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What is the Accounting Rate System?

One of the reasons the ITU was formed, back in 1865, was in recognition of the need to agree upon a common method of dividing the revenues for international telegraph service between the originating and destination countries. The methodology which was subsequently developed was later carried over to telephone services, albeit with some modifications.

It is based on a dual price system for each call with independent prices for each route. For each international call, the originating telecommunications carrier charges users one price, known as the collection charge or tariff, but the cost to the originating carrier of terminating the call is governed by a second price, known as the accounting rate. This rate is negotiated between the originating and terminating carrier and is related, although sometimes very loosely, to the carriers’ end-to-end facilities costs.

On any given route, one carrier pays settlements to another carrier only to the
extent that there is a traffic imbalance – that is, one carrier has terminated a greater volume of telephone minutes than the other carrier. The dual price system for international telephony makes carriers’ net revenue for international service a function of their accounting rates as well as their collection charges. If traffic is balanced on a particular route, the value of the accounting rate is essentially irrelevant since no settlement is necessary and each carriers’ revenue will depend directly on its collection charge.

Accounting rates are commonly stated in US dollars or Special Drawing Rights (SDRs) – a monetary unit based on a ‘basket’ of major currencies – per minute of traffic. The originating and terminating carrier usually divide the accounting rate 50/50 to determine the amount paid on excess traffic by the originating carrier to land its traffic; that rate is known as the settlement rate.

However, where there is an imbalance in the flow of traffic between countries, the accounting rate may have a significant effect on the commercial options of the two carriers. Unlike most exporters of goods, who include the cost of shipment and distribution of their product into the final end-user price, telecommunications operators traditionally have not factored in the costs of delivering a call beyond the ‘half circuit’ point (ie, beyond an imaginary half-way point between the originating country and the destination country).

Consequently, if a carrier has a significant incoming traffic deficit, the settlement payments which it must make to its foreign correspondent limit its ability to reduce its collection charges. Conversely, a carrier with a net traffic surplus has little incentive to operate more efficiently or to reduce the accounting rate because of the net settlement benefits it receives under the status quo. This is a major reason why some carriers which have relatively lower collection charges, often due to the competition from other carriers, and a net traffic deficit have become dissatisfied with the current accounting rate regime.

Critics of the current system argue that it tends to subsidize high cost monopoly carriers at the expense of lower cost carriers and end-users from competitive regimes. On the other hand, some industry analysts argue that the push for a decrease in the accounting rate is largely backed by large carriers in ‘rich’ nations keen to find ways to increase their profit margin. They point out that while carriers claim to be pushing the issue in order to bring about lower prices for telecommunications consumers, in practice when reductions in the accounting rate have been negotiated bilaterally between carriers, this reduction in expenses has only rarely been passed on to the consumer in the form of lower call prices.

The reform of the international accounting rate system is currently occupying much of the time of the ITU’s Study Group 3, in the Telecommunication Standardization Sector. The Group is currently evaluating a number of new structures which could replace the existing system. At present, there are three basic options:

  • facilities-based interconnection;

  • "sender-keeps-all";

  • a system of call termination charges.

The work of this group will continue, to try to find a way to reconcile the real concerns of the developing nations over loss of vital telecommunications revenue with the need to reduce costs and create a more equitable system for all.

How does the accounting rate system work?

Simple example showing application of accounting rates to international telecommunication services

Volume and collection charges different
between two countries

Scenarios showing application of accounting rates
in different operating environments

Volume and collection charges different
between two countries

Volume is the same but collection charges differ between two countries

Volume is different but collection charges are the same
between two countries