Discounts breach may cost Telecom

Telecom faces a possible fine of $10 million after a watchdog ruled that "loyalty discounts" it offered wholesale customers breached its undertakings on operational separation.

The ruling is an embarrassment for Telecom chief executive Paul Reynolds, whose $7m salary and incentive package has sparked controversy. Mr Reynolds had cited improved relations with regulators and policy-makers among the company's achievements.

Vector chief executive Simon Mackenzie suggested it should make the Government think twice about a possible role for Telecom in its $1.5 billion broadband investment initiative, details of which are due in the next few weeks. "If you provide funding to a large incumbent, is their behaviour going to change?"

The Independent Oversight Group, set up last year to monitor Telecom's compliance with its split into three business units, upheld complaints by Vodafone and state-owned enterprise Kordia that loyalty discounts offered to internet providers breached the Telecommunications Act. The Telecom Wholesale discounts were conditional on customers not unbundling phone exchanges operated by network arm Chorus.

The group said the breach was "non-trivial", but it would be up to the Commerce Commission to decide whether to prosecute. A decision is likely by October.

The maximum fine for a breach of the act is $10m or three times the value of any financial gain that Telecom derived, whichever was the greater.

Telecom Wholesale head Matt Crockett said Telecom thought the discounts were within the spirit of competition and was disappointed by the decision, but would abide by the ruling and discontinue them.

The commission is also considering whether the discounts breached the Commerce Act, which could also lead to a fine of up to $10m. A spokeswoman would not comment on whether the commission might prosecute Telecom under both laws.

Vodafone and Kordia-owned internet provider Orcon would not say whether they might separately seek compensation from Telecom in the courts.