1. The Council welcomes the analysis conducted by the Telecommunications Authority (TA) in reaching preliminary conclusions on the issues raised on broadband interconnection in the industry consultation paper, and has pleasure in responding to this second consultation.
The Need for Basic Ground Rules for Broadband Interconnection
2. The Council shares the view that the coverage of the alternative access networks cannot be compared with that of the incumbent operators in the initial years. Given the current immature competition, certain types of in-building wiring systems and coaxial cable systems may constitute "bottleneck" facilities in the provision of access to end users in the buildings. To protect new entrants or small network operators, who are at a disadvantage because of the asymmetry in bargaining power, the Council agrees that the TA should formulate basic ground rules for the regulation of broadband interconnection. If commercial negotiation still fails beyond a reasonable time, the TA should be prepared to determine the terms and conditions of broadband interconnection.
3. The Council trusts that the TA will closely monitor the evolution of broadband infrastructure and balance the need for a limited degree of regulation against preserving commercial incentive in investment.
Network to Network Interconnection
4. The Council understands that the primary point of interconnection in the broadband world would be the Internet itself given that the Internet Protocol (IP) has become the protocol of primary choice in data networking on a global scale of "any to any connectivity". However, under the current situation, new carriers may find it not cost-justifiable, even if technically feasible, to achieve end-to-end broadband connections through IP networks. This in turn may limit their ability to compete. The Council agrees with the TA that further study on the technical feasibility of Type I connection between core networks and the standards available is necessary before a decision is taken. In the course of further study, it would like TA to also take into consideration the potential effect of such arrangements on competition and economic benefits.
5. The Council recognizes that Type II interconnection through customer access networks already in place to reach customers is necessary at present to overcome physical constraints, which is favorable to the incumbent. It agrees with the TA's view that Type II interconnection should be mandated at any technically feasible points along the local loops of a wireline-based fixed network and in-building block-wiring system, to put new carriers on a level-playing field.
Network to Service Provider Interconnection
6. The Council welcomes the TA's principle of encouraging all forms of interconnection between service providers and the network operators under mutually agreed commercial terms and conditions. It agrees that a tariff-based arrangement could better reflect the market condition and thus generate a more efficient investment signal for both the network operators and service providers.
7. Given the extensive customer base of CWHKT and HKCTV networks (CWHKT's broadband network reaching 90% of households and HKCTV's optical fibre network passing over 1 million homes by April 2000), the Council is particularly concerned with the inherent market power in ownership of the networks and the entry barrier known as "network effect". Without "open access", the accessibility to the networks of end-users would be held back. As service providers have greatly outnumbered network operators, open access policy is one of the major enabling factors for high capacity communications systems that are vital for the promotion of electronic commerce in the digital age. The Council welcomes the TA's approach in re-affirming the open access policy.
General Principles of Interconnection Determination
8. The Council welcomes the TA's overall objective of striking a balance between investment incentives and promotion of open access and competition regarding broadband interconnection. The Council concurs with the TA's view that regulatory intervention should be kept at a minimum, provided that a competitive environment could give the right signals to investment and stimulate effective demand. The TA's residual power for mediation or determination would only need to be exercised in the event that commercial negotiations fail. The Council would emphasize that the interconnection arrangements, under commercial negotiations or by TA's determination, should be based on transparent and non-discriminatory principles.
Comments on the Charging Principles
9. When assessing the appropriate charging principles on broadband interconnection, the Council is inclined to opt for the Long Run Average Incremental Cost (LRAIC) approach, taking into account the unique business risk and rate of return involved in network investment. However the Council would query how the time-adjusted cost of capital and the risk premium could be realistically estimated in a way that would be fair but not over-compensate the network operators. The Council also agrees in principle that investment and technologies under the dynamic development of the broadband environment bear a much higher risk of obsolescence and thus may justify a higher risk premium and cost of capital. However, it has reservations and concerns that these qualitative factors are difficult to quantify.
10. The Council is mindful of the fact that a LRAIC-based approach would need adjustments to cater for different degrees of cost sharing. Possible configurations for Type II interconnection - full bandwidth, partial bandwidth, transmission service options - would have different impacts on the level of cost sharing. It is possible that how carriers share cost would affect the charging method to end-users, ultimately determining the broadband usage. Inherent problems of free riders and market distortion could affect competition and the way in which a broadband Internet service develops.
11. Though sympathetic to the administrative burden for the regulator to assess each cost structure and the interconnection charges individually, the Council has difficulty in endorsing the TA's approach in simply re-iterating that the structure should reflect cost, without formulating clear and practical guidelines.
12. Regardless of the charging principles, and to uphold fair competition, the network operators should be obligated to offer the same terms to the service providers as to their in-house retail units, in order to avoid vertical squeeze and cross-subsidization.
Essential Support Elements
13. It is noticed that the provision of essential facilities to support the interconnection are obstructed because "essential support elements", access to which is essential in order to effect interconnection, is not available. For example, equipment rooms, cable entry points, risers, ducts and conduits. The Council supports that such elements should be shared and the costs of establishing and maintaining such elements should be allocated to the interconnecting operators on the basis of the relative proportion of the capacity being requested.
