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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) PANAMSAT CORPORATION, ) ) Complainant, ) ) v. ) File No. E-96-21 ) COMSAT CORPORATION -- ) COMSAT WORLD SYSTEMS, ) ) Defendant. ) ) ) MEMORANDUM OPINION AND ORDER Adopted: May 19, 1997; Released: May 20, 1997 By the Commission: I. INTRODUCTION 1. In this Memorandum Opinion and Order, we address a formal complaint filed by PanAmSat Corporation (PAS, or complainant) against COMSAT World Systems (CWS, or defendant). In its complaint, PAS alleges that CWS violated: (1) Section 201(b) of the Act, by offering service under a tariff that would generate revenues that are below cost with the predatory intent to foreclose competition; and (2) Section 202(a), by charging different rates to similarly situated customers for the same or similar services. For the reasons stated below, we deny the complaint. II. BACKGROUND 2. COMSAT is the sole U.S. signatory and representative to Intelsat, which is an international treaty organization that owns communications satellites. The signatories purchase satellite transmission time from Intelsat for resale to their customers. CWS is the operating division of COMSAT that provides international satellite transmission through Intelsat. COMSAT RSI (RSI) is another wholly owned subsidiary of COMSAT. PAS competes directly with CWS in the market for international satellite-delivered communications services. 3. On August 19, 1994, the Department of Defense (DOD) issued a Request for Procurement (RFP) for service to DOD's Commercial Satellite Communications Initiative (CSCI). Because the RFP could be satisfied through the use of Intelsat space segment, CWS filed Transmittal No. 43 on June 8, 1995 to establish its Tariff F.C.C. No. 2. Under this tariff, CWS would make available leased transponder services to the winner of the RFP. 4. PAS opposed Transmittal No. 43 on the same grounds as those stated in this complaint: that the proposed prices were both predatory and unavailable to CWS's commercial customers. The Commission asked CWS to submit additional cost figures, and CWS filed those figures with Transmittal No. 61 on September 20, 1995, which modified Transmittal No. 43. On September 29 and October 5, 1995, the Commission allowed Transmittal Nos. 43 and 61 to go into effect. 5. Tariff 2, as modified by Transmittal 61, provides that CWS will make available to "an agency of the United States government or a duly authorized agent acting on its behalf" satellite C-band and Ku-band transmission services for private network communications. The federal government or its agents will gain access to the transmissions through government user terminals. Particular satellite transponders may be reserved one to three years in advance, and discounts of up to 62.16% off the base price are available for high transmission volumes. 6. On June 6, 1995, RSI, another COMSAT subsidiary, submitted a bid in response to the RFP, which it won on July 18, 1995. On September 18, 1995, RSI submitted to the Commission a Section 214 application and a tariff application, pursuant to which RSI proposed both to purchase the Intelsat space segment under the CWS tariff and to resell the segment to CWS under RSI's own tariff. PAS opposed both applications, but the Commission granted RSI's Section 214 application on October 13, 1995, and the RSI tariff became effective five days later. PAS filed this complaint on February 21, 1996 and the defendant filed its answer on April 5, 1996. Following some limited discovery, the record closed with the parties' submissions of briefs on November 7, 1996, and reply briefs on November 27, 1996. III. DISCUSSION A. Section 201(b) Issues 7. Overview. Section 201(b) of the Act provides, inter alia, that "[a]ll charges, practices, classifications, and regulations for and in connection with . . . communications service, shall be just and reasonable." The crux of the complainant's claim under Section 201(b) of the Act is that the defendant has constructed a predatory pricing scheme in its Tariff 2 offerings. The complainant makes two principal allegations to support its claim: (1) that the defendant has priced its Tariff 2 offerings "below cost" and (2) that as a consequence of the below cost pricing, the defendant will operate as a predator in the market for international satellite services. The defendant denies that Tariff 2 is priced below cost or that it exercises market power through the Tariff 2 offerings. As discussed in detail below, we find that complainant has failed to substantiate either of its predatory pricing allegations and, therefore, has not shown that the defendant violated Section 201(b) in connection with its Tariff 2 offerings. 1. Contentions of the Parties 8. Complainant's arguments. Complainant alleges that Tariff 2 is predatory and thereby is "unjust and unreasonable" in violation of Section 201(b). Complainant argues generally that a tariff is predatory if its projected revenues drop below its projected costs at any point during the life of the tariff, regardless of whether total revenues exceed total costs during the projected life of the tariff. 9. Complainant asserts that Tariff 2 is priced in a predatory fashion because it is not priced above cost at all times. It claims that defendant's projected revenues will drop below its projected costs in the year 2005. Complainant asserts that, in reaching this conclusion, it uses the cost figures filed by defendant in its Tariff 2 filing. It further asserts that CWS has obfuscated its costs through novel accounting methods that should be rejected by the Commission, and that defendant's revenues are well below its costs, when more conventional methods are applied to defendant's figures. 10. Complainant argues that the revenues from Tariff 2 drop below costs under several interpretations of the tariff data. Complainant alleges, for example, that the tariff provision decreasing the basic price for satellite transmission services by 62 percent for high volume transmission orders is prima facie predatory, because such a discount would drop defendant's revenues below its costs by wiping out defendant's authorized return on investment. Complainant contends that defendant cannot claim that losses incurred by its high-volume discounts will be made up from extra revenue earned during low-volume usage because under the flexible terms of Tariff 2, a customer is free to order the high volume services without first having paid low-volume charges. 11. Complainant further states that defendant has the desire and ability to operate as a predator in the market. According to complainant, defendant has previously resorted to predatory pricing and has the economic incentive and market position to do so again. Complainant alleges that whatever revenue losses defendant sustains from Tariff 2 will be made up through price mark-ups by its subsidiary, RSI. Finally, complainant says, the Commission is not precluded from considering these issues, even though they were presented in PAS's opposition to CWS's Tariff 2. 12. Defendant's arguments. Defendant argues that so long as the total revenues of Tariff 2 exceed its total costs for the duration of Tariff 2, the tariffed offerings are not predatory and therefore not unjust and unreasonable. When the tariff's total costs are compared with total revenue for the ten-year projections of Tariff 2, defendant argues, revenues exceed costs. Therefore, it argues, the tariff is not predatory. 13. Defendant adds that absolute revenues exceed absolute costs at all times under Tariff 2. Defendant contends complainant has misconstrued the tariff's cost and revenue figures, because the complainant incorrectly compares average costs over the life of the tariff with incremental revenue from just one year (2005). Defendant contends that complainant's accounting analysis is overly simplistic, while defendant used an accounting methodology that conforms to the manner in which service actually will be provided. 14. Defendant adds that it is illogical to assert that CWS intended to make up any losses in the tariff through its RSI subsidiary, because at the time CWS filed the tariff, CWS had no way of knowing that RSI would be the winning bidder. According to defendant, the Commission has already found that CWS made the same rates available to all potential bidders of the DOD contract. 15. Finally, defendant does not agree that there is a ripe controversy about the lawfulness of the tariff, because the Commission reviewed complainant's arguments of predatory and discriminatory pricing during its tariff review and subsequently allowed the tariff to go into effect. 2. Discussion a. Predatory Pricing -- Background 16. The Commission has determined that predatory pricing is "unjust and unreasonable" and therefore prohibited by Section 201(b) of the Act. In general terms, predatory pricing involves "deliberately pricing below cost to drive out rivals and raising the price to the monopoly level after their exit." Thus, the offense of predatory pricing has two elements: a pricing element and a subsequent recoupment element. Complainant must prove both elements to substantiate its allegations. 17. Pricing element. For the purpose of determining predatory pricing, the Commission has defined "cost" as "average variable cost" (AVC). The Commission has found that in a competitive setting, price is reduced toward cost, and in the absence of competition, economic regulation also uses cost (plus a fair return on investment) as a guideline for prices. The Commission has defined variable cost as "all access charges and billing and collection costs attributable to the service as well as other non-fixed costs which would not be incurred if the service were not offered." Variable costs include, inter alia, cost increments in plant investment as well as network maintenance and network and customer operations attributable to the new service. Once a complainant has demonstrated that a service is priced below its average variable cost, the price is presumed predatory, and the defendant bears the burden of disproving predatory intent. 18. Recoupment element. The U.S. Supreme Court has recently applied, under the Robinson-Patman Act, a two-pronged test for predatory pricing. Not only must prices be below average variable costs for some duration, but also "[t]he plaintiff must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on predation, including the time value of money invested in it." The Court's pronouncement is similar to the Commission's finding in the Competitive Carrier Rulemaking that predatory pricing is likely to occur only if the predator has "'(1) greater financial staying power than its rivals, and (2) a very substantial prospect that the losses [it] incurs in the predatory campaign will be exceeded by the profits to be earned after [its] rivals have been destroyed.'" 19. More recent antitrust practice has given increasing weight to an examination of the probability of recoupment of losses incurred from predatory prices, even in the face of evidence that prices are below cost. It does not suffice to show that a competitor has been injured. The complainant must show that competition has been injured by the pricing structure. For investment in below-cost pricing to be rational, the predator must have a reasonable expectation of recovering, in the form of later monopoly profits, more than the losses it suffered. Only where such eventual recoupment is likely will consumers be harmed by lower prices. Without recoupment, "predatory pricing produces lower aggregate prices in the market and consumer welfare is enhanced." 20. Probable recoupment and injury to competition cannot be inferred from below-cost pricing alone, because even when a predatory pricing strategy is competitively feasible, it may not be economically profitable due to its high up-front costs. Such a strategy also may not be chosen if more accommodating responses to competition are more profitable. Thus, in the instant case, complainant must prove not only that the rates in Tariff 2 are priced below average variable cost for some period of time, it must also demonstrate that defendant has a likelihood it will recoup any possible losses through profits obtained later on through its predatory scheme. b. Decision 21. As an initial matter, we agree with complainant's assertion that the Commission is not precluded from considering in this proceeding the issues of predatory pricing and discrimination, even though these issues were presented in PAS's opposition to CWS's Tariff 2. In reviewing a tariff pursuant to Section 203, the Commission determines whether "compelling arguments" have been presented that the tariff rates are "patently unlawful" so as to require rejection or warrant investigation. In the Section 208 proceeding before us, however, the complainant has the burden of proof of establishing a violation of the Act. 22. We find that complainant has failed to carry its burden of proving that defendant has violated Section 201(b) of the Act in connection with its Tariff 2 offering. Complainant's allegations of predatory pricing failed to satisfy the test established by the Supreme Court in Brooke Group. In particular, complainant failed to prove that, under the pricing structure proposed in Tariff 2, defendant's prices are below AVC for at least some period of time. Nor has the complainant shown that, even if defendant's prices were below AVC, defendant has a likelihood of recouping its earlier losses, in the particular market at issue, through profits earned later through a predatory scheme. We address both prongs of the Brooke Group test in the paragraphs below. In addition, in examining the complainant's predatory pricing claims, we find it significant that the complainant has failed to allege other facts that may have raised the specter of a Section 201(b) violation outside of the parameters established by Brooke Group. For example, complainant has not alleged that defendant has acted or will act in any way to recoup its losses from some parallel service. In the absence of such allegation, we conclude that Brooke Group is controlling in this case and compels a rejection of complainant's Section 201(b) claims. (i) Whether the Prices in Tariff 2 Are Below Average Variable Cost. 23. Complainant maintains that the pricing structure proposed in Tariff 2 gives evidence of a predatory scheme in its discounts, its flexible terms, its background figures and in the alternate set of cost calculations offered by complainant. We disagree. 24. We find that complainant has failed to show that defendant's high-volume discounted prices are below its average variable costs. It is incumbent upon the complainant to demonstrate specific, competent evidence that prices are below costs. We disagree with complainant's assertion that Tariff 2 is prima facie predatory because, as complainant alleges, the 62 percent high-volume discount would drop defendant's revenues below its costs. The presence of deep discounts alone does not necessarily indicate that the discounted prices are below average variable cost. Complainant asserts, for example, that it is "common sense" that a 62 percent discount on a product that yields a 11.42 percent rate of return means that the product is priced below cost. The two percentages, however, are not directly comparable. Complainant incorrectly assumes that these two percentages are measures of the same base figure - - in this case, of defendant's standard service price. Although the 62 percent figure is applied to defendant's standard service price, the 11.42 percent is defendant's authorized rate of return that is applied to defendant's capital investment base, not to defendant's prices. Moreover, our rules do not require common carriers to earn a particular rate of return; the rules merely establish the maximum amount that common carriers may earn. Thus, a common carrier could lawfully set its prices at levels that make no contribution to the carrier's return on investment. Because complainant has not provided the threshold evidence that the overall high-volume discounts in Tariff 2 are below average variable cost, we need not reach complainant's allegation that defendant cannot claim that the losses incurred by its high-volume discounts will be made up from extra revenue from low-volume usage (see supra para. 11). 25. We also find that complainant has not proven its allegation that Tariff 2 is priced below average variable cost any point in time. In particular, complainant asserts that defendant's own data show that in the year 2005 defendant's costs will exceed its revenues and that the tariff is therefore predatory, in violation of Section 201(b). We agree with defendant, however, that complainant is using the tariff data incorrectly by comparing average annual costs from a ten-year projection of the tariff with the incremental revenue for one year. We conclude that these data are not directly comparable. 26. Even if complainant were able to demonstrate that costs were greater than the tariff for the year 2005, complainant has offered no explanation as to how below-cost pricing in one year of the tariff's duration would have injured competition. Only when pricing below cost risks injuring competition is there an anticompetitive effect. In this regard, pricing below cost for a limited duration has been upheld where it is not sustained long enough to exclude or drive rivals out of the market. For example, low prices accompanying new product introductions and temporary price promotions to induce future sales have not been viewed as predatory, even though they may have been below an appropriate measure of cost. 27. In addition, the average annual cost figures in defendant's tariff, as cited by complainant, do not represent an appropriate AVC calculation for the purposes of determining predatory pricing. The figures in the tariff include a return on invested capital with accompanying corporate income tax payments. A regulated return on invested capital and the accompanying taxes are not properly included in the calculation of AVC because they are not a function of the increment of service, i.e., they cannot be avoided by not providing the next service increment. 28. We also conclude that the alternative cost calculation offered by complainant does not accurately portray defendant's AVC. Complainant's calculation includes an Intelsat Use Charge (IUC), which complainant states defendant must pay Intelsat for each additional transponder used, regardless of the number of transponders used. Defendant states, however, that as the number of transponders needed increases significantly, the IUC ceases to apply. CWS states that it would negotiate higher volumes with Intelsat through a bulk lease agreement, similar to a special construction tariff. The bulk lease cost would be part of AVC at higher volumes, but that cost may not be the same cost-per-transponder as the IUC. (ii) Whether Defendant Is Likely to Recoup Its Losses. 29. We have concluded that complainant has failed to demonstrate that the pricing structure in the tariff renders prices below average variable costs. Even if it had made that demonstration, however, complainant would still need to show that defendant has the likelihood of recovering its predatory losses though later supercompetitive profits to prove that predatory pricing had occurred. Complainant, however, fails to demonstrate any such ability on the part of defendant. Complainant asserts that defendant enjoys "numerous competitive advantages" by virtue of its treaty status with Intelsat and that, as the market has grown more competitive, defendant has resorted to anticompetitive conduct. Complainant has not, however, provided any data to demonstrate the substantial prospect of the impact of defendant's actions on the market, nor has it provided a description or definition of the relevant market, defendant's market share, barriers to entry, or its relative financial power in the market. 30. The only specific market power allegations that complainant raises is defendant's power over its subsidiary, RSI. We have determined already, however, that the defendant made the same rates available to all potential bidders of the DOD contract. CWS therefore could have had no reliable plan to recoup any predatory losses through price mark-ups by RSI. In addition, the competition of the bidding process presumably suppressed the opportunity for excess profits by RSI or any other bidder. Moreover, with several competitors in the space segment market, there is little likelihood that Comsat will attempt to recoup its losses in the DOD contract by raising rates in the future. 31. Finally, complainant suggests future market misconduct by defendant based on defendant's alleged past market behavior, as evidenced by the Caribnet case. In Caribnet, CWS proposed to serve the Caribbean basin through Intelsat under tariff rates that were discounted fifty percent below similar CWS rates for other parts of the world. The Bureau, however, made no final determination in Caribnet concerning whether the tariff should be allowed to go into effect. The Bureau asked for additional cost data, but the tariff application was withdrawn before the cost data was presented. In the present case, the Bureau asked for and received additional cost data and allowed Tariff 2 to become effective. c. Conclusion 32. We find that complainant has failed to show that defendant's Tariff 2 pricing structure is below defendant's average variable cost for any period in time. We also find that, even if it had done so, complainant has failed to show that a likelihood exists that defendant could recoup its earlier predatory losses through profits earned later through its allegedly predatory scheme. Complainant failed to allege other facts that would raise the specter of a Section 201(b) violation. Therefore, we conclude that complainant has failed to prove that defendant has unlawfully engaged in any acts in violation of Section 201(b) of the Act. B. Section 202(a) Issues -- Unreasonable Discrimination 33. Contentions of the Parties. Complainant alleges that Tariff 2 violates Section 202(a) of the Act because it creates special rates for one group of customers, government agencies, without providing for similar rates to similarly situated customers and, therefore, is unreasonably discriminatory. According to complainant, defendant does not propose to offer the volume discounts in Tariff 2 on a non-discriminatory basis to any or all users, or even to all federal government users. Defendant replies that Section 201(b) of the Act permits carriers to establish a separate classification for service to the government, and that its classification here is, therefore, lawful. 34. Decision. In alleging a violation of Section 202(a), the complainant must demonstrate that the carrier has discriminated in the provision of "like communication" service or has given an "advantage or preference" to a person or group of persons in connection with the service. Upon such as showing, the burden shifts to the defendant to show that the discrimination is justified and, therefore, not unreasonable. In a Section 208 complaint proceeding, the complainant has the evidentiary burden of establishing disparate treatment. Once discrimination is established, the burden shifts to the defendant carrier to show that the discrimination is reasonable. 35. In the instant case, the sole argument presented by the complainant is that Tariff 2 creates special rates for one group of customers without providing for similar rates to similarly situated customers. We note that while the complainant raised this Section 202(a) claim in its complaint, it did not expand on this claim in subsequent pleadings submitted in the proceeding, including briefs and reply briefs, nor did it otherwise provide or allege additional facts to support its assertions. As such, the complainant's allegation of a Section 202(a) violation relates only to the classification afforded the Federal Government. Given the limited record before us, we cannot conclude that defendant violated Section 202(a) based solely on the "Government" classification. The classification afforded the Federal Government is presumptively reasonable under Section 201(b) of the Act, which provides that "All . . . classifications . . . shall be just and reasonable . . . Provided, That communications . . . may be classified into day, night, repeated, unrepeated, letter, commercial, press, Government and such other classes as the Commission may decide to be just and reasonable . . . . " In the absence of evidence or arguments that call into question the presumptive reasonableness of the classification, or that the established class enjoys an undue advantage or preference, we find no basis for a Section 202(a) violation. 36. While Section 202(a) prohibits a carrier from discriminating unreasonably among customers of a service provided under the government service classification permitted in Section 201(a), we find it significant that defendant filed Tariff 2 in response to the specific requirements contained in the DOD RFP. The fact that the tariff is tailored to the DOD RFP, without more, does not amount to unreasonable discrimination among government agencies, so long as the tariff remains available upon its stated terms to any "agency of the United States government or a duly authorized agent acting on its behalf." Under these circumstances, we conclude that Tariff 2 is not unreasonably discriminatory under Section 202(a) of the Act. IV. CONCLUSION AND ORDERING CLAUSES 37. We conclude that complainant has failed to sustain its burden of proof in its attempt to show that defendant violated Section 201(b) of the Act. The calculations presented by complainant do not demonstrate that defendant's revenues are generally, or at any specific time, below its average variable costs; nor does complainant present any market data to show that defendant could benefit or has benefitted from its alleged predatory conduct by driving out its competition and later recouping its losses. We also conclude that offering tariffed services to a federal government customer class is not an unreasonable classification under Section 202(a) of the Act. 38. Accordingly, IT IS ORDERED, pursuant to Sections 4(i), 4(j), 201, 202, 208 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 201, 202, 208 that the above-captioned complaint filed by PanAmSat Corporation IS DENIED. 39. IT IS FURTHER ORDERED that complainant's motion of January 9, 1997, for leave to file a response to defendant's reply brief is DENIED. 40. IT IS FURTHER ORDERED that the above-captioned complaint IS DISMISSED WITH PREJUDICE and that this proceeding IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary