For information
on 9 November 1998

LegCo Panel on Information Technology and Broadcasting

Telephone Charges of Hong Kong Telecom

Background

1. Local telephone lines are supplied in Hong Kong by four fixed telecommunication network services (FTNS) licensees. The dominant licensee, Hong Kong Telecom (HKT)¹ , has 98% of the market share.

2. The prices for local telephone services are subject to the approval of the Telecommunications Authority (TA) under the FTNS Licence. Under the licence conditions, the TA should approve the application for such prices unless the proposals are in breach of licence conditions prohibiting anti-competitive practices and abuse of dominant position or in breach of the relevant price control arrangement. Licensees may not charge more than the tariffs approved by the TA. In addition, a dominant operator (HKT is a dominant operator) may not offer any discount to its tariffs or customer equipment integral to the provision of a telecommunications service except under a discount calculated in accordance with a formula or methodology approved by the TA and published together with its tariffs.

Price control arrangements on HKT

3. Before 1 July 1998, the prices of various telecommunications services of HKT were constrained through the operation of the Telephone Regulation, made by the Secretary for Economic Services (the policy secretary previously responsible for telecommunications). That arrangement restricted the annual rate of increase of the telecommunications services subject to the Regulation to 4% below general inflation (as reflected by the Consumer Price Index (A)) with a sub cap of 3% below inflation for rental charges for residential lines. The continuation of this Regulation became untenable as it would have perpetuated the subsidy of rental charges for residential lines by income from external telecommunications services, at a time when such income would be substantially reduced. This reduction would arise in the external telecommunications market because of increasing competition through reforms to the international accounting rate system to bring such charges for external services towards costs and the development of alternative procedures for completing external calls (such as International Simple Resale). In addition, in order for competition to develop in the local fixed telecommunications market, it is necessary for the tariffs for services in this market to reflect costs. The current prices of telephone lines for residential customers ($68.90) is well below cost (around $120 per month).

4. The Telephone Regulation was repealed, effective 1 July 1998. As set out in the Framework Agreement of 20 January 1998 between the Government and HKT for the early surrender of the licence of Hong Kong Telecom International, the repeal of this Regulation was a condition precedent for the Agreement to be implemented. Within the Framework Agreement, there are measures to achieve improvements in effective competition in the supply of local telecommunications services. These measures include bringing tariffs to costs and extending the reach of Type II interconnection to enable the new FTNS operators to achieve faster roll-out to their customers (see paragraph 6 below).

5. There are provisions in the Framework Agreement for the maintenance of price control over HKT by the TA. In the long-term, we anticipate that the growth of effective competition in the fixed telecommunications market will make price control unnecessary as in the mobile telecommunications market. In the meantime, under the Framework Agreement, there is a phased rebalancing programme to bring local telephone tariffs in line with the level of costs.

Rental charges for residential lines.

• HKT will maintain the existing tariff of $68.90 to 31 December 1998
  
  
• subject to the satisfaction of certain Type II requirements (see paragraph 6 below), HKT will be able to increase the tariff to no more than -
  
  
  $90 effective 1 January 1999
  $100 effective 1 January 2000
  $110 effective 1 January 2001
  
  

Rental charges for business lines

These are unconstrained by the Framework Agreement, but continue to be subject to the terms of the FTNS licence.

Other services previously subject to the Telephone Regulation

These services (as set out in the Annex) will only be able to be increased from 1 January 1999, in aggregate, by 4% less than the Consumer Price Index (A) inflation rate. This will be reviewed after 1 January 2000.

Type II Interconnection Offers under the Framework Agreement

6. Under the Framework Agreement, HKT has to make reasonable offers to the FTNS operators that will, in aggregate, extend the reach of Type II interconnection ² , utilising the existing commercial agreements for Type II interconnection, to at least 50% of HKT's residential customers by 1 January 1999. HKT has met this condition - its offers, if accepted, would have amounted to 54% of residential customers (50% of business customers) so capable of being connected. However, only one new FTNS operator has, in the current economic climate, accepted the offer. HKT is now engaged in ensuring that the work on the exchanges to implement this offer will be completed by 31 December 1998. This work appears on schedule. If the work is completed by then, HKT will have fulfilled its obligations under the Framework Agreement, sufficient to permit it to raise its charges for residential telephone lines up to the levels specified in the Framework Agreement (see paragraph 5 above).

7. The licensee which has accepted the offer from HKT will, by the end of 1998, have access to 24% of the residential lines of HKT for Type II interconnection. Through previous commercially negotiated agreements, HKT has already made exchanges ready for Type II interconnection to the other two FTNS operators. Allowing for overlap of customers, a total of 30% of residential lines and 37% of business lines will be available for Type II interconnection by the end of 1998. One new FTNS operator has requested the TA to determine the terms and conditions of Type II interconnection. Although HKT has applied for a judicial review of the decision of the TA to proceed with such a determination, we understand that commercial settlement of the matter for determination is not entirely out of the question.

8. There are other means to access customers. One new FTNS operator has chosen to provide telephone services over the cable television network operated by its affiliated company. Already a proportion of the homes passed in accordance with its licence obligations are now capable of being reached in this way. The three new FTNS operators are also completing their local network roll-out and developing networks into buildings. In the context of the 1998 Review of Fixed Telecommunications, they have been invited to put forward investment commitments in this respect.

Tariffs for 1999

9. HKT has not yet submitted to the TA its application for tariff revisions for rental for local telephone lines or IDD rates from 1 January 1999. If received, the application would be considered by the TA under the relevant licence conditions and, where necessary, in accordance with the Framework Agreement. Provided HKT has completed by 31 December 1998 its obligation to the FTNS operator which has accepted its Type II interconnection offer made under the Framework Agreement, the TA would accept an increase in rental for residential lines not exceeding $90, made in accordance with the FTNS licence conditions. To do otherwise may give rise to accusations that the Government is in breach of its obligation under the Framework Agreement.

10. For the majority of HKT's residential telephone users, the increase in line rentals will be offset by reductions in their costs for making external telephone calls, whether using the service of HKT or through indirect access to the increasing number of external telecommunications services operators. At present, some 80% of residential lines have IDD capacity and the average consumer spends over $200 on IDD calls per month. The scope for IDD savings offsetting the increases in line rental is significant.


Information Technology and Broadcasting Bureau
6 November 1998


Note 1 : The holder of the fixed telecommunication network services licence is a group of companies comprising Hong Kong Telephone Company Limited, Hong Kong Telecom International Limited and Hong Kong Telecom CAS Limited.

Note 2 : Type II Interconnection

Based on customer's request for switching subscription of services from FTNS operator A to FTNS operator B, FTNS operator B can request FTNS operator A to make "Type II" interconnection arrangement such that the local loop at customer end provided by FTNS operator A can be used to connect with telecommunication facilities of FTNS operator B.