|Regulation for a networked Hong Kong
|M. H. Au
|Director-General of Telecommunications of the Government
|Hong Kong Special Administrative Region
Mr M. H. Au is the Director-General of Telecommunications of the Government of the Hong Kong Special Administrative Region. Mr Au heads the Office of the Telecommunications Authority, OFTA, and is responsible for the regulation of the telecommunications industry and the management of the radio spectrum in Hong Kong. He is also a member of the Broadcasting Authority, the regulator for the broadcasting industry in Hong Kong. Mr Au joined the Telecommunications Branch of the Hong Kong Post Office as Chief Telecommunications Engineer, serving later as an Assistant Postmaster General. He served as Assistant Director of OFTA upon its establishment in July 1993 and later as Senior Assistant Director (Regulatory), OFTA, in charge of the economic and technical regulation of all public telecommunications services. Mr Au holds the degrees of Bachelor of Science in Electrical Engineering (University of Hong Kong), Bachelor of Laws (University of London), Master of Laws (University of Hong Kong) and Master of Finance (Curtin University of Technology, Australia).
Hong Kong is one of the world’s most highly interconnected cities due largely to its aggressive regulatory policies favouring competition and investment. OFTA, Hong Kong’s regulatory authority, has used regulation to substitute for market forces whenever necessary to ensure competition, but has a policy of pulling back, deregulating, whenever market forces have proved strong enough to maintain a fair, competitive market. The result is a thriving market where 76 per cent of the households have access to at least two access networks.
Hong Kong’s living environment may be more crowded than other cities, but its high population and building densities present some unique business opportunities. Take, for example, the rollout of telecommunications networks. Since most people in Hong Kong live in multi-storey apartment buildings, many customers can share the cost of an optical fibre laid to one building. Thus, it is technically feasible and economically viable to roll out ‘alternative’ access networks based on ‘fibre-to-the-building’ to reach customers in 80 per cent of the households. Alternative access networks – including the hybrid-fibre coaxial cable network initially built for TV, upgraded for voice and data services – compete with the ubiquitous copper network of the incumbent fixed line operator. Recent statistics indicate that 76 per cent of households in Hong Kong have a choice between at least two access networks – one incumbent and one alternative network – and 51 per cent have a choice of at least three. In addition to the fixed network coverage, Hong Kong has four 3G mobile networks. They have been, or are being, upgraded to 3.5G, HSDPA, High Speed Downlink Packet Access, based, networks. With convergence, the boundary between fixed and mobile services becomes blurred, and mobile networks are just alternative access networks connecting customers. Hong Kong is now one of the most ‘networked’ cities in the world. Household broadband penetration reached 67 per cent while mobile penetration reached 129 per cent. Competition in the market is intense, and consumers have many attractive packages to choose from. What is remarkable is that competition in the market is mainly ‘facilities-based’ rather than ‘services-based’. This is a target aimed at by many regulators. This multi-networked society is the result of a deliberate effort by OFTA over the past years. All telecommunications investment is market-driven and undertaken by the private sector; the government does not participate in the industry’s investment. The regulator’s task is to liberalise the market, lower the entry barriers and provide a level playing field, so that if investors, local or foreign, can identify business opportunities, they can enter the market. Their success or failure is based on the merits of their products and services and their own efficiency. OFTA realised that by simply opening up the market, effective competition might not materialize. Therefore, OFTA introduced a series of regulations to foster the development of competition. These included interconnection terms based on reasonable relevant costs, mandatory unbundling of local loops, sharing of bottleneck facilities, fair access to numbering resources, number portability, and so on. In particular, to prevent fledging competition from being nipped in the bud by anti-competitive pricing of the ex-monopoly operator, OFTA initially applied ex ante (prior) regulation to the incumbent’s retail prices – these prices were subjected to prior approval by the regulator. OFTA had also made a special effort to facilitate the rollout of networks. One of the potential obstructions to network rollout is entry into buildings. OFTA has helped network operators to gain entry into buildings to lay their cables. Although there is a statutory right of access for the fixed network operators, OFTA prefers to use persuasion to gain the cooperation of landlords and building managers. OFTA launched publicity campaigns, attended meetings between network operators and building managers, and sorted out problems among operators in the use of duct space or sharing of in-building wiring. OFTA also asked the building authority to amend the codes of practice for architects to provide new buildings with adequate ducts and equipment rooms for telecommunications cables and equipment. All regulators accept that regulation is not a replacement for market forces, and should be withdrawn when the market has become effective. The question is, however, ‘when is the market competitive enough to withdraw the regulation’? Hong Kong has had intense debates about whether the market was competitive enough to withdraw certain regulations. The consultations in 2004 are now history and resulted in the termination of ex ante regulation of the incumbent’s retail prices as of January 2005 and the phase-out of mandatory Type II (local-loop) interconnection starting in 2004. The withdrawal of the ex ante regulation of the incumbent’s retail prices was based upon the intensity of competition in the market since competitors were exerting considerable pressure upon the incumbent with their self-built networks and interconnection. The ex ante procedure constrained the incumbent’s ability to respond competitively in the market. Anti-competitive pricing of the incumbent is dealt with through the ‘fair competition’ provisions in the telecommunications law. The decision to withdraw the Type II interconnection was based upon the extensive coverage of the alternative customer access networks built by the new entrants. It was estimated that the construction of alternative access networks was technically feasible and economically viable for 80 per cent of households. OFTA has also considered the impact of Type II interconnection on the long-term investment incentive to rollout competing networks and the fact that facilities-based competition, with potential for product differentiation and higher performance services, is the preferred target. What is unique in OFTA’s approach is, perhaps, the phasing out of mandatory Type II interconnection on a building-by-building basis. OFTA regularly publishes lists identifying buildings with ‘alternative’ access networks. Mandatory type II interconnection to these buildings is phased out three years after a building has been so connected. Mandatory Type II interconnection to all buildings will end by mid 2008. After this, regulation will be confined to locations where the copper local loops of the incumbent operator remain as ‘essential facilities’. This may still be the case for the minority of users at the remotest part of Hong Kong or for some old low-rise buildings in the urban areas. The present regulatory environment puts more emphasis on market-based ex post (after the fact) regulation than rule-based ex ante regulation. Basically, the regulator should set up a regulatory environment promoting competition and facilitating investment. This includes lowering the entry barriers, maintaining a level playing field and making sure that the rules are transparent and clear. When such an environment has been set up, the regulator would sit back and allow the market players to compete with the minimum regulatory interference. The regulator would intervene when the market fails. All ex ante regulation will be subject to review from time to time as the market develops. If the market can deliver, the regulator will not intervene. Some ex ante regulation needs to be retained to address actual or potential market failures. For example, the ex ante regulations on number portability remain because number portability lowers switching barriers and facilitates the working of the market. OFTA now focuses more on creating a regulatory environment conducive to technological and market developments expected in the future. New radio technologies will require some overhaul of the spectrum management policies that, in the past, have been largely based on ‘command and control’. Consideration will be given to more extended use of market mechanisms in spectrum management. Convergence of the telecommunications and the broadcasting industries would require the establishment of one single regulator dealing with issues in the convergent industry in a more holistic manner. Merger of the existing separate telecommunications and broadcasting legislation will be necessary. Fixed/mobile convergence will require a review of the existing separate regulation on fixed and mobile services. The next generation networks, in a multiple network environment, would probably require little regulation at the access and transport levels, but may require some attention at the control and application levels if new bottlenecks are identified. In conclusion, the current status of network rollout in Hong Kong is a result of our market liberalization and privatization policies – the use of regulation to foster the development of competition during the initial stages of market liberalization, and the scaling back of the regulation as the market becomes more effective. The future regulatory focus is to create a regulatory environment conducive to convergence, investment in new technologies and next-generation networks, with more emphasis on market-based ex post regulation than rule-based ex ante regulation.