REPORT OF THE INFORMAL EXPERT GROUP ON INTERNATIONAL TELECOMMUNICATION SETTLEMENTS

Note by the Secretariat: This document contains the report of the Informal Expert Group which met in Geneva, March 24-26 1997, to advise the ITU Secretary-General on reform of the international telecommunication settlements process. The document also contains a report by the Chairman of the Group, Mr Robert Bruce, and the Issues Paper which was prepared for the meeting.

Table of Contents

• RECOMMENDATIONS OF THE INFORMAL EXPERT GROUP ON INTERNATIONAL TELECOMMUNICATION SETTLEMENTS
• MEMBERS OF THE INFORMAL EXPERT GROUP
• NOTE BY THE CHAIRMAN ON DISCUSSIONS DURING THE MEETING OF THE INFORMAL EXPERT GROUP ON TELECOMMUNICATION SETTLEMENTS
• ISSUES FOR DISCUSSION
  
  
  

Geneva & London 9th April 1997

RECOMMENDATIONS OF THE INFORMAL EXPERT GROUP ON INTERNATIONAL TELECOMMUNICATION SETTLEMENTS

INTRODUCTION

At the invitation of the Secretary-General of the International Telecommunication Union (ITU), an Informal Expert Group met in Geneva from March 24 to 26, 1997, to assist him in providing the ITU membership and ITU-T Study Group 3 with independent advice on reform of the existing international settlements system, and to suggest ways that the ITU can help countries to make necessary adjustments.

The Group noted that many countries have liberalized their telecommunication markets which has led to lower settlement rates and facilitated reform of international settlements arrangements. This movement is evolving through unilateral, bilateral and multilateral decisions frequently made outside the framework of the ITU. Important market liberalization decisions such as increased regulatory approval of international simple resale; the liberalization of telecommunication markets in the European Union and elsewhere; and the implementation of the recent World Trade Organization (WTO) basic telecommunications agreement may, unless there is adequate price reform, result in an increasing proportion of the world's international traffic flowing outside the traditional international settlements system. At a minimum, a significant volume of traffic will flow between nations which permit the use of alternatives to the traditional settlement rates for the termination of international traffic.

The Group believes that the ITU's pursuit of international settlements reform should proceed on the assumption that settlement rates between liberalized and non-liberalized markets will inevitably move towards levels dictated by effectively competitive markets.

The Group believes that the various interconnect regimes and call termination charges which actually develop in competitive markets worldwide are likely to produce valuable information. This information can assist the ITU in identifying an appropriate price range for cost-oriented settlement payments (implementation of ITU-T Recommendation D.140) on international routes where the market remains closed to competition on one or both sides.

The Group notes that the ITU Constitution commits its membership to work together for "the establishment of rates at levels as low as possible consistent with efficient service" (Article 1, 2f), and notes the principles contained in ITU-T Recommendations D.140, D.150 and D.155 to move towards a cost-oriented, transparent and non-discriminatory settlement system.

The Group wishes to submit to the Secretary-General a set of Guiding Principles, along with an action plan of specific recommendations.

GUIDING PRINCIPLES

The Group proposes that the following six principles govern the position of the Secretary-General and the ITU in the area of international settlements reform.

1. The ITU should support the introduction of liberalization and competition in telecommunications markets, at national and international levels, by means of both national and, more particularly, multilateral initiatives such as the recent WTO Agreement. In this context the ITU should accelerate and facilitate the evolution of current settlement arrangements to transparent, non-discriminatory and cost-oriented rates, consistent with this new environment and with technological and economic changes in the industry.
2. While the financial arrangements regarding trade in international services between liberalized parts of the world can largely be left to market participants, national regulators and competition law in those countries, settlement arrangements involving non-liberalizing country operators, on one or both ends of a relationship, will require ITU initiatives. Therefore, the ITU should structure "new cooperative relationships" with all stakeholders: its membership, national regulatory bodies, telecommunications operators, and multilateral institutions including the World Bank and the WTO. These "new cooperative relationships" should include reciprocal commitments by national regulators with respect to the multilateral dimension of regulatory initiatives, inter alia those affecting future international settlement arrangements.
3. To facilitate decision-making and mobilizing political support at the national level, the ITU has an important role in providing accurate and timely data. It should ensure effective collection and dissemination of data from all sources, especially with respect to settlement rate levels and trends, and issues relating to tariff rebalancing, price reform, interconnection, and their impact on universal service obligations. The ITU should encourage countries to make available their settlement rates to the ITU on a confidential basis.
4. Considering the relevance of economically rational price levels for the efficient provision of services, the ITU should assist its membership, national regulatory bodies, telecommunications operators, and multilateral institutions in developing costing methodologies and pricing principles, implementing the WTO agreement, and dealing with universal service issues.
5. Specifically, the ITU should help articulate the general range of international settlement rates toward which current rates are likely to evolve given competitive pressures. Such a range would form a practical and useful basis which the ITU membership could utilize in a multilateral framework. Specifically, it should assist them in preparing for the transition to economically efficient international settlement arrangements, in the context of a changing industry structure which will be driven by market forces and principles of economic efficiency.
6. The Secretary-General should mobilize support, together with international development banks, and in co-operation with other multilateral institutions, for the transitional steps necessary to ensure the economic viability and future financing requirements of telecommunications operators in those countries hardest hit by the reform of international settlements arrangements.

In essence, the Secretary-General should position himself as the key advocate for reform of the international telecommunications sector, and the champion of more efficient, low cost telecommunications services for consumers.

URGENCY OF ADDRESSING SETTLEMENT REFORM ON A MULTILATERAL BASIS

The Group is convinced that settlement rates will be reduced towards costs and is persuaded of the urgency of the steps which will be required as countries move ever more rapidly toward more competitive environments. It is likely that, in relationships between competitive markets, settlement rates will quickly be supplemented by alternative financial arrangements. This transition does not require intervention by the ITU. However, there will continue to be a number of relationships between competitive and non-competitive markets. It is desirable that settlement rate reductions, which are already planned by some countries, be coordinated on a multilateral basis, in order that the benefits be shared by the membership as a whole.

Based on this assessment of the issues, the Group recommends that the ITU Secretary General propose an immediate, global reduction in settlement rates of the order of 5 to 10 per cent during 1997 followed by a similar reduction in the first half of 1998 ¹⁾. On the basis of cost studies carried out by the ITU Secretariat ²⁾ it is estimated that, in all but a few cases, settlement rates should be priced below 25 US cents per minute. However, it is recognized that for some developing countries, there will need to be provision for a transition period before cost-based financial arrangements can be achieved.

The ITU has an essential role to play as the bridge between national requirements and action that can be organized on a multilateral basis. In order to mitigate the effects of a reduction in revenues from international settlements, the Group recommends four specific compensatory steps:

• Commitments by the ITU, the World Bank and others to assist those economies likely to be hardest hit in the process of reform;

• An acceleration of work by ITU-T Study Group 3 on reform of international settlements arrangements;

• The commissioning of a series of case studies on the impact of lower international settlement revenues;

• An enhanced role for the ITU in data collection and dissemination of policy-relevant information on settlements, and more generally telecommunication sector reform.

These are discussed below.

FINANCING THE TRANSITION TO RATIONAL SETTLEMENT RATES

The historical level of settlement rates is unsustainable in a competitive environment. Economic rationality means that transmission and termination rates of international voice traffic will decline toward a level dictated by effective competition. This movement is accelerating as a result of a number of factors stated above and is expected to bring significant reductions in prices of international services for consumers.

The transition may mean a decline in incoming foreign settlement revenues for a number of operators. Different countries have differing needs and abilities to make the necessary adjustment. Specifically, the Least Developed Countries and other low income small economies with, say, less than one million inhabitants, are likely to be hardest hit. Some countries have seen more progress than others in reducing settlement rates to levels close to cost. However, the revenue shortfall is mainly a transitional problem. Any potential loss in settlement payments should, over time, be replaced by increased local revenue generation, as national tariffs move toward more efficient levels, as new customers are added, as new services and innovative ways of pricing are developed, and as steps are taken to increase the efficiency of the network.

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 telecommunications area.

Key measures making up an orderly transition

Cushioning the transition problem (providing a "soft landing") will require implementation of five key measures:

1. Downside risk related to revenue flows needs to be mitigated for those countries likely to be the hardest hit.
2. Some form of burden sharing needs to be developed between international carriers and national authorities in the most vulnerable, least developed countries.
3. In fully competitive markets, interconnection charges are dictated by rational economic principles. In those countries where effective competition has not yet been achieved, a general range of charges will have to be used as proxies for such rational pricing. The establishment of a commonly agreed upon range of charges will require significant work.
4. The transition process for the countries which are hardest hit must be time-bound, e.g., it should not be in excess of five years.
5. A review of how the adjustment to economically efficient pricing regimes may impact universal service obligations.

An approach to handling the transition

• International carriers should guarantee certainty over the transition period for those countries likely to be the hardest hit (e.g., total settlement payments maintained at some predetermined level, in exchange for shared risk and staged reductions of the unit settlement rate from current levels to those consistent with effective competition).

• The ITU should commit to assisting countries in any way possible in regard to sector restructuring, settlement rate reductions, and tariff rebalancing. It should play a role of information dissemination and, where requested, could act as honest broker in assisting the parties concerned to negotiate the guarantee mechanism outlined above, and in resolving any disputes that may arise between the parties.

• For its part, the World Bank would be prepared to provide assistance at three levels, within the framework of its Country Assistance Strategy discussions with national governments:

• first, advice and assistance in handling the transition (e.g., with technical assistance), financed either directly through technical assistance loans or grants, or through its infoDev Program;

• second, assistance in offsetting the macro-economic costs of transition in those countries hardest hit, as part of its regular macro adjustment programs; and

• providing assistance with network roll-out by means of loans and guarantees, within the framework of its current telecommunications sector policies which promote private investment in a competitive framework.

ACCELERATING THE WORK OF ITU STUDY GROUP 3

As noted above, in relations between competitive markets, the settlement rate system will be supplemented by alternative financial arrangements that are closer to the cost of providing service. However, during the transition to effective competition, there will be many asymmetric relations between markets with differing degrees of liberalization and increasing opportunities for bypass. The Group recognizes that multiple systems would co-exist in an environment of increasing liberalization. The Group recommends to the Secretary-General that ITU-T Study Group 3 accelerate its efforts to reform the present international settlement arrangements by focusing its work on facilitating the transition to arrangements which are more compatible with a competitive and liberalized marketplace.

In addition, the ITU-T Study Group 3 should accelerate its work on reviewing the likely impact of the Internet on the evolution of international telephony.

CASE STUDIES

In order to gain a more realistic picture of the effect of new international settlements arrangements, it is recommended that the ITU co-ordinate a series of case studies on the impact of reduced international settlements (foreign exchange) earnings on the operation and development of a selected number (say six) of network operators in low income countries who will be most affected. The selection of those operators to be studied should ensure a representative cross-section of economic, regional and sector structure situations to serve as models for similar assessments in other countries.

The studies would look at key parameters such as settlement rate levels, traffic flows, price elasticities of demand, cost components of the network, national economic data, and other sources of income and expenses. The studies would aim to determine the sensitivity of the operator to a reduction in international settlements in relation to income, to network capacity, to investment, to network development plans, to universal services obligations, to the provision of various services, to quality of service, to debt servicing, to maintenance, to employment and, to tax payments.

A general model for the case studies should be developed prior to the start of the exercise and could be based on similar studies carried out in countries such as El Salvador and Mexico.

The purpose of the exercise would also be to recommend steps that need to be taken to mitigate the effect of a reduction in international settlements, including the time required for adjustment. The work would be undertaken in conjunction with the transition financing mechanisms outlined above. The work would be carried out under the aegis of the ITU and could be financed by voluntary contributions and funds from the ITU Development Sector, for example.

DATA GATHERING AND DISSEMINATION

The ITU has a mandate, according to its Constitution, to "undertake studies, ... and collect and publish information concerning telecommunication matters". The collection and dissemination of data relevant for telecommunication policy-makers can assist them greatly in the transition process towards achieving transparent, non-discriminatory and cost-oriented tariff structures. In the context of accounting rate reform, the ITU should also make widely available data on benchmarks, collection charges, cost studies and trends, as well as actual settlement rates where these are published, in order to facilitate the reform process.

Given the urgency of reform, it is proposed that the ITU undertake the following actions in the short and medium-term:

Short term (by May 1997):

• Make available, via a public website ³⁾ , a structured collection of documents, ITU-T Recommendations, statements, studies and links to other sites that are relevant to the topic of international settlements reform, including the Issues Paper prepared for the work of the Expert Group;

• Publish the data already collected on an annual basis by ITU-T Study Group 3 on settlement rate movement between set ranges of levels, without identifying specific countries;

• Undertake additional analysis of input data that would illustrate relative levels and distribution of ranges of settlement rates among respondents.

Medium-term:

• Encourage the ITU membership to make available their settlement rates to the ITU. Where members do not feel able to do this, to encourage them to make this information available to the ITU on a confidential basis, or alternatively, publish indicative ranges of settlement rates and trends over time;

• Continue gathering data on current collection charges for international services to major calling partners, in conjunction with specialist tariff consultancies, and to make this data available as an ITU publication;

• Continue the analysis of data on traffic flows and their relationship to price, and to publish these studies on a regular basis. ⁴⁾

In addition, the ITU should continue to gather and disseminate information of a more general nature on telecommunication sector reform in order to assist policy-makers and regulators involved in the transition process. This would include, but not be limited to, information on meeting Universal Service Obligations, interconnection, costing of network elements and services, establishing a regulator and a regulatory mechanism, managing scarce resources etc.

Attachment

MEMBERS OF THE INFORMAL EXPERT GROUP

Chairman

Robert Bruce, Partner, Debevoise & Plimpton, London

Members

Peter Allen, Vice Chairman, Regulatory Affairs, International Telecommunications Users Group (INTUG), Brighton, UK

James Bond, Division Chief, Telecommunications and Informatics, The World Bank, Washington

Jean-Louis Burillon, Relations avec les Organisations Internationales, Direction des Relations Exterieurs, France Télécom, Paris

Jean-Francois Certain, Chargé de Mission, Secretariat Général, Air France, Paris

Peter Cowhey, Head, International Bureau, FCC, Washington

Donnie de Freitas, Deputy Chief Engineer, Ministry of Communications and Works, Kingstown, St Vincent and the Grenadines

Tim Kelly, Head Operations Analysis, Strategic Planning Unit, International Telecommunication Union, Geneva

Ahmed Laouyane, Director, Telecommunication Development Bureau, Geneva

Henri Lepage, Délégué Général, Institut Euro '92, Paris

Lim Shyong, Vice President, Business Communications, Singapore Telecom, Singapore

Ken Lindhorst, Vice-President, International Public Affairs, AT&T, New Jersey

Vivienne Lucas, Regional Accounting Rates Manager, BT, London

Steve Mijiga, Postmaster General, Blantyre, Malawi

Bridger Mitchell, Charles River Associates, Palo Alto California

Werner Neu, Leiter des WIK GmbH, Bad Honnef, Germany

Gustavo Peña Quiñones, Comisionado, Comisión de Regulación de Telecomunicaciones, Bogotá

Marlene J. Placci, Assistant, International Telecommunication Union, Geneva

Bernard Rouxeville, Chargé de Mission, Ministère de la Poste, des Télécommunications et de l'Espace, Paris

Mark Scanlan, Industry Economist, European Commission, DG XIII, Brussels

Alain Servantie, Head of Unit, International Aspects of Telecommunications and Posts, European Commission, DG XIII, Brussels

Gabriella Sorrentino, Relaciones con corresponsales, Telintar, Buenos Aires

Katharina Stampfli, Head of Economic Affairs, Telecommunications Division, Federal Office for Communications (BAKOM) Biel, Switzerland

Peter A. Stern, Special Advisor, International Telecommunication Union, Geneva

Carmine Taglialatela, Vice-President, CompassRose International Inc, Washington

Saburo Tanaka, Councillor, Telecommunications Standardization Bureau, International Telecommunication Union, Geneva

C. Holland Taylor, Chief Executive Officer, USA Global Link, Fairfield, Iowa

Jerker Torngren, Director, ETNO, Brussels

Soichi Tsukui, Senior Assistant Manager, International Affairs Department, KDD, Tokyo

Tom Wasilewski, Chief, Multilateral & Development Branch, FCC, Washington

Bruce Willey, Vice President of International, Revenue Development for MCI International, MCI, New York

Dimitri Ypsilanti, Head of Telecommunications Section, OECD, Paris

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.

Geneva, March 19^th, 1997

ISSUES FOR DISCUSSION

(A contribution by the Chairman and Secretariat of the Informal Expert Group of a working paper for discussion prior to and during a meeting to be held in Geneva, Switzerland at ITU Headquarters on 24-26 March 1997)

INTRODUCTION: THE ROLE OF THE INFORMAL EXPERT GROUP AND THIS DRAFT ISSUE PAPER

The Secretary-General of the International Telecommunications Union, Pekka Tarjanne has convened an Informal Expert Group ("the Group") to provide him with practical advice and perspectives concerning a set of issues related to changes in the international settlements process. This paper is intended to stimulate an exchange of views before and during the first meeting of the Group to be held 24-26 March 1997.

Need to Define the Role of the Group and Consult in Advance of the Meeting

This draft discussion paper has been based on a preliminary round of consultations that the Chairman has undertaken with the Secretary General and other ITU staff members as well as with several members of the Group (including representatives of the FCC, the EU, the World Bank, the BDT at the ITU, and several international operators). These preliminary discussions have focused on how the Group might best approach its work and how it might, in particular, reflect the concerns of countries still developing their telecom infrastructure. It is the Chairman's intention to circulate this discussion paper in an initial draft form in advance of the first meeting of the Group in March in order to solicit additional ideas and suggestions.

As one member of the Group trenchantly observed, one good question focused on the right issues is better than two solutions to the wrong problem. Hopefully, the Group's work will be influenced by this sage advice and by similarly insightful direction provided by other members of our Group.

Group as an "Information Pump" to Inform Current Discussions in Other Fora

As members of the Group are aware, the secretariat for the Group has assembled a group of background documents and established a website on the ITU server (http://www.itu.int/intset). Document numbers herein refer to documents which are available on the special website.

One of the objectives of the Chairman and the secretariat for the Group is to identify and collect, with active assistance from members of the Group, other relevant documents relating to the international settlements process that can be made broadly available to the Group as well as to others interested in the issues relating to the future evolution of the international settlements process. One of the more important possible roles of our Group may well be to serve as a kind of collecting point and "information pump" for background information and analysis useful to decision-makers in the public and private sectors concerned with the issue of international settlements. See the discussion of "Issue 4/Future Initiatives and the Way Forward" below.

It is the Chairman's hope that the Group will be able to begin to work together well in advance of its first meeting and will be able to continue in contact after its March meeting as an "electronic committee of correspondence" on international settlements. For this purpose the Group has also established an Internet mailbox (dialogue box) to permit discussion and exchange of views right away. Any message sent to intset@itu.int will be retransmitted to all Group members who have given an e-mail address.

Set forth below is an initial outline of four main areas or topics that the Group might consider during its initial meeting:

Issue 1/ Current Situation and Trends:

The initial part of our discussion should in all likelihood assess the current status and trends with respect to international settlements. The Chairman has asked Tim Kelly of the ITU Secretariat to lay out ten "propositions," which are attached hereto in Attachment 1, as a starting point for our discussion of this part of the agenda.

All members of the Group are not likely to agree with all of these propositions; however, it is hoped that Attachment 1 will help focus on differences in assumptions and underlying views within the Group.

Issue 2/ Appraisal of Approaches to Future International Settlement Arrangements

Based on our discussion of the current situation and future trends, the Group might then turn to an appraisal of various efforts to address the future evolution of the international settlement process including initiatives by the FCC, the EU, the OECD, and others.

The focus would be on the pros and cons of each of these initiatives and on the diversity of approaches being taken in North America, Europe, Asia, and other regions to deal with the problem of international settlements.

The Group would attempt to examine differences of perspectives -- among regulators, telecom operators and users as well as among ITU member countries at different stages of developing their telecom infrastructure.

Issue 3/ Concerns of Countries Developing their Telecom Infrastructure with the Impact of Current Trends and New Approaches :

Countries still developing their telecom infrastructure are very likely to be adversely affected by current changes in the international telecom environment and settlement process. The concerns of such countries should be central to the deliberations of the Group in the Chairman's view and that of all the members of the Group consulted so far.

It is essential that the restructuring international settlements and international pricing arrangements must be strongly linked with a major effort to (1) stimulate price reform at the national level and (2) identify new mechanisms to encourage new investment in telecom infrastructure.

Issue 4/ Future Initiatives and the Way Forward:

One of the highest priorities of the Group should be the identification of practical steps to be taken by the Secretary General, the ITU, national regulators, other international bodies, etc. The Group should focus its attention not only on what can be accomplished within multilateral processes of the ITU but also on what other initiatives can be taken (by other international institutions such as the World Bank, the EU, national regulators and officials around the world, and telecom operators) in concert with any steps taken by the ITU. Each of these topic areas is discussed in further detail below; and some suggested questions for the discussions by the Group are indicated as well.

ISSUES FOR DISCUSSION

Issue 1/ Current Situation and Trends

As the background documents assembled by the secretariat for this Group well reflect, and as members of the Group are very aware, new modes of cross-border service provision and new financial relationships among service providers are increasingly supplementing, if not replacing, the traditional arrangements through which international public switched telephone services are jointly provided and settlement revenues are divided on an equal basis between separately owned national service providers on either end of an international telephone call.

• Some observers estimate that a very substantial portion (perhaps as much as a majority) of the total traffic streams on certain major international routes between countries that have liberalized the provision of public switched voice telephone services are already being provided on the basis of financial arrangements outside the traditional international settlements process. (docs. 3, 11, and 12) ⁷⁾

• Within the European Union, as of January 1, 1998, the existing arrangements for joint provision of public switched voice services among national service providers with exclusive rights to provide such services on the basis of the so-called TEUREM settlement principles (doc. 26) will be supplemented, if not substantially replaced within a short period of time, by a new regime based on interconnection charges at the terminating end of international transmission circuits.

• The recent World Trade Organization ("WTO") agreement to liberalize the provision of basic telecommunications services, and especially public switched telephone services, has given dramatic new impetus to the process by which existing international settlement arrangements are being undone by market related and technological developments.
  

All these developments point to the fact that the role of the Group is likely best to be centred around assessing, in light of the recent developments outlined above as well as other forces at work within national and international telecom markets, (1) the pace with which changes are occurring (2) the nature of new arrangements that are now emerging and (3) how such arrangements might affect the effective continued operation of the traditional international settlement process -- and participants in the process, especially countries still developing their telecom infrastructure.

The discussions of the Group will inevitably focus on how new arrangements and competitive forces are affecting the level of international settlement rates and on initiatives taken by international telecom operators and national regulators, such as the FCC, to reduce current settlement rates.

Nevertheless, the role of this Group is not, in the Chairman's view, to identify new price levels or benchmarks. Nor is it likely to be possible for the Group to focus on any single "new" arrangement or methodology to replace the "old" international settlements framework. In the emerging competitive international environment, establishing pricing and business arrangements must be the handiwork of market forces -- and of the interaction of service providers, regulators, and competition policy authorities -- rather than the outcome of committee deliberations. Notwithstanding this fact, the Group may well have a useful role in demonstrating the urgent need for effective steps to facilitate the process of structural adjustment for countries and telecom operators most adversely affected by changes in the traditional settlement process.

The ten propositions, which were prepared by Tim Kelly of the ITU Secretariat and are attached, highlight issues related to a reform of the accounting rates system and provide a structure for assessing the current situation and future trends. The Group might also consider some of the following additional questions:

• How realistic are the predictions of an imminent collapse of the accounting rate system? At what pace are traditional settlement arrangements likely to be replaced by new modes of service provision and settlements within the EU and among markets that have been, or are soon to be, opened to competition?

• How will these changes affect different regions in the world? North America? Latin America? Europe? Asia/Pacific? Africa?

• What is the particular impact on countries still developing their telecom infrastructure? How might a shift toward an interconnection-based approach (or a tariff component pricing model) benefit as well as disadvantage such countries? How can the process of restructuring of international pricing be better linked with the politically sensitive process of price reform at the national level?

• What will be the impact of introducing more flexibility into international settlements, i.e., departure from proportionate return of traffic and 50/50 division of revenues? What will be the impact in markets opened to competition? How will potential distortions of competition be addressed? What will be the consequences of more flexible settlement arrangements for countries with less developed infrastructures?

• How dynamic is the current pattern of international traffic flows? Might certain imbalances in traffic flows reverse in the near or medium term? Why? How does the relationship of collection and settlement charges affect traffic flows?

• What is the size and impact of the growth of Internet-based traffic? Is the impact of this traffic most significant in terms of international revenues? Or is the real opportunity for telecom operators to develop new rate structures for local access? What new metering mechanisms may be feasible or desirable to differentiate between conventional and new multimedia Internet applications?

• How will the emergence of an interconnection based regime in the EU and in other parts of the world for the provision of local, national, or intra-regional services affect arrangements for the provision of international services? How can a consistent approach to developing national interconnection charges best be achieved? How will potential competitive issues in determining interconnection charges be addressed? What should be the role of "benchmarks" at the national level in competitive markets? Are "benchmarks" an invitation to price fixing or a means to facilitate a transition to competitive markets? How can differing national experience in developing "benchmarks" be utilized to promote the process of rebalancing rates and prices at the national level and internationally?

• What will be the impact on the international settlement process of the successful conclusion of the WTO negotiations on basic services? To what extent will it accelerate change with respect to traditional international settlement mechanisms? How might it constrain the options of national regulators in structuring interconnection charges for international services? How can potential challenges and opportunities be best addressed?
  

Issue 2/ Appraisal of Approaches to Future International Settlement Arrangements

The main criticism of the accounting rate system has been that the level of tariffs -- and accounting rates -- do not reflect the cost of providing the international telephone services. The system has also been criticized for being discriminatory and lacking transparency. A number of adjustments and alternative approaches have been studied and proposed.

The OECD has for a number of years been proposing the replacement of traditional settlement arrangements by transparent, non-discriminatory call termination charges whereby the cost of delivery of a call within a country is the same irrespective of where the call originates (see document 25. As noted above, the countries of the European Union are expected to replace the current arrangements by 1 January 1998 with a facilities-based interconnection payments regime whereby the originating operators pays to terminate a call according to the cost of the facilities used. The ITU in its Study Group 3 and some of its regional tariff groups has for a number of years been developing guidelines for operators to establish accounting rates based on the cost of providing the service for which they are being used (see documents 8 and 28). These are being implemented but not quickly enough for some ITU Member States. Last December the FCC proposed to establish benchmarks for accounting rate levels based on tariffed component prices (see document 6).

• It is proposed that the Group compare and critique each of these different approaches to reforming the accounting rate system. Are there other possible approaches to the reform process? As a general matter, what are the strengths and weaknesses of each approach? What is the impact of each approach on prices, traffic flows and revenue flows ?

• With respect to the FCC's approach to developing benchmarks for international accounting rates, what are the strengths and weakness of the tariff component pricing ("TCP") model? What are the potential problems and concerns raised by its efforts to identify the costs of each component (international transmission, international switching, and national extension)? Does the FCC's model reflect the costs of maintaining an international network with multiple traffic streams or is it based only on estimating the costs of a single high volume traffic stream between the United States and particular destination countries? How should national extension prices be estimated given the fact that existing domestic tariffs are badly distorted and do not reflect the cost of providing services? Are there other techniques for identifying cost elements? Can the FCC's model be "multi-lateralized"? Through what process or procedures?

• With respect to the EU's efforts to move to an interconnection based regime, to what extent will traditional TEUREM-based settlement arrangements (doc. 26) be able to co-exist with an interconnection based regime after January 1, 1998? How will the transition process develop? What potential is there for concerns about unfair competition to develop in this process and how will they be addressed by the EU? How will the EU ensure equivalence in approach to establishing interconnection arrangements among EU member states and among EU member states and third countries?

• What issues are raised by other regional efforts such as in Asia (doc. 28) to establish benchmarks for international rates? What methodologies are being utilized to establish such benchmarks?

• Are there any areas of convergence between benchmark prices that can be derived from the various models discussed above? What is the significance of this convergence? Should benchmarks be utilized as a hard or a soft target for international accounting rates? What are the implications of prescribing benchmarks for international accounting rates at the national level?

• How can real movement toward more realistic international settlement rates be encouraged? Are there circumstances in which unilateral initiatives may be justified and appropriate?

• How can differences in national or regional approaches to establishing interconnection charges be reconciled? What are the respective roles of the ITU and the WTO in this process? Are there ad hoc dispute resolution mechanisms that can be effectively utilized?

• What role can ITU-T Study Group 3 play in this process?
  

Issue 3/ Concerns of Countries Developing their Telecom Infrastructure with the Impact of Current Trends and New Approaches to International Settlements Rates

Many developing countries depend on predictable hard currency revenues to implement long-term sector development plans. In these countries like many others, pricing international calls above-cost helps subsidize local services and network development. Imbalances in traffic flows and consequently revenue payments are a result of alternative calling procedures which are not of their making. (document 3 and 19).

These countries are under growing pressure to reduce accounting rate levels and therefore hard currency revenues. Rather than trying to maintain a system which is bound to change these countries will need to adapt. Internal prices for telecommunication services will need to be restructured in spite of political arguments to the contrary. New sources of investment will also need to be found.

The Group might consider some of the following issues of concern to the developing countries.

• Have previous reductions in accounting rate levels stimulated sufficient new traffic to keep revenues from international services constant?

• How can the political consequences of price restructuring best be addressed?

• What techniques can be developed to mitigate the consequences of rate reform at the national level? Differentiating between new and old subscribers? Permitting more pricing flexibility for local connections in the face of backlogs and waiting lists? Utilizing the availability of cellular tariffs as a upward ceiling for local fixed line rates in the face of shortages and backlogs? Establishing "new rate packages" combining lower international calling and higher local charges for selected groups of subscribers? Establishing "life line" rates? Encouraging private investment in public calling offices through franchising arrangements?

• How can targets for transition periods be best developed?

• What alternatives might there be to ensure a predictable inflow of revenues to permit countries to develop and implement long term network expansion plans? Is it possible to negotiate international settlements on a bulk basis providing assurances of international revenue flows over a period of time?

• Might it be possible to "earmark" a designated portion of international settlement payments on a transitional basis to ensure investment in new infrastructure and reduce incentives to divert such revenue flows to activities outside the telecom sector? Could such earmarked funds be matched by financing from outside sources such as the World Bank or from major international operators providing international services to such a country? Could "benchmarks" be utilized to identify the amount of such earmarked funds and to establish targets for the generation of domestic revenues to match reduced per minute revenue flows from international services?

• How can the practical experience of countries rebalancing their rates be best shared with other countries? What is the role of the ITU in disseminating this experience?

• How can the World Bank, the EBRD, BDT, and other development agencies best stimulate efforts to restructure pricing at the national level? What new initiatives and new resources may be required?
  

Issue 4/ Future Initiatives and The Way Forward

In light of the issues discussed above, and the discussions during the March meeting, the Group should focus on practical steps that can be taken to facilitate necessary adjustments in international settlement arrangements. Pressures for change are growing; and potential conflicts over the process of change are increasing in intensity. What can be done to facilitate the process of change and minimize unnecessary conflict as well as the adverse consequences for countries still developing their telecom infrastructure?

The ITU's Role as an "Information Pump"

• What could the ITU do to establish an easily accessible source of information -- an "information pump" -- for all those involved in restructuring of international settlement arrangements ? Could the ITU establish an "intelligence gathering and assessment capability" for national regulators and policy-makers who must address the problems of price reform on an urgent basis?

• What types of information are of most critical importance to international and national decision-makers? Is there a way to improve the quality of information about traffic flows -- about the percentages of traffic flowing within and outside the existing settlement process and estimated ranges of prices per minute over particular traffic streams?

• If an international market in switching and transmission circuits is beginning to develop, is there any way that information relating to such a market can be reported and presented in a better manner? What might be the ITU's role in this process?

• In particular, how can institutions such as the ITU, the FCC and the EU with access to data about traffic streams better integrate and share available data?

• How could benchmark data relating to interconnection charges be collected and made publicly available? What legitimate concerns might there be about the dissemination of proprietary information? What about concerns about ensuring a fully competitive price setting process?

• Would it be possible to graphically represent traffic flows that are outside the traditional settlements process on a computerized and updateable map that might be available on the ITU's Internet server and might dramatically document the need for national policy makers to move ahead with price reform at the national level?

• How can shifts in volumes and traffic balances be better monitored?

• Are there other key indicators of the change process? Information about call-back services? Calling cards? Pace of liberalization in various countries? The formation of business alliances and international marketing arrangements?
  

Critical Importance of Information about Price Reform at the National Level

• How can case studies relating to experience with respect to rate reform at the national level be standardized and made available? How can the Internet be utilized to generate an inward flow of information from national regulators and telecom operators as well as outward flows of information to such regulators and operators?

• What are the roles of the World Bank and the BDT in the rate restructuring process? How can their technical and financial assistance be better targeted to deal with issues of price reform and to create incentives for new investment in face of changes in international settlement rates?

• What are the roles of regional institutions such as the EBRD, the EU, the Asian and African development banks?
  

Need for Technical and Financial Assistance

• How can the EU and the FCC become more effective sources of technical assistance with respect to complex issues relating to price restructuring and interconnection?

• What role can international operators play as sources of technical assistance and financing -- through transitional payment arrangements (see Issue 3 above)".
  

Role of the WTO and Trade-related Institutions

• What is the role of the WTO and trade-related institutions at the national level in this process?
  

Other Initiatives and Role of the Group

• What other initiatives can usefully be initiated to facilitate the process of sectoral restructuring and the development of new international settlement arrangements?

• What role if any can the Group play in this process? Should the Group focus its energies primarily on identifying issues and raising questions for other groups to address? How can it best operate within the ITU framework? Could it function as an electronic committee of correspondence or open forum for the flow of ideas and information among various institutions and organizations involved in the process of restructuring the international settlements process?
  
  
  
  
  

Attachment 1

Ten propositions relating to the international telecommunication settlements system

(A Series of Propositions for Discussion by the Informal Expert Committee Prepared by Tim Kelly, Strategic Planning Unit, ITU)

1. The accounting rate system is in need of reform. In particular it needs to be adapted to a competitive market environment.
2. In competitive markets, it is likely that several different systems for cost and revenue-division may coexist. Carriers should be able to choose which one suits them best.
3. In a liberalized environment, the business for originating calls and the business for terminating calls are quite separate. A country which is opening its market should provide market access for both call origination and call termination.
4. Where a country has an incumbent (ex)-monopoly, the regulator should ensure that call termination is handled in a transparent, non-discriminatory and cost-based manner.
5. The settlement rate comprises three separate cost components: the international transmission link, the international gateway, and call termination (national extension). Reform of the accounting rate system will involve unbundling those three elements and allowing carriers to make economically rational build or buy decisions for each separate component.
6. Cost structures are asymmetric. Therefore there is no reason to expect or to insist that the costs for the three components will be the same in all countries. In particular, call termination costs may be expected to be higher in developing countries. Developing countries will need time and assistance to make the transition from the settlement rate regime which currently exists to a new cost-based system.
7. The cost of call termination should be distance insensitive. While there may be minor differences related to the distance from the international gateway, these could and should be averaged out.
8. The same price structure for call termination should be available to all on a non-discriminatory basis, irrespective of the origin or routing of a call. Discounts may be available for volume of calls, and there might be a competitive market for call termination. However, a company offering call termination should offer the same price schedule to all-comers, including companies with whom it has a financial relationship, in a non-discriminatory manner.
9. The main aim of the regulator should be to protect the customer not to protect the industry. To this end, regulators should ensure that the gap between the collection charge and the call termination charge should be minimized. The best way to achieve this is through competition. In a competitive marketplace, there should be no need for principles such as uniform termination charges or proportional return.
10. Settlements payment deficits are primarily the result of unbalanced traffic flows which are, in turn, the result of the adoption of alternative calling procedures. As such, settlement payment deficits are an inevitable outcome of the battle among carriers for market share. In the transition to a competitive environment, settlement payments can be expected to increase not to decrease.
    

Attachment 2

REFERENCE DOCUMENTS

(Most of these documents are available on the specially created website http://www.itu.int/intset/)

No

Title

Ref.

Date

Source, URL

11

OECD/GD

(95)19

1995

http://www.oecd.org/dsti/gd_docs/
s95_19e.html

12

http://www.itu.int/ti/publications/
#TRAFFIC96

13

Jul/Aug 1991

14

26-Oct-91

http://www.itu.int/intset/iic.htm

15

ECTRA

(96)61-E

21-Oct-96

16

Apr-91

17

Jan 1997

http://www.usagl.com/Our%20Company/
WhitePapers/AccountingRates.htm

18

16 Dec 96

19

20 Jan 1997

20

OFTEL Consultation Doc.

Dec 95

http://www.open.gov.uk/oftel/iddcalls.htm

21

FCC 96-37

31 Jan 1996

http://www.fcc.gov/Bureaus/
International/Orders/1996/fcc96037.txt

22

23

FCC 96-157

CC90-337

May 29, 1996

http://www.fcc.gov/Bureaus/
International Orders/ 1996/fcc.96157.txt

No

Title

Ref.

Date

Source, URL

24

OECD/GD(97)/4

http://www.oecd.org/dsti/
gd_docs/97_gd14.html

25

OECD

ICCP Series No. 36

1995

108 pages

26

ITU-T

Rec 300R

1995

http://www.itu.int/itudoc/itu-t/rec/
d/d300r_28881.html

27

ITU-T

SG3

Nov 1996

http://www.itu.int/intset/sgconsult/
consult.htm

28

Annex 3 of Report of Tariff Group for Asia and Oceania

May 1996

http://www.itu.int/intset/tas.htm

29

Dec 1996

http://www.open.gov.uk/oftel/
interac1.htm

30

ITU-T

Rec. 400R

Oct 1993

http://www.itu.int/itudoc/itu-t/rec/
d/d400r_28277.html

31

ITU-T

Rec.500R

Oct 1993

http://www.itu.int/itudoc/itu-t/rec/
d/d500r_24202.html

32

ITU-T

Rec.600R

Oct 1993

http://www.itu.int/itudoc/itu-t/rec/d/
d600r_24994.html

Footnotes

1) Prior settlement reduction agreements, to be implemented in this time frame, will have priority unless otherwise mutually agreed by both parties. Within the European Union, for instance, reductions are likely to be significantly greater than 5-10 per cent for terminating traffic.

2) ITU/TeleGeography Inc. "Direction of Traffic, 1996", chapter two.

3) http://www.itu.int/intset.

4) See ITU/TeleGeography Inc. "Direction of Traffic 1996" and "Direction of Traffic Database, 1983-95".

5) Though this note is intended to reflect the Chairman’s personal views, it has also attempted to reflect as much as possible the diversity of views within the Group about some very important issues with respect to which no common views within the Group could be easily reflected in the Group’s report and recommendations. Some well-focused views of various members of the Group are reflected herein: however, the Chairman has encouraged individual members to convey their own perspectives directly to the Secretary General. Such personal views are very likely to be stimulated by the Group’s report and recommendations and should be included in the Group’s overall report.

6) A copy of Issues for Discussion, a contribution by the Chairman and Secretariat of the Informal Expert Group, dated March 19, 1997, is included in this document.

7) See Attachment 2 to this paper.