Introduction
Internet Access Scheme
Government Involvement

Free Internet Access
Striking a Deal
Resolution


Introduction

Telecommunications networks around the world have become inundated over the last few years by the increase in internet traffic. In New Zealand, the incumbent telecommunications carrier, Telecom New Zealand Limited (Telecom) has decided to put in place a scheme that it says is designed to manage the impact of this increased traffic on its network.

The repercussions have been widespread. Competing carriers and internet service providers (ISPs) have been outraged by Telecom's heavy-handed approach, which has had significant financial consequences for some.

The government has become involved and there have been several court cases. The matter has been considered by a ministerial inquiry and, most recently, action has been taken against Telecom by New Zealand's competition authority.

Internet Access Scheme

In November 1999 Telecom began charging residential customers NZ$0.02 per minute after the first 10 hours online per month, unless they accessed their ISP through a new number with a special prefix (0867). Telecom claimed this was necessary to protect the stability of its telephone network, which is threatened by rapidly increasing internet traffic. The scheme provides Telecom with the ability to give priority to voice calls and intelligently manage any traffic overloading on its network caused by internet users.

CLEAR retaliates
Despite this justification, the measures attracted widespread criticism. The reaction of one of Telecom's main rivals, CLEAR Communications Limited (CLEAR), was particularly vociferous. CLEAR insisted that the scheme was designed by Telecom to avoid its interconnection payments to CLEAR. Under their 1996 interconnection agreement, Telecom paid CLEAR up to NZ$0.02 per minute for calls from Telecom customers to CLEAR customers. Likewise, CLEAR paid Telecom up to NZ$0.03 per minute for calls from CLEAR customers to Telecom customers. This pricing arrangement meant that over the course of a year, Telecom would pay CLEAR approximately NZ$18 million and CLEAR would pay Telecom approximately NZ$73 million.

However, the 1996 agreement did not contemplate the increase in internet traffic. When CLEAR began to attract ISPs to its network, the flow of internet access calls from Telecom customers to CLEAR's network increased. As a result, Telecom reportedly began paying an extra NZ$1 million a month in interconnection fees.

The 0867 number range was not covered by the 1996 agreement. As a result, Telecom claimed that it did not incur any interconnection charges for calls to 0867 numbers.

Further criticism
CLEAR was not alone in treating Telecom's justification with suspicion. Some commentators highlighted the lack of evidence that internet users endanger Telecom's network. Others questioned why the scheme was limited to residential users and not businesses, which are also substantial users of the Internet.

Many ISPs were particularly scathing of the scheme. Some were concerned about the high compliance costs involved in switching to the new numbers. Others were concerned that the scheme would result in reduced quality of service for internet users. Some were concerned the scheme would provide Telecom with access to demographic information about ISP clients.

Government Involvement

In the face of this criticism, New Zealand's former government elected not to challenge the 0867 scheme. The government holds one share in Telecom known as the Kiwishare. Among other things, the Kiwishare imposes an obligation on Telecom to provide unmetered local calling for residential customers (ie, local residential callers are charged line rental, rather than on a call-by-call basis).

Despite receiving advice that the 0867 scheme could breach the Kiwishare, the former government entered into an agreement with Telecom not to challenge the scheme. In return, Telecom provided assurances that calls to 0867 numbers would be free and the quality of 0867 calls would be no worse than ordinary residential calls to the Internet.

Free Internet Access

The introduction of free internet access caused tensions to escalate. In March 2000 a small free ISP, i4free, set up in the CLEAR network and obtained 0867 numbers from Telecom. Calls to i4free's 0867 numbers entered the Telecom network, but were then redirected to the CLEAR network by call-forwarding, pursuant to a number portability agreement between CLEAR and Telecom. Telecom paid interconnection charges to CLEAR for calls redirected from its network to the CLEAR network. CLEAR shared this interconnection revenue with i4free.

Telecom initially reacted to this arrangement by unilaterally disconnecting i4free's 0867 numbers.

In response, i4free won an interim injunction in the High Court compelling Telecom to reconnect its numbers. Within days, Telecom reduced the number of calls that could simultaneously access i4free's numbers, claiming that calls to free ISPs were overloading one of its exchanges. i4free obtained another interim injunction, this time preventing Telecom from restricting its access.

In granting the injunctions, the High Court held that there existed a serious question to be tried. This was that by disconnecting the 0867 numbers, Telecom had breached its 0867 agreement with i4free. The court also stated that a serious question existed as to whether Telecom had used its dominant position in the market to breach Section 36 of the Commerce Act 1986 (New Zealand's principal antitrust legislation).

Striking a Deal

The dispute appeared destined for further lengthy court action with CLEAR alleging Telecom had breached its number portability agreement by disconnecting the numbers, and Telecom threatening to appeal the injunctions. However a bitter public dispute was unlikely to be looked on favourably by the telecommunications inquiry launched by the new government in February 2000. This inquiry was mandated to recommend changes to New Zealand's telecommunications regulatory environment.

To allow the smoke to clear around this increasingly public dispute, CLEAR and Telecom struck a temporary three-month deal in May 2000. Under this agreement, Telecom paid NZ$6.75 million to CLEAR to accept the 0867 numbers and suspended the NZ$0.02 charge to consumers. CLEAR dropped its case relating to the portability agreement and Telecom dropped its appeal against the i4free decision.

The deal placated a significant source of resistance to the 0867 scheme. Telecom had earlier silenced other voices of dissent by paying a number of ISPs to accept the 0867 arrangements (including an amount reported to be between NZ$13 million and NZ$20 million to New Zealand's second largest ISP, Ihug).

Resolution

Nearly a year after the scheme was implemented, the issue appears to have finally been settled. In October 2000 Telecom and CLEAR announced that they had agreed new interconnection arrangements. Now that the parties are aware of the impact of internet callers on traffic flow and interconnection revenue, the new interconnection agreement is expected to take internet traffic into account.

The telecommunications inquiry has also issued its final report looking at the state of the industry in New Zealand. Among other things, the inquiry has recommended that the Kiwishare obligation be clarified to include local low speed data connections. If this recommendation is adopted, Telecom will remain obliged to provide residential callers with unmetered access to their local ISP, whether or not Telecom compels them to use an 0867 number.

But while the 0867 scheme may no longer be a major commercial issue in the telecommunications industry, Telecom has received a new and unexpected challenge. In August 2000 the Commerce Commission (New Zealand's competition watchdog) began an action against Telecom for breaching Section 36 of the Commerce Act. Section 36 prohibits companies in a dominant market position from using that position to prevent or deter competition. If Telecom is found to have breached Section 36, it could face a penalty of up to NZ$5 million.


For further information on this topic please contact Malcolm Webb or Stan Findlay at Bell Gully by telephone (+64 9 916 8800) or by fax (+64 9 916 8801) or by e-mail ([email protected] or [email protected]). The Bell Gully web site can be accessed at www.bellgully.com.


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