For information
on 9 November 1998

Purpose

This paper updates Members on the submissions received in response to the "1998 Review of Fixed Telecommunications : A Considered View", (the Fixed Telecommunications Consultation Paper). It also summarises the responses which the Office of the Telecommunications Authority has received in the concurrent "Review of Delivery Fee Arrangements - Further Considered Views of the Telecommunications Authority for Industry Consultation" (the Delivery Fees Review). In addition, the paper provides information on the licensing of fixed telecommunications operators in other cities around the world, as requested by Members.

I. 1998 Review of Fixed Telecommunications : A Considered View.

Background

2. On 3 September 1998, the Information Technology and Broadcasting Bureau (ITBB) released the Fixed Telecommunications Consultation Paper for a one-month public consultation. This Panel was briefed on the proposals on the same day as was the telecommunications industry. This Panel held a special meeting on 25 September 1998 to hear industry views on the Consultation Paper. ITBB has held meetings with concerned parties, including the three new Fixed Telecommunication Network Service (FTNS) licensees, potential new entrants to the fixed telecommunications market and the Hong Kong Telecommunications Users Group.

3. We have received a total of 37 submissions which are summarised at Annex A. (Copies of the original submissions, except those marked confidential, will be made available for public inspection at ITBB from 10 November 1998.) With the exception of the licensing of additional external telecommunications services operators (see paragraph 6 of this paper), we have not come to a final view on the proposals set out in the Fixed Telecommunications Consultation Paper. A summary of the views expressed, by topic, is set out below. Moratorium on the issue of further local FTNS licences

4. There was general consensus that more effective competition was necessary in the local fixed telecommunications market. But views differed on whether this could be better achieved by an extension of the moratorium on the issue of further local FTNS licences (backed up by further investment commitments) or by lifting the moratorium and allowing new operators. The majority of local telecommunications service providers (not network operators), overseas telecommunications companies and telecommunications users considered that the moratorium had served its purpose and should be lifted. For those who supported a lifting of the moratorium, the majority agreed that roll-out commitments should be required of the new entrants. Both the Consumer Council and the Hong Kong Telecommunications Users Group considered that the Government should be cautious about opening up the market and that operators (existing and new) should show long-term commitment to the Hong Kong market.

5. The dominant FTNS licensee considered that the moratorium should be lifted. Some potential new entrants suggested that there would be large social and economic benefits arising from a decision to end the moratorium. It would, in addition, reaffirm Hong Kong's commitment to free trade. All the three new FTNS operators considered that the moratorium should be extended (to 2001 as requested by New T&T, 2002 by New World Telephone and 2003 by Hutchison Telecommunications). They took the view that as the existing local market was distorted through below-cost local tariffs and inadequate competitive safeguards, we could not rely on the market to decide the appropriate number of operators for this particular market segment. They pointed out that with their continuing losses, they would be unable to justify further investment if additional local FTNS licenses were issued. Other respondents commented, though, on the low levels of investments hitherto made by the three new FTNS operators. The Director of the Telecommunications Research Project at the University of Hong Kong considered that a short extension of the moratorium might be justifiable if the investment commitments of the three new operators exceeded the investment proposals (to be turned into commitments, should they be accepted) of other potential new entrants. Government is discussing with the three new FTNS operators and potential entrants their investment proposals and proposed commitments.

Liberalisation of the external telecommunications market

a) Licensing of external services operators

6. Government announced on 22 October 1998 its decision to issue external telecommunications services licences on demand for operations from 1 January 1999. An early decision on this was necessary to ensure that the current level of competition in access to external services could be maintained or increased. The quality and cost structure of the services which can be offered under the new licences (and for which the existing FTNS operators have been licensed) is superior to that of call-back. The issue of external telecommunications services licences on demand, for operations from 1 January 1999, will allow the 32 call-back operators and others to compete in this market. This is also consistent with the way in which we have liberalised other external telecommunications services such as call-back services, Virtual Private Network and International Simple Resale of facsimile and data.

b) Licensing of external facilities-based operators

7. The vast majority of respondents who commented on this issue favoured the proposal in the Fixed Telecommunications Consultation Paper that we issue, on demand, licences for facilities-based services for operations from 1 January 2000. The three new FTNS operators (who were already licensed for the provision of external facilities), however, wished to restrict the further opening up of this market segment for the duration of their proposed extension of the moratorium on the issue of further local FTNS licences (see paragraph 5 above). Their concern was that foreign operators could exploit their position through their links to the distant end. The Hong Kong Telecommunications Users Group considered that such concerns could be addressed through competitive safeguards contained in the external facilities licences.

Interconnection and access

8. There was a cautious welcome to the proposal in the Fixed Telecommunications Consultation Paper to develop a new form of licence for the provision of in-building (and in-estate) broadband networks. It was considered important that network interconnection was mandatory and on cost-based terms. Some respondents considered that the introduction of such networks would only complicate the licensing system without leading to substantial consumer benefits. All four FTNS operators considered that the proposal would undermine their investments. The Hong Kong Telecommunications Users Group suggested that such licences should not be given to affiliates of FTNS operators. Sun Hung Kai Properties welcomed the proposal, but emphasised the importance to maintain the Universal Service Obligation so as to ensure that consumers would not be denied high quality fixed telecommunications services.

9. Many respondents, including the Consumer Council, considered it important to improve access to new and existing buildings and other enclosed spaces, and our legislative proposals in this respect were generally welcomed. The tunnel companies expressed reservations about the TA becoming involved in the setting of access fees for telecommunications services in tunnels and interfering with what they considered to be a free market mechanism. Regarding interconnection for local FTNS operators, the three new FTNS operators generally welcomed the legislative proposals put forward in the Fixed Telecommunications Consultation Paper. Hong Kong Telecom, on the other hand, considered that as competition increased, the need for regulatory intervention in this field should diminish. Interconnection for external telecommunications services is dealt with in paragraphs 13-16 below.

Regulatory issues requiring amendments to the Telecommunication Ordinance (Cap. 106)

a) General

10. The proposals to amend the Telecommunication Ordinance as set out in Chapter 6 of the Fixed Telecommunications Consultation Paper are primarily technical housekeeping amendments to improve and clarify the Ordinance. We are considering the comments received, which were, of necessity, highly technical.

b) Economic regulation

11. Our proposals on competitive safeguards (paragraphs 6.14 to 6.20 of the Fixed Telecommunications Consultation Paper refer) attracted many comments. Many respondents considered that the proposal to increase the penalties for breaches of licence conditions by a factor of 10 was insufficient where breaches of competitive safeguards were concerned. Their criticism was mainly that the penalty was unrelated either to the economic benefit which the company concerned could derive from breaching the competitive safeguards or to the economic harm which could accrue to its competitors or the public in future. In relation to the latter, some respondents noted that under our proposal civil remedies would become available should a company breach a direction by the TA. We are further considering the appropriate level of penalty for breaches of licensing conditions and the need to give the TA powers to levy a wider range of penalties in such circumstances. A number of submissions requested stronger enforcement of the competitive safeguards. With the stronger investigative powers which we proposed the TA should enjoy, more proactive investigation would become possible. The TA would continue to be bound by due process before coming to a decision, which might include the levy of penalties.

The next steps

12. ITBB, in conjunction with the Office of the Telecommunications Authority (OFTA), is undertaking a detailed analysis of the views received and is having further discussions with the industry on the moratorium on the issue of local FTNS licences. We aim to announce our policy decisions on the outstanding issues by the end of 1998.

II. Review of Delivery Fees Arrangements - Further Considered Views
of the Telecommunications Authority for Industry Consultation
(the Delivery Fees Review)

Background

13. On 30 September 1998, OFTA issued a consultation paper on the Delivery Fees Review which developed on the proposal on interconnection set out in paragraph 3.4 of the Fixed Telecommunications Consultation Paper. The proposal was that there should be an interconnection arrangement between external services/ facilities and the local fixed networks, to be determined by the Telecommunications Authority (TA), so as to ensure that there would be commercial incentive for continued investment in the local infrastructure and that the external services providers (and consequently their customers) would not be overcharged. In the consultation paper on the Delivery Fees Review, OFTA proposed the setting of a Local Access Charge (LAC) - the cost-based interconnection charge for the conveyance over the local fixed networks for traffic to and from places outside Hong Kong for which competition from International Simple Resale (ISR) or similar types of services would be available from 1 January 1999. A modification of the existing delivery fee system was proposed for other non-competitive routes. In addition, the Universal Service Contribution (USC), currently 13.4 cents a minute, would continue to be payable to the operator with the Universal Service Obligation (i.e. the Hong Kong Telephone Company Limited).

14. According to the consultation paper on the Delivery Fees Review, the LAC would initially be set at 17.9 cents per minute. The LAC for a particular call would be received by the local fixed network operator to which the customer originating or receiving the calls is directly connected. The rationale is to promote the development of the competing local fixed networks for them to provide telephone lines to directly connected customers rather than providing indirect access. Since the LAC includes a cost component for the local loop, it would be reasonable for the operator supplying the local loop to receive the charge. The level of the LAC is cost-based, taking into account the current cost of investing in a local fixed network and including the cost of capital which is commensurate with the risk of investing in the local fixed networks in the current economic climate. The level of the LAC aims to strike a balance between the need to maintain commercial incentives to invest in and develop the local fixed networks and the avoidance of undue cost burden on the consumers of ISR or similar types of services.

Comments

15. OFTA has received 11 submissions from the industry in response to the consultation paper on the Delivery Fees Review. There was general support for the proposal for the non-competitive routes. As regards the LAC for competitive routes, most potential operators of ISR and other services who do not operate network facilities commented that it was set at too high a level. The three new FTNS operators considered that the arrangement would primarily benefit the incumbent carrier which had 98% market-share. At least one FTNS operator felt that the LAC level did not fully reflect the costs of the new operators.

The next steps

16. OFTA is considering the comments received. The TA will make a final decision in November 1998 so that the external services providers could complete their business plans in time for their services to be launched in 1999.

III. Comparison of licensing of local fixed telecommunications
operators in other cities

17. Following the special meeting of this Panel on 25 September 1998, Members requested information on local fixed telecommunications operators in other cities with a telecommunications development status comparable to that of Hong Kong. The comparison at Annex B is based on information obtained from the telecommunications administrations concerned and data from publications.


Information Technology and Broadcasting Bureau
2 November 1998

Annex B

1. Auckland (New Zealand)

1.1 Telecom New Zealand is the incumbent fixed network operator. Clear Communications entered the market in 1991. Telecom New Zealand has close to 100% of the market. Clear Communications has about 50,000 lines in Auckland, Wellington and Christchurch. There is no limit on the number of fixed network operators.

1.2 Auckland City has about 350,000 population.

2. Kuala Lumpur (Malaysia)

2.1 There are six local fixed network operators licensed (TMB, Celcom, Time Telekom, Binariang, Mutiara and STW). The dominant operator TMB has 99% of the market.

2.2 Kulua Lumpur has 1.3 million population (1997).

3. London (UK)

3.1 There are seven fixed networks in operation in London.British Telecom is the dominant operator.

3.2 London has 7.9 million population (1998).

4. New York City (USA)

4.1 According to the State Utilities Commission of the New York State, 26 operators have been licensed to provide fixed network services in New York City, 11 of which are facilities-based operators. However, according to the Federal Communications Commission, there are 14 facilities-based operators in New York City. Some trade magazines referred to 9 networks in operation in New York City.

4.2 New York City has 8.6 million population.

5. Singapore

5.1 Singapore Telecom is the sole operator in Singapore. StarHub has been licensed to provide service from 1 April 2000. Singapore has 3.5 million population (1998).

6. Sydney (Australia)

6.1 The telecoms market in Australia was fully liberalised in July 1997. 24 carriers have been licensed to compete with the incumbent national operator Telstra, which owns around 99% market share in fixed network services (1998). The licensed carriers are not subject to any geographical limitations in service provision. In Sydney, two fixed networks (Telstra and Optus) are currently in operation. Some of the carriers licensed after July 1997 have plans to operate in the Sydney area.

6.2 Sydney has 3.5 million population.

7. Taipei (Taiwan)

7.1 Chunghwa Telecom is the sole operator in Taiwan. A policy decision on the liberalisation of the fixed network services market will be finalised by 1998.

7.2 Taipei has 2.6 million population (1998).

8. Tokyo (Japan)

8.1 According to the Ministry of Posts and Telecommunications of Japan, 25 Type I carriers (i.e. carriers with network facilities) are in operation in the Tokyo area. They include the dominant national operator Nippon Telephone and Telegraph (NTT), Kokusai Denwa and Densin (KDD) , 6 operators for inter-city and international services, 5 operators using satellites and 12 operators of cable TV networks. Information from trade magazines referred to only two fixed networks in operation in the Tokyo area (NTT and Tokyo Telecommunication Network).

8.2 Tokyo has 12 million population (1998).

9. Toronto (Canada)

9.1 Trade magazines referred to four operators providing fixed network services in Toronto (Bell Canada as incumbent; MetroNet Communications, NORTEC and Wispra Tel as competitors). Official information from the Canadian Radiotelevision and Telecommunications Commission (CRTC) indicates that two service providers are in operation in Toronto while the other two are still constructing their networks.

9.2 Toronto has 2.4 million population (1998).


Information Technology and Broadcasting Bureau
2 November 1998


Note 1 : The information set out in this paper is based on information obtained from the telecommunications administrations concerned and data from publications.