Hong Kong: Type II Interconnection to be Abolished by 2008

Hong Kong's telecommunications regulator OFTA has announced its decision to abolish the mandatory Type II interconnection policy applicable to telephone exchanges for individual buildings covered by such exchanges by 30 June 2008, two years ahead of its original proposal. The announcement was made on 6 July 2004 in the "Statement of the Telecommunications Authority "Review of type II interconnection "(the "Statement").

The withdrawal of type II interconnection at the exchange level shall be gradual and will take place on a building-by-building basis commencing on 1 October 2004 and finishing by 30 June 2008. The first phase of the withdrawal shall apply to buildings having at least two self-built networks. A two-year transitional period shall be allowed for such buildings when mandatory Type II interconnection shall continue followed by a one year grandfather period to protect the regulated interconnection terms for lines connected during the transitional period. Type II interconnection at the exchange level will remain mandatory for buildings fulfilling the "essential facilities" criterion.

Since the liberalisation of the local fixed telecoms network services market in 1995, there has been an impressive rollout of self-built network by new entrants in Hong Kong. Nowadays, about 53% of buildings in Hong Kong have at least two self-built customer access networks. Such buildings will be the first for which mandatory Type II Interconnection at the telephone exchange level will be abolished. For other buildings PCCW, the dominant fixed line operator in Hong Kong, will have to allow access to the "last mile" to other operators until such time as the other operators build their own "last mile" connections.

The new time table for the phasing out of mandatory Type II interconnection at the telephone exchange level is much tighter than the original proposal by the Telecommunications Authority ("TA") last year which had envisaged a three year transitional period followed by a three-year grandfather period.

Roll-out of customer access network to 20% to 25% of buildings in Hong Kong is not viable for either technical or economic reasons. Recognising this, the TA has clarified in the Statement that after June 2008 he may need to mandate Type II interconnection in respect of such buildings if he is satisfied that PCCW's customer access network is "essential" for competition. Factors for consideration shall include whether such network can be duplicated and whether refusal to access will foreclose competition.

The Statement has also clarified that other types of mandatory Type II Interconnection, namely Type II interconnection at the street Level (ie at distribution points under the streets); and Type II interconnection at in-building level (ie interconnection to the in-building wiring) will be maintained.

The Statement has also clarified that the charging principles for Type II interconnection have not been reviewed and that the charging principles set out in TA Statement No.7 (Second version) of 18 March 2002 will continue to apply. However, under Section 36A of the Telecommunications Ordinance, the TA has the authority to revise such principles as and when the circumstances require.

It was also clarified in the Statement that mandatory Type II interconnection will not be extended to fibre-based customer access networks of fixed carriers.

Finally, despite lobbying on the part of service providers of wholesale access for regulation similar to the open network access regulation for the 3G operators, the TA has taken the view that market conditions do not yet justify such regulation. The rationale for this is that the new policy for Type II interconnection should lead to more self-built customer access networks being rolled out and this in turn should lead to increased competition in the wholesale market.

Hong Kong now has the distinction of being the first jurisdiction to announce the withdrawal of mandatory local loop unbundling. Of the world's developed economies it was only Canada that tried to abolish local loop unbundling in 1997 but backed away from the move in 2001 after reviewing the state of competition in their fixed carrier market.

The TA believes that the withdrawal of mandatory local loop unbundling in Hong Kong is a proactive, forward-looking and yet pragmatic decision, giving new impetus to industry players to invest in advanced networks and offer competitive services. This will lead to enhanced choices for consumers and will increase Hong Kong's chances of becoming a leading digital city. All eyes are now on Hong Kong.

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