The U.S. Federal Communications Commission ("FCC") has recently amended its International Settlements Policy ("ISP"), which applies to all rate agreements between U.S. and foreign telecommunications carriers for the termination of international telephone calls. The Report and Order on Reconsideration (See Footnote 1) (the "Order"), released on May 6, 1999, (See Footnote 2) modifies or eliminates several outdated ISP requirements that limited the ability of U.S. carriers to compete overseas. The Order should help reduce prices for U.S. consumers and promote innovation in international telecommunications services.
Fees imposed by carriers to terminate telephone calls comprise a significant portion of the cost of international calls. These fees are typically far in excess of the actual termination costs. The per-minute termination fee, or accounting rate, (See Footnote 3) has traditionally been negotiated between U.S. and foreign carriers subject to the terms of the ISP. Prior to the amended rule set forth in the Order, the ISP required all rate agreements to provide for: (1) an equal division of accounting rates between foreign and U.S. carriers; (2) the nondiscriminatory treatment of U.S. carriers; and (3) a proportionate return of inbound traffic. These requirements were imposed to protect U.S. carriers from a practice known as "whipsawing," in which dominant or monopoly foreign carriers drive up settlement rates (and subsequently consumer costs) by pitting competing U.S. carriers against one another.
Reasons for the ISP amendments
Since the ISP was first applied to voice traffic in 1986, (See Footnote 4) the international telecommunications market has changed significantly. In particular, foreign markets have grown much more competitive. In 1997, 72 countries committed to open their telecommunications markets to competition by committing to the WTO Agreement on Basic Telecommunications. Since then, many new telecommunications service providers have begun to compete with former monopoly or state-run carriers, and settlement rates in those markets have dropped substantially. The Order accordingly recognizes that the uniform application of the ISP requirements is unnecessary or even counterproductive in certain circumstances. For example, in competitive markets, a foreign carrier would typically have little incentive to engage in "whipsawing," since U.S. carriers could simply switch to a competitor. In such instances, imposing the ISP requirements unnecessarily restricts the negotiating ability of U.S. carriers.
The ISP also can foster undesirable anti-competitive effects. Because the ISP essentially requires U.S. carriers to adopt a unified bargaining position in relation to foreign carriers, every U.S. carrier knows a significant component of its competitor's costs. This tends to reduce competition at the retail level. Additionally, the uniformity requirement could reduce incentives for U.S. carriers to negotiate for lower settlement rates. Because the same settlement rate applies for all U.S. carriers with respect to a particular foreign carrier, a U.S. carrier would not gain any market advantage from aggressively negotiating for lower rates.
Changes Introduced by the Order
New ISP Exemptions. The Order addresses the ISP's anti-competitive effects by implementing extensive new exceptions to the ISP. Principally, the ISP will no longer apply to (1) all settlement rate agreements between U.S. carriers and foreign carriers that lack "market power," (See Footnote 5) and (2) all settlement rate agreements on routes where U.S. carriers can terminate 50 percent or more of U.S.-billed traffic in the foreign market at rates that are at least 25 percent below the applicable benchmark rate. (See Footnote 6.) The scope of the exemptions provided in the Order exceeds that of the initially proposed changes. (See Footnote 7.) First, the exemption for non-dominant foreign carriers (i.e., those lacking market power) now extends to all foreign markets. Under the original proposal, the exemption was limited to WTO-Member countries. However, the Order extends the ISP exemption to non-WTO countries as well, to encourage U.S. carriers to negotiate competitively with new entrants in those countries. The FCC decided that whenever a foreign carrier lacks market power, the potential for "whipsawing" U.S. carriers is essentially eliminated, thus rendering the ISP restrictions unnecessary. Rather than making U.S. carriers responsible for determining whether a foreign carrier lacks market power, the FCC will make an affirmative finding for each foreign carrier indicating that it either does or does not qualify for the exemption. A list of "presumptively" non-exempt carriers was issued concurrently with the release of the Order. (See Footnote 8.) These carriers will not qualify for the ISP exemption unless otherwise allowed by the FCC.
Second, the Order lifts the ISP completely on routes where at least 50 percent of U.S.-billed traffic can be terminated at 25 percent (or more) below benchmark rates. (See Footnote 9.) In contrast, the original proposal contemplated exempting only selected "liberalized" routes. (See Footnote 10.) The Order applies the exemption to all carriers, whether they lack market power or not. The FCC believes that carrier competition on routes meeting these criteria will adequately protect against "whipsawing," eliminating the need to impose the ISP requirements on such routes.
Flexibility Policy Superceded. The new ISP exemptions essentially duplicate (and thus supercede) the net effects of the FCC's flexibility policy, which created special exceptions to the ISP requirements. (See Footnote 11.) Where no ISP exemptions apply, the FCC may waive the ISP for individual settlement agreements when doing so would serve the public interest. Also, any agreements approved under the former flexibility policy will remain in effect. There should be no net change resulting from the elimination of the flexibility policy; any agreement that would have been approved under the flexibility policy would either be eligible for ISR or would qualify for one of the new ISP exemptions under the Order.
Modifications to Filing Requirements. The Order also modifies the ISP's filing requirements for certain agreements and accounting rate information. The filing requirement for settlement rate and contract information has been eliminated for agreements between U.S. and non- dominant foreign carriers. Where U.S. carriers have entered into an agreement with a foreign carrier having market power, the filing requirement will remain in force; however, the filing now may be done confidentially on routes exempted from the ISP.
The procedure for accounting rate filing has been streamlined to avoid the confusion caused by the former procedure. The Order eliminates the option to file "notifications"; carriers will now have to file "modification requests" for all changes in accounting rates. (See Footnote 12.) The FCC expects this change will create minimal impact since few carriers actually filed notifications, and since modification requests can be drafted to take effect retroactively.
New Exception to Ban on Special Concessions. The "No Special Concessions" rule (which prohibits U.S. carriers from accepting special concessions from dominant foreign carriers) will not be applied vis-a-vis the terms and conditions under which traffic is settled on routes that are exempted from the ISP. Maintaining the rule on such routes would undercut the purpose of removing the ISP (i.e., allowing the market to control arrangements between carriers). The rule otherwise remains in effect on all routes.
New Safeguards Implemented. The Order adopts additional safeguards applicable to U.S. carriers that are affiliated with foreign dominant carriers in order to discourage collusive behavior between foreign carriers and their U.S. affiliates. U.S. carriers that are affiliated with or that are non-equity joint partners with dominant foreign carriers may not enter into arrangements that have the potential to significantly impede competition on international routes. The FCC will take remedial action, including reimposing the ISP, wherever such arrangements are discovered.
PHJ&W regularly advises clients on a variety of telecommunications matters, including FCC applications to provide international telephone services and the filing requirements necessitated by such services. We can formulate specific advice for clients on how the changes introduced by this Order may impact your international operations.
1/ See 1998 Biennial Regulatory Review Reform of the International Settlements Policy and Associated Filing Requirements, IB Docket No. 99-73, Report and Order and Order on Reconsideration (1999). The full text of the Report is available at: http://www.fcc.gov/Bureaus/International/Orders/1999/fcc99073.txt.return
2/ The Order is expected to become effective in mid-July, 1999. return
3/ Accounting rates represent the full per-minute termination fees shared between the originating and terminating carriers. Settlement rates represent each carrier's portion of the negotiated accounting rate. return
4/ Prior to 1986, the ISP applied only to international telegraph and telex services. return
5/ A carrier lacks market power when it controls less than 50% of the market share in each relevant market. Relevant markets include international transport facilities and services (including cable landing station access and backhaul facilities), inter-city facilities and services, and local access facilities and services on the foreign end. return
6/ The FCC established a benchmark system for accounting rates in 1997. See International Settlement Rates, IB Docket 96-261, Report and Order, 12 FCC Rcd 19,806 (1997) (Benchmarks Order). The Benchmarks Order set up a four-tiered system of target accounting rate ranges to be negotiated with foreign carriers. The rates are determined based on economic development, and range from 15 cents for upper income countries to 23 cents for lower income countries. return
7/ The FCC issued a Notice of Proposed Rulemaking delineating these proposed changes in August 1998. See 1998 Biennial Regulatory Review Reform of the International Settlements Policy and Associated Filing Requirements, IB Docket No. 98-148 and CC Docket No. 90-337, Notice of Proposed Rulemaking, 13 FCC Rcd 15,320 (1998). return
8/ Under the Order, a foreign carrier will be presumed to lack market power if it possesses less than 50 percent of the market share in each of the relevant markets. A list of carriers presumed to possess market power is available at http://www.fcc.gov/Bureaus/International/Public_Notices/1999/da990809.txt.return
9/ When the Order was released on May 6, 1999, qualifying rates (i.e., those 25 percent below the benchmark settlement rate) were as follows: for upper income routes, 11.25 cents; for upper middle income routes, 14.25 cents; and for lower income routes, 17.25 cents. return
10/ The "liberalized markets" consisted of those WTO-Member countries that were authorized to provide International Simple Resale ("ISR"). ISR is the provision of switched traffic over international private lines interconnected to the public switched network. Traffic routed pursuant to an ISR arrangement is not subject to the ISP requirements. return
11/ The flexibility policy allowed U.S. carriers to "waive" the ISP requirements when negotiating settlement agreements with countries whose telecommunications markets met the FCC's criteria for providing effective competitive opportunities for U.S. carriers. See Regulation of International Accounting Rates, CC Docket No. 90-337, Phase II, Fourth Report and Order, 11 FCC Rcd 20,063 (1996)(Flexibility Order). return
12/ Under the previous ISP regulations, reductions in accounting rates could be filed with the FCC by means of a notification; the rate change would become effective one day after filing. All other rate changes (except flexibility filings) required filing a modification request. Modification filings are subject to a 21-day comment period before they become operative (i.e., provided they are unopposed, or flagged by the FCC as contrary to the public interest).