Telecom is to be split into three business units by a bill unveiled today by Parliament's powerful Finance and Expenditure select committee.
The Telecommunications Amendment Bill - the tool Government will use to force Telecom to open its network to competitors - is the basis for local loop unbundling.
The Government believes the bill will develop a more competitive market for broadband and cheaper, faster and more reliable service for consumers.
The bill proposes a harsher model than what Telecom proposed to the committee - to operationally split its wholesale and retail arms.
The bill proposes operational separation of the company into a network access arm, wholesale arm and retail arm with an independent oversight group to make sure that competitors who use Telecom's service get fair and equal access.
The model proposed by the bill is very similar to the Government favoured British Telecom model.
The bill has kept its recommendation that Telecom's business also undergo an accounting separation - which will expose Telecom's accounts to the public.
It includes the strong disincentive of a $10 million penalty, increased from the proposed $1 million, for failure to comply with a separation undertaking.
Telecom chairman Wayne Boyd said the model was "not ideal".
"This form of separation is more complicated and costly than we believe is necessary for New Zealand but we will work to implement it as swiftly as reasonably possible," he said.
Telecom shares, which lost a third of their value after the Government announced in May it would legislate to force Telecom to open up its network to rivals, were little moved by the news.
They were already down 5 cents ahead of the announcement and remained there on $4.25 soon after.
Mr Boyd said Telecom had already made progress down the path outlined with a major reorganisation, including voluntary separation into retail and wholesale units, but the committee had recommended a split into at least three divisions, including a network access division.
"We will be doing what we can to settle on detailed undertakings with the Crown with input from the industry."
Mr Boyd said the whole industry, including Telecom and its customers, needed certainty about the future of the regime so players could invest.
Communications Minister David Cunliffe welcomed the amended bill.
"The Government will consider the recommendations before deciding on the next step in the progress of this bill."
The committee, which reported back to the House today, stopped short of recommending separate ownership of Telecom's wholesale and retail divisions.
Telecom's three-way split
* Network access unit
This unit will be responsible for Telecom's entire internet and phone network and will sell network access to Telecom's retail unit and Telecom's competitors who want to put their own equipment onto Telecom's network to create innovative, different services to Telecom.
* Wholesale unit
This unit will sell its own packages to other internet and phone companies, who will resell them as their own.
* Retail unit
Telecom's business that offers services to consumers such as Xtra, residential and mobile phones.