One sector where Hong Kong has few peers is cheap international call services. Six years of government deregulation have opened the door for hundreds of discount call operators. Trading vacant bandwidth and cutting overheads to the bone, they have attacked PCCW's dominant market position, driving prices down to historic lows. Now, many could be facing termination. Stung by the upstarts, PCCW has launched a two-pronged assault. On one flank, PCCW is attacking the insurgents on price, offering rates so low that matching them would put even the most efficient small operator out of business. On the other, the company has dragged the telecoms regulator to the High Court, winning a delay in policy implementation that strengthens its hand in the marketplace. The key battleground is local access charges (LAC) - the price international call providers must pay to have their calls carried the 'last mile' over fixed-line carriers' networks. LAC charges, pegged at 12.6 cents per minute, usually flow to PCCW, but also benefit the four other operators with partially built networks: Hutchison Global Communications, New World Telecom, Wharf T&T and City Telecom. As IDD rates plummeted, LAC charges became an increasingly burdensome proportion of total call costs. In today's cut-throat market, they may determine survival or failure for many operators. After a six-month industry review of local access charges, the Office of the Telecommunications Authority (Ofta) decided in March to cut the controversial charge to 8.6 cents, from June 1. But PCCW successfully applied to the High Court for a judicial review, winning the firm a reprieve until after the September hearing. The company is deftly using the stay of execution to turn the screws on the competition. Recent price offers by the incumbent are now within a hair's breadth of the local access charges paid by external international call operators. Recent promotions promise 100 free minutes and a 24-hour flat rate of 15 cents to China and a flat rate 12 cents to Britain, Australia, Canada and the US, plus 200 free minutes for its residential customers if they sign for its 0060 international call plan. The margin squeeze could drive even the most efficient small players out of the market. Zone1511, a web-enabled call provider which offers a range of competitive carrier call rates to retail and business clients, is a case in point. 'We can't compete if we have to price below cost,' said managing director Kam Poon. PCCW dismisses allegations of predatory pricing, saying that the new competition is just getting a taste of its own medicine. A spokesman said the company would defend its customer base, pointing to 'a severely competitive IDD market, with price cuts initiated by new entrants'. Ofta director-general Au Man-ho stresses he is not there to keep people in business. 'Our job is not to protect the competitors, but protect competition,' he said. At the heart of the controversy is what rate fairly compensates fixed-line operators for international call traffic using their networks. In fixed-line operators' submissions to the regulator, the most common argument was that LAC revenue provided a crucial incentive to invest in networks. The regulator appears unmoved by the argument. After all, the LAC revenue stream accounted for just 2 per cent of the total for fixed-line operators in the first half of last year, according to industry data. Ofta has concluded that the 'disruption to a level playing field' is the most important factor to consider. After conducting a review on the LAC charge, Ofta in October 2000 cut it from 15.8 cents a minute to the current 12.6 cents. PCCW's court action is not being brought to challenge the regulator's jurisdiction per se, but on a procedural technicality. The company argues that Ofta has overstepped its authority by conducting a policy review. Whether or not PCCW wins its day in court, it is already benefiting from the delay, allowing it more time to squeeze competitors and, by some estimates, earning it $60 million a month in LAC charges otherwise forgone. The perspective of City Telecom, as an international call turned-fixed-line operator, is interesting. The firm receives LAC and competes keenly in the IDD market with a 22 per cent market share. While City Telecom chose to support the regulator's proposals to cut access charges, it is not a make or break issue. What concerns chairman Ricky Wong Wai-kay is the costly policy delays from challenges to Ofta in the courts and the precedent it sets. 'Competition will come down to who can afford the best lawyers,' he said. Andrew Bruce, deputy chairman of the External Telecommunications Service Society, has similar views. 'If PCCW wants to compete through the courtroom, it will be to the detriment of consumers and the rest of the industry,' he said. For some operators it might just be time to call it quits. Even if PCCW fails to overturn the regulator's decision, refunds on local access charges might arrive at shuttered offices.