One of the influences affecting the periodic re-setting of the X factor is, inevitably, the ability of the company to make a reasonable rate of return on invested capital. It has been pointed out that if the X is frequently reset on this basis only, then the basis of regulation has effectively "degenerated" to the less desirable rate-of-return method.
Therefore a compromise is necessary in which the X factor
i. Is reset quite infrequently, i.e. at intervals of 5-10 years.
ii. Is set not only with regard to the firm's rate-of-return in previous
years but also such factors as the general cost trends in the industry worldwide.
This long term compromise may emerge both in the UK and USA. We see it as an appropriate basis for tariff regulation in Hong Kong also.
5.9.2 The regulation of the competitor, and other regulatory considerations
It has been the practice overseas, where competitive network carriers are permitted to enter the market, to subject them to the authority of the telecommunications regulatory institution but not to exercise control over tariffs. While MCI and other long distance competitive carriers in the United States are subject in principle to Federal Communications Commission (FCC) jurisdiction, but the FCC forbears from regulation of MCI tariffs. In the United Kingdom, the compliance of Mercury with its operating licence under the 1984 Telecommunications Act is subject to Oftel oversight, and Mercury must offer service under a tariff, but the level of the tariffs is not subject to control by any scheme analogous to the RPI-X formula governing many of BT's tariffs.
We consider similar arrangements to be appropriate in the case of any competitive telecommunications service provider in Hong Kong. The new network operator should be obliged to offer service under tariff, but the tariff level should not be controlled as are those of HKT. The requirement that service be offered under a published tariff is desirable because it limits the ability of the competitor to engage excessively in "cream skimming", i.e. the targeting of service only at those customers which represent the most profitable opportunities.
International experience also shows that it would be necessary to make quite complex arrangements for interconnection between the two networks. Our proposals in this regards are as follows:
that the second carrier and HKT share a relationship with CWHK which is on an equal footing in all respects, technical, service, and financial. In particular both would obtain the same proportion of revenue derived from each outgoing international call. The distribution of incoming traffic between these two carriers must be determined; this point would require more detailed consideration nearer the date of commencement of switched voice telephone service by the second carrier.
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