PCCW - HKT TELEPHONE LTD v. THE TELECOMMUNICATIONS AUTHORITY

HCAL 6/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 6 OF 2007

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J U D G M E N T

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I. INTRODUCTION

1.  PCCW challenges the validity of a Direction issued by the Authority on 7 November 2006.

2.  The Direction required PCCW to secure interconnection between its network and that of Wharf T & T Ltd. in relation to the telephone number block “5804”.  Such interconnection would enable subscribers to a VoIP (Voice over Internet Protocol) telephony service offered by Zone Ltd. to call (and be called by) persons connected to PCCW’s network.  VoIP telephony is sometimes simply known as IP telephony.

3.  PCCW’s network is the largest in Hong Kong.  In practice, this means that Zone’s VoIP service would not be commercially attractive unless its subscribers could connect with PCCW’s customers.

4.  The Direction provided for the interconnection to be charged on an interim basis at the same level and direction as currently applied to traffic between PCCW and Wharf for end-users of a basic telephone service making use of numbers with the prefix “2” or “3”.

5.  The latter numbers are allocated to users of IP telephony services provided by PCCW and Wharf.  Currently, PCCW and Wharf charge each other for such services at LIC (Local Interconnection Charge) rates, whether or not the relevant calls are local (that is, whether or not the calls originate from or terminate in Hong Kong).

6.  LIC is to be contrasted with the higher LAC (Local Access Charge) typically payable to local operators by providers of ETS (external telecommunication services) involving connection with persons outside Hong Kong.

7.  The charge imposed by the Direction accordingly meant that all external traffic (that is, calls originating from or terminating at places outside Hong Kong) between users of Zone’s IP telephony service and persons linked to PCCW’s network would be charged at LIC and not LAC.

8.  The Direction explained that the charge imposed was “interim” in the sense that it could be varied in two ways.

9.  It could be varied through a later commercial agreement reached between PCCW and Wharf.

10.  But it could also be varied by a final determination of terms of interconnection (including charges) by the Authority at the request of PCCW or Wharf under Telecommunications Ordinance (Cap.106) (TO) s.36A.  In that event, the Authority could direct the retrospective application of the terms and conditions determined.

11.  PCCW complains about the Direction in 2 respects.

12.  First, PCCW argues that the Authority had no power to make the Direction.

13.  The Direction cited 3 provisions of the TO as justifying intervention by the Authority:-

(1)	TO s.36B(1)(a)(iii) which empowers the Authority to issue a direction to compel a licensee (such as PCCW) to “secure the connection of any telecommunications service”;
(2)	TO s.36B(1)(a)(i) which empowers the Authority to compel a licensee to “comply with any of the terms or conditions of its licence”; and,
(3)	TO s.32F(4)(c) which empowers the Authority to “issue directions in writing to require a licensee ... to ... observe the codes of practice issued by the Authority”.

14.  PCCW says that none of the 3 provisions were applicable here.  It concludes that the Direction was therefore illegal.

15.  Second, even if the Authority had power, PCCW says that the Direction was unreasonable, disproportionate, and contrary to numerous statements by the Authority that he would intervene only in the event of market failure.

16.  PCCW stresses that it was ready and willing at all times for its network to be interconnected through Wharf with Zone’s customers.  But PCCW says that it was not obliged to allow interconnection at any price.  PCCW has repeatedly insisted that Wharf should pay LAC (as opposed to LIC) on external traffic between PCCW’s customers and those of Zone’s IP service.

17.  PCCW highlights the Authority’s acceptance that, although once dominant in the Hong Kong telecommunications market, PCCW is no longer so.  The Authority does not suggest that, by insisting on LAC in its negotiations with Wharf, PCCW was abusing a dominant position.

18.  PCCW further notes that there is no evidence that, if made to pay LAC on Zone’s external traffic, Wharf could not pass such charges onto Zone or that Zone would go out of business from having to bear LAC.

19.  In those premises, PCCW contends that the Authority should have allowed it to negotiate a commercial settlement (however long a period of time that may take) for interconnection on such terms (including payment of LAC) as PCCW might see fit.  PCCW says that there was no basis for the Authority to intervene in the market by issuing the Direction and imposing LIC in the interim.

20.  In response to PCCW, the Authority says that it has jurisdiction under one or more of the 3 provisions cited in the Direction.

21.  The Authority further stresses the importance of ensuring that any point in a given Hong Kong network or service is interconnected with all other points in any other Hong Kong network or service.  This “any to any connectivity” (also known as “A2A”) is a cornerstone of the Authority’s policy.

22.  In the Authority’s view, a person connected to a network or service should be able to communicate with any person connected to some other network or service.  Otherwise, the Authority believes that Hong Kong consumers would not fully benefit from the liberalisation which has taken place in the telecommunications market.

23.  The Authority says that all the Direction did was to secure interconnection and enable Zone to commence a telephony service.  For the interim, the Direction specifies LIC as the operative rate.  But nothing (the Authority stresses) hinders PCCW and Wharf from subsequently agreeing LAC nor prevents the Director from later determining (upon a request from Wharf or PCCW or at the Director’s own initiative) that LAC is retrospectively and prospectively to apply to external calls made through Zone’s service.

24.  Thus, while there has been some intervention, it is (the Authority argues) no more than what was reasonably necessary to secure the important policy objective of interconnection.

25.  Further, the Direction (the Authority says) was not precipitously imposed on PCCW.  Wharf and PCCW had more than a reasonable time to negotiate charges for interconnection.  The Authority only intervened after months had passed with the parties still deadlocked in commercial discussions.

26.  Wharf first approached PCCW about interconnection with Zone’s service in early June 2006.

27.  From late June 2006 onwards Wharf complained about the failure of several network operators (including PCCW) to establish interconnection with Zone.

28.  The Authority wrote to PCCW about Wharf’s complaint on 18 July 2006.  He intimated that he would issue an interim direction unless PCCW effected interconnection with Zone by 28 July 2006.

29.  As at 21 September 2006 all networks other than PCCW had secured interconnection for Zone’s service.

30.  On 28 September 2006 the Authority sent a draft Direction to PCCW for comment.  PCCW did not make any substantive comments.  It merely stated that it was inappropriate for the Authority to intervene and asked for extensions of the time in which to respond in more detail to the draft Direction.

31.  The Authority finally issued its Direction (in similar terms to the September 2006 draft) under cover of a letter to PCCW dated 7 November 2006.

II. DISCUSSION

A. The allegation of illegality

A.1 The power under TO s.36B(1)(a)(iii)

A.1.1 Background

32.  TO s.36B provides as follows:-

“	(1)	Subject to subsection (2), the Authority may issue directions in writing:-
		(a)	to a licensee requiring it to take such action as the Authority considers necessary in order for the licensee to:-
			(i)	comply with any of the terms or conditions of its licence; or
			(ii)	...
			(iii)	in relation to any interconnection ..., secure the connection of any telecommunication services being the subject of its licence to:-
				(A)	any other telecommunications service being the subject of a licence granted under this Ordinance ...
	(2)	No direction shall be so issued under subsection 1(a)(iii) ..., unless the Authority is satisfied that the licensee or such person has been afforded reasonable opportunity to make representations to the Authority.”

33.  TO s.36B is to be contrasted with TO s.36A which provides as follows:-

“	(1)	The Authority may determine the terms and conditions of interconnection ...
	(2)	The Authority may make a determination on the request of a party to the interconnection or, in the absence of a request, if he considers it is in the interest of the public to do so.
	(3)	The terms and conditions in a determination may include any technical, commercial and financial terms and conditions that the Authority considers fair and reasonable.
	(3A)	Without limiting the general nature of subsection (3), the terms and conditions in a determination may include:-
		(a)	the level of, and the method of calculating the charges that any party will pay to another;
		(b)	the points at which interconnection is to be made;
		(c)	the technical standards for interconnection;
		(d)	the supply by any party to another of any element of a telecommunications network, system or installation;
		(e)	the supply by any party to another of any telecommunications or ancillary service;
		(f)	the supply by any party to another of any information necessary for the efficient planning and handling of services through the interconnection;
		(g)	the sharing of facilities ...
	(3B)	The charges in a determination shall be based on the relevant reasonable costs attributable to interconnection and, in determining the level, or method of calculation, of the relevant reasonable costs attributable to interconnection, the Authority may select from among alternative costing methods what he considers to be a fair and reasonable costing method.
		....
	(4)	No determination shall be made under subsection (1) unless the Authority is satisfied that the parties to any arrangement for interconnection ... 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.
	(5)	Written notice of a determination, or of the completion or adjournment of a determination process commenced, under subsection (1) shall be served personally or by registered post on the parties to the arrangement for interconnection or, in the absence of a concluded arrangement, the parties who in the Authority’s opinion would have been parties to the interconnection arrangement had it been concluded.
		....
	(10)	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 circumstances as the Authority considers appropriate in the particular circumstances of the case.”

34.  PCCW holds a Fixed Carrier (FC) Licence under the TO.  Zone holds a Serviced-Based Operator (SBO) Licence.  Wharf holds a Fixed Telecommunications Network Services (FTNS) Licence.  Unlike FC or FTNS licensees, SBOs do not have their own network.

35.  An SBO merely provides services.  It does not own the infrastructure over which those services are transmitted.

36.  In the case of Zone, it has to rely on Wharf’s network to act as a “host” for its services.

37.  To date, neither PCCW nor Wharf has sought a determination under TO s.36A as to final terms of interconnection in relation to Zone’s “5804” service.  The Authority has not initiated a TO s.36A determination on the matter either.

A.1.2 PCCW’s case on illegality

38.  Mr. David Pannick QC (appearing for PCCW) submits that the Authority has no power under s.36B(1)(a)(iii) to impose terms and conditions of interconnection.  He advances 3  arguments under this head.

A.1.2A  Main argument

39.  All the Director can do under s.36B(1)(a)(iii) (Mr. Pannick says) is to direct (“secure”) interconnection.  There was no need to do that here because PCCW was prepared to interconnect at all times with Wharf in relation to Zone’s service.

40.  What the Director cannot do under s.36B(1)(a)(iii) (Mr Pannick stresses) is to order that PCCW interconnect on any particular terms or conditions as to charge (whether or not interim).  The Director may only determine terms and conditions of interconnection under TO s.36A.

41.  Mr. Pannick accepts that TO s.36B does not explicitly limit the Authority’s jurisdiction to issue directions in relation to interconnection.  But, relying on the maxim that general statutory provisions do not cut down the ambit of more specific provisions, Mr. Pannick says that it would be odd if the Authority could avoid his obligations under TO s.36A by means of TO s.36B(1)(a)(iii).

42.  TO s.36A establishes a process which the Authority must undertake before he can determine terms and conditions of interconnection (including any charges for interconnection).  All parties agree that a s.36A determination is a lengthy, time-consuming procedure.  TO s.36A also sets out factors which the Authority must take into consideration before reaching a final determination.  Those details of procedure and consideration are absent from TO s.36B.  The legislature (Mr. Pannick submits) could not have intended the exercise of any power to secure interconnection under TO s.36B to serve as a means of circumventing or abbreviating the stringent requirements of TO s.36A.

43.  Thus, Mr. Pannick concludes that TO s.36B(1)(a)(iii) only mandates the Authority to direct interconnection (something which was unnecessary given that PCCW was fully willing to interconnect).  It does not authorise him to impose any terms or conditions of interconnection (the only matter in dispute between PCCW and Wharf).  If the Authority wished to direct interconnection on LIC terms (whether in the interim or otherwise), he had to undertake the full process of a TO s.36A determination.

44.  Mr. Pannick appreciates that his present argument on the relation between TO ss.36A and 36B(1)(a)(iii) runs contrary to his own submissions on behalf of PCCW in PCCW-HKT Telephone Ltd. v. The Telecommunications Authority HCAL No. 152 of 2002, 30 June 2004.

45.  In the latter case, Mr. Pannick successfully argued before Hartmann J that an interim direction to interconnect made under TO s.36B(1)(a)(iii) was unreasonable in not specifying any terms and conditions of interconnection.  Hartmann J consequently quashed a TO s.36B(1)(a)(iii) direction on the ground that it ought to have (but did not) specify essential terms (including charges) for a Type II broadband interconnection which the Authority had directed PCCW to effect with Wharf.

46.  Mr. Pannick is now contending that, contrary to his previous argument, the Authority had no power at all to direct interconnection under TO s.36B(1)(a)(iii)  on any terms.  However, Mr. Pannick says that (if he is right) the fact that a jurisdictional point was overlooked in the earlier case should not affect the outcome here.

A.1.2B  Alternative argument 1

47.  If his main argument is wrong, Mr. Pannick says that the power under TO s.36B must still be construed narrowly.  It can only be an ancillary power exercisable to preserve a status quo in the interim pending a lengthy final determination under TO s.36A.  There must be (Mr. Pannick suggests) a s.36A determination afoot, before the Authority can legitimately invoke this ancillary power to impose terms and conditions of interconnection.

48.  Since there has not been (and there still is no) TO s.36A determination in relation to Zone’s service, any interim jurisdiction under TO s.36B could not have been properly invoked by the Authority when making its Direction.

A.1.2C  Alternative argument 2

49.  In the alternative to his first 2 arguments, Mr. Pannick submits that the Authority could not lawfully impose LIC as an interim term of interconnection whatever his power under TO s.36B(1)(a)(iii).  This is because the imposition of LIC (Mr. Pannick says) contradicts:-

(1)	a TO s.36A determination made by the Authority on 30 December 1998; and,
(2)	Guidelines issued by the Authority on 18 March 2002.

50.  The December 1998 Determination and the March 2002 Guidelines provided for ETS traffic to be charged on an LAC basis as between local network operators (such as Wharf and PCCW).  The 2  documents defined ETS traffic as including external IP telephony services.

A.1.3 Evaluation of PCCW’s case

51.  I am not persuaded by Mr. Pannick’s submissions on TO s.36B(1)(a)(iii).

A.1.3A Main argument

52.  I do not think that Mr. Pannick’s main argument is right for 3 reasons.

53.  First, TO s.36B(1)(a)(iii) expressly authorises the Authority to impose terms and conditions of interconnection when making a direction.

54.  In PCCW-HKT Telephone Ltd. Hartmann J (at §86) noted that the power under TO s.36B(1)(a)(iii) was to direct that a licensee take such action as the Authority “considers necessary” to secure interconnection.  This means (Hartmann J reasoned) that there is “a discretion to the Authority to decide in each instance what is or is not necessary” to secure interconnection.

55.  In some cases the Authority may take the view that a simple direction to interconnect will be enough to secure a result.  If so, it might not be necessary to impose any terms and conditions.

56.  But, in other cases, the Authority may decide that it is necessary to require that certain action be taken to secure interconnection.  The Authority may then impose terms and conditions on a licensee in order to effect such action and so secure interconnection.

57.  Second, in PCCW-HKT Telephone Ltd. Hartmann J emphasised that the discretion under TO s.36B(1)(a)(iii) did not undercut the ambit of TO s.36A.  For example, he stated:-

“	110.	In my judgment, the intention of the legislature must be read by looking more broadly to s.36A and B.  S.36B empowers the Authority to direct interconnection.  This is a jurisdiction given to the Authority to exercise in the public interest.  It may be necessary, having regard to the speed of technological developments, to direct interconnection at what in all the circumstances is reasonably short notice.  But, as I have earlier indicated, there is nothing in either section to suggest that the direction must be coupled with terms and conditions.  To the contrary, in making a determination under s.36A in respect of terms and conditions the legislature, in order to ensure fairness has laid out what must be recognised as a full process of consultation and consideration.  A determination of terms and conditions therefore may be a lengthy process while interconnection made in terms of a direction issued pursuant to s.36B may be a reasonably short process.
	111.	It follows, in my view, that if the Authority is to ensure fairness between a licensee who is required by a direction to give interconnection and a licensee who is to benefit from that interconnection, unless he is able to set interim terms and conditions then the purpose of the Ordinance will be undermined....”

58.  I agree with Hartmann J.  TO s.36A and s.36B(1)(a)(iii) are complementary.

59.  Given (for instance) that a determination under TO s.36A is time-consuming, it must be open to the Authority pending such process to impose interim terms, including terms of charge.  Those temporary terms would constitute part of the action which the Authority considers necessary fairly to secure prompt interconnection between relevant networks.

60.  The discretion under TO s.36B(1)(a)(iii) to direct whatever action is considered necessary in the interim could not then derogate from a power to arrive at a final determination of terms of interconnection under TO s.36A.  The discretion is merely being exercised to maintain the status quo pending a final determination.  The discretion’s existence in no way offends against the maxim identified by Mr. Pannick.

61.  Third, Mr. Pannick’s main argument does not take account of the force behind the words “secure connection” in TO s.36B(1)(a)(iii).

62.  Consider the implications of Mr. Pannick’s argument. 

63.  Licensee A refuses interconnection with Licensee B. On B’s complaint, the Authority directs A to “secure connection”. A responds that he is prepared to effect interconnection but on condition that B pays unit charges of $x.  B, however, maintains that $y (y being less than x) is the reasonable charge.

64.  If Mr. Pannick is right A would not have to interconnect pending further negotiation with B or a lengthy s.36A determination.  Interconnection would not be “secured” for some time to the detriment of Hong Kong consumers, especially the customers of A and B.

65.  Such result would emasculate TO s.36B(1)(a)(iii).  The immediate securing of interconnection can, on Mr. Pannick’s case, always be forestalled by negotiations over appropriate terms and conditions.

66.  If Mr. Pannick is right, it is hard to see any practical utility to the Authority’s power under TO s.36B(1)(a)(iii) to secure interconnection.  This would be despite the use of the strong word “secure” in relation to the effecting of interconnection.  That cannot have been what the legislature intended.

67.  Mr. Pannick suggests that the above example is unrealistic.  A (Mr. Pannick says) would not attempt to hold B to ransom by proposing an exorbitant unit charge of (say) $1 billion.

68.  In the real world (Mr. Pannick submits) unless A is in a dominant position, it would not be in A’s interest to impede interconnection with B’s customers.  A is thus likely only to ask for what A deems to be a reasonable charge.  There would be no basis for the Authority to interfere in such case of normal competitive bargaining.

69.  If, on the other hand, A is abusing a dominant position by demanding an outrageous rate, there would be other provisions in the TO (Mr. Pannick observes) to counter such wrongful practice.  Examples of those provisions would be TO ss.7K (prohibition of anti-competitive practices), 7L (prohibition of abuse of dominant position) and 7N (prohibition against discrimination).

70.  The latter provisions would deal adequately with the scenario where A attempts to hold B to ransom.  It would therefore be wrong (Mr. Pannick contends) to construe TO s.36B to deal with a situation which was unlikely to arise in the ordinary course and which was adequately catered for elsewhere in the TO.

71.  I do not find Mr. Pannick’s response convincing.

72.  I am not simply thinking of the situation where A holds B to ransom with an outrageous negotiating position.  In my example, A and B might each have valid reasons for regarding $x or $y as an appropriate charge.  If each maintained his position, there would be little alternative to breaking the deadlock other than through a protracted negotiation or TO s.36A determination.

73.  Absent any textual indication in s.36B to the contrary, I do not see why that provision should be construed narrowly as not being available to deal with this perfectly plausible scenario.  If the Authority (as he does) takes the policy view that interconnection should be effected at the earliest opportunity for the benefit of consumers generally, he should be able to make use of the power under TO s.36B(1)(a)(iii) to secure a speedy interconnection on interim terms.

A.1.3B Alternative argument 1

74.  Nothing in TO s.36B(1)(a)(iii) suggests that the exercise of the power thereby conferred is only ancillary to an ongoing TO s.36A determination.  I do not see, for instance, why a determination may not be interim or ancillary to ongoing negotiations over the appropriate charge rate for interconnection.

75.  Mr Pannick argues that, since no one has commenced a s.36A determination in relation to Zone’s service, the November 2006 Direction is permanent in practical effect.  He therefore suggests that the Direction is an attempt to secure a final determination without going through the strict requirements of TO s.36A.

76.  I do not accept that characterisation of the Direction.

77.  The Direction goes out of its way to stress that it is interim in 2  respects.  First, it is interim pending any future agreement on terms and conditions between Wharf and PCCW following negotiations.  Second, it is interim pending any future s.36A determination which might be commenced by PCCW, Wharf or the Authority.

78.  If PCCW is unhappy with the interim charges imposed by the Direction, it can itself request a final determination under TO s.36A.  I do not think the fact that it has so far opted not to do so, somehow makes the Direction “permanent” despite clear words to the contrary.

A.1.3C Alternative argument 2

79.  I do not think that the 1998 Determination and 2002 Guidelines constrain the Authority’s power under TO s.36B(1)(a)(iii).  Here I agree with the submission of Mr. Nicholas Green QC (appearing for the Authority).

80.  When the Authority sets interim terms under TO s.36B, he must by the nature of the exercise be doing so with an eye to the future, whether it be the outcome of ongoing negotiations or a later TO s.36A determination.

81.  The November 2006 Direction is forward-looking in character.  Nothing in the texts of TO ss.36A or 36B restricts the Authority to following previous determinations or guidelines when directing interim terms or conditions in the exercise of his power under TO s.36B.  The Authority is empowered and duty-bound to make a fresh decision in light of actual market conditions at the time of his direction.

82.  No doubt the Authority may take into account the existence of the 1998 Direction and 2002 Guidelines.  Those are relevant circumstances or precedents.  But he is not bound to follow them in 2007 if (say) he believes that market conditions have changed since 1998 or 2002 or if his views on the true nature of IP telephony services have changed over the intervening period.

83.  In other words, if the Authority believes that what he said about IP telephony in 1998 or 2002 was wrong, it would be odd if he were now still required to issue a direction in precisely the same terms as the 1998 or 2002 documents.

84.  The evidence is that the Authority has in fact altered his opinion on the appropriate way of dealing with IP telephony charges.

85.  In the 1998 and 2002 documents, the Authority thought that operators should be charged LAC for external telecommunications via IP telephony.

86.  But in a statement dated 20 June 2005 (the VoIP Statement) entitled “Regulation of Internet Protocol (IP) Telephony” the Authority signalled a change of thinking.

87.  The Authority there referred to the situation where IP telephony traffic is carried over fixed networks.  He noted the practical difficulty of identifying whether such traffic was local or external for the purposes of charging LAC.  He doubted, however, whether in any event it was appropriate to charge LAC for any such external IP telephony traffic identified.

88.  More specifically, he said:-

“	51.	Some respondents to our Consultation Paper consider that it is necessary for the TA to review the existing LAC charging mechanism and methodology in order to cater for the IP-based environment.  However, the TA considers that the existing charging principles for LAC are set up based on a circuit-switched network model while IP Telephony services are carried over packet-switched networks.  In interconnection between circuit-switched network and packet-switched networks, a gateway will be involved.  In this regard, the existing LAC charging principles will remain unchanged over the circuit-switched interface of the interconnection gateway and the per minute LAC will continue to be calculated according to the cost of the circuit-switched network facilities invested in routing the external traffic and the volume of the external traffic involved.  Some FTNS operators said that external traffic carried over IP networks should also be captured for LAC payment -- the IP addresses of the IP telephony traffic can be checked and recorded to determine whether the call is generated from overseas or not.  The initial view of the TA is that this proposal which seems technically feasible may not be a practicable and cost-effective solution for operators to adopt in order to identify such traffic.  Nevertheless, the TA welcomes any further view on this when conducting an overall review of the existing LAC regime and methodology in future.
	52.	The TA notes that interconnection arrangements between IP-based networks have their inherent mechanisms for fair compensation of the participating network operators and so far there has been no need for the regulator to intervene in the interconnection arrangements between IP-based networks.  As such, there appears to be no need for the equivalent of the LAC mechanism to be developed for the IP-based environment.”

89.  The Authority expanded on his doubts about the correctness of charging LAC for external IP telephone calls in a later statement entitled “Service-Based Operator (SBO) Licence” dated 6 January 2006.

90.  He said:-

“	Local Access Charge
	10.	As regards the concern over external traffic ‘disguised’ as internal traffic, the TA notes that one of the characteristics of the IP telephony service is that the telephone number is not necessarily assigned to a fixed location but may permit the use of the service in a nomadic way, i.e. at any location as long as a broadband connection to the Internet is available.  Given such a special feature of IP telephony services, prohibiting users from using Hong Kong numbers at places outside Hong Kong would restrict the users from benefitting from the full capabilities of the new technology, and would not be practicable and enforceable.  A local telephone number can be taken as an ‘address’ on a local network and it represents a ‘network terminating point’ at a local place.  In the situation where the phone assigned with this local telephone number is used in a place outside Hong Kong, it is just that this local network terminating point is linked to the phone in a place outside Hong Kong through the Internet, which is quite similar to the ‘external extensions’ arrangement for a ‘direct exchange line’.  Following this, a more realistic and practical approach that would not restrict users’ benefits is to classify communications between phones using Hong Kong telephone numbers as local calls, even though it may be possible that one or both parties to a telephone call is/are physically located outside Hong Kong.
	11.	In considering whether external traffic carried over IP networks should be captured for LAC payment, the TA expressed his initial view in the VoIP Statement that the proposal of checking the IP address of the IP telephony traffic to establish whether the traffic was external might not be a practicable and cost-effective solution (paragraph 51 of the VoIP Statement).  In any case, the telephone numbers concerned are numbers for the end-users not providing a public telecommunications service.  These numbers should be distinguished from numbers used as access to public telecommunications services and other types of services, such as calling card account services and ICFS [International Call Forwarding Services].  In the VoIP Statement, the TA also indicated there that he would ‘[welcome] any further view on this when conducting an overall review of the existing LAC charging regime and methodology in future’.  The TA will include this issue n the review of the LAC charging regime and methodology that he may initiate in the future.”

91.  The Authority’s changed views on the inappropriateness of charging LAC for external IP telephony services are of course only tentative.  There will be a future consultation on the issue.  But, in the mean time, it must be open to the Authority to reflect his present views in the interim terms and conditions set by the Direction.

A.2    The power under TO s.36B1(a)(i)    

A.2.1 Background

92.  TO s.7A provides:-

“The Authority may attach special conditions, consistent with this Ordinance and not inconsistent with the prescribed general conditions, to a licence he is empowered to issue, including special conditions on a carrier licence in addition to the prescribed general conditions and which special conditions are to be interpreted subject to the prescribed general conditions.”

93.  PCCW’s FC Licence contains the following special conditions:-

“	3.	REQUIREMENTS FOR INTERCONNECTION
	3.1	The licensee shall interconnect the service and the network with ... other fixed carriers or fixed telecommunications networks and services licensed under the Ordinance...
	3.2	The licensee shall use all reasonable endeavours to ensure that interconnection is effected promptly, efficiently and on terms, conditions and at charges which are based on the licensee’s reasonable relevant costs attributable to interconnection.”

94.  Special Condition (SC) 3 appeared in nearly identical form in PCCW’s earlier FTNS licence.  In the latter document, it was General Condition 13.

A.2.2 PCCW’s case on illegality

95.  Before a direction can be issued under TO s.36B(1)(a)(i), there must be some failure to comply with a term of one’s licence.  There was (Mr. Pannick contends) no such failure here.

96.  PCCW complied with SC 3.1 (Mr. Pannick says) because it was prepared to interconnect its network with Zone’s IP telephony service.

97.  On the other hand, Mr. Pannick suggests that there could not have been a breach of SC 3.2 because that clause only requires PCCW to use “reasonable endeavours” to ensure interconnection.  The obligation under SC 3.2 is not absolute.  It cannot have been unreasonable for PCCW, especially in light of the 1998 Determination or 2002 Guidelines, to have insisted that interconnection be on LAC payment terms for external traffic.

A.2.3 Evaluation of PCCW’s case

98.  In my view, the Authority was entitled to issue the Direction under TO s.36B(1)(a)(i).

99.  SC 3.1 is categorical.  It requires PCCW to interconnect.

100.  I do not think that it is an answer to the duty under SC 3.1 for PCCW to say that it is prepared to interconnect, subject only to an agreement to pay LAC.  If that response were to be treated as sufficient compliance with SC 3.1, it would undermine the mandatory nature of the obligation imposed by the condition.  The clause does not say that PCCW “shall interconnect subject to condition,” but simply that PCCW “shall interconnect”.

101.  I do not think SC 3.2 derogates from the generality of the obligation to interconnect under SC 3.1.

102.  Contrary to Mr. Pannick’s submission, I believe that SC 3.2 is to be read as comprising 3 obligations.

103.  First, there is an obligation to “use all reasonable endeavours to ensure that interconnection is effected promptly”.

104.  Second, there is an obligation to “use all reasonable endeavours to ensure that interconnection is effected ... efficiently”.

105.  Third, there is an obligation to “use all reasonable endeavours to ensure that interconnection is effected ... on terms, conditions and at charges which are based on the licensee’s reasonable relevant costs attributable to interconnection”.

106.  SC 3.1 imposes a general duty to interconnect.  The first part of SC 3.2 identifies how soon any interconnection must take place.

107.  With the best will in the world, interconnection may not be achievable forthwith.  There may, for example, be technical or other engineering problems to overcome before the physical interconnection of networks can be achieved.

108.  What the first and second obligations in SC 3.2 do is to forestall the use of such problems as an excuse to delay interconnection.  On the contrary, a licensee “shall use” all reasonable endeavours to achieve prompt and efficient interconnection.

109.  The third obligation restricts a licensee’s entitlement to payment for interconnection to “charges ... based on ... the licensee’s reasonable relevant costs attributable to interconnection”.  The licensee cannot charge whatever he wants.  Instead he is subject to an obligation to charge no more than his reasonable relevant costs.

110.  The third obligation implies that PCCW has a right to be paid for interconnection.

111.  But it will be noticed that, strictly, the language of SC 3.2 is that of imposing obligations, rather than conferring rights.  It would be odd, I think, if such language were now to be read as giving a licensee the right to suspend its overriding obligation to interconnect under SC 3.1 except upon agreement on appropriate charges.

112.  In fact, the third obligation says nothing about a licensee having such a right to suspend.  The third obligation merely stresses the duty to use reasonable endeavours to ensure interconnection is effected on terms, conditions and charges reflective of reasonable relevant costs and no more.

113.  It may be that SC 3.2 allows a reasonable amount of time for discussion over what a licensee’s reasonable charges may be. The allowance of some such time may be implicit in the acknowledgment in the first and second parts of SC 3.2 that interconnection may not be forthwith, but can be within a period consistent with the use of “reasonable endeavours” in all relevant circumstances.

114.  But this does not mean that PCCW can delay its overriding duty to interconnect under SC 3.1 indefinitely pending negotiations over what an appropriate charge for interconnection may be.  Just as PCCW’s main argument on the limits of TO s.36B(1)(a)(iii) would have robbed that provision of its force, so its unduly restrictive reading of the obligations in SCs 3.1 and 3.2 would emasculate SC 3.1 of practical effectiveness.

115.  Here it seems to me that the Authority could validly take the view that, in all the circumstances, the 5 months from June to November 2006 over which PCCW and Wharf negotiated charges was well in excess of the time by which reasonable endeavours would have ensured interconnection.  Accordingly, in my judgment, the Authority was entitled to treat PCCW as being in breach of its obligations under SCs 3.1 and 3.2 and to issue the Direction.

A.3 The power under TO s.32F(4)(c)

A.3.1 Background

116.  TO s.32F concerns the Authority’s powers in relation to a numbering plan.

117.  Under TO s.32F(3)(b) the Authority may “issue codes of practice relating to the use of numbers and codes in the numbering plan”.  TO s.32F(4)(c) allows the Authority to direct a licensee to observe any codes of practice so issued.

118.  The current “Code of Practice Relating to the Use of Numbers and Codes in the Hong Kong Numbering Plan (Cap.106)” (as revised on 3 March 2006) states (in §9) that operators should observe a number of principles.  Principle (e) is in the following terms:-

“[U]nless otherwise specified in this [Code of Practice] or specifically approved by the TA, all numbers and codes in the Hong Kong Numbering Plan should allow ‘any-to-any communication’ i.e. a calling party can reach a called party by dialling the number or code of the called party, irrespective of the networks (mobile and fixed inclusive) used by the calling party and the called party and irrespective of whether the calling party is calling from overseas or from a local station.”

A.3.2 PCCW’s case on illegality

119.  Mr. Pannick submits that the Authority had no power to issue a direction under TO s.32F(4).

120.  He says that the Code of Practice and the Authority’s power to enforce it relate specifically to the Hong Kong numbering plan.  The power to enforce the Code does not extend to the duty to interconnect or the power to determine terms and conditions of interconnection.  Those matters are expressly dealt with in TO ss.36A and 36B.

A.3.3 Evaluation of PCCW’s case

121.  Here I agree with Mr. Pannick.

122.  First, if the Authority had no jurisdiction to issue the Direction under TO s.36B(1)(a)(i) or (iii), it would be strange if the TO nonetheless enabled him to issue such direction through the promulgation of a Code of Practice under TO s.32F.

123.  The Code of Practice would at best be a form of subsidiary legislation.  If the Authority did not have power under primary legislation (the TO) to issue the Direction, he could not vest such power in himself through subsidiary legislation passed by him.

124.  Conversely, if the Authority already had such power under the TO, the promulgation of the Code of Practice could not add anything to that already existing power.

125.  Second, in any event, it seems to me that principle (e) of the Code of Practice simply states that telephone numbers and codes used in Hong Kong should have the attribute of allowing any-to-any connectivity.  The principle does not import any further duty to interconnect not already imposed by the TO or an operator’s licence.

126.  Thus, I do not believe that TO s.32F(4) (read with Code of Practice principle (e)) confers on the Authority any further jurisdiction to direct interconnection not already vested in him by TO ss.36A and 36B.

A.4 Conclusion on illegality

127.  The authority had power to issue the Direction under TO ss.36B(1)(a)(i) and (iii).  He did not have any additional power to direct interconnection under TO s.32F(4) and Code of Practice principle(e).

B. The allegation of unreasonableness

B.1 PCCW’s case

128.  Mr. Pannick has drawn my attention to numerous public remarks by the Authority to the effect that he will typically only intervene in the telecommunications market where he perceives that market forces have failed or are likely to fail.

129.  Mr. Pannick accepts that such statements may not, as a matter of law, amount to an unambiguous statement giving rise to a legitimate expectation.  But he suggests that it is not necessary for him to argue that a legitimate expectation has arisen.

130.  Instead Mr. Pannick points to the following matters in addition to the Authority’s remarks:-

(1)	There is no evidence that Wharf could not absorb interim charges on an LAC basis for the interconnection of Zone’s service.
(2)	There is no evidence that Wharf could not pass on such interim LAC charges to Zone.
(3)	There is no evidence that Zone would be squeezed out of the telecommunications market by having to pay interim LAC charges.
(4)	In light of the 1998 Determination and 2002 Guidelines, it could not be said that PCCW was unreasonably insisting on LAC.
(5)	In any event, the Authority has reached no conclusion as to whether it is reasonable or unreasonable for PCCW to insist on LAC as the price for interconnecting Zone’s service.
(6)	It is accepted that PCCW no longer occupies a dominant position in the Hong Kong telecommunications market.

131.  On the basis of the above, Mr. Pannick submits that it was unreasonable for the Authority to have intervened in the market at all by issuing the Direction.  He should instead have allowed the parties to proceed with commercial negotiations as they saw fit and permitted the market to take its course.

132.  Further, according to Mr. Pannick, if Wharf or Zone were unhappy with the slow progress of negotiation on charges for interconnection, the remedy was in their own hands.  Either of them could always initiate a TO s.36A determination.

133.  Intervention in the market by means of the Direction not being justified by any evidence of a market failure, the Authority’s conduct can only be characterised (Mr. Pannick concludes) as unreasonable, irrational or disproportionate.

B.2 Evaluation of PCCW’s case

134.  I am unable to accept Mr. Pannick’s argument.

135.  As Mr. Green submits, the burden is on PCCW as the applicant in a judicial review to establish that the Direction is unreasonable or irrational.  PCCW must satisfy me that no Authority properly advised would have issued the Direction.  I do not believe that this test of unreasonableness is met.

136.  The Authority issued the Direction in order to ensure that PCCW complied with its overriding duty under the TO and SC 3.1 to interconnect.

137.  That being the case, it is not relevant to speculate on whether there has or has not been a market failure justifying intervention.  Nor was it relevant for the Authority to look into (or present evidence on) whether Wharf or Zone could bear LAC on an interim or any other basis.  Neither of those matters is actually at issue here.

138.  The question in the present case is whether the Authority could reasonably take the view that PCCW had failed to comply with its duty to interconnect.  I have already mentioned that, in my judgment, in light of the lapse of time since interconnection was requested by Wharf, the Authority could validly take such view.  Accordingly, he was entitled (indeed duty-bound as regulator) to issue the Direction to ensure that PCCW complied with its obligation to interconnect.

139.  Insofar as the interim terms of the Direction were concerned, the Authority had to make a judgment call.  Wharf and Zone were prepared to pay LIC, while PCCW wished to charge LAC.  In the event, without prejudice to future negotiations or a TO s.36A determination, the Authority decided to impose the same rates as were currently being charged by PCCW and Wharf on their own IP telephony services.

140.  I cannot say that such decision by the Authority was in any way disproportionate.  His priority was to secure prompt interconnection by PCCW, while preserving the status quo (and keeping an open mind) on appropriate rates.

141.  The Direction was undoubtedly an intervention.  But (as Mr. Green noted) it was of the lightest possible and justifiable in light of the Authority’s policy on interconnection.

142.  I add that, given PCCW’s obligation to interconnect promptly and efficiently, the possibility of Wharf or Zone requesting a s.36A determination is not apposite.  A s.36A determination will take time.  It will not by itself lead to a prompt and efficient interconnection consistent with PCCW’s obligations under the TO and its FC Licence.

III. CONCLUSION

143.  PCCW has failed to establish either illegality or unreasonableness in relation to the Direction.  Its judicial review is dismissed.

144.  There will be an Order Nisi that PCCW pay the Authority’s costs, such costs to be taxed if not agreed.