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Telecom settles over wholesale loyalty offer - $1.6 million to be paid in compensation

9 July 2010

The Commerce Commission has reached a $1.6 million settlement with Telecom Corporation of New Zealand Limited. The settlement follows a Commission investigation launched after receiving complaints from the telecommunications industry alleging that Telecom Wholesale's 'loyalty offers' breached Telecom's Separation Undertakings.

The loyalty offers related to Telecom Wholesale's regulated wholesale broadband service, used by competing service providers to provide broadband service to retail customers. Telecom offered substantial discounts in return for a commitment for the service providers to maintain current and future customers on Telecom Wholesale's service rather than that of a competitor.

The Separation Undertakings require Telecom not to discriminate between or against its wholesale customers. The Commerce Commission's investigation concluded that the loyalty offers were likely to constitute breaches of the Undertakings. Telecom's Independent Oversight Group (IOG) also investigated industry complaints and determined that Telecom Wholesale's loyalty offers were non-trivial breaches of the Undertakings.

"In the Commission's view the loyalty offers were detrimental to investment in telecommunications infrastructure and undermined wholesale competition. Following the IOG's decision, Telecom withdrew the offers from the market. However, had Telecom not ceased the offers there would have been significant ongoing harm to competition in the telecommunications market," said Dr Ross Patterson, Telecommunications Commissioner.

"The $1.6 million settlement means that the complainants Vodafone and Orcon have been compensated, and that further harm to the competitiveness of the market has been prevented. While the issue was serious enough for the Commission to consider issuing proceedings, we are pleased to have worked constructively with Telecom to settle this issue. The settlement avoids potentially lengthy and expensive litigation," said Dr Patterson.

Vodafone and Orcon will share the $1.6 million compensation equally. The settlement does not prevent anyone from seeking further compensation directly from Telecom. As part of the settlement, Telecom has also been warned by the Commission that it is likely that the loyalty offers amounted to discrimination in breach of the Undertakings.

The Commission also received complaints about the loyalty offers under the Commerce Act. The Commission considers that the issue has been sufficiently resolved under the Telecommunications Act and therefore further action under the Commerce Act is unnecessary.

Background

Timeline. Between December 2008 and July 2009 Telecom's Wholesale Business Unit launched a series of loyalty offers in relation to the regulated wholesale broadband service.

The Independent Oversight Group (IOG) received complaints from the telecommunications industry in relation to the offers and in June 2009 issued a preliminary determination.

In August 2009 the IOG determined that the loyalty offers were non-trivial breaches of clause 56 of the Undertakings. The IOG's report can be found here: http://www.iog.org.nz/n49.html

Following the IOG decision, Telecom Wholesale withdrew all loyalty offers from the market.

 In August 2009, the Commission received complaints from Vodafone and Kordia (on Orcon's behalf).

In September 2009 the Commission announced that it was opening an investigation into an alleged breach of the Separation Undertakings.

In October 2009 as part of its investigation, the Commission consulted on the meaning of 'equivalence of inputs' and 'non-discrimination' in the Undertakings.

 In November 2009, the Commission announced that it intended to file proceedings.

 The Separation Undertakings have effect as a deed given by Telecom to the Crown under Part 2A of the Telecommunications Act 2001 (Act) on 25 March 2008.

The purpose of Operational Separation is set out in Section 69A of the Act:

a)           to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services in New Zealand; and

b)           to require transparency, non-discrimination, and equivalence of supply in relation to certain telecommunications services; and

c)           to facilitate efficient investment in telecommunications infrastructure and services.

Clause 56 of the Undertakings provides that:

56           Wholesale Unit will not discriminate.

56.1     When doing or omitting to do anything in respect of the provision of a Relevant Wholesale Service, the Wholesale Unit (including its Employees, agents and contractors) will not discriminate between Service Providers and Retail Units or between Service Providers.

56.2     For the avoidance of doubt:

(a)       clause 56.1 does not prevent the Wholesale Unit from doing or omitting to do something in respect of the provision of a Relevant Wholesale Service that is different for different recipients of that service where those differences reflect the different requirements of the recipients;

(b)       clause 56.1 is subject to clause 6; and

(c)       this clause does not limit clauses 47 to 49.

The Separation Undertakings required Telecom to establish an Independent Oversight Group (the IOG) to monitor Telecom's compliance with the Undertakings. The IOG's decisions are not binding on the Commission.

The Commerce Commission is responsible for enforcing the Undertakings. Only the courts can find that the Undertakings have been breached.

Penalties. While the Commerce Commission can take enforcement action for a breach of the Undertakings, it is up to the courts to set appropriate penalties. The High Court may impose penalties of up to $10 million for each breach. In addition, the High Court may issue orders on any terms and conditions the High Court thinks appropriate, including to restrain Telecom or to require Telecom to undertake specific actions.

The Commission has published guidelines for handling operational separation complaints. These guidelines can be found on the Commission's website at www.comcom.govt.nz/operational-separation

The settlement between the Commerce Commission and Telecom will be available on the Commission's website at www.comcom.govt.nz/telecomwholesaleloyaltyofferinvest/