[ Keidanren ] [ Policy ]

Comment on the First Draft Report of the Telecommunications Council

November 30, 2000

Information and Telecommunication Committee
Japan Federation of Economic Organizations (Keidanren)

1. Basic Thinking

This is the most important key for the people and the industry in Japan to enjoy the benefit of the rapidly advancing information technology. Whether the government of Japan can - and has the will to - create a free and fair competitive environment in the telecommunications market. Today, the industry of this country faces increasingly fiercer competition on world markets, and the people take ever-keener interest in the Internet. Their demand for low-cost and diversified telecommunication services has been mounting. They want telecommunication carriers with
In order to strengthen international competitiveness of Japan's telecommunication carriers, they must not to rely on government's protective regulation and policy, rather, they must to build up their own technological competence and capacity to meet the needs of customers and changes occurring in the market.
In line with this basic thinking, Keidanren has made some proposals and has claimed the to enact a basic law designed to protect the interest of users and ensure free and fair competition among telecommunications service providers. In this sense, we appreciate that the Telecommunications Council (an advisory body to the Minister of Posts and Telecommunications) recently released its first draft report recommending measures to promote competition among the telecommunications service providers. The measures, however, are premised on the existing Telecommunications Business Law, which is based on a system of regulating business designed to ensure propriety and rationality of operations and retains a strong tinge of state control of telecommunication.
The most critical point to promote competition in the telecommunications industry is to create a new market environment where users freedom of choice of services that meet their needs so that they can derive maximum benefit. To accomplish this, emphasis of the law should be placed not on controlling operations of service providers but on ensuring free and fair competition among them and providing maximum benefit to the users as befitting the IT age. It is particularly necessary to implement the following measures as soon as possible: To specifically define its purpose (to provide maximum benefit to the users and ensure free and fair competition among telecommunications service providers), drastically reduce the number of items requiring prior regulatory approval and create a system of post factum check, abolish the system of dividing telecommunication services into Type I and Type II that restricts the method of procuring circuits, introduce a regulatory system based on the degree of market control power of service providers, and enhance the transparency of regulatory procedures.

2. Comment on the First Draft Report of the Telecommunications Council
- To Enact a Competition Promoting Law

(1) Explicit Definition of the Purpose of the Law and the Duty of the Government to Promote Competition

The existing Telecommunications Business Law provides that its direct purpose is to "ensure the propriety and rationality of the management of telecommunication business," and promote thereby healthy development of the telecommunication industry, serve the convenience of the people, and advance the welfare of the people. On this point, the Council argues in its draft report that a phrase "to promote fair competition among telecommunications service providers" should be included in the purpose of the Telecommunications Business Law. However, we believe that the government should go a step further and include "to maximize the benefits of the users" and "ensure free and fair competition" in the prime purpose of the law as other countries have done.
The Telecommunications Business Law of certain countries defines the maintenance and promotion of effective competition among telecommunications service providers as the duty of the government. Similar provisions should be institute in Japan and the government should enhance the transparency of its administration of laws and regulations and dispute arbitration procedures.

(2) Drastic revision of the system requiring prior regulatory approval and the strengthening of the system of post-factum check

Under the existing law, any person who wants to become a Type I telecommunications carrier must obtain a license from the Minister of Posts and Telecommunications. And such person must file with the Minister of Posts and Telecommunications an application furnishing information concerning the kind of service it proposes to provide and the area which it proposes to serve, and a description of its telecommunications facilities, together with its business plan and an estimate of its revenues and expenditures for the first five years - to serve as data on the basis of which the regulators evaluate the applicant's financial capacity and technological competence and check the viability of its business plan. Furthermore, when a licensed carrier proposes to change its facilities, the area and the kind of its service after it has started providing services, such carrier must obtain authorization from the Ministry of Posts and Telecommunications by filing an application to that effect, together with an estimate of its revenues and expenditures for the first five years that follow such changes. As it is difficult to predict how long it will take to get authorization for new service, the applicant cannot mount a publicity campaign or work out business agreements or tie-up with other service providers. This puts a drag on flexible and nimble development of business, and service providers' effort to meet the changing needs of their customers is thwarted. True, the Council's draft report does recommend a change in the regulatory system from one requiring prior regulatory approval of clauses of a contract and connecting agreements with non-controlling service providers. However, many provisions requiring prior regulatory approval still remain intact, hampering effective utilization of information technology.
Technological innovation in information and telecommunications field and changes in its market are so rapid that no one can predict with certainty what will happen to them a year later. In dealing with such market, the principle of requiring prior regulatory approval should be abolished and fair and transparent rules should be instituted so that service providers can improve their ability to foresee things happening in the market, freely exert their ingenuity and demonstrate their initiative, and problems can be dealt with as they occur and institute new rules for competition as necessity arises. The system of post-factum check is not inconsistent with the rule-based administration. As it pointed out in its basic IT strategy, the IT Strategy Council strongly urged the government - and pressure has since been growing - to shift its administrative attitude from prior regulations-oriented to ex-post-facto check approach according to transparent rules."
What is needed is to create a framework within which the users are given a wide choice of services and diverse telecommunications service providers can freely exert their ingenuity and demonstrate their initiative under conditions of fair competition. The system requiring prior regulatory approval aimed at ensuring the propriety and rationality of management of telecommunications service providers should be abolished regardless of their status of control of the market or the lack of it, and a system of ex-post-facto check (including a Ministerial order to improve the conduct of business) should be established to deal with problems harming the interest of the users or impeding fair competition.

(3) Institution of Regulation of Service providers Controlling the Market

In its draft report, the Council proposed the institution of a provision restricting an abuse of market controlling power. This is a valid proposal. However, unless the requirement of prior regulatory approval based on the classification of service providers into Type I and Type II by taking a notice of owing telecommunications facilities is abolished at the same time, such proposal would actually amount to strengthening the regulation of the market. In order to make the restriction of an abuse of market controlling power truly effective, the requirement of prior regulatory approval should be abolished in principle, and the scope of the market, the definition of service providers that have an abuse of market controlling power, and the regulation of such service providers should be thoroughly reviewed.

(4) Abolition of the Division of Business, and Opposition to the Institution of the Carriers' Carrier System

The existing Telecommunications Business Law divides the telecommunication business into Type I and Type II on the basis of having the telecommunications facilities, and regulates the industry with a rigidity unseen in Western countries (such as the regulation of the method of acquiring circuits). Particularly, it lays down the principle of integrating the installation of circuits and the furnishing telecommunication service and requires Type I service providers to have circuit facilities of their own to provide telecommunication service. What is more, in case a carrier acquires circuits by virtue of IRU (indefeasible right of user), lending of fiber-optic cable (for ten years or longer) is defined as the installation of facilities, and lending of band as telecommunication service, and Type I service providers are not authorized to rent core cables or bands for less than ten years from any person other than a telecommunication carrier. Type II service providers (telecommunications service providers other than Type I telecommunications service providers) are defined as a provider who receives services from a telecommunications carriers and are not authorized to rent cables by virtue of IRU or rent cables (for less than ten years from any person other than telecommunications service providers) or zones. The division of service providers into Type I and Type II has impeded flexible building of networks by service providers, with the result that the system has been improved in a piecemeal fashion.

  1. Abolition of the Division of Business
    In the draft report, the Council argues that it is proper to simplify the regulation of Type II service providers so that they can freely provide multifaceted services, while maintaining the licensing system for Type I service providers. However, it does not make any reference to problems that are likely to arise when the division of business into Type I and Type II is abolished.
    Basically, the decision to install or rent facilities should be left to the discretion of, and should be made by, service providers at their own risk, and the government has no business in regulating the choice of service providers. When viewed from users' perspective, there is not much difference in services and business attributes between Type I and Type II service providers. Moreover, Type I service providers should be allowed, just as Type II service providers are, to freely provide multifaceted services. Therefore, there is no justification for regulating the method of acquiring circuits by dividing service providers into Type I and Type II.
    To force service providers to choose between Type I and Type II, an outdated and an unprecedented system, is far from a rational stance to be taken by a government professing to lead an IT revolution. In response to an urgent poll Keidanren has conducted on the advisability of dividing service providers into Type I and Type II, a majority of the respondents said that "what really counts is whether service is provided properly to the users or not, that to define the telecommunication business on the basis of whether a carrier owns the facilities and provides the service through such facilities or restricts the method of acquiring circuits is irrational, and that such system of regulation is non-existent in major industrial countries and should therefore be abolished." The division of service providers into Type I and Type II should be abolished at an earliest possible date, so that service providers can freely develop imaginative telecommunications services and the users can freely choose services that meet their needs.
    On the question of division of business, the Council argues that "it is necessary to study the question further in light of the progress being made in convergence of telecommunications and broadcasting or the trend of separate regulation of hardware and software carried out in Western countries. However, the government should set a definite date for reaching a conclusion and establish as soon as possible a forum for reviewing the question from the standpoint of deregulating the method of acquiring circuits by service providers.

  2. We Oppose the Institution of the Carriers' Carrier System
    The Council proposes the institution of the Carriers' Carrier System with a view to facilitating fair utilization of circuit facilities owned by public bodies and utilities. However, with the form of utilization of fiber-optics diversifying, the practice of separating cable lending from band lending, and that of cable lending for ten years or longer from cable lending shorter than ten years have outlived their relevance to market reality. No other country separates cable lending from band lending any longer. What is more, there is no reason justifying the separation of the installation of facilities from providing telecommunication service on the basis of the length of period of lending of cables. Facilities are only a means for providing service, and to define the providers of such means as a telecommunication carrier and impose new regulation is simply going overboard.
    The crux of the problem lies in the existing system that restricts the method of acquiring circuits by telecommunications service providers. It must be said that to make the regulatory system even more complicated by instituting the Carriers' Carrier System unknown in other countries to deal with problems arising from the separation of Type I service providers from Type II service providers is far from a desirable institutional reform. The government instead should change the existing system and its administration of the law with a view to maximizing the benefit derivable by the users and ensuring the flexibility of networks and liberalize the method of acquiring circuits by telecommunications service providers including the acquisition of circuits in the form of cable lending or band lending from any person other than licensed telecommunications service providers. When this is accomplished, the institution of the Carriers' Carrier System would become unnecessary.

(5) Facilitation of Laying Cables

In order to enable the users to receive service that meets their needs, it is necessary to promote horizontal inter-ministerial cooperation and coordination to facilitate cable laying by telecommunication service providers. In this connection, should encourage public utilities to make efforts on their own to fairly and expeditiously furnish information concerning the idle capacity of their utility poles and underground ducts and the state of leased circuits. Moreover, public land should be actively utilized by relaxing the regulation of the use of roads, by building common ditches and information boxes, and by offering public space (such as the sewer system) for use by telecommunications service providers. And it is hoped that the government draws up an action plan to facilitate the use of public land. In case the government draws up guidelines as arbitration standards under the Telecommunications Business Law for offering utility poles and underground ducts owned by public utilities such as NTT and power companies, it should take into account measures public utilities have taken on their own.

(6) Formulation of Competition Rules and the Strengthening of Surveillance

The Council says that it is necessary to maintain closer coordination between policy-making and implementation of regulations. This runs counter to the global tendency. In order to ensure free and fair competition, it is essential to formulate competition rules, keep watch on, and maintain, competition, and arbitrate disputes fairly and transparently - all from a neutral position. In major countries, such function is performed by an organization independent from politics, service providers, policy-making bodies, and industrial development agencies. In the future, it is desirable that Japan would establish a body similar to such organization.
In order to promote the formulation of rules designed to address problems that are likely to be caused by technological innovations and rapid changes occurring in the market, Japan should introduce at an earliest possible date a petition system that requires the government not only to arbitrate disputes between telecommunications service providers but also empowers the users and service providers alike to demand the government to change the existing system, its operation and competition rules and requires the competent regulatory agency to publish its response within a fixed period.
Systems and policies relating to telecommunication have extremely profound influence on the livelihood of the people and the nation's industrial activities. The government has the duty to make its decision-making process transparent and explain actions it takes to the users and telecommunications service providers. In making important decisions, the government should be required to make public its original draft in advance, provide an adequate period for hearing public comment, and present its view in response to such public comment.

(7) Revision of the NTT Law

For quite some time, Keidanren has been urging the government to repeal the regulations empowering it to directly intervene in the management of NTT (approval of the appointment and discharge of its directors, its business plans, amendments to its articles of incorporation, restriction of equity participation of foreign firms, and the regulations relating to government-owned shares, etc.). In this respect, the Council argues that regulation of the various activities of NTT should be crafted on the basis of a sweeping review of the role played by NTT, including approaches to be taken to ensure global services, the promotion of research and technology and the spread of its findings. However, the government should stop directly intervening in the management of NTT (a private concern) as soon as possible so that it can run its own affairs under conditions of fair competition in accordance with the principle of self-accountability. When we consider the issue of autonomy of communication, we should weigh the advisability of relinquishing the NTT shares held by the government, abolishing the restrictions on equity participation in NTT by foreign investors, and ensuring the priority of communication in case of an emergency such as a disaster by enacting a competition promotion law.
On the question of universal service, the Council suggests that universal service should be made available to telephone subscribers, pay phones, and emergency phones, and that it is proper to adopt, as a concrete measure to ensure such service, a fund formula under which service providers deposit a certain amount of money in contribution with a neutral body and distribute such fund to pay for universal service. And in discussing a concrete measure, it is necessary to disclose information concerning the cost incurred for providing universal service and build a national consensus, including the users who are bearers of the last resort, on issues such as whether the government should bear the cost as a social policy, whether there should be a difference in rates among regions. In such cases, the system should be created and run on the premise that it is neutral to competition.

(8) Regulation of Incentives

The Council proposes the introduction of regulation of incentives for NTT. However, this could leave things to the discretion of the regulators. Therefore, it is necessary to take a searching look at this proposal, including measures to ensure conditions of fair competition and transparency of judgment standards and administrative procedures.

(9) Annual Revision of Laws and Regulations and Competition Rules

Given rapid-paced technological innovation and changes in the market, it is difficult to anticipate with certainty things happening in coming years. Therefore, regulations and competition rules instituted under the new competition law should be reviewed annually. In such cases, it is necessary to hear views from a broad section of the population in the form of public comment to revise the law and the regulations instituted thereunder from the standpoint of maximizing the benefit of the users and ensuring free and fair competition among telecommunications service providers. And changes in the law and regulations should be effected after showing the grounds on which the government effected such changes.

(10) Disclosure of a Schedule for Implementing Effective Competition Promotion Measures

In order to make the debate over the proposed institutional reforms effective, the government should explicitly state its vision of, and the policy for, competition it envisages in the field of telecommunication, and publicize a schedule for implementing competition promotion measures to the users and the people at large.

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