Draft ruling says Telecom targeted competitive threat

Telecom's evidence of customer demand for controversial loyalty discounts described as 'unconvincing'

Telecom's motives in offering loyalty discounts to wholesale customers were questioned more strongly in a draft copy of a decision by Telecom regulator the Independent Oversight Group (IOG) than in the final public version, released yesterday. The IOG, which is charged with monitoring Telecom's operational separation undertakings, refers in both versions of its decision to an executive paper from Telecom Wholesale. That paper contains comments that, in the IOG’s view, establish that the discount offers were constructed to prevent access seekers from using local loop unbundling (LLU). Yesterday, the IOG ruled the dicount scheme constituted a "non-trivial" breach of Telecom's separation undertakings, a finding that could lead to a maximum fine of $10 million. A draft version of the decision, however, is much more strongly worded, saying the executive paper, from which the loyalty scheme sprang, "made it plain that the intent was to lock in a segment of customers who do not intend to unbundle and to provide Telecom with a competitive alternative to UCLL being provided by Vodafone and Orcon… “ In the final copy of the IOG report, this was changed to “However, the effect of the loyalty offers was to enter into contracts with a segment of customers … “ Telecom Wholesale denies it deliberately designed the loyalty discounts so that certain service providers, those that had already invested heavily in local loop unbundling, couldn’t take them up. In the draft, Telecom says the offers were designed to meet the request of a group of customers with a pressing need. However, the draft says, Telecom Wholesale “did not provide convincing evidence of such requests. “The offers were in effect discriminating against those who had participated in unbundling,” the final copy of the IOG decision finds. According to the IOG, unbundling is a “fundamental plank of operational separation” as mandated by the government.

In June, The Dominion Post reported that Telecom had made no secret that the discounts were an attempt to limit the uptake of unbundling and that chief executive Paul Reynolds told analysts the company is committed to seeing no more than 15 per cent of phone lines unbundled.

"The wholesale loyalty offers have already proven to be very effective in maintaining our traditional business and margins," he told analysts in Sydney in May, the paper reported.

The Telecom Wholesale executive paper also expresses concern about emerging competition in the wholesale market, according to the IOG document. Providers wanting to take up the loyalty offers of 15 to 20 percent discounts on broadband and voice bundles would have to commit to keeping 90 percent or more of their business with Telecom Wholesale over two years.

This requirement put the offers out of reach of Vodafone and Kordia/Orcon, both of which have substantial investment and business in unbundled exchanges. It would also prevent TelstraClear from receiving the discounts from Wholesale, if the Australian-owned telco decided to go ahead with unbundling regional exchanges.

In a statement, Telecommunications Users's Association (TUANZ) boss Ernie Newman said yesterday that TUANZ believes, in general, Telecom has responded to operational separation constructively and with integrity.

“Competition law is inherently complex with many fine judgment calls, especially where it involves network industries with their special characteristics. Sometimes the only way to define the boundaries is to test them, and this is one such case," he said.

Newman today said the emergence of the draft did not change TUANZ's position.

"We have not taken a view over whether Telecom erred or not," he says. "There was always going to be a first transgression."

Newman says a draft is a draft and there could be good reasons why the language was changed in the final version.

Telecom Wholesale has responded saying it is disappointed in the decision but will remove the discount offers as soon as possible. CEO Matt Crockett said he would make no further comment until the IOG's decision was reviewed.

Crockett did not immediately returned calls this afternoon seeking comment about the draft version of the decision.

One key issue in the decision was whether the IOG accepted a broad definition of the term "will not discriminate" in clause 51 if the undertakings, as argued by complainants Vodafone and Kordia or whether to take a narrow definition, requiring prejudicial treatment, as argued by Telecom.

— Additional reporting by Rob O'Neill

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Tags VodafonewholesaleKordiaOrconNetworking & Telecomms IDiogTeledom

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