Hong Kong: Price Regulation

Editor’s Note: This note is based on the statement Implementation of the ex post Regulation of the Tariffs of PCCW-HKT Telephone Limited under a New Fixed Carrier Licence, issued on 13 January 2005 by the Hong Kong Telecommunications Authority. The note was prepared with the assistance of the Office of the Telecommunications Authority (now Office of the Communications Authority).

In January 2005, the Office of the Telecommunications Authority (OFTA) announced the lifting of the prior approval requirement on the dominant operator, PCCW-HKT Telephone Limited’s (PCCW-HKT) prices. This change was made by issuing a new fixed carrier (FC) licence. Under the new FC licence, PCCW-HKT does not have to get its prices approved by the Telecommunications Authority (TA), including moves to offer discounts and other benefits in response to price competition.

This decision reflects a change in OFTA’s approach from ex ante regulation to ex post regulation. The change to ex post regulation was prompted by significant changes in market circumstances for the fixed telecommunications service segment in Hong Kong since ex ante tariff regulation was first implemented in 1995. Key market changes include:

  • Persistent market share erosion for the incumbent,
  • The emergence of alternative products, and
  • The lowering of barriers to entry.

The TA found that, under the current market circumstances, the existing ex ante tariff approval scheme was no longer effective in facilitating competition. It is implementing ex post regulation through a new Fixed Carrier (FC) licence. Under PCCW-HKT’s new FC licence:

  • PCCW-HKT does not have to get its prices approved by the TA, including moves to offer discounts and other benefits in response to price competition. However, any amendments to any published tariff of PCCW-HKT for interconnection, which was in force at 1 December 2004 and continues in force must first be approved by the TA in writing with a view to safeguarding against any anti-competitive interconnection charges. This includes tariffs for:
    • Interconnection between PCCW-HKT and mobile carrier licensees, public mobile radiotelephone service licensees or personal communications services licensees,
    • Interconnection between value added services and the public switched telephone network operated by PCCW-HKT,
    • Broadband copper local loop and exchange co-location services,
    • Internal protocol — virtual private network services, and
    • Residential cell relay services.

Interconnection requirements that arise after 1 December 2004 will relate to new networks or products not yet in operation. OFTA considers that existing operators will have had fair opportunity to develop competing products, and so it would be inappropriate to apply ex ante tariff regulation over any such new interconnection requirements.

  • PCCW-HKT is required to notify the TA of any discount to its published tariffs at least one day before the discount becomes effective. The exception to this is external call services and external bandwidth services, which have been found non-dominant by the TA in the past, reflecting the absence of competition concerns. The TA may amend the list of services exempted from the requirement of discount notification from time to time,
  • The TA can publish a discount notified by the licensee, when ‘public interest’ justifies it, according to consumer, competition and government policy considerations,
  • PCCW-HKT must still meet accounting separation requirements. Furthermore, the company is required to supply information sufficient for the TA to establish a reasonable cost basis for the service, including but not limited to the long run average incremental cost (LRAIC) on a current cost basis.

Following submissions in response to the consultation, the TA decided that other existing operators will also have the option of exchanging their existing ex ante licence for an ex post FC licence. To exercise this option, operators must make a written request to change their licence to the TA.

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