The Commission has established various rules and policies regarding international settlement rates. The following is a general overview of some of those rules and policies.

Background

U.S. carriers negotiate operating agreements with foreign carriers that establish the terms for exchange of telephone traffic between countries. This agreement normally includes a rate for termination of each other’s traffic. In traditional arrangements, U.S. carriers negotiate “accounting rates” with the foreign carrier. One half of the accounting rate represents each carrier’s obligation to the other for termination of traffic and is termed a “settlement rate.” U.S. and foreign carriers charge each other to terminate the other’s traffic, but carriers only pay on the imbalance (i.e., the carriers credit each other for traffic exchanged and pay on the difference).

The increased competition that developed over the past several years on many U.S. international routes has been accompanied by lower settlement rates and calling prices to U.S. consumers. Commission policy seeks to further promote competition and lower calling rates by encouraging market-based, commercial arrangements between U.S. and foreign carriers for the exchange of traffic. However, Commission policy also, for many years, has provided for competitive safeguards to protect U.S. consumers against anticompetitive behavior should it occur on a U.S. international route.

International Settlements Policy

The Commission’s International Settlements Policy (ISP), originally known as the Uniform Settlements Policy, dates back to the 1930’s. The Commission formally adopted the policy into its rules in the 1980’s. The ISP was initially developed to prevent anticompetitive behavior on U.S.-international routes at a time when, in most countries, telephone service was provided by only one company – a monopoly provider. The Commission established the policy to create a unified bargaining position for U.S. carriers because foreign carriers with monopoly power could take advantage of the presence of multiple U.S. carriers by “whipsawing” or engaging in anticompetitive behavior. “Whipsawing” generally involves the abuse of market power by a foreign carrier or a combination a carriers within a foreign market that is intended to play U.S. carriers against one another in order to gain unduly favorable terms and benefits in arrangements for exchange of traffic.

The ISP contains three elements designed to ensure a competitive playing field among providers:

1. U.S. carriers all must be offered the same effective rate and same effective date (nondiscrimination). This means that if a foreign carrier offers a U.S. carrier a reduced settlement rate starting on a given date, it must offer that same rate to all U.S. carriers beginning on the same date.
   
2. U.S. carriers are entitled to a proportionate share of return U.S.-inbound traffic based upon their proportion of U.S.-outbound traffic. This means, for example, that if U.S. carrier traffic on the U.S.-France route accounts for 15% of the U.S. carrier’s traffic to a French carrier, that French carrier must send 15% of its calls to the U.S. through the U.S. carrier.
   
3. Settlement rates for U.S. inbound and outbound traffic are symmetrical (i.e., the accounting rate is divided 50-50 between the U.S. carrier and the foreign carrier).

While the policy is designed to address concerns of anticompetitive behavior, it has shortcomings in competitive markets. Specifically, the requirements of the ISP prevent U.S. carriers from negotiating flexible, individualized rates and terms that are responsive to changing market conditions and beneficial to U.S. customers. Thus, as explained below, the Commission, in its 2004 ISP Reform Order, reformed its rules to remove the ISP from benchmark-compliant routes, giving U.S. carriers greater flexibility to negotiate arrangements with foreign carriers on certain international routes.

1997 Benchmarks Policy

International settlement rates are the most important component of the marginal cost of international telephone service. While the ISP protected U.S. customers from the abuses of market power such as “whipsawing,” international calling rates remained high, in spite of the fact that technological advances and competition were causing U.S domestic rates to fall. These rates remained high because in many countries, competition was non-existent or insufficient to drive settlement rates down to cost-based levels. In an effort to drive settlement rates closer to cost, the Commission exercised its jurisdiction over U.S. carriers in 1997 and prohibited them from paying inappropriately high rates to foreign companies to the detriment of U.S. consumers. Specifically, the Commission established its benchmarks policy with the goal of reducing above-cost settlement rates paid by U.S. carriers to foreign carriers for the termination of international traffic, where market forces had not led to that result. The benchmarks policy requires U.S. carriers to negotiate settlement rates at or below benchmark levels set by the Commission in its 1997 Benchmarks Order. The Benchmarks Order divided countries into four groups based upon economic development levels as determined by information from the ITU and World Bank. As such, the following benchmark rates apply:

1. Upper Income - 15¢
2. Upper Middle Income - 19¢
3. Lower Middle Income - 19¢
4. Lower Income - 23¢

The Commission’s Benchmarks Policy has contributed to a decline in international settlement rates. Commission staff estimates U.S. consumer savings of up to $38 billion due to the decline in settlement rates from 1997 through 2002.

2004 International Settlements Policy Reform

In the 2004 ISP Reform Order, the Commission reformed its rules to remove the ISP from U.S.-international routes for which U.S. carriers have negotiated benchmark-compliant rates. (See, International Settlements Policy Reform: International Settlement Rates, IB Docket Nos. 02-324 and 96-21, First Report and Order, FCC 04-53 (rel. March 30, 2004)

Lifting the ISP on those routes allows U.S. carriers greater flexibility to negotiate arrangements with foreign carriers. The Commission found that doing so would encourage market-based arrangements between U.S. and foreign carriers that would further our long-standing policy goals of greater competition in the U.S.-international market and more cost-based rates for U.S. consumers. A carrier that seeks to add a route to the list of routes exempt from the ISP may do so by filing an effective accounting rate modification showing that a U.S. carrier has entered into a benchmark-compliant settlement rate agreement with a foreign carrier that possesses market power in the country at the foreign end of the U.S.-international route that is the subject of the request. (See 47 C.F.R. 64.1002(c) as amended in the 2004 ISP Reform Order. See also the current list of Foreign Carriers that are presumed to have market power.

The complete list of international routes that are currently exempt from the ISP.

The complete list of routes still subject to the international settlements policy (ISP).

Competitive Safeguards: Although the ISP Reform Order lifted the ISP for many of the international routes, the Commission also concluded that settlement rates on most routes continue to be above cost and there continues to exist the potential for anti-competitive conduct and other forms of market failure. Thus, the ISP Reform Order modified and clarified safeguards to prevent anticompetitive conduct by foreign carriers. The Commission maintained the “No Special Concessions Rule” that prohibits carriers from accepting special concessions from foreign carriers with market power and established processes for bringing allegations of anticompetitive harm before the Commission. The Commission also said that it would regard certain actions as indicia of potential anticompetitive conduct by foreign carriers, including, but not limited to: (1) increasing settlement rates above benchmarks; (2) establishing rate floors that are above previously negotiated rates, even if below benchmarks; or (3) threatening or carrying out circuit disruptions in order to achieve rate increases or changes to the terms and conditions of termination agreements. The Commission stated that each of these types of actions has been demonstrated as a means to disrupt normal commercial negotiations in order to force U.S. carriers to accept above-cost settlement rate increases that would be passed on to U.S. customers, and may require Commission action to protect U.S. customers.

Mobile Termination Rates: On October 26, 2004, the Commission released a Notice of Inquiry to develop a record on foreign mobile termination rates. The Notice of Inquiry seeks to further develop the Commission’s understanding of the possible effects of foreign mobile termination rates on U.S. customers and competition in the U.S.-international telecommunications services market. The Notice of Inquiry solicits comment on foreign mobile termination payment arrangements and on payment flows between carriers that terminate mobile calls in certain foreign countries. It also requests data and information on foreign mobile termination rates, on the actions taken by foreign regulators with respect to these rates, and on competitive concerns raised in the FCC’s ISP Reform proceeding. The Notice also seeks comment and information on the appropriate framework for evaluating whether foreign mobile termination rates are unreasonably high.

Reports

The International Bureau prepares various reports on accounting rates. Reports that are currently available online

Accounting Rate Modifications.,The following is a link to access accounting rate modifications.

Reports of U.S. Accounting Rates. The International Bureau prepares a monthly statistical report that contains U.S. accounting rates for various services for certain international points that are subject to the international settlements policy. This report is an Excel file that may be downloaded

Electronically File Your Accounting Rate Change.