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Back and forth on foreign billing: FCC embroiled in international rate debate
Telephony / October 5, 1998

By Larry Luxner

WASHINGTON -- Overseas governments from Albania to Zimbabwe are deeply concerned that a proposal by the Federal Communications Commission to change the system of payment for overseas calls will devastate their economies.

But the FCC will prevail, says telecom lawyer Scott Harris -- and that's good news for people in the United States tired of paying 15¢ a minute to call England or France, where competition is thriving, but over $2 a minute when placing calls to countries like Jamaica, Paraguay or Saudi Arabia.

"The primary function of the FCC is to protect U.S. consumers," says Harris. By implementing the new regulations, "the U.S. is saying it will not allow its consumers to be victimized by foreign monopolies."

The FCC proposal, unveiled just over a year ago, calls for a gradual change in the way U.S. long-distance telephone companies settle their bills with foreign carriers. Companies like AT&T, MCI and Sprint have for years complained about a growing trade deficit in telecommunications which now amounts to several billion dollars a year. As such, they've pressured the FCC to reform international accounting and settlement rates systems.

In the Caribbean, phone companies are bracing for reductions of 50% to 70% of their annual foreign-exchange earnings, should the FCC proposals be introduced.

"This is a significant loss of revenue for us. We're talking about millions of minutes," complains Lincoln Robinson, technical manager at the Caribbean Association of National Telecommunications Organizations (CANTO) in Port of Spain, Trinidad.

CANTO, an umbrella group of 30 phone companies from throughout the Caribbean, has sent a strong protest letter to the FCC, and has hired Bob Aamoth of Kelley Drye & Warren to argue its case in Washington.

"Our position is that the FCC doesn't have jurisdiction to regulate foreign carriers in foreign countries. Secondly, this is a violation of international treaties which require mutual consent for these kinds of acitvities," said Aamoth, who in addition to CANTO represents 20 various foreign entities and six petitioners who are directly appealing the FCC ruling: Japan's KDD, Hong Kong Telecom, Cable & Wireless, Taiwan's CHT, Singtel and Guyana Telephone & Telegraph.

Aamoth says "the methodology the FCC used does not work," and that the FCC has no right to force foreign carriers to comply with these benchmark rates as a condition of entering the U.S. long-distance market.

According to Kathy O'Brien, an attorney with the FCC's International Bureau, outpayments from U.S. carriers to foreign phone companies totaled $5 billion. In 1995 -- the latest year for which statistics are available -- the top 10 recipients of such payments were Mexico ($876 million); China ($237 million); India ($210 million), Philippines ($160 million); Colombia ($133 million), Dominican Republic ($127 million); Canada ($126 million); Japan ($122 million) and Korea and Israel ($121 million).

"Settlement rates are in many cases above cost-based levels, and the United States has been working for years to get them down, but in countries where there's no compe-tition, they're just not coming down," said O'Brien. "This has a negative effect on U.S. consumers in terms of artificially inflating the price of international calls, and it also has the potential anti-competitive effect in the U.S. market as it opens to foreign competition."

Under the FCC order, which took effect Jan. 1, carriers in the United States have exactly one year to negotiate rates that comply with the benchmark for upper-income countries (including Western Europe, Japan, Taiwan and Singapore). That increases to two years for upper-middle countries (Argentina, Brazil, Chile, Mexico, Uruguay and most English-speaking Caribbean islands); three years for lower middle-income nations (Bolivia, Colombia, Ecuador, Paraguay, Peru, Venezuela and Central America), and four years for lower-income countries (China, India and much of Asia and northern Africa). Carriers have five years to negotiate allowable rates with nations having teledensities of under 1 per 100 inhabitants -- an unenviable category that includes Haiti and most of sub-Saharan Africa.

Jack Nadler, a partner in the Washington law office of Squire, Sanders & Dempsey, says the next round of the controversy will be heard in the D.C. Circuit Court of Appeals, where "a broad coalition representing governments and carriers in 100 countries" has filed suit against the FCC.

"In the first place, the FCC has no jurisdiction to establish the right that foreign carriers can charge for a service that they provide in their home country," says Nadler, who represents two groups: AHCIET, a Madrid-based association comprising 33 telcos in Spain, Mexico and South America, and Comtelca, which speaks for six Central American phone companies.

"Secondly, the FCC's effort to impose accounting rates for the entire world violates the binding regulations of the ITU," he said. "Third, the FCC lacks statutory authority under the Communications Act to set the prices a U.S. carrier can pay to its non-FCC regulated supplier. Fourth, the specific accounting-rate benchmarks are unlawful because they're based on secret submissions provided by AT&T rather than reliable, publicly available data. Finally, there's no basis for the special restrictions the FCC imposed on foreign carriers that have U.S. affiliates.

"Everyone recognizes that over time, accounting rates will have to move toward costs, which means that while there have been significant reductions in recent years, there are likely to be more reductions in the years to come," Nadler adds. "But that's going to be a very difficult transition for many phone companies."

Cable & Wireless, the dominant telco in the English-speaking Caribbean, is especially worried, given the high volume of traffic between the islands it serves and immigrants living in the United States.

Director Richard Wainwright-Lee says the FCC proposal could create "significant economic dislocation in this region, let alone in the world of international telecommunications." Christine Holgate, C&W's director of marketing for the Caribbean and Bermuda, warns that Jamaica alone stands to lose $75 million a year.

Just how much is at stake is itself a matter of debate.

"If the FCC successfully imposes these new rates on the world, U.S. carrier payments would be slashed by around $3.8 billion," says Aamoth. The FCC couldn't quantify that amount, since traffic would likely rise as lower tariffs come into effect.

Everyone seems to agree that the country with the highest amount of phone traffic to and from the United States is Mexico. In 1995, AT&T and Teléfonos de Mexico (Telmex) negotiated an international settlement rate of 39.5¢ a minute that would cover a three-year period. In return for not seeking a lower rate, AT&T was assured it would get a 25¢ settlement rate in 1998 and a cost-based rate thereafter, moving towards the FCC benchmark for Mexican settlement rates of 19¢ by Jan. 1, 2000.

However, when the 39.5¢ rate with Telmex expired on Dec. 31, 1997, Telmex subsequently negotiated a 37.5¢ rate with Sprint, and expects AT&T to pay the same -- which AT&T refuses to do. The two parties have been conducting negotiations to reach a mutually satisfactory agreement. In addition to the FCC, AT&T has also raised the issue with the U.S. Trade Representative's Office.

"The enduring dispute between U.S. and Mexican operators and regulators," says a report by Washington-based ITC, "continues to propel the issue of settlement rates to the forefront of international telecom controversy."

For his part, Aamoth says the FCC's actions smell of hypocrisy.

"Access charges in the United States are five to seven times above cost, because we have universal service built into them. But the U.S. doesn't want to pay these charges, which I find to be something of a double standard," says Aamoth. "Our view is that these are services being provided by foreign carriers in a foreign country, and that they're subject to the foreign regulator. The FCC should have no role in setting that rate."

Of course, other lawyers disagree.

"The U.S. policy is clearly to drive international accounting rates down to economic levels, so that the traffic is driven by the market rather than artificial regulatory regimes," says Donna Lampert, a Washington telecommunications attorney.

Scott Harris, managing partner at Harris Wiltshire & Grannis, agrees with Lampert, and has no doubt the FCC will get its way.

"In my view, the chances of overturning the FCC's decision range between zero and zero," he observed. "So they're going to take effect."

The issue has put the United States at odds with much of the developing world, and has come up at the ITU's Policy Forum in Geneva as well as the recent ITU development conference in Malta.

"The collective judgement of the world is that multilateral action would be preferable to bring down accounting rates. But there has been no effective multilateral action," he explains. "The FCC is going ahead, and everyone accepts the fact that the U.S. will implement its benchmark regime to drive down accounting rates."

This is good, says Harris, because "the regime is simply a mechanism to allow mo-nopoly carriers to exact monopoly profits from overseas users. In addition, you decrease the amount of communications, and that in turn is a drag on the entire country. You favor your local telephone monopolist and disadvantage every other sector of the economy."

Harris, who was chief of the FCC's international bureau from 1994 to 1996, says U.S. consumers could see prices for overseas calls dropping as early as next year, though the lower rates will become effective on a staggered basis -- with developing countries getting more time to comply than wealthier, industrialized countries that don't need the revenue as badly.

Harris discounts the traditional argument that foreign telephone monopolies need badly needed long-distance revenue to build up their networks.

"If that's the case," he argues, "where are those networks? They've been allegedly using these monies to build these networks for decades, but there are distressingly many places where it's best, inadequate. It hasn't worked, because you can't derive enough money from accounting rates to build an infrastructure. What you need is private capital and open competitive markets."

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