NEW DEVELOPMENTS IN TELECOMMUNICATIONS INDUSTRY DEREGULATION

01/01/1999

---

Telecommunications Law Amendment

The latest draft amendment to the Telecommunications Law was completed by the Ministry of Transportation and Communications (MOTC) on 29 December 1998, and is slated to go to the Executive Yuan for approval. Its main content is as follows:

Article 12 of the draft amendment relaxes restrictions on foreign shareholding in a Type 1 telecommunications enterprise. Current regulations restrict total direct and indirect foreign ownership to 20%; the relaxed restrictions hold direct foreign ownership to not more than 20%, and the sum of indirect and direct ownership to not more than 60%. Indirect ownership is determined by multiplying the percentage of total shares held by a domestic corporation in a Type 1 telecommunications enterprise by the percentage of that corporation's total shares which are held by foreigners, or the percentage of its capital provided by foreigners. The draft amendment furthermore defines "foreigner" as either a foreign natural person or foreign legal person.

Article 16 of the draft amendment provides that when two Type 1 telecommunications companies' networks are interconnected, their setup must fulfill the principles of transparency, reasonableness, equal treatment, unbundled elements, and cost-based charging. Article 16 also provides that if two Type 1 telecommunications enterprises are unable to come to an agreement within three months from the time that one of them issues a request for network interconnection, the Directorate General of Telecommunications (DGT) will step in to make a ruling, either as requested by one of the parties, or ex officio. Either party dissatisfied with the DGT's decision may seek redress through administrative appeal and litigation procedure.

Article 19 states that all Type 1 telecommunications enterprises should, in accordance with the items on their business license, establish an independent accounting system to separately calculate profits and losses for each item. Paragraph 4 of Article 26 prohibits Type 1 telecommunications enterprises from utilizing cross-subsidies when setting rates, which would hinder fair competition. The above regulation also applies to Type 1 telecommunications enterprises which also engage in Type 2 telecommunications activities or non-telecommunications business activities.

Currently, rate calculation formulas for Type 1 telecommunications enterprises are proposed by the DGT for the MOTC's review, which shall in turn send them to the Executive Yuan for submission to the Legislative Yuan for approval. Type 1 telecommunications enterprises' primary rates are sent to the DGT and turned over to the MOTC for approval, while secondary rates are to be approved by the DGT. Article 26 of the draft amendment adopts a different means of rate regulation: the "price-cap adjustment method." This method restricts rate increases to the amount of the annual increase in the consumer price index less an adjustment coefficient. The MOTC will make implementation rules regarding the entities to which this method applies, the business areas to which it applies, rate categories, the setting of the adjustment coefficient, regulatory methods, and initial rate approval.

In order that owners of dedicated telecommunications network may apply for a leased line license so as to lease out their telecommunications networks and connect them to the public telecommunications system in tandem with deregulation of the fixed network, Article 47 allows the connection with the public telecommunications system with the approval of the MOTC.

Draft Regulations Governing Fixed Network Business

In order to deregulate the fixed-network telecommunications industry, the Directorate General of Telecommunications (DGT) disclosed the draft Regulations Governing Fixed Network Business on 23 December 1998, and held a public seminar to explain the draft Regulations on 28 December. The MOTC plans to promulgate the draft Regulations in February, 1999, and begin accepting applications. The draft Regulations cover various businesses, including full-service networks, local networks, long distance networks, international networks, and leased lines. The main points are as follows:

Chapter 1: General Provisions

It lays out the legal basis for the Regulations, definitions, the governing authority, the administrative authority, business categories, license categories, and the basis for related operational regulations.

Chapter 2: Special Permit, Establishment, and Alteration

This chapter includes conditions and procedures for applying for special permit, special regulations on applicants for a leased lines license, the process by which a special license is issued, the term of the license, changes in plans, issuance and return of performance bonds, handling of failures to perform, supplementary or replacement license issue, prohibition of the transfer of special permit, and provisions concerning the Chunghwa Telecommunications Corporation.

Chapter 3: Rules for Operations Management

Section 1 comprises items applicable to all fixed network business, including network management and maintenance, tariff regulation, network connection principles, universal services principles, regulation of dominant carriers in the telecommunications market, accounting practices and standards, telecommunications oversight, protection of consumer rights, network quality standards, and cessation of operations.

Section 2 contains standards applicable to local networks, including number allocation and use, number portability service, the principle of equal interconnection, directory services, and public communications services such as emergency and public telephones.

Sections 3 to 5 provide special regulations governing long-distance networks, international networks, and leased lines, and the mutatis mutandis application of the local networks provisions to these networks.

Article 4: Dispute Resolution

This chapter governs negotiations among operators, DGT mediation, and rulings of the Telecommunications Review Committee.

Matters of concern voiced by attendees at the public seminar included the number of licenses to be granted (the DGT originally planed to issue two general network licenses), and the minimum capitalization. There is also a concern regarding Article 23 of the Draft Regulations (stating that the applicant must complete at least 25% of the construction referred to in the business plan before applying to the MOTC for the special permit for commencement of operation), which it was felt would put undue financial pressure on operators. Another uncertainty is whether the draft amendment to the Telecommunications Law can take effect before applicants submit their applications. These matters may present difficulties for potential participants in the fixed network business as they attempt to evaluate their prospects and prepare proposals. The text of the draft Regulations may be found at the DGT's web site (http://www.dgt.gov.tw).