Topics on Promotion of Competition in Communications Market

Fundamental Philosophy

1. Utilization of information communications technology
   As the econo-societal structure in Japan changes with the approach of the 21st century, topics important to our country will include qualitative improvement in the lifestyle of the citizens, as well as the maintaining and strengthening of economic vitality. As means to these ends, it is extremely effective to utilize rapidly progressing information communications technology which forms an infrastructure for the lives of citizens and for industrial activities. This also contributes to making the public sector more efficient, including the area of government administration.

2. Movement toward competitive environment
   In order to promote the utilization of information communications technology, it is essential to promote competitiveness in all fields in the communications market, to make communication charges even less expensive, and to diversify communication services. However, the current state of the Japanese communications market is such that although the fruits of competitiveness are beginning to appear, the local communications markets essentially remain in a monopolistic state. This is one factor inhibiting improved convenience in terms of both costs and service. Accordingly, preparing an environment in which competition functions in these monopolistic markets is one very important topic in communications administration.
   To this end, it is essential to ease or eliminate regulations which hinder competition, as well as to formulate clear rules for promoting competition. In recent years, progress has been made in easing entry regulations and in eliminating market division in the communications field under the "regulation easing promotion plan", but in order to further execute easing of regulations and eventually entrust the field to competition based on the market principle, it is necessary to formulate clear rules which remove the arbitrary actions of government administration.

3. Importance of interconnection rules
   Among the rules used to promote competition, interconnection rules between carriers are especially important. Through these, fair competition conditions are determined, and competition for not only local communication markets but the entire communications field will be promoted. This point is also emphasized in the "Outlook on the Future of the Information Communications Market" compiled by the Federation of Economic Organizations (Keidanren) in January of this year, but using the opportunity afforded by the "Proposed Basic Rules for Interconnection" (hereafter called the Proposed Basic Rules) issued some time ago by the Special Committee to Promote Interconnection of the Telecommunications Council, we would like to clarify further our opinions relating to the problems of interconnection rules and the promotion of competition in the local communications markets.

I. Promotion of Competition in Local Communications Markets

1. Promotion of various forms of competition
   Conventionally, the local communications markets, particularly the subscriber lines, have had a strong natural monopoly and have been thought to be difficult to enter. However, (a) from the standpoint of the user, it makes no difference whether or not the carrier providing the service has itself installed the lines, and it is possible to achieve competition by other carriers using the facilities and functions, and (b) in addition, if the fact is considered that although very few in number, there are carriers which themselves have installed the line facilities directly connected to users and which provide service, promotion of competition in various forms should be boldly pursued by the advancement of technological improvement and the easing of restrictions without adopting the premise of a monopoly. Through this, it is anticipated that wireless systems and non-wireless systems, portable systems and fixed systems, land-based systems and satellite systems will be seamlessly integrated in the future, and that an environment will be realized in which the user is not even aware of through what facilities the service is provided. Basic competition forms at the present time are, first, a form in which a carrier competes by installing line facilities itself; second, a form in which a carrier competes by using a portion of the line facilities and functions of other carriers; and third, a form in which a carrier competes by leasing and reselling line facilities and services of other carriers. It is anticipated that a carrier will compete by selecting and combining the desirable forms on the basis of that carrier's strategy.

2. A carrier competing by installing line facilities itself
   It is predicted that by eliminating market divisions such as between international and domestic calls, and longdistance and local calls, and in the future by eliminating so-called demand-supply adjustment provisions, the number of carriers entering the local communications markets will increase. The possibility is growing that competition will be fostered. However, the market is still essentially in a monopolistic state due to the difficulty in securing routes for installation of line facilities and the magnitude of the cost of installation.
   In the case of installing non-wireless lines, the greatest problem is securing routes. Accordingly, it is essential to liberalize access to telephone poles and conduits through rational and non-discriminatory conditions, and to ease regulations governing utilization of roads and rivers. For this purpose, it is necessary to position promotion of competition in the local communications markets as a national policy theme, and for this to be dealt with by the central government, local government entities and concerned carriers together.
   In addition, in the case of installing wireless lines, the largest obstacle is the limited nature of radio waves, and it is essential to develop technologies in order to utilize more effectively the frequencies that are usable at present as well as develop new frequencies. In this vein, we would like to draw attention to the fact that the promoting of structuring of the "subscriber wireless access (wireless local loops)" system has been suggested in "Topics of Information Communication Policy and Coping in the Future" (hereafter referred to as the "Policy Vision") published by the Ministry of Posts and Telecommunications some time ago.

3. A carrier competing by using a portion of the line facilities and functions of other carriers
   As possible forms wherein a carrier competes by using a portion of the line facilities and functions of other carriers, under current administration, there are two methods--connection and business consignment. At present, the interconnection method is as a principle left to negotiations between carriers, but because mutual profits tend to be reciprocal, the negotiations tend to not proceed smoothly and problems arise such as the negotiations becoming prolonged. This kind of problem appears particularly in interconnections with a carrier which has an essential monopoly on the subscribers' lines. Concerning business consignment through a type I telecommunications carrier, business consignment is, with rare exceptions, not seen because the type I telecommunications carrier as a principle has installed the line facilities itself and provides the service, and in reality, this practice is limited to international telecommunications carriers and mobile communications carriers.
   Accordingly, it is necessary to quickly create rules relating to interconnection between carriers, and to reevaluate the principle of facility ownership by type I telecommunications carriers and the present state of business consignment.
   On this point, we would like to draw attention to the fact that the Ministry of Posts and Telecommunications has suggested "promotion of flexible utilization of other carriers' facilities" in "Policy Vision".

4. A carrier competing by leasing and reselling other carriers' line facilities and services
   Under current government administration, telecommunications carriers are divided into type I telecommunications carriers which have installed line facilities themselves and provide service, and type II telecommunications carriers, which encompasses all other entities conducting telecommunications carrier business. The type II telecommunications carriers lease lines from the type I telecommunications carriers, and provide value-added services by connecting computers or the like to these lines. Additionally, through the complete liberalization of public interconnections, the simple reselling of basic audio services has become possible. Through this, the difference between the type I telecommunications carriers and the type II telecommunications carriers has disappeared. However, at present, the two groups' charges and conditions for providing service are handled under differing regulations, creating a problem with regard to impartial competition.
   In addition, for the type I telecommunications carriers, reselling is not recognized under facility ownership principles, and it is impossible to compete by flexibly constructing networks using reselling.
   Accordingly, it is necessary to reevaluate the division of carriers into type I and type II.
   Furthermore, it is anticipated that the resale business will become more active if wholesale charges are implemented, the implementation of which is also being considered in the Proposed Basic Rules.
   Moreover, if the above measures are implemented, there is also the point of view that the incentive to install line facilities and provide service will be weakened, but for the time being, it is thought that recognizing a variety of forms of competition has priority.

In part II below, we state our opinions regarding rules for interconnection, which are essential to carriers which compete by using a portion of other carriers' line facilities and functions.

II. Promotion of competition through smoothing interconnections
-- Centering on comments on the proposal by the Special Committee of the Telecommunications Council --

Fundamental philosophy on interconnection rule formulation

1. From the standpoint of the user, it is important that "it is possible for anyone to send communications at low cost from anywhere at any time, and that communications can be received anywhere". In addition, from the standpoint of the carrier, it is important that if desired "conditions are arranged so that all services can be provided to all users". From these vantage points, in a market which differs from the era of a single long distance carrier having a monopoly and instead has a multiplicity of competing carriers, mutual interconnections are indispensable, and it is necessary to foster an environment which enables and smooths interconnections among the all carriers.

2. In order to arrange fair competition conditions, the guarantee must be made that as a principle the usage conditions for the case where one carrier uses its own facilities and functions to provide service and the usage conditions when other carriers connect to a carrier's facilities and functions to provide service are the same. In addition, conditions must be such that when a new carrier enters the communications market, or when an existing carrier provides a new service, it is possible to determine beforehand whether or not it will be possible to connect with reasonable cost and timing.

3. From the above vantage point, we wish to state our opinions about the "Proposed Basic Rules for Interconnection" which was announced some time ago. In formulating the interconnection rules, the Telecommunications Council first clarifies the philosophy at the proposal stage, and we highly praise the fact that a wide range of opinions from citizens was sought.
   Furthermore, we would like to have it announced how, in the final collecting of the report, each of the various opinions was reflected in the current Proposed Basic Rules, and if an opinion is not reflected, the reason for this. So doing not only guarantees the transparency of the procedure, but we firmly believe is also indispensable in improving the reliability and efficacy of the rules. It is our hope that in the future, decisions will be made using these transparent procedures concerning not only items for which details should be determined and items which should continuously be examined but also for rules used in promoting competition.

4. In addition, in maintaining the reliability and efficacy of the rules, it is essential to reevaluate the rules appropriately and in a timely manner in accordance with changes in the business environment, such as progress in competition and the development of mobile communications. To this end, procedures for reevaluations should be clearly defined beforehand.

Compulsory interconnection

1. From the vantage point of enabling and smoothing interconnections between all carriers, compulsory interconnection is necessary. In doing this, we find it proper that, taking as a premise the current division of carriers into type I and type II, "all type I telecommunications carriers" should be targeted, as put forth in the Proposed Basic Rules, and furthermore, certain of these carriers should be given additional obligations. However, it is necessary to consider whether or not those of the type I telecommunications carriers which are smaller than a certain carrier size should be excused from meeting this obligation.
   In addition, from the vantage point of trying to make interconnections more swiftly, determining a standard period of time for negotiations between carriers should be considered.

2. A fundamentally important item in promoting competition particularly in the local communications markets is fair conditions for facilities and functions which are essential to providing service but which are difficult to install, and moreover, making it so that these can be used at a reasonable cost. In the Proposed Basic Rules, the subscriber lines are considered to pertain to the abovedescribed facilities, and a designated carrier is defined as "a fixed communications carrier having subscriber lines on a scale exceeding 50% of the total subscriber lines in a set market (prefecture)."
   Concerning this, first, we think it reasonable that the range of designated carriers is defined using subscriber lines as the criterion. However, concerning the definition itself, the basis for this should be clarified after further consideration. In addition, in the Proposed Basic Rules, the range of facilities which are the suitable target of the special rules is defined as "facilities, out of those owned by the designated carriers, which cover almost all prefectures and are comprised integrally with the subscriber lines," but the actual facility should be clearly stated in this definition.

Special rules regarding designated carriers

1. We think it reasonable that as one special rule, elucidation is sought for conditions such as unbundling of functions and structural elements of essential facilities, appropriate interconnection charges on the basis of interconnection accounting, and the provision of interconnections at points on all essential facilities among those where interconnection is technically feasible, and the obligation to create an agreement and table of charges, as in the Proposed Basic Rules.
   In addition, not only the facilities and functions but also the charge system should be unbundled in conjunction with this, but by so doing, costs become more transparent, and it is thought that this will make it easier to judge whether to enter the business or start a new service.

2. Concerning the portability of telephone numbers, the designated carriers should not formulate a plan of implementation, but rather actual rules including the present state of expense burdens should be considered. In addition, for access to add-on services such as free dialing and for securing dialing parity (making the number of digits uniform), it is necessary to make the philosophy clear.

Procedures for determining charge tables and agreements

1. In determining the charge tables and agreements, it is important to guarantee transparency and to go through procedures which have rational contents even to other carriers in order to secure reliability and efficiency as a rule. From this vantage point, we think that giving third parties including other carriers the opportunity to express their opinions and the opportunity to file complaints is proper, along with the Basic Proposed Rules idea of providing application materials to the general public.
   Concerning the opinions of third parties including other carriers and the opinions of designated carriers with respect to these, these, including an actual name list, should be made public from the vantage point of securing transparency. In addition, it should be clearly stated that authorization will be given immediately if there are not opinions from third parties, and when authorization is not given, the reasons for this should be made public.

2. In the Proposed Basic Rules, for interconnection pacts between other carriers which are not under a charge table and agreement, the premise is that these are subject to authorization as is conventional, but we think it is sufficient to secure transparency and fairness and make interconnections swiftly by making the interconnection pacts public.

Interconnection accounting system and calculation of interconnection charges

1. As is pointed out in the opening statement of the Proposed Basic Rules, in determining the basic rules of interconnection, it is necessary to take action which takes into consideration the asymmetry of information regarding costs. Conventionally, the response to asymmetry of information was not adequate, and consequently, there is criticism to the effect that "costs which are not associated with interconnection may be imposed" and "the allocation of interconnection charge costs may be arbitrary", as in the Proposed Basic Rules, and this has become a source of friction between designated carriers and other carriers. In order to resolve this current situation, it is essential for an accounting system for interconnection to be prepared and for interconnection charges to be calculated on the basis of this, as pointed out in the Proposed Basic Rules.

2. The framework for interconnection accounting must be a framework which guarantees that the usage conditions when one carrier uses its own facilities and functions to provide service and the usage conditions when other carriers connect to a carrier's facilities and functions to provide service are the same, as stated in the basic philosophy in part II, section 1. On this point, we think it reasonable that the Proposed Basic Rules considers it appropriate that the essential facilities management division provides the essential facilities under the same conditions to the sales division of the carrier itself and to other carriers.
   Through the establishment of an interconnection accounting system, we think that it will become possible to secure fair competition conditions between designated carriers and other carriers, but it is necessary to clarify the philosophy concerning the relationship between interconnection accounting and the necessity of current financial accountability of each operation division of NTT which was introduced for reasons of fair competition.

3. In addition, we find it reasonable from the standpoint of making the range of costs suitable that in recording expenses, the method which enables "reversion to expenses reflecting association with interconnection" is used.
   In the Proposed Basic Rules, it is proposed that the ABC method be introduced as the method of addition of common costs and indirect costs, but for basic methods, further consideration is necessary such as clarifying the pros and cons of each method.

4. Furthermore, in order to reduce interconnection charges and also enable the lowering of user charges, not only should the designated carriers be obligated to make information public and bear the responsibility of adducing evidence, but a system should be established which gives an incentive for the designated carrier itself for streamlining the cost of essential facilities.
   On this point, we consider it proper that the Proposed Basic Rules suggest the direction of improving the method of complying with the conventional comprehensive cost method. However, although we are trying to give further consideration to the long-run incremental cost method proposed by the U.S. and UK, we would like to have scheduling of this method more clearly established. Interconnection charges hold the key to promoting competition in the future communications markets, and hence the creation of a model through the long-run incremental cost method should be started promptly.

5. In the Proposed Basic Rules, a method of calculating the interconnection charges on the basis of the existing facilities of designated carriers is appropriate on the premise of interconnection accounting, but this method is inadequate in terms of reducing costs. In the Proposed Basic Rules, it is stated that "it is appropriate for the Minister of Posts and Telecommunications, in granting his authorization of tariffs, to properly employ the system in the manner that should not include in the interconnection charge costs, costs derived from significant inefficiencies in the operation of the designated carriers' essential facilities", but there is the fear that non-transparent interference by administration will result contrary to shift to administration based on transparent rules. From this fact also, it is necessary to attempt to reduce regulation costs and secure the transparency of administration while also promoting designated carriers' streamlining efforts by creating a model on the basis of future costs such as in the long-run incremental cost method, or by introducing incentive regulations such as a price cap system. By so doing, it is anticipated that interconnection charges can be lowered, and these merits can be returned to the user also.

State of the interconnection-related expense burden

1. The Proposed Basic Rules take into consideration the fact that the current NTT network is not necessarily structured assuming interconnections. We can praise the fact that a philosophy is stated concerning the present state of the burden of expenses such as interconnection establishment and "structural expenses of the network created in order to provide the basic interconnection functions (costs, etc. for providing the interconnection interface and costs for unbundling the structural facilities)."

2. In Keidanren's outlook in January of this year, it was stated that the cost of preparing a standard interface for interconnection should be borne by the designated carriers. On this point, we find it proper that the Proposed Basic Rules first handle "structural expenses of the network created in order to provide basic interconnection functions" as "expenses created in general in facilities for improving structure", that is to say, when the designated carriers bear the burden of structural expenses as functions which the network should have, the recovery of these costs is discussed.
   However, in the Proposed Basic Rules, concerning the present state of recovery, it is suggested that "recovery should be in the form of interconnection charges and user charges from users of the facilities which were improved", but on this point, the form should be the following.

   1. As "expenses created in general in facilities which are improved", the sales division of the designated carriers as well as the other carriers, which use these facilities, should bear the burden fairly with the same interconnection charges.
   2. Whether or not the sales division of the designated carriers recover these expenses as user charges should be at the discretion of the designated carriers in this case.

Handling of interconnection between multiple carriers

Through the increase in the number of carriers, it is predicted that in the future cases of interconnection between not just two carriers but among multiple carriers will increase in number. In the Proposed Basic Rules, through the formulation of general rules relating to interconnection, such as making the above-described interconnections obligatory, and the creating and authorizing of arbitrary charge tables and agreements, a smooth response is enabled even in those cases, but there is also the philosophy that "conditions with other carriers are covered by contracts between two adjacent carriers", and simple procedures should be determined.

Relationship between mutual interconnection and business consignment

In the Proposed Basic Rules, it states that "concerning the state of physically connecting networks permanently, application of interconnection systems should be enabled", but, for example, when an international telecommunications carrier consigns the domestic communications business, this should be done so as to not create problems in terms of fair competition with other carriers.
Concerning the state of business consignment, the philosophy should be structured in combination with the relationship such as reevaluating the division of carriers into type I and type II and the principle of type I telecommunications carriers owning the facilities.

State of debt burden

Concerning debts in designated carriers' service, this should not be made to be a burden on other carriers, as stated in the Proposed Basic Rules.
Supposing that this debt-plagued service were to be regulated as a universal service, the state of a neutral burden on competition in order to maintain the universal service should be considered.

III. Elucidating the Schedule for Competition based on Market Principles

1. Through the formulation of interconnection rules, the groundwork has been prepared so that all carriers can compete to provide better services with lower charges. What is sought next is further improvement in convenience for users in terms of charges and services, and the elucidation of a schedule for easing regulations governing this, in particular the easing or eliminating of regulations on charges and agreements.

2. Even in this case, in order to promote fair competition, regulations for NTT which are stricter than those for other carriers should be imposed with a time limit, and the regulations should be eased or eliminated in accordance with progress in competition. From the above standpoint, for carriers other than NTT, basic services which have deep implications on the economics and lifestyle of citizens should be a reporting system, and for services under other competitive environments, regulations should be eliminated. For NTT, for services which are basic services with deep implications on the economics and lifestyle of citizens and for which competition is inadequate, a price cap system should be introduced, and services under competitive environments should be handled basically the same as other carriers.
   In addition, regulations regarding items other than fees and agreements for NTT should be incrementally eased or eliminated in accordance with progress in competition, and it is necessary to prepare an environment such that carrier management can be conducted dynamically and independently under competition.
   In addition to the above, elucidating a schedule with the intention of fundamentally reevaluating the framework for competition such as reevaluating the division of carriers into type I and type II is also essential in making the communications markets more active.

3. In conjunction with this, it is necessary to also consider the state of the burden of universal services. To this end, first the range of the universal service and the attendant cost should be made clear, and then the state of the competition-neutral burden should be determined.

Conclusion