It has been discovered by Telecom's Independent Oversight Group (IOG) that the company's operational undertakings were breached by its "loyalty discounts" offer to wholesale customers.

It has appeared that the conclusion was reached by the watchdog in a confidential draft report, while its final report is expected within 10 days.

The matter will be taken to the Commerce Commission, if a breach is confirmed. The commission is separately considering a formal investigation into whether Telecom Wholesale's loyalty discounts breached the Commerce Act.

It should be noted that the maximum penalty for breaching an undertaking is a $10 million fine, plus $500,000 a day for a continuing breach.

A commission spokeswoman said that the IOG's findings would not be binding on the commission, while adding that the decision would be taken by courts whether the undertakings had been breached, if any enforcement action resulted.

She said: "Should the IOG conclude that there was a breach of the undertakings and report their findings to the commission, the commission would then consider whether to commence its own investigation, or whether to immediately seek formal enforcement action in the High Court."

According to Telecom spokesman Mark Watts, the process is in the hands of the IOG and it will await developments.