This paper discusses the various issues on the introduction of 3G mobile services and consults the industry

This paper discusses the various issues on the introduction of 3G mobile services and consults the industry

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Date: 23 October 2001Wharf New T&T LimitedWHARFT NEW T&T LIMITEDSUBMISSION IN RELATION TOREVIEW ON THE TELECOMMUNICATIONS AUTHORITY'SSTATEMENTS NO. 4, 5, 6, 7 (REVISED) AND 8 ON INTERCONNECTION ANDRELATED COMPETITION ISSUESA CONSULTATION PAPER DATED11 SEPTEMBER 2001 1Date: 23 October 2001Wharf New T&T Limited TABLE OF CONTENTSPage1. INTRODUCTION............................................................................................................42. THE RELATIONSHIP BETWEEN THE INTERCONNECTING PARTIES - EQUALSTANDING WITH EQUALRESPONSIBILITIES……………………………………..53. THE USE OF LONG RUN AVERAGE INCREMENTAL COST ("LRAIC")APPROACH TO MEASURE THE RELEVANT COSTS FORINTERCONNECTION....................................................................................................74. OTHER TYPE II INTERCONNECTION ISSUES ON LRAIC AND FDC.................135. IS THE HISTORICAL OR THE FORWARD LOOKING OR CURRENT COSTMORE APPROPRIATE WHEN APPLIED TO TYPE I AND TYPE IIINTERCONNECTION? ................................................................................................146. WHAT SHOULD BE THE APPROPRIATE STRUCTURE FOR THEINTERCONNECTION CHARGES FOR THE RECOVERY OF THE COSTS FORINTERCTION LINKS, PORTS, SWITCHES AND NETWORKCONDITIONING?.........................................................................................................17WHAT SHOULD BE THE APPROPRIATE COST RECOVERY MECHANISM FORTHE ESTABLISHMENT OF LINKS AND NETWORK ...

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Date: 23 October 2001
Wharf New T&T Limited
WHARFT NEW T&T LIMITED
SUBMISSION IN RELATION TO
REVIEW ON THE TELECOMMUNICATIONS AUTHORITY'S
STATEMENTS NO. 4, 5, 6, 7 (REVISED) AND 8 ON INTERCONNECTION AND
RELATED COMPETITION ISSUES
A CONSULTATION PAPER DATED
11 SEPTEMBER 2001
1Date: 23 October 2001
Wharf New T&T Limited

TABLE OF CONTENTS
Page
1. INTRODUCTION............................................................................................................4
2. THE RELATIONSHIP BETWEEN THE INTERCONNECTING PARTIES - EQUAL
STANDING WITH EQUAL
RESPONSIBILITIES……………………………………..5
3. THE USE OF LONG RUN AVERAGE INCREMENTAL COST ("LRAIC")
APPROACH TO MEASURE THE RELEVANT COSTS FOR
INTERCONNECTION....................................................................................................7
4. OTHER TYPE II INTERCONNECTION ISSUES ON LRAIC AND FDC.................13
5. IS THE HISTORICAL OR THE FORWARD LOOKING OR CURRENT COST
MORE APPROPRIATE WHEN APPLIED TO TYPE I AND TYPE II
INTERCONNECTION? ................................................................................................14
6. WHAT SHOULD BE THE APPROPRIATE STRUCTURE FOR THE
INTERCONNECTION CHARGES FOR THE RECOVERY OF THE COSTS FOR
INTERCTION LINKS, PORTS, SWITCHES AND NETWORK
CONDITIONING?.........................................................................................................17
WHAT SHOULD BE THE APPROPRIATE COST RECOVERY MECHANISM FOR
THE ESTABLISHMENT OF LINKS AND NETWORK CONDITIONING? ............17
7. INTERCONNECT LINK COSTS .................................................................................20
8. NETWORK CONDITIONING COST ..........................................................................20
9. THE FORECAST OF TECHNOLOGY OBSOLESCE ................................................22
10. LONG RANGE ASSET REPLACEMENT STRATEGIES..........................................24
11. ACCOUNTING PRACTICE AND DEPRECIATION SCHEDULE............................24
12. WHAT MODIFICATION, IF ANY, SHOULD BE MADE TO THE PRINCIPLES
CONCERNING RESPONSIBILITY OF PAYMENT FOR THE SPECIAL CALL
TYPES IDENTIFIED IN THIS SECTION OF, AND THE ANNEX TO,
THE PAPER? ................................................................................................................29
13. ECONOMIC AND TECHNICAL EFFICIENCY .........................................................30
14. TRANSPARENCY AND PUBLICATION OF INTERCONNECTION CHARGES
AND JUSTIFICATIONS...............................................................................................33
2Date: 23 October 2001
Wharf New T&T Limited
15. ANNUAL REVIEW OF CHARGES.............................................................................35
16. RELATIONSHIP BETWEEN RETAIL AND WHOLESALE CHARGES .................36
17. COMPETITION FIRST AND FOREMOST.................................................................39
18. "HEAVY-HANDED" REGULATION VS. "LIGHT-HANDED" REGULATION......40
19. OTHER ISSUES............................................................................................................42
20. CONCLUSION..............................................................................................................43
3Date: 23 October 2001
Wharf New T&T Limited
SUBMISSION IN RELATION TO
REVIEW ON THE TELECOMMUNICATIONS AUTHORITY'S
STATEMENTS NO. 4, 5, 6, 7 (REVISED) AND 8 ON INTERCONNECTION AND
RELATED COMPETITION ISSUES
A CONSULTATION PAPER DATED
11 SEPTEMBER 2001 (the "Consultation Paper")
1 INTRODUCTION
1.1 Wharf New T&T welcomes the opportunity to present its views on the issues raised in
the Consultation Paper.
1.2 The role of the Telecommunications Authority (TA) is to promote and attain the
telecommunication policy objectives of the Hong Kong Government. The TA has the
duty to lay down a regulatory framework that is conducive to the development of
long-term sustainability in competition.
1.3 Wharf New T&T advocates that the TA should adhere to the following principles for
interconnection:
(a) Interconnection is a necessity in a multiple network environment. The TA
must undertake whatever necessary to ensure prompt and efficient
interconnection. The relationship between the parties is one of equal standing
with equal responsibilities and the terms of interconnection must truly reflect
that relationship.
(b) Operators should bear its own cost for meeting their licensing obligation.
Operators should not have to compensate the other operators through
interconnection charges for such obligations such as network conditionings.
(c) If compensation is warranted the cost of the most efficient operator should
prevail. This will minimize costs, avoid overcompensation to the inefficient
operator and encourage efficiency.
(d) Ensure transparency and publication of interconnection charges of the
dominant operator. This will minimize delay and anti-competitive conduct.
(e) There must be a level-playing field. Adopt light-handed regulation when and
only if the market is ready which means that consumers are FREE to move on
from one network to another and when the operators concerned are not
dominant.
4Date: 23 October 2001
Wharf New T&T Limited
1.4. To lay down a regulatory framework that is conducive to the development of long-
term sustainability in competition and the TA must remove ALL barriers which come
in the form of :
• excessive charges imposed by the dominant operator for implementation of
various interconnection facilities;
• Lack of transparency in charges imposed by the dominant operator;
• refusal to provide sufficient point of interconnection capacity on fair and
reasonable terms, promptly and efficiently;
• the insufficient quota unilaterally set by the dominant operator in the cutover
of local access links;
• the insufficient quota unilaterally set by the dominant operator in the
processing of number port requests; and
• unreasonable delay in the implementation of various interconnection requests
including broadband Type II interconnection.
2. The Relationship Between the Interconnecting Parties - Equal Standing with
Equal Responsibilities
2.1. Liberalization of the fixed line industry means that there are multiple fixed networks
operating in Hong Kong. In a multiple network environment traffic will be passed
between the various networks as subscribers of one network operator access another
subscribers, services or service providers, of another network operator, the network
operators must therefore interconnect their respective networks for the passing of
traffic between them. Interconnection is therefore a necessity in order for
operators to operate in a multiple network environment. General Condition (GC)
13 of the FTNS licence thereby requires each FTNS operator to provide prompt and
efficient interconnection.
2.2. Interconnection is also one of the essential elements in meeting the licence obligation
under GC 10(1), which requires each operator to operate, maintain and provide a good,
efficient and continuous service in a manner satisfactory to the TA. In order to meet
the obligation under GC 10(1) each of the FTNS operators must ensure that its
subscribers can access any subscribers, services or service providers, of another
network operator, any time.
2.3. It is also a fact that insufficient interconnection capacity over the interconnect route or
failure to interconnect will result in subscribers of one network not able to access
subscribers or services or service providers of another network operator. This poses
real threat to the efficient operation of multiple networks; to the consumers and to the
development of competition.
5Date: 23 October 2001
Wharf New T&T Limited
2.4. Notwithstanding the recognized benefits of interconnection it is true to say that the
incumbent operator has absolutely no incentive to establish and maintain
interconnection promptly and efficiently. Effective interconnection ensures the
working of multiple networks. Efficient working of multiple networks encourages the
development of competition, which poses real threat to the incumbent operator. It is
therefore crucial for the regulator to mandate interconnection and to lay down very
clear rules in establishing and maintaining interconnection. The regulator must also
be prepared to step in promptly to direct interconnection when there is a failure to
adhere to these rules.
2.5. In mandating interconnection and constructing clear rules for establishing and
maintaining interconnection amongst the network operators, Wharf New T&T submits
that the TA must make it clear the relationship between the interconnecting parties,
particularly in the case of Type I interconnection; number porting. Each party has the
obligation to establish and maintain interconnection pursuant to GC 13 of their
respective FTNS licences in order to operate in a multiple network environment; and
each party has the obligation to operate, maintain and provide a good, efficient and
continuous service to meet their respective obligation under GC 10(1) of their
respective FTNS licence. The relationship between them therefore is one of equal
standing with equal responsibilities. It is therefore totally inappropriate for them to
treat each other as “requester” and “provider” as the case may be. It is also totally
inappropriate that one operator would have to “request” for interconnection capacity.
It is equally inappropriate that the other operator being requested could have the right
to review and consider whether or not the “request” is reasonable or acceptable and to
decide whether it would “provide”, when to provide and on what terms.
2.6. Wharf New T&T submits that the confusing relationship between the interconnecting
parties have contributed to much of the problems in establishing and maintaining
effective interconnection with PCCW-HKT. For instance in the case of the dispute
between Wharf New T&T and PCCW-HKT in the provision of POI (point of
interconnect) capacity over the interconnection route between the respective FTNS
networks of the parties, PCCW-HKT should have been directed to provide sufficient
POI capacity over the interconnect route between its network and that of Wharf New
T&T to meet its obligation under GCs 10(1) and 13. It should not be for Wharf New
T&T to “request” PCCW-HKT to provide POI capacity in order that PCCW-HKT
would be in a position to meet its obligation under GC 10(1). It is certainly not right
that PCCW-HKT should have the right to reject the “request”. Surely in this case the
only approach is for the parties to notify each other of the estimated volume of traffic
likely to be generated by their respective subscribers on a regular basis. Each party
upon receipt of notification from the other party would have to ensure that it has
sufficient capacity for the passing of traffic to and from its network, ie its subscribers
would be able to access subscribers or services or service providers of the other party.
2.7. The confusing relationship between the interconnecting parties has regrettably formed
the basis of the terms of the determination issued by the TA on 16 March 2001. This
has produced an unfortunate outcome whereby an operator has to submit “requests”
6Date: 23 October 2001
Wharf New T&T Limited
for capacity and to commit on term and volume in order to interconnect. Yet the
operator who is supposed to make the “request” has absolutely no alternative if it
wants to operate in a multiple network environment. This unfortunate outcome has
undesirable effects and send a wrong signal to industry participants - it in effect
“excuses” the incumbent dominant operator in failing to provide interconnection; it
negates the incumbent dominant operator’s obligation to provide interconnection pursuant to
GC 13; it also negates the incumbent dominant operator’s obligation to provide a good,
efficient and continuous services to its subscribers pursuant to GC 10(1) of its FTNS licence.
The unfortunate outcome of the determination on 16 March 2001 also shifts the entire2.8.
burden of interconnection from the incumbent dominant operator onto the new
operators; it accepts that the incumbent dominant operator has no requirement for
interconnection even in a multiple network environment; it accepts that the incumbent
dominant operator will provide interconnection as a form of assistance or subsidy to
the new operators.
2.9. This basis of relationship is fundamentally wrong and is inequitable. It goes against
the principle of operating in a multiple network environment. It creates unleveled
playing field, which will have a detrimental effect on the achievement of competition
in the industry. This is particularly acute in the case of fixed line industry where the
parties have started on an unleveled playing field; instead of leveling the playing field
the situation was worsen. The TA must correct this wrong basis of relationship
between the interconnecting parties; equally the terms of the determination issued on
16 March 2001 must be overturned and be replaced by one that assumes the correct
relationship between the parties.
2.10. Wharf New T&T therefore submits that the TA must first of all acknowledge that
correct relationship between the interconnecting parties is one of equal standing with
equal responsibilities. The terms of interconnection between the parties must truly
reflect the correct relationship between the interconnecting parties.
2.11. This submission is prepared based on the assumption and expectation that
interconnection is a necessity for operating in a multiple network environment and the
only correct relationship between the interconnecting parties is that of equal standing
with equal responsibilities. Wharf New T&T urges the TA to review all the relevant
statements the subject of the Consultation Paper by adopting the correct relationship
between the interconnecting parties as a starting position and to ensure that the basis
for interconnection between the parties truly reflect the relationship between them.
3. THE USE OF LONG RUN AVERAGE INCREMENTAL COST ("LRAIC")
APPROACH TO MEASURE THE RELEVANTTS FOR
INTERCONNECTION
3.1 Wharf New T&T agrees with the TA's preliminary view that LRAIC rather than FDC
should continue to be adopted for the purpose of determining interconnection charges.
7Date: 23 October 2001
Wharf New T&T Limited
LRAIC provides a sound economically efficient "Build” verse “Buy" pricing signal to
new entrants. A new entrant would be more inclined to build its own network if the
incremental cost to build the network is lower than the incremental cost of using the
incumbent's network. There should not be any assumption that new operators would
not build their own network where the incremental "build" cost is higher than the
incremental cost of using the incumbent's network. The reasons being that building its
own network infrastructure will ensure better network quality to serve its directly
connected customers, and will be more cost efficient due to a better technology and
optimal network configuration.
3.2. The present unequal size of customer bases and network as well as the level of
relative competitiveness render the FDC approach illogical. PCCW-HKT has
over 90% of the fixed lines market in Hong Kong. On this basis it has the "virtual
monopoly" of providing originating and terminating services. There is no other
realistic substitute in the market for PCCW-HKT’s interconnection services. The
interconnection services are indispensable in reaching those 90% customers. The
charging principle should therefore be based on the premise that it will encourage
more interconnection services and the dominant operator should not be over
compensated to undermine the relative competitiveness of other network
operators. It should also be noted that other regulatory regimes continue to adopt the
LRIC model. For example the fixed line industry of the U.K., which was liberalised
in 1984, continues to adopt the LRIC model.
3.3. In economic terms the dominant operator should only recover from the network
operator the marginal cost or the LRAIC cost. In the diagram depicted below it can be
demonstrated that if the dominant operator were allowed to impose a FDC rather than
a LRIC or the marginal cost it would create a sub-optimal economic consequence.
Price MC2
(Interconnection
P2Charges) D MC1
P1
Demand
Q2 Q1
Quantity (Volume of
Interconnection Traffic)
Under the LRAIC arrangement the marginal cost is represented by MC1. The
dominant operator charges are set at P1 and produces at Q1 amount of interconnection.
If the dominant operator were allowed to charge a portion of indirect fixed cost which
8Date: 23 October 2001
Wharf New T&T Limited
is not causally related to interconnection traffic but rather other corporate activities,
the extent of the increment will result in the shift of MC1 to MC2, resulting in an
increment in the interconnection charge represented by the difference between P2 and
P1. This will decrease the demand for interconnection traffic that is now at Q2.
3.4 The regulator must ensure that the dominant operator cannot pass on its indirect
fixed costs onto their competitors. This indirect fixed cost related to activities such
as corporate strategic planning, product advertising, marketing and legal and
regulatory services bear no relevance to interconnection traffic but to enhance the
dominant operator's own competitiveness. Furthermore allocation of indirect costs
will be totally arbitrary and in fact on what basis is the high level of interest expense
which can be included in common fixed cost be allocated to interconnection charges.
Is it fair that the dominant operator can recover part of their interest expense from
other operators through interconnection charges under the FDC approach? It makes
the FDC approach even more inappropriate when the magnitude of the indirect cost or
fixed cost bears no relationship to the marginal cost. If the dominant operator
increases its overhead expense which is fixed or traffic and line insensitive, the
requesting operator is required to compensate the increased proportion of that fixed
cost which is unrelated to the relevant and marginal interconnection cost.
To take this point further we note that for the year ended December 31 2000 in the
PCCW-HKT published group accounts the cost of sales, which arguably is variable in
nature, amounts to HK$2.2 billion and the general and administrative expense, which
arguably is fixed and traffic insensitive in nature, amounts to HK$4.8 billion (see note
6 to the accounts). The fixed cost accounts for our 220% of the marginal cost. In
other words if PCCW-HKT can recover a X% of the total indirect cost and overhead
and the X%, say is based on the relativity of interconnection traffic to total traffic, and
on the assumption that the variable cost is driven according to this relativity of
interconnection traffic to total traffic, the interconnection charges under FDC could
increase by a corresponding 220%. This argument illustrates the danger of adopting
FDC model. Coupled with these reasoning with the fact that there is a huge
imbalance of traffic it would be illogical and unsound for the non-dominant operators
to compensate the dominant operator for these activities, which would undermine the
relative competitiveness of the non-dominant operators.
3.5. Wharf New T&T would like to point out to the TA that "[t]he incremental costs will
also include the shared costs common to all the service elements of the entire
conveyance service" as set out in Paragraph 10 of the Consultation Paper requires
further consideration. At present the incremental cost for conveyance services
provided to interconnecting carriers include the shared costs common to all the service
elements of the entire conveyance services, which are the conveyance service
provided to interconnecting carrier and retail customers. Wharf New T&T is
concerned the extent of this common cost should be included in the LRAIC for
the interconnecting carrier conveyance services. It is not entirely clear in any of
9Date: 23 October 2001
Wharf New T&T Limited
1the TA Statements or the 1998 Determination whether such common cost is fully
absorbed for LRAIC purpose. If such cost denoted by X were fully absorbed in the
LRAIC for the interconnection conveyance it effectively means that other
operators are subsidising the dominant operator’s conveyance services provided
to its retail customers. This is not a true incremental costing principle. The
diagrams depicted below provided the logic of our argument.
Cost
Cost
(X) (X)
Common cost Common cost
100% Conveyance for 100% Conveyance
interconnect volume for retail volume
In this illustration the dominant operator is able to recover the common cost denoted
by X from its interconnection charges. It should be noted that such common cost X
would have been incurred irrespective of whether there is any conveyance service for
interconnection. In other words the X is not a true incremental cost to the dominant
operator. The diagram below suggests the true should be derived
from full conveyance volume at 100% to say 99% and take the corresponding
decrease in the cost represented by Y. The Y rather than X represent the true
incremental cost to the dominant operator.
(Y)Cost
Incremental cost
(X)
Common cost
99% 100%
100% Conveyance for
interconnection volume
3.6. Under the current regime the interconnection charge includes an element of cost of
capital. Wharf New T&T would like to submit its view on its rationale and the basis
of its computation.

1 Determination under section 36A of the Telecommunication Ordinance between the networks of Wharf New
T&T and PCCW-HKT on Interconnection, Switch Port, Datafill and ISDN Charges dated 21 August
1998
10