Accounting rates and how they work1
One reason why 20 European countries came together in 1865 to form the
predecessor to the International Telecommunication Union (ITU) was the need to agree upon
a common method of dividing the revenues for international telegraph service between the
originating and destination countries. The methodology they developed was later carried
over to telephone services, albeit with some modifications. It is based on a dual price
system for each call, with independent prices for each route
For each international call, the originating carrier charges users one
price, known as the collection charge or tariff, but the cost to the originating carrier
of terminating the call is governed by a second price, known as the accounting rate. This
rate is negotiated between the originating and terminating carrier and is related,
although sometimes very loosely, to the carriers’ end-to-end facilities costs.
Accounting rates are commonly stated in US dollars or Special Drawing Rights
(SDRs) -- a
monetary unit based on a "basket" of major currencies -- per minute of traffic.
The originating and terminating carrier usually divide the accounting
rate 50/50 to determine the amount paid by the originating carrier to land its traffic;
that rate is known as the settlement rate. On any given route, one carrier pays
settlements to another carrier only to the extent that there is a traffic imbalance --
that is, one carrier has terminated a greater volume of telephone minutes than the other
carrier.
The dual price system for international telephony makes carriers’
net revenue for international service a function of their accounting rates as well as
their collection charges. If traffic is balanced on a route, the value of the accounting
rate is essentially irrelevant since no settlement is necessary and each carriers’
revenue will depend directly on its collection charge. However, where traffic is
imbalanced, the accounting rate may have a significant effect on the commercial options of
the two carriers. If a carrier has a significant traffic deficit, the settlement payments
which it must make to its foreign correspondent limit its ability to reduce its collection
charges.
Conversely, a carrier with a net traffic surplus has little incentive to
operate more efficiently or to reduce the accounting rate because of the net settlement
benefits it receives from the status quo. This is a major reason why the carriers which
have relatively lower collection charges, often due to competition from other carriers,
and a net traffic deficit are dissatisfied with the current accounting rate regime: It
tends to subsidize high cost monopoly carriers at the expense of lower cost carriers and
end-users from competitive regimes.
How does the accounting rate system work?
Simple example showing application of accounting rates to
international telecommunication services
Source: ITU/TeleGeography Inc.
1) The source
of this text is chapter 3, Box 3.1 of ITU/Telegeography Inc., "Direction of Traffic, 1996".
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