DA 96-1645 Before the Federal Communications Commission Washington, D.C. 2055 In the Matter of ) ) AT&T Corp. ) File Nos. ISP-96-W-268 MCI International Corp. ) ISP-96-W-296 ) Petitions for Waiver of the ) International Settlements Policy ) to Change the Accounting Rate for) Switched Voice Service, Virtual Network) Connection or Global Software Defined ) Network Service, and Switched 64 ) Service with Australia) ORDER AND AUTHORIZATION Adopted: September 30, 1996 Released: September 30, 1996 By the Chief, International Bureau: I. Introduction 1. This decision approves waivers filed by AT&T and MCI to reduce the accounting rate for service between the United States and Australia. The proposals will result in a significant reduction in the accounting rate, move it closer to cost, promote economic efficiency, and reduce net settlement payments. Approval of these waivers will also increase the pressure on other administrations in the region to reduce their accounting rates with U.S. carriers. Our action will benefit U.S. telephone consumers by providing the basis for lower prices on calls to Australia and also provide the potential for a broader range of price reductions throughout the Pacific Basin and Asia. 2. As we noted in our Accounting Rate Policy Statement, market conditions are changing rapidly in the international communications service industry. We have indicated that we will waive our International Settlements Policy in appropriate situations so that beneficial change is not impeded by regulatory inertia. The proposals under review may present such an opportunity. They are a positive step towards a cost-based accounting rate for service between the United States and Australia. In addition, they represent an effort to bring cost considerations into the accounting rate determination by introducing different rates based on cost differences. They also provide an opportunity to move to the kind of market-oriented settlement arrangement envisioned in our Policy Statement. We are prepared to support such a step. 3. While we approve the proposals of AT&T and MCI to introduce a lower accounting rate with Telstra, we urge AT&T and MCI to negotiate a nondiscriminatory, cost- based, interconnection fee arrangement with Telstra to replace the agreements approved in this decision when they expire on June 30, 1997. This is a logical step for the carriers to take based upon the recent history of accounting rate agreements between them and will expedite the transition from the traditional settlement arrangement. To begin the process, we urge AT&T, MCI and other U.S. carriers to initiate discussions with Telstra for the purpose of introducing such an arrangement upon expiration of the current waiver approved in this order. II. Background 4. Historically, U.S. carriers' IMTS accounting rate with Telstra has been among the lowest in the Asia/Pacific region, falling from 1.5 SDR in 1985 to the current level of 0.4 SDR. These low accounting rates have contributed to relatively low net settlement payments with Australia, generally less than $5 million in recent years. In fact, the United States had a net settlement surplus of $10 million with Australia in 1994 although initial filings show a net payment of $15 million from the United States to Australia in 1995. 5. AT&T and MCI have filed waivers to introduce a unique "zone based variable accounting rate" of 0.308 SDR per minute, approximately 45›, with Telstra. This is a reduction of almost twenty-five percent from the existing settlement rate. The rate applies to both carriers' switched voice service, to global software defined network service for AT&T, and to virtual network connection service for MCI. A surcharge equal to thirty seconds continues to apply to country direct calls. The accounting rate is scheduled to become effective on July 1, 1996, and expire on June 30, 1997, when a new agreement must be reached. Both carriers will also reduce the rate for international switched digital service from 0.8 SDR per minute to 0.4 SDR per minute. 6. The waivers have complex features not normally associated with accounting rates changes. The "zone based variable accounting rate" is derived from three accounting rates: (1) 0.3 SDR per minute for U.S. billed calls that terminate in Sydney or Melbourne; (2) 0.32 SDR per minute for U.S. billed calls that terminate outside Sydney or Melbourne; and (3) 0.34 SDR per minute for U.S. billed calls that terminate on the cellular network in Australia, regardless of the destination. (The difference between each rate, 0.02 SDR, equals about 3›.) AT&T states that the differences among rates are based on Telstra's costs to terminate U.S. billed calls. Each rate is weighted by its share of the total settlement minutes terminating in Australia during 1995 and part of 1996 to determine the "zone based variable accounting rate." The resulting rate, 0.308 SDR, is used to conduct initial monthly settlements between the U.S. carriers and Telstra. 7. In addition, the proposal is divided into two time periods: July 1996 through December 1996, and January 1997 through June 1997. At the end of the period, the "zone based variable accounting rate" will be re-calculated using the actual distribution of minutes among the three call categories for the period. If the re-calculated rate differs from 0.308 SDR, the initial net settlement payment for the period will be adjusted on the basis of the cumulative imbalance of minutes during the six month period and the difference between the 0.308 SDR and its re-calculated value. If the re-calculated rate exceeds 0.308 SDR, for example, because a greater proportion of minutes terminates outside Sydney or Melbourne or on Australia's cellular networks, then the net settlement payment from the U.S. carrier in question to Telstra will rise. Conversely, if the re-calculated rate is less than 0.308 SDR, then the net settlement payment will fall. During January through June 1997, settlements will again be calculated initially at 0.308 SDR. An adjustment in the net settlement payment for the period, if any, will likewise be determined by re-calculating the rate using the distribution of minutes for the period. III. Discussion 8. Our goal continues to be cost-based, nondiscriminatory, transparent accounting rates that promote economic efficiency, improve resource allocation, stimulate competition and ensure low IMTS rates. Cost-based rates benefit not only U.S. users but also the global community. The proposals of AT&T and MCI advance that goal in two ways. First, there will be a significantly lower accounting rate for service with Telstra. This action is a significant move towards a cost-based rate for terminating a minute of service in Australia and holding down net settlement payments with Australia. Second, the proposals attempt to take into account varying termination costs of separate classifications of service. 9. We believe a significantly lower accounting rate for service between the United States and Australia will put added pressure on other administrations throughout Asia and the Pacific region to negotiate lower rates with U.S. carriers. The proposed accounting rate would be far below the rates U.S. carriers have negotiated with other administrations in the region. We note, for example, that the rate with Japanese carriers, 0.63 SDR, is more than double the rate we are approving with this decision and it was last changed in 1994. 10. While the AT&T and MCI proposals have significant benefits, they nevertheless fall short of our goal of nondiscriminatory, cost-based, transparent settlement arrangements. The settlement rate, while significantly lower than the existing rate, remains well above even a conservative estimate of Telstra's costs of terminating international service. An examination of Telstra's published tariffs reveals that the settlement rate proposed is, in fact, well above the total tariffed price (when calculated on a per-minute basis) that Telstra charges for the individual components of terminating international dedicated private line service, including international transmission facilities, international switching facilities and national extension (domestic transport and termination). As discussed below, a comparison between the national extension portion of this tariffed price (its major component) and Telstra's domestic interconnection prices demonstrates the degree to which Telstra's tariffed price for terminating dedicated international service (which, we stress again, is less than the settlement rate proposed here) exceeds its underlying costs. 11. Despite Australia's strong support for cost-based termination charges, national carriers in Australia have decidedly better interconnection arrangements with Telstra than it is apparently willing to offer U.S. facilities-based carriers at this time. For domestic resellers, Telstra's national interconnect tariff has a schedule of fixed and usage sensitive charges. Under the current fee schedule, Telstra's charges to domestic resellers appear to be approximately only one half to two thirds of the national extension portion of its tariffed price to terminate dedicated international service. It should be noted, moreover, that AUSTEL, the regulatory agency in Australia, has stated that these domestic resellers claim they pay more than twice the charge Optus (Australia's other facilities-based carrier) pays to Telstra for interconnection. Thus, the interconnection fee paid by Optus may be only one quarter or one third of the national extension portion of the tariffed price that Telstra offers for terminating dedicated international service. 12. With regard to the proposal for varying accounting rates based on the site of termination, we are encouraged by U.S. carriers' attempts to bring cost considerations into their accounting rate determinations with foreign administrations, for, as we stated in our Surcharge Order, in a competitive environment prices should reflect actual costs. While we support this effort to lower the accounting rates and appreciate Telstra may have different costs for terminating traffic outside of Sydney or Melbourne or on cellular networks, we are troubled that the parties have not made sufficient efforts to explain these cost distinctions. Neither U.S. carrier presents information to show that Telstra's cost to terminate a minute of service differs among Melbourne and Sydney, the rest of Australia, and cellular service, or that the accounting rate variations are accurate reflections of these differences. We urge carriers in the future to present a clearer rationale when requesting similar waivers. 13. Finally, we reiterate that our ISP requires nondiscriminatory treatment of U.S. carriers, i.e., that they be offered the same accounting rate with the same effective date by a foreign carrier, particularly when that carrier is in a position to exercise market power. We expect, therefore, that other U.S. facilities-based carriers providing service with Telstra will be offered the same settlement terms proposed by AT&T and MCI in their waivers. IV. Conclusion 14. Telstra has negotiated a series of accounting rate agreements with U.S. carriers in recent years that push the rate in the direction of declining rates to terminate service. In addition, U.S. carriers and Telstra have proposed to recognize separate classifications of service that are reported to contribute identifiable and measurable additions to the underlying cost to terminate a call. The series of reductions and the attempts to recognize discrete costs of particular service classifications could be viewed as steps in a transition from traditional, bilaterally negotiated settlement arrangements with the equal division of the accounting rate to a nondiscriminatory, cost-based, transparent interconnection payment arrangement. 15. We have long promoted nondiscriminatory, cost-based accounting rates that are publicly available. Although we have reservations about some specific details of the waivers filed by AT&T and MCI, we believe the reduction in the accounting rate outweighs these concerns. Moreover, the proposals present an opportunity to go directly to a nondiscriminatory, cost-based, interconnection fee arrangement when the agreements expire June 30, 1997. We therefore urge Telstra and U.S. carriers to consider negotiating such a settlement arrangement for implementation next year and would expect that any such settlement arrangement be priced at levels significantly lower than the settlement rate approved here. 16. In the meantime, we intend to work closely with the Australian authorities to consider what measures might be necessary if carriers are to transition from the traditional settlement method to a nondiscriminatory, market-oriented, interconnection fee approach. We expect U.S. carriers to keep us informed of their progress in discussions with Telstra over the next year. IV. Ordering Clauses 17. Accordingly, IT IS ORDERED that AT&T's request to establish an accounting rate with Telstra in Australia at 0.308 SDR per minute for switched voice service and global software defined network service and 0.4 SDR for international 56 kbps switched digital service effective July 1, 1996, through June 30, 1997, is approved. 18. IT IS FURTHER ORDERED that MCI's request to establish an accounting rate with Telstra in Australia at 0.308 SDR per minute for switched voice service and virtual network connection service and effective July 1, 1996, through June 30, 1997, and 0.4 SDR for international 56 kbps switched digital service effective July 1, 1996 is approved. 19. IT IS FURTHER ORDERED that AT&T and MCI keep the International Bureau staff informed of any negotiations with Telstra to enter into settlement arrangements based on a nondiscriminatory, cost-based interconnection fee to replace the agreements approved in this order when these agreements expire on June 30, 1997. 20. 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 date of public notice of this Order (see C.F.R. Section 1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Donald H. Gips Chief, International Bureau