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Telecom would be "suffocated" by a Government plan to split it into three operating divisions, it says in a submission to the Economic Development Ministry.

The company received support from Business New Zealand and the Tourism Industry Association, but scant sympathy from the Commerce Commission and rival telcos. They have mostly opposed a Telecom alternative that it sell its fixed-line network to an industry or Government-backed consortium.

Telecom put a brave face on the cool response, saying that as it had only recently released its proposal to hive-off its network, it was "understandable that in some quarters there has been confusion or misunderstanding" about some of its proposal.

It reiterated that, if forced to separate into three divisions, it would invest only a third of the $1.5 billion it says is needed to meet the Government's target of 5 megabit per second broadband connections in 90 per cent of New Zealand homes by 2010.

The result would be that "infrastructure investment would stall". A digital divide would then become imbedded between inner cities and the rest of New Zealand, it said.

"New Zealanders will continue to demand investment to keep up with world-best standards, which could result in a spiral of arbitrary regulation as governments seek to plug gaps and appease disaffected consumers."

The Commerce Commission said Telecom was wrongly assuming the commission would set pricing for local loop unbundling and wholesale access to its network, discouraging infrastructure investment.

"Telecom's unsupported assertions of a regulatory bias to lower returns, and a propensity on the part of the commission to expand regulation once investments have been made, are unfounded," it said.

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