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Press Release
30 Nov 2003
Clarification of Misunderstandings Towards "Type II Interconnection" Policy
The Government is currently conducting a review on "Type II Interconnection" policy. Its decision is yet to be pronounced. Different views have been expressed on this very subject. Regrettably instead of focusing on the benefits of "Type II Interconnection", wrong emphasis has been placed on the commercial interests of individual fixed-line operators. This has created great confusion to members of the public. Wharf T&T believes there is a need to clarify some of these confusions/misconceptions.

Untrue Accusation of "Discrimination"

A host of a radio programme recently shared his thoughts in the newspapers and on air about "Type II Interconnection". He stated that, "Fixed-line operators using 'Type II Interconnection' are offering their services to selected customers only instead of all consumers in Hong Kong. This is obviously unfair to residents in other areas and is discriminatory."

This statement clearly shows a lack of understanding on this subject on the part of the host. The fact is the ability of other operators to offer choices to consumers is very much restricted by the speed in which they can deploy Type II Interconnection with PCCW. Normally PCCW will only process 3 exchange collocation applications at one time. Assuming full co-operation from PCCW, it will still take about 9 months or longer from planning to approval and to implement each collocation exchange. With this speed it would take over a decade for another operator to extend its coverage to all of PCCW's exchanges in Hong Kong.

At the same time, there is a huge difference between PCCW's charges for Local Access Links (LAL) for "urban" and "rural" districts. The one off and monthly charges for "rural" districts are $875 and $111 per LAL, which are even higher than PCCW's retail price for its residential fixed-lines. PCCW's standard retail price for its residential fixed-lines is $475 (installation) and $110 (monthly) per line (not to mention its various discounts or promotional packages including waiving of installation charge of $475 if the customers switch to PCCW from other operators). This effectively frustrates the other operators' ability to provide service in the "rural" areas (which according to PCCW's definitions incidentally include most of the new towns in the New Territories). For this reason, the accusation of "discrimination" against certain districts, raised by the said host, is wholly unjustified.

There is clear evidence that the charges for LAL, concluded years ago have included a very high "cost of capital", which we estimate to be close to 20%. This rate of return on investment is a lot higher than most companies (including monopolies regulated by Schemes of Control) would get.

"Type II Interconnection" Is Not a "Re-sale" - Operators Must Still Build Extensive Networks

Wharf T&T continues to emphasize the fact that "Type II Interconnection" is not a simple re-sale transaction. Rather it enables operators to lease the copper wire that enter homes and business premises. The copper wire is currently controlled by PCCW (which it has constructed through decades of monopoly rights and with assistance from Universal Service Contributions). It is only a small but critical part of a telecommunications network. Operators still need to invest heavily on new technologies, systems and equipment, as well as constructing their own extensive fibre optic networks.

Indeed the Director-General of Telecommunications recently clarified this point at a seminar on "Putting the Service into Broadband: Hong Kong's Telecommunications Future" on 14 October 2003 where he said: "Another potential misconception is that investment in the customer access network equals all investment in the broadband infrastructure. ......The local loop is not the entire infrastructure. Local loop is just the 'last mile' in the long chain of delivery to the end-users. ......The customer access network just represents part of it. The copper loop is not even the entire customer access network......It is therefore misleading to refer to a network operator gaining access to the customers through Type II Interconnection does not build its own network because it has still to build the rest of the network apart from the 'last mile'......"

The argument that "Type II Interconnection" hinders long-term investment is also unfounded and misleading. In the past 8 years, Wharf T&T has invested more than $4.5 billion to build its own fibre optic networks and it continues to expand its service coverage. Our investment speaks for itself, today Wharf T&T has nearly 5,000 manholes throughout the streets of Hong Kong Island, Kowloon and the New Territories with service coverage to 80% of Hong Kong Island and 90% of Kowloon, with the coverage of the New Territories developing rapidly. On the other hand, Hong Kong Broadband Network, which boasts $1 billion investment to provide service to 750,000 households, has much lesser number of manholes when compared with Wharf T&T. The number of manholes tells us about the size of their own network.

Wharf T&T adopts a two-pronged access strategy, namely, self-built and leasing, which it believes to be the most effective way to extend network and service coverage so as to provide choice to consumers in Hong Kong. This has proven to be a great success.

"Interconnection" Policy is Reciprocal & "Mutually Beneficial" in Nature

In fact, "Interconnection" is a very common practice in the telecommunications industry where operators lease from each other a portion of their network so as to enhance their connection capabilities. The aim of this is to provide telecommunications services to consumers more efficiently. Even a hundred-year stalwart like PCCW or new entrants like Hutchison Global Communications, New World Telecommunications and Hong Kong Broadband Network are leasing from the other operators in order to provide service to their customers. Wharf T&T believes that it is both essential and beneficial to maintain "Type II Interconnection" in order to provide consumers with more choices.

The Success of the Government's "Type II Interconnection" Policy

Since the start of liberalization of the fixed telecommunications market, the Government has actively supported the deployment of "Type II Interconnection" to promote competition. This ensures that consumers would be able to enjoy the benefits of competition as soon as possible.

The Director-General of Telecommunications also spoke on the benefit of "Type II Interconnection" during a recent seminar on "Putting the Service into Broadband: Hong Kong's Telecommunications Future" on 14th October 2003. He stated that, "... As of the end of 2002, 8.6 % of all telephone lines were unbundled, which is the highest rate in the world. OFTA has enabled competition to develop in the local fixed telephone line market, which is recognized to be the most difficult market for competition because of the control of the last mile by the incumbent. By 2002, 58% of all residential customers had at least one alternative choice for their telephone line supplier other than the incumbent player, by means of 'Type II Interconnection'." This further underscores the importance of "Type II Interconnection" policy.
Why Should Consumers be Deprived of Greater Choice?

Recently a local newspaper speculated that in buildings where there are two service providers (one of them being PCCW) using their own access network then "Type II Interconnection" should not be mandatory. Wharf T&T cannot see why consumers should be subject to such restriction. Clearly with "Type II Interconnection" consumers in those buildings would be able to enjoy a choice of more than two service providers, why should their choice to enjoy greater benefits through greater competition be restricted? The suggestion of withdrawing "Type II Interconnection" in situation where there are two service providers with own network will lead to a duopoly situation, which will only undermine the interests of consumers.

"Type II Interconnection" Has Nothing to Do with the Amount of Investment

It is wrong to assume that the abolition of "Type II Interconnection" will force new operators to expedite their investments on construction of their networks. It is a fact that Hong Kong is a very congested city. Very often operators are not able to find adequate space to install their telecommunication facilities inside and outside the buildings. In Hong Kong there are many SMEs and residents who live in older, smaller buildings and remote areas who cannot access any alternative networks due to physical or economic constraints. For them "Type II Interconnection" is the only viable way to enjoy the benefits of choice of service providers.

Our study shows that in the Kwun Tong District where clusters of SMEs are located, more than 40% of all commercial lines have switched to Wharf T&T. If "Type II Interconnection" were abolished, 90% of these customers will be deprived of the right to choose their telephone service provider.

Consumers do not really need to have multiple sets of wire running into their homes or offices. It would be a total waste of resources to replicate the network in such a way. "Type II Interconnection" allows industry to rationalize and efficiently allocate scarce resources and invest appropriately, which will ultimately benefit consumers.

Network Coverage

The Government's review of "Type II Interconnection" policy has spurred much heated discussions and debates within the industry. It is necessary for the Government to assess objectively the number of consumers who would be affected if "Type II Interconnection" were abolished. Wharf T&T suggests that each fixed-line operator publishes its coverage by direct access and by "Type II Interconnection" and estimate the extent of each of its coverage in 3, 6 and 9 years' time if "Type II Interconnection" were abolished. Wharf T&T believes that if "Type II Interconnection" were withdrawn, the number of consumers without choices would soar to several millions.
Conclusion

The Telecommunications Authority has stated that, "if a customer connected to the end of a local loop exercised his or her free choice not to continue with the local access service supplied by the operator owning the loop, the piece of wire and the associated facilities constituting the local loop would immediately become idle. In addition, the construction of additional parallel local loops to serve the same customer amounts to wasteful duplication and could cause serious disruption and inconvenience to a number of end customers." (as per Statement No. 6 (Revised) on "Interconnection Configurations and Basic Underlying Principles" on 18 March 2002)

The above confirms the Government's view on "Type II Interconnection" which has been recognized as an effective tool to bring about choice, lower prices and range of services to consumers. Wharf T&T fully supports the continued availability of "Type II Interconnection" policy without any sunset period. Wharf T&T urges the Government to actively advance and facilitate the deployment of "Type II Interconnection" and to effectively counterbalance any anti-competitive maneuvers from the incumbent. Finally, Wharf T&T hopes that all organizations concerned will also seriously consider the rights of consumers and continue to make "Type II Interconnection" available.
About Wharf T&T Limited

Wharf T&T, licensed in 1995, is the fastest growing network operator after the opening of Hong Kong's fixed telecommunication market, owning the second largest fully fibre-optic network in Hong Kong. Since its launch, Wharf T&T has continually sought to upgrade its services and deliver competitive products at competitive prices to Hong Kong businesses and consumers.

Wharf T&T is a member of The Wharf Group, one of the largest groups of companies in Hong Kong. The Wharf Group also owns i-CABLE Communications Limited, the No. 1 Television Station in Hong Kong for News, Movies and Sports, as well as a leading Internet access service provider.

For further information about both Wharf T&T and The Wharf Group, please visit the Wharf T&T website at www.wharftt.com.

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