Last month protests from bloggers and internet activists led Prime Minister John Key to delay new controversial new copyright rules till March 27 so that telcos and copyright owner groups could work out a code of practice.
But yesterday TelstraClear - New Zealand's third biggest telco behind Telecom and Vodafone - said it was not prepared to take part in the code and bolster a poorly drafted law that was bad for its customers.
Under section 92A internet service providers and other businesses that supply internet services to staff can be forced to take customers off the internet, based on unproven allegations of illegal downloads by copyright owners.
Telco bosses were furious with the rule but worked on a code of practice to introduce a mediator so they did not have to act as judge and jury on their customers.
They also wanted copyright owners - led by the local arms of the Hollywood record and film industry - to pay some of the costs.
TelstraClear was never keen on the code. The firm's head of corporate services, Matthew Boland, said customers were aware of implications and the code may be making matters worse for them.
"We have had an unprecedented large reaction from customers who knew it could force them to disconnect the internet with no proof they did anything wrong. We cannot do this to our customers," he said.
TelstraClear would not ratify the code that aimed to make bad legislation work.
"Our preference is that we end up with a law that works on the onus of proof and not accusation," he said.
The law had been passed by the previous government and this one had inherited a mess, he said.
"The Government needs to revisit the issue and provide a law that is clear. We will comply with the law, but we are not going to increase the risk for our customers.
A spokesman for Commerce Minister Simon Power said even if TelstraClear did not take part there had been progress on a new code.
But the Government was not ruling out reviewing the rules which had been heavily attacked by telcos and other business groups, he said through a spokesman.
The Telecommunications Users Association - representing companies whose internet services to staff would make them ISPs under section 92A - is backing "a principled stand" by TelstraClear.
Chief executive Ernie Newman said section 92A should go back to the drawing board. The move left plans for a code "in chaos".
TelstraClear's hard line comes amid concerns the international copyright groups that won section 92A in this country would attempt similar moves in Australia.
It would cause a lot of problems for TelstraClear's parent company Telstra if it were established there, said an industry source.
Telecom and Vodafone were working on a plan that would have the Copyright Council administer section 92A, an industry source said.