******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) AT&T Corp. ) File No. ISP-97-W-040 ) Petition for Waiver of the ) International Settlements Policy ) to Change the Accounting Rate ) Arrangement for Switched Voice) Service with Japan ) MEMORANDUM OPINION AND ORDER Adopted: November 7, 1997 Released: November 10, 1997 By the Chief, Telecommunications Division: Introduction 1. We have before us a petition by AT&T Corporation ("AT&T") to waive the Commission's International Settlements Policy ("ISP") to introduce an alternative settlement arrangement for switched voice service with a correspondent in Japan, Kokusai Denshin Denwa ("KDD"). AT&T's petition was opposed by MCI Telecommunications Corporation ("MCI") on the grounds that the arrangement violates the ISP and fails to satisfy the Commission's criteria for alternative settlement arrangements. After careful review of the record, we find that AT&T's proposed alternative settlement arrangement does not meet the criteria established for such arrangements. We, therefore, deny this petition, but encourage AT&T to negotiate an agreement with KDD that moves the accounting rate toward cost-based levels, responds to the concerns discussed in this order, and is consistent with recent FCC policy decisions on accounting rates. Background 2. International communications service markets are undergoing rapid and profound change as more and more national markets begin to open, new carriers enter the global marketplace, a variety of new services become available, and technology continues to improve. Continued reliance on traditional settlement practices in all situations can impede these developments. In order to foster competitive market conditions, the Commission's Flexibility Order adopted a policy which allows U.S. carriers to negotiate settlement arrangements that depart from the ISP under certain conditions. Briefly, alternative arrangements are possible with carriers in a country that passes the Commission's effective competitive opportunities (ECO) test, or if such an arrangement will promote market- oriented pricing and competition to a non-ECO country, while precluding an abuse of market power. 3. AT&T, on behalf of itself and AT&T Alascom, seeks a waiver of the Commission's ISP to introduce a flexible arrangement which provides for settlement rates for service between the United States and its carrier correspondent in Japan, KDD, which would not be divided on a 50/50 basis. The waiver applies to international message telephone service ("IMTS") and global software defined network service. AT&T's current accounting rate with KDD, which became effective in 1994, is 0.63 Special Drawing Rights ("SDR") per minute (about 88›). A charge of 1.9 SDR per message is imposed on operator-assisted, collect calls and paid to the non-billing carrier. AT&T Alascom's rate is 0.95 SDR per minute and there is a surcharge of 1.13 SDR for operator-assisted, collect calls. 4. AT&T's proposal would introduce a significant change in the current settlement arrangement. Beginning April 1, 1996, the settlement rate for service to KDD in Japan provided by AT&T and AT&T Alascom would be 0.24 SDR (about 33›) per minute. KDD's service would be terminated at 0.18 SDR (about 25›) per minute. The surcharge on collect calls would be eliminated by the agreement but a new one would be imposed on country direct calls--0.12 SDR per call for service provided by AT&T and AT&T Alascom, and 0.09 SDR per call for service provided by KDD. The U.S. carriers' accounting rate would fall to 0.19 SDR (about 26›) per minute on April 1, 1997; KDD's would be 0.1 SDR (about 14›) per minute. In addition, the respective surcharges on country direct calls would decline to 0.095 SDR and 0.05 SDR. AT&T and KDD have also agreed to reduce the settlement rates to a level which is "... competitive with the cost of terminating calls in the United States and Japan by any facilities-based carrier self-provisioning calls between the United States and Japan." The effective date for this part of the agreement would be April 1, 1998, or sooner if international simple resale between Japan and the United States is permitted prior to that date. Finally, proportionate return would continue to be the basis for allocating incoming traffic among U.S. carriers. 5. AT&T's waiver is supported by Pacific Gateway Exchange ("PGE") and KDD. MCI opposed the waiver stating that Japan has not yet passed the Commission's ECO test for facilities-based services, and AT&T does not demonstrate that abuses of market power would be avoided or that market-oriented pricing and competition would be promoted by the alternative settlement arrangement. MCI also notes that the disparity between the settlement rates has not been justified by differences in the costs to terminate a minute of service in Japan as compared to the United States. Finally, MCI notes that the rates to be paid by AT&T and AT&T Alascom would exceed the tariff component price for Japan, and the benchmark rate proposed by the Commission for high income countries. Discussion 6. The Commission's Flexibility Order created guidelines for U.S. carriers to negotiate settlement arrangements with foreign carriers that propose to depart from our ISP. First, the foreign country involved in the arrangement should satisfy the ECO test. For a non-ECO country, a U.S. carrier may still negotiate an alternative settlement arrangement, particularly if the arrangement involves a non-dominant foreign carrier, but it must submit sufficient evidence to demonstrate that the flexible arrangement will promote market-oriented pricing and competition and, at the same time, preclude an abuse of market power by the foreign carrier. Additional safeguards apply to arrangements between affiliated carriers if more than twenty five percent of the service on the route is affected. 7. The Commission has not determined, nor has AT&T attempted to demonstrate in its petition, that Japan satisfies the ECO test for international switched message service, but we have found KDD to be a dominant carrier in the international communications service market in Japan. So approval of the proposal requires AT&T to demonstrate that its implementation will promote market-oriented pricing and competition, while precluding an abuse of market power by KDD. 8. AT&T has not made this demonstration. The Commission's longstanding goal for international settlement arrangements is cost-based rates because these rates promote economic efficiency and are the rates that would exist in a competitive market situation. The arrangement between AT&T and KDD would introduce a significant difference between the rate to terminate service in Japan as compared to the United States. Further, that difference would increase in the second year of the agreement when AT&T would pay 0.19 SDR per minute, which is almost twice as much as KDD's rate of 0.1 SDR to terminate a minute of service in the United States. Yet, AT&T fails to show that the rates are based on costs or that the difference in settlement rates is the result of a difference in its costs as compared to KDD's costs. Further, AT&T provides no explanation for the growing difference in settlement rates between the first and second year of the agreement. 9. AT&T attempts to justify these rates by arguing that they result in savings in the first couple of years, and the proposal will ultimately lead to cost-based rates in the third year. Our calculations show, however, that there are only modest savings in its net settlement payments to KDD under the alternative settlement arrangement, and there would be little change in its net settlement payment per U.S. billed minute, a measure of AT&T's financial settlement cost. Therefore, the arrangement's benefit to U.S. consumers is not apparent. In addition, the arrangement lacks a firm commitment to cost-based rates in the third year. Without a more concrete proposal as to what the rates will be in the third year, it is impossible to determine how this arrangement would promote either market-oriented termination charges or competition in this market. 10. In general, we believe settlement rates are significantly higher than economic costs. This is almost certainly the case for service between the Japan and the United States, where the current accounting rate is more than double the rate of any other high income, industrialized country. We believe competitive market conditions would result in a much lower settlement rate than the proposal negotiated by AT&T and KDD. We note, for example, that the rate to be paid by AT&T to terminate service in Japan would exceed by a wide margin the rate we recently adopted for high income countries. In addition, the agreement lacks any assurance that the rate in 1998, which is yet to be negotiated, would approach a cost-based level. 11. We find, therefore, that AT&T has not adequately justified the difference in settlement rates nor has it demonstrated convincingly that the alternative settlement arrangement will promote market-oriented prices and competition. It is not our intention to discourage U.S. carriers from negotiating alternative settlement arrangements with dominant carriers by this decision. We expect such an arrangement, however, to move the rate clearly toward cost-based levels and result in lower net settlement payments, whether it is based on an accounting rate that is divided equally or, as is the case here, an asymmetric rate structure. If an asymmetric rate structure is involved, information showing that the U.S. carrier's net settlement payment per U.S.-billed minute with the foreign carrier would be measurably lower with the proposed alternative arrangement than it would be with the current accounting rate would be an indication that the arrangement moves the rate in the direction of cost-based levels and is likely to produce significant savings in the net settlement payment in comparison to the current arrangement. In addition, a showing that the proposed rates are based on the economic costs of terminating calls in the two countries, and the arrangement is consistent with recent Commission decisions on accounting rates, would increase the chance that an alternative settlement arrangement with a dominant carrier would be approved. Of course, we also expect the U.S. carrier to demonstrate that market-oriented pricing and competition will be promoted. 12. Finally, a flexible settlement arrangement, including asymmetric rates, may be appropriate with a dominant foreign carrier in a country which has not met the ECO test if there is a firm commitment in the proposal to negotiate a rate that is comparable to lower U.S. settlement rates that are now in effect with other developed countries having more competitive markets, like the United Kingdom (7›), Sweden (8.5›), or Canada (10›). Similarily, a firm commitment to the immediate introduction of new forms of competition such as international simple resale may lend support to a proposal's acceptability. The carriers, of course, could agree to retain the traditional, symmetric accounting rate arrangement. In this case, the settlement rate should more clearly move toward existing U.S. settlement rates with developed countries where competitive markets have not emerged, like Germany (10.5›) and France (13›), and achieve such a rate in the final stage of the agreement. No matter what form the ultimate agreement between AT&T and KDD takes, however, we expect that the new agreement would capture at least the savings that would have occurred under the agreement we reject here. In order to reach a new agreement expeditiously, we encourage AT&T to resume bilateral discussions with KDD in an effort to negotiate a new settlement arrangement with these concerns in mind. Ordering Clauses 13. Accordingly, IT IS ORDERED THAT AT&T's request, on behalf of itself and AT&T Alascom, is DENIED. 14. IT IS FURTHER ORDERED that AT&T shall immediately resume negotiations with KDD to reduce settlement rates in a manner that is consistent with the guidelines set forth in this order and that it will use it best efforts to reach agreement in an expeditious manner. 15. IT IS FURTHER ORDERED that MCI's opposition to AT&T's filing is granted. 16. 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 Diane J. Cornell Chief, Telecommunications Division International Bureau