TNAG-2247-FCO40-3230-Business-interests-in-Hong-Kong-Cable-&-Wireless-1991 — Page 117

6.b) Scheme of Control Policy

6.5 The Scheme of Control essentially exists in Hong Kong to prevent the potential abuse of monopoly power. If a full liberalisation policy is not pursued, however, we are recommending the replacement of the current return on shareholder funds arrange- ment with a price capping arrangement. The advantage of this system is that it can help to remove the existing tariff imbalance on domestic services while ensuring the transfer of international benefits to the end-user. We suggest an RPI (Retail Price Index) plus formula for domestic, which would continue until the current level of cross- subsidy has been eliminated (this would mean an eventual increase in domestic subscriptions of 32%). On international services we suggest an RPI minus formula. We are also recommending a one-time decrease of 13%. This ensures that the net effect on the majority of residential users is beneficial, because there need only be an 11% decrease in IDD to neutralise the effect of the increase in line-rental charges from the termination of the cross-subsidy. In fact, the benefit would be slightly greater than

this because the international tariff decline would be immediate, whereas the cross-

subsidy removal would be introduced over time.

6.6 We believe price-capping is preferable to other forms of control because it is the one least subject to distortion, a point increasingly acknowledged by regulators in both the UK and US (see Exhibit 19). A return on assets formula, for instance, could encourage over-investment and would not provide incentives to HKT to reduce its costs. Moreover, a strong case exists for establishing clear rules about pricing policy. This will help HKT, HKTI, the competitors and customers in allowing them to plan their investment in communications with greater confidence.

Exhibit 19: International Regulatory Comparisons

U.K.

"In July, 1988, when the Director General announced his agreement with BT on an inland price cap, he said he decided not to propose the introduction of a price cap on international telephone calls but to rely on increases in competition to provide protection to the customer...keeping the area under review looking for indications of abuse of monopoly power. However, the rate of return over the ensuing three years was over four times that for the controlled services. As a result, the Director General has agreed with BT that its licence should be modified to limit increases in the main price cap to RPI-6.25 and that international services should be included within the cap. BT has also agreed to reduce its prices for international calls by 10 percent as soon as possible."

Competition and Choice: Telecommunications Policy for the 1990s-Department of Trade and Industry

U.S.

"The Commission confirmed the conclusion that incentive based regulation is superior to rate of return for the regulation of dominant carriers. The Commission concluded that a system of regulation that "capped” prices, but not profits, of companies would provide incentives to those companies to improve management of underlying costs and increase responsiveness to consumer demand."

FCC Docket 87-313, In the Matter of Policy and Rules Concerning Rates for Dominant Carriers, released February 8, 1991