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U.S. Efforts to Reduce International Calling Costs Starting to Pay Off

Posted: 10/1998

Regulatory News

U.S. Efforts to Reduce International Calling Costs Starting to Pay Off

By Carol L. Bowers

Notwithstanding the pending lawsuit over the Federal Communications Commission’s
(FCC’s) attempt to reform international settlement rates last year, the agency is
proceeding with an even greater overhaul that it says will benefit consumers worldwide.

Regina Keeney, chief of the FCC’s International Bureau, says the renovation would be
the agency’s greatest undertaking since the international settlements policy was created
in the 1930s.

"While the policies have served carriers very well in the past, the world has
changed a great deal since the 1930s, and has even changed since last November, which was
the last time we looked at these rules," Keeney says. "Competition is increasing
in foreign markets, settlement rates are coming down and consumer rates are coming down as
well. Now, new entrants will have more flexibility in particular to negotiate with foreign
carriers."

The latest FCC proposal would remove the international settlements policy and contract
filing requirements for agreements in which the foreign carriers lacked market power in
World Trade Organization (WTO) countries. The agency also is considering removing the
policy altogether for arrangements between U.S. carriers and carriers for WTO countries
that meet the FCC standard for international simple resale.

However, the long path to international settlement rate reform is fraught with peril
and a need for high-level diplomacy.

"The United States has been trying to advance accounting rate reform for the past
eight to 10 years," says Suzanne Settle, senior policy advisor at the National
Telecommunications Information Administration (NTIA). "But it’s a sensitive and
difficult issue:"

A difficult issue because some telecommunications markets still are controlled by a
monopoly that often is state-owned. Difficult because of concerns over sovereignty.
Difficult because it involves billions of dollars. Difficult because U.S. carriers
themselves invented international callback to avoid paying settlement fees on minutes of
traffic, creating a sort of backlash.

Through a very delicate process, the NTIA has worked with the International
Telecommunications Union (ITU), the pre-eminent international telecommunications
organization, and has made headway in getting ITU member nations to embrace principles
that would lead to rate reform. It’s important to note that not all ITU member nations
signed the precedent-setting WTO agreement on telecommunications, and that the WTO
agreement did not address the accounting rate situation. ITU study groups formed to
address the issue are trying to reach consensus on the issue.

The problem is simply illustrated: If a U.S. carrier sends a U.K.-based company 50,000
minutes of telecom traffic, and the company in the United Kingdom sends the U.S.-based
carrier 50,000 minutes of traffic, no fees are paid. But if the U.S. carrier sends over
100,000 minutes of traffic, and the U.K. carrier returns only 50,000 minutes of traffic,
then the U.S. carrier has to pay for those extra 50,000 minutes of traffic. In countries
where a monopoly controls telecommunications, the fees sometimes are quite high. The
average per-minute rate is about 36 cents, but rates range from 8 cents to more than $2.
Government figures show that U.S.-based carriers spent about $5.4 billion in 1996 on that
kind of traffic imbalance, which officials also believe unnecessarily drives up the cost
of international calls.

The idea behind the U.S. policy overhaul is that lifting the restrictions would free
U.S. carriers to compete more aggressively in competitive markets if the cost of
terminating international calls dropped. Then, the FCC theorizes, normal commercial
pressures would govern relationships between international carriers and they would be in a
position to reach more quickly to technological and market-induced changes.

"I’m very enthusiastic about this," William Kennard, FCC Chairman, says of
the pending overhaul. "This will make a real difference in the lives of Americans.
Ten percent of the people living in this country were born in a foreign country, and many
more have relatives living abroad. These proposals will lower their rates. What better
benefit can you deliver to American consumers than that?"

Citing the example of U.S. traffic sent to the United Kingdom and Jamaica, Kennard
notes that calls from New York City residents to London cost one-sixth of the cost of a
call to Jamaica. "This notice will explore allowing U.S. carriers to negotiate deals
with emerging Jamaican carriers," he says.

Still, the idea is not universally popular. The FCC’s proceeding last fall, in which
the agency set benchmark prices for international settlement rates to be paid by U.S.
carriers, still is causing political fallout in the form of a lawsuit filed by Cable &
Wireless PLC.

The company challenged the FCC on four points in a suit filed in the U.S. Court of
Appeals for the District of Columbia, which was scheduled to hear the case in September.
Specifically, Cable & Wireless claims the FCC had no authority to set benchmark prices
and that the rates were "arbitrary and capricious." In addition, the company
argues that the FCC has no authority to force carriers to comply, and questions whether
the agency was obligated to address the price for international Internet services.

Assistant Attorney General Joel Klein, head of the antitrust division of the U.S.
Department of Justice, argues in his response that U.S. consumers have for years
"subsidized foreign telephone systems" through high international settlement
rates that raised the cost of the calls. He says the FCC rightly has made a concerted
effort to foster competition both domestically and internationally. While the benchmarks
affect foreign carriers, Klein notes, "the foreign company may always decline to
accept telephone calls from the United States and thereby exempt itself from any
involvement whatsoever with the FCC."

"The commission identified a serious, ongoing, worsening problem in international
telephone service and it took steps to correct the problem," Klein says. There are
"no genuine legal reasons" for disturbing the FCC’s policies, he says.

Wireless All-or-Nothing LNP Approach Questioned

By Peter Meade

The Telecommunications Resellers Association (TRA) thinks it has a remedy for the
foot-dragging favored by wireless carriers, which are seeking a lengthy extension to their
local number portability (LNP) implementation deadline. Experts say TRA’s phased approach,
while successful in the wireline arena, may be impractical in the wireless world where
roaming is a factor.

In comments filed with the Federal Communications Commission (FCC), TRA proposed what
it says is a simpler method for implementing wireless LNP, which would give consumers the
ability to change service providers without having to change their phone number or access
to calling features. The Washington-based trade group also discounts claims from several
wireless carriers and the North American Numbering Council (NANC) that "technical
hurdles" will prevent wireless carriers from meeting the June 30, 1999, target for
LNP mandated by the FCC.

TRA says LNP for wireless carriers should be accomplished in a manner similar to that
for their wireline counterparts. Instead of aiming for total LNP by the mid-1999 deadline,
TRA suggests wireless carriers implement LNP by individual markets, starting with the
largest metropolitan service areas (MSAs). Smaller and rural markets then could be cut
over later but still within a reasonable amount of time, TRA says. This approach is being
taken by wireline carriers, which have until the end of the year to complete the top 100
MSAs.

A phased approach would ease the all-or-nothing burden on wireless carriers, while
making sure the largest markets are made ready first for competition, says Steve Trotman,
TRA director of local services.

Kent Olson, a consultant with the Strategis Group Inc., Washington, says he favors an
all-or-nothing cutover vs. TRA’s phased-in approach because wireless customers must have
the ability to roam wherever they want and be confident they will have the benefits of
LNP.

As roaming is not a factor for wireline customers, starting with the biggest markets
and working downward represents an efficient method for completing the process, Olson
explains. In contrast, he says, if the wireline method were applied to wireless,
subscribers could roam in and out of LNP-enabled areas and risk losing some enhanced
service options.

TRA’s Trotman says wireless carriers are taking a route that can only mean more delays.
"The same technology [used] for short text messaging can be used for wireless
LNP," he says. "It’s not that [wireless carriers] lack the engineers or
resources to figure this out. They have more [resources] than many foreign countries. It’s
just that they’re looking at it from a difficult angle."

Strategis Group’s Olson is looking at the situation and the carriers’ ability to make
the mid-1999 deadline with a wait-and-see attitude. "LNP represents a tremendous
expense for carriers to take on themselves," he says. "But the FCC has
established a firm deadline, which I’m sure the carriers are looking at with a mixture of
focus and anxiety." The process should go according to schedule as long as the
wireless carriers stick together and do not start facing off against one another, he says.

Slamming Bills Go to Conference, Surety Provision Under Debate

By Carol L. Bowers

Bills to combat slamming head for a joint conference committee after the summer recess,
where House and Senate leaders will be forced to decide whether surety bonds will be
required of switchless resellers of long distance services. The surety bond requirement
was removed from the House version of the bill (HB 3888) prior to passage.

"We can’t claim total victory yet, but we can claim partial victory," a
spokeswoman for the Telecommunications Resellers Association (TRA) says. The group planned
to spend the interim lobbying against the surety bond provision, arguing it is a
discriminatory burden for these smaller carriers.

The Senate version of the bill (s.1618 ) contains the surety bond provisions, requiring
switchless resellers to annually demonstrate to the Federal Communications Commission
(FCC) that they are financially sound. That could be done by posting a surety bond or
showing a letter of credit from a reputable financial institution, certificates of deposit
or demonstrating access to cash or cash equivalents.

The measure was prompted in part by a case in which the FCC fined a reseller for
slamming, only to find that it had gone out of business and the owner had disappeared.

Does the FCC’s Data Rulemaking Proposal Go Far Enough?

By Carol L. Bowers

Competitive local exchange carriers (CLECs) and long distance carriers were quick to
crow over the Federal Communications Commission’s (FCC’s) recent proposal that Baby Bells
be allowed to offer long distance data transmission only through separate subsidiaries.
The question is, are they being shortsighted?

"This is dija vu all over again for people who have institutional memory,"
says Bruce Egan, a research fellow at Columbia University. "It’s laughable. These are
the same regulations the FCC tried on information and enhanced services and the agency
fell flat on its face then."

Indeed, the FCC on its own initiative rescinded rules that would have required the Bell
operating companies (BOCs) to have separate subsidiaries for enhanced services, and that
sector has been rife with innovation since the FCC’s proposed rulemaking on data
services–accompanied by plans to complete a six-month study ordered by
Congress–effectively scuttled the various BOC petitions to offer long distance data
transmission outside the same restrictions that now apply to voice.

Instead, just as it once did with enhanced services, the FCC said the Bells could
proceed with their plans only by creating an artificial structural separation. FCC
Chairman William Kennard believes the move would force the companies to treat their own
subsidiaries just as they treat CLECs and ensure competition.

"The point is that competitive carriers may not be so happy when the phone
companies say, ‘No dice.’ The FCC has essentially just invited the phone companies not to
play ball. Even a CLEC can understand that," Egan says.

That’s certainly the view of Bell Atlantic Corp., which plans to lobby the FCC to
change its opinion by the time the final rules are set.

"Under the current proposed rules we simply wouldn’t market to the masses through
a separate sub," says Ed Young, senior vice president and deputy general counsel for
Bell Atlantic. "And under the current unbundling rules, why would someone come up
with high-speed data services and then sell them to a competitor at below-cost
prices?"

Even though creating a separate subsidiary would relieve the Bells of the resale
obligation, Young says the rulemaking proposal was a "missed opportunity."

"Look at how the cellular and wireless industry has thrived without regulation.
Prices have come down, service is better, consumers have more options. The same thing
happened when the commission relaxed its regulation of enhanced services. Voice mail has
become competitive with answering machines. They had an opportunity to do the same thing
with high-speed data, and they missed it," he says.

Ed Wynn, vice president of regulatory policy for Ameritech Corp., also expressed
disappointment with the FCC’s proposal. "It appears that instead of focusing on
removing regulatory barriers, they’re focusing on creating more regulation. We read
Section 706 to say the commission has a duty to remove regulatory barriers so that
advanced data services can be made available to all Americans."

The other problem is that under existing rules, a Bell operating company could do just
what the FCC has proposed, Wynn says. Ameritech already has such a separate subsidiary,
established before the Telecommunications Act of 1996 was passed, but like the parent
company, it, too, is subject to long distance restrictions.

MCI Communications Corp., an opponent of the Bells’ suggestions, has in response asked
the FCC to require the Bells to divest themselves of their basic telephone networks.

Jonathan Sallet, MCI’s chief policy counsel, notes the original premise of the Bells’
petitions for regulatory relief under Section 706 of the Telecom Act was that the
companies would not deploy data services aggressively if the FCC did not rule in their
favor. That section of the act allows the FCC to remove regulations or refrain from
regulating advanced technology if it would improve deployment to Americans, and to conduct
a study to be finished by February 1999 to determine whether the new technologies are
reaching the public quickly enough.

"The fundamental point is that all of the evidence cuts the other way,"
Sallet says, citing plans by Ameritech, US WEST Inc., Bell Atlantic and GTE Corp. to roll
out asymmetrical digital subscriber line (ADSL) technology for high-speed interconnections
within the next few years.

"When you talk about building this new data network, you have to remember that in
the digital world, a bit is a bit is a bit; whether it’s voice, fax or e-mail, they’re 100
percent interchangeable," Sallet says. "But for them, owning the facilities is
the critical piece to the puzzle. The only adequate kind of structural separation is
divestiture."

Court OKs FCC Definition of Shared Transport as UNE

By Carol L. Bowers

In the first court victory for the Federal Communications Commission (FCC) since its
orders implementing the Telecommunications Act of 1996 were first challenged, a federal
appeals court has ruled that incumbent local exchange carriers (ILECs) must provide
so-called shared transport facilities to competitors at actual cost.

The ruling by the 8th U.S. Circuit Court of Appeals in St. Louis upheld the FCC’s Third
Order on Reconsideration, which requires companies to treat shared transport–the trunks
that carry traffic for multiple customers and competitors to switches–as unbundled
network elements (UNEs). The case pitted competitive local exchange carriers (CLECs),
including AT&T Corp. and MCI Communications Corp., against GTE Corp, Ameritech Corp,
Bell Atlantic Corp., SBC Communications Inc. and US WEST Inc.

The ILECs argued that shared transport constituted a service that could not be
separated into UNEs. For example, if a company needed three switches on the ILEC network,
and three trunks to carry the traffic to those switches, the ILECs argued that each trunk
had to be purchased separately, says Ed Wynn, vice president of regulatory policy for
Ameritech.

"We knew we had to provide each link, but not all together as one element,"
Wynn says. "The 8th Circuit says you can get those three trunks or links as a single
network element, but they’re not saying you have to combine those trunks with the three
switches and deliver it as a preassembled combination. I’m not sure this ruling really
changes much, but I’m sure it will be challenged."

Jonathan Sallet, MCI’s chief policy counsel, says the company is pleased the court
upheld the FCC’s authority to define UNEs. "Because shared transport is an essential
building block to broad-based local competition, this ruling will have a positive impact
on MCI’s efforts to offer choice in local services," he says, declining to elaborate
more on the company’s plans.

On its face, the ruling appears to be at odds with the same court’s earlier ruling in a
consolidated case brought by the Iowa Utilities Board. That ruling, which said incumbents
could not be required to recombine UNEs for their competitors, primarily concerned the
FCC’s attempt to set the pricing of UNEs; the court said the FCC had no such authority.

In its latest opinion, the court wrote that the FCC’s attempt to define UNEs did not
represent a renewed attempt to set pricing for those elements, as the ILECs contended. The
court noted, however, that the Telecom Act requires the FCC to examine whether access to
proprietary network elements is necessary and whether the failure to provide those
elements would impair a competitor’s attempt to offer services. Shared transport met both
tests, the court said.

8th Circuit Maintains ISP Access Charge Exemption

By Carol L. Bowers

A federal appeals court has ruled that Internet service providers (ISPs) will continue
to be exempt from paying fees to local exchange carriers (LECs) for calls placed to their
services. The ruling by the 8th U.S. Circuit Court of Appeals in St. Louis upholds a
Federal Communications Commission (FCC) order that declared calls to ISPs are local and
not long distance, regardless of the routes they may travel over the global Internet or
their ultimate destination.

The FCC’s access reform ruling was appealed by both LECs and interexchange carriers
(IXCs), with the LECs arguing the fee system sets up an unfair arbitrage for ISPs and the
IXCs arguing the FCC did not reduce access charges to their true incremental cost.

The FCC maintained, however, that ISPs had never been subject to the per-minute access
rates before the new rules were set and that the continued exemption did not represent a
discriminatory subsidy.

"We agree that the FCC’s decision to exempt ISPs from interstate access charges
while continuing to investigate potential future changes in this area is a reasonable
exercise of the agency’s discretion under the [Telecommunications Act of 1996],"
Chief Judge Pasco Bowman wrote on behalf of the three-judge panel. In addition, the court
upheld the FCC’s decision to increase the subscriber line charges for additional lines to
$3.50 for first line and $5 for second line.

"I think the Bells felt like they got short-changed … but we liked how it came
out," says Joe Beatty, chief financial officer for Focal Communications Corp., a
competitive LEC (CLEC) based in Chicago. "We don’t mind that a higher proportion of
the cost of access is put onto the fixed monthly line charge because as LECs ourselves, we
experience those same costs when we deliver service to our customers."

Beatty says the company also was pleased by the court’s view on the exemption for ISPs
and enhanced service providers (ESPs). "If the ESP exemption were somehow reversed it
would cause a major disruption to the Internet itself by changing the economics
abruptly," Beatty says.


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