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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* DA 96-2007 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) Cable & Wireless, Inc.) ) Application for Authority Pursuant to ) Section 214 of the Communications Act ) ITC-96-239 of 1934, as amended, to Provide ) Facilities-based Service between the ) United States and the United Kingdom ) ) In the Matter of) ) Cable & Wireless, Inc.) ) Petition for Non-Dominant Status on ) International Private Line ) ISP-93-007-ND Routes ) ORDER, AUTHORIZATION AND CERTIFICATE Adopted: November 27, 1996 Released: November 29, 1996 By the Chief, International Bureau: TABLE OF CONTENTS Topic Paragraph No. I. Introduction 1 II. Background and Pleadings 2 III. Discussion A. CWI's Application to Provide Facilities-based International Services8 1. Analysis of CWI's Market Power 9 2. Public Interest Analysis 22 B. CWI's Request for Non-dominant Treatment 24 IV. Ordering Clauses 30 I. Introduction 1. In this order, we grant Cable & Wireless, Inc. (CWI) authority pursuant to Section 214 of the Communications Act of 1934 to provide international facilities-based switched and private line services between the United States and the United Kingdom. We also find that CWI should be regulated as a non-dominant carrier in the provision of international facilities-based and resold switched and private line services between the United States and the United Kingdom. II. Background and Pleadings 2. CWI is a U.S. corporation organized under the laws of the District of Columbia. It is a domestic common carrier authorized to provide international switched and private line services between the United States and numerous countries, including the United Kingdom, through the resale of switched and private line services provided by other U.S. carriers. CWI also is authorized to provide international switched and private line services on a facilities basis between the United States and various international points CWI "is ultimately 100 percent owned by Cable and Wireless plc (C&W plc), a company organized under the laws of England and Wales." C&W plc has an 80 percent ownership stake in Mercury Communications Ltd. (Mercury), a foreign carrier that provides domestic and international telecommunications services in the United Kingdom. 3. CWI requests Section 214 authority to provide international facilities-based switched and private line services on a non-dominant carrier basis between the United States and the United Kingdom. CWI certifies that it is affiliated within the meaning of Section 63.01(r)(i) of the Commission's rules with Mercury. CWI asserts that grant of its application will serve the public interest by promoting competition and stimulating more efficient use of telecommunications services. BT North America Inc. (BTNA) and AT&T Corp. (AT&T) filed comments supporting and opposing, respectively, CWI's application, to which CWI responded. 4. CWI contends that Mercury does not possess bottleneck control in the United Kingdom's domestic market and that British Telecom (BT) is "widely recognized" as the dominant provider in that market. CWI avers that "[t]here are currently 22 regional and national facilities-based license holders and 125 cable operators licensed to provide service within defined citites and towns." CWI asserts that, according to the United Kingdom's Office of Telecommunications (Oftel), Mercury generates "approximately 0.549 percent of the residential [market] revenues and 7.216 percent of the business market revenues in the U.K. local market." CWI claims that, in the national market, Mercury generates approximately 5.86 percent of the residential market revenues and 20.5 percent of the business market revenues. CWI also maintains that approximately 60,000 people a month switch from BT to local cable companies for their telephone service. CWI also asserts that it does not have the size and resources to discriminate against unaffiliated U.S. carriers in the U.K. domestic market because it controls only 13 percent of the domestic digital infrastructure. 5. With respect to the market for international services, CWI asserts that Mercury's share of the U.K. international market is as modest as its share of the U.K. domestic market. CWI contends that, "in 1995, Mercury held only 24.6 percent of the IMTS [i.e., international message telephone service] and ISR market based on revenue, and only a modest 36 percent of the IPL [i.e., international private line] market." CWI maintains that there is sufficient supply elasticity in the facilities-based switched and private line markets in the United Kingdom and that it will increase in the future. In this regard, CWI claims that there are 25 licensed ISR providers operating in the United Kingdom, as well as a multitude of other carriers reselling IMTS and IPL services. In addition, CWI states that DTI has "proposed ending the present duopoly on international facilities to the U.S.," that over 40 companies have applied for international facilities-based licenses which DTI expects to grant by the end of 1996, and that the new applicants will not be subject to foreign ownership restrictions. CWI also states that the Commission has determined that the United Kingdom is an "equivalent country" for ISR purposes. CWI also suggests that international service customers in the United Kingdom benefit from strong price competition as evidenced by the facts that "the average BT phone bill has fallen by over 25 percent in real terms since 1990, AT&T claims it undercuts BT's basic rates by up to 40 percent on some calls, and Mercury can offer international calls at 20 percent less than BT." CWI asserts that it does not possess the size and resources to discriminate against unaffiliated U.S. carriers because it controls 42 percent of the digital IPLs and 17.6 percent of the international digital infrastructure. For these reasons, CWI claims that Mercury lacks sufficient market power to control bottleneck services or facilities in the United Kingdom and, therefore, has no ability to discriminate in favor of CWI in that country. 6. CWI also claims that its application passes the effective competitive opportunities (ECO) test established in the Foreign Carrier Entry Order. In support, CWI cites DTI's decision to "eliminate[] the U.K. duopoly on international facilities" and the Commission's designation of the United Kingdom "as an 'equivalent' country for . . . [ISR] purposes[.]" In addition, CWI avers that the licenses of incumbent facilities-based carriers contain conditions ensuring nondiscriminatory interconnection and imposing competitive safeguards. Further, CWI maintains that the fact that there are more than 150 facilities-based carriers attests to the efficacy of these competitive safeguards and Oftel's regulatory oversight. 7. AT&T asserts that Mercury possesses market power and that the United Kingdom fails the effective competitive opportunities test because the United Kingdom "legally prohibits facilities-based international competition . . . and allows only . . . Mercury and BT to provide facilities-based international services." AT&T claims that CWI has made no showing of any public interest factors that would warrant approval of its application. AT&T therefore recommends that the Commission defer reaching a decision on CWI's application until the "U.K. takes more definitive action toward removing the current de jure international facilities-based prohibition." AT&T also suggests that, as a part of "its overall public interest analysis[,]" the Commission should examine "whether new entrants have the practical ability to obtain international facilities and the means to access that capacity in the U.K." In particular, AT&T recommends that "the role Mercury will play in making access available to new entrants should be evaluated herein." III. Discussion A. CWI's Application to Provide Facilities-based International Services 8. Because CWI and its foreign carrier affiliate Mercury are under the common control of C&W plc, we must review CWI's application to provide international services to the United Kingdom under the framework established in the Commission's Foreign Carrier Entry Order. In that order, the Commission determined that foreign carriers seeking to provide U.S. international services to countries in which they have market power must demonstrate that the affiliated country offers "effective competitive opportunities" (ECO) for U.S. carriers to offer like services. The Commission stated that it would apply the ECO analysis only to Section 214 applications filed by foreign carriers or certain affiliates of such carriers that seek to provide U.S. international services on routes where the foreign carriers have market power on the foreign end. The Commission determined that it is unnecessary to apply the ECO analysis where an applicant's foreign affiliate does not have market power on the foreign end of the route. The Commission also determined that it would continue to consider other public interest factors that may weigh in favor of, or against, granting the application. Such public interest factors include the general significance of the proposed entry to the promotion of competition in the U.S. telecommunications market, any national security, law enforcement, foreign policy, or trade concerns raised by the Executive Branch, and the presence of cost-based accounting rates. 1. Analysis of CWI's Market Power 9. The Foreign Carrier Entry Order defines market power as "the ability of the carrier to act anticompetitively against unaffiliated U.S. carriers through the 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." To assess Mercury's market power, we apply traditional antitrust principles to examine: (1) Mercury's market share; (2) the supply elasticity of the market; (3) the demand elasticity for Mercury's services; and (4) Mercury's cost structure, size and resources. We analyze Mercury's market power in the provision of international switched services and private line services separately because the two services constitute separate product markets. 10. We examine first the local and national (domestic long distance) markets for terminating international private line and switched services at their U.K. destination. A carrier controlling bottleneck facilities and services in the domestic local or long distance markets could discriminate in favor of an affiliate competing in the private line or switched services markets by offering its affiliate superior technical quality, faster provisioning or preferential rates. 11. We find that Mercury's shares of the U.K. domestic market for local services are low: 0.55 percent and 7.21 percent of the residential and business markets, respectively, based on revenues, and 5.86 percent and 20.5 percent of the national (long distance) residential and business markets, respectively, based on revenues. We also note that, according to CWI, "Mercury is not the sole provider of telecommunications services in any part of the United Kingdom." We also find that there is sufficient supply elasticity in the U.K. domestic market to support a finding that Mercury does not control bottleneck facilities and services in that market. Mercury provides facilities-based local and long distance service in the United Kingdom in direct competition with BT (the largest provider of domestic telecommunications services in the United Kingdom) and 22 regional and national facilities- based licensed holders. In addition, there are 125 cable operators licensed to provide local telecommunications services. Further, the United Kingdom has opened its markets for the provision of domestic local and long distance services. Also, the fact that 60,000 customers a month switch from BT to local cable companies for their telephone service supports a finding that U.K. customers consider the local services provided by U.K. competitors generally to be close substitutes and that they are willing to switch local carriers to obtain price reductions and desired services. 12. We also find that Mercury's size and resources do not provide persuasive evidence that Mercury holds market power in the United Kingdom's domestic telecommunications market. Mercury's parent, C&W plc, is a large, well-financed corporation with interests in more than forty carriers world-wide. It is not surprising that Mercury might enjoy some advantages, including resource advantages, scale economies, and ready access to capital, as a result of its relationship with C&W plc. Such advantages do not, however, necessarily indicate that Mercury has the ability to control price. As the Commission observed in the First Interexchange Competition Order, the issue is not whether Mercury has advantages, but "whether such advantages are so great to preclude the effective functioning of a competitive market." There is nothing in the record to indicate that the advantages that Mercury may derive as a result of its ownership by C&W plc confer market power on Mercury. Indeed, Mercury faces competition in the domestic local and long distance markets from numerous carriers, including such large, well-financed, and well-established carriers as BT. We note that Mercury's shares of local and national calls based on revenues between April 1992 and March 1995 have remained very low relative to those of BT. Further, the number of exchange lines that Mercury owns in the United Kingdom in comparison to those owned by BT remains low, a trend which suggests that Mercury does not have the ability to exclude competition in this market. Based on these facts and findings, we conclude that Mercury lacks market power and does not control bottleneck services and facilities in the United Kingdom's domestic market for terminating international switched and private line services. 13. We next examine the facilities-based markets for international switched and private line services. We analyze the facilities-based markets for these services because U.S. carriers, whether operating on a facilities or resale basis, ultimately depend upon the underlying international facilities-based carrier(s) to provide international service to the United Kingdom. If a carrier were to exercise market power in facilities-based international services markets, it could discriminate in favor of an affiliated U.S. service provider by offering the affiliate preferential rates or conditions of service. 14. With the issuance of new facilities-based international licenses by DTI, we do not find that Mercury's current market shares of 24.6 percent and 36 percent for international switched and private line services confer market power in either product market. The market data available to us for the United Kingdom does not focus solely on the share of the two licensed international facilities-based carriers, but compares Mercury's shares to the shares of all other U.K. international carriers, including BT and resale carriers. Statistics for the first three months of 1996 reveal that BT has a market share of 68.05 percent based on minutes as compared to Mercury's market share of 19.41 percent. The data suggests that, with the issuance of new facilities-based licenses, Mercury will lack the ability to raise and sustain prices above a competitive level for the provision of international switched and private line services. 15. With respect to supply capacity in the facilities-based international services market, we find that there is significant capacity on existing and future cables and satellite circuits between the United States and the United Kingdom. The continental United States and the United Kingdom are served or will soon be served by a number of submarine cables, including the TAT-12/TAT-13 cable network, the PTAT system, the Atlantic Express I and II cables, as well as by Intelsat, PanAmSat, Orion, and Columbia/TDRS satellite systems. There is no evidence in the record to suggest that new competitive carriers will not be able to obtain access to existing and planned supply capacity. 16. With respect to barriers to entry into these product markets, the second factor in our analysis of supply elasticities, we note that DTI has announced it will eliminate the restrictions limiting the provision of international facilities-based services to BT and Mercury and has invited companies to apply for licenses to provide international facilities-based telecommunications services on all routes from the United Kingdom "on the same terms enjoyed by BT and Mercury." DTI, however, has not yet authorized any carrier other than Mercury or BT to provide international facilities-based services. It is therefore not clear whether the ability to obtain an authorization to provide such services will prove to be a barrier to entry into the international facilities-based switched and private line services markets. Until DTI issues additional licenses, Mercury's and BT's competitors must acquire the underlying services to provide international switched and private line services on a resale basis from Mercury or BT. 17. Nevertheless, we are encouraged by the United Kingdom's decision to accept applications for international facilities-based licenses and its announced intention to "quickly" issue additional licenses for such services "on the same terms as those enjoyed by BT and Mercury." We believe that DTI's execution of this intention by issuing additional licenses for international facilities-based services will introduce a new wave of competitors in the provision of international facilities-based and resold services from the United Kingdom. Further, there is nothing in the record before us to suggest that the United Kingdom will impose restrictions on foreign ownership or participation in the provision of international facilities-based switched and private line services. Indeed, the United Kingdom currently "imposes no restrictions on either foreign ownership of telecommunications service providers or foreign participation in . . . any . . . sector of the U.K. telecommunications market." In addition, we have no reason to believe that DTI would impose restrictions on entrance into the international facilities-based switches services market based on demand. We therefore anticipate that the implementation of the United Kingdom's new regulatory policies will promote competitive entry into the international facilities-based switched and private line services markets. 18. We further find that the current number of international service competitors is evidence of an elastic demand for Mercury's services. According to CWI's undisputed claim, a "multitude" of carriers resell international private line services and IMTS, and 25 operators provide ISR services. We also find that the likely increase in the number of facilities-based competitors resulting from the issuance of new licenses by DTI will add to the level of competition by vendors for customers. 19. We also find, for the same reasons stated in paragraph 12, that Mercury's size and resources do not provide persuasive evidence that Mercury holds market power in the provision of international facilities-based switched and private line services. Mercury today faces competition in the provision of international facilities-based services from BT, and we expect additional well-financed competitors to enter the facilities-based market soon. Further, Mercury's shares of the international switched and private line services markets have remained low relative to BT's shares. 20. Based on the record in this proceeding, we find that, once DTI issues additional facilities-based licenses for international switched and private line services, Mercury will lack market power in the United Kingdom in the provision of these services. Because Mercury will lack such power and, therefore, the ability to discriminate among U.S. carriers in the provision of international switched and private line services, we do not apply the effective competitive opportunities test as part of our review of CWI's application. As discussed infra, our grant of the instant application will become effective after DTI issues additional international facilities-based licenses. 21. On October 22, 1996, C&W announced that Mercury Communications, Inc., NYNEX CableComms Group, Bell Cablemedia plc and Videotron Holdings plc proposed to merge their operations to create Cable & Wireless Communications (CWC), a telecommunications company offering cable and telephony services in the United Kingdom. C&W plc, NYNEX, and Bell Canada will own 52.6 percent, 18.5 percent, and 14.2 percent, respectively, of CWC, with the remainder "to be sold to the public in an initial offering in 1997." CWI states that, "[n]either Mercury nor any of the cable companies with which Mercury is merging are the sole telecommunications providers in any part of the U.K." CWI also states that, if the proposed merger is consummated, then CWC "will control over 566,000 residential lines representing approximately 2.5 percent of the U.K. residential market . . . . [, and] 337,000 business lines representing 5 percent of the U.K. business market[.]" Although the proposed merger has not been consummated, it does appear that CWI is correct in its assertion that, even after the proposed merger is consummated, Mercury will not have "bottleneck control in local or long distance telecommunications services." 2. Public Interest Analysis 22. We next examine whether there are any countervailing public interest reasons to deny CWI's application. The Executive Branch has not raised any national security, law enforcement, foreign policy or trade concerns with this application. AT&T suggests that our public interest analysis should include an examination as to whether new entrants into the U.K. international services market "have the practical ability to obtain international facilities and the means to access that capacity in the U.K." and what "role Mercury will play in making access available to new entrants." The Commission has, however, determined that it should only apply its ECO analysis -- which includes an analysis of practical barriers to entry into the relevant market -- to applications from foreign carriers that have market power, or are affiliated with such carriers, in the destination market they seek to serve. In this order, we find that Mercury lacks market power in the local and national markets and that it will lack market power in the international switched and private line markets at the time the instant facilities-based authorization is effective. The application, therefore, is not subject to our ECO analysis. We therefore need not examine whether there are practical barriers to entry into these markets as part of our public interest analysis under the Foreign Carrier Entry Order. Our finding is based in part on the lack of any specific evidence in the record to indicate that new competitors will not be able to access international capacity. 23. We thus find that no countervailing public interest factors have been raised by any party in this proceeding that would warrant denying CWI's application. Accordingly, we find that the public interest would be served by granting CWI's application to provide facilities-based international switched and private line services. B. CWI's Request for Non-dominant Treatment 24. Under the Commission's rules, a U.S. carrier that is affiliated with a foreign carrier that is not a monopoly in a destination country and that seeks to be regulated as a non- dominant carrier for the provision of facilities-based switched or private line services, or for the resale of private line services, bears the burden of submitting information sufficient to demonstrate that its foreign affiliate lacks the ability to discriminate against unaffiliated U.S. international carriers through control of bottleneck services or facilities in the destination country. 25. In a 1994 decision authorizing CWI to resell interconnected international private lines for the provision of switched service between the United States and the United Kingdom, we classified CWI as a dominant carrier for the provision of such service. In 1993, the Commission classified CWI as dominant in its provision of resold non- interconnected private lines to the United Kingdom. In a 1994 order, we deferred a decision regarding a pending CWI petition for reclassification as a non-dominant carrier for the provision of resold, non-interconnected IPL service on the U.S.-U.K. route. AT&T opposed CWI's petition for reclassification in that proceeding. In CWI Increased Private Line Resale Capacity Order, we deferred to the instant proceeding a decision on whether CWI should be reclassified as a non-dominant carrier in its provision of resold non-interconnected IPL services between the United States and the United Kingdom. 26. As discussed above, we find that CWI's foreign affiliate Mercury will not control bottleneck services or facilities in the United Kingdom once DTI issues additional international facilities-based licenses. CWI's foreign affiliate would then lack the ability to discriminate against unaffiliated U.S. international carriers terminating switched and private line traffic in the United Kingdom. Consequently, we find that CWI should be regulated as a non-dominant carrier for the provision of the international facilities-based switched and private line services between the United States and the United Kingdom after DTI issues additional international facilities-based licenses. For the same reason, we also find that CWI should then be regulated as a non-dominant carrier for the provision of resold interconnected and non-interconnected private line services for which CWI previously obtained Section 214 authority on a dominant carrier basis on the U.S.-U.K. route. 27. We disagree with AT&T's allegation that Mercury has the ability to discriminate against unaffiliated U.S. carriers because it is allowed "to set its rates for private line half-circuits without regulatory review[.]" We believe that Mercury's low market share relative to BT, the high supply and demand elasticities of the market, and the number, size and financial strength of Mercury's current and future competitors (including BT) in the provision of international private line services, will prevent Mercury from engaging in discriminatory pricing behavior. We also believe that the fact that Mercury is not subject to rate regulation suggests Oftel's confidence that competition will restrain Mercury from engaging in discriminatory or other anticompetitive pricing activities. We also disagree with AT&T's contention that Mercury has the ability to discriminate against unaffiliated U.S. carriers because it has all the necessary authorizations to compete, continues to benefit from regulatory policies intended to foster the development of 'managed competition,' has secured and implemented interconnection arrangements with the BT, and "enjoys access to the customer base in the U.K. not available to U.S. carriers generally." As indicated supra, it is to be expected that Mercury, as an incumbent in the international facilities-based private line market, would enjoy certain advantages over new entrants into the market. We do not believe that the benefits identified by AT&T give CWI an unfair advantage over competitors, nor do we believe these advantages are so great as to preclude the effective functioning of a competitive market. 28. Accordingly, we find that CWI should be regulated as a non-dominant carrier for the provision of all international switched and private line services between the United States and the United Kingdom after DTI has issued additional facilities-based licenses. We reserve the right to revisit CWI's status on the U.S.-U.K. route at a later date in the event CWI in the future obtains market power which could enable it to discriminate against unaffiliated U.S. carriers. 29. Our grant of CWI's application to provide international facilities-based switched services and our reclassification of CWI as a non-dominant carrier in its provision of facilities-based switched service on the U.S.-U.K. route will become effective after DTI issues additional international facilities-based switched services licenses, CWI informs the Commission in writing that DTI has done so, and the Chief, International Bureau, informs CWI that the Bureau has received its notification and its authorization is effective. Similarly, our grant of CWI's application to provide international facilities-based private line services and our reclassification of CWI as a non-dominant carrier in its provision of facilities-based and resold private line service (both interconnected and non-interconnected) on the U.S.-U.K. route will become effective after DTI issues additional international facilities-based private line services licenses, CWI informs the Commission in writing that DTI has done so, and the Chief, International Bureau, informs CWI that the Bureau has received its notification and its authorization is effective. Should either group of licenses be limited in number or contain conditions that limit the ability of licensees to compete effectively in the relevant market(s), we reserve the right to reconsider the instant grant. IV. Ordering Clauses 30. Accordingly, IT IS HEREBY CERTIFIED that the present and future public interest, convenience, and necessity require a grant of the present application and IT IS ORDERED that application File No. ITC-96-239 IS GRANTED, and Cable &Wireless Inc. (CWI) is authorized to provide international facilities-based switched and private line services between the United States and the United Kingdom. 31. IT IS FURTHER ORDERED that the facilities for which authority is granted in this order shall be used to provide service between the United States and the United Kingdom only, except that: (1) CWI may use the facilities in conjunction with previously authorized facilities or services to route through the United States traffic that originates and terminates in third countries; (2) CWI may use the facilities to route U.S. traffic on an indirect, switched transit or switched hubbing basis to countries where CWI does not have an affiliation with a foreign carrier, and to countries where it does have an affiliation with a foreign carrier provided it has received a grant of specific authorization under the Communications Act of 1934, as amended, 47 U.S.C.  214. 32. IT IS FURTHER ORDERED that CWI shall be regulated as a non-dominant carrier for the provision of all its authorized international switched and private line services between the United States and the United Kingdom in accordance with the requirements of paragraph 35 infra. 33. IT IS FURTHER ORDERED that the petition filed by CWI in File No. ISP- 93-007-ND is GRANTED and CWI is authorized to provide non-interconnected, resold international private line service between the United States and the United Kingdom on a non- dominant carrier basis in accordance with the requirements of paragraph 35 infra. 34. IT IS FURTHER ORDERED that, as a non-dominant carrier on the U.S.-U.K. route, CWI shall comply with Sections 43.82, 63.21 and 63.15(b) of the Commission's rules. 35. IT IS FURTHER ORDERED that this the grant of CWI's application to provide international facilities-based switched services and our reclassification of CWI as a nondominant carrier in its provision of facilities-based switched service on the U.S.-U.K. route WILL BE EFFECTIVE after DTI issues additional international facilities-based switched services licenses, CWI informs the Commission in writing that DTI has done so, and the Chief, International Bureau, informs CWI that the Bureau has received its notification and its authorization is effective. IT IS FURTHER ORDERED that the grant of CWI's application to provide international facilities-based private line services and our reclassification of CWI as a nondominant carrier in its provision of facilities-based and resold private line service (both interconnected and non-interconnected) on the U.S.-U.K. route WILL BE EFFECTIVE after DTI issues additional international facilities-based private line services licenses, CWI informs the Commission in writing that DTI has done so, and the Chief, International Bureau, informs CWI that the Bureau has received its notification and its authorization is effective. 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 Section 1.4(b)(2) of the Commission's rules, 47 C.F.R.  1.4(b)(2). FEDERAL COMMUNICATIONS COMMISSION Donald H. Gips Chief, International Bureau