeal?[22] Section 100 of the Act provides for a right of appeal, confined to questions of law, from relevant decisions of the Commission to the High Court. This section makes no provision either way in relation to further appeals. [23] On the argument of Vodafone, there is a right of appeal to this Court under s 66 of the Judicature Act 1908 which provides:66 Court may hear appeals from judgments and orders of the High CourtThe Court of Appeal shall have jurisdiction and power to hear and determine appeals from any judgment, decree, or order save as hereinafter mentioned, of the High Court, subject to the provisions of this Act and to such rules and orders for regulating the terms and conditions on which such appeals shall be allowed as may be made pursuant to this Act.The words, "save as hereinafter mentioned" are a reference to s 67 of the Judicature Act which is immaterial in the present context. [24] On the other hand, Telecom and the Commission maintain that s 97 of the Commerce Act operates so as to require leave for an appeal to this Court. This section is relevantly in these terms:97 Appeal to Court of Appeal in certain cases(1) Notwithstanding anything in any enactment, any party to any appeal before the High Court against any determination of the Commission who is dissatisfied with any decision or order of the Court may, with the leave of the Court or of the Court of Appeal, appeal to the Court of Appeal; and section 66 of the Judicature Act 1908 shall apply to any such appeal. (Emphasis added.)Telecom and the Commission place particular reliance on the words I have emphasised. They maintain that these words mean that the section necessarily prevails over s 66 of the Judicature Act. [25] The legislation is untidy and I see the interpretation issue as closely balanced. In the end, however, I have concluded that the Vodafone argument is to be preferred. [26] Section 97 of the Commerce Act forms part of a suite of sections dealing with appeals against decisions of the Commission. The first relevant section, both in logic and sequence, is s 91 which confers, with some exceptions, a right of appeal to the High Court against "any determination of the Commission under this Act". In this context, it seems logical to construe the expressions "determination" and "decision or order of the Court" in s 97 as a references, respectively, to determinations under the Commerce Act and to decisions of the High Court under ss 93 – 96 of that Act. Indeed when the Commerce Act was enacted (which was prior to the Telecommunications Act) that is all that those expressions could have referred to. [27] This latter point is not a decisive consideration: see s 6 of the Interpretation Act 1999. Enactments apply to circumstances as they arise. This raises the question whether the enactment of the Telecommunications Act and the creations of rights of appeal from Commission determinations under that Act are "circumstances" to which s 97 can fairly be said to apply. I think that this question is most appropriately answered by reference to the presumed intention of Parliament in relation to the Telecommunications Act. [28] The most plausible interpretation of the Telecommunications Act is that Parliament intended to create stand-alone appeal rights and pathways and did not intend to adopt the Commerce Act model. The right of appeal under s 100 of the Telecommunications Act is confined to questions of law, whereas under the Commerce Act there is a general right of appeal. As well, the different right of appeal to the Court of Appeal provided for in s 60 of the Telecommunications Act is subject to a leave requirement (albeit one which is expressed in terms which differ from that provided for in s 97 of the Commerce Act). And s 15 of theTelecommunications Act, which identifies the provisions of the Commerce Act which apply to the Telecommunications Act, does not mention s 97 of the Commerce Act. [29] On the basis that s 97 applies only to Commerce Act appeals, the opening words of s 97 ("Notwithstanding anything in any enactment") are not of controlling significance because the section as a whole does not apply to appeals under the Telecommunications Act. [30] Accordingly I conclude that Vodafone has a right of appeal under s 66 of the Judicature Act and not merely a right to seek leave to appeal under s 97 of the Commerce Act. [31] If I had taken a different view on this point, I would, in any event, have favoured the granting of leave to appeal.Is there a question of law?[32] It will be recalled that in s 5 of "net cost" is defined as meaning:... the unavoidable net incremental costs to an efficient service provider of providing the service required by the TSO instrument to commercially non- viable customers[33] On the Vodafone argument, the Commission did not apply the statutory test. Instead, the Commission determined "net cost" by reference not just to the relevant statutory language but also its own self-imposed requirements that the result must accord with its preferred scorched node methodology. [34] If this complaint is made out, it necessarily raises a question of law.Is the proposed Vodafone methodology consistent with the TSO Deed?[35] To date the Commission has proceeded on the basis that it is open to Telecom to meet its obligations under the TSO deed by the use of mobile telephony. This is consistent with cl 8 of the TSO deed which provides:Telecom may use any method or any technology in providing the services it is obliged to provide in this Deed, provided that doing so does not place Telecom in breach of this Deed. (Emphasis added.)[36] Telecom accepts that the Commission's methodology for applying the mobile telephony cap is consistent with the TSO deed. But it argues that the Vodafone methodology is not. [37] Telecom's argument proceeds on this basis. [38] The expression "local residential voice telephone service" is defined in cl 3.3(b) of the Schedule to the TSO deed so as exclude:calls to or from telephones or devices connected to cellular, mobile radio, paging and other non-PSTN networksTelecom accepts that this exclusion is not applicable to the Commission model (as the postulated subscriber mobile telephony devices are connected to the public switch telephone network ("PSTN") at the node). But Telecom maintains that the exclusion means that it is not required to provide calls to and from subscriber telephones connected to mobile networks (as postulated by the Vodafone methodology). Accordingly the net cost of providing such calls would not be within the s 5 definition of "net cost" in s 5 which addresses only services "required" by the TSO deed. [39] This argument has not been formally addressed by either the Commission or the High Court, and the Commission invited us not to address it either. I think it best, however, to grasp the nettle.[40] The TSO deed is drafted so as to make it clear that Telecom is not required to provide its customers with free calling to non-PSTN networks (which is why customers must pay for landline to mobile calls). It is likewise not required to provide its customers with the facility to receive free calls from non-PSTN networks, although in practice it does. But there is no logical reason why it should not be able to meet its TSO obligations by providing mobile telephony services. Indeed, to construe the TSO deed in the manner contended for by Telecom would be inconsistent with the technology-neutral policy underlying the Act and which is repeated in cl 8 of the TSO deed. [41] Accordingly I prefer an interpretation of the exclusion in cl 3.3(b) of the Schedule to the TSO deed so that "telephones or devices" are construed as referring: (a) Not to the subscribers' telephones or devices; but rather (b) To the "telephones or devices" to which the subscribers make calls or from which they receive calls.Was the approach of the Commission erroneous in law?Overview[42] The difficulties with a completely bottom up scorched earth approach are obvious. Such an approach would not permit the recovery of costs associated with long-life network assets which may have been (and presumably were) efficient when first put in place. Investment decisions which were efficient when made and implemented will not necessarily be statically efficient at all future points in time. Modelling on the basis of a completely optimised network would make no allowance for a TSP's sunk and irreversible costs associated with earlier investment decisions. No real-world telecommunications company would sacrifice its sunk costs in existing and functional infrastructure the moment that better technology becomes available. As well, a bottom up approach based on an optimised network could deter the TSP from investing efficiently in its network as presently configured.[43] On the other hand, a purely top down model which starts with the TSP's actual costs is likely to incorporate existing inefficiencies which may not be readily identifiable by the Commission. As well, confidentiality issues around the information which the TSP supplies to the Commission are likely to result in a lack transparency from the perspective of others with a stake in the process (such as the liable persons). [44] In practice regulators such as the Commission have tended to adopt the scorched node approach (or variations of it) to modelling. As already noted, this has been largely by way of compromise. The implied scorching of the nodes and access networks involves the stranding of long life network infrastructure which may have been efficient when first constructed. And treating the core network as a given necessarily incorporates any inefficiencies associated with that network and results in some lack of transparency in the cost-assessing process. That the scorched node approach is indeed a compromise is illustrated by the willingness of the Commission to engage in some minor core network optimisation (involving small exchanges).The consistency of the scorched node approach with the Telecommunications Act[45] The Act gives mixed signals as to the nature of the test which is envisaged. [46] Some of the relevant provisions can be read as suggesting that the primary focus should be on the TSP's existing infrastructure. For instance: (a) Section 84(1)(a) requires assessment of the benefits to the TSP of providing services to CNVCs, less the cost of doing so. (b) Section 84(1)(b) refers to the provision of a reasonable return on the incremental capital employed in providing services to CNVCs. (c) Sections 88(a)(i) and 92(a)(i) both refer to the "net cost to the TSP" of complying with the TSO instrument.[47] I am satisfied, however, that the legislature envisaged an objective test based on a notional efficient operator. I consider that this is made clear by s 5 which relevantly provides:5 InterpretationIn this Act, unless the context otherwise requires,— net cost means the unavoidable net incremental costs to an efficient service provider of providing the service required by the TSO instrument to commercially non-viable customers (Emphasis added.)[48] I regard the Commission's scorched node model as adopted prior to the 2003- 2004 determination as consistent with s 5. An efficient service provider will make long term investments in the infrastructure which are necessary to provide the required services. A system of modelling which operates on the basis that those investment decisions are, in effect, up for grabs, on an annual basis would not make any sense. On the other hand, given that the scorched node construct is so closely associated with the architecture of traditional telephone networks, it can hardly be regarded as implicitly embedded in a statutory scheme which is technology-neutral.The application by the Commission of the scorched node approach to the possible use of mobile telephony[49] At this point, it is necessary to set out the reasons given by the Commission for rejecting what I have described as the Vodafone methodology:36. The Commission has acknowledged in the past that the level of efficiency modelled for TSO purposes is not the maximum level of efficiency. The Commission recognized that the evolution of an efficient network design is restricted to some extent by past decisions. To take account of this constraint, the hypothetical network takes into account a number of Telecom's network characteristics. Under this "scorched node" approach adopted by the Commission, the costs of an "efficient service provider" are those a provider would incur in providing TSO services using best available technology, but given the location of the TSP's current network nodes. 37. The Commission nonetheless noted in its first TSO determination that some optimisation is necessary in order to maintain incentives forefficient investment by the TSP. Further, while taking into account Telecom's existing network characteristics, and adopting reasonable assumptions regarding the level of efficiency modelled, the Commission seeks to model costs in line with the level that might be expected in a competitive environment. 38. Submissions arguing for optimisation to reflect the incremental costs of mobile networks are not aligned with the Commission's fundamental scorched node paradigm. This paradigm requires any optimisation of the access network to be integrated with Telecom's current network nodes. In these circumstances, replacement access technologies will have to be cost effective in delivering services as a supplement to a fixed network. In particular, optimisation which relies on economies of scale or low incremental costs derived from existing mobile networks to lower costs will not be accepted by the Commission. 39. The Commission acknowledges that this approach could be challenged as inconsistent with the competitive environment in New Zealand at the time of the TSO, in which mobile services were widely deployed and used. It could be argued that in such circumstances, efficient costs of access networks should reflect those of the overlay mobile networks, even for delivery of service to CNVCs. For example, TelstraClear has argued that an efficient service provider would select the least cost means of providing TSO services to customers, including through purchasing wholesale services from other providers, reflecting market reality. 40. The Commission does not consider that efficient costs of access networks should reflect those of the overlay mobile networks. Such an approach would, in effect, model the outcomes of a tender process for delivery of the TSO, and would depart too far from reasonable standards of efficiency previously adopted by the Commission. Given the essentially non-commercial nature of the service being delivered, the Commission considers that some reasonable bounds need to be placed on the attempt to approximate the costs that would be incurred in a competitive environment. The Commission will accept the lowest cost technology consistent with the scorched node approach. 41. The Commission will remain open to submissions as to forward looking costs of delivery of service to CNVCs, but such submissions need to be consistent with reasonable assumptions about efficiency.Was the Commission's approach erroneous in law?[50] The Commission's reasons for dismissing Vodafone's approach were succinct and conclusory: (a) Vodafone's approach was inconsistent with the Commission's scorched node paradigm and accordingly "optimisation which relies on economies of scale or low incremental costs derived from existingmobile networks to lower costs will not be accepted by the Commission". (b) The Vodafone approach would require the Commission to model the outcomes of a tender process for the performance of the TSOs, and this would depart too far from reasonable standards of efficiency previously adopted by the Commission. (c) In light of "the essentially non-commercial nature of the service being delivered, some reasonable bounds need to be placed on the attempt to approximate the costs that would be incurred in a competitive environment". [51] Up until the 2003-2004 determination, the Commission had proceeded on the basis that a core network of the kind operated by Telecom was essential to the provision of the services required by the TSO deeds. The wireless technologies which it built into its model were, by their nature, merely adjuncts to the use of that core network. So the Commission's conclusion in the 2003-2004 determination that mobile telephony was capable of meeting the relevant technical standards introduced a new element. [52] This factor, when considered in light of the existing and overlaid mobile telephony networks of Telecom and its competitors, changed the nature of the debate. Before, the concept of optimisation of infrastructure involved comparison of existing infrastructure with an optimised but virtual equivalent. This was in a context in which technological development would not normally induce Telecom to replace immediately a less than optimal element of its infrastructure (whether core network or local access network) and thus lose the associated sunk costs. But once mobile telephony is seen as meeting the required technical standards, the relevant comparison was no longer between infrastructure which is there and an optimised but virtual equivalent. Rather it is between two existing infrastructures. Logic might suggest that the cost modelling conducted by the Commission should look to identify which system is the cheaper.[53] In those circumstances, it was not enough for the Commission simply to rely on its general scorched node preference. Instead it was required to reassess that preference in light of the changed circumstances. Relevant to that assessment are two features of the statutory scheme to which I draw attention. [54] The first is the word "unavoidable" in s 5. Costs associated with supplying services to CNVCs which could be avoided or reduced by the use of existing mobile telephony infrastructure might be thought to be "avoidable" rather than "unavoidable". I note that in a discussion paper which was a precursor to its first determination (TSO Discussion Paper and Practice Note – Cornerstones Issues Paper 22 March 2002) the Commission concluded (at [45]) that "unavoidable" did not "expand significantly the meaning of the remaining terms in the definition". So it treated "unavoidable" as equivalent to "incremental"; in effect as adding nothing to the definition. This is presumably why the Commission did not address the significance of "unavoidable" in the determination in issue before us. I prefer to construe s 5 on the basis of all the words used in it, including "unavoidable". [55] The second is s 18, the Part 2 statement of purpose which is incorporated into the Part 3 exercise by s 84(2)(c). At [39] of its decision, the Commission recognised an apparent inconsistency between its rejection of the Vodafone methodology and "the competitive environment in New Zealand at the time of the TSO, in which mobile services were widely deployed and used." It was content, however, to reject this for reasons which, despite the repetition, I think it right to set out again:The Commission does not consider that efficient costs of access networks should reflect those of the overlay mobile networks. Such an approach would, in effect, model the outcomes of a tender process for delivery of the TSO, and would depart too far from reasonable standards of efficiency previously adopted by the Commission. Given the essentially non- commercial nature of the service being delivered, the Commission considers that some reasonable bounds need to be placed on the attempt to approximate the costs that would be incurred in a competitive environment. The Commission will accept the lowest cost technology consistent with the scorched node approach.I consider that the reasons given by the Commission (departure from "reasonable standards previously adopted" and the need for "reasonable bounds" on attemptsto approximate the costs in a competitive environment) do not justify the non- compliance with the statutory purpose of promoting competition. [56] In short I am persuaded the Commission erred in law when it rejected the Vodafone methodology because it conflicted with its preferred scorched node methodology. In doing so, it treated consistency (or otherwise) with its scorched node model as the controlling consideration instead of going back to, and applying, the key statutory provisions. [57] I recognise the considerable complexities involved in the exercise required of the Commission and emphasise that my judgment is addressed to the reasons given by the Commission. My approach comes down to the conclusion that the arguments for the Vodafone methodology are more formidable than the Commission recognised and could not lawfully be rejected on the basis of the reasons given by the Commission. In this difficult area, it would obviously neither be right nor practical for a Court to come up with its own determination for the 2003-2004 year. Accordingly, I would allow the appeal but would leave it to the Commission to reconsider the determination. I emphasise that I have not concluded that on such reconsideration the Commission would necessarily be required to adopt the Vodafone methodology.ARNOLD J Table of Contents Para No Introduction [58]Vodafone's key concern [61]The context of Part 3 [64]The process envisaged by Part 3 [78]The need for a methodology or model [79]An evaluative process [85]The Commission's treatment of wireless technology [97]Vodafone's criticisms [103]My evaluation [108]Does Vodafone's approach require a scorched earth methodology? [109]Did the Commission give proper effect to the net cost definition? [117]The scope of the Commission's task? [126]Did the Commission take proper account of the purpose statement in s 18? [130]Decision [137]Introduction[58] I have had the opportunity to read William Young P's judgment in draft. Because I have reached a different conclusion on the principal issue in the appeal, I write separately. [59] This case concerns the Commerce Commission's "Final Determination for TSO Instrument for Local Residential Service for period between 1 July 2003 – 30 June 2004" dated 23 March 2007 ("the 2003 - 2004 Determination"). Broadly, the point at issue is whether the Commission's treatment of the mobile technologies is consistent with Part 3 of the Telecommunications Act 2001 ("the Act"). [60] My judgment is structured as follows. I begin by briefly summarising Vodafone's key concern with the 2003 - 2004 Determination. I then make two general observations about Part 3, one concerning the context of Part 3 and the other concerning the nature of the process contemplated by Part 3. Finally I discuss the particular issue that Vodafone has raised, and in the course of that discussion I will explain why I disagree with the President's analysis.Vodafone's key concern[61] Mr Gray QC for Vodafone described the central issue in this case as being whether the Commission had calculated the net costs to an efficient telecommunications service provider ("TSP") of providing local residential telephone services in accordance with Telecom's telecommunications service obligations ("TSO") instrument consistently with: (a) the definition of "net cost" in s 5 of the Act; and (b) the purpose set out in s 18 of the Act. [62] He submitted that the hypothetical efficient TSO service provider which the Commission was obliged to utilise in its analysis was one which "owned a network which incorporated fixed line and mobile networks", that is, a TSP having, in this respect, Telecom's characteristics. Such an efficient TSO service provider would, he argued, have supplied at least some commercially non-viable customers ("CNVCs") from its mobile network as it could have done so more cheaply than from its fixed wire network, even if that latter network was optimised as required by the Commission. The Commission's refusal to entertain this approach was, Mr Gray submitted, wrong in principle and inconsistent with s 18. There was, therefore, an error of law which this Court should correct on appeal. [63] I will set out and comment on Vodafone's arguments in more detail later in this judgment.The context of Part 3[64] Part 3 contains "provisions about the supply of certain telecommunications services under TSO instruments, the enforcement of those instruments, and contributions payable by certain telecommunications service providers to the suppliers of those telecommunications services": s 4(f) of the Act. TSO instruments are contracts between the Crown and TSPs for the supply of telecommunications services to groups of end-users who might not otherwise be supplied on acommercial basis or at an affordable price: ss 5 and 70. They have a strong public or social service element to them. [65] Vodafone's challenge to the Commission's approach relates to the contributions payable by it and other TSPs to Telecom in relation to local residential telephone services (TSO services) provided under the Telecommunications Services Obligations Deed for Local Telephone Service ("the TSO Deed"), entered into by the Crown and Telecom in December 2001. [66] In determining contributions under Part 3, the Commission must consider the purpose set out in s 18: s 84(2)(c). Relevantly, s 18 provides:Purpose(1) The purpose of this Part [ie, Part 2, which deals with the regulated supply of services between TSPs] 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. [67] To understand that purpose, it is necessary to place Part 3 of the Act in its context. As the President has noted, when Telecom was privatised, the Crown and the purchasers of Telecom's shares entered into an arrangement concerning the provision of services to residential customers. Telecom's articles of association provided for a Kiwi Share and conferred various rights on the Kiwi Shareholder (the Minister of Finance). Under the arrangement, Telecom was obliged to continue to provide "ordinary residential telephone service" (most importantly, access at a capped line rental and free local calling) on defined terms (referred to as the Kiwi Share Obligations or KSO): see Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1992) 5 TCLR 166 at 182 (HC) and Final Report of theMinisterial Inquiry into Telecommunications 27 September 2000 ("the Fletcher Report") at [3.4] and [9.1]. [68] To the extent that the KSO prevented Telecom from recovering from its residential customers the cost of providing "ordinary residential telephone service", it was obliged to subsidise that service from revenues from other services, for example services to business customers or toll services. Telecom considered that such cross-subsidies had the potential to distort the competitive process. This was because they would impose what was effectively a regulatory cost on Telecom in respect of its cross-subsidising services, which typically were services for which there was competition. As a consequence, Telecom would have to carry a cost which its competitors did not share in relation to these competitive services, in circumstances where those competitors benefited from the ubiquity of reach resulting from the subsidised service. Telecom considered that the KSO did give rise to such cross-subsidies, and sought some contribution to the cost of the KSO from its competitors in its interconnection charges. This was one of the factors that gave rise to the many disputes within the industry, as evidenced by the Clear/Telecom litigation, for example Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 (PC). [69] Part 3 was introduced following the Fletcher report and was intended in part to address this issue. In introducing the Bill the Minister of Communications, Hon Paul Swain (9 May 2001) 592 NZPD 9116, said:The problem in the past has been the way in which other telecommunications providers have been required to meet the costs of Telecom's Kiwi share obligations. The practice has been for Telecom to include a premium on the price for interconnection with its network, which was not transparent or competitively neutral. Part 3 implements a transparent and neutral mechanism to deal with contributions to the cost of telecommunications service obligations, including the Kiwi share obligations.[70] The KSO was replaced by the TSO Deed. It is a deemed TSO in terms of s 71 of the Act. (The TSO Deed is one of two TSO instruments under the Act, the other being with a different TSP and relating to services to the hearing impaired.)[71] The mechanisms in Part 3 enhance competition in a number of different ways. The Commission discussed this in its TSO Discussion Paper and Practice Note – Cornerstones Issues Paper 22 March 2002 ("the Cornerstones Issues Paper") at [31] – [36]. It said:35. The Commission considers that the key impact of the section 18 purpose statement on Part 3 of the Act, other than where it is cited specifically in the Part itself, is to require the Commission when making determinations to minimise any distortion to the competitive process or to efficient investment. (Emphasis added.)[72] It then proposed the following list of criteria going to these two aspects – promoting competition and achieving efficiency – (at [36]):Promoting competition• maintaining competitive neutrality;• ensuring the regime does not impede investment which promotes competition in telecommunications markets.Achieving efficiency gains• adopting a long-term perspective when calculating avoidable cost;• maximising incentives on the [telecommunications service provider] to minimise its costs in providing the required services;• maximising incentives on the [telecommunications service provider] to investigate, and where appropriate implement, new cost reducing technologies;• minimising any impact on the demand of TSO customers for non-TSO services; and• minimising any impact on the demand for all telecommunications services by non-TSO customers (including the impact of the TSO levy passed onto the end-users of services provided by other telecommunications service providers – liable persons).[73] As this list of criteria highlights, competition/efficiency analysis is multi- faceted. It must take account of the perspectives of all TSPs (ie, the TSO service provider and other TSPs and potential TSPs) and of consumers. It is likely toinvolve trade-offs – particular considerations may pull in different directions, short- term and long-term perspectives may conflict and so on. [74] To illustrate, I agree with the Commission that, properly applied, the Part 3 process should minimise any distortions to the competitive process. But minimising such distortions relates to both the TSO service provider and other TSPs. For example, looking at it from the perspective of the TSO service provider and taking Telecom as an example, if Telecom does suffer a cost burden as a result of its TSO Deed obligations, Part 3 provides a mechanism for the sharing of that cost burden among "liable persons". "Liable persons" are essentially other TSPs which take advantage of the ubiquity of reach resulting from the TSO Deed. In terms of s 5 of the Act:liable person, in relation to a TSO instrument, means (except when they are the TSP),– (a) Telecom; and (b) a person– (i) whose network is interconnected with a fixed PSTN operated by Telecom; and (ii) who provides a telecommunications service in New Zealand to end-users by means of some component of a PSTN that is operated by the person. (Emphasis added.)The section defines "fixed PSTN" as follows:fixed PSTN– (a) means a PSTN, or that part of a PSTN, that connects an end-user's building to the local switches or equivalent facilities; and (b) includes those local switches or equivalent facilities. (Emphasis added.)Accordingly, liable persons are TSPs which interconnect with the switch/end-user component of Telecom's network. By sharing among liable TSPs any legitimate cost burden incurred as a result of supplying TSO services, the Part 3 process should eliminate or minimise what would otherwise be an artificial distortion (anasymmetric cost structure arising from a regulatory obligation) in competitive telecommunications markets. [75] However, taking a broader perspective, Part 3 enables the Commission to ensure that liable TSPs (including Telecom) meet any legitimate cost burden from the TSO Deed in a way that is competitively neutral. This allows TSPs to compete against each other in competitive markets solely or principally on the basis of their relative efficiencies in providing the contested services. [76] In terms of efficiencies, there is a helpful discussion in the Commission's paper, A Guide to the Role of the Commerce Commission in Making Access Determinations Under the Telecommunications Act (28 May 2002) ("the Guide"), which is also relevant to the Part 3 process. The Guide identifies the three types of economic efficiency – allocative, productive and dynamic: at [64]. It states that allocative efficiency is difficult to apply in the telecommunications industry as the presence of high fixed and common costs means that prices must be set above marginal costs. It also notes that there may be tensions between allocative and productive efficiency on the one hand and dynamic efficiency on the other, which means that trade-offs must be made. In that context, time horizons may be important: at [65] – [69]. As the Commission noted in the Cornerstones Issues Paper (see [72] above), the Part 3 process must maintain incentives for efficient investment by, in this case, Telecom. But it should also place pressure on Telecom to be efficient in the provision of the regulated service by not allowing recovery of inefficiently incurred costs. [77] One final point about context. In introducing the Bill, Hon Paul Swain said that the Government intended to allow for the possibility of holding tenders for the provision of these regulated services. The Minister said (at (9 May 2001) 592 NZPD 9116):The Kiwi share obligations contained in Telecom's constitution are currently the only example of a telecommunications service obligation. However, the bill leaves open the possibility of declaring other telecommunications service obligation instruments in the future, and allows for the possibility of putting such obligations out to competitive tender.As I read Part 3, there is no reason why such a tender process could not be conducted, but a difficulty may then arise as a result of the definition of liable persons with its requirement for interconnection with the switch/end-user component of Telecom's network.The process envisaged by Part 3[78] There are two features of the process envisaged by Part 3 which require emphasis at this point. The first is that to implement the process, the Commission had to develop a methodology or model which it could apply from year to year. The second is that in developing and applying that methodology or model, the Commission was necessarily engaged in an evaluative process. I now develop these two points.The need for a methodology or model[79] Subpart 2 of Part 3 sets out the annual procedure for determining the amount that service providers must contribute in respect of TSO obligations. It provides for a series of steps within a relatively constricted timeframe: (a) Within 60 working days of the end of the financial year:• all "liable persons" must provide the Commission with specified data: s 81;• Telecom must provide the Commission with calculations of the net costs of complying with the TSO Deed in the financial year: s 83. (b) Within 120 working days of the end of the financial year, the Commission must make reasonable efforts to prepare, and give public notice of, a draft determination which contains the information specified in s 88. This includes Telecom's net cost of complying with the TSO Deed in the financial year, plus supporting information and the amount of revenue that Telecom and each liable person receivesduring the financial year from providing services over the Telecom network or its own network. The public notice must give a closing date for submissions, which must be not less than 20 working days after the giving of the public notice: s 86. (c) Within 40 days of the closing date for submissions, the Commission must make a reasonable effort to prepare, and give public notice of, a final determination containing the matters specified in s 92 and provide it to all liable persons. [80] Given that this is an annual process which is intended to be completed within a reasonably tight timeframe, it seems to me inevitable that the Commission will have prepared a methodology or model by reference to which it can deal with the data once it is provided. Put another way, it cannot have been contemplated that the Commission would start each annual process with a blank sheet of paper. As the Commission has noted, "network cost modelling exercises are generally resource- intensive and costly": 2001 - 2002 Determination at [449]. [81] The Commission did in fact develop a core methodology following an iterative process involving consultation with members of the telecommunications sector. In early 2002 the Commission released two papers, the Cornerstones Issues Paper and the TSO Discussion Paper and Practice Note – Implementation Issues Paper 19 April 2002 ("the Implementation Issues Paper"). Having received written responses to these papers from various parties, including Telecom and Vodafone, the Commission held a four-day conference in mid July 2002 at which those who had responded were invited to elaborate on their views. The Commission then reported back to the industry on its thinking following the conference in a paper entitled TSO Position Paper 30 September 2002, although that paper did not record final decisions. The Commission held a TSO modelling workshop for industry members in November 2002 at which it introduced a model that it proposed to use, namely the Hybrid Cost Proxy Model (HCPM) developed by the United States Federal Communications Commission for optimisation and costing of access network components. The Commission also developed a purpose-built model for design and costing of switching and transport components ("CostPro"). (These are referred to inmore detail at [93] below.) In April 2003 the Commission released its cost model based on HCPM and sought further comment. [82] The Commission's final decisions on the various issues that it was required to resolve were addressed in the first of its determinations to be issued under Part 3, for the 20 December 2001 – 30 June 2002 period. The Commission's draft determination was issued on 27 June 2003; the Commission then held a conference in August 2003 before issuing its final determination on 17 December 2003 (the 2001 - 2002 Determination). [83] The iterative process adopted by the Commission in developing the methodology that it would apply in its annual determinations must be taken into account when assessing the Commission's reasoning in relation to mobile telephony in the 2003 - 2004 Determination. The President describes the Commission's reasoning in rejecting Vodafone's approach as "succinct and conclusory": at [50] above. While that is true, the Commission's reasoning must be seen against the background that preceded it. Vodafone raised the issue of the extent to which mobile technology should be accommodated in the methodology at an early stage in the consultative process. It was discussed, for example, when Vodafone made its oral submissions at the conference concerning the draft 2001 - 2002 Determination. The views expressed by the Commission in its 2003 - 2004 Determination on mobile technology did not, then, emerge for the first time in the determination. Rather, they were discussed and developed over the course of a lengthy (and on-going) consultative process. [84] Another consequence of the fact that the process is to be carried out annually within a relatively short time frame is, in my view, that there is unlikely to be radical change in the methodology from one year to the next. Rather, changes are likely to be incremental, at least initially. A fundamental rethinking of a significant part of the methodology may well take more time than the annual timetable allows.An evaluative process[85] Part 3 of the Act envisages that the Commission will identify, among other things, the "net cost" to Telecom of serving CNVCs. "Net cost" is defined is s 5 of the Act to mean "the unavoidable net incremental costs to an efficient service provider of providing the service required by the TSO instrument to [CNVCs]". The standard of an "efficient" service provider effectively directs the Commission not to simply utilise the costs in fact incurred by Telecom in providing services to CNVCs but to utilise the costs that an efficient provider would incur. In this way, Part 3 attempts to avoid one of the deficiencies of traditional "cost plus" forms of utilities' regulation and attempts to replicate the type of outcome that would occur if the CNVCs were supplied in a competitive market. [86] As the Commission noted in the 2001 - 2002 Determination, the Act gives relatively little guidance on how the net cost calculation is to be carried out, so that the Commission is left "to exercise some degree of judgement in calculating the net cost of the TSO": at [27]. [87] In considering the costs of the TSO services to an efficient service provider, the Commission had to decide whether to adopt a top-down or a bottom-up approach. The Commission described the difference between the two approaches in the 2001 - 2002 Determination as follows:366. Networks are alternatively modelled on a top-down or bottom-up basis. A top-down model typically starts with engineering data and accounting information from a real network and makes various adjustments to the inputs with the intention of estimating the costs to an efficient network operator of providing the service to be costed. A bottom-up model, on the other hand, builds a theoretical model of a forward-looking efficient network from the ground up, and uses this to calculate the cost. Telecom's cost model tends to take a top- down approach, although some bottom-up information is also included.[88] The Commission adopted a bottom-up approach, which "involves identifying the individual network elements and activities necessary to provide the relevant services and then determining the costs of each of those elements and activities": Commerce Commission TSO Position Paper 30 September 2002 at [27]; 2001 -2002 Determination at [445]. It did so because it considered that this approach to modelling "is most likely to provide a reliable estimate of the net cost of the TSO, and is most consistent with the Act": 2001 - 2002 Determination at [445]. Telecom objected to the bottom-up approach, on the ground that it went further in its efficiency demands than the Act required, a contention which the Commission rejected: see the discussion in the 2002 - 2003 Determination at [43] – [54]. [89] The Commission then had to consider the extent of optimisation to be incorporated into the model. A fully optimised model would be constructed on a "greenfields" basis, incorporating the most up-to-date technology, a network topology with the most efficient routing and exchanges placed at the most efficient locations (the "scorched earth" approach). In effect, it would ignore the existing network. But, as the Commission pointed out, most regulators reject such an approach as it does not recognise efficient investments made by TSPs in their networks in the past and does not encourage continued efficient investment by TSPs: see the discussion in the TSO Position Paper at [35] – [43]; 2001 - 2002 Determination at [39]. In discussing the concept of an efficient TSP the Commission said in the TSO Position Paper:22. The Commission's view is that an efficient service provider is one that makes efficient decisions over time as to what services to provide and how to provide them. The Commission recognises that given the uncertainty and irreversible nature of investments in telecommunications infrastructure, efficient investment decisions may ex post appear to be inadvisable.Accordingly, the Commission adopted what it described as the scorched node approach, which requires some, but not complete, optimisation. [90] The Commission explained the bottom up, scorched node approach in its 2001 - 2002 Determination at [448]:The Commission's position is to use a bottom-up model that is designed so that:• Equipment in the network between the network termination point (customer) and the first node in Telecom's current network may be optimised, including equipment, technology and layout;• Equipment at nodes can be optimised (e.g. replace switch with [a remote line unit]); and• Some nodes with a small number of lines can be removed.In short, the scorched node approach retains the core network, the existing exchange service area (ESA) boundaries and the local exchanges but optimises and rebuilds the network within the ESAs. (An ESA is the geographical area served by a fixed network node or exchange.) [91] In the argument before us, there was no direct challenge to the Commission's decision to adopt a scorched node methodology, although as I say below, I consider that Vodafone's approach is inconsistent with it. As I see it, the methodology has much to commend it. The scorched earth approach may be economically pure, but it is doubtful that it is realistic, given that it would not allow TSO service providers to recover the costs of investments that were efficient when made, an important consideration in an industry like telecommunications which is characterised by large capital investments and rapid technological change. In my view, the Act, like the Commerce Act, is not concerned with abstract economic theory but with the application of economic concepts and principles in a real world setting. It establishes a regulatory regime which incorporates economic principles but is based on the reality of New Zealand telecommunications markets. [92] The Commission's decision to adopt a bottom-up model incorporating a scorched node approach reflects the Commission's assessment of the appropriate balance to be struck between the various interests at play. A top-down approach would have started with Telecom's actual costs and modified those to take account of the need to ensure efficiency. The Commission considered this insufficiently rigorous and chose a bottom-up, scorched node approach, which it considered created stronger incentives for efficiency. But it also recognised that to assume that a TSP could "wipe the slate clean" each year, as is implicit in a scorched earth approach, would run the risk of under-compensating the TSP for investments that were efficiently incurred.[93] As I have said, the particular models that the Commission adopted were HCPM and CostPro. In its 2001 - 2002 Draft Determination, the Commission described HCPM as follows:461. HCPM is a forward-looking economic, computer based cost model which is used by regulatory authorities to estimate the forward- looking costs of network facilities and services. 462. This model takes an approach which:• is consistent with the Commission's bottom-up, scorched-node modelling position;• can be adapted to calculate TSO net cost as required by the Act;• is transparent;• can be supported and validated by international experts in a cost effective manner; and• is well known to the industry both in New Zealand and overseas.It described the CostPro model as follows:550. The Commission has developed a switching and transmission model (Costpro) with which to estimate the [Long Run Incremental Cost] of calls associated with CNVCs. 551. Using forward looking technology, Costpro calculates the Long Run Incremental Cost for material and labour investments associated with the switching, signalling and transport of landline telecommunication network functions. In conjunction with HCPM, the output from CostPro is used to calculate the TSO cost.The CostPro model was designed to use forward-looking, commercially available telecommunications technologies. It also employs modelling algorithms that reflect the best practice of contemporary switch and transport engineering. [94] In applying these models in order to identify CNVCs, the Commission looked at clusters of customers. (A cluster is a group of customers who are connected to the same feeder box or directly to the same exchange.) If the line rentals (which includes access and local calling) and expected supplementary revenues (see s 84(1)(a)) from customers within the cluster are less than the net costs of providing TSO services to them (which includes a reasonable rate of return on anyincremental capital employed (see s 84(1)(b)), the customers in the cluster are CNVCs. [95] As will be obvious, the Part 3 process requires the Commission to reach decisions on a variety of issues. I have already referred to some – the choice between a top-down and bottom-up model, between a scorched earth and scorched node approach, and between assessing customers individually or in clusters. And there are many others, for example, decisions as to valuation methodology, depreciation and weighted average cost of capital. [96] In making such decisions the Commission must consider a wide range of factors, some competing, and make evaluative assessments as to what is appropriate in respect of each issue. The fact that the Commission makes a decision on a particular issue that does not produce the lowest possible net cost figure will not necessarily mean that the decision is contrary to the scheme and purpose of Part 3. There is an illustration of the competing considerations at play in an exchange between the Commissioners and Vodafone's representatives and experts at the conference following the issue of the draft 2001 - 2002 Determination. The discussion highlighted that a low net cost figure might assist new players to enter telecommunications markets, but operate as a disincentive to Telecom to continue to invest in the network. By contrast, a higher figure might facilitate dynamic efficiency by encouraging Telecom to invest further in its network, but discourage new entrants.The Commission's treatment of wireless technology[97] In its 2001 - 2002 Determination the Commission said:457. At the time of the TSO Draft Determination, the Commission considered that, although the scorched node modelling approach permits full optimisation of the network between the customer and node, the wire-line copper pair remained the most efficient and best in-use technology platform for TSO service delivery for the TSO period.[98] However, it noted that Telecom used multi-access radio (MAR) to provide local residential telephone service under the TSO Deed to approximately 12,000lines in remote or low-density areas. (MAR involves an antennae system serving a number of remotely located customers. An antenna located at an exchange communicates with an antenna at a cabinet, which is linked by line to the customers' premises. MAR systems have a range of about 20 kilometres, but require line of sight access. Coverage can be extended by the use of repeaters.) Accordingly, the Commission decided to implement a wireless technology price cap within the HCPM model to identify areas where it would be more efficient to use a MAR system for local access than that the traditional fixed wire copper pair. It also recognised the possibility that other forms of wireless technology might become relevant over time: see 2001 - 2002 Determination at [457] – [460] and Appendix 12. [99] In its first full year determination, that for the 2002 - 2003 year, dated 24 March 2005, the Commission repeated its view that the wire-line copper pair remained the most efficient and best in-use technology platform for TSO service delivery for the period: see 2002 - 2003 Determination at [271]. However, it went on to recognise a second form of wireless technology as being capable of providing TSO service to the required quality standards, namely wireless local loop (WLL). (WLL involves wireless links from customer premises to base sites, which themselves have wireless links to an exchange in the relevant ESA.) The Commission concluded that WLL costs for certain types of terrain were significantly below the Commission's then current wireless cap. Accordingly in relation to those areas, the Commission applied a WLL cap, and in relation to the remainder retained the MAR cap: see 2002 - 2003 Determination at [272] – [276] and Appendix 8. [100] In the 2003 - 2004 Determination, the Commission again repeated its comment about the wire-line copper pair (at [213]), but went on to conclude, for the first time, that mobile technology was capable of providing TSO service to the requisite quality standards. The Commission considered two different forms of mobile technology, global system for mobile communications (GSM), which is a time division multiplex technology, and code-division multiple access technology (CDMA), and developed a mobile technologies (MT) cap based on GSM: see 2003 - 2004 Determination at [214] – [222] and Appendices 2, 3 and 9. The MT cap was a "virtual incremental build on the local switch": 2003 - 2004 Determination at [434]. This meant, for example, that the Commission assumed at least one base transceiverstation in each ESA, rather than seeking to utilise whatever infrastructure was already in place in existing mobile networks (which might, for example, have permitted several ESAs to be serviced from one cell tower). [101] Of the 786 ESAs in the Commission's model, all had geography appropriate for MAR, 201 had geography appropriate for WLL and 79 had geography appropriate for MT and WLL. On the Commission's analysis, MAR gave the cheapest cost in all ESAs, so that was utilised as the cap: see 2003 - 2004 Determination at [219] and [246] – [247]. [102] It is important to understand the basis on which the Commission introduced the MT cap. The Commission accepted that mobile technology was technically capable of meeting the standards required for TSO services: see 2003 - 2004 Determination Appendix 2 at [432]. This is not the same as saying that the service that would have been provided to CNVCs from an existing mobile network (unadapted) would in fact have met those standards. At [711] in Appendix 9 to the 2003 - 2004 Determination the Commission said:GSM networks used predominately for mobile telephony are designed to deliver a performance which is inferior to that anticipated for the TSO. The data traffic capability is less than would be expected through an internet access dial up environment as required by the TSO.As I understand it, to provide service that met TSO quality standards from an existing GSM mobile network would have required some adaptation of the network, for example, use of different antennae: see 2003 - 2004 Determination Appendix 9 at [708] – [713], especially [710].Vodafone's criticisms[103] As with the WLL and MAR caps, the Commission modelled its MT cap on the basis that the focus of the analysis was on the link from the local switch to the end-user. It did not utilise the existing mobile networks that Telecom and Vodafone already had in place. Mr Gray submitted that if optimisation principles were applied in a technologically neutral way (see [8] of the TSO Deed), those existing mobile networks would be considered as a potential means of supplying the TSO service. Inother words, the incremental costs of using the existing mobile networks to provide the TSO service should be the measure of net cost (assuming, of course, that those costs were lower than those of any alternative). [104] The Commission gave two particular reasons for its rejection of Vodafone's approach in its 2003 - 2004 Determination. Adoption of it would, the Commission said at [40]: (a) in effect, "model the outcomes of a tender process for the delivery of the TSO"; and (b) "depart too far from reasonable standards of efficiency previously adopted by the Commission". The Commission went on to say at [40]:Given the essentially non-commercial nature of the service being delivered, the Commission considers that some reasonable bounds needs to be placed on the attempt to approximate costs that would be incurred in a competitive market. The Commission will accept the lowest cost technology consistent with the scorched node approach.[105] Mr Gray criticised the Commission's approach, essentially on two grounds. He submitted that the Commission: (a) substituted a model for the statutory language. As a consequence, the Commission did not accurately assess the unavoidable net incremental costs to an efficient TSP of providing the TSO service as required by s 5; (b) did not consider sufficiently, or give proper effect to, the purpose statement in s 18. As a consequence, the Commission's calculation of the net cost of providing TSO services was considerably overstated.[106] In relation to the first point, Mr Gray argued that the Commission's MT cap did not reflect the efficient service provider standard for various reasons, including that it: (a) ignored existing mobile sites (cell towers), some of which could service multiple ESAs; and (b) built mobile nodes over existing fixed nodes even though the fixed nodes were not located at the most efficient positions for mobile technology. That is, the capacity of mobile technology was artificially limited by the constraints of the fixed wire network. He said that the Commission should have modelled the cost to Telecom of developing its mobile network so that it could provide TSO services using mobile technology by means of its existing mobile infrastructure. [107] As to the second point, Mr Gray submitted that the Commission's approach was inconsistent with s 18. He said that it impaired productive efficiency because the TSO service had a higher cost than an efficient service, allocative efficiency because it operated like a tax on competitors and promoted gaming and dynamic efficiency because it failed to capture gains from emerging technologies. The Commission should not, he said, have modelled greenfields mobile constructs in each ESA but should have assessed the net incremental cost to Telecom of providing the TSO service from its existing mobile network, developed and/or expanded if necessary.My evaluation[108] In my view, the Commission was entitled to adopt the approach which it did, and made no error of law in doing so. There are four reasons for this: (a) First, as I see it, Vodafone's approach effectively requires the Commission to adopt a scorched earth methodology. Thatmethodology was, in my view, one that the Commission was entitled to reject. (b) Second, I consider that the Commission did give proper effect to the net cost definition. (c) Third, Vodafone's approach either requires the Commission to assess the efficiency of Telecom's mobile network or requires it to model the results of a tender for TSO services. (d) Finally, I consider that the Commission did turn its mind to the purpose statement in s 18, and reached a decision that was rationally available to it. I deal with each point in turn.Does Vodafone's approach require a scorched earth methodology?[109] Vodafone argued that, when determining net cost, the Commission failed to assess properly how an efficient TSP would provide TSO services, given the availability and suitability of mobile networks. But before us at least, it did not argue that the Commission was obliged to adopt a scorched earth methodology. Rather, it accepted that the Commission could properly adopt an approach which recognised past investments by a TSP. As Mr Gray put it in his written submissions:The efficient service provider standard requires the Commission to model the cheapest means available for providing the [TSO] services, taking into account historic investment decisions. (Emphasis added.)[110] The italicised words are an important qualification on the preceding language. The scorched node approach was intended to take account of historic investment decisions and recognises that "the evolution of an efficient network design depends on past decisions": TSO Position Paper at [41]. As the Commission also said, a scorched earth approach, which ignores past investments, is likely to under-compensate TSPs for efficient investment decisions previously made.Accordingly, it is unlikely to incentivise TSPs to continue to make such investments in the future. [111] Mr Stevens submitted that Vodafone's approach to mobile technology would result in the scorching of part of Telecom's core network, contrary to the premise underlying the scorched node model. Indeed, this is why the Commission rejected it. McGechan J in the Court below accepted that Vodafone's approach would scorch parts of Telecom's core network: see [54]. I agree. If Vodafone is right that the Commission must consider whether TSO services can be provided more cheaply from Telecom's mobile network and, if so, utilise those costs as the net costs of providing TSO services, the result must be that some part of the Telecom core network would ultimately become redundant (be scorched). [112] To my mind, there is an inherent contradiction in Vodafone's argument in this respect. On the one hand it accepts that the Commission should take account of Telecom's historic investment decisions, but on the other it says those decisions should be ignored in the context of the application of the MT cap, at least as they relate to the fixed wire network. It may be that when he referred to historic investment decisions Mr Gray had in mind that Telecom has made past investments in its mobile network. But that does not resolve the inconsistency because the logic of Vodafone's position would continue to apply even if Telecom did not own a mobile network, as long as there was at least one such network in New Zealand. I return to this when I discuss the tender point below. [113] In his judgment, the President says (at [52] above) that once the Commission accepted that mobile technology was capable of meeting the required technical standards, the relevant comparison was no longer between the existing infrastructure and an optimised but virtual equivalent, but was between two existing infrastructures, fixed and mobile. The President indicates the Commission's cost modelling should identify which system is cheaper. Accordingly, the Commission could not simply rely on its preference for a scorched node analysis. Implicitly, then, the President holds that the Commission ought to have been willing to apply a scorched earth methodology.[114] I do not agree that the Commission has simply applied its scorched node model rather than applying the statutory tests, nor do I agree that the Commission should have applied a scorched earth methodology. The Commission developed the scorched node methodology because it, like other regulators, considered that it best reflected the various factors that it was required to accommodate within the Part 3 analysis. That was, in my view, a legitimate choice. The scorched node methodology and the HCPM and CostPro models will require periodic review or reassessment by the Commission, and perhaps ultimately replacement. But I do not think it reasonable to expect that the Commission should, on the first occasion that mobile technology was capable of meeting the quality standards for TSO service, abandon its previous approach in favour of one whose adoption would or could have far-reaching implications. Given that the Commission's approach was developed after a lengthy consultative process and that this was only the third determination (or the second for a full year), it is not surprising that the Commission was reluctant to depart from the scorched node methodology and, more importantly, the balance of considerations that it reflects. I do not think that it was an error of law for the Commission to refuse to do so. [115] Moreover, I consider that there is a real issue as to whether the Commission could properly have adopted a scorched earth approach under Part 3, at least at the outset of the Part 3 regime. Historically Telecom has fulfilled its obligations under the TSO Deed (and under the predecessor KSO) through its fixed wire network. That does not mean that Telecom should be immune from the pressures created by new technologies in relation to the TSO service, and the TSO Deed does seem to be technologically neutral. But if the Commission had adopted at the outset an approach that ignored Telecom's efficient past investments in its fixed wire network, it is certainly arguable that it would have erred in law. [116] There are several provisions in the Act which provide some support for this view, albeit that they are by no means decisive: (a) The first step in the calculation of net costs is for Telecom to provide the Commission with "calculations of the net cost of complying with the TSO instrument during the financial year": s 83(a). It isimprobable that the expectation was that the service provider would develop a "greenfields" model in order to provide the requisite data. It is more likely that the expectation was that at least some of Telecom's actual costs would be relevant to the analysis, albeit within the context of the Commission's optimised models. (b) Section 84 of the Act sets out various considerations which the Commission either must or may take into account when determining net costs. One of the matters that the Commission must take into account is the provision of a reasonable rate of return on the incremental capital employed in providing the services to CNVCs: s 84(1)(b). Again I think it unlikely that the contemplation was that this would be an entirely theoretical figure (as it would be if a scorched earth approach were to be adopted). It seems more likely that the figure would have some connection with Telecom's actual investments (again, within the framework of the Commission's optimised models). (c) The Commission's final determination must include the net costs to Telecom of complying with the TSO Deed in the relevant financial year and all material information that first, relates to the net cost calculation and second, would not, in the Commission's opinion, be likely to unreasonably prejudice Telecom's commercial position: s 92(a). Again, this tends to suggest a scorched node rather than a scorched earth approach. It contemplates that commercially sensitive information will be used in the calculation, and in this context information that is commercially sensitive is likely to concern current or expected costs. It is more difficult to see how the estimated costs of a hypothetical "greenfields" network could be commercially sensitive. That said, I acknowledge that the calculations are likely to incorporate real figures that may be confidential, for example, direct and indirect revenues from CNVCs.Did the Commission give proper effect to the net cost definition?[117] Mr Gray argued that the Commission did not apply the "net cost" definition properly as it refused to consider whether Telecom could have provided TSO services more cheaply from its mobile network than from its fixed wire network as optimised. [118] The President accepts this submission. He draws attention to the word "unavoidable" in the definition of "net costs" s 5. The President says at [54] above:Costs associated with supplying services to CNVCs which could be avoided or reduced by the use of existing mobile telephony infrastructure might be thought to be "avoidable" rather than "unavoidable".The President goes on to point out that, in the Cornerstones Issues Paper at [45], the Commission treats "unavoidable" as adding little or nothing to the definition. [119] I do not consider that the President's criticism of the Commission's analysis is valid, as I shall now attempt to explain. [120] Section 5 refers to the "unavoidable net incremental costs to an efficient service provider". I think the Commission was correct when it stated that the word "unavoidable" does not "expand significantly the meaning of the remaining terms in the definition": Cornerstones Issues Paper at [45]. The term "incremental cost" is a technical economic term. The Commission's approach to it is summarised in its 2001 - 2002 Determination as follows:31. The concept of incremental cost is well established in economics. It is the additional cost a firm would incur if it chose to serve an extra customer or group of customers, or provide an extra unit or tranche of output. It is often useful to think of this in terms of the difference in a firm's costs "with" and "without" the additional customer(s) or unit of output. 32. In the context of the TSO, the incremental cost of an obligation to provide services to [CNVCs] is, therefore, equal to the difference in the firm's total costs between the circumstances where it supplies those customers in conjunction with all its other customers, and when it does not. 33. In terms of the access network, the relevant increment will be the access costs associated with clusters of CNVCs. In terms of the corenetwork, the relevant increment will be the total tranche of calling costs associated with CNVCs. 34. In estimating the net cost of the TSO, the Commission's intention is to determine unavoidable incremental costs as the difference between the long-run costs an efficient service provider would incur with and without the obligations imposed by the TSO instrument. This includes a return on incremental capital required to meet the obligations under the TSO instrument, as well as appropriate depreciation costs of those assets. 36. The incremental cost should be the long run incremental cost (LRIC). The long run is a period of time of sufficient duration for the firm to be able to alter all inputs to the service. This means that long-run incremental costs include the costs of all the inputs used to provide the service. (Footnotes omitted.)See also the discussion of the High Court (Ellis J and Professor Maureen Brunt) inClear Communications Ltd v Telecom Corporation of New Zealand Ltd (1992) 5 TCLR 166 at 202 and Baumol & Sidak Toward Competition in Local Telephony(1994) at 55 – 59. [121] As is apparent, the concept underlying "incremental cost" is that if the additional increment is not supplied, the relevant incremental costs will not be incurred. In that sense incremental costs are avoidable. But if the additional increment is supplied, the incremental costs must be incurred, and in that sense are unavoidable. Quite why the word "unavoidable" was included in the definition in s 5 in combination with the word "incremental" is difficult to fathom. TelstraClear suggested in its submissions to the Commission dated 3 May 2002 that it might have resulted from the way in which the Telecommunications (Information Disclosure) Regulations 1999 were drafted: at [50] – [53]. Be that as it may, the Commission was right, in my view, to treat the word "unavoidable" as adding little to the other words in the definition. [122] However, Mr Gray's argument did not depend on the use of the word "unavoidable" in the definition of net cost. He argued that the Commission did not identify the true incremental costs of the TSO services because it refused to considertheir provision from a mobile network as a whole and, if this proved to be the cheapest option, to utilise that in determining net cost. [123] The difficulty with this is that it cannot be said that simply because the Commission has not produced the lowest possible net cost figure, its analysis is wrong as a matter of law. As I have said, in formulating its approach the Commission had to make a variety of decisions, with varying impacts on the net cost calculation. At these various decision points, or some of them at least, the Commission could have made different choices, which would have had different effects on the net cost figure. In short, there was a range of legitimate choices open to the Commission. [124] The Commission recognised that an efficient producer can be defined as one which produces a given quantity and quality of service for the lowest possible cost. But it also accepted that that approach had to be modified to take account of efficient past investment decisions, and to create incentives for future efficient investment: see [89] above. So the touchstone was not the lowest possible cost, but the lowest cost consistent with other factors to which the Commission was entitled to give weight; that is, the touchstone was not "the maximum level of efficiency", but "reasonable standards of efficiency": 2003 - 2004 Determination at [36] and [40]. [125] Vodafone's approach does not sufficiently recognise this. Nor, in my view, does the President's reasoning, because it suggests that the Commission was obliged to make decisions that produced the lowest net cost figure otherwise the relevant costs might be thought to be "avoidable". In my view, it is not the statutory purpose to achieve the lowest net cost possible. The analysis is more complex than that.The scope of the Commission's task?[126] Mr Gray argued that Vodafone's approach did not require the modelling of a tender process. Rather, it meant that the Commission could not properly ignore the reality that Telecom has a mobile network from which it could provide TSO services.[127] There are two responses to this. First, if the key point is that Telecom has a mobile network and, as an efficient operator, should use it to provide TSO services where possible (which may require some adaptation), that implies that the Commission must assess the efficiency of Telecom's mobile network. That is, the Commission would be required to assess the net incremental costs to an efficient service provider of providing TSO service by means of Telecom's mobile network to those clusters of CNVCs who could be serviced from it. This seems to me to involve an expansion of the Commission's task that is both unreasonable and unrealistic, at least until it is possible that all clusters of CNVCs could be serviced from the mobile network. The Commission's present use of the MT cap involves a more specific and limited process. [128] Second, in my view the logic of Mr Gray's argument does not depend on Telecom itself having a mobile network – it simply requires that there be at least one mobile network operating in New Zealand, irrespective of which TSP operates it. One submitter on the 2003 - 2004 draft determination argued that an efficient TSP would select the least costly means of providing TSO services to its customers, "including through purchasing wholesale services from other providers, reflecting market reality": 2003 - 2004 Determination at [39]. [129] It is undoubtedly correct that, in competitive markets, firms face "make or buy" decisions, and the rational choice will often be to buy rather than to make. But in my view the Commission was entitled to reject the attempt to emulate such an approach in the present context. Modelling the outcome of a tender process would not be straightforward, and might unduly divert the Commission from its overall task. If there were more than one mobile operator, for example, the Commission would have to assess their relative efficiencies in provision of mobile services. As I noted at [77] above, the Minister noted the possibility of tendering TSO services when the Telecommunications Bill was introduced into the House, but the Government has not yet moved to do so. That option remains, but there seems to be no reason why the Commission should attempt to model such a process in the absence of a clear legislative direction that it do so.Did the Commission take proper account of the purpose statement in s 18?[130] Mr Gray argued that the Commission did not take sufficient account of the purpose of promoting competition in s 18, as required by s 84(2)(c), because it did not recognise that there are existing mobile networks that could provide services to CNVCs, a submission which the President accepts. The President points to the Commission's recognition in [39] of the 2003 - 2004 Determination of the apparent inconsistency of its rejection of the Vodafone methodology and "the competitive environment in New Zealand at the time of the TSO, in which mobile services were widely deployed and used". The President says that the limits stated by the Commission in its 2003 - 2004 Determination (see [104] above) do not justify "non- compliance with the statutory purpose of promoting competition": at [55] above. Accordingly, the President considers that the Commission has erred in law. [131] As the President notes, the TSO Deed does not limit Telecom to providing services to CNVCs over its fixed wire network. It could chose to provide "local residential service" to them by way of mobile technology. As I have noted, Telecom has used at least one form of wireless technology (MAR) to provide the switch/end user connection. [132] The present dispute concerns way in which mobile technology should be taken into account in the net cost analysis – is the focus properly on the link between the switch and the customer's premises as the Commission says, or is it on what the mobile network as a whole can deliver as Vodafone says? [133] The purpose statement in s 18 does not provide a clear – or any – answer to this. There are two reasons for that: (a) First, s 84 simply directs the Commission to "consider" the purpose set out in s 18 in determining net cost. It does not require the Commission to, for example, "give effect to" the s 18 purpose statement (compare s 19(c)).(b) Second (and this may explain the first point), what is required for the promotion of competition in telecommunications markets for the long term benefit of end users (s 18(1)) and the achievement of efficiencies (s 18(2)) is not self-evident. Rather, it is highly debatable and requires consideration of a range of (sometimes competing) factors involving the TSO service provider, other actual and potential TSPs and consumers, so as to arrive at an evaluative assessment. As McGechan J said at [60]: [T]he need to consider the promotion of competition within s 18 introduces a considerable breadth into the vision required. This is not a situation requiring application of a formula. It is more a situation which requires the weighing of a number of factors, and the reaching of an overall judgment.As I see it, then, the direction to the Commission to "consider" s 18 provides something of a framework for analysis, but nothing more, and certainly not an answer. [134] What is clear, as McGechan J said at [59], is that the Commission did explicitly turn its mind to the s 18 purpose as it developed and applied its methodology. For example, the Commission discussed the s 18 issues in the Guide; there is an extensive discussion of them in the Cornerstones Issues Paper at [31] – [36]; the Commission acknowledged s 18 as part of the statutory framework in its determinations (eg, the 2001 - 2002 Determination at [25]); and, most importantly, the Commission addressed competition and efficiency considerations in the discussion of particular issues in its preparatory papers and in its determinations. The Commission did, then, "consider" s 18. [135] The Commission's decision in relation to the MT cap was, in my view, one that was open to it. I consider it had a rational basis. While the decision was based on the scorched node methodology, that methodology reflected a trade-off that the Commission considered should be made from a competition/efficiency perspective, a trade-off that recognised and encouraged efficient investment by the TSO service provider while maintaining pressure on it to eliminate inefficiency. The Commission recognised the implications of its approach for mobile technology froman early stage. When indicating its preference for the scorched node approach in the TSO Position Paper it said:43. The Commission's view is, therefore, that a full scorched earth approach where technology in the network can uniformly be changed (e.g. to a full wireless access network) is inappropriate.[136] For these reasons, I do not believe that it can properly be said that the Commission failed to consider s 18. The Commission simply gave greater weight to some facets of the competition/efficiency analysis than to others. That is precisely what specialist bodies such as the Commission are expected to do.Decision[137] Accordingly I would dismiss the appeal and order that Vodafone is to pay costs to Telecom and the Commerce Commission for a complex appeal on a band B basis. I would certify for two counsel.GLAZEBROOK J Introduction[138] I agree with Arnold J that the appeal should be dismissed (and with the costs orders he suggests), but my reasoning differs in some respects from his. I set out my reasons briefly below, noting first some points I agree with in William Young P's judgment.William Young P's judgment[139] I agree with the analysis at [22] – [34] of William Young P's judgment that Vodafone has a right of appeal under s 66 of the Judicature Act and that there is potentially a question of law involved. I too would have granted any application for leave to appeal, even if Vodafone merely had a right to seek leave to appeal unders 97 of the Commerce Act. I also agree with William Young P that the Vodafone methodology would not be inconsistent with the TSO Deed for the reasons he gives at [35] – [41] of his judgment.Background[140] I adopt Arnold J's analysis of the background to the appeal and of Vodafone's arguments outlined at [59] – [107] of his judgment.The Commission's reasons for rejecting Vodafone's approach[141] The Commission's reasons for rejecting Vodafone's approach are set out at [49] of William Young P's judgment and summarised at [50]. [142] I turn first to the Commission's reason summarised at [50](b) of William Young P's judgment: that the Vodafone approach would require the Commission to model the outcomes of a tender process. This is similar to Arnold J's first reason (discussed at [109] – [114] of his judgment) for rejecting Vodafone's arguments: that Vodafone's approach effectively requires the Commission to adopt a scorched earth methodology. [143] As I understand it, Vodafone's primary argument is not that the equivalent of a tender process should have been undertaken but rather that the capabilities of Telecom's existing mobile network should have been assessed and taken into account in setting net cost. Nor does its primary argument require a totally scorched earth approach. Under Vodafone's suggested approach, account would be taken of Telecom's existing investment in both its fixed and mobile networks. [144] However, it seems clear that some development or expansion of Telecom's mobile network would be necessary (see at [102] of Arnold J's judgment), and, even then, it is not suggested that it would be able to service all CNVCs to the requisite standard. Vodafone also, as I understand it, argues that some optimisation of Telecom's mobile network should occur. This means that Vodafone's approachwould, as Arnold J notes at [127], require the Commission to assess the efficiency of Telecom's mobile network and, to that degree at least, is akin to a scorched earth model. [145] Given that the existing Telecom network would need development and optimisation, there was in my view no error (and certainly not one of law) in the Commission's view that Vodafone's approach would in effect be a tender model. I agree with Arnold J's comments at [126] – [129] that there is no obligation under the Act for the Commission to model a tender process and thus that there can be no error of law in its refusing to adopt such a model. [146] I turn now to the Commission's reason for rejecting Vodafone's approach, summarised at [50](a) of William Young P's judgment: that Vodafone's approach is inconsistent with the scorched node model. In my view, the scorched node model adopted by the Commission was (at its inception) consistent with s 5 of the Act. Indeed, it was clearly an appropriate model for the Commission to adopt for the reasons given by William Young P at [42] – [48] of his judgment and by Arnold J at [91] – [92] of his judgment. [147] There is no doubt that Vodafone's approach would require a departure from the strict scorched node approach. Indeed, Vodafone's very complaint was that the Commission should have used Telecom's actual mobile network rather than a hypothetical one tied to the nodes (see at [100] of Arnold J's judgment). There is also no doubt that Vodafone's approach would require discounting Telecom's fixed network and the past investment decisions made with regard to that network (at least where the mobile network could deliver in a more cost efficient manner). This is essentially a scorched earth approach with regard to at least part of the fixed network. The suggested optimisation of Telecom's mobile network could be seen as essentially doing the same for that network. [148] There may well come a time when the Commission should abandon the scorched node approach but that time has not so clearly arrived that it was an error of law for the Commission to refuse to reconsider its model. After all, as Arnold J points out at [114], this was the first occasion mobile technology was capable ofmeeting the requisite quality standards (and not for all CNVCs), and the scorched node model was developed after a lengthy consultative process and is only in its third year of operation. [149] The Commission's third reason, summarised by William Young P at [50](c), seems merely to restate one of the justifications for adopting a scorched node approach. This model was a legitimate choice for the Commission and it cannot be an error of law to maintain that model unless it has clearly become inappropriate to do so. [150] Vodafone argues that the Commission has not applied the s 5 definition of net cost correctly and has not given proper weight to s 18. I agree that the Commission gave proper effect to the net cost definition for the reasons Arnold J gives at [117] – [125] of his judgment. I also agree, for the reasons given by Arnold J at [130] – [136] of his judgment, that the Commission took proper account of s 18 of the Act.Where I differ from Arnold J[151] I record that I do not agree with Arnold J's tentative conclusion at [115] – [116] of his judgment that it may have been an error of law for the Commission to have adopted a scorched earth methodology at the outset. Despite what William Young P calls "mixed signals" in the Act (see at [45] – [47] of his judgment), I consider that a scorched earth approach would have been consistent with the Act even at the inception of the process. I consider, as does William Young P, that the legislature envisaged an objective test based on a notional efficient operator. This is made clear by s 5 of the Act. This would have allowed a green fields approach to have been adopted. [152] On the other hand, s 5 does not mandate an approach that ignores past investments that were efficient at the time they were made. This is particularly the case in an industry where technology is developing at a very fast pace. I see the "mixed signals" in the Act as allowing an approach that takes account of past investment decisions and the actual costs of the provider. I do not, however, see the"mixed signals" as mandating that approach. The appropriate approach was one for the expert Commission, taking account of all relevant factors.Conclusion[153] For the above reasons, I do not consider there to have been an error of law in the Commission's approach. However, a point may well come (and relatively soon) where the Commission would be obliged as a matter of law to consider whether its scorched node approach should still apply. As noted by William Young P at [48], the scorched node approach is not embedded in the legislation.Solicitors: Wilson Harle, Auckland for Appellant DLA Phillips, Wellington for Respondent Commerce Commission, Wellington