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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* DA 96-1559 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In Re Application of ) ) KDD America, Inc. ) File No. I-T-C- 95-481 ) Application for Authority under ) Section 214 of the Communications ) Act of 1934, as amended, to Resell ) Non-interconnected Private Line ) Services Between the United States ) and Various International ) Points ) ORDER, AUTHORIZATION AND CERTIFICATE Adopted: September 17, 1996 Released: September 17, 1996 By the Chief, International Bureau: TABLE OF CONTENTS Paragraphs I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . 1 II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . 2- 3 III. DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . 4- 55 A. MARKET POWER. . . . . . . . . . . . . . . . . . . 6- 19 1. IPL Resale Market . . . . . . . . . . . . . . 9- 10 2. Underlying Facilities Market. . . . . . . . . 11- 19 a. Domestic Market for Terminating Private Lines 11 b. IPL Facilities Market. . . . . . . . . . . 12- 19 B. ECO ANALYSIS . . . . . . . . . . . . . . . . . . . 20- 46 1. Resale Entry. . . . . . . . . . . . . . . . . 22- 23 2. Interconnection . . . . . . . . . . . . . . . 24- 30 3. Competitive Safeguards. . . . . . . . . . . . 31- 41 4. Regulatory Framework. . . . . . . . . . . . . 42- 45 5. Summary . . . . . . . . . . . . . . . . . . . 46 C. ADDITIONAL PUBLIC INTEREST FACTORS . . . . . . . . 47- 50 D. REGULATORY STATUS OF KDD . . . . . . . . . . . . . 51- 55 IV. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . 56 V. ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . 57- 61 I. INTRODUCTION 1. In this Order, we grant KDD America, Inc. ("KDD") authority, pursuant to Section 214 of the Communications Act of 1934, as amended, to resell non-interconnected international private lines ("IPLs") between the United States and Japan. KDD has demonstrated, pursuant to the Commission's Foreign Carrier Entry Order, that, on balance, Japan provides U.S. carriers effective competitive opportunities to resell non-interconnected IPL services in Japan. We find that authorizing KDD to provide this service will serve the public interest by improving competition in the U.S. international services market by providing additional choice for consumers leading to heightened price and service competition. II. BACKGROUND 2. KDD is a wholly-owned subsidiary of Kokusai Denshin Denwa Co., Ltd. ("KDD-Japan"). KDD-Japan is a Japanese corporation that provides international telecommunications services in Japan. KDD-Japan is the largest Type I (facilities-based) IPL carrier. KDD- Japan participates in the IPL resale market through a minority ownership interest in AT&T JENS Corp. and a controlling interest in KDD TELESERVE, Inc. ("KDD TELESERVE"). Based on these ownership interests, KDD-Japan's total attributable market share in the IPL resale or Special Type II IPL market is less than one percent. 3. On August 11, 1995, KDD filed an application to obtain Section 214 authority to resell non-interconnected IPLs as a non- dominant carrier to Germany, the United Kingdom, and Japan. AT&T filed a petition to deny, which did not oppose authorizing service to the United Kingdom or Germany, but opposed authorization to Japan. AT&T argued that KDD's affiliate, KDD-Japan, had market power and that Japan did not satisfy the FCC's entry criteria. KDD opposed AT&T's petition and AT&T responded. Following the release of the Foreign Carrier Entry Order, KDD submitted a supplemental filing which included information relevant to the rules adopted in that Order. AT&T filed a partial opposition to the supplemental filing, opposing only the Commission's grant of Section 214 authorization for service to Japan. The International Bureau issued an order that authorized KDD to resell non-interconnected IPLs to Germany and the United Kingdom but deferred consideration of KDD's request to provide service to Japan until all interested parties could comment on KDD's Supplement. After the International Bureau released the order, KDD replied to AT&T's partial opposition to the supplemental filing. III. DISCUSSION 4. KDD's affiliation with a foreign carrier requires us to review its application to Japan under the framework established in the Commission's Foreign Carrier Entry Order. In that Order, the Commission stated that carriers seeking to provide international services to countries in which they have an affiliate with market power must demonstrate that the affiliated market offers effective competitive opportunities ("ECO") for U.S. carriers seeking to offer like services. If an applicant's foreign affiliate does not have market power in the destination market, we do not conduct an ECO analysis. The Commission also stated in the Foreign Carrier Entry Order that it will continue to consider other public interest factors that may weigh in favor of, or against, granting the application. These factors include the general significance of the proposed entry to the promotion of competition in the U.S. communications market, any national security, law enforcement, foreign policy, or trade concerns raised by the Executive Branch, and the presence of cost-based accounting rates. 5. In this order, we analyze whether KDD's foreign affiliate, KDD-Japan, has market power in the relevant destination markets. We conclude that KDD-Japan has market power in the facilities-based non- interconnected IPL market in Japan which potentially could be used to discriminate against and among competitors in the IPL resale market. Because KDD-Japan has market power in the underlying facilities-based market, we then examine whether Japan satisfies the ECO test for the resale of non-interconnected IPLs. We conclude that, although there are significant concerns with the competitiveness of Japan's IPL market, on balance, Japan offers ECO for the resale of non-interconnected IPLs. We also find no additional public interest reasons to deny the application, and conclude that we should grant the application. Finally, we determine that while KDD should be granted entry to the U.S. market, it must be regulated as dominant for its service to Japan because its affiliate KDD-Japan possesses sufficient market power in the underlying facilities-based market to enable it to discriminate against competing IPL resellers. A. MARKET POWER 6. In the Foreign Carrier Entry Order, the Commission found that applications from foreign carriers that hold market power raise the greatest potential for anticompetitive conduct, particularly where U.S. carriers are not allowed to compete effectively in those markets. The Foreign Carrier Entry Order defines market power as "the ability of the carrier to act anticompetitively against unaffiliated U.S. carriers through control of bottleneck services or facilities on the foreign end." Bottleneck services or facilities are "those that are necessary for the provision of international services, including inter-city or local access facilities on the foreign end." Our concern with KDD's application is thus whether KDD's affiliate, KDD-Japan, possesses sufficient bottleneck control to discriminate against U.S. carriers entering the Japanese market for non-interconnected private line resale. Such discrimination could distort competition in the U.S. market among KDD and other IPL resellers. 7. KDD argues that the only relevant market for a market power analysis is the resale market for non-interconnected IPLs. We disagree. There are two distinct markets in which KDD-Japan's market power could enable it to act anticompetitively against U.S. carriers seeking to provide non-interconnected IPL resale service in Japan: (1) the IPL resale market itself, as this is the market in which U.S. carriers would actually be competing against KDD, and (2) the underlying facilities-based market which all resellers depend upon to provide their resale service. 1. IPL Resale Market 8. In the IPL resale market, KDD-Japan's attributable market share is less than one percent and Japan has no foreign ownership restrictions on non-Japanese entities providing IPL resale services. In fact, there are 15 foreign-owned Special Type II carriers operating in Japan. Given KDD-Japan's low attributable market share in the Special Type II market and competition in this market, we find that KDD-Japan does not have market power in the IPL resale market. 2. Underlying Facilities Market 9. Within the underlying facilities-based market, we examine first the domestic market for terminating private lines at their Japanese destination, as a U.S. IPL reseller ultimately relies on a facilities-based carrier in Japan to reach the Japanese end user. A carrier controlling bottleneck facilities and services in the domestic market for terminating private lines could discriminate in favor of an affiliate competing in the non-interconnected IPL resale market by offering its affiliate superior technical quality, faster provisioning or preferential rates. Second, we examine the facilities-based IPL market. If a carrier were to exercise market power in the facilities-based IPL market, it could similarly discriminate in favor of an affiliated IPL reseller by offering the reseller preferential rates or conditions of access. For instance, if KDD-Japan has market power in this market, it could discriminate in favor of KDD by: (a) provisioning KDD's requests for IPLs faster than other carriers; (b) giving higher quality IPLs and better service; and (c) offering better rates (e.g., volume discounts) not available to competing carriers. 10. Our market power analysis focuses on traditional antitrust principles: (1) KDD-Japan's market share; (2) the supply elasticity of the market; (3) the demand elasticity of KDD-Japan's customers; and (4) KDD-Japan's cost structure, size and resources. a. Domestic Market for Terminating Private Lines 11. We find that KDD-Japan does not have market power in the domestic connecting private line market because the KDD Law of 1952 prohibits KDD-Japan from providing domestic services except for terminating its own international traffic. b. International Facilities Market 12. The issue remains, however, whether KDD-Japan, which is by far the largest of only three carriers authorized to acquire and operate IPL facilities in Japan, has market power or bottleneck control over facilities-based IPLs and thus could discriminate in favor of an affiliated IPL reseller. KDD states KDD-Japan has 60 percent of the facilities-based IPL market but others calculate that KDD-Japan has 65 percent or more of all IPL circuits. Additionally, the record indicates that KDD-Japan has 75 percent of the market share based on revenue. Although KDD-Japan's market share has declined from its prior 100 percent share, it is still relatively high. High market share, however, is not the sole determining factor of whether a firm possesses market power. We also examine supply and demand elasticities, conditions of entry and other market conditions to determine whether a particular firm can exercise power in the relevant market. 13. KDD contends that there is significant supply elasticity in the IPL market in Japan. Besides KDD-Japan, since 1989 there have been two other Type I international carriers in Japan: International Digital Communications, Inc. ("IDC"), and International Telecom Japan, Inc ("ITJ"). According to KDD, ITJ and IDC operate their own cable landing stations and international gateways and thus are not dependent upon KDD-Japan for switching or transmission capacity to provide IPL services between the United States and Japan. KDD states that the Commission has held that there is substantial excess capacity in the Pacific Region and that IPL services are not subject to the exercise of market power. It estimates that unsold, or sold but unused, indefeasible right of user interests ("IRUs") on undersea fiber optic cables between Japan and the United States represent 75 percent of total planned capacity on those cables. In addition, KDD identifies four satellite providers that are authorized as Type I carriers and more than 100 Type I domestic carriers that potentially could enter the IPL market. As of December 8, 1995, MPT clarified that all domestic carriers in Japan, except Nippon Telephone and Telegraph ("NTT"), are eligible to become Type I or Type II international carriers. 14. AT&T asserts that it is premature to consider the more than 100 domestic facilities-based carriers as competitors in the facilities- based IPL market in Japan. AT&T contends that not one domestic carrier has entered the IPL market and no domestic carriers have plans to enter the international market. And, AT&T explains that the Japanese Ministry of Posts and Telecommunications ("MPT") will permit such entry only if demand warrants it. Moreover, AT&T contends that KDD-Japan's control over IPL facilities is protected by Japanese foreign ownership restrictions that preclude foreigners from owning the facilities. 15. There are two factors that determine supply elasticities in the market. The first is the supply of capacity of existing competitors: supply elasticities tend to be high if existing competitors have or can easily acquire significant additional capacity in a relatively short time period. The second factor is low entry barriers: supply elasticities tend to be high even if existing suppliers lack excess capacity if new suppliers can enter the market relatively easily and add to existing capacity. 16. Notwithstanding the ample supply of the unsold, or sold but unused, IRUs on undersea fiber optic cables between Japan and the United States, we are concerned that there are only three facilities- based IPL carriers, and no new carriers have entered the facilities-based IPL market since 1989. We disagree with KDD that the four satellite providers and the potential 100 domestic carriers are viable competitors. While four satellite providers are authorized as Type I international carriers, only one currently provides facilities-based IPL services. Furthermore, this Type I carrier provides facilities-based IPL service only via satellite and we have no information about the market penetration of this provider. Additionally, we find it premature to consider the domestic providers as competitors. Given that MPT permits entry into Type I services only if "appropriate in light of demand in the service area," we cannot be certain that the domestic carriers or others will ever gain entry into the IPL market. While KDD claims that MPT has routinely authorized new entry by Type I carriers without requiring applicants to make a concrete showing that there is unmet demand or that existing facilities are inadequate, the MPT requirement has not been eliminated and no new carriers have entered since 1989. Finally, we are concerned that Japan's 33 1/3 percent foreign ownership cap prevents U.S. carriers from gaining control of an IPL facilities-based carrier. Thus, we find that the supply of IPLs is restricted. 17. Demand elasticity or responsiveness is the propensity of customers to switch carriers or otherwise change the amount of services they purchase from a carrier in response to relative changes in price and quality. According to KDD, the IPL market in Japan primarily serves high-end business subscribers who are sophisticated users of telecommunications services. These users, KDD asserts, have the willingness and ability to select an IPL provider based upon price and other differences among carriers. We agree with KDD that, in general, high-end business customers for IPLs are often highly demand elastic. 18. As for KDD-Japan's size, cost structure and resources, KDD appears to argue that KDD-Japan is small compared to the total Type II market. KDD states that, in 1993, KDD-Japan's revenue was $2.5 billion. This amount was one quarter the total combined revenue for Special and General Type II carriers, which was $9.5 billion. KDD- Japan nevertheless is still by far the largest IPL carrier in Japan. Indeed, KDD-Japan's position as the largest international carrier in Japan raises the possibility that its cost structure, size and resources could enable it to discriminate against U.S. carriers providing resold IPLs. We need not reach a conclusion on this issue, however, as KDD- Japan's high market shares of the IPL circuits and the restricted supply of facilities-based IPL providers in Japan taken together are sufficient to conclude that KDD-Japan has market power. 19. We conclude that KDD-Japan has significant market power in the facilities-based IPL market. This conclusion is based on a totality of the circumstances, including that only three carriers have entered the facilities-based IPL market in Japan since 1989, and MPT restricts entrance into the IPL facilities-based market based on demand. In addition, KDD-Japan still retains at least 60 percent ownership of IPL circuits and 75 percent of the revenues for the facilities-based IPL market, and foreign ownership restrictions preclude U.S. carriers from controlling any facilities-based IPL carriers. Such foreign ownership restrictions provide a form of protection against competitive pressures generated by open capital markets. The conclusion that KDD-Japan possesses market power in the facilities-based IPL market is reinforced by the relatively high IPL prices in Japan. According to AT&T, IPL prices for the Japanese half of a circuit are approximately fifty percent higher than for the corresponding U.S. half, further suggesting that the Japanese facilities-based IPL market lacks vigorous competition. In light of these factors, we find that KDD-Japan has market power in the facilities-based IPL market. B. ECO ANALYSIS 20. Under our rules established in Foreign Carrier Entry Order, we only conduct an ECO analysis when an applicant's foreign affiliate has market power in the destination market. Our finding that KDD- Japan has market power in the underlying facilities-based IPL market therefore requires us to conduct an ECO analysis of the non- interconnected resale IPL market in Japan. We analyze the resale IPL market, as opposed to the facilities-based IPL market, because the ECO test analyzes whether the destination country, Japan, offers ECO for U.S. carriers offering like services, which in this case is resale of non- interconnected IPLs. 21. Under the ECO analysis framework established in the Foreign Carrier Entry Order, we examine the: (1) legal ability of U.S. carriers to provide the relevant resale service in the destination market where the applicant possesses market power; (2) practical barriers to entry, including the existence of reasonable and nondiscriminatory charges, terms and conditions for the provision of such service; (3) competitive safeguards to protect against anticompetitive and discriminatory practices affecting the service including fair and transparent regulatory procedures; and (4) separation between the regulator and operator of international services. Additionally, we examine other public interest factors that may warrant grant or denial of the application. 1. Resale Entry 22. The first factor we examine under the ECO test is whether there are any legal restrictions on U.S. carriers' ability to enter Japan to provide non-interconnected IPL resale service. KDD states that there are no foreign ownership restrictions of any kind on IPL resale service carriers and that MPT regulation of IPL resellers is light-handed. KDD explains that applicants for Special Type II international carriers obtain from MPT a registration and an authorization for operating agreements with foreign correspondents. MPT processes the registration application in most instances in less than 15 calendar days. Absent notice to the contrary from MPT, the applicant may begin providing service on the 20th calendar day after filing the application. Usually, MPT reviews and approves the operating agreements with foreign correspondents within 30 days. KDD states that, to date, MPT has never rejected a Special Type II carrier's application for registration or an application for approval of an operating agreement. KDD asserts that the presence of over 32 IPL resale carriers, 15 having substantial foreign-ownership, supports KDD- Japan's contention that the regulatory requirements to enter the IPL market are minimal. We note that AT&T acknowledges that Japan may provide U.S. carriers with the legal ability to offer non- interconnected IPL resale service. 23. Based on this record, we conclude that Japan affords open entry for U.S.-based non-interconnected IPL resale carriers due to the absence of legal, regulatory or other restrictions on foreign or U.S. companies entering this market, minimal licensing barriers and the presence of non-Japanese carriers operating in Japan. 2. Interconnection 24. The second factor examined under the ECO test is whether there are reasonable and nondiscriminatory charges, terms and conditions for local termination of international services in Japan. In addition, there must be adequate means to monitor and enforce these conditions. Thus, we consider whether local termination terms and conditions are publicly available on a nondiscriminatory basis at reasonable prices. Publication of such terms and conditions hinders a foreign carrier from favoring its affiliated U.S. carrier over competing unaffiliated carriers in terms of both economic and technical local termination access to its facilities. 25. KDD contends that interconnection terms are inapposite because the relevant market segment is for non-interconnected IPL resale services. KDD is correct that Japan's regime for interconnection to the public switched network ("PSN") is not at issue here. But, even a provider of non-interconnected IPL service must have access to the domestic network in Japan to terminate its IPLs at its end user's premises. Therefore, we must examine the terms and conditions for a foreign IPL reseller to gain access to the domestic network to terminate its IPL services. 26. Foreign applicants seeking to provide non-interconnected IPLs on the U.S.-Japan route may lease the IPL domestic circuit portion in two ways. First, the foreign applicant may obtain the Japanese portion of the IPL from the international gateway to the end user's premises from one of the three Type I international carriers, KDD- Japan, IDC or ITJ. Type I carriers can use their own facilities or they may act on the applicant's behalf and contract to use NTT or other domestic carriers' facilities to terminate IPL traffic. Second, the foreign applicant may make arrangements directly with NTT or other domestic Type I carriers to terminate IPL traffic. 27. According to KDD, such arrangements are conducted pursuant to a non-tariff-based contract and are not normally published unless both parties agree. Although Special Type II carriers obtain service from Type I carriers pursuant to non-tariff-based contracts and not by tariff, KDD maintains that the non-tariff-based contracts offered to carrier customers use the tariff rates offered to end users. KDD explains that such tariff rates are filed with MPT by Type I carriers and are published. Additionally, KDD states that MPT reviews and approves the non-tariff-based contracts to ensure that the terms and conditions are reasonable and nondiscriminatory. Moreover, KDD states that the U.S.-Japan International Value-Added Network Services ("IVANS") agreements prove that MPT will not treat international Special Type II businesses in a discriminatory manner and that MPT will ensure that Type I international carriers do not impose any surcharges upon Special Type II carriers through non-tariff-based contracts. KDD explains that MPT retains authority to order Type I carriers to enter interconnection agreements at the request of a party when negotiations for such interconnection fail to be conducted or come to an agreement and when MPT deems interconnection especially necessary and appropriate to promote the public interest. 28. AT&T contends that KDD has failed to demonstrate that the charges, terms and conditions for providing non-interconnected IPL service in Japan are reasonable. AT&T emphasizes that the interconnection arrangements in Japan must be obtained through carrier-to-carrier negotiations, rather than under published, standard charges, terms and conditions. AT&T asserts that non-public arrangements raise the risk that disparate, discriminatory rates will result. 29. Although AT&T has raised some legitimate concerns about the terms, conditions, and charges for obtaining the domestic terminating link of a non-interconnected IPL in Japan, AT&T has not presented evidence that the charges for these links are so unreasonable as to cast doubt on the effectiveness of the competitive opportunities available to IPL resellers in Japan. As noted above in paragraph 11, KDD-Japan does not have market power in the Japanese domestic market for terminating private lines. Furthermore, we find that the U.S.-Japan IVANS Agreements that contain a general description of the requirements and procedures applicable to Type II international carriers, combined with the competitive safeguards as described below, are sufficient to prevent cross-subsidization between NTT and KDD- Japan. One safeguard is that MPT reviews and approves contracts between Type I carriers, such as NTT, and Special Type II carriers to ensure that the terms and conditions are reasonable and nondiscriminatory. Another example is that Type I carriers offer rates to special Type II carriers pursuant to non-tariff-based contracts equal to those offered by Type I carriers to end-user customers pursuant to tariff. Our conclusion is not affected by NTT's owning 13 percent of KDD-Japan. We believe this relatively low level of ownership is unlikely to give NTT the incentive to favor KDD-Japan or KDD in providing terminating private line services. Indeed, it appears that all IPL resellers can obtain nondiscriminatory access to domestic IPL termination offerings in Japan. Thus, we find that KDD is unlikely to receive favorable treatment in this market from either KDD-Japan or NTT. Moreover, at least 32 resellers are already operating in this market, which suggests that these resellers are able to obtain domestic terminating links under adequate terms which enable them to compete in this market. On balance, we find that Japan affords competing IPL resale providers nondiscriminatory access to domestic connecting private line facilities. 30. We emphasize that we are not considering here the harder issue of whether Japan offers an effective regime for interconnecting international service to the PSN, as the instant application is for non- interconnected private lines. We note that we have serious doubts about the full effectiveness of MPT's interconnection rules. Even MPT has publicly noted its dissatisfaction with the rules. In any future application that requires us to examine Japan's rules governing interconnection to the PSN, we would require such doubts to be addressed. 3. Competitive safeguards 31. The third factor that we examine is whether competitive safeguards exist in the foreign country to protect against anticompetitive or discriminatory practices affecting non- interconnected IPL resale. The safeguards we consider important include: (1) the existence of cost-allocation rules to prevent cross- subsidization; (2) timely and nondiscriminatory disclosure of technical information needed to use, or interconnect with, carriers' facilities; and (3) protection of carrier and customer proprietary information. 32. Cross-Subsidization. KDD states that all three competitive safeguards are present in the Japanese regulatory scheme. KDD explains that although KDD-Japan owns a controlling interest in KDD TELESERVE, KDD TELESERVE is a separate corporation from KDD- Japan and takes service from KDD-Japan pursuant to a non-tariff-based contract at the same rates as other Special Type II carriers or end user customers who subscribe to service under tariff. Furthermore, KDD states that MPT promulgated cost-allocation rules and other regulations that require KDD-Japan to provide services to recover fully distributed costs. In addition, KDD states that all Type I carriers must keep accounts in accordance with the classification of account items and accounting practices. Finally, KDD asserts that the general provisions in the Telecommunications Business Law ("Telecom Law") prohibit unreasonable rates and discrimination which establish a legal basis for preventing cross-subsidization. 33. AT&T states that, beyond a minimum requirement for nondiscrimination, other competitive safeguards are absent and Japan does not have fair and transparent regulatory procedures. AT&T contends that MPT's requirements do not prevent KDD-Japan from underpricing resellers by giving discriminatory discounts on its facilities-based services. AT&T argues that this requirement is necessary to prevent KDD-Japan from misusing its control of facilities- based IPL to impede resale competition. AT&T also contends that Japan does not maintain regulatory protections against discriminatory pricing by KDD-Japan. 34. We believe that AT&T has raised some valid concerns, but on the whole, find that there is insufficient information to conclude that KDD-Japan could cross-subsidize its affiliates to the point of being anticompetitive. We find it important that KDD TELESERVE, Inc. and KDD are separate corporations from KDD-Japan, and they take service from KDD-Japan pursuant to non-tariff-based contracts at the same rates as other Special Type II carriers or end user customers who subscribe to service under tariff. Furthermore, we note that MPT has promulgated cost-allocation rules and other regulations that require KDD-Japan to provide services to recover fully distributed costs. And, the record indicates that all Type I carriers must keep accounts in accordance with prescribed procedures. Finally, we note the general provisions in the Telecom Law prohibit unreasonable rates and discrimination; these provisions establish a legal framework for preventing cross-subsidization. We nonetheless remain concerned that there may not be adequate safeguards to prevent KDD-Japan from offering KDD TELESERVE or KDD discriminatory pricing. This concern is tempered by: (1) KDD-Japan having less than one percent of the Special Type II international market through AT&T JENS Corp. and KDD TELESERVE and (2) the lack of evidence suggesting that existing protections have been ineffective in preventing cross-subsidization between KDD-Japan and KDD TELESERVE. If we receive information contradicting this conclusion, we will revisit the issue. 35. Disclosure of Network Information. While KDD does not point to any MPT regulations imposing technical disclosure rules specifically on KDD-Japan, KDD explains that the regulations that address NTT's use and disclosure of customer information (as detailed below) ensure that competing Type II carriers have equal access to network information and that NTT takes the necessary measures to make planned network services and functions available to all Type II carriers simultaneously. 36. AT&T states that Type I carriers in Japan are not obligated to provide disclosure of network information except on a case-by-case basis pursuant to the regulator's request. Additionally, according to AT&T, Japan's regime is not transparent because it lacks specific rules protecting Type II non-interconnected IPL resale carriers. AT&T argues that the absence of necessary safeguards should be dispositive in this proceeding. 37. Disclosure of network information is the dissemination of information needed to use or interconnect with a carrier's facilities, such as information about signalling systems or number portability. We note that Japan imposes disclosure of network information regulations on NTT, which as stated above, is a Type I facilities-based provider that controls the underlying local access facilities. Here, KDD asserts that regulations applicable to NTT ensure that all competing Type II carriers have equal access to network information and that NTT takes the necessary measures to make planned network services and functions available to all Type II carriers. AT&T does not provide evidence that Japan's network disclosure rules governing NTT have frustrated carrier efforts to obtain timely interconnection to NTT's facilities. We do not find that the lack of special technical disclosure regulations imposed on KDD-Japan undermines a finding of ECO for the non-interconnected international resale market in Japan. Access to technical network information is more important generally to the underlying facilities-based carrier which owns and controls the network, as compared to the resale carrier, which does not get involved in the network's operations. We further note that there is no evidence in the record that the current regulations governing NTT are inadequate. 38. CPNI Safeguards. KDD states that Japan's civil and criminal laws, including the Telecom Law, regard customer proprietary network information ("CPNI") as protected proprietary information. Moreover, because KDD-Japan does not have market power over the originating or terminating domestic circuits, KDD asserts that CPNI rules for KDD- Japan are unnecessary. KDD states that MPT established CPNI regulations governing NTT, which controls inter-city and local access facilities in Japan. KDD explains that the CPNI regulations require NTT to establish internal procedures, including the creation of a separate division within the company for CPNI matters, to ensure the appropriate use of CPNI. Those regulations impose controls also upon the dissemination of CPNI within NTT and to the public. KDD explains that NTT takes the necessary measures to make planned network services and functions available to all Type II carriers simultaneously and that MPT is fully empowered to address any problems regarding discrimination or cross-subsidy that might arise. In addition, MPT has under consideration whether Type I international carriers should be subject to similar CPNI requirements as apply now to NTT. 39. AT&T states that KDD admits that MPT does not maintain CPNI rules governing KDD-Japan. AT&T contends also that KDD fails to address whether Japan maintains safeguards to prevent KDD-Japan from misusing carrier proprietary information. Moreover, AT&T points out that, in the Foreign Carrier Entry Order, the Commission states that a foreign carrier such as KDD-Japan has much less incentive to support its government's implementation of effective competitive safeguards once its affiliate has gained U.S. market entry. KDD replies that KDD-Japan cannot misuse carrier proprietary information without sanction, for Japan's civil and criminal laws, including the Telecom Law, regard CPNI as protected proprietary information. 40. We agree with AT&T that CPNI rules are important in the non-interconnected private line resale service to prevent KDD-Japan from providing confidential customer information to KDD. KDD states that the Telecom Law regards CPNI as protected proprietary information and therefore KDD-Japan cannot misuse carrier proprietary information. Additionally, the CPNI rules for NTT apply indirectly to KDD-Japan by virtue of KDD-Japan using NTT's network for its domestic terminating facilities. Considering AT&T has not provided evidence that the current CPNI rules governing NTT or those in the Telecom Law are inadequate to prevent NTT or KDD-Japan from misusing customer proprietary information to benefit KDD, we find that the CPNI rules are sufficient to safeguard against KDD-Japan from providing confidential customer information to KDD. If we receive information contradicting this conclusion, we will revisit the issue. 41. While the record indicates Japan's competitive safeguards continue to suffer from significant shortcomings, we conclude that these safeguards are, on balance, sufficient to prevent KDD-Japan from discriminating against unaffiliated IPL resale carriers. The record indicates that several important safeguards relevant to this application are already in place, and MPT is empowered to address problems regarding discrimination or cross-subsidy that might arise. If we receive information contradicting this conclusion, we will revisit the issue. Based on the record, however, we find that Japan's rules are sufficient to satisfy this element of the ECO test in the context of the non-interconnected IPL resale market. 4. Regulatory framework 42. The fourth factor of the ECO analysis is whether there is an effective regulatory framework in the destination country to develop, implement and enforce legal requirements, interconnection arrangements and other competitive safeguards. There must be sufficient separation between the operator and the regulator to ensure that the regulator is independent, empowered, and does not have a conflict of interest in regulating the operator. Absent sufficient separation, there is little reason to believe that such favoritism will not occur. Transparent procedures are important also to allow competitors to know precisely what obligations are required of the incumbent dominant carrier and what rights they have to seek enforcement of such obligations. Fair and transparent procedures that allow public input into the decision-making process help ensure that the resulting rules are effective and nondiscriminatory. 43. KDD contends that MPT is an independent regulatory authority that is completely separate from Type I and Special Type II international carriers. KDD contends that the government's five percent attributable indirect ownership interest in KDD-Japan is insignificant. KDD explains that MPT may hold hearings in numerous specified cases, including complaints that a Type I carrier has engaged in improper discrimination against a Special Type II carrier. Furthermore, KDD states that MPT is fully empowered to address problems regarding discrimination or cross-subsidization because it oversees contracts between Type I and Special Type II international carriers, actively reviews cost support materials and maintains rules governing the allocation of costs among services, and the derivation of rates for specific services. 44. AT&T argues that MPT is not independent. AT&T considers MPT's five percent ownership of KDD-Japan significant, based on the Commission's telco-cable cross-ownership rules. Second, AT&T explains that the Japanese government -- the same entity responsible for regulatory oversight of KDD-Japan -- owns a majority of NTT and NTT owns 13 percent of KDD-Japan. Third, AT&T states that the regulatory authorities are not required to seek public comment in their regulatory making decisions. And fourth, AT&T questions the right of competitors to seek enforcement of the provisions and whether the Japanese regulator would be likely to respond positively to such complaints. 45. The record indicates that MPT has the power to address problems through tariff review, arbitration and other complaint process, yet MPT does not appear to be bound to respond within a particular time period. While the record indicates that an advisory council may advise MPT on public policy issues, it is unclear whether the council is comprised of disinterested parties or how the council reaches its decisions, i.e., whether the documentation is released at the MPT's discretion. We are concerned also about MPT's 5 percent ownership of KDD-Japan and NTT's 13 percent ownership of KDD- Japan, as the MPT owns 2/3 of NTT. We would like to see further separation of the regulator and operator in Japan. As we stated in the Foreign Carrier Entry Order, absent sufficient separation between the operator and the regulator to ensure that the regulator is independent, empowered, and does not have a conflict of interest in regulating the operator, there is little reason to believe that the regulator will not favor the operator. We note, however, that AT&T has not provided any evidence in the record that MPT has granted preferential treatment towards KDD-Japan. Furthermore, given that the competitiveness of the IPL resale market and the safeguards MPT has already implemented, we conclude that MPT is likely to be sufficiently effective in its enforcement and regulatory activities affecting IPL resale. We will, however, continue to monitor whether MPT does in fact take adequate action to remedy any anticompetitive conduct that might occur. 5. Summary 46. On balance, we find that Japan satisfies the ECO test for the limited field of resale of non-interconnected IPLs. First, we note the absence of legal, regulatory or other restrictions on foreign or U.S. companies entering this market. Second, we find that, despite certain shortcomings, Japan affords nondiscriminatory terms and conditions for the domestic market for terminating private lines. Third, it appears that there are sufficient safeguards in place to protect against anticompetitive practices and discriminatory practices affecting non- interconnected IPL resellers. And fourth, we conclude that MPT is sufficiently separate from KDD-Japan to address any problems that U.S. carriers or others may encounter with respect to the Japanese telecommunications IPL resale market. Although we agree with some of AT&T's concerns, we do not believe that these concerns will have a sufficiently direct effect on competing non-interconnected IPL resellers to prevent them from competing effectively in the Japanese market. Thus, we conclude that Japan offers ECO to non-interconnected IPL resale carriers, which would compete with KDD. We emphasize our right, however, to revisit this decision if there are significant changes in NTT's or KDD-Japan's status that negatively influence resellers' ability to terminate their private lines in Japan. For example, we may revisit the issue if evidence emerges that as a result of MPT permitting KDD- Japan to provide domestic service or NTT to provide international service, that the effectiveness of the competitive opportunities available to IPL resellers is called into serious doubt. C. ADDITIONAL PUBLIC INTEREST FACTORS 47. The additional public interest factors that we consider include the general significance of the proposed entry to the promotion of competition in the U.S. communications market and any national security, law enforcement, foreign policy, and trade concerns raised by the Executive Branch. Also, we consider the relationship of accounting rates to relevant cost benchmarks as a factor under our general public interest analysis. 48. According to AT&T, there are other countervailing public interest reasons to deny KDD's application. AT&T contends that Japan's accounting rates are far above relevant cost benchmarks. Moreover, AT&T states that KDD-Japan negotiates accounting rates on behalf of all three carriers, as IDC and ITJ are not permitted to negotiate separately with U.S. carriers for accounting rates. AT&T believes that the United States will gain greater market access in Japan through the Group on Basic Telecom ("GBT") negotiations by continuing the status quo instead of permitting KDD-Japan, the leading Japanese international carrier, to enter the U.S. IPL services market to provide services to its home market. Finally, AT&T argues that KDD's entry into the U.S. market would have no general significance in promoting competition in the U.S. communications market, as there are a large number of carriers already providing resale and facilities-based IPL services in the U.S. market. 49. KDD states that AT&T's criticism of the U.S.-Japan accounting rate is inapposite, as KDD is not seeking authority to enter the U.S. international switched services market. Also, KDD states that all Type I international carriers have independent authority to negotiate accounting rate agreements with U.S. carriers, as KDD-Japan does not have authority to negotiate accounting rate agreements that are binding on the other Type I international carriers. KDD further states that using its application as a trade tactic is indefensible, as Japan has already fully opened its own international IPL resale market to United States and other non-Japanese carriers, and AT&T and other U.S. entities have already entered that market segment in Japan. KDD emphasizes that AT&T is the only party to oppose KDD's application. Finally, KDD argues that AT&T's contention that an additional entrant into the non-interconnected IPL resale would not promote additional competition in the United States runs counter to the Commission's ECO policy. 50. We find that there are no other countervailing public interest reasons to deny grant of KDD's application. The Executive Branch has not raised any national security, law enforcement, foreign policy, or trade concerns with this application. While we are concerned about Japan's high accounting rates and would like to see them decrease, we do not find that a reason to deny KDD's application to enter the non-interconnected IPL market, as proliferation of these services will help put pressure on the above-cost accounting rates. We also believe that U.S. consumers will benefit by authorization of a new non-interconnected IPL resale carrier serving Japan. We accordingly find it in the public interest to permit KDD to enter the non- interconnected IPL resale market on the U.S.-Japan route. D. REGULATORY STATUS OF KDD 51. The final issue to determine is whether to regulate KDD as dominant on the U.S.-Japan route for non-interconnected IPL service. Although we find in this order that Japan, on balance, offers ECO to resellers of non-interconnected IPLs, that finding does not necessarily dictate that the applicant lacks market power and should accordingly be regulated as non-dominant. For this analysis, we must determine whether KDD's affiliate, KDD-Japan, has bottleneck control over transmission facilities that U.S. applicants need in order to provide non-interconnected IPL resale service. If KDD-Japan possesses such bottleneck control in the underlying facilities market, we would ordinarily regulate KDD as dominant in the IPL resale market, absent a showing by KDD that Japan's regulatory framework will prevent KDD- Japan from discriminating against competing U.S. resellers of IPLs. 52. We regulate U.S. carriers affiliated with a foreign carrier with market power in a destination country as dominant on that route in order to ensure that a U.S. carrier and its foreign affiliate are not routing traffic between the United States and an affiliated country in a manner that discriminates against other unaffiliated U.S. carriers. As stated in the market power analysis in paragraphs 12-19, KDD-Japan has significant market power over the underlying IPL transmission facilities which IPL resellers need to serve Japan. KDD-Japan is the largest international carrier in Japan and it is one of only three facilities-based IPL providers in Japan. Due to the MPT requirement that restricts entry into the international facilities-based IPL market based on demand, new entry is uncertain. 53. Although we have concluded above that there are sufficient safeguards in place to enable competitors to compete effectively with KDD in the relatively open IPL resale market, we are not convinced that the Japanese regulatory regime is adequately empowered to effectively prevent KDD's affiliate, KDD-Japan, from abusing its market power in the far less open underlying facilities-based IPL market. The record indicates persistent concerns with MPT's ability to prevent discrimination in the facilities-based IPL market despite the fact that MPT is generally empowered to address problems regarding discrimination through tariff review, arbitration and other complaint processes. For example, the agreements used to obtain the underlying facilities-based IPLs are negotiated by contract and are not published unless both parties agree. Although MPT reviews and approves such contracts, transparent procedures are important to indicate what obligations the incumbent carriers have and what rights competitors have to seek enforcement of such obligations. 54. Given the market power that KDD-Japan has over the IPL facilities and the lack of transparency, we find that the potential exists for KDD-Japan to favor KDD over U.S. resellers. Therefore, to safeguard against this possibility, we find that KDD should be regulated as dominant on the U.S.-Japan route. 55. As a dominant carrier, KDD is subject to several regulatory safeguards. KDD must: (1) obtain a Section 214 authorization prior to adding circuits; (2) file traffic reports on a quarterly basis; (3) file its international tariff on 14 days' notice; and (4) maintain complete records of the provisioning and maintenance of network facilities and services it procures from its foreign carrier affiliate. Through these regulations, the Commission monitors dominant carriers' facilities and capacity to ensure that they will not monopolize service on a particular route or engage in anticompetitive practices. If competition in the facilities-based IPL market increases and MPT takes steps that give us greater confidence that KDD-Japan could not favor KDD over other IPL resellers, we would be willing to re-examine KDD's dominant status. IV. CONCLUSION 56. We find that grant of authorization to KDD to resell seven T1 non-interconnected IPL circuits for service to Japan is in the public interest and consistent with Section 214 of the Communications Act. We find that KDD's affiliate, KDD-Japan, has market power in the underlying facilities-based IPL market and thus KDD's application for non-interconnected IPL resale authority must satisfy our ECO test. Despite certain shortcomings in Japan's competitive safeguards, we are satisfied that ECO presently exists in the IPL resale market. Because KDD-Japan has market power over IPL facilities in Japan, we classify KDD as dominant on the U.S.-Japan route for providing IPL resale services. Authorizing KDD to provide non-interconnected IPL resale service to Japan will benefit consumers by adding an additional resale carrier on the U.S.-Japan route. V. ORDERING CLAUSES 57. Accordingly, IT IS ORDERED that application File I-T-C-95- 481 IS GRANTED and KDD America, Inc. is authorized to resell seven T 1 international private line circuits not interconnected to the public switched network for the provision of international private line services between the United States and Japan. 58. It is FURTHER ORDERED that KDD America, Inc. will be regulated as a dominant carrier pursuant to Section 63.10 of the Commission's rules, 47 C.F.R.  63.10 (1995). 59. It is FURTHER ORDERED that KDD America, Inc. shall comply with Section 203 of the Communications Act, 47 U.S.C.  203, Part 61 and Sections 43.51 and 43.61 of the Commission's Rules, 47 C.F.R. Part 61 and  43.51 and 43.61, and shall file annual reports of circuit additions in accordance with the requirements set forth in Rules for Filing of International Circuit Status Reports, CC Docket No. 93-157, Report and Order, 10 FCC Rcd 8605 (1995). 60. It is FURTHER ORDERED that this authorization of KDD America, Inc. to provide private lines as part of its authorized services is limited to the provision of non-interconnected private line service only between the United States and Japan, that is, private lines that originate in the United States and terminate in Japan, or that originate in Japan and terminate in the United States. In addition, KDD America may not -- and KDD America's tariffs must state that its customers may not -- connect private lines provided over these facilities to the public switched network at either the U.S. or foreign end or both, for the provision of international switched basic services, unless authorized to do so by the Commission upon finding that Japan affords resale opportunities equivalent to those available under U.S. law, in accordance with Regulation of International Accounting Rates, Phase II, First Report and Order, 7 FCC Rcd 559 (1991), Order on Reconsideration and Third Further Notice of Proposed Rulemaking, 7 FCC Rcd 7927 (1992), Third Report and Order and Order on Reconsideration, FCC 96-160, released May 20, 1996. See also Foreign Carrier Entry Order at  133-138. 61. This order is issued under Section 0.261 of the Commission's Rules and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commission's Rules may be filed within 30 days of the public notice of this Order (see Section 1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Donald H. Gips Chief, International Bureau