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First Outing For Telecom Separation Undertakings Enforcement Regime

29/11/2009

Loyalty schemes promoted by Telecom Wholesale early this year will be the focus for the first outing of the enforcement regime attaching to Telecom New Zealand’s operational separation undertakings.  Hot on the heels of an adverse ruling by the Telecom Independent Oversight Group (IOG), the Commerce Commission is to bring proceedings in the High Court for what it considers to be a breach of Telecom’s core undertaking to not discriminate amongst telephony service providers in its terms of access, via Telecom Wholesale, to the fixed telephony network. 

In a brief response to the Commission’s announcement, Telecom expressed its disappointment at the Commission’s decision in what it – Telecom – regards as an area of uncertainty in the 170-odd page separation undertakings protocol.

But Telecom probably saw it coming, once the IOG had back in August announced its decision to uphold complaints by Vodafone and Kordia that the Telecom Wholesale loyalty schemes discriminated against them in offering significant discounts to service providers which undertook to keep their clientele on the Telecom network for a two-year period.  The IOG found that the schemes discriminated against service providers such as Vodafone which had invested in local loop unbundling, since the only way for them to participate would be to forego their investment in unbundling.  This is the first occasion on which the IOG has been called upon to make a judgment as to the impact of the separation undertakings on Telecom business activity.

Telecom’s stance before the IOG had been that “discriminate” as used in the undertakings should be construed in a narrow sense as importing the notion of unfairness or lack of justification, elements which, so Telecom argued, were absent in the loyalty schemes since any service provider was free to avail itself of the offer.  But the IOG preferred the complainants’ argument that, in the absence of any perjorative adverb, the verb “to discriminate” simply equated with “to differentiate”.  Telecom Wholesale had also submitted to the IOG that the separation undertakings should not oblige it to “second-guess” the business requirements of various service providers when formulating its own product offerings.  As to this, the IOG noted an email sent by a Wholesale account manager to Vodafone which made it tolerably clear that Telecom had indeed anticipated that its loyalty scheme “will not suit Vodafone”.

The competing arguments now fall to be determined by the High Court and the stakes for Telecom are potentially high.  Breach of the separation undertakings carries a maximum penalty of $10 million and the court has discretion to impose a wide range of other sanctions.  Yet this was not some shady back-room deal which was unearthed by Commerce Commission surveillance or whistle-blowing.  The Telecom Wholesale loyalty schemes were conceived and offered in the full light of day after – it may be safely assumed – in-depth assessment as to compliance with the undertakings.  And Telecom’s CEO complained following the Commission’s announcement of enforcement action that it had asked the Commission for its blessing before launching the promotion but had received no reply. 

Hardly surprising, that.  The Commerce Commission is first and foremost an enforcement agency for whom it is anathema to give prior approval to potentially infringing behaviour.  The more so, one suspects, where a high profile new regulatory regime is in play.

What Telecom had perhaps not anticipated was the adverse ruling of its IOG on the legality of the schemes.  The possessive pronoun is apt here because, under the undertakings agreement with the Crown, Telecom appoints the five members of the group, albeit after consultation with the government and the Commission on its selection of the three non-Telecom appointees.  And Telecom also funds the IOG’s oversight activity, including the provision of a support office drawn from Telecom personnel.  But any thought that the IOG would not live up to its name has surely been displaced by its decision on the Wholesale loyalty schemes.  And indeed nothing less than independence would have been expected from a body chaired by a former High Court judge of longstanding. 

In its press statement announcing its enforcement action against Telecom Wholesale, the Commerce Commission was at pains to point out that it is in no way bound by the finding of the IOG.  And truth to tell, the IOG is a strange creature in a strange place.  It is an ad hoc body created not by the legislation which mandated Telecom’s operational separation – the 2007 amendment to the Telecommunications Act 2001 – but by the separation undertakings deed entered into between Telecom and the Crown.  The IOG is modeled closely on the ponderously named “Equality of Access Board” established under the regime for operational separation of British Telecom, as indeed is the whole separation regime for Telecom NZ.  Both are very much works in progress.

Given the Commerce Commission’s decision, it is difficult to see what role the IOG has usefully performed in this instance.  This is not to criticise its ruling, the written reasons for which can be downloaded from its website (iog.org.nz), but the IOG’s contribution to the question whether Telecom Wholesale’s loyalty schemes breached the separation undertakings might better have been made before rather than after the event.  Of course this was Telecom’s call, not the IOG’s.  And the Commerce Commission could well have taken its enforcement decision even if the IOG had ruled in favour of Telecom.  Be that as it may, the IOG’s decision is not part of the process now to be played out in the High Court and indeed has been rendered irrelevant by the Commission’s enforcement action.

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