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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