THE INTERNATIONAL TELECOMMUNICATIONS
SETTLEMENTS PROCESS:
WHATS NEEDED? DESTROY AND REPLACE IT OR ADJUST IT?
Peter A. Stern
Teleglobe Canada Inc., Montreal
IIC Telecommunications Forum
25 - 26 October 1990
Washington
For additional copies, contact the IIC, Tavistock House South,
Tavistock Square, London, WC1H 9LF; Tel: 01-388-0671; Tlx: 24578;
Fax: 01 380-0623; or the author at 680 Sherbrooke Street West,
Montreal, Canada, H3A 2S4
TABLE OF CONTENTS
1. INTRODUCTION 1
2. HOW THE INTERNATIONAL SYSTEM WORKS 5
2.1 The International Framework 5
2.2 The International Settlements Process 7
2.3 Transit Arrangements 11
3. EXAMPLES OF OTHER SCHEMES 12
3.1 The Commonwealth Wayleave Schemes 12
3.2 The Commonwealth Telecommunications Financial
Agreement (CTFA) 14
3.3 Telecom Canada Revenue Settlement Plan 16
3.4 Nature of Cooperative Arrangements 17
4. THE CANADIAN SITUATION 18
4.1 The Canadian International Telecommunications
Market 18
4.2 International Collection Charges 20
4.3 Transit Arrangements 22
4.4 Teleglobe's Settlements 23
4.5 Regulatory Oversight 24
4.6 Settlement Arrangements Between Canadian
Telecommunications
Companies and US Carriers 25
5. ALTERNATE ARRANGEMENTS: CHANGING THE SYSTEM 28
5.1 End-to-End Ownership Arrangement 28
5.2 Free Trade/Competitive Model 32
5.3 Other Proposals 33
6. MODIFICATIONS WITHIN THE EXISTING SYSTEM 33
6.1 Assessment of Some Proposals 33
6.2 The FCC and OFTEL Reviews 38
6.3 The European Commission 40
7. CONCLUSION: IS THE PRESENT SYSTEM REALLY
UNSUSTAINABLE? 41
NOTES 47
REFERENCES 55
1. INTRODUCTION
A year ago the international telecommunications community was
shocked by accusations of price gouging and cartelistic behaviour
by the influential Financial Times. Hugo Dixon, the newspaper's
telecommunications correspondent wrote of a "pricing system
based on an obscure set of accounting practices" established
by the "world's telephone companies in cozy club
committees" whose "meetings switch from one capital
city to another''.1 Such accusations were not new;
they had, however, been limited to the more academic works. For
example, in their 1988 book, When Countries Talk:
International Trade in Telecommunications Services, Aronson
and Cowhey speak of "the ancien regime of telecommunications
(consisting) of national monopolies tied together by an
international cartel that legally sanctioned administered prices,
equal splits of international revenues, and rules that forbid
competition for international traffic" and that
"strictly controlled entry".[1] In a similar vein W.J.
Drake of the University of California speaks of the "postal
industrial complex" in which "PTT engineers were aghast
at being described as undemocratic cartel managers conspiring
against the free market, since commercial considerations had
never been an acknowledged criteria for evaluating standards and
regulations". In the same paper Drake quotes Eli Noam's
reference to "the rent-seeking coalition that provided links
of shared economic interests across frontiers"2.
While not so virulent in their accusations of the existing
international telecommunications settlement arrangements, Ergas
and Paterson, nevertheless, suggested last year that these are no
longer appropriate in a world of rapidly changing technology and
supply and regulatory structures. They argued that while the
present system of international settlements has many advantages
it is outdated and they suggest a number of alternatives, some of
which are examined in this paper. [2, 3]
An intense debate about the appropriateness of the
international telecommunications regulatory framework of which
the settlement process forms part had already taken place a few
years earlier within the committee established under the
International Telecommunications Union (ITU) to draft new
international telecommunications regulations. Here proponents of
a much more liberalized international system found themselves
confronted by those who wanted to maintain, and even strengthen,
the benefits that international agreement on procedures and
standards had brought. The difficult compromise which was finally
achieved during the final hours of the 1988 World Administrative
Telegraph and Telephone Conference (WATTC-88) limits the reach of
the new regulations to the basic international services and
"the underlying international transport means used to
provide such services". Beyond this, members are encouraged
to respect the provisions of the new Regulations and the
voluntary ITU standards (the CCITT and CCIR Recommendations).
Article 9 recognizes the right of countries to enter into special
mutual arrangements "which do not concern Members in
general".3
The WATTC debates admittedly did not center on the traditional
revenue settlement process but rather on the potential regulatory
barriers to entry into the new competitive enhanced services
market; however, developing countries used the occasion to
introduce a proposal to modify the international settlements
arrangements through an unequal division of the accounting to
compensate them for the higher unit costs for facilities that
they provide in their relations with industrialized countries4.
A resolution attached to the new regulations instructs the ITU to
do further cost studies and suggests that the results of such a
study might lead countries in developing-industrialized country
relationships to agree to a split of the accounting rate other
than the normal 50/50.
Just as delegates at the WATTC in Melbourne were making their
final compromises the Federal Communications Commission in
Washington was issuing an analysis that showed that the US
balance of payments deficit for international telephone traffic
(or international message toll service, ITMS) had grown from $US
40 million in 1970 to $US 2 billion in 1988.[4]
Carrying this research further Leland Johnson has since
concluded that accounting rates are substantially above the cost
of network use and that the resulting excess profits earned by
international carriers are encouraged because they can be used to
subsidize domestic and local service.[5]
The Financial Times articles brought quick reaction from
OFTEL, the UK regulator, which opened an inquiry into British
Telecom's international rates which at the time were not included
in the basket of prices subject to the UK price cap (RPI-X)
formula. More recently the FCC arguing that "the US can no
longer underwrite foreign telecommunications administrations
particularly in developed countries" issued a notice of
proposed rule making in which it proposes "a three-part
reform of (the US) existing international settlements policy to
bring international accounting rates closer to the cost of
providing international telecommunications services and to reduce
US international calling prices by perhaps as much as fifty
percent" [6]. At the same time the European Commission was
looking at the European telecommunications operators' pricing
practices which result in a wide disparity between local, long
distance, and intra European long distance rates.
Finally, countries such as the US, UK and others have been
seeking to liberalize world-wide markets for telecommunications
services (as a service in its own right and as a mode of delivery
of other services) through the development of a new General
Agreement on Trade in Services (OATS) presently being negotiated
under the GATT Uruguay Round. Relevant to the discussion of
prices charged for telecommunications facilities and services is
the (still square bracketed) provision in the telecommunications
annex to the proposed GATS which states that such prices should
"reflect costs" or at least be
"cost-oriented".5
The debate about international telecommunication practices and
procedures which has recently been brought out in front of the
general public must then be seen in the context of the
discussions that have been taking place in somewhat more
restricted circles about the appropriate structures for a new
more liberalized international telecommunications regime.
Following a brief review of the functioning of the present
international settlements process, the accounting rates system,
this paper presents and critically analyzes some of the
alternatives that have been put forward with the objective of
correcting the problems of excessive prices and large balance of
telecommunications payments deficits. These alternatives have
been justified by their authors as necessary because the current
system is no longer consistent with the introduction of
competition, of new services, and of new technologies, nor with
the increased commercialization in the provision of international
telecommunication facilities and services. The paper examines
other alternatives, cooperative schemes, which have worked and
continue to work well in situations where independent carriers
have for one reason or another found themselves to be partners in
joint ventures. The paper also gives a short overview of
settlement practices of Canadian international carriers and,
finally, offers some assessment of the impact of changes to the
present arrangements on both industrialized and developing
countries.
2. HOW THE INTERNATIONAL SYSTEM WORKS
2.1 The International Framework
The international telecommunications system consists of
sovereign international carriers interconnecting among each other
for the purpose of exchanging international telecommunications
traffic. Many of these carriers are also responsible for
providing telecommunications facilities and services inside their
own countries. Some are government departments while others may
be statutory bodies or even private companies. In a few countries
competition has been introduced in the provision of international
services and facilities. The only significant exception to this
model of joint provision of international services among
sovereign international carriers was the Cable & Wireless
owned telegraph cable network which spanned the British Empire
during the latter part of the 19th and the earlier part of the
20th century.6 Decolonizations and nationalizations
after the Second World War led to the break-up of the Cable and
Wireless owned international network. More recently, however,
there has been a reversal in this process at least in certain
countries where governments have privatized telecommunications
operators and sold parts or all of them to foreign interests in
order to reduce foreign debts and demands on tight budgets.
Argentina, Chile, Mexico, Jamaica, New Zealand, Australia, and
Venezuela are countries which have sold or are in the process of
selling off to foreign interests significant parts of their
telecommunications operations.
Nevertheless in most countries international facilities and
services have and continue to be provided jointly and not
end-to-end because these countries have simply been too reluctant
to open to foreign ownership a sector which they feel is
strategically important to their economies and sovereignty.
Telecommunications is by no means the only sector where sovereign
ownership and operation of a country's resources is the norm. The
continuation of this practice is at the heart of the trade
liberalization discussions now drawing to a conclusion under the
GATT Uruguay Round.7 Yet the introduction of greater
international competition and removal of regulatory and market
barriers to entry by foreign providers of facilities and services
which is the main objective of large industrialized countries and
groups such as the US and the EEC may well result in a gradual
but significant erosion of the sovereignty principle.
Comprehensive international arrangements which have been
developed over the past 150 years ensure that this system of
Joint provision by sovereign operators works. It is not by chance
that any country's telecommunication system can interconnect with
that of any other country and that there is interoperability of
virtually all services. Bilateral or multilateral agreements
between or among international operators on the provisioning,
operation, and maintenance of international facilities and
services and their remuneration is facilitated by the broad
framework of internationally agreed rules and guidelines
developed by all countries under the auspices of the ITU.8
The international settlements process which has now been so
severely criticized is part of this framework and has been a
cornerstone in the development of universal access to an
international and interoperable system linking all countries
small and large, developed and less developed.
2.2 The International Settlements Process9
For an international telecommunications service provider
international telecommunication accounting practices distinguish
between remuneration of the corresponding carrier in the country
of destination or transit for the delivery of its traffic and the
charge in national currency collected by an operator from its
customers for the international facilities and services provided.
According to CCITT Recommendations D.150 and D.155, which concern
tariff and accounting practices in the international telephone
service, the carrier in the destination country can be
remunerated on the basis of a flat-rate price per circuit, on the
basis of the traffic units carried, or through a procedure
whereby accounting revenue is shared between terminal operators.
Under the flat-rate price and traffic unit price procedures the
carrier at the destination establishes its prices broadly based
on the cost of the international circuit section it provides, the
use of its international exchange (gateway) and the national
extension. Under the accounting revenue division procedure the
value of traffic in each direction between two corresponding
international carriers is multiplied by a mutually agreed tariff
or "accounting rate" to give an accounting revenue
which is "in principle, shared equally between the
(carriers) of the terminal countries in respect of each traffic
direction". In theory, international carriers can agree on
other than equal shares when their costs or the extent of the
facilities that each provides vary significantly; however, in
practice accounting rates are shared 50/50. If during a given
settlement period (say a month or a quarter) there is more
traffic flowing in one direction than the other, the carrier
which receives more traffic than it sends will receive a greater
amount of compensation from the corresponding operator for
delivering its traffic than it has to pay out. The direction of
the traffic imbalance, therefore, determines which operator has
to pay its partner in a bilateral relation more than it receives.
If, for example, the accounting rate between Canada and a given
foreign destination is SDR 1.66 and the accounting rate is
divided 50/50 then Canada pays its foreign partner 1/2 x 1.66 =
SDR 0.83 per minute of traffic to deliver that call to its
destination from the mid-point (say mid Atlantic) to the
destination subscriber; to facilitate accounting, however,
partners in a bilateral relation look at the sum of the traffic
in both directions for a given period and apply the accounting
rate only to the difference. If, therefore, during the period
there are more minutes of traffic flowing out of Canada than
flowing in, the imbalance obtained by multiplying by half of the
accounting rate gives the "traffic settlement" which is
due to the foreign administration. The greater country's traffic
imbalance with another country, the greater its net payments
outflow.
If traffic levels are equal in both directions the outpayments
are the same in both directions. In certain relations where
traffic levels are more or less equal, carriers may agree to not
exchange international accounts. Contrary to the result of most
other international trade in goods and services transactions
where a net export results in a net payment inflow in
international telecommunications a net outflow of traffic will
result in a net payments outflow from the country that
"exports" that traffic.
Collection charges are considered to be a purely national
matter fixed by the provider of the international services
subject to government, regulatory, financial and competitive
constraints. The International Telecommunication Regulations like
CCITT Recommendation D.150 emphasize the need "to avoid too
great a dissymetry between charges applicable in each direction
of the same relation''.l0
The countries of Europe and the Mediterranean Basin have
established somewhat more detailed provisions for determining the
compensation for facilities made available by one international
carrier to another for transit and for delivery of a call through
its national network. CCITT Recommendation 300.R establishes
prices to be charged on a per circuit or per channel basis
according to per minute utilization and distance.
What can cause significant traffic imbalances? Generally these
can be attributed to large disparities in collection charges
between partners, the greater difficulty of completing calls in
one direction than the other and to certain calling patterns
between families and businesses. In addition, the low level of
disposable income and the lack of foreign exchange in certain
countries may act as a barrier to outbound traffic growth.1l,
12
A carrier with a traffic imbalance in its favor will naturally
wish to maintain or even increase that imbalance. Its partner
will on the contrary attempt to mitigate the financial impact of
the imbalance by negotiating to have the accounting rate reduced
and where appropriate assisting the other partner to overcome any
technical difficulties which hampers outgoing calls. This is
significant. The commercial nature of the international
settlements arrangements is such that the interests of partners
in a bilateral relationship always diverge unless a perfect
balance in traffic is maintained. This is hardly characteristic
of a cartel!
The trend has been to reductions in accounting rates
reflecting the decreasing unit cost to the international carrier
to deliver the traffic that it receives and the decreasing
charges collected by the originating operator for an
international call. Tensions arise when the latter collects less
per unit of traffic than it has to pay out to the far end
operator for delivering that unit. With the ever increasing
volume of international traffic there is, therefore, pressure to
change accounting rates. Continuing negotiations between parties
cause accounting rates to be driven lower again thereby
contradicting accusations that the system is rigid and not apt to
change or evolve.
2.3 Transit Arrangements
Carriers in countries which are used as transit points between
origin and destination are remunerated either according to a
flat-rate price for facilities made available on dedicated
circuit basis rather than on demand or according to a traffic
unit price on the traffic which is switched through the transit
point(s). The terminal and transit carriers in a switched transit
relation would normally negotiate an accounting rate for the
relation and then divide it into two terminal shares and one or
more transit shares. The balance of the accounting rate after
deduction of the transit share(s) is normally divided equally
between the terminal carriers; however, as in the case of direct
relations they may also agree to something other than a 50/50
share.
With the advent of competition for transit traffic, carriers
began in the late 1970s to offer Transit Remuneration Plans
(TRPs) whereby transit facilities are offered to terminal
operators at competitive rates. These rates are then deducted
from the total rate between the two terminals. The balance is
then divided between the terminal carriers. The fierce
competition among carriers to attract transit traffic is hardly
characteristic of a cartel no more than is their behaviour in
negotiating accounting rates.
3. EXAMPLES OF OTHER SCHEMES
This section examines some other schemes that have at one time
or other been put into practice. These are cooperative in nature
designed to share revenues and costs among members of a
partnership or consortium.
3.1 The Commonwealth Wavleave Schemes
Under the Wayleave Schemes which were in effect from 1948 to
1973 expenses of the Commonwealth network, known as the
"common-user system" were shared on the basis of each
partner's so called "Wayleave" revenue. Total actual
expenses incurred by all partners in a given year were
re-allocated to each partner in proportion to its shares of the
total revenue. There were rules governing the costs that could be
charged to Wayleave expenditure and their calculation and rules
for excluding certain revenues and adjustments for other revenues
where the collection charges for a given service in a given
relation fell outside certain limits. Revenue derived from
traffic coming from outside the common user system (known as
foreign traffic) was shared 50/50 between the point of entry and
terminal partner. The Wayleave Scheme had the great merit of
providing a collective network which all partners could use
without regard to routing. It encouraged the maximum use of the
Commonwealth network and helped the poorer countries finance
development of their facilities with the cost being borne by the
partnership as a whole spread over the life of the facility; it
had the disadvantage, however, that any move by a partner to
increase or lower its collection rates, terminal charges or other
element of net Wayleave revenue, affected all other Partners.
This in turn made it almost impossible for a partner to assess
the result of a decision to change its collection rates and at
the same time the scheme did not encourage careful control of
expenditure by individual partners, since their expenditures were
shared by the partnership as a whole.
In 1958 a second parallel Wayleave scheme (Wayleave II) was
introduced to cater for the broadband submarine cable systems
which were being introduced into the Commonwealth system. Usage
of these systems was measured by each partner's Wayleave revenue
with expenditure shared accordingly. In intra-Commonwealth
relations a fixed scale of accounting rates, varying according to
distance, was used instead of actual revenue. This meant that
changes in Partners' intra-Commonwealth collection rates did not
affect other Partners through the Wayleave II accounts. Revenues
for traffic coming into the common-user system were retained by
the entry point.
3.2 The Commonwealth Telecommunications Financial
Agreement (CTFA)
The Wayleave schemes were replaced in 1973 by the Commonwealth
Telecommunications Financial Arrangements or CTFA, a scheme
whereby the cost of each partner's facilities which made up the
Commonwealth common user system was recovered from each other
partner in proportion to the use the latter made of that facility
with use measured in terms of units of traffic actually carried
over each facility. The system required detailed calculations
both of usage on a stream by stream basis according to units of
traffic and of incurred unit costs (such as maintenance,
depreciation, rental, and administration costs) of each separate
segment. The scheme had provisions for sharing costs of
facilities operated jointly with administrations which were not
members of the organization and, furthermore, it had some
built-in adjustments designed to maximize the utilization of the
common-user network and to counterbalance certain financial
disparities between partners using different technologies.
In relations between any two partners revenues were shared
equally between the two terminal points. Transit partners did not
share in the revenues; however, they were compensated for the use
of their facilities under the cost sharing part of the scheme
which included an adequate return on capital invested. Revenues
squalled traffic times accounting rate and not the amounts
actually collected by each partner (Partners were free to set
their collection charges according to their own needs and
priorities). CTFA provided a partnership agreed set of accounting
rates and divisions for use in all intra-Commonwealth relations.
At the outset these rates were generally lower than prevailing
rates outside the partnership and were much more reflective of
the cost of providing facilities. The lower rates also encouraged
the growth of traffic on the common-user Commonwealth network.
The scheme had a number of features which were beneficial to
the partnership. For example, since unit costs of facilities on
direct relationships were averaged and the same charges were paid
by both partners in a given relation, the high cost partner (most
often the developing country partner) shared in the economies of
scale of the lower cost partner. Unrestricted use of network
transit facilities at cost (including return on capital) was of
significant benefit to partners that depended heavily on
Commonwealth transit points since the charges were usually lower
than the share of the accounting rate or the fixed fees borne by
foreign administrations. The system encouraged partners to
attract traffic from outside of the partnership and encouraged
development of common-user facilities.
The system did, however, have its disadvantages. It was
complex (with the degree of complexity increasing with the
introduction of the new technologies and services). It was costly
to administer, it did not always give the expected results, and
the final settlements could not be calculated until each and
every partner had submitted its reconciled and audited accounts
(which was no mean achievement). Consequently, the organization
decided in 1983 to move to the accounting rates system being used
by other administrations with, however, a small preferential
adjustment being applied to the accounting rate division in
relations between developing and the developed partners in favour
of the former. The preferential adjustments were intended to
ensure that the developing partners enjoyed the same advantage
from the economies of scale as did the major partners. Lost with
the old system was a built-in incentive for members of the
Organization to develop and improve their international
facilities which linked them to their Commonwealth partners and
other foreign destinations. Earlier this year the 30 members of
the organization decided to discontinue the preferential
accounting rates adjustment and to concentrate their effort and
resources on a program of development and training where
assistance could be directed to improving the network, its
operation and administration. In international settlement terms
therefore the history of the Commonwealth partnership has evolved
from an end-to-end arrangement, where one company, Cable &
Wireless, owned and operated the British Empire telegraph cable
network, to one where the universally accepted accounting rates
system for joint provision of international services and
facilities by sovereign administrations prevails.
3.3 Telecom Canada Revenue Settlement Plan
While not international carriers the nine members of the
Telecom Canada association have a revenue sharing arrangement
called the Telecom Canada Revenue Settlement Plan which
compensates each member company in proportion to its cost of
providing domestic long distance services. In this plan collected
toll revenues net of commission paid to independent telephone
companies13, 14 are put in a common pool from which
settlements are paid out (or received as the case may be) for
Canada-US traffic (settlements with US long distance carriers),
Canada-overseas traffic (settlements with Teleglobe Canada), and
Telesat Canada traffic (for domestic satellite services). Each
member is then reimbursed from the pool for its portion of the
so-called Recoverable Assigned Costs which included maintenance,
depreciation, traffic, financial expenses and income tax. The
residual portion of the pool is then distributed in proportion to
each member's non-traffic sensitive access cost (the subscriber
loop) assigned to Telecom Canada services in relation to total
system assigned access cost. The assignment of access cost is
based on the ratio of Telecom Canada direct costs to the direct
transmission and switching costs associated with the local and
monopoly toll services.
3.4 Nature of Cooperative Arrangements
The Commonwealth, like the Telecom Canada arrangements, are
characterized by their cooperative nature. They have been
developed to meet the needs of a partnership or consortium of
sovereign or independent operators who have joined together to
attain a common purpose. In the case of the Commonwealth it was a
decision of governments to continue with a cooperative
arrangement among sovereign international commercial carriers
(usually monopolies) in order to promote the use and development
of each partner's external telecommunications facilities. In the
case of Telecom Canada the cooperative arrangement among
independent telephone companies each with its territorial
franchise ensure the existence of a Canada-wide long distance
network.
Intelsat and Inmarsat, the joint telecommunications satellite
cooperative (not for profit) ventures of international
telecommunications operators, were formed under similar
cooperative arrangements where each member contributes capital in
proportion to its use of the system. The utilization charges are
established at a level which generates the revenue required to
meet the operation, maintenance and administration of the system
as well as amortization of and compensation for use of capital.
4. THE CANADIAN SITUATION
4.1 The Canadian International Telecommunications
Market
Canada's international telecommunications market is divided
into two. The Canada-US, the largest bilateral market in the
world, and Canada-Mexico traffic accounts for eighty percent of
this and is provided on the Canadian side of the border by
Telecom Canada, an association of nine major (Type 1) regional
domestic telephone companies plus Telesat Canada, and by Unitel15
(formerly CNCP) which provides non-public switched voice and data
services across Canada. Presently there is no competition on the
Canadian side for Canada-US and Canada-Mexico message toll
service (MTS). Telecom Canada has operating agreements with
AT&T, MCI, and US Sprint; Unitel, with RCA, Western Union,
MCI, US Sprint, etc. for non-MTS. There are no specific
restrictions within the leased line tariffs of Telecom members or
Unitel covering their use for the provision of value-added
services.
Teleglobe Canada has, for the time being16, the
exclusive mandate for the provision of international
telecommunications facilities and services outside of the US
market. Teleglobe does not provide domestic services and until
recently has been dependent on the companies of the Telecom
Canada group and Unitel to deliver Canada's overseas traffic to
and from the international gateways in Montreal, Toronto and
Vancouver.17, 18 Teleglobe and Telecom, on the one
hand, and Teleglobe and Unitel, on the other, have negotiated
settlement agreements for the delivery of this traffic. For
example, Teleglobe pays the Telecom Canada association a fixed
amount per minute of incoming international message toll service
(IMTS) traffic which is delivered to the destination subscriber.
Similarly, there is a fixed amount for each call and minute of
outgoing IMTS traffic which Teleglobe pays to the association.
These amounts are intended to compensate the domestic carriers
for providing billing and operator services, local access, and
line haul to and from Teleglobe's gateways. They also contain a
contribution to the local, rural and remote services which
continue to be cross-subsidized in Canada from the benefits of
the long distance and international services.
Overall, Teleglobe's outpayments to foreign carriers
represent, by far, the single most important cost component in
providing international service from Canada, followed by the
settlement payments to Telecom Canada. Typically, Teleglobe keeps
less than 5% of revenues collected in Canada.
4.2 International Collection Charges
With the exception, of course, for traffic with the US and
Mexico international collection charges are established by
Teleglobe in consultation with the domestic carriers and are
subject to rate of return regulation. Revenues collected on
behalf of Teleglobe by the domestic carriers for international
calls originating in Canada are paid out to Teleglobe by Telecom
Canada on behalf of its nine regional members after deduction of
the agreed settlement amount.
The Canadian telephone subscriber will not normally be able to
distinguish in his monthly statement between long distance
(domestic, US and Mexico) telephone services provided by Telecom
Canada members or the independent telephone companies and
international services provided via Teleglobe's facilities. In
spite of this and in a situation such as Canada's where the
international and domestic carriers operate at arm's length,
there are advantages for the international carrier to set the
international collection rates because, inter-alia, of the
flexibility that it gives it to optimize its traffic flow through
appropriate rate differentiation and, therefore, to optimize the
efficiency of the international network.
For example, Teleglobe introduced off-peak calling period
discounts as an incentive to increase traffic during troughs in
network utilization. Teleglobe's rates for international calls to
given destinations have also been aligned with the cost of
providing the service to those destinations including the
settlement payments to the foreign as well as domestic carriers.
Teleglobe's international telephone tariff schedule currently has
16 rate bands with each destination country classified according
to the level of payments it receives in its settlements with
Teleglobe. Within each band there are reductions for off-peak
hours.
Thus as opportunities arise, Teleglobe undertakes to reduce
collection rates and therefore stimulate traffic to those
destinations where the foreign operator has agreed to reduce the
accounting rate. Therefore, while they may not be mathematically
related there is nevertheless a relationship between accounting
rates and collection charges. Often the increase in traffic
caused by the decrease in collection rates will more than offset
the effect of the reduced accounting rate.
Canadian subscribers enjoy so-called "postalized"
rates whereby overseas telephone calls to any given country are
charged the same rate, without distinction as to their
geographical point of origin within Canada. On the contrary,
Canada-US collection rates are distance sensitive on both sides
of the border.
4.3 Transit Arrangements
Ever since the days of the single channel telegraph cables
Canada has been an important transit point between Europe and the
Pacific Basin. The various revenue and cost sharing arrangements
that existed first under the Commonwealth Telecommunications
Board and later under the Commonwealth Telecommunications
Organization established after the nationalization in various
Commonwealth countries of the assets of Cable & Wireless and
Marconi in the late 1940's, promoted the use of Commonwealth
facilities by members of the organization around the world.
Teleglobe continued as an important transit point especially for
Commonwealth traffic flowing between the UK, Australia, Hong Kong
and the Caribbean. The Canada transit route provided and
continues to provide an off-peak hour alternative for Europe to
Far East traffic. Teleglobe has accordingly invested heavily in
North Atlantic and Pacific cable systems which carry not only
terminal but also transit traffic. Since the discontinuation of
the Commonwealth cost sharing arrangements there is no longer a
special incentive for Commonwealth countries to use Canada as a
transit point for switched traffic. Like other important transit
points Teleglobe must therefore offer transit fees and quality of
service which can attract such traffic in a highly competitive
market.
4.4 Teleglobe's Settlements
Much like the US, Canada has had a net outward imbalance of
traffic and, consequently, of payments. In 1989, the gap between
outward and inward traffic was about 50%. The gap in 1984 was
25%. Over the past few years outward traffic has been growing at
nearly 30% a year while inward traffic growth was just above 20%.
While not the only cause for the growth in outward traffic,
reductions in international collection charges have had a
significant effect. On the average, our collection rates have
been reduced by 33.3% from $2.16 to $1.45 per minute since 1988.
Over the same period accounting rate reductions have been agreed
with more than 100 foreign administrations with reductions
ranging from 5% to 75%. On the average, Teleglobe's accounting
rates compare quite favorably with those of AT&T. Efforts to
bring accounting rates lower and more in line with costs will
continue so as to allow us and our correspondents to reduce
collection charges and thereby stimulate the growth of
international traffic between Canada and these countries. We are
also presently negotiating reductions in our settlements with the
domestic carriers. These have not changed for quite a number of
years even though international collection rates in Canada have
as indicated been reduced by over 30% in the last two years
alone.
Our international call charges compare quite favorably with
those in other countries. An analysis of international business
telephone call charges among OECD members shows that Australia,
Canada and the US have one of the lowest charges which are at a
level of about 82-84% of the OECD average.l9 This is
significant because in a comparison of US and Canadian overseas
rates three Canadian "handicaps" must be kept in mind:
the enormous difference in the volume of overseas traffic; the
Canadian policy of "affordable local telephone service"
implying a significant degree of cross-subsidization of local and
remote services by Canadian long distance and international
services; and the policy of the federal government to apply a tax
on telecommunications services. Business users are eligible for a
credit to offset this tax.
4.5 Regulatory Oversight
Before being privatized in April 1987 Teleglobe was not
regulated. The Canadian government through the Department of
Communications and the Treasury Board approved the corporation's
annua1 budget and major construction expenditures. Teleglobe
would similarly have had to seek approval of any tariff increases
had there been the need for any.20
Teleglobe is now subject to the regulatory oversight of the
Canadian Radio-television and Telecommunications Commission
(CRTC). For the four year period 1 January 1988 to 31 December
1991 the newly privatized company is being allowed a rate of
return on common equity, on average over the transitional period,
in the range defined by the weighted average mid-point of the
return allowed by the CRTC on common equity of Bell Canada and
British Columbia Telephone Company21 plus 2%.22
This rate of return regulation applies to the totality of
Teleglobe's business. All tariffs have to be approved by the
CRTC. While the CRTC has no direct authority over accounting rate
levels negotiated with foreign administrations, it approves the
settlement agreements between Teleglobe and the domestic
carriers.
The CRTC can gain access in confidence to Teleglobe's
accounting rates settlement agreements and can apply some
regulatory remedy if it feels that these are not in the public
interest.
4.6 Settlement Arrangements Between Canadian
Telecommunications Companies and US Carriers
With only one exception, Canadian telephone companies do not
have separate agreements with US carriers. Rather, Telecom Canada
as an association of its nine regional members23 has
agreements with AT&T, MCI, US Sprint and other US long
distance carriers for MTS and other services such as 800, private
line, packet switched data and transborder satellite. Telecom
Canada settles with these carriers on the basis of an accounting
rate procedure. Net receipts from any monthly settlement go into
a common pool. Net outpayments are taken from the pool. This pool
is used by Telecom Canada to share revenues and costs among
member companies for the use of each others facilities for long
distance communications. Canadian independent telephone companies24
interconnect with Telecom Canada members that deliver their
traffic to and from the US. They settle with their
interconnecting Telecom Canada member subject to the
interconnection agreement between them.25
Prior to 1986 AT&T and Telecom Canada shared revenues
according to a cost-based ratio of 51.74/48.26 with the larger
share going to the latter. Under the current interconnection
agreements, Telecom Canada and the US long distance carriers
settle under an accounting rate procedure with the current (as of
1 October 1990) rate of $US 0.28 per minute for peak period
traffic $US 0.24 for off-peak. This represents a reduction of
respectively 33% and 37% over the previous rates of $US 0.42 and
$US 0.38.
Unitel has similar interconnection agreements with US carriers
for services other than MTS.
The CRTC approves the interconnection agreements including the
accounting rates which Telecom Canada and Unitel have negotiated
with their US correspondents. Like the domestic long distance and
local rates, Canada-US call charges must also be approved by the
CRTC.
Long distance settlement agreements between Telecom Canada
members and the interconnecting independent telephone companies
are subject to approval by the appropriate regulator. These
companies are, however, regulated individually by their
respective regulators on a rate of return basis.
In 1981 the CRTC conducted an extensive review of the Telecom
Canada Revenue Settlement Plan (see section 3.3 above) and
approved the procedure.26
5. ALTERNATE ARRANGEMENTS: CHARGING THE SYSTEM
There have been many proposals to replace the accounting rates
system with other arrangements. While Drake has complained about
"the dearth of theoretically-informed examination of the
production and contents of the ancien regime"27,
the authors of these proposals, mainly from the academic circles,
would no doubt dispute Drake's conclusions that their proposals
were devoid of theoretical foundation. We will examine a few of
these and assess their practicability as alternatives to the
current practice.
5.1 End-to-End Ownership Arrangement
Aronson, Cowhey, Ergas and Paterson 28 have
suggested an end-to-end ownership arrangement whereby one or
several global carriers would own and operate international
facilities and services. They would pick up and deliver traffic
to each connecting country's international gateways. The domestic
carrier(s) would then be responsible for carrying the traffic
between the gateway and the customer. Under such an arrangement,
according to Aronson and Cowhey, each country could continue to
structure its national telecommunications as it best sees fit and
could continue to cross-subsidize local rates from the
international service through an access charge applied at its
international gateways. They warn, however, that such an
arrangement would require that "the precise terms governing
foreign entry into domestic markets would be negotiated
bilaterally, subject to guidelines in the multilateral
agreement" and that as a consequence countries need to
"develop a nondiscriminatory way of limiting the total
number of foreign networks".29
For Ergas and Paterson the main benefit of an end-to-end
ownership and operation arrangement is its ability to
"by-pass the accounting rate" allowing "the new
end-to-end carriers ... to introduce price structures attractive
to the larger, global customers with extensive discounts for long
term commitment30. Aronson and Cowhey confirm that
"this model is particularly appealing for large users and
well-situated providers of telecommunications services''.31
Ergas and Paterson also feel that there are benefits to be
gained by "greater control over end-to-end quality, improved
customer account management and more effective
'one-stop-shopping"'.
However, while arguing in favour of this alternative, its
proponents also reveal the shortcomings of their proposal. It is
evident that under an end-to-end arrangement competition would be
restricted because few global carriers would have the huge
investments required and because, as Aronson and Cowhey indicate,
there would be a need in negotiations among countries to limit
the number of foreign carriers leading to an oligopolistic market
structure. It is difficult to determine under these circumstances
the extent to which the customer of international services would
benefit since these authors all admit that the only winners would
be the large users with sufficient bargaining power. One must
also wonder, how with this solution with fewer providers of
international telecommunication facilities and services, a
cartelistic market structure could be avoided if it cannot, as
they claim or imply, under the present arrangements. Furthermore,
one must ask what really are the benefits to be gained by
"greater control over end-to-end quality, improved customer
account management and more effective 'one-stop-shopping "'
when there are adequate provisions in existing and forthcoming
CCITT Recommendations that allow international operators to deal
efficiently with exactly these and other procedures. Ergas and
Paterson are surely not suggesting that the present system be
replaced for such questionable benefits. How many of the hundreds
of millions of international callers around the world will really
need or want "one-stop-shopping"?
This model, which Aronson and Cowhey call the "Direct
Foreign Investment Model", has the further disadvantage that
it assumes that all countries would be prepared to allow other
countries' global carriers to establish and operate international
facilities and services right into their countries on the basis
of reciprocity for their global carriers a practice, which they
point out, is not currently the case in the air transport sector.
Recognizing the impracticality if not the impossibility of being
able to respect such a condition, Aronson and Cowhey suggest as
an alternative an "International Corporate Alliance
Model" consisting of joint ventures of carriers and perhaps
large users, equipment manufacturers, and other investors
"implicitly or explicitly approved by governments".
It is not difficult to surmise which countries and which
carriers would be beneficiaries of such arrangements and which
would be the losers.
Interestingly, both the global carrier examples which Ergas
and Paterson use to illustrate their argument have so far failed
to establish themselves according to the end-to-end model. Cable
& Wireless which formed alliances with American and Japanese
carriers to build a "Global Digital Highway" is now
inviting other carriers such as Teleglobe to take investment
shares in the trans-Atlantic and trans-Pacific fibre optic cable
systems which form part of their global network. In compensation
Cable & Wireless would exchange international traffic with
the investing carriers. With participation then being opened to
other sovereign international carriers there is little left to
distinguish this arrangement with the traditional practice of
joint ventures among international carriers to build
international facilities such as undersea cables and satellite
systems. These arrangements are, of course, carried out in
conjunction with the continued application of the accounting
rates system. Their other example, Panamsat, the US private
satellite venture, has encountered difficulties in getting
agreement from foreign administrations where ownership
participation by entities from these countries has been denied
for the simple reason that such an arrangement would have
undermined the basic principle of the international
telecommunications system namely equal sharing of ownership by
sovereign entities leading to equal sharing of the accounting
rates.
Aronson and Cowhey have again not failed their critics in
providing them with a good argument, why their model with
end-to-end owned and operated facilities connecting into
international gateways would not necessarily bring down the
prices charged to customers. Since national governments or
regulators would effectively continue to control access fees for
connection to the local network, there is nothing to conclude
that prices would be any lower than under the present
arrangements. The object of contention would simply have been
shifted from the level of accounting rates to the level of access
charges.
5.2 Free Trade/Competitive Model 32
This is in reality another varient of the end-to-end model
where international telecommunications markets would be opened to
entry by competing foreign carriers. France Telecom could for
example offer US foreign and perhaps also US domestic services in
competition with AT&T, MCI and US Sprint, who would have the
same privileges in the French market. While such a model could
become possible under the proposed General Agreement on Trade in
Services (GATS), it is unlikely that any country (including the
US) is prepared, for the foreseeable future to commit itself to
completely opening its basic telecommunications services markets
without restriction to foreign entry.33
The likely outcome of such a model would be an oligopoly with
a small number of huge multinational providers dividing the
market among themselves rather than competing with each other.
The only beneficiaries would be the large users.
5.3 Other Proposals
Other proposals such as collection at both ends and revenue
and cost sharing arrangements are neither practical nor
appropriate to the present commercial environment of independent
national operators providing services jointly with monopoly or
competing international operators in other countries.
6. MODIFICATIONS WITHIN THE EXISTING SYSTEM
6.1 Assessment of Some Proposals
As an alternative to rejecting the accounting rates system
altogether, a number of changes within the system have been
proposed. Ergas and Paterson34, for example, suggest
that both carrier interconnection agreements and the CCITT
Recommendations contain provisions for "planned, periodic
reductions" in accounting rates through the application of a
price cap (RPI-X) formula based on productivity gains.
International operators, they propose, could even apply schedules
of reduction of accounting rates over time or after a certain
volume of traffic has been reached. It is, however, very doubtful
that new rules could be introduced into the CCITT Recommendations
which many find already to be too restraining and inconsistent
with the move toward a greater liberalization of the regime which
these authors also seen to want to promote.
There would, furthermore, be problems in applying an RPI-X
formula. What standard would one use to measure the retail price
index and productivity gains in each country? What happens in the
likely case when these vary at different rates? Would this lead
to an effective accounting rate split of other than 50/50? Who
would enforce the commitment to decrease rates according to the
agreed formula? Would there be a need for a disputes settlement
mechanism? Where would it reside?
In another proposal by the same authors each operator in an
international relation would lease or buy the facilities forward
from their usual meeting point (say mid way) to its
correspondent's international gateway. Beyond that the foreign
carrier would as in an end-to-end ownership relation pay the
domestic carrier an access or "handling charge, applied on a
national treatment basis". Again it is difficult to see how
this might work in practice. Would, for example, the accounting
rate method still apply in one direction if one of the two
correspondents is not prepared to sell or lease his facilities?
What assurance were there that prices would be lower than in the
traditional method of settlement? Why would one country's
international and domestic carriers (in most countries they are
the same) be prepared to receive less compensation for the
facilities and services they provide to the foreign carrier under
this "quasi gateway to gateway" option than under the
regular accounting rates mechanism? One would have to assume that
if a country has a policy of cross-subsidization, the subsidy
element would have to be built into the access charge.35
Other modifications which these and other authors have
proposed include: application of other than 50/50 accounting rate
divisions; off-peak accounting rates; and two tiered accounting
rates with the lower rate applying once a certain imbalance has
been reached; and growth based accounting rates with a lower rate
applying once a certain traffic level has been reached.
Much has been said and written about the proposal to split
accounting rates in proportions other than 50/50. The Maitland
Commission had proposed such an arrangement in calls between
industrialized and developing countries with the additional
resources being used in the latter "for example, to finance
pre-investment costs" of telecommunications development
projects.36 Proportions other than 50/50 might for
example, be justified and agreed when "the facilities made
available by each of the Administrations of the terminal carriers
are not approximately equivalent, or if Administrations reach
agreement on a different proportion when, for example, the costs
differ greatly".37 A recent study38 by
the ITU on the costs of providing and operating international
telephone services between industrialized and developing
countries shows that "on the average, the total cost per
minute of telephone calls is about 2.08 times higher (SDR 0.76 vs
SDR 0.37) in the given group of (19) developing countries
compared with the cost in the given group of (8) industrialized
countries. A number of important assumptions did, however, need
to be made and, furthermore, like the inconclusive study that
preceded it39. This study indicates the extreme
difficulty of obtaining reliable data because of the absence of
"accounting and administrative infrastructures necessary for
the derivation of data, their collection from various sources and
finally their integration".40 Neither study
mentioned the transaction costs that might be involved in any
system that would require precise costing of services.
The OECD in discussing the merits of "non-uniform
settlement procedures" also acknowledges that this implies
"a knowledge of relative costs for international service
between countries" which would be difficult to obtain
because "with increased international competition and
privatization there is a growing reluctance by operators to
reveal costs".41 The OECD suggests, on the
contrary, what is needed is greater transparency in accounting
rates, traffic flows, revenues, and perhaps also costs; however,
neither the OECD nor any other proponents of bringing accounting
rates closer to costs have dealt with the complexity and
transaction costs. One would have to begin with a universal
agreement on the calculations and accounting procedures to be
used. In addition, the extreme difficulty of obtaining proper
data in many countries cannot be overlooked.
There are other inconveniences with the unequally split
accounting rates scheme as the Commonwealth experience has shown;
there was the lack of adequate assurance that resources thus
transferred would be used by recipients to develop their networks
or services; the preferential adjustment could be negated through
negotiated adjustment to the accounting rate level; and finally
in a commercial environment there is the reluctance of some
international operators to reveal commercially sensitive traffic,
accounting and other data and also to fund activities which they
feel more appropriate to national or international development
agencies.
Making accounting rate levels more flexible depending on the
particular circumstance (eg. variations in daily traffic volumes,
degrees of imbalance, etc.) is, of course, possible under the
present arrangements and needs simply to be negotiated and agreed
between operators. However, as Ergas and Paterson point out,
there are inconveniences such as the different off-peak periods
depending on the direction of traffic flow.
Teleglobe has looked at the feasibility of two-tiered or
growth based accounting rates and came to the conclusion that the
potential benefit of implementing such arrangements is outweighed
by far by the huge administrative burden that they imply. Regular
phased-in reductions which are a function or projected traffic
growth agreed with our correspondents are a much more sensible
and simply solution. Teleglobe does have peak and off-peak rates
with several countries.
Teleglobe as a net exporter of traffic is constantly
negotiating to have accounting rates lowered to reflect
productivity gains and regulatory-driven reductions in collection
rates.
6.2 The FCC and OFTEL Reviews
The FCC's proposed three-part reform is intended to be
implemented very much within the system. Through it the FCC seeks
"to reduce US international calling prices by perhaps as
much as fifty percent" by:
(i) permitting a US international carrier to reduce
the accounting rate with any one of its foreign
correspondents without it having to obtain a waiver of
the International Settlements Policy (ISP), which is
intended to ensure uniform settlement rates among US
international carriers on parallel routes. The carrier
would have to notify the FCC of the lower rate which
would continue to have to be divided 50/50. No other
changes to the operating agreement would be allowed with
the foreign carrier which "must be prepared to offer
the same rate to all US carriers serving that
country";
(ii) modifying the ISP waiver procedure to allow
waivers only for "a change that results in a more
cost-based accounting rate" combined with "a
firm carrier commitment to lower international calling
prices";
(iii) having US pressure applied in appropriate
international fore to have accounting rates brought
closer to cost, for example, through the revision of any
language in any existing or proposed, CCITT
Recommendations in order to clarify that international
accounting rates should be cost-based and that all
countries should exercise their best effort to minimize
the national cost of providing international
telecommunications services", or through the
permitting of simple resale and sharing on international
routes.
In conclusion, there is the implication that if foreign
governments and operators are not prepared to bring accounting
rates in line with costs and reduce the large disparities in
collection charges, the FCC would assume "authority to
establish international accounting rates" by attaching the
required conditions to "grants or certificates of operation
of international facilities" under Section 214 of the
Communications Act.42 It is, however, difficult to
understand what leverage the FCC has to force foreign carriers to
offer the same rate to all US carriers serving that country. One
must assume an automatic return to the status quo if a foreign
carrier is not prepared to go along.
OFTEL's first concern was not with controlling international
accounting rates but with the high UK prices for international
calls and private circuit leases. Following his investigation of
these prices and the question of international simple resale, the
Director General of Telecommunications, Sir Bryan Carsberg,
proposed two measures designed to put downward pressure on BT's
prices for international services, namely, implementation of a
price cap on UK international call charges and circuits which had
until March 1991 been excluded because of the scope that this had
given Mercury to compete more effectively with BT internationally
and allowing simple resale between the UK and any other country
that similarly allows it in direction of the UK.43 Any
adverse effect on the UK's balance of payments due to a lowering
of collection charges should in OFTEL's view be offset through
indirect benefits such as the possibility for the UK to attract
more overseas operations to the UK because of the attractiveness
of lower telecommunication costs. Forcing a lowering of
international call prices would, of course, also put pressure on
BT and Mercury to seek a lowering of accounting rates with their
correspondents.
6.3 The European Commission
The European Commission has undertaken an informal inquiry,
the first step in a procedure which might eventually lead to an
anti-trust procedure against European telecommunications
operators if it is found that they have colluded to keep
intra-European long distance rates artificially high. The
objective of the Commission is to put pressure on operators to
bring their international prices more in line with costs and also
to facilitate and promote intra-European communication.
7. CONCLUSION: IS THE PRESENT SYSTEM REALLY
UNSUSTAINABLE?
The main and generally shared conclusion of the very limited
number of academics who have recently begun to study the present
international telecommunication arrangements and in particular
the accounting rates method for international settlements is that
the system, which has served its purpose, is inconsistent with
the world-wide liberalization trends and must therefore be
replaced; we have seen, however, in our analysis of their
proposals that there are some important deficiencies in their
conclusions. Closer examination of some of their arguments
favoring one or another alternative has, on the contrary,
revealed some fresh arguments in favour of the present system.
Furthermore, their conclusions are based on the unsubstantiated
view that the present system is a cartel that does not provide
any pressure on prices, while in fact prices of international
commercial services provided by international carriers such as
Teleglobe have been reduced by as much as 35% over the last few
years and have been accompanied by a continuing trend of
reduction in accounting rates through the negotiating mechanism
which is afforded by the current arrangements. Ergas and Paterson
who last year at the margin of the ITU Plenipotentiary Conference
talked about "the harmful consequences of the present
arrangements"44 and made a number of proposals
for new types of arrangements, have since turned their research
efforts to showing that everyone benefits when accounting rates
and collection charges are reduced.45
Yet these same authors had indicated in their earlier paper
that the accounting rate system is consistent with an
institutional structure in which international facilities and
services are jointly provided by sovereign international
carriers. The OECD adds that "there is widespread agreement
that the international accounting arrangements have historically
benefited the development of international telecommunications
services and interconnectivity".46 It goes
without saying that the system is universally recognized and
applied. It is simple. Transaction costs are minimal since it
does not require complex determination of supporting data such as
per unit costs of segments of the network and, furthermore,
nothing in the scheme prevents sovereign countries from adopting
national tariff policies which best suit their requirements and
circumstances. The system is also flexible. It can be adapted to
and applied differently to different services. Countries have the
possibility to negotiate more than one accounting rate for a
given service to cater for off-peak or other special customer
charges. They may agree to apply other than 50/50 accounting rate
divisions or, alternatively, a "sender-keeps all"
arrangement. In fact, the new international framework is such
that countries may enter into special mutual arrangements
"which do not concern members in general".47
The system has the further advantage that it can be applied in
conjunction with other systems such as the collaborative
arrangements which were described earlier in this paper. The most
obvious argument in favour of the system is that it evolves as it
functions towards a continuous realignment of accounting rate
levels in a downward direction. This in turn allows collection
rate reductions which lead to higher traffic volumes and then
further rate reductions.
In addition, Ergas and Paterson have mentioned the
predictability, uniformity, stability and incentive aspects of
the system and, in spite of the doubts expressed about its
continued relevance, it remains to be shown that it is
inconsistent with the changing technological, administrative and
regulatory structures around the world. On the contrary, one of
its main advantages is that it maintains a universal framework
within which international telecommunications administrations who
find themselves in diverse regulatory and structural situations
can continue to operate with each other with minimal constraints
while continuing to seek through negotiations to advance their
commercial interests through accounting rate reductions resulting
in collection rate reductions and further traffic stimulation.
On the other hand, one cannot fail to agree with the FCC that
the reluctance by countries and international operators to bring
accounting rates and collection charges in line with costs, has
caused "unwarranted settlement payments"48
to be made by countries such as the US and Canada which have made
important progress in bringing down international call prices and
have relentlessly negotiated with our foreign correspondents with
the overall objective of lower accounting rates across the board.
The system has, however, been criticized for keeping
international customer charges and accounting rates well above
cost, for causing huge traffic imbalances which result in balance
of payments deficits, for failing to impose "discipline on
carriers to ensure that the cost reductions secured through
technical advance are passed on to consumers", and finally
as a means for the international carriers to administer prices
through an international cartel.49 By calling or
implying that the system is a cartel critics such as Aronson,
Cowhey, Drake, Dixon, Noam and others have demonstrated that they
do not really understand how it works. Had they put it to the
test, as might have been expected, they would have quickly had to
conclude that, since there is no provision for the international
carriers to enter into agreements to set prices and quotas, one
of the more important conditions of a cartel has not been
respected. Furthermore, there are no legally enforceable
documents with penalties for violators of such pricing
arrangements and, furthermore, no formal system of collusion as
these authors would have their readers believe.50
There are, of course, the ITU Constitution, Convention and
Administrative Regulations, international treaties which above
all recognize each nations sovereignty to organize and regulate
its telecommunications according to its needs and interests.
These treaties, which have resulted from difficult negotiations
and compromises, maintain a delicate balance between the
interests of any one nation and those of its partners. The
present international settlements process has been developed to
be consistent with such sometime opposing interests in mind and
as shown earlier contains a built-in commercially driven dynamism
towards cost reduction in all instances where traffic imbalances
occur which is the rule rather than the exception.
A very important conclusion that one needs to be drawn is that
international cooperation among sovereign nations, which have
jointly developed such a framework, can only be achieved through
bilateral negotiation between partners on each relation. One
country 's telecommunication administration, government or
regulatory authority cannot impose prices or other disciplines on
another sovereign country. Governments and regulatory authorities
have jurisdiction over only one of the partners in a bilateral or
multilateral negotiation of accounting rates.
It has been Teleglobe's experience that many of our foreign
partners have recognized the impact of their high accounting
rates and collection charges on Teleglobe and have through
discussion agreed to respect the trend towards lower accounting
rates even if they could not always show it to be of immediate
benefit to them. Some have, as indicated earlier, agreed with
reductions of up to 75%. Where, however, in a bilateral
negotiation an administration, which is the beneficiary of
important settlement payment inflows, refuses to agree to
lowering the accounting rates and take measures to even the flow,
more coercive methods may need to be envisaged. The most obvious
measure consists in maintaining high collection rates for calls
to such countries causing significant price disparity with calls
to neighboring countries which have agreed to lower accounting
rates and thereby discouraging traffic flows to the former.
Ultimately, some countries might even consider mounting of some
retaliatory trade sanctions affecting other sectors and letting
the quality of service on the particular relation drop to the
point where it will seriously impede traffic flows towards the
recalcitrant country.
The OECD study opposes the use of the accounting rate system
to assist development of goals because it would not be efficient.
Developing countries have, however, argued that providing them a
higher share of the revenues in relations with the industrialized
countries would only reflect the higher costs they incur in
providing their part of the international facilities and
services. The difficulty, as we have seen, is how to determine
what those costs are. There is, however, merit, we believe, in
the OECD's suggestion that "in order to assist developing
economies to adjust to lower accounting rates and not to induce a
too abrupt fall in revenue it could be envisaged that when
introducing lower rates these could be introduced on a
growth-based basis. That is rates are reduced once a pre-set
volume of traffic has been attained". We had indicated
earlier that the introduction of growth based accounting rates is
a cumbersome and costly process. We would, therefore, prefer
regular phased-in reductions agreed before hand as a function of
projected traffic growth and in recognition of the financial
impact of our developing country partners.
We feel that these objectives can be achieved not by
destroying the system, which has been so carefully constructed
with the divergent needs of over 160 countries in mind, but
through a mutual understanding of difficulties being encountered
by some. We are confident that such mutual understanding will in
the end prevail and permit the achievement of an overall
reduction in the level of world-wide accounting rates and
collection charges and an elimination or at least serious
reduction in collection charge disparities and payments outflows.
It is through reasoned discussion of this important international
telecommunication issue in fora such as this that the concerns of
all parties will be better understood and where consequently,
progress can be made in promoting a more just and reasonable
application of this system.
NOTES
1. The Financial Times, 3 April 1990. In a later
article Dixon predicted that "the days when the
world's telephone companies could agree among themselves
in cosy club committees how the international
telecommunications market should be regulated are
passing" (Financial Times, 15 May 1990).
2. Drake's like Aronson's, Cowhey's and Dixon's
criticisms of the international telecommunications system
are based in part on some serious misunderstanding of how
it works. For example, on the subject of collection
charges Drake writes that they "comprise two
elements, access charges and utilization charges. Access
charges include the initial fee for subscriber hook-up
and regular rental payments for terminals and/or
continued connection. They are established and collected
solely at the national level in accordance with an
administration's particular budgetary circumstances, and
may vary widely across countries. They are established
and collected via international coordination, since
transmission involves the facilities of sending,
receiving and sometimes transit countries". (See
W.J. Drake, Asymmetric Deregulation and the
Transformation of the International Telecommunications
Regime, in E.M. Noam, G. Pogerel, ed. Asymmetric
Deregulation: The Dynamics of Telecommunications Policies
in Europe and the United States, Norwood Ablex
Publishers.) While certain Recommendations in the
D-Series (eg. D.10, D.11 which deal with the public data
service, and D.210 which deals with charging and
accounting in the ISDN) define these two components of
collection charges, none comes near to suggesting that
they "be established and collected via international
coordination". Recommendation D.150 for the
Telephone Service does not speak of utilization and
access charge components. It simply states that "the
collection charge is the charge collected by an
administration from its public for the use of the
international telephone service". Like the
International Telecommunication Regulations this
Recommendation states that too great a dissymmetry
between collection charges in each direction in the same
relation should be avoided. See Annex A, ref. [9].
3. For an overview of the WATTC debate see P.A. Stern,
International Telecommunication Regulations: Issues and
Tensions, an Update on WATTC-88, Paper presented at the
Interdisciplinary Seminar on Regulated Industries, Centre
for the Study of Regulated Industries, McGill University,
15 February 1989.
4. The Independent Commission for World Wide
Telecommunications Development (The Maitland Commission)
had recommended in 1984 that "Member States of the
ITU consider in the light of their own circumstances a
rearrangement of their international traffic accounting
procedures with the aim of setting aside a small
proportion of revenues from calls between developing
countries and industrialized countries. The resources
transferred thereby should be devoted to the
telecommunications sector in the developing country or
countries concerned or contributed to a fund and used,
for example, to finance pre-investment costs." The
Missing Link: Report of the Independent Commission for
World Wide Telecommunications Development (The Maitland
Commission Report) Geneva, December 1984.
5. The US prefers the stronger words "reflects
cost to the greatest extent possible", while the EEC
wants the less stringent "cost-oriented"
prices.
6. Following the nationalizations of the assets of
Cable & Wireless (and Marconi), in various
Commonwealth countries after World War II, the
Commonwealth network also became to be characterized by
the joint provision of international telecommunications
facilities by sovereign international telecommunications
entities. Their revenues and costs were, however, shared
according to collaborative financial agreements signed by
the member Governments.
7. More recently some countries have opened their
telecommunications sectors to foreign ownership.
Argentina, Chile, Mexico, and New Zealand are examples.
Australia has now envisaged selling to foreigners part of
Aussat which will compete with Telecom Australia - OTC.
In the US up to 25% ownership of US carriers is now
allowed. In contrast, the Canadian Government in
privatizing Teleglobe, Canada's international carrier,
did not permit ownership by non-residents nor
non-resident carriers (see section 5 of the Teleglobe
Canada Reorganization and Divestiture Act).
8. These rules are contained in several legal
instruments, the most fundamental of which currently are
1989 ITU Constitution and Convention which not only
describe the composition, purpose and structure of the
Union but also contain general provisions concerning
international telecommunications such as, for example,
the right of the public to use international
telecommunication services or the priority of safety of
life and government telecommunications over other types
of telecommunications or provisions concerning the
establishment, operation and protection of
telecommunication channels and installations. The
Administrative Regulations are also binding international
treaties which set out the rules for the orderly use of
the radio frequency spectrum and the
geostationary-satellite orbit which are both limited
resources (Radio Regulations) and for the provision of
international telecommunications services (International
Telecommunication Regulations). Detailed provisions
concerning the development, implementation, operation and
maintenance of international facilities and services are
contained in Recommendations of the International Radio
and International Telegraph and Telephone Consultative
Committees (CCIR, CCITT). These Recommendations are
established within international committees of experts
representing governments, operators, manufacturers and
others, and while they are not legally binding in nature
and do not have treaty status, they do provide a basis
for normalization since they represent the collective
view and in that respect provide a common basis for
bilateral mutual agreements on the establishment of
international telecommunications services within the
framework of international treaties such as the
Convention and Regulations. The Recommendations are thus
considered to be important in ensuring interconnection
and interoperability of international telecommunication
facilities and services.
9. Description taken from P.A. Stern, The Atwater
Project on the Impact of Telecommunication and Data
Services on Commercial Activity and Economic Development:
The International Telecommunication System, Montreal,
March 1990.
10. Article 6.1.1 of the International
Telecommunication Regulations states that "each
administration shall, subject to applicable national law,
establish the charges to be collected from its customers.
The level of the charges is a national matter; however,
in establishing these charges, administrations should try
to avoid too great a dissymetry between the charges
applicable in each direction of the same relation",
Final Acts of the World Administrative Telegraph and
Telephone Conference, Melbourne, 1988 (WATTC-88).
Similarly, Annex A of CCITT Recommendation D.150 defines
the collection charge as being "the charge collected
by an Administration from its public for the use of the
international telephone service" and invites
administrations "as a general principle, in fixing
the collection charges, (to) make every effort to avoid
too large a dissymmetry between the charges applicable in
each direction of the same relation" (Blue Book).
11 The OECD points out that "the direction of
calls, their frequency and duration are a function of a
variety of factors. These include the degree and pattern
of internationalization of manufacturing and service
activities, international trade in these activities, and
the pattern of international location of subsidiaries. It
also reflects the pattern of international migration, the
development of domestic telecommunication
infrastructures, and national levels of disposable
income. The price of international calls, although
important, is not the sole factor in determining
direction, frequency and duration of calls. The
elasticity of demand with respect to the price of an
international call will differ from country to country,
and in some cases may be fairly inelastic in the short
run, but be susceptible to change in the longer run as
consumer habits change". See Working Party on
Telecommunication and Information Services Policies,
International Telecommunication Charging Practices and
Procedures, DSTI/ICCP/TISP/90.7, 16 May 1990.
12. CCITT Recommendation D.150 gives the following
reasons why collection charges at two ends of a relation
will not necessarily be the same:
a) in most countries collection charges and accounting
rates will be expressed in different currencies;
b) collection charges and accounting rates may be
based on different traffic units;
c) the value of national currencies can fluctuate
relative to the special drawing right (SDR) or the gold
franc;
d) collection charges may be influenced by government
fiscal policies.
Recommendation D.300R (Europe and Mediterranean Basin)
adds two more reasons:
e) Administrations frequently establish common
collection charges for geographical zones or groups of
countries;
f) in many relations there will be different routes
with different accounting rates to which a single
collection charge will be applied.
13. In addition to the nine mayor telephone companies
which are members of Telecom Canada there are over 50
independent companies whose size varies from 500 to
350,000 network access lines. Some are privately owned,
some provincially owned and others municipally owned.
14. There are four principal forms of settlement
between Telecom members and the independent telephone
companies: (i) commission per message received and
operated and line-haul payment which takes into account
the number of circuits and circuit miles provided by the
independent; (ii) commissions per messages received and
operated and a prorating of the balance of revenues based
on the total message miles contributed by each company in
carrying the traffic; (iii) the accounting rate method;
(iv) the originating carrier receives a constant
percentage of the originated toll revenue or a fixed
commission for each originated toll message. (See Report
of the Federal-Provincial-Territorial Task Force on
Telecommunications, Competition in Public Long-Distance
Telephone Service in Canada, Minister of Supply and
Services Canada 1988, ISBN 0-662-56266-6).
15. Unitel has recently applied to the Canadian
Radio-television and Telecommunications Commission (CRTC)
to compete with Bell Canada in public long distance
telephone service. It is expected that the CRTC will
begin hearings on Unitel's application in April 1991.
(See CRTC Telecom Public Notice 1990-57, Unitel
Communications Inc. Application to Provide Public Long
Distance Telephone Service: Scope of Proceedings, 11
June 1990 and CRTC Telecom Public Notice 1990-73 Unitel
Communications Inc. and B.C. Rail
Telecommunications/Lightel Inc. - Applications to Provide
Public Long Distance Voice Telephone Services and Related
Resale and Sharing Issues: Scope and Procedure, 3
August 1990).
16. Teleglobe's mandate as the sole authorized
Canadian operator of facilities to provide
Canada/overseas telecommunications services is assured
for minimum period of five years from the date of
privatization (April 1987).
17. In September 1990 the CRTC decided to permit
resellers and private users to access Teleglobe's
international message toll service directly through the
resale of Canadian domestic carriers' private lines (see
CRTC Telecom Decision CRTC 90-19, Application by
Fonorola Inc. and ACC Long Distance Ltd., 4 September
1990). The CRTC ruled in favor of the request by the
resellers to interconnect directly into Teleglobe's
facilities stating that this decision is consistent with
two earlier related decisions, namely, Decision 90-2, Teleglobe
Canada Inc. - Resale and Sharing of International
Services, 23 Februarv 1990, which allows the resale
and sharing of international private lines for services
other than interconnected voice and Decision 90-3, Resale
and Sharing of Private Line Services, which allows
resale and sharing of domestic leased lines for
interconnected voice services on a joint use basis (that
is, not dedicated to a single user), provided a monthly
per channel contribution is made to the local service.
18. In The Global Telecommunication Traffic Boon: A
Quantitative Brief on Cross-Border Markets and
Regulation, IIC, 1990, Gregory C. Staple ranks the top 25
international carriers by the volume of outward public
telecommunication traffic carried in 1988. According to
Staple's figures Telecom Canada ranks fifth after
AT&T, Deutsche Bundespost Telekom, British Telecom,
and France Telecom. Teleglobe ranks 16th ahead of MCI and
US Sprint.
20. Since its creation in 1950 Teleglobe has never had
to increase its rates for overseas telephone service.
21. Before August 1989 the federal government (through
the CRTC) had regulatory jurisdiction only over two
regional Telecom Canada members, Bell Canada and British
Columbia Telephone and four national companies, CHOP (now
Unitel), Telesat Canada, Teleglobe Canada, and Cantel,
the cellular radio competitor of Bell Canada. The other
members of the Telecom Canada consortium as well as most
of the independents were regulated by their respective
provincial governments. In August 1989 the Supreme Court
of Canada ruling in the case of Alberta Government
Telephones vs CRTC and CNCP Telecommunications decided
that the federal government has exclusive Jurisdiction
over the members of Telecom Canada, that had up to then
been regulated provincially, because these companies
provided inter-provincial long distance services. The
court, however, also decided that Alberta Government
Telephones and the other provincially owned telephone
companies were protected by "crown immunity"
under the Railwav Act. (For a good discussion of
the Canadian regulatory situation see H.N. Janisch and
R.J. Schultz, Exploiting the Information Revolution:
Telecommunications Issues and Options for Canada, The
Royal Bank of Canada, Montreal, October 1989.)
22. See Direction to the Canadian Radio-Television and
Telecommunications Commission Respecting the Approval of
the Telegraph Tolls and Telephone Tolls for the New
Corporation in Force from Time to Time in the
Transitional Period, annexed to PC 1987-705, 2 April
1987, Privy Council of Canada. In the same document the
Government of Canada directs the CRTC to accept "for
the purpose of calculating the revenue requirements of
the new company a new balance sheet in which the net
fixed assets are 140 percent of the net historical book
value as reflected in the balance sheet of
Teleglobe" with "a ratio of long term debt to
equity of 45/55".
23. The ten Telecom Canada members are: British
Columbia Telephone Company; Alberta Government Telephones
(ACT); Saskatchewan Telecommunications; Manitoba
Telephone System (MTS); Bell Canada; The New Brunswick
Telephone Company; The Island Telephone Company; Maritime
Telegraph and Telephone Company Limited; Newfoundland
Telephone Company Limited; and Telesat Canada. The
consortium was originally formed in 1931 to facilitate
the provision of coast to coast telephone service.
24. supra note 13
25. supra note 14
26. See CRTC Decision 81-13, Bell Canada, BC Tel, and
Telesat Canada: Increases and Decreases in Rates for
Services ant Facilities Furnished on a Canada-wide Basis
by Members of the Trans-Canada Telephone System
27. Drake, supra note 2 at p. 2
28. Aronson & Cowhey, ref. [l], Ergas and Paterson
et al, ref. [2, 3]
29. Aronson & Cowhey, ref. [1], p. 221
30. See Ergas and Paterson ref. [2] p. 17
31. See Aronson & Cowhey, ref. [1], p. 225
32. While Article II, Coverage, of the draft Multilateral
Framework for Trade in Services (MTN.GNS/35, 23 July
1990) states that all services shall be covered, Section
2.3.4 of the proposed Sectoral Annex on
Telecommunications states that "a Party shall
not be required to grant market access to service
providers, including telecommunications service
providers, of other parties other than as provided for in
its schedule", in other words, to the extent it is
prepared to commit itself to opening markets in a
particular service sector (draft dated 5 October 1990).
33. US international carriers such as AT&T and MCI
along with the Consumer Federation of America and the
International Communications Association are opposed to
including coverage of basic telecommunications services
in the proposed Multilateral Framework for Trade in
Services of the telecommunications annex (see
Telecommunications Reports, Aug. 27, 1990 p. 1 - 4
and Sept. 10, 1990 p. 11 13). The United States Trade
Representative (USTR) and Department of Commerce fear
"that exclusion of basic telecommunications may lead
to the exclusion of other sectors and could undercut the
entire services negotiations" and therefore support
"an agreement that incorporates universal coverage
of services and does not exclude any sectors" with
"however, strong safeguards for the provision of
basic telecommunications services must be built into the
agreement to defend US trade, regulatory, and commercial
interests" (see letter from Robert A. Mosbacher,
Secretary of Commerce to Hon. Carla A. Hills, United
States Trade Representative, September 14, 1990). In
other words, basic services would not be specifically
excluded from the agreement but the US would only be
prepared to make binding commitments on the principles of
MEN, national treatment and market access on a reciprocal
basis.
34. See Ergas and Paterson, ref. [2].
35. Article IV of the proposed Multilateral Framework
for Trade in Services foresees the possibility of
countries allowing subsidies which would have to be
notified. This article might, however, lead to disputes
depending on the interpretation of Article 4.2.2 of the Sectoral
Annex on Telecommunications (version 5.10.90) which
would require public telecommunications transport
services to be priced in a manner "reflecting
cost" or to be "cost oriented".
36. Maitland Commission Report, see supra note,
ref. 4.
37. CCITT Recommendation 150, paragraph 2.3.1.
38. Follow-up Study of the Costs of Providing and
Operating International Telephone Service Between
Industrialized and Developing Countries, ITU, Geneva,
1990.
39. Study of the Costs of Providing and Operating
Telecommunications Services Between Industrialized and
Developing Countries, ITU, Geneva, 1988, ISBN
92-61-03841-7.
40. supra note 38.
41. supra note 11 at p. 17.
42. FCC Notice of Proposed Rulemaking in the Matter of
Regulation of International Accounting Rates, CC Docket
No. 90-337 Released Aug. 7, 1990.
43. Advice submitted by the Director General of
Telecommunications to the Secretary of State,
International Telephony: Simple Resale and Control of
Prices, 1 Oct. 1990. On 5 March 1991 the British
Government issued a White Paper which formally ended the
duopoly which had existed for seven years. Of
significance with respect to international services was
the decision of the government to include the price of
international services in the price cap formula, the
agreement by British Telecom to reduce its prices for its
international services by 10% as soon as possible, and
the opening of international markets for simple resale
(including live voice and telex) but only with countries
that similarly allow it. It is unlikely, however, that
the government will issue any new international licenses
for the time being.
44. Ergas and Paterson, ref. [2], p. 13
45. See Ergas and Paterson, ref. [3]. In order to
arrive at their conclusion that a reduction in accounting
rates and collection charges results in everyone
benefiting, Ergas and Paterson have had to make some
important assumptions about traffic elasticities and
carrier costs. For example, traffic elasticities for
countries where the per minute collection charge is more
than $US 2.50 are assumed to be -1.2 or -1.8. One must,
however, question the validity of such an assumption
especially in the case of developing countries where, as
the OECD study indicates, demand may in fact be
"fairly inelastic in the short run" (supra
note 11 at p. 7). Available statistics show that
demand in developing countries is, in fact, very
inelastic lying in the range from -0.2 to -0.8 for
domestic and long distance telephone service. Demand for
international calling in these countries must reasonably
be expected to be even more inelastic.
46. supra note 11 at p. 19.
47. Article 9, International Telecommunications
Regulations (Melbourne, 1988).
48. supra note 42 at p. 9.
49. Aronson and Cowhey, ref. [1], Ergas and Paterson,
ref. [2, 3], Drake supra note 2
50. The Penguin Dictionary of Economics defines a
cartel as "a group of firms which enter into an
agreement to set mutually acceptable prices for their
products, and this is often accompanied by output and
investment quotas. The rules of the cartel will be
embodied in a formal document, which may be legally
enforceable, and penalties will be laid down for firms
which violate it. The essence of a cartel is that it is a
formal system of collusion, as opposed to a set of
informal or tacit agreements to follow certain pricing
policies. Currently, cartels are illegal in the U.K. and
the U.S., it being held that their general effect is to
restrict output, raise prices, and, in general, create
monopoly conditions in industry. On the other hand,
cartels have been legalized at certain times, especially
in Germany in the inter-war period, when they were seen
as a means of achieving gradual
"rationalization" of an industry suffering from
excess capacity or of achieving sufficient strength to
compete more effectively in international trade."
See G. Bannock, R.E. Baxter and R. Rees, The Penguin
Dictionary of Economics, Penguin Books, 1972.
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[7] OECD Working Party on Telecommunication and
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[9] CCITT Recommendation D.150 New System for
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Assembly, Melbourne, 1988 (Blue Book).
[10] CCITT Recommendation D.155 Guiding Principles
Governing the Apportionment of Accounting Rates in
Intercontinental Telephone Relations, CCITT IX Plenary
Assembly, Melbourne, 1988 (Blue Book).
[11] CCITT Recommendation D.300R Determination of
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Telephone Relations Between Countries in Europe and the
Mediterranean Basin, CCITT IX Plenary Assembly,
Melbourne, 1988 (Blue Book). .
[12] Sir Bryan Carsberg, Advice Submitted by the
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