1. Cost Issues in International Settlements March 1998 DNTA David N. Townsend & Associates DNTA@dntownsend.com http://www.dntownsend.com/dnta/

2. Cost Issues in International Settlements DNTA 2 Cost component definition: the ITU framework ITU-T Recommendation D.140 defines three basic operational components (network elements) of international telephone termination service: 1.International transmission facilities 2.International switching facilities 3.National extension

3. Cost Issues in International Settlements DNTA 3 Cost component definition: the ITU framework 1. International transmission  Earth station  Submarine/terrestrial cable system  Cable landing station  International terrestrial radio links  National links between these facilities and the International Exchange

4. Cost Issues in International Settlements DNTA 4 Cost component definition: the ITU framework 2. International switching  International telecommunications maintenance and operations center  Telephone exchange  Associated transmission and signaling equipment

5. Cost Issues in International Settlements DNTA 5 Cost component definition: the ITU framework 3. National extension ITU definition: The national extension, used for international telephone traffic, consists of national exchanges, national transmission facilities and, if appropriate and identified under a bilateral or multilateral agreement, the local loop.

6. Cost Issues in International Settlements DNTA 6 Cost component definition: the ITU framework 3. National extension A. For combined international and national administrations: Trunk switches/national exchanges National transmission facilities Local loop, “if appropriate and identified under bi- lateral/multilateral agreement”

7. Cost Issues in International Settlements DNTA 7 Cost component definition: the ITU framework 3. National extension B. For separate international and national administrations: Payment by international administration to national administration on the basis of:  Per minute  Annual lump sum  Revenue/Cost sharing (e.g. percentage of international collections), or  Combination of any of above three

8. Cost Issues in International Settlements DNTA 8 The FCC methodology: Tariffs as surrogate for costs Two basic components to the FCC’s “Benchmark Order” (Docket 97280) on international settlement rates to be paid by U.S. carriers: 1. Development of cost estimates using a “Tariffed Components Price” (TCP) methodology; and 2.Development of “benchmark” settlement rates, based upon worldwide averages of TCP costs.

9. Cost Issues in International Settlements DNTA 9 The FCC methodology: Tariffs as surrogate for costs 1. International transmission  The FCC uses tariff prices for international leased circuits.  Formula = price for 2.048 Mbps circuit  (120 lines x 8,000 mins per line)  Results range from 0.7¢ per minute (Mexico) to 25.5¢ per minute (Kenya), with most countries’ results falling below 10¢ per minute.

10. Cost Issues in International Settlements DNTA 10 The FCC methodology: Tariffs as surrogate for costs 2. International switching  The FCC utilizes the published switching component of TEUREM (European) country settlement charges.  Countries are divided according to three categories of economic development.  Results range from 1.9¢ to 4.8¢ per minute.

11. Cost Issues in International Settlements DNTA 11 The FCC methodology: Tariffs as surrogate for costs 3. National extension  The FCC uses a complicated formula of weighted averages of local and in-country long distance tariffs.  Based upon a sample of incoming traffic to each country from the U.S.  The results range from a high of $25.2¢ per minute to a low of zero, for three countries that don’t charge for domestic calls on a per-minute basis.

12. Cost Issues in International Settlements DNTA 12 Problems with the benchmark approach  The term “benchmarks” is meant to describe average or target cost or price levels for an entire industry.  Benchmark prices do not necessarily reflect the actual cost experience of any given operator.  The goal is to establish an approximate industry-average cost, as an objective for all operators to move toward.

13. Cost Issues in International Settlements DNTA 13 Problems with the benchmark approach  Benchmarks assume that costs are, or should be, the same across widely different countries and economies. This is clearly not true.  Under the FCC policy, countries with above average costs must lose money on international settlements, while countries below can make a profit.

14. Cost Issues in International Settlements DNTA 14 Problems with the benchmark approach Examples: RussiaTCP = 35¢ per minute ThailandTCP = 17¢ per minute Benchmark for both = 19¢ per minute

15. Cost Issues in International Settlements DNTA 15 Problems with the FCC “TCP” for national extension costs  Improper use of non-discrimination principle  Below-cost national tariffs  Ignores fixed charges  Rebalancing effects

16. Cost Issues in International Settlements DNTA 16 Problems with the FCC “TCP” for national extension costs  No accounting for domestic access charges  Miscalculation of local tariffs  Incorrect assumptions about commercial costs  Rejecting Universal Service contributions

17. Cost Issues in International Settlements DNTA 17 Toward a theoretical basis for national extension costs Three components to economically “appropriate” national extension costs: 1.Incremental cost of national usage 2.Proportionate share of joint and common costs 3.Support for infrastructure development

18. Cost Issues in International Settlements DNTA 18 Toward a theoretical basis for national extension costs 1. Incremental national usage cost  National trunks  Tandem switches  Local switches Total recurring capital + operating costs, divided by combined total minutes of use in network.

19. Cost Issues in International Settlements DNTA 19 Toward a theoretical basis for national extension costs 2. Share of joint and common costs  Administration and commercial overhead expenses (excluding marketing costs)  Local loop recurring capital and operating costs (existing loops only)  Subtract monthly subscription revenues Divide result by total minutes of use in network.

20. Cost Issues in International Settlements DNTA 20 Toward a theoretical basis for national extension costs 3. Contribution to infrastructure (Universal Service)  Projected near-term annual network investment  Subtract projected annual connection charge revenues Divide result by total minutes of use in network. Yields an upper ceiling for contribution element.

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