July 1996

Introduction

1. The HKCSI welcomes the opportunity to consider and comment on the OFTA consultation paper on pricing structure of local fixed telephone services. This paper sets out the HKCSI's views following consultation among the Coalition.
2. The current flat-rate system has served Hong Kong well. Although the usage pattern is skewed with the result that a large number of users are indirectly subsidising a small number of heavy users, the system has the undoubted advantage of simplicity. It is acceptable to the public at large. There has been no complaints of unfairness, and no strong public demand for a review of the pricing structure. In short, there is apparently no problem that requires fixing.
3. Notwithstanding the above, we agree with the Telecommunications Authority (TA) that there is a need to look ahead in light of the very rapid development in recent years of the use of the telephone for other communication purposes. In the broader context, both government and industry have been promoting the use of the "information superhighway". The HKCSI has consistently been arguing for the case of a "national information strategy" for Hong Kong to promote more widespread and effective use of communication and information technology. We have emphasised that Hong Kong must not lag behind in the movement towards greater use of technology and communication, in order to maintain its competitiveness vis-a-vis regional economies. Hong Kong should be prepared for more extensive uses of our telephone network for non-voice communication and software driven applications. The present usage pattern will not remain unchanged.
4. But the more widespread use of communication and information technology will have far reaching cost implications for the telephone network. The capacity of the whole system will have to be enhanced, thus calling for greater investment from the telecom carriers and higher prices for users. If additional investment is not made and capacity is not increased, there will be more clogged lines and jammed networks, which is not acceptable for a communication-dependent territory. We cannot encourage more widespread use of communication but at the same time tolerate a deterioration of its quality. The TA is therefore right to anticipate the problem and encourage public discussion about possible solutions.

Principles

5. We believe consideration of the pricing structure should be guided by the following, some times conflicting, principles:
   1. Use of the telephone network for non-telephone (or non-voice-only) communication is not only a practice to be accepted, but should be encouraged in light of the more widespread development of information technology and communication.
   2. The quality of the telecommunications system must not be allowed to deteriorate in the face of greater use of the network.
   3. The user-pay principle is preferable not only because it is fairer, but also because it encourages more efficient use of the system.
   4. To the extent that it is consistent with the "user-pay" principle, the current simple flat-rate system should be maintained as far as possible. To change it would call for a major change in dialling habit, with considerable social cost. Besides, in the promotion of Hong Kong as a business centre, the image of "free local calls" has become an asset which it will be unwise to dispose of.
6. Having regard to the above principles, it is our view that an attempt should be made to find a fair pricing system that would cater for the increased use of the telephone network, encourage efficiency, enhance competition by enabling new entrants to compete effectively in the market, as well as accommodate the simplicity of the present system. Conceptually, a compromise solution could be envisaged by dividing telecom services into "basic" and "enhanced services" - which to some extent is already being practised. The simple solution will then be to retain the present flat rate for basic services, while applying the user-pay principle to enhanced services.

Evaluating the proposed options

7. Applying the above principles, it is clear Option (B) as proposed by OFTA is not acceptable. Under this option, if the quality of telephone service is to be maintained, prices will have to be increased across-the-board to provide for additional capacity, or there has to be more cross-subsidisation from non-local telecom services. The former case will be extremely unfair on the majority of small-volume users, while the latter approach would encourage inefficient uses of the telephone network, and distort competition in the wider market of telecom and IT services. Hong Kong could hardly afford such inefficiency if it were to continue to stay ahead in the region.
8. In theory, Option (C) would be ideal as it is based on the user-pay principle. However, it is contrary to the prevailing dialling habit of the community. If, as anticipated, the additional pressure on the telephone network comes mainly from the more "advanced" uses such as computer and IT, it may be unfair to pass this pressure - in the form of a change in dialling habit - onto the average telephone user. Without a flat rate as a benchmark, Hong Kong also risks losing its reputation as a cheap telecommunications hub even though average prices may not be higher.
9. Option (A) may appear to be closest to our suggestion of dividing services into "basic" and "enhanced", but we cannot support it for the following reasons:
   1. There is, in fact, a conceptual difference between Option (A) and our proposed division between basic and enhanced services, in that under Option (A) the user-pay principle applies only to services regulated through a PNETS license. There will conceivably be a considerable amount of non-PNET traffic of the nature of "enhanced" rather than "basic" services (e.g. two computers permanently linked up through software and modem for a commercial or recreational application) . These will not be subject to the user-pay charging. They will add to the burden of the system without contributing to the cost.
   2. With regard to the flat-rate charging, maintaining the status quo will not only perpetuate the cross-subsidy between light and heavy users, but demand greater cross-subsidisation between local and international services. Such inefficiency cannot be sustainable economically in the long run. It will eventually lead to underinvestment in the local networks, which will not be in the interest of the consumer.

Recommended option: Option (D)

10. Ideally, we would prefer a pricing mechanism which combines a fixed rate charging for basic services and a usage-based charging for enhanced services. In practice, however, it would be extremely difficult to make a distinction between basic and enhanced services. While some services are clearly of a basic nature, such as ordinary telephone calls, and others may be clearly of an enhanced nature, such as telemarketing, there is a considerable grey area where concensus is not easy, for example, ordinary fax. The distinction between basic and enhanced services will be even more difficult as new products and services emerge in ever greater number.
11. One way of overcoming this difficulty in practice is to assume that the user of enhanced services are more likely to be a heavier user than the ordinary user of basic services. While the distinction between basic and enhanced services can be controversial, that between light user and heavy user is not.
12. Taking account of the above, Option (D) would appear to be the best compromise. It contains both a flat rate element as well as a per-usage option, and is capable of distinguishing between light users and heavy users, hence also giving the consumer a freedom of choice. It encourages the greater use of the telecommunications network but at the same time provides a rebalancing of the pricing system without aggravating the inefficiencies of cross-subsidisation.
13. The setting of the flat rate is critical in ensuring the success of the scheme. In our view, the $90 per month for residential lines and $120 for business lines as suggested by the OFTA consultation paper is reasonable. Although the $90 level for residential lines still falls below the average cost of the network ($103 per month), a significant rebalancing will be achieved which will be conducive to the development of more efficient and competitive services. For the average-to-heavy users, a $21 premium over the existing charge of $69 per month is not excessive for unlimited calls and thus maintaining the current dialling habit. For the light users who opt for a per-usage pricing system, while they will lose the simplicity and convenience of a flat-rate system, it is not unreasonable to expect them to adjust to a per-usage system which enables them to pay less.

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