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File ref. ITBB CR 7/4/6 (98) II

LEGISLATIVE COUNCIL BRIEF
1998 REVIEW OF FIXED TELECOMMUNICATIONS

INTRODUCTION

spacer fileAt the meeting of the Executive Council on 1 September 1998, the Council ADVISED and the Chief Executive ORDERED that the Consultation Paper at the Annex, the "1998 Review of Fixed Telecommunications - a Considered View" - (the 1998 Consultation Paper II), should be published on 3 September 1998.

BACKGROUND AND ARGUMENT

General Background

2.spacer fileWhen we issued three new Fixed Telecommunication Network Services (FTNS) licences in June 1995, we agreed to a three-year moratorium on the issue of further FTNS licences. This moratorium is up for review now - a review also required as the result of our commitment under the World Trade Organisation (WTO) Agreement on Basic Telecommunications. Also, in the Policy Statement, which we issued following our Agreement on 20 January 1998 for the early surrender of the licence of Hong Kong Telecom International Limited (HKTI), we have undertaken to consult the public on the further opening up of the external telecommunications markets.

3.spacer fileThe telecommunications sector is directly responsible for 3.2% of Hong Kong's GDP. This percentage is increasing as our economy shifts towards the services sector. The operation and competitiveness of our service sector depend critically on the quality of Hong Kong's telecommunications network and services. Enhancing our telecommunications' competitiveness will enhance our overall competitiveness. This is particularly important at this time of economic downturn.

4.spacer fileHong Kong's policy objectives for telecommunications were set out in 1994 and remain valid today, namely :

  1. that the widest range of quality telecommunications services should be available to the community at reasonable cost;
  2. that telecommunications services should be provided in the most economically efficient manner possible; and

  3. that Hong Kong should serve as the pre-eminent communications hub for the region now and into the next century.

Consultations to Date

The 1998 Consultation Paper I

5.spacer fileOn 30 April 1998, we issued a preliminary consultation paper, the 1998 Review of Fixed Telecommunications (the 1998 Consultation Paper I). The principal issues which were the subject of that consultation are set out in the extract at Annex A to the Consultation Paper II at the Annex. The 1998 Consultation Paper I set out the issues for consultation and invited comments, following which policy proposals would be developed for further comment in a second round of consultations. This second round of consultations has been developed in parallel with the consultation on the Television Review so that issues of convergence of telecommunications and broadcasting can be considered in a co-ordinated manner.

6.spacer fileThe consultation period for the 1998 Consultation Paper I ran to 12 June 1998 and we received 30 submissions. A summary of these submissions is at Annex B to the Consultation Paper II at the Annex.

The Issues

(A) Moratorium on the issue of Further Local Fixed Telecommunication Network Services (FTNS) Licences

7.spacer fileThe local fixed telecommunications services market has been competitive since 1 July 1995 when, after an open selection exercise, three new entrants, in addition to the former monopoly operator Hong Kong Telephone Company (HKTC), were licensed as FTNS operators. The FTNS licence allows the licensee to construct a fixed telecommunications network and operate telecommunications services over that network. The FTNS licences were originally granted only for the provision of local services and facilities. We indicated at the time that we would introduce a moratorium on the issue of further FTNS licences for a period of three years. This moratorium expired on 30 June 1998.

8.spacer fileIn the 1998 Consultation Paper I, Government invited comments on whether the moratorium had served its intended purpose of allowing the new entrants a period of time to establish their operations and commence their network deployment without the distraction of other competition.

9.spacer fileApart from the majority of the existing facilities operators, the submissions tended to agree that the moratorium had served its purpose. Hong Kong Telecom supported the ending of the moratorium but the other three FTNS operators (New World Telephone (NWT), Hutchison Communications Limited (Hutchison) and New T & T) did not. The proposals of the latter group were to extend the moratorium to 2001 or 2002 to provide them with further time to roll-out their networks sufficient to compete with the dominant operator, Hong Kong Telecom. They consider that three years had been insufficient to establish a market presence under a flat-rate local tariff regime which would not be fully re-balanced until 2001. On the other hand, potential new operators and consumers and users were of the view that the new FTNS operators had not made effective use of their headstart provided by the three-year moratorium.

10.spacer fileWe consider there is a strong case for more effective and greater competition in the FTNS market. There have been difficulties for the three new FTNS operators in achieving greater market penetration than the 2% that they have reached in their first three years of operation. We accept there is a need to enhance the competition safeguards in our regulatory regime in order to provide more effective competition in the market. To this end, we have made proposals as set out in paragraph 26(b) below.

11.spacer fileThe Government is aware that long term commitments to substantial and continued investments are required to establish a local FTNS network of a wide enough coverage to provide adequate competition with the dominant FTNS operator. Also such investments would create more jobs which are particularly helpful in the current economic situation. At the same time, the Government recognises that local telephone tariffs have stayed below cost and will continue to be so until rebalancing is fully achieved in 2001, and this would affect investment decisions. In order to encourage further investments in FTNS market, so as to provide greater competition, we could consider granting further FTNS licences or encouraging the three new FTNS operators to step up their investments and efforts in their networks by extending the moratorium for a limited period of time. If further FTNS licences are issued, the licensees should be required to enter into commitments to provide networks which are comparable to the best of the three new FTNS licensees. If the moratorium is to be extended , the three new FTNS licensees should be required to enter into commitments to further roll-out their networks to an extent considered acceptable by the Government for the purpose of providing effective competition with the dominant FTNS operator. The Consultation Paper II invites comments on both these proposals.

(B) Liberalisation of the External Telecommunications Market

(a) Licensing of external services operators

12.spacer fileGovernment has progressively liberalised the external telecommunications market within the confines of the exclusivities granted within the HKTI licence. To date, licences for such non-exclusive services and circuits have always been issued on an unlimited basis. These licences are -

  • International Value Added Network Services (IVANS) including voice value-added service
  • Managed Data Network Services

  • Call-back Services

  • Self-Provided External Telecommunication Systems (SPETS)

  • Virtual Private Network (VPN) Services

  • International Simple Resale (ISR) for facsimile and data services

13.spacer fileFollowing the Agreement with Hong Kong Telecom on the surrender of the HKTI licence which occurred on 31 March 1998, external services competition will be allowed from 1 January 1999 and external facilities-based competition from 1 January 2000. In external services competition, operators can run competitive telecommunications services over the facilities (cables, satellite links, etc.) of a licensee permitted to own and operate such facilities. In external facilities based competition, licensed providers can provide external facilities, or external public services over their own facilities. The Government has already announced through the Policy Statement that the existing FTNS operators will be invited to apply for extension of their service to cover external services and facilities from these respective dates. The 1998 Consultation Paper I sought views on whether further such licences should be issued. It sought comments on the Government's initial position that, on the assumption that an appropriate set of interconnection arrangements can be struck for non-exclusive external services providers, the Government would propose not limiting the number of external services licences (including external voice ISR licences). Such interconnection arrangements are necessary so that services can be delivered to all customers in Hong Kong. For many service providers, in order to do this it will be necessary for them to use the facilities of an FTNS operator who will require payment for the services - the interconnection charges.

14.spacer fileWe intend that the interconnection arrangements will be such as to provide FTNS operators with sufficient revenue to cover all relevant costs of carriage of external telecommunications services on the local networks, including the appropriate cost of capital reflecting the risk involved in investing in the local infrastructure, such costs to be assessed on a forward looking basis. This will help us ensure that there is commercial incentive for continued investment in the local infrastructure and that external services providers will fairly compensate the local network operators for the use they make of that infrastructure. The TA will determine fair charges for interconnection between the external service providers and the local networks to ensure that the FTNS operators are adequately compensated and that external services providers (or their customers) will not be overcharged.

15.spacer fileThe majority of respondents favoured the opening up of the external services market to an unlimited number of operators from 1 January 1999. This would provide large benefits to consumers in terms of the variety of services and lower prices, in line with the policy objectives behind the Agreement for the early surrender of the HKTI licence. The former Provisional Legislative Council members, in approving the relevant parts of that Agreement, said that they wished to see maximum competition to avoid the formation of a cartel comprising the existing FTNS operators. In their view, it was important that the competition provided by the call-back operators continued - and this would be very difficult to achieve in the new environment without an ability for them to use voice ISR - voice ISR having a cheaper cost structure and providing better quality services. If the operators currently using call-back are to be able to continue to mount effective competition, it will be necessary for them to have external services licences effective from 1 January 1999.

16.spacer fileOf the FTNS operators, only Hong Kong Telecom welcomed the issue of an unlimited number of external services licences. New World Telephone and Hutchison opposed this (as did Smartone, a mobile telecommunications operator). New T & T did not favour the approach, but recognised the strength of argument in favour, and argued that this course should only be adopted if the interconnection regime gave the FTNS operators appropriate recompense for the investments they were making in the local infrastructure. The Government believes this will be the case, given the arrangement put forth in paragraph 14 above.

17.spacer fileThe TA proposes to issue external services licences on demand under a Public Non-Exclusive Telecommunications Service (PNETS) form of licence to operate services from 1 January 1999. As an interim measure restriction on anti-competitive conditions will be incorporated in the licence, inter alia, to ensure that affiliates of large carriers do not receive advantages from these carriers which are unavailable to other operators in Hong Kong. The issue of an unlimited number of external services licences would discourage the existing malpractices in the market of services operated without proper authorisation and relieve the TA of the regulatory burden of having to determine which services are within the scope of external services which certain classes of licensees are permitted to operate.

(b) Licensing of external facilities-based operators

18.spacer fileExternal facilities for telecommunications comprise shares in submarine cables and satellite capacity, together with a network of relationships with other carriers overseas. External facilities-based services require a heavy investment in terms of money and human resources. There was concern among a number of respondents that only well-resourced large carriers could afford the necessary investment. While this investment would help achieve one of our telecommunications objectives of preserving Hong Kong as the pre-eminent telecommunications hub for the region, there was concern that such investors may have little interest in improving Hong Kong's local infrastructure. Against that the potential new entrants argued that their investment in external facilities should be welcomed as it would contribute to increasing Hong Kong's efficiency, especially important at a time of economic downturn.

19.spacer fileThe Government considers, on balance, that we should welcome further competition in the external facilities-based services market, as a means to spur innovation, stimulate investment in our telecommunications infrastructure, improve service quality and reduce prices. The approach would accord with our free market philosophy and give encouragement to new local and overseas investors. Existing investors would continue to be encouraged to invest in the development of their own services and through providing carriage for others' services at appropriate interconnection charges as described in paragraph 14 above. There could also be opportunities for new facilities services providers, e.g. satellite uplink and downlink facilities operators, which would provide added value to our telecommunications and broadcasting services. At the same time, such a liberalised home environment will assist our telecommunications operators in expanding their businesses overseas.

(C) Interconnection and access

(a) Interconnection

20.spacer fileWe have stated in paragraph 14 above our position on the interconnection arrangements for external telecommunications services, namely that these arrangements will be set to provide appropriate incentives for the roll-out of local infrastructure. We also intend, as set out in paragraph 26(d) below, to introduce legislation to clarify the powers of the TA in respect of interconnection.

(b) Access to buildings

21.spacer fileThe issue of access to buildings by telecommunications operators has been identified by a number of submissions to the 1998 Consultation Paper I as critical to the further development of fixed telecommunications in Hong Kong. If we are unable to ensure access to buildings by all FTNS operators, our policy of enhancing consumer choice cannot be achieved. Legislative proposals to assist in achieving such aims are put forth in paragraph 26(c) below.

(c) Facilities licences with limited geographic coverage

22.spacer fileIn 1998 Consultation Paper I, the Government queried whether it would be desirable to consider issuing licences with a limited geographic coverage. The majority of respondents indicated that they did not favour this as it could increase regulatory complexity (in defining the areas and determining interconnection arrangements, for instance), potentially put barriers in the way for other telecommunications operators to access these areas, thus paradoxically reducing consumer choice, assisting 'cream-skimming' and reducing incentives for the roll-out of the information infrastructure.

23.spacer fileOne submission, though, did suggest that new technologies like Digital Enhanced Cordless Telecommunications (DECT) could be used over small areas. With dual-mode GSM/DECT handsets, full mobility would be possible. This could be considered in the context of the review of the market for cordless access services to be conducted soon.

24.spacer fileHowever, in considering how to encourage the full cabling for broadband networks, the Government considers that there could be merits in encouraging the provision and operation of in-building (and in-estate) broadband networks in the so-called "intelligent buildings". We intend to create a new form of licence for the construction of, and subsequent operation of services over, such networks. To prevent the developers from unfairly exploiting their positions in their respective buildings, there have to be safeguarding conditions for the construction and operation of in-building (and in-estate) networks. The TA would ensure that there would be full interconnection at reasonable costs of such in-building networks with other networks outside the buildings and that the right of access by network operators outside the buildings for extension of their own networks to their end-users within the buildings would be strictly enforced. Occupants of such areas would continue to enjoy full choice of the provision of telecommunications networks and services. The provision of in-building broadband networks with full interconnection requirements would promote economic efficiency as it would then not be necessary to duplicate facilities within buildings.

(D) Fixed-mobile Convergence

25.spacer fileThere were few submissions on this topic. The majority opted to retain the current distinction, arguing that the markets were still separate, differentiated, for example, by price, mode of pricing (time-charged and on a both-way basis) and physical requirements (spectrum and base stations versus cables). The Government does not propose any substantial change to the ways in which mobile and fixed telecommunications are regulated at present but will keep this under review in line with economic and technological changes. However, recognising that mobile communications are becoming an important tool for business and domestic use, we do propose to improve the ability of mobile telecommunications operators to provide ubiquitous coverage for all mobile networks throughout Hong Kong. At present, the extension of mobile network coverage to shielded areas within buildings has occasionally been hindered by discriminatory treatment accorded by developers or landlords to mobile network operators. In some cases, the cost of extending coverage into tunnels and buildings has been unduly inflated because the tunnel operators and landlord exploit their monopoly position and charge excessive rent or access fees. Therefore we intend to include appropriate provisions in the amendment to the Telecommunication Ordinance to deal with these problems, without overturning existing agreements. Proposals to this effect are also contained in the legislative proposals alluded to in paragraph 21 above and set out in paragraph 26(c) below.

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

26.spacer fileProposals to improve the telecommunications regulatory environment have been the subject of industry consultation in August and December 1996 in the form of draft bills. These proposals were generally welcomed by the industry. A summary is set out below.

  1. Licensing framework

    We propose to streamline the licensing framework to make it more flexible to cope with the rapid developments in the telecommunications industry. A hierarchy of licensing authorities is proposed :

    1. the Chief Executive in Council to continue to prescribe the conditions in, and issue, exclusive licences. As we do not intend to issue more exclusive licences, this authority will remain largely dormant;
    2. the Secretary for Information Technology and Broadcasting (SITB) to prescribe, after industry consultation and through Regulation allowing legislative scrutiny, the general conditions of carrier licences which the TA may issue. At the moment, the Chief Executive in Council is empowered to make Regulations by section 37 of the Telecommunication Ordinance;
    3. the TA to issue the carrier licences prescribed by SITB, and to prescribe the conditions in, and issue, all other licences under the Telecommunication Ordinance;
    4. a new system of class licences is proposed for the supply of certain telecommunications services and to operate certain networks. After the TA determines the scope of individual class licences and their terms and conditions after industry consultation, there would be no need for a person intending to supply the specific service or operate the specific networks to apply for an individual licence provided that he complies with the conditions specified in the class licence.

    Proposals in relation to sound and broadcasting licences will be developed in co-ordination with the outcome of the 1998 Review of Television Policy. In the meantime, no changes are proposed which may affect these licences.

  2. Fair competition

    The four existing FTNS licences contain a comprehensive set of competitive safeguards and we propose to extend these safeguards to other licences. In order to clarify the TA's powers in enforcing these safeguards, we intend to incorporate the measures in the primary legislation. The more important of these measures include requiring licensees to publish their tariffs, prohibiting licensees from engaging in anti-competitive practices and prohibiting the dominant operator from abusing its market power and engaging in anti-competitive price discrimination. We are reviewing the level of penalties for anti-competitive behaviour.

  3. Access

    In order for the benefits of telecommunications competition to reach all sectors of the community, consumers must have unimpeded access to the full range of services available in the market. We propose that provisions in lease agreements, etc. attempting to limit such rights shall be voided. To complement the existing statutory right of access to buildings, we propose that for new buildings there should be mandatory standards for telecommunications access facilities.

    We have also identified deficiencies in the access right for radiocommunications operators. With the increasing reliance people in Hong Kong have on mobile networks, we consider it appropriate for mobile operators to have access rights to various confined public spaces (e.g. indoors shopping malls and tunnels). The mobile operators will be expected to pay reasonable rental for the use of the space taken up by the installed equipment. If agreement cannot be reached with the landlord and there are no alternatives to accessing the space, then we propose that the TA may make a determination on the rental which should be based on costs plus a reasonable return to the landlord. These provisions will not apply to existing agreements. Sections in other ordinances contrary to this policy intent will be amended accordingly.

  4. Interconnection

    In the light of operational experience, the TA's power of determining the terms and conditions of interconnection, under Section 36A of the Telecommunication Ordinance, is not sufficiently explicit. We propose better definitions of terms and to clarify the TA's powers, particularly in relation to Type II interconnection (interconnection with the local loops to customers' premises) and the appropriate costing method for such interconnection.

  5. Technical issues

    We propose to expand the powers of the TA to provide for the planning of the use of the spectrum, (including the designation of frequency bands for spectrum utilisation fees,) and to set technical standards for telecommunications equipment.

  6. Remedies

    We propose that persons affected by non-compliance with a TA direction should be able to seek civil remedies from the non-complying party.

We propose to rehearse briefly once again these proposals in the current consultation document in order that any subsequent legislative changes which we may propose will reflect the up-to-date views of the community.

BASIC LAW IMPLICATIONS

27.spacer fileThe Department of Justice advises that the proposal on amendments to section 14 of the Telecommunication Ordinance and consequential amendments to the tunnel ordinances to enable the Telecommunications Authority to determine what constitutes fair and reasonable charges is consistent with Basic Law Article 5 and Article 106.

HUMAN RIGHTS IMPLICATIONS

28.spacer fileThe Department of Justice will consider and advise on legislative proposals to amend the Telecommunication Ordinance to ensure that the proposals are consistent with the human rights provisions of the Basic Law.

FINANCIAL AND STAFFING IMPLICATIONS

29.spacer fileAny additional financial and staffing resources arising from the exercise of this review will be absorbed by the existing allocations of the Information Technology and Broadcasting Bureau and by the Office of the Telecommunications Authority Trading Fund (OFTATF). Additional financial and staffing resources to process and then monitor additional licences which may be issued as a result of this review will be obtained by the OFTATF from such licence fees.

ECONOMIC IMPLICATIONS

30.spacer fileThe proposal will benefit telecommunications users and the commercial and business activities which are underpinned by telecommunications. The proposals are balanced and will preserve the attractiveness of Hong Kong as a place for investment in telecommunications.

ENVIRONMENTAL IMPLICATIONS

31.spacer fileThe TA has control over road openings for telecommunications purposes and he will ensure that if further FTNS licences were to be issued, this will not result in unnecessary road openings. He will continue to co-ordinate such openings so that all telecommunications work is done at one time. Additional operators will not necessarily mean additional road openings. TA will also give consideration to requiring the provision of common telecommunications ducts in future road openings so as to reduce environmental disturbance.

PUBLICITY

32.spacer fileThe Consultation Paper will be published in hard copies and posted on the Internet for a four-week consultation period commencing on Thursday, 3 September 1998. We will brief Legislative Council Members before making the document public in a press conference on 3 September 1998. We will brief the telecommunications industry after the press conference.

Subject Officer : Mr G F Woodhead
PAS(ITB)E
Tel. 2189 2210
Fax 2511 1458


3 September 1998

Information Technology and Broadcasting Bureau
Government Secretariat