Three degrees of separation imposed on Telecom

The Government will enforce a three-way operational separation on Telecom as it strives to boost competition in telecommunications and cut prices for consumers.

Telecom estimates the move will cost it about $360 million.

Communications Minister David Cunliffe said yesterday that the Government hoped to increase competition and investment in the sector for the long-term benefit of all New Zealanders.

Telecom must run a separately branded fixed-line network unit independently from its wholesale and retail sales businesses.

It must also establish an independent oversight group, backed up by the Commerce Commission, and faces tight timeframes and potential $10 million fines if it breaches rules.

The details of the announcement are broadly in line with plans the Government outlined in April, which mimic the breakup of British Telecom.

Telecom chairman Wayne Boyd initially labelled the plan unworkable and Telecom put forward a structural separation plan of its own.

However, Mr Cunliffe said the company had changed its mind, referring three times to an excellent working relationship with incoming Telecom chief executive Paul Reynolds. He went as far as thanking Mr Reynolds for his input.

"It's my expectation that Telecom not only will be able to implement this but they are in agreement with it," Mr Cunliffe said.

"It won't be lost on people that Dr Paul Reynolds played a leading role in implementing the BT split so I'm sure that he knows how to do."

Mr Reynolds quit his role as chief executive of BT Wholesale in London to move to Auckland and run Telecom.

Telecom said its initial assessment of the Government's plans was that they were challenging, but workable. It has 20 working days to respond.

It estimates separation will cost it $200 million in capital expenditure over four years plus operational costs of up to $40 million a year during the same period.

Telecom must meet key organisational change requirements by March 31, 2008, which Mr Cunliffe dubbed "separation day".

Telecom must remove its ability to discriminate in favour of its own infrastructure services within four years, enabling rivals such as TelstraClear and Vodafone's Ihug to access Telecom's network on the same basis as Telecom.

Mr Cunliffe said there would be six-monthly tracking milestones and annual targets.

The Government wanted to improve New Zealand's use of broadband, or high-speed, Internet.

It ranked 21st out of the 30 Organisation for Economic Cooperation and Development countries.

The four-year timeframe was as fast as could be expected for such a complex task, he said. Under the Telecommunications Act, Telecom could face penalties of $10 million for breaching undertakings plus $500,000 a day for any continuing breach.

Telecom's shares rose 14 cents, or 3.3 per cent, to $4.44 yesterday.

Craig Brown, Walker Capital Management principal, said investors were pleased there were no big surprises in the announcement.

Though Mr Cunliffe said no deal had been done with Telecom enabling it to sell its fixed-line network, he said any sale in the future was a matter for Telecom.

Mark Ratcliffe, Telecom's chief operating officer for technology and enterprises, said there had been no negotiations to sell the network.