PCCW-HKT TELEPHONE LTD v. THE TELECOMMUNCIATIONS AUTHORITY

HCAL 63/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 63 OF 2004

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J U D G M E N T

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1.  This is the applicant’s application for judicial review against the decisions (“the Decisions”) of the Telecommunications Authority (“TA”) to issue:

(1)	a Statement dated 27 February 2004 entitled “the Review of the Principles and Costing Methodology of the Local Access Charge (“the February 2004 Statement”); and
(2)	a Determination dated 4 May 2004 regarding the levels of Local Access Charges to be levied by the applicant (“the Determination”).

Factual background

2.  The applicant is a Hong Kong company and is the holder of a Fixed Telecommunications Networks Service (FTNS) Licence issued under the Telecommunications Ordinance, cap. 106 (“the Ordinance”).

3.  The applicant is also a provider of External Telecommunications Services (ETS) in Hong Kong.  ETS are communications services between Hong Kong and destinations outside Hong Kong and include International Direct Dial (IDD) voice and facsimile services.

4.  Previously, all ETS were provided exclusively by Hong Kong Telecom International Limited (“HKIL”).  With the liberalization of the market on 1 January 1999, the TA had licensed many companies to provide ETS in Hong Kong.  As of 9 June 2004, there were 225 ETS providers.

5.  Most of the ETS providers do not have domestic or local telecommunications networks.  In order to reach the customers in Hong Kong, these providers have to interconnect their networks with the local networks owned by local FTNS licensees.  Including the applicant, there are at present a total of ten wireline based FTNS licensees, five of them have significant local networks.

6.  Before 1 January 1999, HKIL paid the local network operators a “delivery fee” for the delivery of IDD calls to and from the network of HKIL.  In anticipation of the competition in the ETS market consequent upon the liberalization of the market, the TA issued, after consultation, a Statement entitled “Local Access Charge and Modified Delivery Fee Arrangement” dated 25 November 1998 (“the November 1998 Statement”).

7.  Under the November 1998 Statement, ETS providers that do not operate a local network will pay Local Access Charges (LAC) to local FTNS operators.  The stated purpose of the LAC is to compensate the FTNS operators for the use of their local network facilities for the delivery of external traffic to and from customers in Hong Kong.  The November 1998 Statement also set out the principles and methodology for determining the LAC.   The LAC is intended to represent the costs that would be incurred if the ETS providers were to construct the local networks themselves.   Included in the calculation of the LAC is the costs of using the local loops, which are the customer access facilities.

8.  In the November 1998 Statement, the TA decided only to fix the LAC of the applicant, which at the time supplied 98% of all customer access lines in Hong Kong.  The November 1998 Statement was implemented by a determination dated 30 December 1998 issued under section 36A of the Ordinance. 

9.  As indicated in the November 1998 Statement, the determination was only in relation to the LAC of the applicant.  The TA takes the view that although the LAC of the other FTNS operators were not determined, there is the protection that the ETS providers could request, or the TA could on its own initiative make, a determination under section 36A if the level of LAC of the other FTNS operators are found to be out of line.   It is not in dispute that the applicant’s LAC has indirectly set the ceiling for all LAC.

10.  In 2000, the TA conducted a regular review on LAC.  After consultation, the TA issued a Statement entitled “Review and Methodology for Calculation of Interconnection Charges for Value-Added Services and Public Mobile Radiotelephone Services and Local Access Charges” dated 25 October 2000 (“the October 2000 Statement”).  The Statement concluded that the methodology for calculating LAC, including the inclusion of the local loop costs as a cost component, should be maintained, but the level of LAC should be reviewed.

11.  The October 2000 Statement was implemented by a further statement dated 28 June 2001 entitled “Review of Local Access Charges” (“the June 2001 Statement”).  Under the June 2001 Statement, the level of LAC was revised downwards.  Although the revision applied only to the applicant, the other FTNS operators agreed to and did revise the level of their LAC to be in line with the revised rate of the applicant.

12.  As a result of request from seven ETS operators, the TA conducted another review of the LAC in 2003, which leads to the present application.  On 1 September 2003, the TA initiated an industry consultation paper entitled “Review of the Principles and Costing Methodology of the LAC” (“the September 2003 Consultation Paper”).  The stated objective of the consultation is to conduct “a comprehensive review on the principles and the costing methodology of LAC” “in light of the rapidly changing market landscape, the innovation of technologies and the fact that the LAC regime has been in place for more than four years”.  Representations were invited on 15 questions.  Among them were whether the local loop costs should remain as a cost component for LAC and whether the existing methodology for calculating local loop costs was justified.

13.  The applicant considered the review was an extensive one that had policy implications.  It requested for an extension of time to respond to the September 2003 Consultation Paper.  In refusing to grant an extension, the TA refuted the applicant’s views that the review carried policy implications or represented a change in policy.  In the end, the applicant was granted an extension and its submission was lodged on 21 October 2003.  Among other things, the applicant stated that it did not accept it was a “dominant” local fixed line operator.  The applicant further stated that the local loop costs should remain included in the calculation of LAC both for reasons of principle and for practical reasons.

14.  The TA received a total of 18 submissions on the September 2003 Consultation Paper, including that of the applicant.

15.  On 27 February 2004, the TA issued the February 2004 Statement, one of the subject matters challenged in these proceedings.  The Statement set out the results of the consultation and concluded that the charging principles and costing methodology for the determination of LAC rates should remain unchanged, with the exception that the local loop costs should no longer be a cost component for LAC.

16.  The TA indicated in the February 2004 Statement that it would, based on the conclusions in the Statement, issue a section 36A determination on the levels of LAC applicable to the applicant.  The TA stated that it would publish a Preliminary Analysis of the level of LAC, based on data obtained from the applicant, and subject to comments from the industry on the Preliminary Analysis, it would finalize the determination.  

17.  The TA issued the Preliminary Analysis on 12 March 2004, setting out the preliminary views on the levels of LAC in accordance with the findings of the LAC review.  The revised level of LAC proposed in it applied only to the LAC of the applicant.  The TA invited submissions on why a determination should not be made and on the levels of LAC set out in the Preliminary Analysis.

18.  On 13 April 2004, the applicant filed its submission on the Preliminary Analysis under protest.  In the submission, the applicant reiterated the point that it was not the “dominant” operator in the market.  It also made the point that its LAC should not be regulated at all.  Including that of the applicant, the TA received a total of 9 submissions on the Preliminary Analysis.

19.  On 4 May 2004, the TA issued the Determination, the other subject matter challenged in these proceedings. The levels of LAC set out in the Determination were the same as those in the Preliminary Analysis.  They represent a 30% downward revision.  As in the past, the Determination is directed at and binds the applicant alone.  It was to be effective on 1 June 2004.   The Determination was accompanied by a Final Analysis, setting out the considerations of the TA in reaching the Determination. 

The application for judicial review

20.  On 27 May 2004, the applicant filed the Form 86A herein.  Hartmann J granted Leave to judicial review on the same day.  The Notice of Motion was filed on 9 June 2004.

21.  On the applicant’s application, Hartmann J also granted an interim stay of the Determination.  The TA’s application to set aside the interim stay was dismissed on 25 June 2004. 

22.  By summons filed on 3 September 2004, the applicant applied to amend the grounds for judicial review to add a new ground.  At the hearing of the judicial review application, with no objection from the TA, leave to amend was granted and the TA was given leave to file and rely on an additional affidavit. 

23.  By its Form 86A, the applicant seeks the following final relief:

(1)	An order of certiorari to quash the Decisions or either of them; and/or
(2)	A declaration that the Decisions or either of them is ultra vires; and/or
(3)	An order of mandamus to oblige the TA to reconsider the
	Decisions or either of them after consultation with the applicant in accordance with the law.

The grounds for the judicial review application

24.  A number of grounds were raised in the Form 86A.  At the hearing, however, only two grounds were argued, the second of which is the newly added ground.  They are:

(1)	The Decisions are unlawful because the TA lacks the power to make a determination under section 36A of the Ordinance concerning the LAC of the applicant alone on the ground that it considers the applicant to have a dominant position in the market.
(2)	The TA committed an error of law in failing to make a decision on whether the applicant remains dominant in the market, and that the TA had failed to comply with its obligation under section 36A(4) not to make a determination without giving the party concerned a reasonable opportunity to make representations and to consider the representations made.

Section 36A of the Ordinance

25.  The relevant legislative framework is contained in section 36A of the Ordinance.

26.  Under section 36A(1), the TA has the power to determine the terms and conditions of interconnection.  Section 36A(2) provides that such a determination may be made if the TA considers “it is in the interest of the public to do so”.

27.   Section 36A(4) provides:

“No determination shall be made under subsection (1) unless the Authority is satisfied that the parties to any arrangement for interconnection of the type mentioned in subsection (3D) have been afforded reasonable opportunity to make representations to him as to why a determination should not be made and the Authority has considered representations made before he decides whether or not to make such a determination.”

28.  Section 36A(10) further provides:

“In making a determination under subsection (1), the Authority shall give regard to-
	(a)	the Government's policy objectives for the telecommunications industry;
	(b)	consumer interests;
	(c)	encouraging efficient investment in telecommunications infrastructure;
	(d)	the nature and extent of competition among the parties to the interconnection concerned and their respective abilities to compete with each other fairly; and
	(e)	such other matters as the Authority considers appropriate in the particular circumstances of the case.”

The arguments and the core issue in dispute

29.  It is common ground that (1) historically the applicant had assumed a dominant position in the relevant market, (2) the TA had since the introduction of LAC, determined the LAC of the applicant alone, (3) the section 36A determinations made by the TA only bind the applicant, and (4) in the past, the other FTNS operators had adjusted their rates of LAC to be in line with the LAC level of the applicant.

30.  It is the applicant’s case that the TA decided to issue the Determination against the applicant alone because the TA considered or assumed that the applicant occupied or continued to occupy a dominant position in the market.  The applicant says that, at the very least, the substantial reason for the TA’s decision is the applicant’s perceived market dominance.  

31.  The applicant says that market dominance is not a legitimate consideration under section 36A.  The TA accepts that as a matter of law, it is not entitled to make a section 36A determination against the applicant alone on the basis of its dominance in the market.  There is a separate statutory scheme on market dominance under sections 7G and 7N of the Ordinance.

32.  The TA’s case is that the Determination was not to control or regulate the LAC of the applicant as a perceived dominant player in the market.  The TA contends that the Determination was merely to implement the findings of the review as set out in the February 2004 Statement.  It is said that the TA could have achieved the reduction of LAC in a number of ways, and that it is within its discretion to choose which operator(s) to be the subject of the LAC determination.  The TA says that it had decided to adopt the approach of determining the LAC of the applicant alone as setting the benchmark for the other FTNS licensees, out of practical considerations and administrative convenience. 

33.  In particular, the TA considers it is logical to continue the past practice of determining the LAC of the applicant alone, which was based upon its historical position as a dominant market player.  The TA also considers, in view of past experience, the applicant is a natural choice for issuing a determination so as to set the industry benchmark.  The TA therefore argues that the applicant was not chosen for its current dominance.  It is the TA’s submission that in deciding to make a determination of the LAC of the applicant, it had made no finding of dominance and it was not necessary to do so.

34.  Accordingly, the core and critical issue in the determination of this application is whether the TA’s decision to make the Determination was based on the market dominance of the applicant.  It should be noted at this juncture that the applicant does not accept that it has a dominant position in the market and that it is presently appealing to the Appeal Board on the TA’s finding of dominance.  The issue of market dominance is not a matter that this court needs or should be concerned with.

35.  Given the TA’s agreement on the ambit of the TA’s power under section 36A as mentioned in paragraph 31 above, if the applicant can show that the decision to issue the Determination is based upon its perceived market dominance, it will succeed on Ground (1) for the present application, and it will not be necessary to deal with the procedural challenge under Ground (2).   Conversely, if the applicant fails to make good its contention, then both Grounds for judicial review will fail. 

36.  The applicant submits that if it can establish that the TA was influenced by the consideration that the applicant had a dominant market position, it is not necessary for it to prove that this was the sole or even the dominant influence, and that it will be sufficient to prove that the influence was a substantial one that cannot be clearly disentangled from the other valid considerations.  Reliance is placed on R v. Broadcasting Complaints Commission, Ex parte Owen [1985] 1 QB 1153 at 1176-7.   The TA does not take issue with this.   

Ground (1) of the application

37.  In my view, the determination of the issue in dispute requires an analysis of the reasons given by the TA for issuing the Determination against the applicant alone, as stated in the Final Analysis, of which paragraphs 46 to 48 are particularly relevant, and in the evidence filed in opposition to this application, notably paragraphs 37 to 50 of the 1st affidavit of So Fat Foon.   

38.  It will appear from the reasons given by the TA for determining the applicant’s LAC that its decision was principally influenced by two considerations.   The first is the historical dominance of the applicant and the consequent practice of determining only the applicant’s LAC.  The second is the fact that the applicant’s LAC as determined by the TA has been largely followed by the other FTNS licensees.

39.  In my view, underlying the TA’s decision to follow the past practice of issuing a section 36A determination against the applicant alone must be its view or assumption that the applicant had not departed from its historical position of dominance in the FTNS market.  There would be no logical basis for the TA to follow the past practice and not to choose another operator as the subject of determination when admittedly the basis for the practice was the applicant’s dominant position in the market. The references in paragraphs 47 and 48 of the Final Analysis to the fact that the applicant had not been declared non-dominant, that the applicant is still considered dominant in the relevant local FTNS market and that market dominance is not a pre-condition for making a section 36A determination are illustrative of the point. 

40.  Although the TA had said it was not necessary and it had not taken a view on the applicant’s current dominance, the reality of the situation is that its decision to continue the past practice of only determining the applicant’s LAC was influenced by its belief that the applicant retains a dominant, hence influential, position in the market.  As said by the TA, experience has shown that the other FTNS operators will generally set their LAC at a level commensurate with that of the applicant as determined by the TA.   Plainly, the reaction of the other FTNS operators to the TA’s determinations in the past is a crucial factor in the deliberations of the TA.  In so far as the TA seeks to draw a distinction between the historical dominance of the applicant and its current dominance, it is a distinction without a difference. 

41.  As to the TA’s reason that the rates of the applicant’s LAC as determined, has served and continues to serve as the benchmark for the industry, it is based on the fact that the applicant’s market share in June 2004 was about 70% for both residential and business lines.  The TA takes the view that since the applicant’s network carries the largest volume of LAC traffic of all the FTNS operators, the applicant is a natural choice for the TA to set the benchmark for the industry.  

42.  In my view, significant market share and market dominance are inter-related considerations. As put in the 2^nd affidavit of Terence Cassells, high market share and the ability to serve as the industry benchmark are key factors in determining dominance.  Among other things, market share is part of the statutory criteria which the TA has to take into account in making a section 7L finding of dominance in a telecommunications market: see section 7L(2) and (3) of the Ordinance.

43.  If the applicant was not perceived to enjoy a dominant position in the relevant local market, it is difficult to understand why the TA would have considered it appropriate or necessary to determine its LAC for the purpose of setting the template for the industry.  It is the TA’s expectation that the other FTNS operators will follow the applicant’s LAC as determined.  As a matter of logic, the applicant’s LAC cannot serve as an effective benchmark for the industry, and the TA’s expectation will be unfounded, if the applicant’s market position is similar to the many other local FTNS operators.

44.  It follows from the above analysis that the applicant’s perceived market dominance is, at the very least, a substantial influencing factor in the TA’s decision to issue the Determination against the applicant alone.  In my view, it is the rationale underlying the decision.  Ground (1) of the application is therefore made out insofar as it relates to the Determination.  The reasoning however has no application to the February 2004 Statement, which is not a decision.  It only sets out the results of the 2003 consultation and LAC review.  At any rate, the Statement has become academic. 

45.  The TA accepts that the Determination cannot stand if Ground (1) is made out.  Given my conclusion on Ground (1), it is therefore not necessary to deal with Ground (2) of the application and the arguments associated with it, including whether the TA had acted in breach of section 36A(4) of the Ordinance.

Conclusion

46.  For the above reasons, the application for judicial review is allowed in respect of the Determination.  Applying the normal rule of costs follow event, I make an order nisi that the costs of these proceedings, save and except the costs of the amendment of Form 86A, be to the applicant against the respondent, to be taxed if not agreed.  As to the costs of the amendment, given that the newly added Ground (2) is in fact not necessary, and this is apparent from the submissions of the TA, I consider that the applicant ought to pay the TA’s costs of and occasioned by the amendment, to be taxed if not agreed.  There will be an order nisi accordingly.  There is also a certificate for two counsel.  Although the applicant had appeared by three counsel, I do not consider there are justifiable circumstances to certify it fit for three counsel.