Telecom may face big fine on loyalty scheme

Oversight group finds fault with wholesale discounts, sources say

Telecom's Independent Oversight Group found the company breached its operational separation undertakings by offering "loyalty discounts" to wholesale customers, sources say.

It is understood the watchdog reached the conclusion in a confidential draft report. Its final report is expected within 10 days.

If a breach is confirmed, the matter would be forwarded to the Commerce Commission, which is separately considering a formal investigation into whether Telecom Wholesale's loyalty discounts breached the Commerce Act.

The maximum penalty for breaching an undertaking is a $10 million fine, plus $500,000 a day for an continuing breach.

A commission spokeswoman says the IOG's findings would not be binding on the commission and the courts would decide whether the undertakings had been breached, if any enforcement action resulted.

"Should the IOG conclude that there was a breach of the undertakings and report their findings to the commission, the commission would then consider whether to commence its own investigation, or whether to immediately seek formal enforcement action in the High Court."

Telecom spokesman Mark Watts says the process is in the hands of the IOG and it will await developments.

IOG spokesman Phil O'Connell says the group's policy is not to comment on matters which "may or may not be under consideration".

Telecom began offering the discounts to wholesale customers in December, on the condition that they had 90 percent of their Auckland business with the company.

The aim appeared to be to dissuade rivals from unbundling its phone exchanges, or buying wholesale products from Vodafone and Orcon which had already done so.

Telecom extended the offer nationwide earlier this year and last month announced more loyalty discounts targeted at wholesalers that kept 90 per cent of business in five North Island centres with Telecom Wholesale.

The latest move appeared designed to forestall a challenge by TelstraClear, which has announced plans to unbundle up to 70 of Telecom's 714 exchanges, targeting provincial centres as well as Auckland.

Telecom chief executive Paul Reynolds told analysts earlier this year that the company was committed to seeing no more than 15 per cent of phone lines unbundled.

He said the wholesale loyalty offers had proved very effective in maintaining its traditional business and margins.

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