International Accounting Rate Reform in Telecommunications

Twenty European countries came together in 1865 to form an organisation, the predecessor to the International Telecommunications Union and to arrive at mechanisms and agree upon a methodology of distributing the revenues from the international telegraph service. The current accounting rate system is a modified version of the then developed methodology for the International telegraph. This international settlement regime based on accounting rates has long been under attack by economists, policy-makers in developed countries and international trade organisations. The ITU, the OECD, the FCC and other regulatory bodies are pursuing various initiatives to reform or replace the existing accounting rate system. These regulatory initiatives are aimed at reducing the current pricing distortions embedded in the accounting rate system. In the wake of the WTO agreement, a system of traffic compensation that is not ‘cost oriented’ is not only unsustainable, it is also in violation of the regulatory principles set out in the WTO reference paper. The FCC has been at the forefront of the move to decrease accounting rates. In August 1997, the FCC adopted “benchmark” accounting rates for different groups of countries, which it considered more closely related to the actual costs of providing international service between those countries and the US. The benchmark rates range from $0.15-$.23 per minute, and are far below those currently in practice, particularly for most of the developing countries which are sometimes in excess of $1.00 per minute. If implemented, these rates would significantly reduce international calling revenues of these countries. While the FCC obviously has no direct regulatory jurisdiction outside of the US, it has threatened to deny access to the US market to PTOs from other countries that do not reduce their accounting rates to the benchmark levels. While the future of the existing accounting rate system is being debated in regulatory circles, an increasing proportion of international traffic is bypassing this traditional system of compensation. Facilitated by the global trend towards the liberalisation of telecommunications markets, new technological means for bypassing the accounting rate system are also developing rapidly.