On 28 February 2004, OFTA, the Telecommunications Authority, Hong Kong’s national regulator, issued a consultation paper on draft Telecommunications Authority Guidelines relating to Anti-Competitive Conduct in Telecommunications Markets in Hong Kong (the “Draft Guidelines”). The Draft Guidelines will replace the “Guidelines to Assist the Interpretation and Application of the Competition Provisions of the FTNS Licence” issued in 1995.
The Draft Guidelines explain how OFTA applies and enforces the anti-competitive conduct provisions of the Telecommunications Ordinance. The anti-competitive conduct provisions prohibit:
- conduct by licensees where that conduct has the purpose or effect of preventing or substantially restricting competition in a telecommunications market (section 7K of the Telecommunications Ordinance)
- abuse by a licensee of a dominant position (section 7L)
- conduct by a licensee involving discrimination between persons who acquire the services in the market where that conduct has the purpose or effect of preventing or substantially restricting competition in a telecommunications market (section 7N)
The Draft Guidelines explain, in particular, the matters the Telecommunications Authority will take into account when deciding whether any conduct has the purpose or effect of preventing or substantially restricting competition in a telecommunications market.
Under the Draft Guidelines, the burden of proving an infringement of the anti-competitive conduct provisions rests with the Telecommunications Authority and it is required to decide on the basis of the evidence available whether it is more likely than not that the conduct in question constitutes a breach of one of the prohibitions.
The competition test
The Telecommunications Authority is required to assess whether a licensee’s conduct has the purpose or effect of preventing or substantially restricting competition in a telecommunications market.
Where the Telecommunications Authority considers that conduct has as its purpose the prevention or substantial restriction of competition, it is not necessary for him to opine whether the conduct actually had that effect. The Telecommunications Authority is only required to consider the effect of particular conduct if its purpose is not clear. Purpose refers to the objective meaning and purpose of the conduct when considered in its economic context and is to be determined at the time the conduct occurred.
In considering whether conduct has the effect of preventing or substantially restricting competition, the Telecommunications Authority will consider the state of competition in the relevant market and compare that to the nature and extent of competition that would exist in that market but for the conduct in question.
The test for deciding whether competition is substantially restricted requires both quantitative and qualitative assessments. Following the UK House of Lords case of R v. Monopolies and Mergers Commission ex p South Yorkshire Transport Ltd  1 WLR 23, Hong Kong’s Telecommunications (Competition Provisions) Appeal Board has held  that a restriction of competition will be substantial if it is large enough to be worthy of consideration. The Appeal Board continued that the effect must be at least significant but need not be big.
Markets will generally be defined in four dimensions, namely:#
- product or service, i.e. the goods and/or services supplied or purchased,
- geographic, i.e. the geographic area to or from which the goods and/or services are supplied or purchased
- functional, i.e. the level in the production or distribution chain at which the goods and/or services are supplied or purchased
- temporal, i.e. the supply or purchase of goods with reference to time
Following the case of Coca-Cola v. Commission  All ER (EC) 460, the Telecommunications Authority’s view is that, while previous market definition cases can be informative, they should not be regarded as binding with respect to future decisions.
Specific types of anti-competitive conduct
Section 7K(3) of the Telecommunications Ordinance provides that anti-competitive conduct may include an agreement, arrangement or understanding. The Telecommunications Authority considers that, in order for there to be an agreement, there must be something binding in law and enforceable by the parties whereas something less (i.e. a meeting of minds and a consensus as to what is to be done) will be sufficient for an arrangement or understanding to exist.
Specific types of anti-competitive conduct include price fixing agreements, action that prevents or restricts the supply of goods or services to competitors, agreements between licensees to share markets, collusive tendering, bundling and tying, the giving or receiving of an undue preference or unfair advantage, information sharing agreements the purpose of which is to eliminate or substantially restrict competition, the establishment and maintenance of trade associations where the rules of membership are exclusionary and vertical agreements that contain anti-competitive terms.
Dominance and abuse
Under section 7L(2) of the Telecommunications Ordinance, a licensee is in a dominant position when it is able to act without significant competitive restraint from its competitors and customers. This definition indicates that a licensee will be in a dominant position if it has substantial market power.
Dominance is more likely to exist where the licensee has a persistently high market share. The Telecommunications Authority considers that a licensee with a market share persistently above 50 per cent may, in the absence of contrary evidence, be considered dominant. In addition, the Telecommunications Authority considers it unlikely that, unless factors exist that suggest otherwise, a licensee with a market share of less than 40 per cent will be individually dominant.
Market share is an important factor but does not, on its own, determine whether a licensee is dominant. For example, the Telecommunications Authority will also consider the licensee’s power to make pricing and other decisions independently of competitive pressures, the barriers (both structural and strategic) to other players entering the market, the degree of product differentiation and sales promotion and past conduct.
Section 7L(5) of the Telecommunications Ordinance identifies certain types of conduct as conduct that may have the purpose or effect of preventing or substantially restricting competition, and which would thereby be deemed abusive. This includes predatory pricing, price discrimination, unfair terms, bundling and tying and discrimination in the supply of services to competitors. The Telecommunications Authority also considers that the following other types of conduct may be an abuse of a dominant position: cross subsidisation, leveraging dominance into upstream and downstream markets, excessive pricing, price squeezing and refusal to supply.
In addition to discriminatory conduct that might fall within sections 7K and 7L of the Telecommunications Ordinance, the following types of conduct are also likely to concern the Telecommunications Authority: the imposition of different terms or conditions of supply, discrimination relating to access and the provision of discounts that do not reflect underlying cost differences.
Responses to the consultation paper should reach OFTA by 26 April 2004.
PCCW-HKT v. Telecommunications Authority, Appeal No. 4 of 2002