the rate of inflation. It also provided an undertaking to ensure that interconnection would be provided to competitors on a “fair and reasonable basis”.

Clear Communications negotiated a long-distance access agreement with Telecom and entered the market in April 1991. By 1995, Clear had 21% of the domestic long-distance market and 24% of the international calls market. Shortly afterwards, Clear attempted to reach an agreement to access Telecom's local loops in order to be able to provide a local call service, but negotiations broke down. The matter at issue was whether Telecom could set the access charge using the Efficient Component Pricing Rule of Baumol (1983) and Willig (1979), which included the lost profit of Telecom, or whether, as Clear argued, the access price should be based on avoidable cost. Clear took Telecom to court for claimed abuse of its dominant position. The High Court supported Telecom's application of the Baumol-Willig rule but found that Telecom had indeed impeded entry. Both companies appealed and in December 1993 the Court of Appeal upheld the dominance finding but found against the Baumol-Willig rule. The case was finally appealed to the Privy Council in Britain, who accepted the original High Court judgement and supported the Baumol-Willig rule. Their argument was that if the monopoly price element (Telecom's lost profit from each call carried by Clear) was objectionable, then it was open to the government to control those monopoly profits directly under the provisions of the Commerce Act.

The case is justly famous, both because it illuminated the economic principals of the efficient component pricing rule, and because it demonstrated the major drawback of relying on competition law, namely the time and cost involved in resolving disputes. The case started in 1991 and the government did not resolve the issue until July 1995. In 2001 the government passed a Telecommunications Act which obliges the Commerce Commission to resolve access disputes, to monitor the regulatory regime, and to recommend changes to the list of regulated services. It was not until April 2003 that the Commerce Commission, acting under the requirement of the Telecommunications Act, published an issues paper consulting on whether access to the local loop should be regulated. $ ^{2} $ New Zealand appears to be following an evolutionary path in clarifying the role of regulatory agencies, starting from a minimalist position, but responding to the need to resolve disputes quickly and to restrain market power more effectively than appears possible under the normal provisions of competition law.

There are similar lessons to learn from the early experience of telecoms regulation in the UK. When BT was privatised in 1984, it faced a single small licensed rival, Mercury, that was granted protection against entry until at least 1991. Although BT's services to final customers were subject to price-cap regulation, access agreements between BT and Mercury were left to commercial negotiation. Mercury, like Clear in New Zealand, immediately disputed the terms offered by BT and appealed to OFTEL, the telecoms regulator. Economists rapidly established that interconnection agreements between symmetric network operators, each of which had sole ability to terminate calls to its subscribers, would lead to agreements that were at or above the profit-maximising level. The fact that both operators might speedily agree access charges was no guarantee that these charges would be in the