NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file how2ftp. File how2ftp (.txt & .wp) is in directory /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** FCC 96-157 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Regulation of International ) CC Docket No. 90-337 Accounting Rates) Phase II ORDER ON RECONSIDERATION Adopted: April 8, 1996 Released: May 29, 1996 By the Commission: I. Introduction 1. In this order we reaffirm our commitment to reduce the international accounting rates paid by U.S. carriers to foreign carriers to more cost-based levels. We also reaffirm our commitment to prevent undue discrimination among U.S. carriers by foreign carriers. 2. In the Second Report and Order and Second Further Notice of Proposed Rulemaking in this proceeding, we adopted benchmark accounting rates and required U.S. carriers to file reports on progress in negotiating lower rates. We also declined to relax certain aspects of our International Settlements Policy (ISP). Atlantic Tele-Network, Inc. (ATN) seeks reconsideration of benchmark rates that apply to developing countries and of our decision not to adopt proposals that would permit U.S. carriers to accept a disproportionate share of return traffic. We deny ATN's petition. II. Background 3. In the Second Report and Order, we found that international accounting rates have remained well above cost, despite the Commission's direction to U.S. carriers to negotiate lower, more cost-based accounting rates. To assist U.S. carriers in their negotiations, we adopted benchmark settlement rates for Europe ($.23-$.39 per minute) and for other regions ($.39-$.60 per minute). 4. We also decided not to adopt proposals to depart from the traditional ISP principle that U.S. carriers shall accept only their proportionate share of return traffic from foreign correspondents. We concluded that this policy is a necessary safeguard to prevent discrimination among U.S. carriers and reduce U.S. net settlement outpayments. III. Discussion A. Benchmark Rates 1. Pleadings 5. ATN argues that the record does not justify our determination that accounting rates in developing countries are above cost or that our benchmark settlement rates are more cost- oriented than existing rates. According to ATN, developing countries have such fundamentally different cost structures that no settlement rate benchmarks can reasonably be adopted for carriers in such countries. Thus, it says the $.39-$.60 per minute benchmark rates for those countries are unjustified. In support, ATN notes that a cost study performed for the International Telecommunication Union (ITU), for consideration by its members, found that costs for developing countries vary widely, and are on average 2.08 times greater than the costs incurred by developed countries to provide international service. 6. ATN also argues that our decision failed to take fully into account "the extent to which U.S. carriers themselves aggravate the IMTS settlements deficit...." According to ATN, a large part of the net settlements deficit is caused not by the level of accounting rates, but rather by U.S. services (such as country direct) that treat foreign-originated calls as U.S.- originated calls. ATN also refers to social causes of the traffic imbalance that exists between the United States and developing countries. ATN cites a letter filed by the Caribbean Association of National Telecommunications Organizations ("CANTO") which states that Caribbean nationals residing in the United States and the expanding investment by U.S. companies in the Caribbean are major causes of the traffic imbalance between the United States and developing countries. In its comments in this proceeding, CANTO states that "the traffic imbalance between U.S. carriers and their correspondents in developing countries may have relatively little connection with accounting rate levels." Specifically, CANTO predicts that infrastructure development in developing countries will lead to a smaller traffic imbalance between the United States and developing countries. CANTO urges us to consider this factor in determining how to pursue cost-based accounting rates. ATN similarly argues on reconsideration that our decision did not fully consider the relevance of public interest factors such as infrastructure development and privatization initiatives in establishing benchmarks applicable to developing countries. 7. AT&T opposes ATN's petition saying that the record supported our finding that the wide disparity in accounting rates for service between the United States and various countries is evidence of above-cost accounting rates. AT&T argues that this disparity cannot be explained by the distance between the United States and other countries because the costs of satellite and cable facilities are distance insensitive. AT&T also argues that "there are no differences in the costs incurred by correspondents for switching and domestic distribution of international calls -- whether the international calls originate in the United States or any other country." AT&T notes that the benchmarks merely serve as guidelines, for use by U.S. carriers as negotiating targets, and that the benchmark range offers sufficient flexibility to take account of differing cost characteristics for particular countries. AT&T asserts that the cost study cited by ATN "does not provide a reasonable basis for challenging the Commission's conclusions" because the methodology was flawed. Moreover, AT&T contends that the ITU Study demonstrates that the benchmarks are reasonable. MCI comments generally that ATN's arguments on reconsideration are baseless. 8. ATN replies that MCI offers no support for its comments. It also contends that it is arbitrary and misleading for AT&T and the Commission to judge the cost basis of all accounting rates in a region by comparing the lowest rate to the highest rate. It considers AT&T's position that transmission costs are relatively uniform and distance insensitive to be directly at odds with the adoption of higher benchmarks for developed countries in Asia than for developed countries in Europe. AT&T's criticisms of the ITU study, according to ATN, apply a fortiori to the Second Report and Order because the Commission did not collect cost data or devise any cost allocation methodology. ATN urges that, until we do so, we withdraw any accounting rate benchmarks for developing countries. 2. Discussion 9. In the Phase I Report and Order, we stated that technological improvements and intra-regional accounting rates suggest that "foreign carriers in the Asia and Europe regions may be maintaining accounting rates with the United States that either ignore relevant cost trends or are discriminating against the U.S. carriers...." We therefore directed U.S. international carriers "to negotiate with their foreign correspondents accounting rates that are consistent with relevant cost trends and that eliminate any non-cost-based differences between accounting rates applied by [a] foreign [correspondent] within its own region and those applied for the United States." 10. In the Second Report and Order, we examined accounting rates for international traffic between the United States and Europe, Asia and countries outside Europe and Asia. We adopted benchmark settlement rates for Europe ($.23-$.39 per minute) and for Asia and all other regions ($.39-$.60 per minute). We found in the Second Report and Order that regions outside of Europe and Asia are similar to Asia in that they contain a mix of developed and developing countries. We affirm our conclusion in the Second Report and Order that the benchmark settlement rates of $.39-$.60 per minute are reasonable and proper as a helpful target to be used in the negotiations process between U.S. carriers and foreign correspondents from developing countries outside Europe. 11. Direct information on the cost of providing telecommunication service in developing countries is largely unavailable to the Commission. A study published since the Second Report and Order, however, concluded that the average cost of providing service between the United States and Australia is between $.30 and $.50 per minute for most calls. Even if we assume that the high end of this range is an accurate cost estimate, existing accounting rates for service between the United States and developing countries are between two hundred and three hundred percent greater than the actual cost of service. The study also suggests that the cost of service may be as high as $.70 per minute for calls between the United States and Australia to areas with low volumes. Even assuming that all traffic between the United States and developing countries is low-volume (relative to the capacity of the facilities), accounting rates for such countries are nearly two hundred percent the cost of service computed by the Australian study. Moreover, we refer to and reaffirm the findings in the Second Report and Order that the benchmark range established for Asia is consistent with the increasing trend in accounting rate reductions in Asia since 1988, and that, because regions outside Asia are comprised of a similar mix of developed and developing countries, this range is equally appropriate for developing countries in these regions. We find no evidence in this record on reconsideration to refute these findings. 12. Cost-reducing improvements in technology, as well as evidence of accounting rate discrimination in areas outside of Europe, buttress our finding that accounting rates for most of these countries remain significantly above unit costs and are not declining in pace with cost reductions. ATN argues that disparities in the accounting rates maintained by GT&T with the United States and other countries are, in part, historical in nature. Because no carrier can establish accounting rates unilaterally, ATN argues, it is unreasonable to infer purposeful discrimination from an accounting rate structure in which some countries have lower accounting rates with a particular country than with the United States. This explanation, however, does not justify requiring U.S. carriers to pay accounting rates that are not declining with costs. We have substantial, uncontroverted evidence that the cost of the international portion of facilities used for international telephone calling has decreased significantly. In addition, while we agree with ATN to the extent it argues that different countries may have different costs for the national extension of the international call, any such differences in cost do not explain the marked disparity in accounting rates maintained by individual countries with different correspondents. 13. Moreover, even assuming that developing countries on average have higher costs for the national extension, such costs would not justify the consistently high level of accounting rates maintained by some developing countries. The unit cost of operating a country's telephone network should decrease as the country adds modern capital equipment incorporating technological advances, replaces facilities, expands the capacity of the network, improves the quality of service, increases access to telephone service and otherwise encourages increased use of the network. CANTO states that its members are re-investing the vast majority of settlement revenues received from foreign correspondents to expand and modernize their basic telecommunications networks. Additional investment in a country's telephone network should reduce costs. 14. International accounting rates have been, and remain, high in the face of declining costs of terminating traffic. In view of this fact, and the other evidence discussed above, we affirm our conclusion that accounting rates for developing countries outside Europe have not followed relevant cost trends (i.e., they remain significantly above, and have failed to decline with, unit costs); and that the benchmark rates adopted in the Second Report and Order constitute a reasonable and useful target for U.S. carriers in their negotiations with foreign correspondents in these countries. ATN's petition does not undermine this conclusion. The benchmark range for countries outside Europe is broad enough to cover both developed and developing countries in the region and sufficiently flexible to allow developing countries to bring their accounting rates within the benchmarks within the ITU-set timeline of one to five years. Finally, we emphasize that the benchmarks are only negotiating guidelines, not mandatory requirements. 15. We agree with ATN that U.S. callers should expect to pay the costs incurred by the foreign correspondent for providing its part of the international service. But, U.S. carriers and users should pay only those costs associated with such service. U.S. carriers and users should not be required to subsidize the cost of non-telecommunications-related infrastructure in the foreign country. Nor should they be required to bear the cost incurred by foreign carriers to use the foreign network for purely domestic services, or for international calling between the foreign country and a country other than the United States. 16. The ITU Study, on which ATN relies, was based on cost information dating from as early as 1986. While it was a significant step towards addressing these issues, the ITU Study is not a reliable source of cost data for assessing the benchmark ranges. Demand for international telecommunications service is growing rapidly and costs have continued to fall since 1986. The ITU Telecommunication Standardization Sector ("ITU-T") in 1995 completed its work on Recommendation D.140, "Accounting Rate Principles for International Telephone Service." That recommendation sets guidelines for deriving cost-oriented accounting rates, including what cost elements to take into account and methodologies for determining individual parties' costs. We will consider using these guidelines as we modify and update our settlement benchmark ranges. And, as we indicated in our recent Policy Statement on international accounting rates, we will soon consider alternative ways for U.S. carriers to work with foreign governments and carriers to facilitate the transition to lower accounting rates. We recognize that foreign carriers in developing countries need to ensure that they derive meaningful benefits from cost-based accounting rates. 17. In the meantime, we are willing to consider any evidence that accounting rates for a particular country are cost-based, or that our benchmarks are inappropriate for a particular country. In the absence of direct evidence that our benchmark range is inappropriate for any particular country, we find it both reasonable and necessary to affirm the benchmark rates that apply to developing countries on the basis of the best evidence available to us. In so doing, we affirm our commitment to reduce accounting rates to more cost-based levels. 18. We emphasize that our main concern in the Second Report and Order is accounting rates that exceed the cost of providing service. We do not disagree with ATN that there may be other factors that contribute to the current 4.3 billion net settlements deficit -- which adds significantly to the overall U.S. trade deficit. Nevertheless, a significant portion of the settlements deficit results from above-cost accounting rates. As we have stated in this proceeding, above-cost accounting rates are a primary reason for U.S. consumers paying high collection rates for their international telephone calls. Above-cost accounting rates are also inconsistent with other U.S. regulatory goals, such as increased use of the telephone network and universal service. B. Proportionate Return 19. In the Phase II Further Notice in this proceeding, we invited comment on alternative regulatory actions which could encourage lower, more cost-based accounting rates. We sought comment on several proposals, including proposals to depart from the practice of proportionate allocation of return traffic (i.e., traffic destined for the United States) among U.S. carriers, to serve the infrastructure needs of developing countries. After reviewing the submissions, in the Second Report and Order we determined that we would continue to require U.S. carriers to "accept only their proportionate share of return traffic" as a "necessary safeguard[ ] that limit[s] the possibilities for discrimination against U.S. carriers." 1. Pleadings 20. ATN argues that the Commission "has never adopted or enforced a rigid policy requiring carriers to accept only that amount of return traffic which corresponds to the proportion of traffic originated by each carrier on a particular route." According to ATN, the Commission previously proposed adoption of such a policy in CC Docket No. 86-494, but concluded that proceeding without adopting the policy. ATN believes, therefore, that the Commission incorrectly endorsed proportionate return as a continuation of existing policy rather than as a brand new policy which must be adopted and justified, if at all, on a de novo basis. 21. ATN also takes issue with the Commission's finding that there was insufficient information in the record to demonstrate how we could deviate from proportionate return while adequately protecting against whipsawing of U.S. carriers by foreign carriers. ATN states that it furnished the Commission with a mechanism for justifying a departure from proportionate return without creating any risk of whipsawing. In its comments in this proceeding, ATN urged the Commission to permit its monopoly telecommunications subsidiary, Guyana Telephone and Telegraph Company ("GT&T"), to route to ATN all "growth" traffic from Guyana to the United States during ATN's five-year investment program in GT&T. ATN claimed an equitable right to carry this traffic in light of its commitment to spend over $50 million upgrading Guyana's communications infrastructure. Under this proposal, GT&T would route to AT&T only its proportionate share of the existing amount of traffic. ATN subsequently explained that it considered "growth traffic" as all traffic exceeding a chosen benchmark year. ATN also proposed that, if GT&T entered into operating agreements with other U.S. carriers, GT&T would divide the benchmark traffic proportionately among the U.S. carriers. 22. ATN asserted that its proposal would permit new entry and increase competition in the U.S. market; improve service quality and increase traffic volume in the Guyana market (and on the U.S.-Guyana route); and reduce the international trade deficit by encouraging foreign investment by U.S. entities. To counter concerns about whipsawing of U.S. carriers by GT&T, ATN offered to have the Commission require adherence to the growth traffic proposal and to the current accounting rates on the U.S.-Guyana route as conditions of ATN's Section 214 authorization. ATN argued that these conditions would prevent GT&T from whipsawing U.S. carriers, which ATN defines as altering the flow of return traffic in exchange for concessions from other U.S. carriers serving the U.S.-Guyana route. ATN argued further that its proposed traffic allocation did not constitute whipsawing, because GT&T had not tried to play U.S. carriers off each other. On reconsideration, ATN reiterates its position that the Section 214 conditions it proposed are sufficient to prevent whipsawing without requiring proportionate return. 23. AT&T supports our determination that the FCC has a longstanding policy of proportionate return and that proportionate return is a vital means to prevent whipsawing. MCI commented generally that ATN's arguments on reconsideration are baseless; MCI has been unable to obtain a standard operating agreement with GT&T; and ATN could more productively devote its time to finalizing an operating agreement with MCI. We note that, since filing its comments, MCI has obtained an operating agreement with GT&T. 2. Discussion 24. The Commission has long been concerned with the ability of foreign administrations to discriminate among U.S. carriers by manipulating return traffic flows. Although this Commission has not applied a rigid rule of proportionate return, our policy has been to include this safeguard against discrimination where appropriate. Since the 1950's, one of the guiding principles in our scrutiny of international traffic relations has been that U.S. carriers "should be permitted to share proportionately in ... inbound traffic in order to be able to compete effectively." We have consistently applied this principle, deviating from it only where required by the public interest, as for example, when a foreign administration lacked technology capable of providing proportionate return. 25. Contrary to ATN's petition, the Commission's rulemaking in CC Docket No. 86- 494 does not suggest otherwise. In that proceeding, the Commission solicited comments concerning the development of a proposed "international model" representing an "ideal" regulatory regime for international communications. As part of its proposal, the Commission suggested three alternative proposals to combatting discrimination or "whipsawing" in the allocation of return traffic. One of these proposals required a proportionate return of traffic to each U.S. carrier serving a given country. 26. In asking for comment on this proposal, the Commission did not suggest that requiring a proportionate return of traffic was a new idea. Indeed, the Commission had recognized the principle of proportionate return for many years and had applied that principle on a case-by-case basis where necessary to achieve its regulatory objectives. Nor, in declining to adopt an "international model," did the Commission eschew the continued use of proportionate return as a regulatory device in appropriate circumstances. Rather, in a series of orders issued both during the pendency of the proceeding and thereafter, the Commission responded to perceived opportunities for anticompetitive conduct by requiring adherence to the principle of proportionate return. 27. Any remaining doubt about our policy should have been removed as a result of Commission action in this docket. In Phase I of this proceeding, we expressly reaffirmed our "longstanding U.S. regulatory policy that U.S. carriers should be afforded nondiscriminatory treatment in their traffic relations with a given country and therefore receive a proportionate share of return traffic." We in fact required that carriers filing either notifications of, or waivers for, changes in the accounting rates on a given U.S. international route certify that they had not bargained for, nor received any indication that they would receive, more than their proportionate share of return traffic. We therefore reject ATN's argument on reconsideration that we were incorrect in endorsing proportionate return as a continuation of an existing policy. 28. Moreover, we have previously rejected the scheme ATN proposed in its initial comments in this proceeding as inadequate to prevent ATN from abusing its monopoly power to the detriment of other U.S. carriers. ATN made the same proposal in its Section 214 application to provide facilities-based service between the United States and Guyana. We rejected ATN's proposal when we granted its Section 214 application, and the District of Columbia Circuit recently denied ATN's petition for review of our decision. ATN's petition made the same arguments it raises here in favor of its return traffic proposal. Neither the court's decision, nor the record in this reconsideration proceeding, provides us with a reason to revisit our conclusion in this proceeding that adopting ATN's proposal would erode our goal to prevent discrimination among U.S. carriers. We reaffirm our decision for the reasons stated in our Second Report and Order. 29. We acknowledged in the Second Report and Order that deviations from proportionate return might help developing countries improve their telecommunications infrastructures, but concluded that it would not serve the U.S. public interest overall. We find no reason in this record to reverse or modify that determination as it applies to ATN. We note that many of the public interest goals cited by ATN can be achieved without deviating from our policy in favor of proportionate return. For instance, competition on the U.S.- Guyana route can be achieved by GT&T entering into operating agreements with other U.S. carriers. And, although U.S. investment in foreign telecommunications networks may be beneficial, ATN has not demonstrated to our satisfaction that privatization initiatives warrant special treatment in the settlements process for U.S. carriers such as ATN that are affiliated with a monopoly foreign carrier. We recently recognized, in our Policy Statement on international accounting rates, that a requirement of proportionate return of traffic may impede competitive behavior in markets where competitive entry is occurring. It may, for example, deter U.S. terminating carriers from offering innovative pricing and supply arrangements. As we indicated in our Policy Statement, we are willing to work with U.S. carriers to facilitate alternative settlement arrangements in markets where the legal, regulatory, and economic conditions support competition. To this end, we have issued a Public Notice inviting parties to file supplemental comments in this docket to address the framework for alternative settlement arrangements for effectively competitive markets. IV. Conclusion 30. In this order, we affirm our determination that the benchmark settlement rates applied for developing countries outside Europe are reasonable and necessary to assist U.S. carriers in negotiating accounting rates that are more cost-based. We continue to believe that our decision provides significant flexibility to allow developing countries to bring their accounting rates within the established benchmarks within a reasonable period of time. While we agree with ATN that phenomena other than high accounting rates may contribute to the net settlements deficit, our focus in this proceeding is on above-cost, discriminatory accounting rates, which contribute substantially to the U.S. net settlements deficit. 31. In addition, we affirm our conclusion that we should not deviate from our proportionate return policy in the manner proposed by ATN. We do not believe that ATN's proposed scheme for allocating return traffic would adequately protect against anticompetitive effects in the provision of U.S. international services. Nor do we believe that the other public interest considerations cited by ATN outweigh this public interest concern. V. Ordering Clauses 32. Accordingly, IT IS HEREBY ORDERED that the petition for reconsideration filed by ATN IS DENIED. 33. IT IS FURTHER ORDERED that ATN's Motion for Leave to File Reply Out of Time is hereby GRANTED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary