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Up to $50 million of yearly government subsidies to Telecom could be up for review if this morning's breakdowns to 111 calls is found to amount to a substandard service.
Telecom's emergency network went down for three hours this morning, leaving police to track down about 20 missed calls to 111 to make sure callers were not in a critical emergency.
Communications Minister Steven Joyce said Telecom could face penalties after an upcoming investigation into the network failure.
Telecom receives about $50 million a year from the government to make up for an obligation to provide free 111 calls and other services, such as competitive rates for rural users.
Every year the Commerce Commission checks that Telecom has met these requirements, under the Telecommunications Standards Obligations Deed.
If Telecom does not connect 85 per cent of 111 calls within 15 seconds during the year to the end of June, the company stands to lose some of its subsidies.
A Commerce Commission spokesperson said a review would be conducted later this year and it would be impossible to say at the moment whether Telecom currently stands to lose its subsidy or by how much.
Telecom has never breached its obligations in the past.
Mobile phones are currently not counted in the checks for the subsidies, despite Telecom's ongoing problems to its XT network, including disruptions to 111 calls on Monday.
Investigations are being launched after a third of emergency 111 calls failed to get through this morning.
Police spokesman Rob Lee said it took Telecom at least 45 minutes to let them know 111 calls were not getting through because of a fault with the network.
The fault happened at the Papatoetoe exchange in south Auckland at 3.30am today.
Police knew nothing of it until 4.15am when an officer tried to make a 111 call. When he could not get through, he radioed in, Mr Lee said.
Telecom advised there was a problem about the same time, he said.
"It is disappointing for us to have been advised a little bit after the fact."
Police Communications Centre national manager superintendent Andy McGregor said police were still tracking down about 20 people who could not reach them through 111 this morning.
"Our priority right now is to do all we can to get back to those people who couldn't get through, assess their situation and see if they still require police help."
Communications Minister Steven Joyce said the government will join investigations into the network disruption, and Telecom could face penalties.
"I am determined to get to the bottom of what happened because public confidence in accessing emergency services must be retained," Mr Joyce said.
Mr Joyce said he wanted answers to why 111 calls were not re-routed to working exchanges, and whether contingency plans - including notifying police communication centre that there was a problem - kicked in as they should have.
Police were concerned they were not told early enough that the system was down and they would have to call people back, Mr Joyce said.
The investigation will also make sure all failed emergency 111 calls were followed up and received a call-back, and, in cases where no answer was received, that a police patrol car was dispatched to check whether a genuine emergency was taking place.
Telecom could have its payment received for providing 111 services reduced if an inquiry found the company had failed to deliver as required, Mr Joyce said.
Telecom spokesman Mark Watts said Telecom apologises for this morning's 111 emergency calls system failure which "shouldn't have happened" and was "a bad look" after the company's recent repeated XT failures.
He said the cause was a software problem in south Auckland's Papatoetoe exchange, blocking about 30 emergency calls.
Missed calls triggered an alert and calls were diverted to the North Shore, he said.
But there were intermittent disruptions past 7am, until the system was fully restored.
Mr Watts said the 111 system had now been fixed.
Mr Watts admitted this morning's failure was "very disappointing".
He told National Radio that today's problem was not related to the XT network. It affected callers on all networks on landlines and mobiles.
National Radio reported callers getting a range of responses including an engaged signal and no signal at all.
A police northern communications spokesman said he had been told the number of calls getting through was "less than normal", but he did not have official figures.
Police said the problem appeared to be confined to the Auckland area, with National Radio reporting that police were still having trouble with the system at 7am.
Telecom is required by law to provide emergency calling on its fixed network. However, mobile phones are not covered.
The latest issues come on the back of Telecom's problems with its flagship XT mobile phone network, which has failed four times in the last two months.
The most recent outage happened on Monday for customers living south of Taupo.
During that occasion, one customer was unable to get through to the 111 service to report an assault on a man in Christchurch.
Christchurch man Ron Ching said he was getting a takeaway meal about 6.30pm on Monday when he witnessed a young Asian student being assaulted by a group of skinheads in front of a busy shopping mall.
When Mr Ching tried to use his cellphone to call 111 and *555 via the XT network, it would not connect.
Other onlookers instead used their cellphones on different networks to call for help.
Communications and Information Technology Minister Steven Joyce said he was waiting to be convinced that Telecom could ensure an uninterrupted connection to emergency services.
Mr Joyce said the Government might need to regulate to ensure that operators prioritised 111 calls in situations where networks become unstable.
"You might think it's an extreme case scenario, but I never thought I would be in that situation I was in [on Monday night] either."
Telecom chief executive Dr Paul Reynolds said Mr Ching's situation was very unfortunate.
"Every XT mobile phone has the capability to flick on SOS mode, when there is no XT service, over to an alternative network. Vodafone for example," he said.
"But in the instance where there is service - in this case [on Monday night] there was data and text service - it would not flick over automatically and I guess ... that's what happened to that gentleman."By Michael Dickison Email Michael