TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 243

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flow in Hong Kong's case is from international services to local access and usage. The proportion of revenues arising from international calls which is retained by the local telephone company is set at 40%. proportion greatly exceeds the (marginal) cost of delivering the local portion of an international call. This subsidy is used to finance the provision of local access lines at low cost, and to finance the free use of the telephone network for all non-international calls.

The introduction of telecommunications services competition has complex implications for this pattern of subsidy. These are considered below.

5.7.1 The present cross subsidy position

Analysis of patterns of cross subsidy in a telecommunications network is always a complex and controversial matter. Many of the costs in a telecommunications network are incurred for the purpose of providing a variety of services, and the magnitude of calculated cross subsidy depends on the way in which these common costs are apportioned among services. For example, it is not possible for a customer to make an international call without first using the public switch telephone network to reach the international gateway. It might be argued therefore that the entire cost of the local network be attributed to international service, whereupon international service would no longer be defined as cross subsidising local service.

Analysis of these issues must be based on correct definitions of fixed and variable cost in a network. These two categories of cost are also termed "non traffic sensitive" and "traffic sensitive" respectively. The great majority of costs in a network such as that of Hong Kong are fixed in the sense that they do not depend on the number of calls which a customer makes. There are then additionally two elements of variable cost:

a variable cost associated with each call a customer makes locally

a variable cost associated with each international call

A tariff which truly reflected the cost structure in the Hong Kong network would contain three elements, reflecting these three elements of cost. Each customer would pay a large fixed price per month, related to the cost of providing a line to that customer but not depending on the number of local or international calls made. There would additionally be a small cost per local call (actually very small, in view of the cost structure of the network, and possibly not worth collecting), and a larger variable cost per international call.

Even with such a distinction between fixed and variable cost there is room for some dispute as to the extent of cross subsidy, due to difficulties in distinguishing among the cost elements. We present in Exhibit 5.11 a rough breakdown of the cost structure of the public switched telephone and the revenues collected for international versus local service.

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