A watered-down final decision sees competitors gain "bitstream access" for digital subscriber line (DSL) services, which deliver Telecom's Jetstream high-speed internet to home users and small- and medium-sized businesses.
Bitstream access is a win for internet providers struggling to make a living reselling Jetstream, but it is of limited use without other components of unbundling, notably access to copper lines.
The prospect of a provider such as TelstraClear entering the local calling market nationwide in competition with Telecom is now unlikely.
The decision means Telecom's competitors do not have to install their own equipment in Telecom's exchanges, but bitstream access is little more than a jazzed-up wholesaling deal.
TelstraClear chief executive Rosemary Howard said the report was "very disappointing" and would do little to "cure New Zealand's broadband problem".
Webb said that when costs were weighed up, unbundling was considered too expensive and technically difficult for Telecom to implement.
Unbundling had proved to be a disaster overseas and a last-minute wholesaling deal tabled by Telecom last month had effectively removed the need for it.
That well-timed offer was aimed at granting competitors a wholesale deal for Telecom circuits, allowing them to service corporate customers beyond the reach of their own networks.
At the time, TelstraClear scoffed at Telecom's offer, which was subsequently fleshed out in letters to the commission.
Telecom's head of regulatory affairs, Bruce Parkes, said the company was not offering anything new, but improving pricing and technical configuration.
"TelstraClear has always been able to fill in the gaps. That's why they have customers like the BNZ."
Telecom had undertaken to provide the service from July and it would be monitored by the commission to ensure it was effective.
Sydney-based telecoms analyst Paul Budde said TelstraClear might have to revive plans for serious investment in networks, which would not be received "with much enthusiasm by the mother company in Australia".
"The big loser is TelstraClear. They'll have to rethink their position in the New Zealand market," he said.
Budde doubted that DSL bitstream access alone would generate much new competition on a large scale as voice calling was still the big earner in the telco business and Telecom's monopoly remained undented.
Telecom earned more than $1 billion in line access charges alone in the year to June 30, showing just how lucrative voice services are. By comparison, DSL revenue was just $56 million.
Webb envisaged significant competition in the broadband market, though he declined to outline any growth projections.
While the scrapped plan for full unbundling would have stimulated competition in local calling, the priority for Webb was generating broadband competition.
"[Local calling competition] we saw as a benefit of full local loop unbundling, but it wasn't the primary focus for doing it," he said.
"Competing voice services fade into the background."
Communications Minister Paul Swain will now review the commission's recommendation and has promised to come out with a final decision by May, after opening his office door to another wave of telco lobbyists.
Webb said the bitstream access plan, if approved, could take effect six months after that.
Telecom's share price closed up 5c at $5.25 yesterday.
Local loop recommendations
Rejected
* Full unbundling - giving other phone companies access to the copper lines linking Telecom's customers with the telephone exchange, and allowing them to use those lines as they wish.
* Alternative of allowing competitors to share Telecom-provided services on those lines also rejected.
* Full unbundling would allow competitors to provide new calling and internet services, with less reliance on Telecom - but at higher cost.
Recommended
* High-speed data or "bitstream" system used by Telecom to deliver Jetstream services should be opened to competitors.
* Competitors also gain access to other parts of Telecom's network needed to allow bitstream access.
Commerce Commission report:
Local Loop and Fixed Public Data Network Unbundling
