Today I have been asked to address the question whether the developments we see taking place in the telecommunications industry constitute deregulation or re-regulation. I think it is possible to dispose of that issue quickly enough. In my opinion there is preciously little that one can point at in the telecommunications industry today and say it is genuinely de-regulated. I can find a few isolated examples of deregulation : single line customer equipment in Hong Kong is deregulated - no licences are required and no type approval process is mandatory.
The paging sector in Hong Kong also has minimal regulatory barriers to entry - there is no practical limit to the number of licences, spectrum is available and the licence is obtained within days via essentially an "over-the counter" application. Thus in Hong Kong we have 38 paging licences on issue : these are held by about 20 companies and utilize 62 radio channels. Competition in this sector is vibrant and over one million paging customers (ie something over 17% of Hong Kong's population) use these services. But even with this apparent degree of freedom, I do not think it is correct to claim these paging operators are free of regulation : after all a licence is still necessary and the paging licence requires conformance to a range of regulatory instruments, for example, the Hong Kong telecommunications numbering plan, technical standards and spectrum allocations. The same sorts of obligations are borne by value added service providers whether operating under individual licences, an exemption order or under a class licence.
So my point is that it would be a mistake to equate liberalisation and the emergence of competition as deregulation. It is far too early to proclaim that we have now entered into a new era free of regulation and we are even further from being able to toast the unequivocal success of the liberalising experiments that have unfolded over the last decade. Much as it pains me to say it, the era we are now in constitutes a period of sustained re-regulation. A period in which all of the hard-earnt successes achieved to date in liberalising telecommunications are potentially at risk. Risks occasioned from many possible quarters : premature lifting of regulatory safeguards, recreation of monopoly power through use of new technologies or services, a diminution of regulatory vigilance and, the possibility of a simple regulatory failure. That more thought is not expended on this latter point constantly amazes me. So much responsibility is now invested in regulators to ensure fair competition and countervail the incumbent monopoly's market power etc etc. Yet the possibility that the regulator may fail or give a sub-optional judgement call is often completely overlooked. Like all human systems - regulatory systems are imperfect. But they look to be with us for a long while to come.
So having disposed of the topic given to me - and having come down resounding of the opinion that for now telecommunications liberalisation is about re-regulation, what I intend to discuss is how one might best proceed with regulation to achieve some sort of reasonable result. I will do this under headings :
- setting policy objectives;
- the form of regulation;
- the regulatory mandate; and
- some illustrations of topical regulatory issues in the Hong Kong context.
I will not have time today to give you a complete picture of telecommunications in Hong Kong. For those that are interested please visit the OFTA World Wide Web site http://www.ofta.gov.hk and you may research at leisure. Our industry in Hong Kong has entered into a very important phase; we now have four local telephone companies, four cellular telephone companies, three CT-2 operators, 38 paging operators, 43 internet service providers and about 100 value added service providers. Hong Kong also has a cable TV company which is aiming to pass more than 90% of Hong Kong homes with optical fibre by 1998 and an incumbent ex-monopoly telephone company with a 100% digitally switched network that wants to provide interactive multimedia services (IMS) starting in the middle of next year (1996). Of course Hong Kong with its population of over 6 million people crowded into a small piece of geography is a rather special case but those factors which make Hong Kong special also generate some special considerations for regulatory policy and practice.
THE STARTING POINT - POLICY OBJECTIVES
To extent there is confusion, ambiguity or outright misreading of the policy objectives, there is a risk of sub-optional outcomes both in terms of industry structure and regulatory apparatus. As examples, we could see wrong service offerings by new entrants, poor business plans, wasted investment by all players and unfocussed regulatory interventions.
It would seem to me that where the policy objectives have been carefully considered and clearly enunciated, there is a better chance that orderly development of the regulatory regime may follow. Of course, there are many possible policy objectives and some countries chose to select, or give priorities to, different objectives but that should not detract from the fact that a clear statement of the starting point is a pre-requisite for national regulatory decision making.
Let me illustrate this by reference to the policy objectives we have established in Hong Kong. There are three :
- that the widest range of quality telecommunications services should be available to the community at reasonable cost;
- that telecommunications services should be provided in the most economically efficient manner possible; and
- that Hong Kong should serve as the pre-eminent communications hub for the region now and into the next century.
Notice that the word competition does not appear in this policy prescription and that is intentional. Competition is a "means" rather than "end" or "objective" in its own right.
Notice also that development objectives are not specifically stated. That is because Hong Kong is already in the fortunate position of having a very high teledensity of 52% (52 lines per 100 people), therefore, basic issues of universal service are essentially already met. However this is not the case in many countries in Asia and development objectives feature highly in these countries. Also it is possible to see that much innovation, such as in the Philippine and Indonesia approaches, is evident in the Asia-Pacific Region.
It is my thesis that over the long term, and I emphasis over the long term, one has to expect the telecommunications industry to conform with the rules and norms that govern the generality of trade and commerce. That would suggest that we must work through a process of liberalisation, re-regulation, deregulation and eventually competition in all sectors of the telecommunications industry. If that is to be the future normality then a corollary follows, namely that policy and regulatory prescriptions must be framed with this liberalisation process in mind and must be flexible enough to evolve with the industry over time.
Therefore the first conclusion I would draw about future telecommunications policy and regulatory frameworks is that they will be more effective when the policy objectives are clearly established and articulated.
The second conclusion is that telecommunications policy and regulation must be framed with the knowledge that eventually the telecommunications industry must move to a competitive basis in common with the mainstream of other industries.
While many would like to see the telecommunications industry quickly conforming to normal industry behaviour, it must be accepted that the transition from monopoly to competition brings specific issues which need to be addressed. Hence the need for a period of sustained re-regulation.
A quick survey of the international regulatory community shows that many regulatory forms are possible, for example :
- allow the PTT to regulate;
- use industry-specific regulation;
- use the general competition law regime.
The PTT as Regulator. In monopoly environments the PTT is usually asked to fulfil regulatory functions which are often concerned with little more than technical standards matters. However as markets become liberalised and competition takes hold in customer equipment and value-added services, the position of a regulator as part of the PTT becomes unsustainable. Even where the PTT's operating and regulatory arms are separated, is it truly realistic to ask the dominant player to be the industry referee as well?
An Industry Specific Regulator. Among liberalised administrations this is the most common regulatory prescription. A body independent of the operators is established to ensure fair play and, in many cases, specifically to promote competition. Examples of this type of regulatory body include; OFTEL, the FCC, CRTC, AUSTEL, OFTA and, the National Telecommunications Commission in the Philippines. Sometimes the regulator is less visible as is the case with the MPT in Japan. The industry specific type of regulation is likely to increase in popularity because of its ability to pass the basic test of objectivity in decision making.
General Competition Law. It is possible to leave regulation of the telecommunications industry to general competition law (fair trading/anti-trust). To a large extent New Zealand has adopted this approach and others, such as the USA, UK and Australia all rely on competition law to some extent. Australia has recently announced that more of its industry specific regulation, particularly in economic regulation, will be passed across to competition law authorities. Of course this presupposes this type of law is available which is not always the case - Hong Kong despite its UK influence has a laizze-faire environment that has no competition/fair-trading laws. Also it is possible to question the effectiveness of competition laws in an industry where competition is yet to take hold.
Competition law generally starts from a premise that the market is already competitive and characterised by a number of rivalling firms. Its focus is on preventing the aggregation of market power through take-over/merger, abuse of market power and anti-competitive conduct such that a firm is able to acquire a dominant market position. However, that approach is effectively the reverse of what we face in telecommunications where the starting point is that dominant market power is held by the PTT monopoly and policy and regulatory prescriptions are striving to encourage new entry on a sustainable basis and, simultaneously, presiding over the dismantling of the PTT's dominance.
Personally I like to think of the various forms of regulation as representing different points on a continuum with industry-specific regulation serving a useful transitional step in taking a country's telecommunications industry from monopoly (regulated by the PTT) to full and open competition regulated by general competition law (where available). I think industry-specific regulation is a necessary intermediate step and, in most regimes, absolutely essential because I have little confidence in the abilities of the normal judicial processes in grappling, in an effective and timely way, with the technical and commercial complexities brought up by telecommunications competition.
An example is interconnection in New Zealand where the matters have been taken through the Courts all the way to the Privy Council over some three years. Eventually the Courts did not (and could not) determine interconnection but the disputing carriers finally settled on a commercial arrangement. That I do not think has served telecommunications liberalisation particularly well and demonstrates how effectively the dominant incumbent can use due process to frustrate and delay while it moves to meet the competition's initiatives and acts to deter entry. This is not to say that I see no role for general competition law, far from it as some areas, for example, misleading advertising, retail price maintenance and misleading conduct, could be handled well by fair-trading law. I just think it is premature to entrust everything to fair-trading law.
An industry-specific regulator brings certain advantages. Principal among these are that the regulator has an ability to focus on the specific industry needs, become expert in the issues and can utilise its power to act as a countervailing force to the incumbent's market power. This last point is important because the regulator may be able to mimic, or be a surrogate for, competition while that competition is becoming established and developing market power of is own.
A regulator serving this role needs to have :
- a charter that is spelt out in its legislation, or other establishing documentation, and that charter needs to be understood clearly by the industry as a whole;
- a substantial suite of powers to perform its role effectively. These powers would include the ability to seek and obtain all relevant information, powers to make directions and the ability to enforce its directions and determinations;
- credibility;
- adequate resources; and
- relevant expertise.
Another issue that must be addressed is the breath of the regulator's mandate. Is the regulator to be only concerned with telecommunications - and what does telecommunications mean in any country's particular environment? Is the regulator asked to take responsibility for radiocommunications and what about broadcasting? One particular feature of Hong Kong's regulatory arrangements is its "one-stop shop" nature. This can be illustrated by the broad sweep of the Telecommunications Authority's responsibilities across both telecommunication and radiocommunication. These responsibilities include :
- technical regulation
(e.g. - standards - compliance procedures - radio interference investigation - co-ordinating satellite filings, etc)
- economic regulation
(e.g. - issuing licences - administering licence conditions - resolving carrier disputes, such as interconnection - price control - maintaining fair competition)
- radio frequency spectrum management
- formulating and administering Hong Kong's telephone numbering plan
- protecting consumer interests e.g. investigating complaints, monitoring service delivery and quality of service standards.
It should also be noted that the Telecommunications Authority serves as the technical regulator for broadcasting services in Hong Kong and is appointed as a Member of the Broadcasting Authority. These arrangements are aimed at improving co-ordination.
If competition is, or is likely to be an issue, also one needs to be aware of the need to look to competitive safeguards - in particular, interconnection, numbering, fair trading, price control and regulatory accounting standards.
SOME REGULATORY ISSUES IN HONG KONG
Hong Kong has implemented a competitive safeguards regime which is in step a contemporary regulatory thinking in developed economies. In this regard I should mention four particular measures :
- the establishment of OFTA. An effective regulator adequately empowered to gain information, analyse it and make and enforce decisions, can act to assist generally in resolving impasses, for example, in interconnection between unequal commercial rivals and can determine these matters if agreements cannot be reached;
- the introduction of price controls to limit the dominant carrier's ability to cross-subsidise between market sectors, particularly from those sectors not facing immediate competition to those that are, and to otherwise limit practices such as predation and bundled or tied service offerings;
- improving the transparency of a dominant carrier's operations through structural and/or financial separations; and
- ensuring equity in numbering allocations and national number planning by putting strategic control with the regulator.
What I should like to do is to take three issues that flow from this competitive safeguards regime to illustrate how we are tackling them in Hong Kong. The three issues I will focus on are interconnection, customer access and number portability.
Interconnection. It is an obvious truism that in a network based industry, interconnection is a vital pre-requisite for effective competition. Hong Kong's policy recognises that and in the period March 1995 through June 1995 I issued no less than 10 Statements on interconnection matters. We have categorized interconnection into two broad classes. Type I interconnection (diagram 1) is the standard form of interconnection between network gateways. This is a relatively well established mode of interconnection and not worth dwelling on for today's purposes.
DIAGRAM 1
Type II interconnection (diagram 2) is, however, a different approach which recognises the difficulties inherent in establishing competition within the vertical local loop environment of Hong Kong. This form of interconnection is aimed at allowing interconnection at the local loop level.
DIAGRAM 2
Main characteristics of Type II interconnection are :
- Interconnection of Network 2 to Network 1 is possible at any of the points A, B or C.
- Interconnection in this configuration is only permissible upon the request of the customer at point D to become a direct customer of Network 2.
- After interconnection, the customer at point D becomes a direct access customer of Network 2.
- After interconnection, the operator of Network 1 continues to own, maintain and support the local loop.
Customer Access. For the sake of simplicity, customer access arrangements can be sub-divided into two class - direct and indirect. The first tends to concern the acquisition of physical access facilities to the customer; the second tends to concern the provision of competing services to customers irrespective of the supplier of the physical access facilities. In Hong Kong we allow both types. Direct access may be achieved by an operator building its own facilities, for example, installing a wired local loop or utilizing wireless local loop technologies. An operator may also decided to lease direct access facilities from another operator or utilize type II interconnection where available.
However, indirect access in the Hong Kong environment is somewhat more interesting. Diagram 3 shows the IDD access arrangements in Hong Kong.
The entire Territory of Hong Kong constitutes one local zone. Therefore all long distance and international direct dial services pass through the monopoly service of Hong Kong Telecommunication International (HKTI). All four local telephone companies connect to HKTI on a non-discriminatory basis and are paid delivery fees for originating and terminating calls to and from the international gateway. The default code for IDD access is 001. Therefore, irrespective of the line provider, a consumer dialling 001 will obtain IDD service through the operator that provides the exchange line. However each of the four local operators has been issued a 00X code (where X is 6 to 9 inclusive). Therefore a consumer can gain the services of any of the four telephone companies by simply dialling 00X in lieu of 001. This approach does not inconvenience the customer by imposing extra digits to dial, it is a simple system, improves choice and can be said to be a true form of "equal access".
Portable Numbering. The last illustration I wish to raise is number portability. Our studies indicated that licensing more operators and providing a sound interconnection environment were unlikely to be sufficient to make the competitive choice attractive to consumers. Our surveying indicated that 68% of customers would not switch operators if they were required to change their telephone numbers. The TA therefore decided to mandate operator portability in Hong Kong. In truth this was not a difficult decision to take as operator portability was estimated to result in an NPV for the period 1995 to 2010 of US$200 million. Geographic portability has an even higher NPV (of about US$1,150 million) but the TA decided competitive market forces would ensure geographic portability was offered to consumers and this in fact has proven to be the case.
Operator portability is now being provided among operators using simple 'call-forwarding' techniques. This is only an interim solution - the industry is working towards the implementation of a full intelligent network based solution by the end of 1996. This has raised some interesting issues none of which are proving to be insurmountable in an environment where the three new entrants are introducing intelligent networks in any event and the ex-monopolist is introducing intelligent overlays on its 100% digital switching platform.
Perhaps, these illustrations of practical regulatory issues in Hong Kong form a suitable basis upon which I might draw a final conclusion to my comments. Governments do have a critical role in establishing the right framework once it has been decided to allow competition. This role encompasses :
- the setting and articulation of the policy goals; and
- the establishment of comprehensive regulatory arrangements with an adequate regulatory apparatus and sufficient competitive safeguards.
These two steps create the environment. Additionally, governments have another important role and that is to create opportunities for the private sector to invest and participate in the industry. Having done this, I would venture that governments should step back and allow the market mechanisms to work. Or in other words, government should be content to clear a path and keep out of the way. Tempting as it might be for bureaucrats in this period of re-regulation to try to map out the details of how this industry might develop, to try to optimise industry structure and to grapple with optimising investment development strategies, I urge caution. Well intended as they may be, I doubt governments could ever be suitably well equipped to anticipate the way this dynamic telecommunications industry may develop. In such circumstances even the most well intentioned government intervention may actually do more harm than good. Also possible is the prospect that the new entrants may come to rely on the regulator too much and never learn to stand on their own two feet. Hence I am not in favour of artificially 'tilting playing fields' in the fond hope of giving the new entrants an easy start. Rather competition is more likely to be sustainable and real in an environment where entrants learn to tackle and succeed against a strong player on their merits and where the referee is willing to enforce rules of fair play.
Therefore the right way to re-regulate needs to be sensitive to allowing the industry to evolve in response to competition. I submit we need to be alert to the need I mentioned at the start to ensure that the telecommunications industry will one day in the future look and behave like other industries. Perhaps in searching for a suitable model we need not look beyond the consumer electronics and computing industries where enormous innovation and diversity is evident, there are no regulatory barriers to entry or exit, licences to participate are not necessary and governments do not underwrite success. As we struggle to introduce telecommunications competition in many countries around the world, I contend that we need to keep our eyes on achieving that sort of model for our telecommunications industries, that we might re-regulate judiciously and that we do what we can to hasten the passage from yesterday's world of monopoly to tomorrow's world of free and open competition.