An industry watchdog has found Telecom’s sweetheart wholesale deals for Woosh, CallPlus and others a breach of its separation undertakings. If the Commerce Commission agrees, Telecom faces a maximum fine of $10 million or $500,000 a day until it corrects the situation.

While the Independent Oversight Group (IOG) refuses any comment – even to confirm its investigation – a person familiar with its processes told NBR a draft decision, made last week, found Telecom’s loyalty discount programme in breach of the Telecommunications Act. After cross-submissions, a final decision is due in around 10 days.

The IOG’s investigation was carried out after it received a complaint from Orcon, and the ISP’s parent company, state-owned enterprise Kordia.

The draft decision is seismic. Telecom has never been found to be in breach of its undertakings, at least on such a scale, since it was operationally separated under the Telecommunications Act in March last year.

If the IOG confirms its decision, the Commerce Commission has the option to launch its own investigation, and levy potentially massive fines under the Telecommunications Act.

How did the situation get so explosive?

Last December, Telecom Wholesale introduced a “loyalty discount programme” offering its Auckland customers steep discounts if gave it at least 90% of their business. CallPlus and Woosh were among those who immediately leapt onboard. Woosh even credited the cut-price wholesale deal with pushing it into the black for the first time in its history.

But Orcon and Vodafone were outraged.

Orcon boss Scott Bartlett describes the scheme as “disloyalty pricing.”

Orcon and Vodafone had moved their own DSL gear into every Telecom exchange in Auckland – so -called local loop unbundling. This allowed them to offer their own wholesale service, and plans and pricing more under their own control.

But it also meant they didn’t qualify for Telecom’s loyalty programme - nor could they match its killer rates.

This month, Telecom has outraged Orcon and Vodafone further by expanding its loyalty programme beyond Auckland to cover Hamilton, Tauranga, Rotorua, Palmerston North and the Hibiscus Coast.

TelstraClear won’t comment, but the common industry view is that the expansion is a pre-emptive move to undercut the telco in areas where it’s about to unbundle Telecom exchanges. (TelstraClear has said it will unbundle 70 exchanges by the end of this year, but still hasn’t said - publically - where).

For Mr Bartlett, the situation is clear-cut: “Telecom has made a blatant attempt to kill-off our fixed line business, and Vodafone’s and TelstraClear’s.”

Mr Bartlett says Orcon's exchange unbundling - which, like Vodafone's has stalled after its initial Auckland-wide burst, bar a foray into central Wellington - will not resume until a decision is made on the loyalty programme. (Unbundling has also been hindered by the separate debate about roadside cabinet pricing.)

The situation is commercial favouritism, said Mr Bartlett. The Orcon chief executive said that Orcon and Vodafone had shown loyalty to Telecom, and were certainly giving it volume business. Instead of rewarding loyalty or volume buying, Telecom is “illegally” rewarding those who have not pursued local loop unbundling, Mr Bartlett said.

Vodafone also had no comment until the IOG made its final decision. Neither did Telecom - though NBR understands it has argued that Telecom Wholesale has no direct knowledge of which exchanges Telecom Chorus has helped TelstraClear unbundle.

The IOG was set up to independently monitor Telecom’s compliance with its separation undertakings under the Telecommunications Act; specifically, that all industry players have equivalence of input. Amendments to the act saw Telecom broken into operationally separate Chorus (network building and maintenance), Telecom Wholesale and Telecom Retail divisions in March last year.

Mr Bartlett describes the IOG as “a relatively powerless” body, and the watch-dog has previously been mocked by the Telecommunications Users Association, which represents around 500 corporate customers, as AWOL.

And indeed the Commerce Commission is not obliged to even mount its own investigation on the back of the IOG’s recommendation, let alone there be any guarantee of it reaching the same conclusion.

Yet Mr Bartlett hopes that with the whole industry watching, events will be kicked into motion by the IOG’s ground-breaking draft decision.

“This is the test of the due process. If it doesn’t work for this one it won’t work for anything,” said Mr Bartlett. “The IOG knows that. Telecom knows that. The commission knows that. The minister knows that.”

Although Telecom’s separation undertakings don’t kick in until December, Woosh and CallPlus have signed 24-month contracts.

As mischievous as ever, Mr Bartlett mused that should the Commerce Commission ultimately come down against the loyalty programme - and the minister agree - then Woosh and CallPlus would be well placed to seek compensation from Telecom.