Questions: 1/3. 2/3
STUDY GROUP 3 – CONTRIBUTION 2
SOURCE*: CHAIRMAN OF STUDY GROUP 3
TITLE: SECRETARY GENERAL'S PAPER ON ACCOUNTING RATE
REFORM
________
Mindful of the rapid and substantial changes occurring in the
environment of international telecommunications industry and the
great pressure for the reform of the traditional accounting rate
regime, the Secretary General has taken the initiative to submit
a comprehensive consultation document, as shown in the
attachment, as a possible starting point for the relevant studies
in Study Group 3. This document had to be treated as a temporary
document at our first meeting in November 1996. However, given
the important substance of the paper, it was agreed that the
paper should remain as a basic reference document throughout the
study of the subjects concerned. Therefore, I am submitting the
document as a white contribution.
It should be noted that the document encompasses a wide area
of subjects which, in the context of our work, relate to two
Questions 1/3 and 2/3. Since these Questions are assigned to
Working Parties 1 and 2 respectively, it is important to indicate
which subjects are to be studied under these separate Questions.
Study Group 3’s management team has tentatively assigned the
various sections in Secretary General’s paper to the two
Questions as follows :
1. Introduction Q.1/3, 2/3
2. Collaboration and competition Q.1/3
3. Cost orientated accounting rates Q.2/3
4. Tariff and traffic dissymmetries Q.1/3
5. Developing country concerns Q.1/3
6. Towards a new paradigm for
international telecommunication services Q.2/3
7. Principles for accounting rate reform Q.1/3, 2/3
However, the document composes a single text so that the
various sections should not be considered out of context.
Members of Study Group 3 are urged to give serious thoughts to
the points raised in this document and to submit contributions.
In addition, in order to assist the Secretary General to further
develop useful material, individual members of Study Group 3, as
experts in this field, should feel free to respond to the
consultation points, directly to the Secretary General.
Although this may be somewhat of an unprecedented way to carry
out studies in Study Group 3, all the members’ understanding
will be appreciated.
Attachment
SOURCE : THE ITU SECRETARY-GENERAL
TITLE : CONSULTATION DOCUMENT ON Accounting Rate Reform
_________________
1. Introduction
The international telephone service has developed to date
under a paradigm of collaboration and co-operation among national
administrations. This paradigm is specifically recognised in the
ITU Constitution which calls upon the Union to "foster
collaboration among its Members with a view to establishment of
rates at levels as low as possible consistent with an efficient
service ..." (Article 1, 2f). The preferred method for
collaboration is the system of charging and accounting specified
in Article 6 of the International Telecommunication Regulations
(Melbourne, 1988) which comprises collection charges (retail
tariffs), accounting rates (wholesale prices agreed between
national administrations), transit charges levied by third
parties and settlement payments between the parties.
The accounting rate system has served the telecommunications
industry well for many decades. One measure of this success is
the fact that any of the 700 million or telephone users around
the globe can speak with virtually any other. But now it is
coming under pressure for reform for a number of reasons which
are reviewed in this document. As Secretary-General of the
International Telecommunication Union, I have received
representations from a number of parties who are seeking to
reform the international accounting rate system, or simply to
ensure that the provisions of relevant international treaties and
ITU-T Recommendations are respected. In particular, I have
received advice from the World Telecommunication Advisory Council
(WTAC) that I should publish a discussion document analysing
pressures for reform of the accounting rate system. I have also
received many calls to accelerate the pace of work in ITU-T Study
Group 3 which has responsibility for the development of charging,
accounting and settlement principles for the international
telephone service.
In response to this advice, I have developed this
contribution, which is at the same time a consultation document,
hoping that it serves as a good starting point for the study of
Question B/3. In order to undertake this study in as efficient a
manner as possible, I would propose that Study Group 3 should
first discuss this contribution and identify the main points that
could serve as the basis for consultation. Then, based on those
consultation points, Study Group 3 could invite Member States and
Sector Members to develop their own contributions which will be
submitted to the Director of TSB for the second meeting of Study
Group 3 in May 1997. (Deadline for submission of normal
contributions will be mid March 1997.)
2. Collaboration and competition
A growing number of national administrations have now licensed
multiple international carriers, or permit capacity resale on
selected international routes. One of the primary objectives of
creating a competitive market environment is to reduce prices to
end-customers. In a competitive environment, collaborative
pricing mechanisms may not represent the optimal means of
achieving low tariffs. The existing system of collaboration and
co-operation has been interpreted by some as an abuse of market
power on the part of some monopoly carriers which are setting
accounting rates substantially above costs, or not passing on the
benefits of accounting rate reductions to consumers in the form
of lower collection charges. There are certain features of the
accounting rate system which may be preventing the full benefits
of competition from being realised.
· Most regulatory bodies that
have licensed competition enforce the principle of uniform
accounting rates on all national carriers safeguarding
against "whipsawing" but leaving little scope for
price competition or technological innovation;
· The principle of
proportional return means that traffic is returned in the
same proportion to that which it arrives in order to prevent
any operator from engaging in "whipsawing", even
though this may not favour the least cost carrier;
· The principle of equal
revenue division (50/50) may prevent competitive carriers
offering preferential rates in return for higher traffic
flows;
· Technical developments,
notably in dynamic routing and packet switching, mean that
the direct route between two correspondents is not
necessarily the least-cost route. The International
Telecommunication Regulations currently give preference to
direct routes except where there is mutual agreement on
alternative routing;
· Insistence on the use of the
accounting rate system may preclude the development of
alternative revenue-sharing mechanisms which may be more
appropriate to particular types of traffic or particular
bilateral relations.
In addition, the necessity for new market entrants to
establish correspondent relations with some 200 or more different
national administrations can act as a significant barrier to
market entry for international services. Furthermore, there is
evidence that some monopoly carriers are unwilling to negotiate
with alternative carriers, or carriers they anticipate will bring
in little additional traffic.
In view of the above arguments, I am seeking advice on how
to improve the compatibility of the accounting rate system with a
competitive market environment. Specifically:
· How can the accounting rate
system be reformed to ensure that the benefits of competition
are passed on to all consumers in the form of lower
collection charges?
· Would "traffic
auctions", in which carriers bid for the opportunity to
terminate traffic, provide a better way of allocating traffic
to least cost routes than proportional return or uniform
accounting rates?
Should carriers in competitive markets be given freedom to
define least-cost routes without requiring mutual agreement
with partner correspondents?
What kind of safeguard mesures will be required, if any,
in order to prevent discriminatory arrangements that do not
meet economic rationality ?
3. Cost-oriented accounting rates
The International Telecommunication Regulations state that in
setting accounting rates, national administrations should take
account of "relevant cost trends". ITU-T
Recommendation D-140 states that "accounting rates for
international telephone service should be cost-orientated..."
and specifies a timetable of up to five years for achieving the
necessary reductions. Annex A to the Recommendation specifies
which cost elements should be taken into account while Annex C
provides guidelines for bilateral negotiations.
While accounting rates have been coming down over time, by
some 3 per cent per year on average since 1988, available
evidence suggests that they are still well above costs. For
instance, during this period, the price of circuit capacity on
trans-Atlantic submarine cables has been falling by some 30 per
cent per year. The average level for 37 countries which reported
information to the ITU was SDR1.73 per minute in 1995, down from
SDR 2.12 in 1988.
Recommendation D.140 notes that there are three main cost
elements necessary to provide international telephone service:
international transmission facilities, international switching
facilities and national extension. Substantial cost reductions
have been realised in the first two areas to such an extent that
they are no longer a major component in the cost of delivering
international service. But the costs of national extension have
proved harder to define. In competitive markets, many carriers
regard such cost information as confidential and have ceased to
supply cost data to regional tariff groups such as TEUREM. Some
have suggested that the best way of estimating costs is to take
the lowest accounting rate in a competitive market and assume
that this is equivalent to cost-orientation. Others have argued
that accounting rates in competitive markets could be replaced by
transit charges plus national extension charges (call termination
charges), as approximated, for instance, by national mobile
interconnect charges.
The normal practice under accounting rate revenue division is
to divide settlement payments on a 50/50 basis. The rationale for
this is that the benefits from each call are approximately equal
in each direction, even though the costs may be different.
Recommendation D.155 allows for the possibility of a sharing
basis other than 50/50 in cases where "the
intercontinental facilities made available by each Administration
in the terminal countries are not equivalent". In
practice, this provision is rarely applied and, in any case, the
major difference in costs arise from the national extension not
from international transmission and switching facilities.
I would welcome comments on methodologies for
cost-estimation and on relevant cost trends. In particular I
would request:
· proposals on methodologies
for assessing least-cost routes for international traffic;
· data on the margin between
accounting rates and national interconnect charges in
particular countries, and whether this margin is justifiable;
· comments on the
appropriateness of applying revenue-sharing mechanisms, such
as call termination charges, which are not based on a 50/50
split.
4. Tariff and traffic dissymmetries
The International Telecommunication Regulations recognise that
the establishment of collection charges is a national matter, but
recommend that "administrations should try to avoid too
great a dissymmetry between the charges applicable in each
direction of the same relation". In practice, asymmetric
tariffs are widespread, particularly in relations which permit
competition at one end but have retained monopoly at the other
end. Furthermore, in some countries there is a growing margin
between the accounting rate on a particular route and the
published collection charge. This margin is naturally used by
operators in competitive environments to offer discounts to
preferred users in respect of the volume of traffic they
generate, or their loyalty. These benefits are not necessarily
available to all users.
Tariff dissymmetries are being exploited by a number of
alternative calling procedures which favour the routing direction
which offers the lowest price. Several alternative calling
procedures are offered by the major carriers themselves,
including use of calling cards, country direct service and
freephone. In other cases, alternative calling procedures are
offered by competitors to the carriers, such as call-back
companies, international simple resellers and operators of
private networks.
The combination of tariff dissymmetries and alternative
calling procedures has served to accentuate traffic imbalances
between countries. While some traffic imbalances occur naturally
due to geographical, historical or demographic reasons,
imbalances have been accelerating due to price distortions and
reverse routing of calls. Traffic imbalances translate into
imbalances in settlement payments between countries and, in
recent years, these have grown to be significant.
I would seek comment on the impact of tariff and traffic
dissymmetries on the efficient operation of the international
telecommunication network. In particular:
· Is there evidence that
traffic dissymmetries are caused by tariff dissymmetries,
either directly through call stimulation or indirectly
through reversed route calling, or is the causality the other
way round? What other factors are involved?
· What is the impact of
reversed route charging on revenue generation and on
investment in the telecommunication network, both domestic
and international?
· What steps can be taken to
encourage lower call charges for all consumers rather than
just business users?
5. Developing country concerns
Many countries, both developing and developed, benefit from
the net settlement payments and therefore have a vested interest
in the continuation of the current system. However, these
payments are generally more significant as a share of total
telecommunications revenue in developing countries. In some
cases, notably in Latin America and the Caribbean, more than half
of annual revenue comes from this source. Furthermore, because
settlement payments are paid in hard currency, they are
particularly welcome in those developing countries which have a
soft currency or which are plagued by inflation and exchange rate
instability. The business plans for network development of many
Public Telecommunication Operators in developing countries are
predicated upon settlement payments which are recycled into
orders for telecommunication equipment imports. If settlement
payments are reduced, it will have a negative effect on the
health of the telecommunication equipment manufacturers as well
as on those finance houses which have lent money to operators in
developing countries, on network development and on consumers.
The impact of reversed route calling on developing countries
is ambiguous. On the one hand it deprives them of potential
revenue from collection charges, but on the other hand it gives
them a guaranteed source of income from settlement payments
without the requirement for marketing, billing or debt
collection. Developing countries could reduce the scope for
reversed route calling if they wished to do so by reducing their
outgoing telecommunications tariffs to bring them into line with
those of partner countries, insofar as they are able, or reducing
the margin between the collection charge and the accounting rate.
But the accounting rate system provides an incentive, for
countries which receive more calls than they send, to maintain
accounting rates at a high level.
For developing countries, the bigger threat lies in the bypass
of the accounting rates system by alternative networks such as
voice over data networks (such as the Internet or frame relay)
international simple resale, private networks, or satellite
bypass. The practice of refile or hubbing may also have an
equivalent effect in that incoming traffic is routed via third
countries with whom the destination country has a low accounting
rate or maintains a "sender keeps all" form of
revenue-sharing. The ability of regulators to control accounting
rate bypass is limited except insofar as the incentive would
disappear if accounting rates and collection charges were more
symmetric and closer to costs. Many developing countries have
recognised the inevitability of accounting rate reduction but are
seeking alternative mechanisms to replace settlement payments or
to ease the transition towards a competitive marketplace.
In reality, the debate is more concerned with distinctions
between monopoly and liberalised telecommunication environments
rather than between developed and developing countries. Many
developing countries have liberalised market entry while many
developed countries maintain monopoly provision. One can foresee
the emergence of three types of bilateral relation:
· Relations between
liberalised markets, where accounting rates are retained as
one among many options for revenue-sharing;
· Relations between monopoly
markets, where accounting rates will remain the dominant
methodology for revenue-sharing;
· Relations between
liberalised and monopoly market which will be subject to
increasing friction as one party seeks to reduce accounting
rates and/or move to alternative methodologies while the
other party seeks to maintain the status quo.
The ITU remains committed to finding an inclusive,
multilateral solution in which all countries move forward
together
I would welcome comments, particularly from operators and
regulators in developing countries, on the issue of accounting
rate bypass and on delineating a transition path to assist
operators to bring their accounting rates and collection charges
closer to costs.
· Should the principles
outlined in the International Telecommunication Regulations
for mutual agreement on routing of traffic be enforced?
Should they also be applied to new market entrants? If so,
how?
· What has been the impact on
revenue derived from international services in those
economies which have reduced accounting rates and collection
charges, and/or which have licensed competitive service
provision for international telecommunications?
· Is it possible to envisage
an alternative, transparent subsidy mechanism from developed
to developing economies which could substitute for settlement
payments in the short to medium-term?
6. Towards a new paradigm for international
telecommunication services
The accounting rate system is founded on the paradigm of
jointly-provided services. However, it is increasingly possible
for carriers to offer end-to-end service, for instance because
they have established a commercial presence in both correspondent
countries, because they have entered into commercial alliances
that offer equivalent market access, or through mobile roaming
agreements. In such circumstances, it would be possible for the
carrier originating the traffic to avoid the obligations of the
international accounting rate system. Such an arrangement may
well offer a wider range of services to users at a lower price.
In addition, many providers of international transit
facilities, such as submarine cables or international satellites,
now seek to sell their services direct to end-users. They are
seeking interconnection agreements which are equivalent to that
offered to national operators.
An increasing number of countries view international
telecommunications as a traded service rather than simply a
jointly-provided public service. At the World Trade Organisation
(WTO), the ongoing negotiations on basic telecommunication
services are due to conclude in mid-February 1997 with an
agreement which would come into force on 1st January 1998,. In
this context the accounting rate system is sometimes viewed as
being in conflict with trade liberalisation principles such as
non-discriminatory market access, transparency or most-favoured
nation status. Furthermore, some of the current practices of
collaboration between carriers, on routing and revenue-sharing,
may be inconsistent with basic principles of competition law.
It should not be assumed that accounting rates are the only
system available. Recommendation D.150 defines two alternative
methodologies: the flat-rate (price per circuit) procedure and
the traffic-unit price procedure. Many new networks, such as the
Internet, are based on "sender keeps all". If
accounting rates continue to fall, then that may be the logical
direction for the public telephone network to follow. Within the
European Union, it has been proposed that accounting rates will
be superseded by facilities-based interconnect agreements after
1998. Many mobile operators already use a variation on this
methodology, for instance in Scandinavia. The public telegram
service uses call termination fees which are set unilaterally
under a procedure by which each operator informs the ITU what
price they intend to charge for terminating incoming telegrams.
I would welcome views on alternatives to the accounting
rate system. In particular:
What are the implications of a WTO agreement on trade in
basic telecommunication services for the accounting rate
system? Should international telecommunications be viewed as
a traded service?
What should be an appropriate method of remuneration for
incoming calls, its features and characteristics ?
· What are the relative
merits/demerits of alternative revenue-sharing mechanisms,
notably call termination charges, which have received the
support of the OECD, and facilities-based interconnect
agreements which have the support of the EU? Please provide
also overall comments/reactions to those alternative
remuneration mechanisms.
· What transition procedures
would be necessary and what timetable appropriate for the
progressive implementation of an alternative system? Could
the accounting rate system co-exist with an alternative
system?
7. Principles for accounting rate reform
In considering either a reform of the accounting rate system
or the transition to an alternative methodology, I would offer
the following principles for consideration:
· Continuity and viability of
international telecommunication service. Any proposed reform
or alternative must ensure, at a minimum, that the
international telecommunication service remains viable from a
technical, financial, operational and commercial perspective.
· Transparency. While progress
towards increased transparency has been made, notably through
the work of ITU Study Group 3 and the OECD, it remains the
case that few countries publish accounting rate data. While
recognizing the commercial confidentiality of some data, we
should also bear in mind that markets thrive on the free
availability of reliable information, particularly on
comparative pricing data.
· Non-discrimination.
Recommendation D.140 encourages non-discrimination in the
application of cost-oriented tariffing, but it may be
necessary to go further than this in order to accommodate the
trade principles of non-discriminatory market access and most
favoured nation (MFN) status. In particular, it may be
necessary to apply the same national extension charge to all
bilateral relations if conditions are similar, and to do so
on a multilateral basis.
· Cost-oriented tariffing.
While it may never be possible satisfactorily to define a
commonly acceptable cost model, it is nevertheless clear that
the principle of cost-oriented tariffing is now widely
accepted. The best way of achieving is to permit competition
at the level of both services and infrastructure.
· Competition. There is now
overwhelming evidence from developing and developed economies
alike to support the contention that competition and private
enterprise, tempered by regulation, provide the best recipe
for telecommunication development. Pro-competitive policies
and market mechanisms should be favoured wherever feasible.
· The benefits of accounting
rate reductions should be passed on to end-users. The
widening gap between accounting rates and collection charges
is an alarming development and indicates that a growing share
of the benefits of technical change and service innovation
are being retained by the operators, or their shareholders,
and not passed on to end consumers. This may be justified if
those operators are engaged upon major investment programmes,
but research from Australia suggests a negative
relationship between high accounting rates and investment.
This would suggest that the profits gained are not being used
to benefit consumers through enhanced service availability.
· Ease of transition for
developing countries. The developing countries have the most
to lose, but potentially also the most to gain from a reform
of the accounting rate system. For this reason, the specific
requirements of the least developed countries should be
paramount in considering a transition path for reform.
I am seeking comment on the direction and application of
these principles for reforms of the accounting rates system.
While recognising that these seven principles need to be
significantly developed and expanded, they nevertheless provide a
starting point for further work. I would appreciate guidance from
the membership of the Union on what is the appropriate forum to
take forward this reform effort:
· Would it be helpful to
convene a World Telecommunication Policy Forum to discuss
this issue in a wider context, or is it sufficient to
continue discussions within the framework of ITU-T Study
Group 3?
· Will it be necessary, at
some stage in the future, to hold a World Conference on
International Telecommunications (WCIT), as provided for in
Article 25 of the ITU Constitution, to revise the
International Telecommunication Regulations? If so, when?
· With which other
organisations, such as the WTO or the OECD, should the ITU be
collaborating in this issue, and how should such
collaboration be conducted?
*************************************************
In conclusion, I wish to affirm that, as Secretary-General of
the ITU, I am committed to moving ahead on a multilateral basis
in which all countries benefit, not just those carriers with
market power. I understand the urgency of reform and am convinced
that a competitive market regime offers the best way forward for
the majority of countries. The purpose of this consultation is to
stimulate debate and to generate ideas. I am not committed to the
survival of the accounting rate system per se, but would
rather see it function more efficiently while alternative options
are developed. In the longer term, I believe that carriers in a
competitive market should have a wide variety of options from
which to choose. Ultimately it is competition rather than
elaborate pricing methodologies which will bring lower prices to
telecommunication consumers.
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