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Note by the Chairman on discussions during the meeting of the informal expert group on telecommunication settlements

NOTE BY THE CHAIRMAN ON DISCUSSIONS DURING THE MEETING OF THE INFORMAL EXPERT GROUP ON TELECOMMUNICATION SETTLEMENTS

INTRODUCTION

At the invitation of the Secretary General of the International Telecommunication Union (ITU), an Informal Expert Group ("the Group") convened in Geneva from March 24 to 26, 1997, to assist him in providing the ITU Members and ITU-T Study Group 3 with independent advice on reform of the existing international accounting rate settlement system.

The following is a general account of the discussions at the Group's meeting in Geneva from the perspective of its Chairman. Although this note has been circulated to, and discussed with, members of the Group, the views set forth herein are those of the Chairman and are intended only to provide an additional personal perspective on the discussions and recommendations of the Group. 5)

THE IMPORTANCE FOR FURTHER CONSULTATIVE DISCUSSIONS AS WELL AS THE NEED FOR URGENT ACTION

The Group agreed at the outset that questions identified for discussion by the Informal Expert Group were a useful basis for starting a dialogue about the necessity of reform and the impact of accounting rate changes. 6) It was also agreed that ongoing discussions of these issues were important and should continue within the framework of the ITU process as well as in other fora at the international, regional, and national levels.

While the Group agreed that further discussions would be useful and constructive, it was believed to be essential that the ITU, together with Member States and other regional bodies, initiate steps, on an urgent basis, to respond to significant changes in the international telecom arena and the international settlements process. These changes are being driven by the outcome of the WTO negotiations, opening of the EU market, the FCC benchmarking rulemaking, as well as steps to liberalize telecom markets being undertaken in an increasing number of countries around the world, including those still developing their telecom infrastructure.

DISCUSSION OF THE ROLE OF THE ITU AND NATIONAL REGULATORY PROCESS

The Group agreed that changes in the international settlement process were being driven by technological and market forces that were well documented in the background materials provided to the Informal Expert Group; and it was generally acknowledged that such changes were not the consequence of the policy or regulatory initiatives of any one ITU Member State or group of telecom operators.

The Group discussed the implications of the FCC benchmarking rulemaking as well as the potential impact of implementation of benchmarked accounting rates on Member States still developing their telecom infrastructure. Concerns were expressed within the Group that initiatives to reform international settlement arrangements were not being undertaken on a multilateral basis; however, the Group recognized that national regulatory initiatives were not responsible for, but were rather a reflection of, technological and market pressures that were effectively now replacing the traditional international settlement process with new approaches to the provision of international services.

The Group discussed at length the relationship of initiatives taken by national regulators such as the FCC to the traditional multilateral responsibilities of the ITU for international settlements. The Group agreed that there was a need to structure a new cooperative relationship among the ITU, the WTO, and national regulatory agencies in dealing with future international settlement arrangements. Such new relationships would involve establishing new procedures or ad hoc mechanisms through which the ITU could provide to national regulators relevant information or data relating to decisions concerning future international settlement arrangements. In turn, such new cooperative relationships should include reciprocal commitments by national regulators with respect to the multilateral dimension of regulatory initiatives concerning future international settlement arrangements.

The Group could not reach agreement concerning how the ITU might best respond to the FCC's initiatives concerning international accounting rates. The discussion focused on the fact that the ITU, as an inter-governmental organization, could not participate directly in national regulatory proceedings although it was agreed that the ITU could provide Members with information and other technical assistance in efforts to comment on benchmark costing or other studies of international accounting rate levels in national regulatory proceedings or to participate in bilateral negotiations with respect to future accounting rate or international settlement arrangements.

The Group discussed very specifically the steps that the Group might take with respect to the proposed FCC rulemaking with respect to benchmarking accounting rates. The discussion focused, in particular, on whether the FCC might take the initiative to invite input from the ITU with respect to certain specific issues under consideration in the FCC proceeding including specifically the development of benchmark numbers for the national tariff component utilized in the FCC's benchmarking methodology. Alternatively, there was discussion of the possibility of an ad hoc effort -- undertaken under the auspices of the Group or on some other basis -- that might result in the preparation, on a very accelerated basis, of various studies or other analyses that might be relevant for consideration by the FCC. Participants in the Group from some of the US-based operators indicated their willingness to assist in organizing such an ad hoc effort. However, the Group believed that the desirability and scope of any such ad hoc effort should be directly addressed by the Secretary General and that the Group's recommendations should not include any specific advice to the Secretary General with respect to any effort on the part of the ITU to provide input or guidance to the FCC with respect to its benchmarking rulemaking proceeding.

DISCUSSION OF COST METHODOLOGIES AND PRINCIPLES

The Group discussed fundamental differences in approaches to cost methodologies for calculating international accounting rate levels and focused, in particular, on the differences in benchmarked levels resulting from the FCC's benchmarked cost study as opposed to some recent cost studies conducted on a regional basis. The differences in the benchmarks derived from these various studies are attributable to differences in cost allocation methodologies, specifically to the historic fully allocated cost basis utilized in the regional cost study as opposed to the costing methodology utilized by the FCC in its benchmark. Participants in the Group from the FCC, as well as most other members of the Group, emphasized that a long run incremental cost methodology was likely to produce even lower benchmarked cost levels than were produced by the FCC study.

The Group could not reach any agreement concerning whether the Informal Expert Group or ITU-T Study Group 3 could address issues relating to these differences in costing methodologies. In fact, there was a recognition that, because of the need to obtain unanimity of approach within Study Group 3 and the difficulties of obtaining data from members, Study Group 3 had not been able in the past to conduct comprehensive cost studies or to develop specific cost allocation principles.

The Group concluded that in view of the timetable for the FCC benchmarking proceeding there was insufficient time to develop any alternative approaches to the cost methodologies being utilized by the FCC or any other national regulatory body for that matter. Indeed it was concluded that the development of any such alternative approaches would require an extraordinary commitment of resources by the ITU and its members and an ability to reach agreement over costing methodologies and principles that was likely to be unachievable given the constraints of the Study Group 3 process or even informal consultative discussions such as those being undertaken by the Group.

Nevertheless, the Group believed that the ITU might assist Member States by assembling various engineering costing models as well as other data points with respect to national interconnection rates for terminating fixed or mobile public switched voice services that might be helpful indicators for the future level of accounting rates. Such indicative data could be useful, in the Chairman's view, when taken together with an approach based on unbundling and identifying the various tariff components for the provision of international services, in ascertaining a broad range for expected future levels of accounting rates. It was noted, in particular, that the FCC benchmark study had relied on studies and analysis undertaken in past years by the OECD and was based around the core elements on the basis of which international services will be provided within the European Union under the so-called interconnection charge model for the provision of international services.

ROLE OF DATA COLLECTION AND DISSEMINATION

There was a broad consensus within the Group that Study Group 3 as well as the Informal Expert Group could usefully focus on the collection of data from ITU members relating to emerging interconnection arrangements as well as mechanisms for ensuring the provision of universal services. Members of the Group from the FCC and the EU emphasized, in particular, their willingness and commitment to such efforts to collect and disseminate to ITU members information relating to the costs and features of interconnection arrangements for local exchange, inter-exchange as well as international public switched voice services. In the future the cost of switching charges would be, it was pointed out during the discussion, largely independent of the fact that calls were directed locally, nationally, or internationally. Thus, the development of a rich body of data with respect to emerging interconnection arrangements was viewed as an important step toward offering ITU members useful guidance with respect to likely future compensation levels for the provision of the switching for international calls.

Notwithstanding the difficulties in developing cost allocation methodologies or other techniques for approximating future levels of compensation for the provision of international calls, the Group strongly believed that such methodological difficulties should not obscure clear evidence from the international telecom market with respect to future compensation levels for international calls. Already a substantial amount of international traffic is being provided on the basis of arrangements outside the traditional settlement process; and this is likely to increase significantly in the coming years. Pricing arrangements for such services will establish, as a practical matter, a market-based benchmark for future accounting rates against which settlement rates not derived from market forces will inevitably have to be aligned. Thus, it was believed to be very useful that the ITU provide its members with access to reliable data concerning relevant market developments and trends.

The Secretary General, the Group believes, must clearly underscore the need for urgent action by ITU members to respond to these changing market conditions. The range for future compensation levels is well understood and is likely, as suggested by many comments during the discussion, to be less than the average $.25 per minute figure identified in a recent ITU study.

Some members of the Group believe that the Secretary General should inform members concerning his views concerning cost methodologies as well as the practical implications of decisions by members to rely on long range incremental cost methodologies as opposed to historic fully allocated cost methodologies in benchmarking future accounting rates. Although the Group could not agree that long range incremental costing principles were the relevant basis for determining future international accounting rates, it was recognized that, in fact, future rates would ultimately be determined by competitive market pressures. Members of the Group stressed that a growing number of countries and telecom operators believe that future cost accounting rates will be based on long run incremental costing principles and that such principles are likely to approximate closely the results that would have been produced in an effectively competitive market. Any personal initiative by the Secretary General would not require, in the Chairman's view, the ITU to take any position concerning the relative merits of differing costing methodologies; but it would signal to Members the fact that future accounting rate levels are likely to coalesce within a specified range between 0 and $.25 and that significant steps may be required to respond to such new conditions.

Absent a clear understanding of the future direction of accounting rates, Members may not be able to take the necessary urgent steps to prepare for a new competitive environment in the global telecom sector.

IMPORTANCE OF MAINTAINING A COMMITMENT TO UNIVERSAL SERVICE

There was substantial agreement within the Group about the importance of maintaining a commitment to the provision of services on a universal basis; however, many differing views were expressed about how this important policy objective could best be pursued in the new competitive environment now emerging in the international telecom arena.

There was unanimity of view within the Group with respect to a proposal that the ITU take the lead, together with the EU, the World Bank, the FCC as well as other national regulators, to collect and disseminate information concerning how universal service issues are being addressed in countries around the world where competition has been, or is now being, introduced. Many within the Group believe that the international telephony tariffs should continue to generate a flow of revenues necessary to finance new telecom infrastructure. Others within the Group insisted on the importance of restructuring and rebalancing national tariffs as the only effective way to ensure the financing of new telecom infrastructure.

The discussion made clear that efforts to rebalance and reform national tariffs did not have to be based only on across-the-board rate increases for local services. Such reform efforts could also involve increased differentiation of pricing options based on differences in demand for services being offered, the technology utilized, the locus in which services are provided, and the actual usage patterns of particular users or groups of users. The sharing of information relating to national price reform efforts should be given, it was agreed, high priority attention by the ITU.

Clearly, there is an urgent need at the national level -- on the part of regulators and telecom operators -- to make a realistic assessment of the impact of the likely magnitude of, and timetable for, reductions in revenue flows from international telephone services. Such an assessment should concretely appraise how revenue shortfalls may be offset by tariff rebalancing, revenues generated by new services, steps to increase efficiency and productivity, or other similar measures. In this respect, the real focal point for efforts to ensure universal service should be less on maintaining the status quo with respect to traditional sources of financing for new infrastructure than on developing a new strategically oriented approach to planning for the new competitive environment.

ITU ROLE IN LEADING A GLOBAL DIALOGUE ON NECESSARY STEPS TO PREPARE FOR A NEW COMPETITIVE ENVIRONMENT

The ITU has a critical role to play, it was agreed within the Group, in encouraging such strategic thinking about the new competitive environment. The ITU should lead a global dialogue about the need to prepare for a new competitive environment, many if not all members of the Group believe. This dialogue must be centred around the ITU's various formal and informal institutional mechanisms; however, it must also be encouraged at the regional and national levels as well. The Secretary General should use his office as a bully pulpit not so much to preach the virtues of competition as to encourage members to take necessary steps to prepare for new competitive realities.

The principles included in the Group's Report are, the Group believed, a good platform on the basis of which the Secretary General might launch such a dialogue in the weeks and months ahead. Such a dialogue is likely to continue on an intensive basis through the end of the Secretary General term in 1998 and will in all likelihood have to be continued by his successor in the years to come.

OVERVIEW OF PROPOSED INITIATIVES TO BE TAKEN BY THE ITU

The Group's specific recommendations are set forth in full in its Report. These recommendations in this report represent a bedrock of consensus among the Group and speak for themselves. These recommendations can be summarized, in the Chairman's view, as follows:

The Secretary General should direct all his energies to demonstrating the need by ITU members, especially those most traditionally dependent on international revenues, to adjust to such new conditions. Among the steps to be taken on an urgent basis are the following:

  • the development of a base of information relating to interconnection arrangements, mechanisms for dealing with universal services, trends with respect to the pricing of international services on a market-driven basis that will assist national decision-making in responding quickly and effectively to emerging developments;
  • urging the ITU membership to take immediate steps in reducing current settlements on a multilateral basis with a reduction of 5 to 10 per cent during 1997 followed by a similar reduction in the first half of 1998 so that all Member States would benefit from the settlement rate reduction planned by the FCC;
  • the assessment of the impact on a representative group of countries and telecom operators of changes in international settlement rates and methods as well as techniques for responding to such changes;
  • the mobilization of a major effort to assist members in linking necessary adjustments in international rates with reforms in national pricing policies to eliminate historic cross subsidies and ensure the financing of new telecom infrastructure;
  • the identification of other transitional measures that might be taken, in conjunction with the World Bank, the EU, and international development agencies, to ensure that, during a transition period, those telecom operators least able to adapt to changes in international settlement arrangements are able effectively to invest revenue flows from international settlements to prepare for the new economic environment in the international telecom arena.

CONCLUSION

The Group believed that it should focus its ongoing efforts in refining these initiatives and that it could usefully continue its consultative efforts as an electronic committee of correspondence and through ad hoc consultations among its members. It agreed as well that the Group might attempt to encourage, on the basis of the discussion paper prepared for its meeting as well as its report (attached hereto), wider and more active discussion of the issues that it had addressed during its deliberations in the context of other meetings of operators and regulators at the international, regional, and national levels.

The Group recognized the need to refine its general recommendations into a set of specific action plans; and it is also aware that implementing its recommendations will require a significant commitment of resources by the ITU as well as by ITU members. Unless such resources can be mobilized, it is recognized the Group's recommendations about dealing with the consequences of a new competitive environment will have a very hollow ring to ITU members most adversely affected by anticipated reductions in international accounting rates.

The bedrock of consensus among members of the Group was centred around the importance of taking a realistic view of the inevitability of pressures for change in international settlement arrangements and for initiating effective steps to deal with these consequences. Members of the Group from countries likely to be most adversely affected by changes in the international settlements process hope, and expect, that there will be an equally realistic appraisal of the difficulties of the structural adjustment process facing many countries and telecom operators.

The Chairman firmly believes that the basis for continued progress in dealing with the difficult transitional process now underway is continued dialogue driven by the spirit of realism and pragmatism that so well characterized the Group's discussions over three days. These discussions demonstrated an immense reservoir of good will, common purpose, and capacity to work together to produce a report that is truly a Group effort. They demonstrated as well a strong and shared commitment to ensuring that the ITU is the focal point for a new and pragmatic spirit of multilateralism in an increasingly diverse and competitive international telecom arena.

The Group emphasized the importance of vigorous discussion and an active, high pressure flow of information to all affected interested parties -- telecom operators, national regulators, users. Such an active, effective process of discussion -- combined with firm and concrete steps to reduce accounting rates and make in tandem necessary structural adjustments -- was viewed by the Group as being essential to reinvigorating a commitment to multilateralism in the international telecom sector in the face of new competitive realities and pressures.

 

 

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