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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) TELEFONICA LARGA DISTANCIA DE ) PUERTO RICO, INC. ) ) Review of Nondiscrimination Safeguards) File Nos. I-T-C-92-116-AL Imposed ) ) Application for Submarine Cable Landing ) S-C-L-93-001 License for the COLUMBUS II ) Cable System ) ) Section 214 Application to Provide Service) I-T-C-93-029 to Spain on the COLUMBUS II ) Cable System. ) MEMORANDUM OPINION AND ORDER Adopted: April 8, 1997 Released: May 2, 1997 By the Commission: Table of Contents Paragraphs I. INTRODUCTION 1 II. BACKGROUND A. Nondiscrimination Safeguards Imposed on TLD 3 B. Submarine Cable Landing License Application 7 III. DISCUSSION A. Nondiscrimination Safeguards Imposed on TLD 15 B. Submarine Cable Landing License Application 23 C. Section 214 Application for Service to Spain 34 IV. ORDERING CLAUSES 40 I. INTRODUCTION 1. In this Order, we review the nondiscrimination safeguards we imposed on Telefonica Larga Distancia de Puerto Rico, Inc. ("TLD") at the time we authorized Telefonica de Espa¤a, S.A. ("Telefonica de Espa¤a") to enter the U.S. market through the control of TLD. In our initial Order authorizing Telefonica de Espa¤a's acquisition of TLD, we committed to review the nondiscrimination safeguards to ensure their effectiveness. We find that the safeguards have been both adequate and necessary to guard against any unfair competitive advantages TLD might have through its affiliation with Telefonica de Espa¤a. Therefore, we do not amend these safeguards. 2. We also consider in this Order TLD's pending applications to acquire ownership interests in the COLUMBUS II Cable System ("COLUMBUS II") and for Section 214 authority to provide service to Spain on COLUMBUS II. We find that U.S. carriers are denied effective competitive opportunities to have ownership interests in cable facilities landing in Spain and to operate as facilities-based international service providers in Spain and therefore deny TLD's applications. II. BACKGROUND A. Nondiscrimination Safeguards Imposed on TLD 3. In 1992, the Commission authorized Telefonica Larga Distancia de Puerto Rico ("Former TLD") to assign its international Section 214 authorizations and submarine cable landing license interests to LD Acquisition Corporation ("LD"), which was affiliated with Telefonica de Espa¤a, the monopoly provider of domestic and international communications services in Spain. Upon completion of the transaction, LD changed its name to Telefonica Larga Distancia de Puerto Rico, Inc., which now provides facilities-based international switched services pursuant to Section 214 and the Submarine Cable Landing License Act. 4. At the time of the transfer, TLD acquired limited Section 214 authorization to provide service to several foreign points, including Spain, from Puerto Rico and the U.S. Virgin Islands. Such authorization to Spain involved the leasing of satellite capacity and the leasing of eight circuits on the COLUMBUS I Cable System ("COLUMBUS I") from CANTV (Venezuela). TLD also acquired ownership interests in the TCS-1 and TAINO-CARIB submarine cables, neither of which interconnected with cables under Spanish control or landing in Spain. 5. In our initial Order we determined that the public interest would be served by allowing Telefonica de Espa¤a, subject to certain nondiscrimination safeguards, to enter the U.S. market. Specifically, under the original TLD Order, TLD was required to: (1) seek additional Section 214 authority before adding or deleting circuits to certified points, or otherwise using the circuits listed in the initial Order in a manner other than specified originally; (2) file quarterly reports of revenue, number of messages, and number of minutes of both originating and terminating traffic for all international services between the United States and each country TLD is authorized to serve; (3) file cost support with its tariffs, which became effective on 45 days notice; (4) provide to competing U.S. carriers access on nondiscriminatory rates, terms and conditions to channels and communications circuits that may be made available by or to TLD; (5) not accept special concessions directly or indirectly from any foreign carrier or administration with respect to traffic or revenue flows between the United States and any country; (6) not route traffic to or from third countries for which it does not have authorization under Section 214; (7) not bargain for or agree to accept more than its proportionate share of return traffic from any country; (8) settle its international accounts in accordance with the nondiscriminatory accounting rate it is required to file with the Commission; (8) comply with any current and future Commission policies and requirements concerning international accounting and settlement rates; (9) file copies of any operating agreements entered into by TLD or its parent or affiliates that affect traffic or revenue flows to or from the United States within 30 days of its execution; and (10) operate as a separate corporate entity from Telefonica de Espa¤a and other affiliated foreign carriers, with separate books of account which are subject to audit by the Commission. 6. To ensure that the nondiscrimination safeguards remained tailored to effectively protect against the potential for abuse of market power by TLD or its affiliate, we committed to review our approach and adjust the nondiscrimination safeguards as necessary. B. Submarine Cable Landing License Application 7. On November 10, 1992, eight U.S. carriers, including TLD's predecessor, LD, filed joint Section 214 and submarine cable landing license applications for authority to construct and operate the COLUMBUS II and AMERICAS-1 Cable Systems. The joint applications were placed on public notice on November 18, 1992. On March 12, 1993, AT&T filed a letter requesting the Commission to bifurcate the proceeding and consider TLD's ownership interest apart from the other joint applicants. TLD opposed AT&T's request, and AT&T responded. On May 7, 1993, the Commission, in a Public Notice, requested additional comments on AT&T's request. MCI International, Inc. ("MCII") and TLD filed comments, and AT&T and TLD filed reply comments. 8. In its pleadings, AT&T argued that TLD's acquisition by Telefonica de Espa¤a presented complex and novel issues that require careful analysis, such as unfair and unequal international market access, potential market abuse by a foreign monopoly carrier, self- correspondency, above-cost accounting rates, and violation of reciprocity requirements of the Cable Landing License Act. AT&T also argued that granting the applications other than TLD's would avoid the risk of increases in the cable systems' costs that would accompany any delay. 9. MCII argued that if the Commission were to review the regulatory conditions imposed by the TLD Order or reciprocity issues such matters should be addressed in a separate proceeding. In response to both AT&T and MCII, TLD stated that bifurcation is unnecessary and would harm TLD in relation to its competitors. 10. On June 30, 1993, pursuant to the Cable Landing License Act and accompanying Executive Order, the State Department after coordination with the Department of Defense ("DoD") and the Department of Commerce's National Telecommunications and Information Administration ("NTIA"), stated that it approved TLD's ownership interests in COLUMBUS II and AMERICAS-1 cables on the condition that the Commission defer action on TLD's portions of the cable system designated for service to Spain and related Section 214 authority for providing service to Spain, pending further review by the State Department and the Commission. 11. The Common Carrier Bureau found that TLD's proposed ownership interest did raise complex and novel issues that required further Commission consideration. Thus, on July 26 and 28, 1993, the Common Carrier Bureau approved the Joint Applications for these cable systems for seven U.S. carriers but deferred action on TLD's application pending a determination by the full Commission. 12. In response to the Common Carrier Bureau's findings, TLD filed an Application for Review requesting that the Commission quickly grant its cable applications. AT&T opposed TLD's application for review on the grounds that it was procedurally defective. AT&T also argued that grant of additional facilities to TLD would not serve the public interest because Telefonica de Espa¤a, through TLD, would continue to receive more favorable treatment for providing service to U.S. customers than U.S. carriers are afforded in attempting to offer service to Spanish customers. AT&T contended that the nondiscrimination safeguards imposed in the TLD Order do not address this issue. AT&T argued that the Commission must require Spain to provide comparable market access to U.S. carriers before granting TLD authority to participate in the COLUMBUS II and AMERICAS-1 cables. 13. On April, 20, 1994, TLD filed a motion for expedited consideration of its cable applications, stating that the AMERICAS-1 and COLUMBUS II cables were scheduled to begin operation on September 1, 1994, and December 1, 1994, respectively and TLD needed a prompt grant of its applications to avoid irreparable harm. AT&T supported TLD's request for prompt action, but reiterated its request that the Commission deny TLD's applications for the COLUMBUS II and AMERICAS-1 Cable Systems. On June 27, 1994, in reply to AT&T, TLD submitted additional comments, including an economic analysis and letters from its customers, to support its position that grant of TLD's applications would greatly benefit both TLD and the residents of Puerto Rico. 14. On August 8, 1994, the Commission granted TLD's request for authority to participate in the construction, acquisition of capacity in, and operation of COLUMBUS II, but deferred ruling on TLD's request for authority to acquire capacity in COLUMBUS II for service to Spain until the views of the State Department were received. The Commission concluded that TLD's Application for Review was properly before it and found that the public interest would be served by granting all of the applications, except for TLD's cable facilities to Spain. The Commission rejected AT&T's argument that the Cable Landing License Act required a reciprocity determination in this instance because, except for the service to Spain, TLD's participation in the cables was a limited expansion of its authority granted in the TLD Order and is fully subject to the safeguards established in that order. III. DISCUSSION A. Nondiscrimination Safeguards Imposed on TLD 15. The primary issue presented in the TLD Order was whether the public interest would be served by approving Telefonica de Espa¤a's acquisition of LD. Our public interest analysis in the TLD Order focused mainly on the issue of whether LD's foreign carrier affiliation made it possible for LD to engage in anticompetitive conduct that could cause harm to other U.S. carriers. 16. In granting the original applications, we concluded that properly designed safeguards could protect against TLD acting in concert with Telefonica de Espa¤a or any other foreign carrier to discriminate against U.S. carriers in the terms and conditions of access to foreign markets for the origination and termination of U.S. international traffic. With regard to TLD's service to Spain, we determined that the facilities-based authorizations we approved to Spain were very limited and unlikely to serve as a vehicle for anticompetitive conduct. Moreover, we stated that the potential for anticompetitive harm to U.S. carriers was mitigated by the underlying facts surrounding the assignment application (i.e., a limited number of circuits were involved, traffic would originate only from Puerto Rico and the U.S. Virgin Islands, and no interconnected private line service would be involved). Other unique public interest factors also were critical to the decision such as the privatization of LD and the allocation of the proceeds of the sale of TLD to education reform in Puerto Rico. 17. Subsequent to the initial TLD authorization in 1992, we adopted U.S. market entry rules and safeguards in the Foreign Carrier Entry Order that are consistent with our original TLD Order. In the Foreign Carrier Entry Order, we determined that we will examine whether effective competitive opportunities ("ECO") exist for U.S. carriers in the destination markets of foreign carriers with market power seeking to enter the U.S. international services market under Section 214. Under our ECO analysis for facilities-based entry, we examine first the legal or de jure ability of U.S. carriers to enter the destination foreign country and provide international facilities based service. Next, we focus on the actual or de facto conditions of entry, including the terms and conditions of interconnection, competitive safeguards, and the regulatory framework. We focus on the overall effect of these four elements on the opportunities for viable operation as a facilities-based carrier in the foreign market. 18. If a carrier is not affiliated with a foreign carrier with market power we will not conduct an ECO analysis because such carriers lack the ability to discriminate against unaffiliated U.S. carriers. We also stated in the Foreign Carrier Entry Order that we will continue to consider other public interest factors that may weigh in favor of, or against, granting the application. These factors include the general significance of the proposed entry to the promotion of competition in the U.S. communications market, any national security, law enforcement, foreign policy, or trade concerns raised by the Executive Branch, and the presence of cost-based accounting rates. Thus, even if an affiliated market does not pass the ECO analysis, other countervailing reasons may exist for the Commission to grant an application. 19. In the Foreign Carrier Entry Order we also delineated and modified the safeguards we impose on foreign-affiliated carriers once we allow them to enter our markets. Those modifications are consistent with the safeguards we imposed on TLD in 1992. We note, however, two changes that we made in the Foreign Carrier Entry Order that impact our regulation of TLD. TLD is subject to these regulatory requirements because, among other things, they were adopted in a proceeding of general applicability. First, in the Foreign Carrier Entry Order we made changes in the tariffing requirements for foreign-affiliated carriers that supersede the original tariffing requirements imposed on TLD. In the original TLD Order we required TLD to file cost support with its tariffs with those tariffs becoming effective on 45 days notice. In the Foreign Carrier Entry Order we found that the benefits derived from requiring dominant foreign-affiliated carriers to file cost support with their tariffs are as a general rule outweighed by the burden imposed by this filing requirement. Moreover, competition in the market for international services is a better constraint on unreasonable prices than our review of a foreign carrier's cost support showing. In addition, we found that a 14-day notice period, as opposed to a 45-day notice period, is sufficient to permit interested parties and the Commission to assess the lawfulness of any filed tariffs. Thus, as of the effective date of the Foreign Carrier Entry Order, on those routes where TLD is regulated as dominant it was no longer required to file cost support with its tariffs, and TLD's notice period for those routes was shortened from 45 to 14 days. 20. Second, in the Foreign Carrier Entry Order we adopted a new requirement that all foreign-affiliated carriers maintain complete records of the provisioning and maintenance of network facilities and services they procure from a foreign carrier affiliate. We found this requirement would constitute a minor burden and would be useful to the Commission in guarding against improper discrimination. TLD, as a foreign-affiliated carrier, is now subject to this recordkeeping requirement on dominant routes. 21. To date, there have been no formal complaints filed by U.S. carriers alleging that TLD has engaged in anticompetitive behavior to the detriment of unaffiliated U.S. carriers on these authorized routes. These safeguards, therefore, appear to have been both adequate and necessary to guard against any unfair competitive advantages TLD might have through its affiliation with Telefonica de Espa¤a. Moreover, with the two modifications discussed above, the original TLD Order's safeguards are consistent with the safeguards we imposed in our Foreign Carrier Entry Order. Thus, we find that the nondiscrimination safeguards we imposed on the original TLD applications do not need to be further modified at this time. 22. We are, however, quite concerned about the persistence of high accounting rates maintained by Telefonica de Espa¤a in Spain and its affiliates in Latin America. The Commission has long supported cost-based, nondiscriminatory and transparent settlement rates for communications services between the United States and other countries. As of April 1, 1997, Spain's settlement rate with U.S. carriers for international message telephone service is 0.22 SDR (30.5›). In comparison, Germany's rate is 0.08 SDR (11.0›) and Sweden's rate is 0.06 SDR (8.5›). Thus, Spain's rate is approximately 175 percent higher than Germany's rate and 262 percent higher than Sweden's rate. The rates of Telefonica de Espa¤a's affiliates in Latin America are also high. For example, the rate to Argentina is 46.0› and the rate to Peru is 60.0›. In comparison, the current benchmark settlement range in Latin America is $.39-$.60. Given these high accounting rates, we find that, if, in the future we adopt accounting rate conditions in a proceeding of general applicability, TLD could be subject to such conditions. B. Submarine Cable Landing License Application 23. The Cable Landing License Act gives the President of the United States broad discretion to grant, withhold, condition or revoke cable landing licenses if the President determines "after due notice and hearing that such action will assist in securing rights for the landing or operation of cables in foreign countries or of maintaining the rights or interests of the United States or of its citizens in foreign countries . . . or will promote the security of the United States, or may grant such license upon such terms as shall be necessary to assure just and reasonable rates and service in the operation and use of cables so licensed . . . ." By Executive Order, the Commission has been delegated the actual responsibility for issuing cable landing licenses. This delegated authority is subject to the proviso, however, that "no such license shall be granted or revoked by the Commission except after obtaining approval of the Secretary of State and such advice from any executive department or establishment of the Government as the Commission may deem necessary." 24. The State Department, after coordinating with DoD, NTIA, and the Office of U.S. Trade Representative sent a letter stating that TLD's application requesting ownership interests in the COLUMBUS II cable designated for service to Spain should not be granted at this time. Pursuant to the Cable Landing License Act, the State Department determined that such a grant "would give Telefonica de Espa¤a ownership interests at both ends of the cable, with monopoly control at the Spanish end. In this situation, grant of the applications would be inconsistent with the rights and interests of U.S. companies that desire to compete in the Spanish telecommunications market." The State Department also stated, however, that "[a]t such time as U.S. companies are permitted to land, own, and operate submarine cable facilities for the purpose of providing basic telecommunications service in Spain, the Department would be willing to reconsider the issue." 25. We agree that this application should not be granted at this time. As stated above, the Commission has been delegated the authority under the Cable Landing License Act to issue cable landing licenses. In analyzing applications under the Cable Landing License Act, we consider whether granting a license will assist in securing the rights for U.S. companies to land or operate cables in foreign countries. 26. In the Foreign Carrier Entry Order, we explained that as part of our public interest analysis under Section 214 of the Communications Act of 1934, as amended ("Act") we examine whether effective competitive opportunities exist for U.S. carriers to provide like services in the destination markets of foreign carriers seeking to enter the U.S. international services market through certain affiliations with a new or existing U.S. carrier. Similarly, in deciding whether it is in the public interest to permit foreign investment in licensees of common carrier radio facilities in excess of the 25 percent benchmark contained in Section 310(b)(4) of Act, we examine whether the foreign country offers effective competitive opportunities to U.S. entities to acquire similar ownership interests in like radio facilities licensees. In the Foreign Carrier Entry Order we did not address our market entry rules for applications under the Cable Landing License Act. This order, however, gives us the opportunity to explain our historical approach to those types of applications, and how it relates to the effective competitive opportunities analysis adopted in the Foreign Carrier Entry Order. 27. One of our goals in adopting our approach in the Foreign Carrier Entry Orderwas to promote effective competition in the U.S. telecommunications market by encouraging foreign governments to open their telecommunications markets. Similarly, as outlined in the FTCC Order, one of Congress's purposes in enacting Section 2 of the Cable Landing License Act was to ensure that U.S. companies could have ownership and operation rights in the foreign country in the same manner as requested by the foreign company. Thus, we have applied on a case-by-case basis an analysis similar to an effective competitive opportunities analysis to applications under the Cable Landing License Act. We emphasize, however, that our analysis as it applies to applications under the Cable Landing License Act is similar but not identical to our analysis under Sections 214 and 310(b)(4) of the Act. 28. In examining the application of a foreign carrier or its affiliates to land and operate a submarine cable system under the Cable Landing License Act, we determine whether the applicant or its affiliate has market power in the destination market of the relevant cable. The Foreign Carrier Entry Order defines "market power" as "the ability of the carrier to act anticompetitively against unaffiliated U.S. carriers through the control of bottleneck services or facilities on the foreign end." "Bottleneck services or facilities" are "those that are necessary for the provision of international services, including inter-city or local access facilities on the foreign end." 29. If we determine that an applicant does have market power in the destination market, we examine the legal, or de jure, ability of U.S. carriers to have ownership interests in submarine cables landing in that market. If no explicit legal restrictions on ownership exist, we will examine other factors to determine whether U.S. carriers have the practical or de factoability to have ownership interests in cable facilities in the destination market(s). 30. Finally, we will determine whether there are other factors that weigh in favor of, or against, granting this application under the Cable Landing License Act. We will make this determination whether or not the applicant or its affiliate has market power in the destination market of the relevant cable. 31. TLD, which is affiliated with Telefonica de Espa¤a, is applying to have ownership interests as a licensee in a submarine cable landing in both the United States and its home market, Spain. The ownership interests consist of three minimum investment units ("MIUs") from the United States to Spain to be jointly owned with Telefonica de Espa¤a. 32. As discussed above, at present, U.S. carriers are forbidden from having ownership interests in the Spanish end of international submarine cable systems. If we grant this application, Telefonica de Espa¤a, through its control of TLD, will have ownership interests at both ends of the cable with monopoly control at the Spanish end. No equivalent rights exist for U.S. carriers to have ownership interests in submarine cables in Spain. The Spanish market, therefore, does not pass the first prong of our analysis that looks at the legal, or de jure, ability of U.S. carriers to have ownership interests in submarine cables landing in Spain. 33. Even though the Spanish market does not pass the first prong of our analysis, we will examine whether other countervailing reasons exist for us to grant this application. In its comments, TLD argued, among other things, that Puerto Rican consumers could enjoy considerable public interest benefits, including economic benefits, if TLD were to gain access to new facilities such as COLUMBUS II. We do not believe that TLD has demonstrated that its ownership in COLUMBUS II facilities serving Spain, a single destination point of the cable, would yield significant economic benefits to Puerto Rican consumers that would outweigh our concerns about the lack of effective competitive opportunities for U.S. carriers to have ownership and operation rights in the Spanish market. Therefore, we do not find sufficient countervailing reasons for us to grant this application. C. Section 214 Application for Service to Spain 34. In addition to applying for a submarine cable landing license TLD also proposes to provide service between the United States and Spain. Therefore, under Section 214 we will examine this application in light of our ruling in the Foreign Carrier Entry Order. 35. As an initial matter, we note that in the Foreign Carrier Entry Order we stated that, although the analysis we adopted would not apply to existing Section 214 authorizations to provide international service held by foreign-affiliated carriers, all such carriers would have their future or pending applications subject to the standards adopted in the Foreign Carrier Entry Order. Because TLD's Section 214 application was pending at the time of our ruling in the Foreign Carrier Entry Order, TLD's application is now subject to the analysis adopted in the Foreign Carrier Entry Order. 36. In performing our ECO analysis on TLD's Section 214 application, we must examine the legal, or de jure, ability of U.S. carriers to offer international message telephone service ("IMTS") in Spain. If no explicit legal restrictions on entry exist, we must examine the other factors of the ECO analysis to determine whether carriers have the practical or de factoability to enter. Finally, we must determine whether there are other public interest factors that weigh in favor of, or against, granting the application. 37. At present, U.S. carriers are barred from providing IMTS service to Spanish customers. If we were to grant this application Telefonica de Espa¤a would be permitted to provide service to U.S. customers using this facility. No equivalent right exists for U.S. carriers to enter the communications market in Spain. The Spanish market, therefore, does not pass the first prong of our ECO analysis that looks at the legal, or de jure, ability of U.S. carriers to enter the foreign market. 38. Even though the Spanish market does not pass our ECO analysis, under the analysis adopted in the Foreign Carrier Entry Order we must determine whether other countervailing reasons exist for us to grant this application. As stated above, TLD has argued that granting this application would serve the public interest. We find, however, that our concerns about the inability of U.S. carriers to enter the communications market in Spain outweigh the potential public interest benefits from granting this application. 39. We are also very concerned about Telefonica de Espa¤a's high accounting rates for traffic between the United States and Spain. As discussed above, these rates are much higher than other European countries' rates. In addition, Telefonica de Espa¤a's affiliates' rates to the United States are also quite high. We declined in the Foreign Carrier Entry Order to make cost-based accounting rates a precondition to entry. Instead, we determined that we would consider the presence of cost-based accounting rates as part of our overall public interest analysis. Accordingly, we view the above-cost accounting rate of Telefonica de Espa¤a as another negative factor in our overall public interest analysis. Therefore, under our Section 214 public interest analysis, we deny TLD's Section 214 application to provide service to Spain using circuits on COLUMBUS II. IV. ORDERING CLAUSES 40. IT IS ORDERED that File No. S-C-L-93-001 for TLD's proposed ownership interests in the COLUMBUS II Cable System for circuits to Spain is DENIED pursuant to the Submarine Cable Landing License Act, 47 U.S.C.  34-39 (1994) and Executive Order 10530, reprinted as amended in 3 U.S.C.A.  301 at 1052 (1985). 41. IT IS FURTHER ORDERED that File No. I-T-C-93-029 for TLD's proposed Section 214 authorization for service to Spain on the COLUMBUS II Cable System is DENIED pursuant to the Communications Act of 1934, as amended, 47 U.S.C.  214. 42. IT IS FURTHER ORDERED that any payments that TLD has made with regard to the capacity held in reserve for TLD in the COLUMBUS II Cable System for service to Spain shall be refunded to TLD with interest, and without financial penalties as provided in Telefonica Larga Distancia de Puerto Rico, Inc., 9 FCC Rcd 4041 at  25 (1994). FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary