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Hang-ups over international phone rate accounting
Journal of Commerce / September 16, 1998

By Larry Luxner

WASHINGTON -- From Albania to Zimbabwe, foreign governments are all but accusing the Federal Communications Commission of plotting to devastate their economies. At issue is one of the touchiest aspects of international telecommunications commerce -- the system carriers in each country use to pay each other for connection and completion of international calls.

But the FCC will prevail, says telecom lawyer Scott Harris -- and that's good news for small and medium-sized U.S. businesses that could see long-distance rates fall dramatically over the next five years, especially to countries where competition is the exception rather than the rule. At present, it costs as little as 15 a minute to call England, France or Japan, where competition is thriving, but over $2 a minute when placing calls to much closer countries like Jamaica, Paraguay or Venezuela.

"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 activities," argued Aamoth. He 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).

Other countries benefiting from the payouts include Brazil ($106 million); Argentina ($96 million); Ecuador ($84 million) and El Salvador ($78 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.

Washington attorney Jack Nadler 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. Secondly, the FCC's effort to impose accounting rates for the entire world violates the binding regulations of the ITU (International Telecommunication Union)," says Nadler, who represents two groups: AHCIET, a Madrid-based association comprising 33 Latin American telcos, and Comtelca, which speaks for six Central American phone companies.

"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.

Lawyers supporting the FCC say that's not the point.

"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, says he has no doubt the regulatory agency 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."

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. He 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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