The Commerce Commission has backtracked on an earlier decision and is recommending the Government regulate the cost of switching mobile phone calls between networks.
The competition watchdog had previously recommended the Communications Minister accept voluntary reductions of mobile termination rates by Telecom and Vodafone.
The commission says it has revised that advice because of a new calling plan offered by Vodafone that allows substantially cheaper calls between customers on its own network.
In light of the plan, the commission says, the cuts in mobile termination rates offered by Vodafone and Telecom won't address competition concerns, and the minister should regulate the charges.
It says the combination of price differences based on the network used and above-cost wholesale mobile termination rates means new entrants face unfair barriers to expand.
The regulator is now arguing for cost-based rates, saying that's the best way to ensure vigorous competition for customers.
The chief commercial officer at 2Degrees, Bill McCabe, agrees, saying its difficult to compete when Vodafone's retail prices are below the wholesale fee his company's being charged.
Telecom says it would like this matter settled as soon as possible, but favours a voluntary-based solution rather than regulation.
In a letter to the regulator, Telecom claims the correlation between retail plans and mobile termination rates is weak.
Vodafone has not commented at this stage.
Submissions on the draft ruling are due on 19 May and the Commission hopes to get a final report to Communications Minister Steven Joyce by early June.
