LC Paper No. CB(1)335/98-99

Ref : CB1/PL/ITB

Legislative Council
Panel on Information Technology and Broadcasting

Minutes of special meeting
held on Friday, 25 September 1998, at 8:30 am
in the Chamber of the Legislative Council Building

Members present :

Hon SIN Chung-kai (Chairman)
Hon MA Fung-kwok (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon David CHU Yu-lin
Dr Hon Raymond HO Chung-tai, JP
Hon Fred LI Wah-ming
Prof Hon NG Ching-fai
Hon James TO Kun-sun
Hon YEUNG Yiu-chung
Hon Emily LAU Wai-hing, JP

Members attending :

Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon Ronald ARCULLI, JP

Members absent :

Hon Eric LI Ka-cheung, JP
Hon Howard YOUNG, JP
Hon CHOY So-yuk
Hon Timothy FOK Tsun-ting, JP
Hon LAW Chi-kwong, JP

Public officers attending :

Mrs Rita LAU

Acting Secretary for Information Technology and Broadcasting

Mrs Jessie TING

Deputy Secretary (2) for Information Technology and Broadcasting

Mr M H AU

Acting Director - General of Telecommunications

Mr K S WONG

Assistant Director of Telecommunications

Mr Geoffrey WOODHEAD

Principal Assistant Secretary for Information

Technology and Broadcasting (E)

Attendance by invitation :

Dr Charles LAM

China Light & Power Company, Limited

Mr Peter A. LITTLEWOOD

General Manager/Planning

City Telecom (H.K.) Ltd.

Mr Ricky WONG

Chairman

Mr Andy HO

Consultant

Consumer Council

Mr Adrian WALKER-SMITH

Principal Trade Practices Officer

Mr HUNG Tin Yau, Victor

Chief Trade Practices Officer

Hong Kong Internet Service Providers Association

Mr Daniel NG

Chairman

Mr Charles MOK

Secretary

Hong Kong Telecommunications Ltd.

Mr Norman K T YUEN

Deputy Chief Executive

Miss Josephine LEUNG

General Manager, Special Assistant to the

Chief Executive

Hong Kong Telecommunications Users Group

Mr T K IM

Executive Committee Member

Mr Graham MEAD

External Liaison

Hutchison Telecom (Hong Kong) Ltd.

Mr Dennis LUI

Managing Director

Mr Peter WONG

Fixed Network Director

New T&T Hong Kong Limited

Mr Leslie HARRIS

President

Ms Agnes TAN

General Counsel

New World Telephone Ltd.

Mr Franky LAI

Commercial Director

Mr Thomas YAU

Manager, Regulatory & Carrier Affairs

Office of the Privacy Commissioner for

Personal Data

Mr Robin MCLEISH

Acting Privacy Commissioner for Personal Data

SmarTone Telecommunications Holdings Limited

Mr Bengt NORDSTROM

Chief Technology Officer and Executive Director

WorldCom Asia Pacific Ltd.

Mr Todd DUTKIN

Director of Regulatory Affairs, Asia Pacific

Miss Magdala HOI

General Manager

Clerk in attendance :

Miss Polly YEUNG

Chief Assistant Secretary (1)3

Staff in attendance :

Ms Sarah YUEN

Senior Assistant Secretary (1)4

I. "The 1998 Review of Fixed Telecommunications - A Considered View"

1 The Chairman welcomed the deputations and invited their views on the consultation paper on the captioned subject.

Meeting with China Light & Power Company, Limited (CLP)

(LC Paper No. CB(1)221/98-99(01)

2 Mr Peter LITTLEWOOD briefed members on CLP's submission and informed members that CLP had a network of optical fibre for communication use. With the emergence of technology that would allow effective utilisation of electric power lines for data transmission, CLP's power network could also offer connectivity to all households and business units in its supply areas. Members noted that CLP would be prepared to consider deployment of the above assets for telecommunications use should the development and deregulation of the telecommunications industry so allow. In addition, it could also help install telecommunications cables when laying its electricity supply lines.

3 Regarding technical work or additional equipment necessary to put CLP's power network to telecommunications use, Mr LITTLEWOOD advised that this would depend on technological development which might have to take a few years to become fully mature and applicable for commercial purposes. As for the capacity of CLP's network of optic fibre, Mr LITTLEWOOD confirmed that it could be used to transmit a large volume of data.

4 In reply to members, Mr LITTLEWOOD stated that while commercial considerations would be taken into account, CLP was ready to offer its network for telecommunications use by entering into partnership with experts in the telecommunications field.

Meeting with Dr Charles LAM

(LC Paper No. CB(1)221/98-99(05) and a further submission from him circulated after the meeting vide LC Paper No. CB(1)271/98-99(01))

5 Dr Charles LAM highlighted in his submission a number of suggested actions in different areas of fixed telecommunications from the perspectives of users and consumers.

6 At members' request for elaboration on "physical separation" as an anti-cross-subsidy method, Dr LAM explained that the proposal was to require separate organisations to run local and international services so that subsidies to a subsidiary by its parent company to keep prices competitive could be avoided.

7 In reply to members' enquiry about possible reasons for the failure of the three new fixed telecommunications network service (FTNS) licensees to achieve more than 2% market penetration in their first three years of operation, Dr LAM commented that this might be due to difficulties in gaining access to buildings, unfavourable interconnection charges, or indecision due to their anticipation of legislative amendments which might provide for integrated players with both fixed and mobile licences.

Meeting with City Telecom (H. K.) Ltd. (CTI)

(LC Paper No. CB(1) 221/98-99(02) and a set of presentation material tabled at the meeting and circulated to all Members thereafter vide LC Paper No. CB(1) 258/98-99(01))

8 Members noted that CTI supported the opening up of the FTNS market for new entrants to ensure fair competition and the setting of interconnection charges on a costs basis rather than on a forward-looking basis as proposed in the consultation paper.

9 In reply to a member, Mr Ricky WONG opined that failure of the three new FTNS licensees to achieve higher market penetration might be due to over concentration of their marketing efforts on international services instead of on local service.

10 Responding to a member's comment that the Administration should assess the industry's readiness to invest in the FTNS market before deciding to grant further FTNS licences, Mr WONG stated that as far as he knew, at least two companies had indicated such interest.

Meeting with the Consumer Council (CC)

(LC Paper No. CB(1)235/98-99(01))

11 Mr Adrian WALKER-SMITH briefed members on CC's submission and pointed out that in CC's view, the current powers of the Telecommunications Authority (TA) to enforce the fair competition provisions in licences were inadequate. In particular, the current level of financial penalties was too low to achieve a deterrent effect against anti-competitive practices. According to CC, a ten-fold increase in the penalty as proposed in the consultation paper was insufficient as it had not taken into account the benefits derived by the company from anti-competitive acts. Members noted that CC considered it necessary to extend the regulatory powers of TA to provide a range of sanctions such as corrective advertising directing against anti-competitive behaviour.

12 On ways to tackle the problem of market domination, Mr WALKER-SMITH agreed that traditionally, fixed telecommunications was a monopoly service and early operators always had an edge over new comers. Although it was always difficult to address the problem satisfactorily, he pointed out that if the regulator could act reasonably in setting the penalties, the situation would improve over time.

13 As to whether the local FTNS market could accommodate more entrants, Mr WALKER-SMITH took an affirmative view having regard to Hong Kong Telecom's commitment to open more than 50% of its lines for access by other FTNS operators pursuant to its agreement with the Government concluded in March 1998. In his view, the present question was whether the other FTNS operators would take the opportunity to really extend into the rest of the market.

14 Addressing a member's concern that CC's proposal to require licensees to share their facilities in old buildings might cause inconvenience to residents, Mr WALKER-SMITH clarified that this would not be the case as the proposal only aimed at requiring operators to share existing facilities and no new installation of facilities would be involved.

Meeting with the Hong Kong Internet Service Providers Association (HKISPA)

(LC Paper No. CB(1)221/98-99(03))

15 Mr Charles MOK briefed members on HKISPA's position that an open, consistent and competitive telecommunications and broadcasting regulatory regime was necessary for Hong Kong to develop into a hub of information technology, telecommunications, and electronic commerce. While HKISPA welcomed the Administration's proposal to increase TA's regulatory powers and to legislate on competition safeguards, the HKISPA was against the imposition of any cap on the number of both service and facility based licences. Moreover, to promote the development of the Internet in Hong Kong, HKISPA also felt that there was a need to keep PNET charges low and was opposed to the imposition of any access or universal service charge on Internet service providers for voice, data or multimedia services.

Meeting with Hong Kong Telecommunications Ltd. (HKT)

(LC Paper No. CB(1)235/98-99(03))

16 Mr Norman YUEN highlighted the following salient points of HKT's submission -

1. HKT supported the Government's plans to issue new licences in local services, international services and international facilities as this could encourage investment and innovation. However, in so doing the Government should not perpetuate policies which denied customers the benefits of the full capabilities of HKT.

2. There was no need to protect international players in the global services market from HKT as they not only had vast resources and experience but also close relationships with large customers in their home territories which gave them great advantages over any competitor. To enable HKT to compete with them fairly in the market, all unreasonable limitations on HKT's ability to meet them service-for-service and price-for- price should be phased out.

3. HKT was gravely concerned about Government-imposed terms and conditions for unbundling HKT's local loop which was presently made available to HKT's competitors under commercial agreements. In HKT's view, such interventionary action would have a negative impact on both HKT and the other FTNS operators' plans to make further investment in network infrastructure.

Meeting with Hong Kong Telecommunications Users Group (the HKTU Group)

17 Mr T K IM stated that the HKTU Group supported the liberalisation of the telecommunications market to bring about cheaper prices, better quality and greater choice, and attached much importance to a level playing field. Members however noted that while the HKTU Group supported an unlimited number of service-based licences, it also saw the need for suitable management and co-ordination over limited resources such as spectrum capacity so as to ensure fair access for all. In this regard, the HKTU Group was opposed to the Government's proposal to develop a licensing system for the provision of in-building (and in-estate) broad band networks.

Meeting with Hutchison Telecom (Hong Kong) Ltd (Hutchison)

(LC Paper No. CB(1)221/98-99(04))

18 Mr Dennis LUI briefed members on Hutchison's submission and stated that Hutchison was strongly against the grant of further FTNS licences for the following reasons -

1. A study conducted in 1993 had already concluded that the maximum number of licences for the Hong Kong FTNS market was four. With a much depressed economy at the moment, the market might be even more limited.

2. Foreign carriers would inevitably treat Hong Kong as a small part of their overall global strategy and would have little incentive to build comprehensive network infrastructure to serve the general needs of the Hong Kong public. If foreign carriers were allowed to simply hold an international gateway facility licence, the wider benefit to them of achieving global reach for their international network and customers would permit them to accept no profit or even losses on the Hong Kong outbound international traffic. This would result in unfair and cut-throat competition which might ultimately put the existing FTNS operators who were committed to Hong Kong out of business.

3. By paying HKT HK$12 billion to open up Hong Kong's international service to competition, Hong Kong had already fulfilled more than its commitment under the World Trade Organisation and was therefore under no obligation to issue further FTNS licences.

19 Mr Peter WONG supplemented that despite difficulties encountered in network construction, especially in gaining access to buildings, Hutchison had installed more lines than its roll-out commitment. In his view, the issue of further licences would only precipitate the problem of building access and lead to network fragmentation, thus further strengthening HKT's dominant position. Hutchison therefore felt that the Administration should extend the moratorium on the issue of further local FTNS licences to give the three new FTNS operators more time to develop a comprehensive network before opening up the market to more competitors.

Meeting with New T & T Hong Kong Limited (New T & T)

(Submission circulated after the meeting vide LC Paper No. CB(1)271/98-99(02))

20 Mr Leslie HARRIS attributed the low market penetration rate of the three new FTNS operators to the abuse of dominant market power and the Administration's failure to deal with its consequences. He considered that dominance could not be dealt with by issuing more licences as this would fragment market forces, strengthen HKT's dominance and discourage the new FTNS operators from making further investment. In his view, the abuse of dominance should be subject to severe penalty. He suggested that to achieve successful competition, there were three requisites. First, equal access by mandating the sharing of local loop facilities at fair prices. Second, determination of a reasonable local FTNS access fee to carry international traffic and requirement for HKT to pay its fees into a local network development fund to obviate the need for universal service contributions. Third, a requirement for HKT to make all its sales offers in written form.

21 Commenting on the Administration's effectiveness in ensuring fair competition, Mr HARRIS pointed out that while governments all over the world were taking steps to ensure a level playing field, Hong Kong had not succeeded in bringing dominance to an end. He added that New T & T's customers were often poached by anti-competitive acts.

22 As for Hong Kong's ability to accommodate more FTNS operators, Mr HARRIS informed members that New T & T had already made substantial investment and installed 700 kilometres of fibre in Hong Kong to reach 60,000 homes, introducing into Hong Kong world-class technologies. Business forecasts however still showed that New T & T would suffer great losses for a number of years to come. In view of this, New T & T did not consider that Hong Kong could accommodate more FTNS operators at the present stage.

Meeting with New World Telephone Ltd. (New World)

(LC Paper No. CB(1) 235/98-99(02))

23 Mr Franky LAI briefed members on New World's submission and pointed out that despite putting in vast investment (investment in networks and accumulated loss totalled $1.4 billion as of June 1998. The figure was expected to reach $3 billion before 2000) and installing more lines than its roll-out commitment, anti-competitive acts by HKT and building access problems had rendered New World unable to introduce into Hong Kong a number of high-speed quality services. In view of the present obstacles to effective competition and the current economic downturn, New World did not consider it the right time for the Government to grant further FTNS licences.

24 Responding to members' query as to why more new entrants would not be conducive to competition, Mr LAI pointed out that network coverage was essential to effective competition in the FTNS market. If the Administration decided to open up the market before the three new FTNS operators had completed their network installation and resolved problems of access to buildings, competition, though increased, would not be effective and fair.

25 On measures the Government should take to ensure a level playing field, Mr LAI proposed that Government should play a more active role in ensuring and co-ordinating access to buildings. It should also urge HKT to enhance the transparency of its pricing mechanism.

Meeting with the Office of the Privacy Commissioner for Personal Data (PCO)

(LC Paper No. CB(1)221/98-99(06))

26 Mr Robin MCLEISH highlighted PCO's concern about the protection of customer information in an open and competitive telecommunications market, and its proposal to strengthen the confidentiality requirements in relevant licences.

27 In reply to a member's enquiry about the PCO's views in relation to the interception of communications, Mr MCLEISH highlighted three main principles that should be observed in conducting interception of communications. First, it should be done through some form of warrant or judicial approval. Second, there should be an independent authority overseeing interception to ensure that it was done according to the law and to handle complaints. Third, there should be publication of statistics on interceptions undertaken legally so as to ensure a high degree of transparency.

28 On the use of encryption and whether decryption methods should be lodged with the enforcement bodies to ensure that illegal acts would not go unheeded with the use of encryption, Mr MCLEISH stressed that there should not be any restrictions on the use of encryption as it was a solution to providing privacy and security in electronic transactions. The mandatory requirement of individuals to use forms of encryption which the law enforcement bodies could decrypt might only penalise law-abiding citizens without effectively checking those who sought to commit unlawful acts through the use of more sophisticated encryption methods.

Meeting with SmarTone Telecommunications Holdings Limited (SmarTone)

(LC Paper No CB(1)235/98-99(04) and its Chinese version tabled at the meeting and circulated to all Members thereafter vide LC Paper No. CB(1)258/98-99(02))

29 Mr Bengt NORDSTROM briefed members on SmarTone's submission. In gist, SmarTone felt that removing the distinction between mobile and fixed telecommunications was instrumental to developing the world's best information infrastructure in Hong Kong and would be the first milestone towards fixed-mobile convergence. SmarTone also opined that mobile operators should be permitted to build their own infrastructure and that interconnection charges for mobile and fixed operators should be consistent.

Meeting with WorldCom Asia Pacific Ltd. (WorldCom)

(LC Paper No. CB(1)221/98-99(07))

30 Mr Todd DUTKIN advised that WorldCom supported opening the local FTNS market to more competition as this would create jobs, develop new skills and enhance Hong Kong's competitiveness and position as a communications centre. He explained that by further easing the limitations on investment into the domestic telecommunications market, Hong Kong could benefit and thrive from the additional resources invested. Additional benefits would include the creation of a link between the development of domestic and international facilities which would bring on-shore the flow of capital and global expertise into the industry. Moreover, allowing carriers to build both the local and international infrastructure would also make Hong Kong competitive in the provision of broad band multimedia and Internet applications critical to the success of Hong Kong in the information era.

31 At members' invitation to comment on the current telecommunications market, Mr DUTKIN pointed out that there was development potential for WorldCom in Hong Kong because the three new FTNS operators had only achieved 2% market penetration and WorldCom had its own plans to address the needs of the local market which would also enable Hong Kong to benefit from the modern technologies of broad band services and the Internet. Moreover, WorldCom considered Hong Kong an attractive market as long as the principles of free trade and free market were upheld.

32 Responding to some members' enquiry about WorldCom's intention to invest in Hong Kong, Mr DUTKIN stated that although the problems of building access and type II interconnection had yet to be solved to enhance competition, WorldCom was willing to invest in Hong Kong even under the existing conditions. He added that WorldCom would make a presentation to the Administration shortly to explain its intention and plans.

33 As regards WorldCom's strategy to enter the Hong Kong market, Mr DUTKIN referred members to WorldCom's successful experience in other parts of the world and said that it would likewise start by first building a small loop, and then expanding it to reach more customers over time. He stressed that WorldCom had faced the problems of building access in every new market and was thus well-equipped to tackle similar problems in Hong Kong.

General discussion

34 In response to members' concern about the need for providing a level playing field and the HKT's apparent dominant market position, Mr Norman YUEN of HKT opined that access to buildings was not a serious problem for the other three FTNS operators as they were associated with major building property developers and should not have difficulties in reaching their customers. On whether HKT was delaying competitors' access to its network, Mr YUEN pointed out that as committed under its agreement with the Government, HKT had already opened 56% of its lines, which were all in major commercial and residential areas, for access by other FTNS operators. He also stressed that the existing mechanism for negotiating a reasonable level of interconnection charges should continue, and that the Government should not mandate the terms and conditions for interconnection arrangements.

35 In considering whether more new entrants should be licensed, Mr Franky LAI of New World stressed the need to give the three new FTNS operators sufficient time to complete an effective network before further opening up the FTNS market. He also explained that despite the fact that the three operators were associated with major property developers, they had an access problem because existing facilities could not accommodate more cables. Mr Peter WONG of Hutchison added that unless the access problem could be overcome, opening the market to more new players would only aggravate the problem. Mr Leslie HARRIS of New T & T further pointed out that even with the introduction of such new technologies as cable telephony, New T & T still had an access problem and it was essential that the three FTNS operators could have type II interconnection at reasonable costs with the co-operation of HKT. Mr Ricky WONG of CTI however opined that since building access was not a problem unique to Hong Kong, the introduction of new competitors, especially overseas competitors with their wealth of experience and expertise, could help solve the problem. In this connection, Mr HARRIS said that new entrants should be required to state their roll-out commitments so as to prevent profit-skimming on their part.

36 To assist members in considering whether the Hong Kong market could support more FTNS operators, a member suggested that the Administration should provide more detailed information and analysis on this aspect. She also suggested that the Secretariat should also gather some relevant information for the Panel's reference.	Admin

(Post-meeting note : Having considered the suggestion and the Panel's need for relevant information, the Chairman would like the Secretariat to assist in gathering factual data on the FTNS market in selected metropolitan cities whose socio-economic conditions were comparable to Hong Kong for the Panel's reference.)

37 The Chairman thanked the deputations for attending the meeting and informed them that there would be a motion debate on this subject at the Legislative Council meeting on 30 September 1998. Deputations would be welcomed to submit further views to the Panel in writing and/or to observe the said debate.

38 The meeting ended at 10:45 a.m.



Legislative Council Secretariat
30 October 1998