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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 ) ) IB Docket No. 96-261 International Settlement Rates ) REPORT AND ORDER Adopted: August 7, 1997 Released: August 18, 1997 By the Commission: Chairman Hundt and Commissioner Ness issuing separate statements. Topic Paragraph Number I. Introduction. . . . . . . . . . . . . . . . . . . . . . . 1 II. Discussion. . . . . . . . . . . . . . . . . . . . . . . . 29 A. Benchmarks . . . . . . . . . . . . . . . . . . . . . 40 1. Tariffed Components Price Methodology . . . . . 45 2. Benchmarks Based on Tariffed Components Prices. 90 3. Safeguard in Cases of Market Distortion . . . 121 B. Implementation of Benchmarks . . . . . . . . . . . 136 1. Impact of Benchmark Settlement Rates on Developing Countries 137 2. Transition to Benchmarks. . . . . . . . . . . 152 3. Enforcement of Benchmarks . . . . . . . . . . 177 C. Section 214 Authorization Conditions . . . . . . . 191 1. Condition for Service to Affiliated Markets . 195 2. Condition for Provision of Switched Services over Private Lines232 3. GATS Obligations. . . . . . . . . . . . . . . .260 D. Effect of Settlement Rate Savings on U.S. Consumers.268 E. Legal Basis For Establishing Benchmark Settlement Rates275 1. The Communications Act and Relevant Case Law. .276 a. Jurisdiction Over Foreign Communication that Originates or Terminates in the United States. . . . . .276 b. Application of Section 201's "Just and Reasonable" Requirement to Accounting Rates. . . . . .282 c. Section 205 Authority to Set Settlement Rate Benchmarks287 d. Benchmarks Proceeding Satisfies Section 205's Procedural Requirements . . . . . . . . . . . . . . .299 e. Contractual Nature of Settlement Rates Does Not Insulate Them from Requirements of the Act. . . . .302 2. International Regulations . . . . . . . . . . .309 III. Conclusion. . . . . . . . . . . . . . . . . . . . . . . .315 IV. Procedural Issues . . . . . . . . . . . . . . . . . . . .316 A. Final Regulatory Flexibility Analysis. . . . . . . .316 B. Paperwork Reduction Act of 1995 Analysis . . . . . .326 V. Ordering Clauses. . . . . . . . . . . . . . . . . . . . .327 Appendix A (List of Commenters) Appendix B (Final Rules) Appendix C (Classification of Economies) Appendix D (Tariffed Component Prices) Appendix E (Tariffed Components Price Methodology) I. Introduction 1. In this Order, we establish benchmarks that will govern the international settlement rates that U.S. carriers may pay foreign carriers to terminate international traffic originating in the United States. The action we take in this Order, along with our recent Accounting Rate Flexibility Order and our proceedings implementing the World Trade Organization ("WTO") Basic Telecom Agreement, substantially completes our plan to restructure the economics of the market for U.S. international telecommunications services. This restructuring will promote the low cost, technologically innovative interconnectivity serving all the world's consumers that should be the hallmark of a Global Information Infrastructure. 2. The benchmark settlement rates we adopt in this Order are necessary because, under the current international accounting rate system, the settlement rates U.S. carriers pay foreign carriers to terminate U.S.-originated traffic are in most cases substantially above the costs foreign carriers incur to terminate that traffic. The significant margins on international termination fees that now prevail cause U.S. consumers to pay artificially high prices for international services and discourage foreign carriers from introducing effective competition and cost-based pricing for all telecommunications services. Moreover, the above-cost margins in settlement rates can be used to finance strategies that create competitive distortions in the market for U.S. international services. 3. The potential for competitive distortions in the U.S. market for international services is a pressing concern as we move forward with implementing the commitments the United States made in the WTO Basic Telecom Agreement reached on February 15, 1997. The Commission has proposed new rules to implement these commitments. These commitments, and our proposed rules, will make it much easier for foreign carriers to enter and invest in all U.S. markets for basic telecommunications services. The benchmarks policy we adopt here reduces the possibility that this more open entry could create competitive distortions in the U.S. market. This approach is fully consistent with our philosophy of using regulatory measures to control the pricing of interconnection by carriers with control over bottleneck facilities. 4. The combination of freer entry into the U.S. market, the market opening commitments of other countries in the WTO Basic Telecom Agreement, and the introduction of our benchmark settlement rates should provide incentives conducive to the introduction of alternative arrangements to the traditional accounting rate system for the termination of international traffic. The Commission has already adopted an Accounting Rate Flexibility Orderthat sets forth the conditions under which U.S. carriers may deviate from the requirements of the Commission's International Settlements Policy ("ISP"). The rules we adopted in the Accounting Rate Flexibility Order should allow carriers to create alternative arrangements for pricing and organizing the supply of international services. 5. This Order addresses the urgent need for reform of the traditional settlements system on the many routes where more flexible cost-oriented alternative arrangements are not yet contemplated. We conclude that we must reduce the settlement rates paid by carriers in the United States in order to fulfill our duty to ensure reasonable rates for U.S. consumers. We also conclude we would promote competition in the United States market by using settlement rate benchmarks to remedy anticompetitive conditions in the international marketplace. We emphasize, however, that we would prefer to achieve our goals through a multilateral agreement on accounting rate reform. If, in the future, there is multilateral consensus on a substantially equivalent international measure to achieve our goals of a more cost-based and non-discriminatory system of settlements in a timely manner, we will waive enforcement of the benchmark settlement rates. This was precisely our approach when we adopted the effective competitive opportunities ("ECO") test to guide conditions for allowing increased foreign investment. When the WTO agreement provided substantially comparable conditions, the Commission proposed to abandon the ECO test for WTO Member countries. 6. Our action in this Order comes after years of efforts by the U.S. Government to achieve cost-based termination fees internationally by means of discussion and negotiation bilaterally and multilaterally at the International Telecommunication Union ("ITU"), the Organization for Economic Cooperation and Development ("OECD"), and other international organizations. We will continue to work in the ITU and other international organizations to achieve such a multilateral agreement. This Order does not take effect until January 1, 1998 -- the same day as the WTO Basic Telecom Agreement. The first target period for U.S. carriers to negotiate rates at or below the settlement rate benchmarks, however, is not until January 1, 1999. We encourage other countries that have expressed interest in an international agreement on reforming the accounting rate system to continue to work with the United States toward achieving that goal. 7. We believe that accounting rate reform is necessary and will benefit consumers and carriers in all countries, including businesses and others who rely on global telecommunications services. Thus, contrary to the views of some commenters, it is not the case that accounting rate reform will benefit consumers in the United States at the expense of carriers in overseas markets. Accounting rate reform will allow consumers in all countries to receive higher quality service, more service options, and lower rates as accounting rates are reduced to a more cost-based level. Accounting rate reform will also benefit every carrier that provides international services by stimulating growth of those services. The current accounting rate system suppresses global demand by contributing to inflated International Message Telephone Service ("IMTS") calling prices. As settlement rates, and in turn calling prices, are reduced, demand for international services will be stimulated. 8. It is clear to us that accounting rate reform is essential if carriers that currently benefit from and rely on artificially high settlement rates are to remain viable. As the Secretary- General of the ITU stated recently, the global telecommunications market has undergone changes that will be "little short of revolutionary" for the future of the international accounting rate system. In this new market environment, carriers who wish to rely on high settlement rates will likely find that market forces will create incentives for bypass of their high-cost routes. 9. The WTO Basic Telecom Agreement reached on February 15, 1997 will have profound effects on the accounting rate system. Pursuant to that agreement, 69 countries, covering 95 percent of the global market for basic telecommunications services, have agreed to permit competition from foreign suppliers of basic telecommunications services. In addition, 59 of these countries have committed to enforce fair rules of competition for basic telecommunications services by subscribing to the detailed, procompetitive rules contained in the Reference Paper on Regulatory Principles negotiated as part of the WTO Basic Telecom Agreement. As a result, most of the world's major trading nations have made binding commitments to transition rapidly from monopoly provision of basic telecommunications services to open entry and procompetitive regulation of these services. 10. The WTO Basic Telecom Agreement will fundamentally change the nature of relations between international telecommunications carriers. In many markets, the accounting rate system will become largely irrelevant as alternative means for routing traffic become the norm. The traditional bilateral correspondent relationships between national monopoly carriers are breaking down as countries open their markets to competition. For example, in markets that permit competition in international services, carriers will be able to provide end-to-end service without the use of accounting rates. In addition, under the WTO Basic Telecom Agreement, more countries will allow switched traffic to flow over private lines, outside the settlements system. At a minimum, the increased competition in the global IMTS market that will result from this trade agreement will exert downward pressure on accounting rates in competitive markets as new entrants compete to terminate foreign traffic. 11. As a result of these competitive pressures, an increasing amount of international traffic will migrate from the traditional accounting rate system to least cost routes through the use of practices such as hubbing, refile, and reorigination. These practices are all examples of routing bilateral traffic through a third country to take advantage of a lower accounting rate between the third country and the destination country. As we observed in the Notice, such least- cost routing practices already have begun to erode the stability of the accounting rate system. Least-cost traffic routing is an economically rational response to inflated settlement rates, and will continue as long as carriers maintain excessive settlement rates. Carriers are also developing technological means other than these least-cost routing practices to bypass the accounting rate system. For example, internet telephony has the potential to be a significant alternative to the accounting rate system. Calls made over the internet are not subject to the accounting rate system, and as a result, we anticipate that charges for internet telephony will be substantially closer to the actual cost of providing service, and much lower than most collection rates for international service. 12. Above-cost settlement rates pose particular problems for the United States as the largest and most competitive market in the world for facilities-based and resale domestic and international long distance services. Because rates in the United States are lower than in many countries, a substantial amount of world traffic is routed through the United States. The traditional settlement rate system assumes that a customer's physical location determines the place of origin of an international call, with the carrier in the originating country paying a settlement rate to the carrier in the terminating country. However, service innovations such as callback allow customers to change the originating country for settlement purposes. The result is that many more calls are originated for settlement purposes from countries like the United States with vigorous retail and wholesale markets than in monopoly markets that lack similar competition. These traffic routing patterns will only be exacerbated as countries implement their market access commitments under the WTO Basic Telecom Agreement. 13. Partly as a result of these traffic routing patterns, the U.S. settlement deficit continues to grow steeply. In 1996, the U.S. settlement deficit totalled $5.4 billion, double what it was in 1990. Conservative estimates put at least seventy percent of that total as an above-cost subsidy from U.S. consumers to foreign carriers. It is this subsidy paid by U.S. consumers which is the focus of our concern, not the total settlements deficit. Our goal is to move to a nondiscriminatory and more cost-based rate structure for the termination of global telecommunications services so that market-generated shifts in the traffic balance do not continue to exacerbate the level of the U.S. net settlements deficit. We do not believe it benefits consumers to arbitrarily restrict a carrier's ability to route traffic in the most economically efficient manner or to restrict the development of new technologies and new routing methods. 14. For all these reasons, we find that the global telecommunications market is changing in ways that cannot accommodate the traditional international accounting rate system. We therefore remain committed to achieving accounting rate reform, despite the opposition in the record from many foreign carriers and some governments. We recognize, moreover, that the liberalizing market trends that are undermining the accounting rate system will also make our settlement rate benchmarks moot for competitive countries and carriers. We have already seen that in markets where there is robust competition, settlement rates are usually substantially lower than in monopoly markets. We anticipate that with the increasing market liberalization that will result from implementation of countries' commitments in the WTO Basic Telecom Agreement, settlement rates between the United States and many countries will rapidly fall below our settlement rate benchmarks. Nonetheless, the benchmarks are necessary because many countries still will not be open to competition, and in those that have introduced competition, efficient pricing structures take time to develop. 15. As the Commission observed in the Notice, there has been substantial agreement in multilateral organizations for several years on the need to reform the accounting rate system. For example, both the OECD and the ITU have been studying accounting rate reform, with the emphasis in both organizations on the principles of transparency, nondiscrimination, and cost- based pricing. The Inter-American Telecommunications Commission ("CITEL") recently formed an ad hoc working group to study the issue of accounting rate reform and many other regional organizations have also committed resources and time to study this issue. 16. Many countries have also demonstrated a commitment to achieving accounting rate reform. For example, the United Kingdom and New Zealand recently joined the United States in improving the transparency of the accounting rate system by publishing their accounting rates. It is expected that the European Union countries will eliminate entirely accounting rates for intra- European calls after January 1, 1998, and rely instead on a system of call termination charges based on domestic interconnection rates. The commitment of many countries to accounting rate reform is reflected in the comments filed in this proceeding. Most commenters acknowledge the need for accounting rate reform, even if they disagree with our approach. 17. A significant multilateral achievement in the realm of accounting rate reform is ITU-T Recommendation D.140, which was adopted by the ITU Telecommunications Standardization Sector Study Group 3 in 1992. ITU-T Recommendation D.140 calls for carriers to adopt nondiscriminatory, cost-oriented, and transparent accounting rates within five years. Adoption of ITU-T Recommendation D.140 was an important step forward in accounting rate reform in terms of a multilateral commitment to a set of guiding principles. However, progress on the actual implementation of those principles has been slow, at best. We are committed to the principle of cost-oriented settlement rates adopted in Recommendation D.140 and to achieving implementation of that principle as expeditiously as possible. Our settlement rate benchmarks are consistent with the directive in ITU-T Recommendation D.140 to achieve cost-oriented rates and represent substantial progress in implementing that directive in the United States. As NTIA states, our benchmarks policy "represent[s] a constructive means of implementing the primary goals of ITU-T Recommendation D.140 -- moving accounting rates closer to cost in an expeditious manner, consistent with transparency and non-discrimination." 18. Many commenters urge the Commission to work through multilateral organizations, especially the ITU, to achieve accounting rate reform. We have contributed actively to the work of multilateral organizations and agree that we should continue to work vigorously with these organizations to pursue accounting rate reform. We do not, however, agree that our contribution to multilateral efforts should be our exclusive means of addressing accounting rate reform. As explained below, we believe we must take action in order to fulfill our statutory mandate to ensure U.S. consumers receive telecommunications services at reasonable rates and to address the potential for competitive distortions in the U.S. market for international services as we move forward with implementation of the commitments made by the United States in the WTO Basic Telecom Agreement. Thus, while we remain committed to pursuing accounting rate reform in multilateral organizations, we must also take action domestically in the interim to reduce settlement rates to a more cost-based level. The action we take here will be concurrent with our continued efforts to achieve reform of the accounting rate system in the ITU and other multilateral organizations. 19. The benchmark rates we adopt in this Order are based on foreign carriers' publicly available tariff rates and information published by the ITU. We categorize countries primarily by their level of economic development, as defined by a World Bank and ITU classification scheme. For each category, the benchmark is based on an average of the tariff rates and other data for each country in the category. The three benchmarks we adopt are: $0.15 per minute for upper income countries; $0.19 per minute for upper middle income and lower middle income countries; and $0.23 per minute for lower income countries. Even though these benchmark settlement rates will continue to exceed, usually substantially, any reasonable estimate of the level of foreign carriers' relevant costs of providing international termination service, they will nonetheless substantially reduce the excess in current settlement rates in a manner that treats foreign carriers fairly. 20. We will require that U.S. carriers negotiate with their foreign correspondents settlement rates at or below the appropriate benchmark according to a schedule of target reductions. If U.S. carriers fail to achieve progress in negotiating settlement rates at or below the benchmarks, we will take appropriate enforcement measures to ensure that progress is made and that, ultimately, U.S. carriers achieve rates that comply with the benchmarks. 21. While we are committed to achieving more cost-based settlement rates, we also recognize that an immediate reduction of settlement rates to the benchmark levels could result in undue disruption of foreign carriers' operations and their correspondent relations with U.S. carriers. Disruption of either U.S. carriers' or foreign carriers' networks would not be in the public interest. The policies we adopt here thus take into account the need to ensure a smooth transition from current settlement rates to our benchmarks. 22. To provide an opportunity for all carriers to make appropriate adjustments to enable them to move to more cost-based settlement rates, we adopt five transition periods for U.S. carriers to negotiate settlement rates at or below the benchmarks. The transition periods are based on the same categories used to calculate settlement rate benchmarks, with an additional category for countries with teledensity, or lines per one hundred inhabitants, less than one. We will require that U.S. carriers negotiate settlement rates with foreign carriers according to the following transition schedule: within one year of the effective date of this Order with carriers in upper income countries; within two years with carriers in upper middle income countries; within three years with carriers in lower middle income countries; within four years with carriers in low income countries; and within five years with carriers in countries with teledensity less than one. 23. We also adopt conditions for certain types of Section 214 authorizations to address potential distortions in the U.S. market for IMTS created by above-cost settlement rates. We adopt two conditions. First, we will condition any carrier's authorization to provide international facilities-based switched service from the United States to an affiliated market on the carrier's foreign affiliate offering U.S. international carriers a settlement rate at or below the relevant benchmark. If, after the carrier has commenced service to the affiliated market, we learn that the carrier's service offering has distorted market performance, we will take enforcement action. That enforcement action may include a requirement that the foreign affiliate's settlement rate on the affiliated route be reduced to a level at or below a "best practice rate," or a revocation of the carrier's authorization. Second, we will grant carriers' applications for authority to provide switched services over facilities-based or resold international private lines on the condition that at least half of the traffic on the route in question is subject to a settlement rate at or below the relevant benchmark. If we learn that competition on the route has been distorted, we will take enforcement action. That enforcement action may include a requirement that at least half of the traffic on the route be subject to a settlement rate at or below the "best practice rate." It could also include revocation of carriers' authorizations. 24. The settlement rate benchmarks we adopt here are consistent with our authority under the Communications Act of 1934 to declare rates and practices to be unjust and unreasonable and to prescribe rates and practices that are just and reasonable. Our settlement rate benchmarks will ensure that a large cost component affecting the end user charges for an international call, the settlement rate, moves closer to the underlying cost of international termination service. By placing a limit on the amount that U.S. carriers can pay for this component, our benchmarks comport with our past ratemaking practices under Sections 201 through 205 of the Communications Act of 1934, as amended ("the Act"). For example, under traditional rate-of-return regulation we prescribed rate components (i.e., allowable rate base items and expenses) or calculation methodologies (i.e., cost of capital, depreciation, cash working capital studies) for U.S. carriers to use in setting their interstate and international rates. More recently, we have moved away from a rate-of-return regulatory regime to a regime that relies on a price cap methodology for dominant carriers provisioning interstate and international services. Even in this new regime, however, we have found it necessary at times to focus regulatory oversight on components that are reflected in the rates charged to end users. We have done this, for example, with regard to the charges that interexchange carriers must pay for access to the exchange access facilities of incumbent local exchange carriers ("LECs") for origination or termination of interstate and international traffic. Because incumbent LECs have little or no competition in the provision of these services, we have taken, and continue to take, action to ensure that the incumbent LEC access rates move toward the underlying cost of providing access services. 25. Similarly, we seek through adoption of benchmark settlement rates to bring a component that affects end user international rates closer to the underlying cost of providing international termination services. As with the access charges paid by interexchange carriers, U.S. international carriers, for the most part, do not have a competitive international market from which to purchase international termination services. We therefore must take action to ensure that the settlement rate component of an end user rate does not prevent U.S. consumers from having access to telecommunications services at reasonable rates. 26. Commenters raised several issues related to our authority under the Communications Act and ITU regulations to establish settlement rate benchmarks. We respond to these commenters' arguments in detail below in Section II.E. In that section, we demonstrate that the Communications Act provides us with the authority to reform U.S. carrier participation in international settlement rate practices in the manner we adopt in this Order. Section 201 of the Act requires that "all charges, practices, classifications, and regulations for and in connection with ['foreign communication' services] be just and reasonable." International telecommunications services that are settled under a settlement rate agreed to by a U.S. international carrier and its foreign correspondent fall within the definition of "foreign communication" in the Act and settlement rates are a "charge" or "practice." We thus find that the plain language of Section 201 gives us jurisdiction over settlement rates. To the extent that the above-cost portion of settlement rates paid by U.S. carriers to their foreign correspondents leads to those settlement rates being "unjust or unreasonable," Section 201 requires us to declare such "charges" or "practices" unlawful. We analyze in detail why the benchmark settlement rates we adopt in this Orderrepresent the highest amount at which we consider a settlement rate to be presumptively just and reasonable under Section 205 of the Act. 27. We also find that our settlement rate benchmarks are consistent with ITU regulations and general international law principles of comity and national sovereignty. The rules adopted here do not constitute the exercise of jurisdiction over foreign carriers. Instead, we establish in this Order the rate at which a settlement rate agreed to by a U.S. international carrier satisfies that carrier's obligation to comply with the "just and reasonable" requirements of Sections 201 and 205. We do not adopt any rules in this Order that provide for enforcement action against a foreign carrier for its failure to agree to a settlement rate at or below the relevant benchmark. Obviously, by placing a cap on the level of the rate U.S. carriers may negotiate with their foreign correspondents, our actions will have an indirect effect on foreign carriers. International services, by their very nature, require one end of the communications to be handled outside of the United States, and thus rules regarding the U.S. end of the communication may have an impact on the foreign end as well. An indirect effect on foreign carriers, however, does not militate against the validity of rules that only operate directly on carriers within the United States. 28. We discuss our settlement rate benchmarks and the methodology for calculating them in Section II.A. In Section II.B., we describe the mechanisms we adopt to assist U.S. and foreign carriers in the transition to more cost-based settlement rates and measures we will take to enforce our benchmarks. We discuss the Section 214 authorization conditions we adopt to address the potential market distortions created by above-cost settlement rates in Section II.C. We describe in detail our legal basis for establishing settlement rate benchmarks in Section II.E. II. Discussion 29. In our Notice, we presented proposals for revising our benchmark settlement rates to move them closer to the level of costs incurred by foreign carriers to terminate international traffic. The Notice solicited comment on four issues: (1) how should settlement rate benchmarks be calculated; (2) how long should the transition to benchmark rates last; (3) what enforcement mechanisms are necessary to ensure carriers make progress in negotiating settlement rates within the benchmarks; and (4) can the benchmark rates be used to address competitive problems in the U.S. IMTS market? 30. Initial comments on our Notice were filed on February 7, 1997, and reply comments were filed March 31, 1997. The Commission received over 120 initial and reply comments, including 90 from foreign carriers and governments. The insights and concerns raised by the commenters have been very valuable to us as we have developed our benchmarks policy. We have taken the concerns raised in the record into account in developing our policy and have modified several of our proposals in the Notice in response to them. 31. We believe we must take action to reduce settlement rates toward cost to fulfill our statutory mandate to ensure U.S. consumers receive telecommunications services at reasonable rates. Our mandate under the Communications Act is to make available a rapid, efficient worldwide wire and radio communications service with adequate facilities and reasonable charges. The measures we adopt in this Order are intended to ensure that IMTS rates paid by U.S. consumers are reasonable. Moreover, they are intended to reduce the potential for competitive distortions in the U.S. market for IMTS that above-cost settlement rates can produce. These distortions could impede the development of competition in the U.S. market, to the detriment of consumers and service providers. 32. Above-cost settlement rates have a direct and substantial impact on the prices U.S. consumers pay for IMTS. U.S. consumers pay on average 88 cents per minute for international calls and they pay on average 13.5 cents per minute for domestic long distance calls. Yet, the difference in cost of the underlying facilities between the two services is minimal. Indeed, as we stated in the Notice, the costs of providing telephony have been decreasing and are becoming virtually distance insensitive due to recent technological advances. Above-cost settlement rates paid by U.S. carriers to their foreign correspondents are a significant factor in the difference in calling prices between international and domestic long distance services. As the Coalition for Hemispheric Competitiveness states, monopoly carriers charging inflated settlement rates "in effect impose their monopoly pricing on customers located in open markets" such as the United States. Therefore, to ensure that the rates paid by U.S. consumers are reasonable, we must reduce the settlement rates paid by U.S. carriers to a more cost-based level. 33. We recognize that while above-cost settlement rates contribute significantly to the high rates paid by U.S. consumers for IMTS, they are not, as some commenters point out, the sole factor. Another important factor is insufficient competition in some sectors of the U.S. market for IMTS. Thus, we must also focus our efforts on encouraging increased competition in the U.S. market if we want to ensure that consumers pay reasonable prices. Our benchmark settlement rates are an important part of that effort because they address the potential market distortions that are created by above-cost settlement rates. 34. There are two such market distortions that could adversely affect competition in the U.S. market for IMTS. One is the potential for one-way bypass. This could occur if a foreign carrier collecting above-cost settlement rates is able to send its switched traffic over resold private lines into the United States, but U.S. carriers are unable to send their traffic over private lines in the reverse direction, and must continue to pay a relatively high settlement rate. The other potential market distortion could arise when a foreign carrier enters the U.S. market to provide facilities-based service to its home market. Any settlement payments made by the U.S. affiliate to its foreign parent for service to the U.S. affiliate's home market would simply be an internal corporate transfer. Because the foreign carrier's U.S. affiliate would not have to pay the above- cost settlement rates that its competitors must pay to the foreign carrier, the U.S. affiliate would be able to price its services in the U.S. market below the level of costs incurred by its competitors. However, if a foreign carrier is paying settlement rates that are closer to cost-based levels than current rates, its incentive and ability to engage in this market distorting behavior are significantly diminished. 35. Some commenters have questioned the need for settlement rate benchmarks and, in many cases, our motive for establishing benchmarks. The problem the Commission is trying to address through its settlement rate benchmarks, as these commenters see it, is the fact that U.S. net settlements payments have been increasing in recent years. These commenters argue that alternative routing services such as callback, country direct services and refile, which the Commission has encouraged, contribute significantly to the U.S. net settlements payments. Therefore, they contend, if the Commission wishes to reduce the U.S. net settlements payment, it should discourage alternative routing services. Many commenters also note that demographic factors such as differences in income levels and substantial immigrant populations in the United States contribute to the traffic imbalance between the United States and foreign countries. Based on this observation, they conclude that the Commission is mistaken in its attempts to address the level of U.S. net settlements payments through settlement rate benchmarks. 36. These commenters are correct in pointing to a number of the causes of the settlements deficit; these arguments, however, fundamentally misconstrue the problem which the Commission seeks to remedy through its settlement rate benchmarks. The rapidly escalating U.S. net settlements deficit is a serious problem, but it is a harmful byproduct of the more basic issue: the fact that the current accounting rate system creates economic inefficiencies in the global market for telecommunications services. We are not, as many commenters contend, concerned with the absolute level of U.S. net settlements payments per se or the contribution of settlement payments to the U.S. trade deficit. Rather, we are concerned with the extent to which those payments reflect rates that substantially exceed the underlying costs of providing international termination services. As discussed throughout the Notice, these above-cost settlement rates contribute to the inflated rates paid by U.S. consumers for international services, create the potential for competitive distortions in the U.S. market for IMTS, and produce inefficiencies in the global telecommunications market. 37. We are not persuaded by those opposing our proposals that our settlement rate benchmarks are not necessary to move settlement rates closer to a cost-based level. Our tentative conclusion in the Notice that most current settlement rates substantially exceed costs has not been refuted in the record. The majority of commenters acknowledge this fact and agree that reform of the accounting rate system is necessary. The lowest enduring settlement rate between the United States and a competitive overseas destination is currently $0.08 per minute. Yet, the average settlement rate U.S. carriers pay their foreign correspondents is approximately $0.35, which is more than four times this lowest prevailing settlement rate. Moreover, settlement rates with many countries are several times higher than the average rate of $0.35. 38. Some commenters contend that we need not take action to reform the accounting rate system and reduce settlement rates to more cost-based levels because settlement rates have been declining recently without government intervention. They also argue that competitive market forces, accelerated by the WTO Basic Telecom Agreement, will ensure that this downward trend continues. Some commenters also argue that our decision in the Access Charge Reform Orderto rely upon market forces to generate cost-based access rates in the United States conflicts with our proposal to establish settlement rate benchmarks. 39. It is true that changing market conditions have increased pressure on the accounting rate system and helped to reduce settlement rates. However, settlement rates are still substantially above-cost. Moreover, the costs of providing international services have continued to decrease. In addition, effective competitive market conditions exist in only a few countries. Monopoly conditions prevail in most. Our experience suggests that in those countries introducing competition in the near future, it will often take time for vigorous competition to create efficient pricing. Under these circumstances, we do not believe we can rely entirely on the market to reduce settlement rates on a timely basis to a more cost-based level. We thus believe benchmark rates are necessary to ensure that U.S. carriers achieve settlement rate reductions on a timely basis that will benefit U.S. consumers. A. Benchmarks 40. We would prefer to let competitive market forces determine settlement rates, as that would provide the best assurance that carriers are charging cost-based rates. But as stated above, competitive market conditions do not exist in many countries at this time. As we stated in the Notice, we believe settlement rates in markets where there is effective competition would tend to the level of long run incremental costs plus a reasonable contribution to joint and common costs. More specifically, for international termination services, prices would tend to the level of total service long run incremental cost, or TSLRIC, plus a reasonable contribution to joint and common costs. As explained in the Notice, the TSLRIC of providing international termination services is the additional cost that a firm incurs as a result of providing that service. This cost includes a risk- adjusted return on capital. The term "total service," in the context of TSLRIC, indicates that the cost measured is that of providing an entire service, in this case, international termination service. The term "long run," in the context of TSLRIC, refers to a period long enough so that all of a firm's costs become variable or avoidable. 41. Most economists generally agree that competitive markets, over the long run, tend to force prices toward incremental costs. In dynamic, competitive markets, firms take action based not on embedded costs, but on the relationship between market-determined prices and forward-looking costs. If market prices exceed forward-looking economic costs, new competitors will enter the market. As new competitors enter the market, prices will be driven toward a forward-looking incremental cost level. For services such as international termination services that share some joint and common costs, incremental costs would include a reasonable contribution to forward-looking joint and common costs. Otherwise, prices based on incremental costs might not permit recovery of forward-looking costs if there were significant joint and common costs among services. 42. Because settlement rates in effectively competitive markets would tend to the level of TSLRIC plus a reasonable contribution to joint and common costs, our settlement rate benchmarks ideally should be set at that level. However, as we observed in the Notice, the data necessary to calculate foreign carriers' incremental costs are not available at this time and no commenter has provided cost data in the record about the costs of providing international termination services. 43. Because data on foreign carriers' costs are not available at this time, we must look to another source of data to establish benchmarks. In this Report and Order, we adopt the methodology for establishing benchmarks that we proposed in the Notice. The methodology is based on foreign carriers' publicly available tariffed rates and data published by the ITU-T. We describe this methodology, which we refer to as the "tariffed components price" or "TCP" methodology, in more detail in the next section. We categorize countries by their level of economic development, and establish a separate benchmark rate for each category using the TCP methodology. For each category, the benchmark is based on an average of the tariff rates and other data for each country in the category. 44. Even though our goal is cost-based settlement rates, the benchmarks based on the TCP methodology that we adopt here result in settlement rates that we believe still exceed foreign carriers' costs to terminate international traffic because they are based primarily on foreign carriers' tariffed rates. Such tariffed rates include costs which would not be included in cost-based settlement rates, such as costs associated with marketing, allowances for uncollectible billings and other retail communications services to consumers. Nonetheless, the benchmarks are substantially below most prevailing settlement rates and represent progress toward achieving cost-based rates, and we find that they are reasonable given the limited data available to us for calculating benchmarks at this time. While we adopt the TCP methodology as the basis for calculating our settlement rate benchmarks, we are still committed ultimately to achieving settlement rates that reflect incremental costs and believe that rates will reflect incremental costs as IMTS markets become increasingly competitive. 1. Tariffed Components Price Methodology a. The Notice 45. The TCP methodology proposed by the Commission in the Notice relies on the framework described in ITU-T Recommendation D.140. That Recommendation contains cost guidelines that identify the three specific network elements that are used to provide IMTS and the cost components for those elements to be included in cost-oriented settlement rates. The specific network elements are: (1) international transmission facilities; (2) international switching facilities; and (3) national extension (domestic transport and termination). 46. The Commission released with the Notice a study by the International Bureau which calculates prices for these three elements. The prices calculated for the international transmission and national extension network components is based on foreign carriers' tariff rates, and the price for the international gateway element is based on data published by the ITU. The TCP methodology proposed in the Notice uses the sum for each country of these tariffed prices for the international transmission and national network components and the price for the international gateway switching component, which we referred to collectively as a country's "tariffed components price," to calculate settlement rate benchmarks. 47. We noted that the logic of basing benchmarks on a foreign carrier's tariffed prices is that those prices are the same tariff rates charged by a foreign carrier to its domestic customers. Nondiscriminatory treatment of U.S. carriers would require that foreign carriers charge U.S. carriers a rate for terminating service from the United States that is comparable to the rate they assess their own domestic customers. We also noted that tariff rates are publicly available, so benchmarks based on such rates can be revised, if necessary, as the tariff rates change. 48. We stated that benchmark settlement rates based on tariffed components prices will permit foreign carriers to recover more than their incremental cost of terminating international service. This is because the tariff rates used in the calculations presumably reflect foreign carriers' incremental cost plus a significant contribution to common costs. In fact, because the tariff rates used to calculate TCPs include costs associated with providing retail communications service to consumers which would not be included in cost-based settlement rates, settlement rates based on retail rates will substantially exceed incremental cost. For example, tariff rates include an allowance for uncollectible billings, general overhead expenses associated with retail service, and marketing and commercial expenses that would not be included in the cost of providing international termination services. 49. The following is a summary of the methodology for calculating the tariffed price for each network element proposed by the Commission in the Notice and detailed in the Bureau Report:  International facility component The international facility component consists of international transmission facilities, both cable and satellite, including the link to international switching facilities. This component includes only the half-circuit on the terminating end because originating carriers have traditionally been responsible for the half circuit on the originating end of a call. The Commission proposed to base the price of this component on foreign carriers' private line rates for dedicated circuits because the circuits used for private line service are functionally the same as those used to provide IMTS. Under the Commission's proposed methodology, the private line rates are converted to a per minute charge. This is done by first calculating the number of voice grade circuits derived from a private line half-circuit and then calculating a per minute rate for these voice grade circuits using an estimate of monthly minutes transmitted over international circuits.  International gateway component The international gateway component consists of international switching centers and associated transmission and signalling equipment. Foreign carriers generally do not offer a separate tariff rate for the international gateway component. The Commission therefore proposed to calculate the price for this component using information published by the ITU-T in Recommendation D.300R. Recommendation D.300R calculates for TEUREM member countries accounting rate shares for each of the three network elements in ITU-T Recommendation D.140. The rates that are calculated vary according to what percentage of plant capacity is digital; the rates decline as the level of digitalization rises, reflecting the greater efficiency of digital equipment. The Commission proposed to categorize countries by the three levels of digitalization used in Recommendation D.300R and to calculate a price for the international gateway component based on the accounting rate shares calculated in ITU-T Recommendation D.300R.  National extension component The national extension component consists of national exchanges, national transmission, and the local loop facilities used to distribute international service within a country. The Commission proposed to use foreign carriers' domestic rates and the distribution of U.S. billed service within a country to compute an average charge per minute for cost of this component. 50. We concluded that a carriers' TCP could provide a sound basis for calculating settlement rate benchmarks in the absence of carrier-specific cost information. We therefore presented and sought comment on several options for calculating benchmarks using the TCPs. b. Positions of the Parties 51. The majority of commenters recognize the dilemma posed by the Commission that, on the one hand, settlement agreements should contain settlement rates that are cost-based, but on the other, the data necessary to calculate costs for each foreign carrier are not available. Commenters disagree, however, on whether the Commission's proposed TCP methodology provides a reasonable basis for calculating settlement rate benchmarks in the absence of cost information. 52. U.S.-owned carriers generally support the TCP methodology as an interim solution to achieve settlement rates that more closely approximate costs than current settlement rates. They emphasize, however, that the TCP methodology would result in rates that are substantially above costs and that the Commission's ultimate goal should be to achieve settlement rates that are cost- based. For example, MCI states that it "firmly supports moving settlement rates toward their true cost" but the TCP approach "would be a reasonable compromise as an interim solution for the purpose of negotiating more reasonable settlement rates." MCI contends that the advantage of the TCP methodology is that settlement rates based on TCPs would be nondiscriminatory because they would represent the same rates charged by foreign carriers to their domestic customers. WorldCom similarly submits that while TSLRIC-based settlement rates are the ultimate goal, the TCP methodology "is an important step in the right direction toward cost-based rates." WorldCom states that the TCP methodology provides a reasonable foundation for benchmarks because it is based on the best available information. In addition, WorldCom notes that the TCPs are a "reasonable surrogate" for setting benchmarks because they are based on the actual rates in effect, as established by foreign carriers and reviewed by foreign regulators. ESI, on the other hand, disagrees that we should set benchmarks based on the TCP methodology. It argues that we should adopt a benchmark ceiling "that is not significantly greater than nine cents." 53. Several commenters concur with the Commission's conclusion that benchmarks based on TCPs will allow foreign carriers to recover costs in excess of their incremental costs of terminating international traffic. The Alexis de Tocqueville Institution asserts that the proposed TCPs "more than cover incremental cost plus a reasonable return." AT&T agrees with the Commission's observation that the TCP for the domestic distribution component is substantially above cost because foreign carriers' tariff rates include retail expenses and overhead costs that are not incurred to provide international termination services, and contends that these same deficiencies apply to foreign carriers' tariffs for dedicated international private line service. WorldCom states that if there is a fault of the proposed benchmarks based on TCPs it is that they "are set too high above true economic costs." 54. Many foreign carriers and some governments oppose the Commission's proposal to use the TCP methodology to calculate settlement rate benchmarks, although they do not offer any specific suggestion for how to achieve cost-based settlement rates in the absence of data on carriers' costs. For example, KDD states that although it "fully supports establishing cost-oriented settlement rates and moving towards a new remunerative system," it opposes the FCC's benchmarking approach. KDD contends "[o]nce the FCC determined that it lacked the data necessary to apply the TSLRIC methodology, its inquiry should have been at an end." Telmex objects to the Commission's proposal to establish benchmarks, arguing that only carriers can determine a credible estimate of the costs they incur to engineer a route. 55. Lattelekom objects to the Commission's goal of achieving cost-based settlement rates, arguing that the goal does not take into account the nature of different traffic minutes. Lattelekom argues that "[n]ot all minutes are the same" and accounting rate principles should be different depending on the underlying nature of the product. In particular, it argues that settlement rates for "value added" services such as home country direct should not necessarily be cost- based. 56. Some commenters object to the Commission's proposed use of the TCP methodology to establish settlement rate benchmarks on the ground that the TCPs do not accurately reflect carriers' costs. For example, GTE concludes that "the use of the TCP methodology is inherently flawed because it does not reflect actual cost." Telmex asserts that "TCP data are simply not a good proxy for actual costs" and the methodology generally "is invalid because it incorrectly assumes that there is a constant relationship between costs and rates across countries." 57. To the extent specific concerns about the TCP methodology are raised in the record, they relate primarily to the Commission's claim that benchmarks based on the TCP methodology will fully compensate foreign carriers for the costs they incur in terminating international traffic. Many commenters dispute this claim, arguing that the TCP methodology could result in an underrecovery of costs in some cases where the domestic tariffs that are used to calculate TCPs reflect cross-subsidies between services. These commenters contend that in cases where domestic tariffs reflect cross-subsidies, tariffs for local service may be below cost and the TCPs based on those tariffs will also be below cost. IDC, on the other hand, recognizes that the TCP methodology includes a profit component and overhead costs, but argues that additional overhead expenses should be included in the benchmark calculations to account for "the basic costs of doing business in each country." IDC further argues that the TCP methodology fails to take into account the fact that the cost of doing business can vary widely from country to country. Thus, according to IDC, the TCP methodology could "handicap" high-cost countries such as Japan. GT&T states that the Commission mistakenly "has focused solely upon the notional settlement rate," instead of the actual per-minute settlement costs of U.S. carriers as determined by net settlement payments. Thus, according to GT&T, the settlement rate benchmarks could ensure that U.S. carriers pay per minute termination costs that are substantially lower than the benchmarks. 58. Some commenters raise concerns related to the currency conversions used by the Commission to calculate benchmarks using the TCP methodology. KDD notes that the TCP methodology ignores the extent to which some foreign currencies like the Japanese Yen are overvalued compared to the U.S. dollar and argues that this deficiency demonstrates the inherent difficulty of translating foreign costs into U.S. dollars on an accurate and consistent basis. According to KDD, this difficulty should preempt any effort to prescribe settlement rates through a TCP approach. France Telecom notes that the TCP methodology does not take into account the effect of currency fluctuations because the TCP estimates are converted into U.S. dollar equivalents on a set date. France Telecom urges the Commission to consider another relevant economic unit designed to neutralize the effects of currency fluctuations. Telmex states that the period for data analysis chosen by the Commission, the fourth quarter of 1995 through the middle of 1996, does not provide accurate data for Mexico because during that period Mexico faced rapid rates of inflation and a significant devaluation of the peso. 59. Telef˘nica de Espa¤a argues that the Commission's reliance on exchange rates to produce U.S. dollar equivalents overestimates the costs of carriers in high-cost developed countries and underestimates the costs of carriers in developing countries. Telef˘nica de Espa¤a urges the Commission to adjust the TCPs for the national extension and international switching components by using the World Bank's Purchasing Power Parity ("PPP") conversion factors rather than exchange rates to convert foreign currencies into U.S. dollars. KDD agrees with Telef˘nica de Espa¤a that the Commission erroneously ignored PPP in calculating the benchmark settlement rates. However, KDD argues that Telef˘nica de Espa¤a misapplied the PPP in urging the Commission to establish lower TCPs for Japan and other developed countries. To the contrary, KDD argues, Japan's TCP is too low because translating the costs it incurs in Japanese yen into U.S. dollars based solely upon the exchange rate would result in KDD receiving less than full compensation for its costs. KDD concludes that the solution is for the Commission to permit U.S. and foreign carriers to allocate exchange rate and PPP risks among themselves through bilateral negotiations. 60. France Telecom, Telef˘nica de Espa¤a, and GT&T question our methodology for calculating the international transmission component. France Telecom questions the Commission's use of a multiplication factor of four to convert foreign carriers' private line rates to a per minute charge, claiming that in its experience, the multiplication factor may be significantly lower. Telef˘nica de Espa¤a similarly argues that we cannot assume that a 4:1 multiplication factor is appropriate for all traffic. Telef˘nica de Espa¤a further argues that the Commission's assumption of 8,000 minutes per circuit per month for purposes of converting private line rates to a per minute charge inaccurately reflects usage on developing country routes. AT&T disagrees with these comments. It states that many smaller carriers use multiplication factors of six and seven. AT&T further states that its experiences show that the assumption of 8,000 minutes "is in fact very conservative." Sprint similarly states that the assumption of 8,000 minutes per month is "reasonable and even conservative." It also states that the Commission's assumption of 4:1 multiplexing is reasonable and consistent with its own experience. 61. GT&T claims that our methodology for calculating TCPs for the international transmission component ignores the fact that carriers use Ramsey pricing to establish rates for dedicated international traffic routing. Thus, according to GT&T, a carrier's retail international private line rate may be less on a per-minute basis than its wholesale costs of terminating international switched traffic. GT&T further argues that the Commission erroneously assumes international private line rates are a meaningful estimate of a carrier's transmission costs. According to GT&T, in developing countries, international private line service may be directed at only a few strategic customers. This is the case in Guyana, where service is directed at two customers. GT&T also objects to the Commission's calculation of Guyana's international transmission TCP, arguing that because Guyana does not have a tariffed rate for international private line service, the Commission has no basis for calculating a TCP for Guyana. GT&T further states that because it exchanges traffic with the United States exclusively via international satellite facilities, the Commission cannot calculate a TCP for Guyana without providing evidence that the costs of such facilities are the same as fiber optic submarine cables. 62. Telef˘nica de Espa¤a also claims that private line rates should not be used to calculate the international facility component. It asserts that the costs of leasing private lines are lower than the costs of operating public lines because switched traffic is more variable than private line traffic and therefore subject to greater risk. AT&T disagrees with this claim. It contends that switched traffic does not carry noticeably greater risks than the leasing of private lines. AT&T further contends that Telef˘nica de Espa¤a fails to consider the profits and retail expenses included in private line tariffs. 63. ABS-CBN states that the TCP for the national extension component in the Philippines understates the costs of termination in that country because it is based upon data which reflect the heavily urban distribution of the Philippine Long Distance Telephone Company's ("PLDT") historic base of access lines. ABS-CBN states that this data does not accurately reflect the costs of new carriers which have an obligation to serve outlying areas which are more expensive to serve. It further argues that the TCP methodology is defective because it relies upon data concerning the geographic distribution of U.S.-originated calls that is not in the record. It contends that reliance on such data would be contrary to what it states is the precedent established by the Commission in the Universal Service Reform Order that the Commission cannot rely on a model that contains confidential data. AT&T disagrees that the Commission's reliance on traffic data not in the record undermines the benchmark settlement rates. It states that every U.S. carrier has full details of the in-country distribution of its U.S.-originated traffic and every foreign carrier receiving settlement payments has that information for the U.S.- originated traffic that it terminates. 64. GT&T objects to the Commission's proposed use of ITU-T Recommendation D.300 R to calculate TCPs for the international switching component. GT&T argues that the Commission's assumption that a country's level of digitalization corresponds to its level of economic development is not supported in the record and the Commission has not shown that the results of the TEUREM study in Recommendation D.300 R adequately reflect the higher costs of developing countries. GT&T further states that the proposed use of a single usage-based amount to estimate switching costs is inconsistent with the Commission's assertion in the access charge reform proceeding that a significant portion of local switching costs likely do not vary with usage. It also states that the TEUREM study cannot be used to calculate a TCP for the international switching component because the underlying data and assumption used to calculate its results have not been made publicly available. 65. Some carriers raise concerns that the TCP methodology ignores certain costs incurred by carriers. ABS-CBN states that the TCP methodology is flawed because it does not take into account the local interconnection costs paid to incumbent local carriers by competing international carriers. As an example, ABS-CBN cites the Philippine market where international carriers had contracts in 1996 with the dominant Philippine carrier which required a $.35 per minute payment for international calls terminating in metro-Manila, plus up to $.15 per minute more for calls terminating elsewhere. ABS-CBN concludes that the Commission's proposed benchmark of $.19 for the Philippines would drive out competing international carriers that must pay domestic interconnection charges that exceed the benchmark level. Similarly, Tricom states that it must pay CODETEL access charges which are nearly three times higher than the Commission's proposed TCP for the national extension component in the Dominican Republic, are higher than the Dominican Republic's overall TCP, and nearly equal to the proposed benchmark for the Dominican Republic. HKTI states that the delivery fee from international calls required by the Hong Kong regulator serves as a floor below which HKTI cannot fall without incurring an actual loss on international calls. Telmex notes that the TCP methodology does not take into account additional costs carriers may incur to satisfy government-mandated service objectives like universal service and infrastructure development. Telef˘nica de Espa¤a also states that the TCP methodology does not include the costs of providing universal service and urges the Commission, at a minimum, to adjust the methodology to include a universal service component. c. Discussion 66. We continue to believe after reviewing the record that the TCP methodology provides a reasonable basis for establishing settlement rate benchmarks in the absence of carrier- specific cost data. Relying on publicly available tariff data and information published by the ITU enables the Commission to make some progress in achieving the goal of cost-oriented settlement rates promised in ITU Recommendation D.140. At the same time, the TCP methodology treats foreign carriers fairly. We do not believe, as some commenters argue, that we should delay taking action to reduce settlement rates until carrier-specific cost data is available. Nor do we believe, as some commenters contend, that we should reject the TCP methodology because it is not a pure cost-based methodology. Rather, where we have data that enables us to bring rates closer to costs and to treat foreign carriers equitably, we believe we have a reasonable basis upon which to establish benchmarks. 67. A primary benefit of the TCP methodology is that it relies on data that is publicly available: carriers' tariffed rates and information published by the ITU. Moreover, it is based on a framework that received consensus approval from the members of the ITU. Importantly, the TCP methodology is equitable because it relies primarily on the tariffed prices carriers charge to their own domestic customers. As Frontier notes, the data on which the TCP methodology is based "represents rates at which the individual component elements would be available if they are offered on an unbundled basis." Reliance on tariffed prices also means that U.S. carriers are treated fairly. As we stated in the Notice, nondiscriminatory treatment of U.S. carriers would require that foreign carriers assess U.S. carriers a comparable charge for the network elements necessary for international termination services as they charge their own domestic customers. 68. We disagree with Lattelekom that settlement rates should vary with the nature of the traffic. The underlying service provided by the foreign correspondent, international termination, is the same regardless of the nature of the traffic. The network components used and the costs of those components do not vary. Because the underlying service and its costs are the same, we see no reason why the settlement rate should be different based on the nature of the end user service provided. 69. It is true, as some commenters note, that the TCP methodology results in benchmark rates that are still above-cost. Nonetheless, the benchmarks we adopt here will achieve significant reductions in settlement rates, bringing them closer to cost, and place some discipline on a system of inflated settlement rates. We therefore adopt the TCP methodology as the basis for calculating settlement rate benchmarks. The TCP methodology study procedure, data collection, and estimation methods are described in further detail in Appendix E to this Order. 70. We disagree with commenters' arguments that benchmarks based on TCPs will not allow foreign carriers to recover their costs of providing international termination services. The fact that foreign carriers' tariff rates for domestic local service in many cases contain cross- subsidies does not mean that reliance on those tariff rates to calculate benchmarks results in an underrecovery of costs. The TCP methodology relies on tariff rates for both domestic local and long distance service to calculate a price for the national extension element. As described in Appendix E, the national extension element is calculated by distributing international calls from the United States among service classifications, time periods, and the destination of the calls. The appropriate tariff rate is then applied to the minutes in each distribution category. Thus, to the extent domestic local tariff rates are priced below cost, any underrecovery of costs should be offset by traffic that is distributed to service classifications such as long distance or international whose tariff rates are above-cost. Moreover, most international traffic is terminated in major metropolitan areas where network costs are generally lower due to the economies of scope and scale that exist where traffic is concentrated in one geographic area. In many cases, more than 70 percent of calls from the United States terminate in major metropolitan areas. Moreover, as we stated in the Notice, the tariff rates used to calculate TCPs include costs associated with providing retail communications service to consumers which would not be included in cost-based settlement rates. For example, tariff rates include an allowance for uncollectible billings, general overhead expenses associated with retail service, and marketing and commercial expenses that would not be included in the cost of providing international termination services. 71. We also note that our estimation procedures generally are conservative, erring on the side of allowing a higher price in many instances. For example, our categorization of countries by three levels of digitalization for purposes of calculating the TCP for the international gateway component produces a conservative estimate of switching costs. We assigned lower levels of digitalization to developing countries based on the assumption that, generally, those countries' networks are less technologically advanced. In fact, however, some developing countries with recent significant infrastructure development could have more technologically advanced telecommunications equipment. Moreover, evidence in the marketplace suggests that the ITU data used to calculate the TCP for the international gateway switching component is substantially above cost. For example, Telia, the domestic carrier in Sweden, has an interconnect tariff which allows competing international carriers to interconnect with its domestic network. The tariff has two components: a monthly connection point charge of approximately $6,000 and fixed monthly charge of approximately $73.00 per facility, e.g., 2.048 Mbps circuit. These fixed charges are equivalent to a monthly rate of $0.003 per minute for usage of 8,000 minutes per circuit. In addition, in our Interconnection Order we concluded that a range between $0.002 per minute of use to $0.004 per minute of use for unbundled local switching is a reasonable proxy for domestic switching service. 72. We find GT&T's argument that our focus on the notional settlement rate instead of the actual per-minute settlement costs of U.S. carriers means that U.S. carriers could pay per minute termination costs that are substantially lower than the benchmarks to be without merit. GT&T's argument fails to take into account the fact that there are two sides to the netting process for calculating settlement payments. It is true that at settlement U.S. carriers pay less than the notional settlement rate times the total amount of traffic they originate. But that is because the minutes they originate are netted against minutes they terminate for the foreign correspondent. Thus, the net payment from the U.S. carrier to the foreign carrier represents payments the foreign carrier owes to the U.S. carrier for terminating foreign-originated calls. The per minute termination cost paid by U.S. carriers is the same; it is just offset by the per minute termination cost paid by foreign carriers. 73. Some commenters raise concerns about the use of exchange rates to calculate the settlement rate benchmarks. Three concerns are raised: (1) that a country's currency may have been devalued vis- -vis the dollar at the time the benchmarks were calculated; (2) currency fluctuations in the future may affect the level of compensation a country receives; and (3) using exchange rates to convert foreign currencies into U.S. dollars overestimates the costs of carriers in high-cost countries and underestimates the costs of carriers in low-cost countries. While currency fluctuations do affect the level of compensation a country receives, this concern is common to all goods and services traded internationally and exists for parties negotiating accounting rate agreements regardless of whether we set benchmark settlement rates. When parties to an agreement set a price for an internationally traded good or service, the value of the compensation the parties receive will vary depending on the exchange rate between the relevant currencies. The parties to an accounting rate agreement have no control over the value of other countries' currencies. Nor do we. Some commenters suggest that we denominate our benchmarks in a neutral currency such as SDRs to reduce the impact of currency fluctuations vis- -vis the dollar. We agree that if parties would prefer to allocate the risk of currency fluctuations by calculating their accounting rate in SDRs rather than in U.S. dollars, they should be free to do so. We believe it is appropriate, however, to leave it up to the parties to an agreement whether to calculate the accounting rate in SDRs or U.S. dollars. 74. We emphasize that any carrier may ask us to reconsider, in a specific case, the benchmarks on the grounds that they do not permit the carrier to recover the incremental costs of providing international termination service. Thus, if the exchange rate used to calculate the benchmarks does not permit a carrier to recover its costs, either because a country's currency may have been significantly devalued vis- -vis the U.S. dollar at the time the benchmarks were calculated or because a carrier is located in a "low cost" country, the benchmark for that carrier can be adjusted. We also note that the effect of any one country's currency valuation on the benchmark calculations is mitigated by the fact that we use an averaging approach, as described in the next section of this Order, to calculate benchmark settlement rates. 75. France Telecom and Telef˘nica de Espa¤a raise concerns about the calculation of the international transmission component. Both state that it may not be appropriate for the Commission to use a 4:1 multiplication factor to convert foreign carriers' private lines to a per minute charge, and Telef˘nica de Espa¤a states that the Commission's assumption of 8,000 minutes per circuit per month for purposes of converting private line rates to a per minute charge inaccurately reflects usage on developing country routes. Both the 4:1 multiplication factor and the 8,000 minutes per month estimate are based on actual operating results experienced by U.S. facilities-based carriers that provide IMTS. The figures are based on the operations of AT&T, MCI, Sprint, and WorldCom, and thus reflect the experiences of different sized carriers. In addition, the figures reflect service provided over a range of traffic routes to countries with varying levels of economic development. Thus, while the multiplication factor for some routes may be lower, as France Telecom notes, it may be higher on others reflected in the estimate. The same is true of the estimate of 8,000 minutes per circuit. Moreover, contrary to Telef˘nica de Espa¤a's claim, the average minutes per circuit in some developing countries may exceed 8,000 minutes because the international transmission circuits are sometimes used to terminate domestic calls where there are inadequate domestic facilities. 76. We find no evidence to support GT&T's claim that carriers use Ramsey pricing to establish rates for dedicated international traffic routing. Ramsey pricing requires precise information about the incremental costs of supplying circuits for private line services and detailed information about the demand elasticities among different classes of international communications users. There is nothing in the record to suggest that this information is available to carriers. In fact, carriers, including GT&T, have vociferously argued that cost information is not available. We also note that there is no evidence in the record that, even if carriers did use Ramsey pricing to establish rates for dedicated international traffic routing, such a pricing strategy would result in below-cost international private line tariffs. We find it highly unlikely that a monopoly carrier would price any service below the level of costs incurred to provide that service. 77. We disagree with commenters that argue international private line rates do not provide a reasonable basis for calculating the TCP for the international transmission component. GT&T argues that international private line rates are not a meaningful estimate of a carrier's transmission costs because, in developing countries, international private line service may be directed at only a few strategic customers. Similarly, Telmex asserts that during the period under review, Telmex had few international private line circuits, used older technology, and offered the lines at very low prices to few customers. AHCIET states that it is not valid to use the tariffs of one service, international private lines, to estimate the cost of another service, international termination. We use carriers' international private line rates to calculate the TCP for the international transmission component because the circuits used for private line service are functionally the same as those used to provide IMTS. Thus, the cost for the underlying facility for both services, the circuits, should be the same. Unless GT&T and Telmex are offering international private line service at below cost rates, their international private line rates would thus recover, at a minimum, their costs of providing the international transmission component of international termination service. 78. We also disagree with GT&T's claim that the Commission has no basis for calculating a TCP for Guyana because Guyana does not have a tariffed rate for international private line service and because Guyana exchanges traffic with the United States exclusively via international satellite facilities. We believe it is reasonable to use the highest available tariff for international private line service in the region, Brazil's rate of $0.066, to calculate Guyana's international transmission TCP. The international private line rates are not used as a precise estimate of individual country's costs to provide the international transmission component of international termination services. Rather, they are used as the next best source of data to calculate benchmarks. As discussed above, reliance on retail tariff rates produces benchmark settlement rates that are in excess of the costs of providing international termination service. Moreover, as described in the next section of this Order, the individual country TCPs are averaged to calculate one benchmark rate for categories of countries. With respect to GT&T's claim that we cannot calculate a TCP for Guyana without providing evidence that the costs of international satellite facilities are the same as fiber optic submarine cables, we note that there is substantial evidence that the cost of international satellite facilities are extremely low. Based on its assumptions about bandwidth, traffic fill factors and financial carrying costs, the ITU cited in its 1996 Direction of Traffic estimates that the per minute cost, including operating expenses, on international cable and satellite systems is less than $0.01. This cost estimate is less than one sixth the rate of $0.066 we use for Guyana's international transmission TCP. 79. Telef˘nica de Espa¤a objects on different grounds to the use of international private line rates to calculate the TCP for the international transmission component. It asserts that the costs of leasing private lines are lower than the costs of operating public lines because switched traffic is more variable than private line traffic and therefore subject to greater risk. We disagree with this argument. Even if switched traffic is subject to greater risk, as Telef˘nica de Espa¤a asserts, that greater risk would be more than offset by the margins in international private line tariffs. The tariffed component prices for the international transmission component ranged from $0.03 to $0.25, with most in the range of $0.05 to $0.07. However, the ITU estimates that the cost of the undersea cable, including operating expenses, used to provide the international transmission component of termination services is less than $0.01 per minute. 80. We also disagree with GT&T's objections to our use of ITU Recommendation D.300 R to calculate the TCP for the international switching component. GT&T argues that the Commission's assumption that a country's level of digitalization corresponds to its level of economic development is not supported in the record and the Commission has not shown that the results of the TEUREM study in Recommendation D.300 R adequately reflect the higher costs of developing countries. As an initial matter, GT&T provides no support for its statement that international switching costs are higher in developing countries. In addition, our assumptions in calculating the TCP for the international gateway switching component are favorable to developing countries. We assumed that developing countries' networks generally are less technologically advanced. We therefore assigned lower levels of digitalization, and as a result, higher prices for the switching component, to developing countries. In fact, however, as noted above, some developing countries with recent significant infrastructure development may have more technologically advanced telecommunications equipment. Moreover, as discussed above, there is evidence in the marketplace that the estimates in the TEUREM study substantially overestimate international gateway switching costs. 81. GT&T also argues that we cannot rely on the TEUREM study to calculate the TCP for the international switching component because the underlying data and assumptions of that study are not publicly available. However, we do not rely on the underlying data and assumptions of the study to calculate the TCP for the international switching component. Instead, we take the results of that study, the accounting rate shares assigned to the international switching component, and assign them to countries based on their level of economic development. Thus, there is no information or data that we relied upon to make our calculations that is not publicly available. 82. GT&T further states that our proposed use of a single usage-based amount to estimate switching costs is inconsistent with the Commission's assertion in the access charge reform proceeding that a significant portion of local switching costs likely do not vary with usage. There is, however, no inconsistency between our calculation of a per minute price for the international gateway switching component in this Order and our statement in the access charge reform proceeding referenced by GT&T. By calculating a per minute price here, we are not saying that switching costs vary with usage. Rather, we are simply taking the total price we estimate and dividing it by minutes to calculate a per minute price. The per minute price we calculate does not vary with usage. 83. ABS-CBN objected in its comments to the fact that data concerning the geographic distribution of U.S.-originated calls used to calculate the national extension component TCP was not in the record. The national extension TCP is calculated by determining the distribution of international calls from the United States within each country and applying the appropriate tariff to the minutes in each distribution category. The distribution of minutes for each country was determined from information collected on AT&T's customers' calls during a three month period that began on January 6, 1996. AT&T filed the data under seal in this proceeding with an accompanying Motion for Confidential Treatment. Although we believed that foreign carriers would likely have call distribution data on the U.S.-originated traffic that they terminate, we welcomed AT&T's filing of the call distribution data to supplement the record in this proceeding. Recognizing that "AT&T's call distribution data could provide competitors with competitively- sensitive market and cost structure information about AT&T's operations," the International Bureau issued an order on July 23, 1997, granting AT&T's request for confidential treatment. The Bureau permitted AT&T to make the information available to all parties of record pursuant to a Confidentiality Agreement that AT&T had attached to its motion. ABS-CBN subsequently filed a motion to establish a comment schedule for the AT&T data. The International Bureau denied ABS-CBN's motion, finding that ABS-CBN had not shown good cause for establishing a comment schedule. The Bureau concluded that, contrary to ABS-CBN's representation, the AT&T data is not complex and is presented by AT&T in a concise, easy-to-understand manner. 84. After reviewing the data, ABS-CBN complained that it could not verify the national extension TCP calculations. ABS-CBN complained in particular that it did not understand how time-of-day weighted prices could have been calculated based on the data provided by AT&T. It concluded that there must be a gap in the data and that the Bureau's asserted reliance on the call distribution data "is suspect." We believe that the data placed on the record by AT&T is sufficient to allow parties to verify the national extension TCP calculations. Moreover, contrary to ABS-CBN's claim, the data is complete. There is no further data that the Bureau relied upon to calculate the national extension TCPs that is not in the record. Because of the confidential treatment granted AT&T's call distribution data, we cannot discuss in this Order details of the data. However, we can describe the data generally. The data is provided in table format, with tariff category in one column and the percentage of calls distributed to each category in another column. For countries that also have time-of-day or peak/off-peak tariffs, percentage of calls distributed in each of the relevant timeframes is included in a separate table. The traffic data that is aggregated in table format was collected during a three month period. In the Bureau Report attached to the Notice, the International Bureau incorrectly stated that the data was collected for the same one hour period during the three months, when in fact, the data was collected throughout the day for three months. For purposes of calculating the national extension TCP, the International Bureau assumed that the percentage of overall traffic to a country distributed among time-of-day or peak/off-peak tariffs was distributed in the same percentage across tariff categories. Thus, for example, if 40% of the traffic was delivered during the off-peak period, it was assumed that 40% of the traffic in each tariff category was delivered during the off-peak period. 85. ABS-CBN further argues, in its comments and its subsequent July 30 Ex Parte, that because the traffic distribution data for the Philippines was collected in 1996, it only covers traffic terminated by PLDT. According to ABS-CBN, the data does not accurately reflect the costs of new carriers which have an obligation to serve outlying areas which are more expensive to serve. As we stated in the Notice, any interested party may ask us to reconsider, in a specific case, the benchmarks on the grounds that they do not permit recovery of its incremental costs of providing international termination service. Thus, if ABS-CBN believes that the benchmark of $0.19 for the Philippines does not permit it to recover its costs, it may submit to us the basis for its cost calculations and we will reconsider that benchmark. 86. Some commenters raise concerns that the TCP methodology ignores certain costs incurred by carriers such as local interconnection costs paid to incumbent local carriers by competing international carriers and additional costs carriers may incur to satisfy government- mandated service objectives like universal service and infrastructure development. As discussed in Section II.B.1, most countries, including the United States, have established a subsidy system in which the cost of the domestic network is not borne wholly by the domestic subscribers in all cases. We recognize, as many commenters point out, that such universal service subsidies are legitimate telecommunications policies. However, we disagree that foreign termination services from certain countries should be required to finance a disproportionate share of network costs, or that foreign carriers should have the ability to impose hidden, discriminatory universal service obligations on termination services for foreign-originated calls. 87. The issue of interconnection rates and universal service obligations is specifically addressed in the Reference Paper on Procompetitive Regulatory Principles negotiated as part of the WTO Basic Telecom Agreement. The Reference Paper obligates the governments that have adopted it as part of their schedules of commitments to ensure the availability of interconnection to major suppliers "under non-discriminatory terms, conditions . . . and rates." It further provides that universal service obligations will not be regarded as anticompetitive, "provided they are administered in a transparent, nondiscriminatory and competitively neutral manner." These principles, as well as the others contained in the Reference Paper, are essential to the implementation of full and fair competition. Discriminatory local interconnection charges and universal service obligations that are levied disproportionately on foreign-originated calls clearly violate these principles. Thus, to the extent that commenters argue our TCP methodology should be revised to take into account discriminatory local access charges or universal service subsidies aimed solely or disproportionately at international termination services, we disagree. We note, however, that as a practical matter, the TCP methodology we adopt here results in settlement rate benchmarks that are still above the cost of providing international termination service. As a result, the benchmarks include a generous contribution that could be applied to fund universal service and other social goals. 88. We emphasize, as stated in the Notice, that any interested party may ask us to reconsider, in a specific case, the benchmarks we adopt in this Order on the grounds that they do not permit the recovery of the incremental costs incurred to receive, transmit, and terminate international service. TSTT requests more detail "regarding the nature of the forum" for such challenges than was provided in the Notice. WorldCom states that the Commission should establish a clear-cut procedure to govern challenges and that the burden should be placed on the foreign carrier to demonstrate that it has higher costs. We will permit those asking for reconsideration in a specific case to file a written request seeking a determination that the relevant settlement rate benchmark does not permit recovery of incremental costs. In its request, the petitioner must demonstrate that the relevant incremental costs are higher than the established benchmark. 89. KDD objects to this process, arguing that foreign carriers should not be required to provide cost data to the Commission to justify a different benchmark. At the same time, KDD questions the accuracy of the Commission's benchmarks. It is not our purpose to set foreign carrier rates, but rather to ensure that U.S. carriers' rates are just, reasonable and nondiscriminatory. However, if the Commission is to ensure equitable treatment under its benchmarks policy, it must provide an opportunity for justification of a different benchmark level if it is believed that the established benchmarks do not permit recovery of relevant costs. We do not here compel any foreign carrier to provide cost data. Rather, we provide an opportunity to seek revision of a settlement rate benchmark with which U.S. carriers are to adhere by providing cost data. Moreover, we note that under the Commission's rules, a party may request confidential treatment of any cost data it submits to justify a different settlement rate benchmark for a U.S. carrier. 2. Benchmarks Based on Tariffed Components Prices a. The Notice 90. We proposed in the Notice to categorize countries by level of economic development and to establish a separate benchmark for each category. We proposed to use the World Bank and ITU's classification of countries based on level of gross national product (GNP) per capita. The four levels of economic development under this classification scheme are: (1) low income, GNP per capita of less than $726; (2) lower-middle income, $726-$2,895 per capita; (3) upper-middle income, $2,896-$8,955 per capita; and (4) high income, $8,956 or more. We proposed to use the simple average of the tariffed components prices for all countries in each economic development category as the upper end of benchmark ranges. 91. We proposed to base our benchmarks on TCP averages instead of relying on individual country TCPs because an averaging approach mitigates the effect of carriers' inefficient pricing structures on our benchmark calculations. Because the TCPs rely on foreign carriers' widely divergent tariffs to set prices for two of the three network elements, any inefficiencies in a foreign carrier's tariffs are captured in its tariffed components price. For example, telephone service in many countries is provided by monopoly carriers whose tariff rates may reflect protected market positions and an ability to charge prices not related to underlying costs. Moreover, many countries have rate structures that use high international or domestic long distance charges to offset below-cost local service fees. Averaging the TCPs mitigates the effect of these inefficiencies by averaging the most inefficient rates with those that are less inefficient. 92. We noted, however, that averaging all countries together would result in a benchmark that was substantially below current settlement rates with lower income countries and in many cases, above or equal to current settlement rates with upper income countries. We therefore proposed to categorize countries by level of economic development for purposes of calculating averages rather than calculate one average for all countries to create a less severe differential between current settlement rates and the benchmarks for lower income countries. We noted that establishing separate benchmarks based on level of economic development would mitigate the impact on developing countries of averaging the TCPs while still capturing some of the benefits of using an average. We also noted that economic development level is a logical way to cluster the tariffed components prices for purposes of averaging because there generally is an inverse correlation between the level of tariffed components prices and a country's level of economic development. b. Positions of the Parties 93. Many commenters that address the Commission's proposal to calculate three benchmarks based on level of economic development express concern about the use of GNP per capita to classify countries. Many of these comments, however, reflect a fundamental misunderstanding about the rationale for the Commission's proposed TCP methodology. They assume that the Commission believes there is a correlation between income level and telecommunications network costs. Based on this misunderstanding, many commenters argue that grouping countries by income level does not capture certain alleged cost differences among countries. 94. For example, Singapore Telecom states that it "objects to the FCC's proposal to use the World Bank classifications as a basis for calibrating the comparative cost levels of individual countries." Singapore Telecom further states that there is not a clear correlation between economic development and telecommunications costs. KDD also erroneously assumes the Commission proposed to establish benchmarks based upon income levels because there is a correlation between income level and telecommunications costs. Accordingly, KDD states that it opposes the Commission's proposal because "whatever relationship may exist between the World Bank classifications and the relevant cost experiences of any country is so tenuous as to be virtually meaningless." Similarly, AHCIET characterizes the Commission's proposal as categorizing countries "to determine costs [] based exclusively on the Gross National Product per capita of each country." AHCIET concludes that it is not valid to use GNP per capita as the only basis to estimate costs. 95. Other commenters oppose the Commission's proposal to establish benchmarks based on income level on the ground that GNP per capita does not accurately reflect differences in development level between countries. For example, Panama states that the Commission's proposal to classify countries on the basis of GNP per capita fails to recognize fundamental differences between countries such as economic, political, social, and technological development. Similarly, TSTT argues that using GNP by itself to categorize countries is inappropriate because it does not take into consideration other social and economic factors such as unemployment, income distribution, and poverty. TSTT states that GNP per capita is not "a true indicator of the level/extent of development of a country's telecommunications infrastructure." Indonesia states that "relevant factors influencing costs such as teledensity, geographical nature, [and] purchasing power parity" should be taken into account in establishing benchmarks. COMTELCA argues that reliance on GNP per capita to categorize countries is not the most effective means to achieve what it presumes is the Commission's goal of allowing "countries with the least developed communications infrastructure to receive the highest settlements payments." COMTELCA urges the Commission to adopt a single regional benchmark for Central America. 96. Some commenters object to the income level classification of specific countries. COMTELCA notes that our grouping of countries by GNP per capita places only two Central American countries in the low income category, while all others are in the middle income category. COMTELCA argues that all of its member countries have underdeveloped telecommunications systems and therefore should be in the benchmarks category designated for the least developed countries. Tricom notes that the Dominican Republic would be at the extreme bottom of the middle income category and contends that it would be more accurate and appropriate to use the four income categories in the World Bank's classification scheme. The Philippines also objects to the Commission's proposal to merge the two middle income groups, arguing that the combined category treats lower middle income countries unfairly. 97. AT&T recognizes that using an averaging approach to establish benchmarks has the advantages of averaging the most inefficient foreign carrier tariffs with those that are more efficient and reducing the burden for less developed countries of moving toward more cost-based rates. However, AT&T urges the Commission to combine the averaging and country-specific approaches by setting the upper end of each country's benchmark range at the lower of either that country's TCP or the average of TCPs for countries in the same income category. AT&T states that combining the approaches is necessary because if the Commission's proposed averaging approach is adopted, countries with TCPs below the average will be discriminating against U.S. carriers by charging rates higher than those charged to domestic customers. COMTELCA opposes this suggestion, arguing that it would not allow foreign carriers to recover their costs. 98. MCI also suggests a hybrid approach to setting benchmark settlement rates using TCPs. MCI proposes that the Commission set country-specific benchmarks equal to the lower of a country's TCP or a target rate twenty percent above the mean for all countries in the same economic development category. According to MCI, the Commission's proposed averaging approach would apportion the effect of the most excessive tariff regimes across all countries, instead of mitigating the effect of tariff inefficiencies. MCI states that its approach would reduce the impact of tariff inefficiencies on benchmark rates. 99. TNZL and Telef˘nica de Espa¤a oppose the Commission's proposal to average TCPs for countries in the same income category and urge the Commission to adopt country- specific benchmarks. Telef˘nica de Espa¤a states that averaging is inappropriate "given that the costs at issue vary significantly even between countries that are within the same category." TNZL objects to the Commission's averaging proposal on the ground that there is no necessary correlation between costs and income level. TNZL concludes that a country's own TCP is a closer "proxy" for costs than the averages proposed by the Commission. Sprint urges the Commission to adopt country-specific benchmarks on the ground that the TCPs reflect cost differences among countries. Sprint states that a country's "geography or distance from the U.S., for example, would, all other things being equal, appear to be highly relevant to its TCP." Frontier, on the other hand, states that country-specific benchmarks would be administratively cumbersome and could result in countries that are similarly situated having significantly different benchmarks. Frontier therefore supports the Commission's proposal to establish benchmarks based on countries' level of economic development. c. Discussion 100. We adopt, with two modifications, our proposal in the Notice to establish separate benchmarks based on countries' level of economic development. We believe, contrary to the arguments of commenters who urge us to adopt country-specific settlement rate benchmarks, that it is appropriate to average country's TCPs and establish benchmarks based on level of economic development. We also believe, contrary to the arguments of some commenters, that GNP per capita provides a reasonable basis for grouping countries for purposes of calculating and implementing settlement rate benchmarks. 101. We use tariff data to calculate two of the three elements for settlement rate benchmarks as the best available option in the absence of cost data. As discussed above, using tariff data has several advantages: it is publicly-available data; it would result in nondiscriminatory treatment of international traffic vis-a-vis domestic traffic; and, importantly, relying on tariff data will result in settlement rate benchmarks that allow foreign carriers to recover more than their costs of providing international service. However, there are also certain shortcomings of using tariff data that make reliance on each country's TCP to establish individual country benchmarks inappropriate. 102. The primary shortcoming of using tariff data to calculate settlement rate benchmarks is that any inefficiencies in foreign carriers' tariffed prices are captured in its TCP. As many commenters note, carriers' tariffed prices in many cases do not reflect the underlying cost of providing the tariffed service. This is in part because the tariffs reflect social policies such as universal service goals. For example, many countries have rate structures that use high international and domestic long distance charges to offset below-cost local service fees. Extreme examples of the problems of relying on tariff data to calculate benchmarks are markets such as Hong Kong and Kuwait that do not charge consumers on a per minute basis for domestic calls, but rather rely on a monthly subscription rate that includes domestic service. Another reason tariffed rates reflect inefficiencies is that, in many countries, telephone service is provided by monopoly carriers whose tariff rates may reflect protected market positions and an ability to charge prices not related to underlying costs. Because tariffed rates vary widely as a result of these inefficiencies, similarly situated countries could have substantially different individual TCPs. Another shortcoming of using tariff data to calculate settlement rate benchmarks is that a country could attempt to influence the level of its future benchmark rate by changing its carriers' tariff rates. 103. We believe it is appropriate to average the individual country TCPs to calculate settlement rate benchmarks to mitigate the effect of these shortcomings of relying on tariff data. As AT&T notes, averaging individual country TCPs mitigates the effect of carriers' inefficient pricing structures on our benchmark calculations by averaging the most inefficient rates with those that are less inefficient. In addition, an average figure is beyond the ability of any one country or carrier to alter significantly, so a carrier would have no incentive to change its tariff rates to affect the level of its benchmark. Telef˘nica de Espa¤a argues that this concern "can be readily solved by an FCC decision not to recognize significant increases in the underlying TCPs if it finds that those increases are solely intended to raise the benchmark." Such a solution would put us in the position of determining whether another country's tariff policies are valid and justified. We do not believe that would be an appropriate role for the Commission. 104. We believe, however, that averaging all individual country TCPs to calculate one benchmark for all countries would ignore important differences among countries. Specifically, we are concerned that calculating one benchmark that applies to all countries would disproportionately affect lower income countries and would not adequately take into account the difficulty many lower income countries will encounter in reducing settlement rates to a more cost-based level. As we observed in the Notice, the TCPs are generally significantly higher in lower income countries than in upper income countries. If the TCPs of lower income countries were averaged with those of higher income countries to establish one benchmark, the differential between the new benchmark rate and current settlement rates would be much greater for lower income countries than for higher income countries. Indeed, for many higher income countries, there would be little difference between an average benchmark and current settlement rates. Establishing separate benchmarks based on level of economic development would mitigate the impact of averaging on lower income countries while still capturing some of the benefits of averaging. 105. Many commenters urge the Commission to heed in particular the effect of significant reductions in settlements revenues on telecommunications network development in lower income countries trying to develop their infrastructure. We agree with these commenters that calculation and implementation of our benchmarks should take into account the impact on lower income countries of moving to more cost-based settlement rates. As many commenters note, investment in network infrastructure in lower income countries benefits not only the economies of lower income countries, but also the economies of other countries. Poor network development is an infrastructure bottleneck that constrains all levels of economic activity and impedes the development of international commerce and trade. 106. In the Notice, we proposed to group countries by level of economic development, using established World Bank and ITU categories based on GNP per capita, for purposes of calculating and implementing our settlement rate benchmarks. Our purpose in using the World Bank and ITU's classification scheme based on GNP per capita was to provide a reasonable indicator of a country's ability to transition to a more cost-based system of settlement rates without undue disruption to its telecommunications network. We believe that the level of development of a country's telecommunications network is an important indicator of that country's ability to transition to a more cost-based system without undue disruption of its network. This is because many carriers with poor telecommunications infrastructure state that they rely on settlement revenues to finance that network development. Thus, a rapid curtailment of settlement revenues could have a negative impact on network development in countries with poor telecommunications infrastructure. We also believe, however, that other social indicators of economic development are relevant to determining the impact of the benchmark settlement rates on a county's telecommunications network. As some commenters point out, a negative impact on a county's overall economic welfare from implementation of the benchmark settlement rates can create an indirect, but substantial, effect on a country's telecommunications network. 107. After reviewing the record, we continue to believe that the categories we proposed in the Notice provide a reasonable basis for establishing and implementing settlement rate benchmarks. The World Bank's classification of countries by GNP per capita is an objective, internationally accepted measurement of countries' level of economic development. While, as some commenters point out, there are many other indicators of economic development level, GNP per capita provides an objective and administrable basis for classifying countries. Moreover, we believe that economic development level is generally a good indicator of the level of development of a country's telecommunications network, and as such, provides a reasonable measure for determining a country's ability to transition to more cost-based settlement rates. As the ITU has observed, "[t]here is generally a close relationship between the level of economic development and telecommunications development." In a study of 164 economies comparing level of GDP per capita and teledensity, the ITU found the strength of this relationship to be significant. 108. Some commenters disagree with economic development as a basis for grouping countries on the ground that GNP per capita is not an accurate indicator of the level of development of a country's telecommunications infrastructure. TSTT suggests that teledensity would be a better basis for categorizing countries. For the most part, we disagree with these commenters. As noted above, there is generally a strong correlation between level of economic development and telecommunications development. As such, we believe economic development provides a reasonable lowest common denominator for determining a country's ability to transition to a more cost-based system of settlement rates without undue disruption to its telecommunications network. Moreover, in providing transition periods, we are also concerned about the effect of our benchmark settlement rates on a country's general economic welfare. GNP per capita provides a more general indicator of a country's level of economic development than factors that focus solely on telecommunications infrastructure. 109. Some commenters argue that our proposal to group countries on the basis of economic development level for purposes of calculating and implementing our settlement rate benchmarks violates our MFN obligations under the WTO Basic Telecom Agreement. We disagree with these commenters. MFN is essentially a nondiscrimination rule that requires each WTO Member to treat like services and service suppliers from all other WTO Members similarly. Our MFN obligation does not affect our ability to calculate and implement our settlement rate benchmarks in a manner that recognizes legitimate differences among countries. As discussed above, we group countries by economic development level to provide a reasonable indicator of a country's ability to transition to a more cost-based system of settlement rates without undue disruption to its telecommunications network. Moreover, calculating one benchmark that applies to all countries would disproportionately affect lower income countries. This is because the TCPs are generally significantly higher in lower income countries than in upper income countries. As a result, if the TCPs of lower income countries were averaged with those of higher income countries to establish one benchmark, the differential between the new benchmark rate and current settlement rates would be much greater for lower income countries than for higher income countries. Thus, carriers in lower income countries would be required to make substantially greater reductions in settlement rates than in upper income countries. 110. We agree generally with commenters who argue that we should maintain separate categories for upper middle and lower middle income countries, rather than combine the two categories as we proposed in the Notice. We proposed in the Notice to merge the two middle income categories because our method of calculating benchmark rates results in benchmarks that are almost identical for lower middle and upper middle income countries. But as some commenters point out, there are often substantial differences in the level of network development between countries at the high end of the upper middle income category and countries at the bottom end of the lower middle income category. These differences are particularly significant in determining a reasonable transition period for U.S. carriers to negotiate settlement rates within the benchmarks. We will continue to merge the two middle income categories for purposes of calculating a settlement rate benchmark, for the simple reason that our method of calculating the benchmark results in a benchmark that is almost identical for the two categories. However, we will maintain the separate categories for lower middle and upper middle income countries that are set forth in the World Bank and ITU's classification scheme for purposes of the transition periods we adopt in Section II.B.2. of this Order. 111. As proposed in the Notice, we will base our benchmarks on the simple average of the TCPs for all countries in each category. This results in benchmarks of: upper income countries $0.15 upper-middle income countries $0.19 lower-middle income countries $0.19 lower income countries $0.23 112. We will adopt our proposal in the Notice to revise and update our benchmarks periodically as necessary. As we stated in the Notice, periodic revisions are necessary to avoid the problem in the future of our benchmarks not keeping pace with cost reductions, and to encourage further movement toward cost-based settlement rates. However, if a U.S. carrier has obtained a commitment from a foreign correspondent to reduce its settlement rate to a level at or below the relevant benchmark within a specified timeframe, we will not require the U.S. carrier to achieve further reductions if the relevant benchmark is revised within the timeframe specified by the U.S. carrier and its foreign correspondent. This will ensure that carriers that have committed to achieving settlement rates within the benchmarks are not adversely affected by any revisions to the benchmarks. 113. We sought comment in the Notice on whether it would be appropriate to forbear from applying our settlement rate benchmarks where there is effective competition for international services on a route and where substantial progress has been made toward achieving rates that represent the incremental cost of terminating international service. Several commenters argue that such forbearance would be appropriate. The European Union agrees with the Commission's statement in the Notice that the most effective way to ensure settlement rates are at cost-based levels is through the development of competitive markets for IMTS. The European Union thus argues that our benchmarks should not be applied to liberalized markets. TNZL argues that there is no need to adopt benchmarks for routes where there is effective competition in the international services market. The United Kingdom also urges that benchmarks not be applied on competitive routes. It states that benchmarks could act as an "upward target for rates in such markets." ABS-CBN states that where non-dominant carriers exist at both ends of a route, the Commission should first rely on commercial negotiations, not regulations, to achieve cost-based rates. Americatel and Entel-Chile request that we forbear from applying our benchmarks to the U.S.-Chile route because, they argue, competition in the Chilean long distance and international markets is already vigorous. IDC contends that the "urgency" of our benchmarks proposals is lessened considerably in many upper income countries such as Japan where, it states, settlement rates have been declining steadily. 114. We continue to believe, as we stated in the Notice, that the best way to achieve cost-based rates is through effective competition. However, we conclude that we should not forbear from applying our settlement rate benchmarks on any route, including routes where competition has been introduced. While we expect, and experience has shown, that settlement rates on routes where there is effective competition will move toward cost-based levels, it will take time for vigorous competition to create efficient pricing. We thus believe that we cannot rely entirely on the development of competitive markets to reduce settlement rates to more cost-based levels in a timely manner. Also, as Japan notes, the standards for determining where effective competition exists and when substantial progress has been made in negotiating cost-based settlement rates could be difficult to establish objectively. Moreover, we are concerned that a policy which would create an exemption based on the existence of competition in the destination market from our requirement that U.S. carriers negotiate settlement rates within our benchmarks may not be consistent with our MFN obligations under the GATS. 115. We note, however, that in markets where there is fully developed competition, settlement rates will likely be below the benchmarks we adopt in this Order. Thus, whether the settlement rate benchmarks should be implemented on those routes would be a moot question. As a practical matter, the benchmarks we adopt here will only affect those markets where competition has not been introduced or has not yet fully developed. We anticipate that with the increasing market liberalization that will result from implementation of countries' commitments made in the WTO Basic Telecom Agreement, our benchmarks policy will have minimal impact on most WTO Member countries. We disagree with the United Kingdom that, in competitive markets, our benchmark settlement rates will serve as upward targets. We expect that competition will force rates to competitive levels, which would clearly be below the level of the benchmarks. In addition, in competitive markets, we expect to see much greater reliance on alternatives to settlement rates as permitted under our Accounting Rate Flexibility Order. These alternatives will help encourage termination rates to drop even closer to costs than the benchmarks we set today. 116. Americatel and Entel-Chile seek confirmation that alternative settlement arrangements approved by the Commission pursuant to the policies adopted in the Accounting Rate Flexibility Order are not subject to the benchmarks. ABS-CBN raises a related issue, arguing that our benchmarks policy is inconsistent with our flexibility policy. We disagree that there is an inconsistency between our benchmarks policy and our flexibility policy. Our flexibility policy establishes a more flexible regulatory framework that permits carriers to take their international traffic off the traditional settlement system where effective competitive conditions permit and to negotiate alternatives for terminating international calls that do not comply with the Commission's ISP. The focus of our ISP is on preventing foreign carriers from discriminating among U.S. carriers. By contrast, the goal of our benchmarks policy is to reduce settlement rates where market forces have not led to more cost-based settlement rates. To the extent we may in the future need to consider the application of the two policies in individual circumstances, we will examine those situations at the time they arise, on a case-by-case basis. 117. KDD notes that under our benchmark proposal, carriers providing service from the United States would have the same benchmark settlement rate as their foreign correspondents, despite the fact that foreign correspondents' benchmarks will vary according to the level of economic development of the country in which the correspondent is located. It concludes that carriers providing service from the United States will therefore be charging their foreign correspondents above-cost rates. CANTO states that Commission acknowledgement that there may be a cost disparity between carriers providing service from the United States and their correspondents in developing countries demonstrates that the symmetrical division of the accounting rate deprives foreign carriers of settlement revenues to which they are entitled under cost-oriented accounting arrangements. Other commenters similarly note that a system of symmetrical settlement rates is inconsistent with our goal of achieving cost-based settlement rates. We agree that in a system where settlement rates are truly cost-based, rates will not be symmetric in all cases. As commenters point out, costs may vary among some countries, although we believe that the variation is minimal in most cases. However, as we have noted, we lack the cost data to determine whether, and to what extent, costs vary from one end of a call to the other. The crux of these commenters' objections is that the Commission should reconsider the 50/50 division of accounting rates required by the ISP. We continue to believe that, in most cases, our ISP is necessary to prevent the "whipsawing" of U.S. carriers by dominant foreign carriers. 118. We decline to adopt AT&T and MCI's proposed alternative approaches to calculating benchmarks. AT&T's proposes to set the upper end of each country's benchmark range at the lower of either that country's TCP or the average of TCPs for countries in the same income category, and MCI proposes to set country-specific benchmarks equal to the lower of a country's TCP or a target rate twenty percent above the mean for all countries in the same economic development category. We believe these proposals are inconsistent with the principle of using averages. We use an average to mitigate the effect of tariff inefficiencies by averaging the most inefficient tariffs with those that are less inefficient. AT&T and MCI's proposals are essentially attempts to guarantee lower settlement rate benchmarks by ignoring the effect of averaging for countries with relatively lower TCPs. We believe that their proposals are theoretically inconsistent with our approach and we decline to adopt them. 119. We disagree with TNZL and Telef˘nica de Espa¤a that we should adopt country- specific benchmarks. They urge us to adopt country-specific benchmarks because, they contend, each country's TCP is a closer proxy for costs than an average. However, the TCPs themselves are not a proxy for costs. Rather, they are based on what we believe is the best available information for assessing the reasonableness of settlement rates in the absence of cost information. Moreover, as discussed above, we believe that averaging is appropriate to mitigate the impact of tariff inefficiencies on our benchmark calculations and to eliminate the incentive of carriers to attempt to influence the level of the benchmark rate that applies to their country by raising tariff prices. 120. In summary, we categorize countries by their level of economic development, as defined by GNP per capita, and adopt a separate settlement rate benchmark for each category. The benchmark for each category is calculated using the average of the TCPs for all countries for which we have data in each category. The country categories and their corresponding benchmark are: $0.15 per minute for high income countries (GNP per capita of $8,956 or more); $0.19 per minute for upper-middle income countries (GNP per capita of $2,896-$8,955); $0.19 per minute for lower-middle income countries (GNP per capita of $726-$2,895); and $0.23 for lower income countries (GNP per capita of less than $726). 3. Safeguard in Cases of Market Distortion a. The Notice 121. We proposed in the Notice to establish a separate benchmark range for each economic development category. We proposed to base the upper end of the ranges on the TCP methodology and for each category, to use an estimate of the incremental cost of terminating international traffic for the lower end of the range. We proposed to use an estimate of the incremental cost for the lower end of the range because it is our goal ultimately to achieve settlement rates that are more closely cost-based than are current settlement rates. We recognized, however, that we do not have sufficient data at this time to calculate a precise estimate of incremental cost. We therefore proposed to use an estimate provided by AT&T of its "average network cost" for termination of inbound international calls as the starting point to derive a preliminary estimate of incremental cost. We also encouraged both U.S. and foreign carriers to submit incremental cost data. 122. AT&T provided an estimate of $0.075 per minute for the costs of the international half-channel, gateway switching, domestic interexchange carrier distribution, and local distribution. To get closer to an estimate of incremental cost, we removed the common costs that we could identify and quantify in AT&T's estimate of average network costs -- the common costs included in the access charges. Removing the access charges from AT&T's $0.075 estimate results in an estimate of $0.06 for the incremental cost of terminating international traffic. We noted that while our estimate is based on the costs of a U.S. carrier, the incremental cost in foreign countries is not likely to vary from our estimate by more than a few cents and likely does not exceed $0.09 per minute. b. Positions of the Parties 123. Commenters express different views on whether the Commission should use an estimate of TSLRIC for the lower end of the benchmark ranges. Several commenters agree with the Commission that it is appropriate to use an estimate of the TSLRIC of terminating international traffic for the lower end of the benchmark ranges because that is the level to which rates would tend in a competitive market. Frontier agrees with the Commission that "pricing based upon incremental costs is economically efficient and, in a competitive environment, rates would tend to move toward incremental costs." WorldCom notes that "economists generally agree that a forward-looking, incremental costing standard is the best reflection of the actual cost of terminating telecommunications traffic. AT&T fully agrees that reducing settlement rates to a TSLRIC-based level "should be the Commission's overall policy objective." AT&T states that TSLRIC pricing is necessary to encourage efficiency and to prevent competitive distortions in the U.S. IMTS market. 124. Those who disagree with the Commission's proposal generally object to the Commission's conclusion that TSLRIC is the appropriate measure of costs for establishing cost- based settlement rates. However, some commenters also object specifically to the Commission's estimate of TSLRIC. 125. Many commenters that object to the application of a TSLRIC methodology to determine cost-based settlement rates do so on the grounds that the methodology has not been accepted by all countries. These commenters object to what they see as an attempt by the Commission to impose the TSLRIC methodology on other countries. GTE and Telmex disagree with the economic theory upon which the TSLRIC methodology is based. They oppose the use of a TSLRIC methodology for setting any rates, including settlement rates. 126. Some commenters disagree not only with the use of a TSLRIC costing methodology to determine cost-based settlement rates generally, but also with the Commission's estimate in the Notice of the TSLRIC of terminating international traffic. For the most part, these commenters argue that the Commission's reliance on AT&T's estimate of its average network cost to calculate a TSLRIC estimate is inappropriate because other carriers' costs are likely to differ from AT&T's. Some commenters cite to our recent Access Charge Reform Order and Universal Service Order as confirmation that the Commission lacks a reliable methodology for estimating the TSLRIC of providing international termination service. 127. AT&T, on the other hand, contends that its average cost data provide a reasonable, and in fact, generous estimate for all carriers of the TSLRIC of providing international termination service. This is because, according to AT&T, there are no material differences between the costs of U.S. and foreign carriers for the termination of international calls. AT&T argues that to the extent cost differences do exist, they should result in foreign carriers having lower costs than U.S. carriers. c. Discussion 128. We have stated many times that the most effective way to ensure that consumers pay economically efficient, cost-based rates is through the development of effectively competitive markets. We therefore believe that where markets are not effectively competitive, and we must seek through regulation to ensure that rates are reasonable, we should attempt to the greatest extent possible to duplicate prices that exist in competitive markets. Our goal in this proceeding thus is to establish settlement rate benchmarks that reflect rates that would prevail if the originating and terminating markets for international services were competitive. 129. We believe settlement rates in markets where there is effective competition would tend to the level of total service long run incremental costs, or TSLRIC. In dynamic, competitive markets, firms take action based not on embedded costs, but on the relationship between market-determined prices and forward-looking costs. If market prices exceed forward- looking economic costs, new competitors will enter the market and prices will be driven toward a forward-looking incremental cost level. For services such as international termination services that share some joint and common costs, incremental costs would include a reasonable contribution to forward-looking joint and common costs. Because rates in competitive markets will tend towards the level of forward-looking incremental costs plus a reasonable contribution to joint and common costs, we conclude that an incremental costing methodology is the appropriate basis for determining cost-based settlement rates. 130. We agree, however, with commenters who contend that we do not have the incremental cost data or a costing methodology necessary to calculate a precise estimate of carriers' incremental cost of terminating international traffic. We noted this lack of data in the Notice. It was for that reason we proposed to use the TCP methodology to calculate the top end of the benchmark ranges. We nonetheless proposed to use an estimate of the incremental cost of terminating international traffic for the lower end of the benchmarks because it is our goal ultimately to achieve settlement rates at an incremental cost level. We calculated a "preliminary estimate of incremental cost" using data supplied by AT&T as a starting point. In making this preliminary estimate, we sought to generate comments and incremental cost data that would enable us to calculate a more accurate estimate of incremental costs. However, we received no comments that help us with this task. AT&T argues that its average cost data provide a reasonable estimate for all carriers of the TSLRIC of providing international termination service, but it submitted no evidence in its comments on what TSLRIC prices would be. 131. We also agree with commenters that argue we should not adopt a TSLRIC estimate based solely on the data supplied by AT&T. While there is no evidence on the record to show that AT&T's costs differ from other carriers, as some commenters assert, we agree that we need more information before we can adopt a TSLRIC estimate. We therefore decline at this time to adopt a TSLRIC estimate for the low end of the benchmark range. Instead, we will adopt one benchmark rate for each economic development category. This benchmark rate will be based, as discussed in Section II.A, on the TCP methodology. 132. Instead of establishing settlement rate benchmark ranges with the low end based on an estimate of the TSLRIC of providing international termination services, as proposed in the Notice, we will adopt a rate that we will enforce as a safeguard when we detect distortion in the U.S. market for IMTS. As discussed in the Notice, and in Section II.C. of this Order, above-cost settlement rates create certain distortions in the U.S. market for IMTS. However, if settlement rates are at cost-based levels, carriers will not have the ability to engage in market distorting behavior. We thus adopt a "best practice" rate that is closer to a cost-based level than our settlement rate benchmarks that we can apply to prevent market distorting behavior. This rate will be applied only to the extent carriers seek authorization to provide facilities-based service from the United States to affiliated markets and to provide private line resale service, as discussed in Sec. II.C., infra. In those cases, the rate will be enforced only if the Commission detects market distortion on the route or routes in question. 133. Because we do not have data to establish an accurate cost-based rate, we will use a market-based rate as a substitute. Rates in competitive markets would tend to an incremental cost level. We thus look to competitive markets to find a rate that can be applied in cases of market distortion in lieu of a TSLRIC estimate. As the Alexis de Tocqueville Institution states, rates that exist "in truly competitive markets [are] the best proxies for actual incremental cost plus a market- based rate of return." We adopt a "best practice" rate that is based on the lowest, commercially viable, settlement rate paid today by U.S. carriers to an overseas carrier from a competitive market. We will revisit this rate in the future, as market conditions warrant. We recognize that there could be instances where this rate does not accurately reflect a carrier's costs of providing international termination service. We will therefore consider, on a case-by-case basis, other factors that may influence the level of the best practices rate as applied to individual carriers. However, the best practice rate we adopt here, as revised in the future, will be a presumptive rate that will apply in cases of market distortion until evidence is presented that other factors should be taken into consideration. 134. As the first step in choosing the current best practices rate, we identify the lowest settlement rate that U.S. carriers pay on average for traffic to any country. The lowest settlement rate that U.S. carriers currently pay on average is with Sweden, at 0.06 SDR ($0.08). The next step in choosing the rate is to determine whether the rate is commercially viable. We conclude that it is. This rate has been in effect since March 1996 and during that time, Sweden has experienced sustainable, vibrant, procompetitive development of its telecommunications industry. We have previously found that Sweden offers effective competitive opportunities ("ECO") for U.S. carriers to offer facilities-based switched and private line services. In making this determination, we found that there are no legal restrictions on competitive entry in Sweden and that the actual conditions, including the terms and conditions of interconnection, competitive safeguards, and the regulatory framework, are conducive to entry. We also noted the actual entry of multiple facilities-based international carriers into the Swedish market. The vibrant procompetitive development of the Swedish telecommunications sectors indicates that its settlement rate with the United States is economically feasible and sustainable. We thus adopt U.S. carriers' current settlement rate with Sweden, $0.08 cents, as our "best practice" rate to be applied in cases of competitive distortion. 135. We emphasize that the "best practice" rate we adopt in this Order will apply only in cases of competitive distortion. We also emphasize that we will consider other factors that may make application of the best practice rate inappropriate for a particular carrier. Finally, we reiterate that, as with our benchmark rates, at such time as we find it necessary to require a carrier or carriers to comply with this rate, any affected carrier that believes such a requirement would prove unjustified may follow the procedures discussed in Section II.A.2 of this Order to request an individualized settlement rate determination. B. Implementation of Benchmarks 136. We are committed to achieving as soon as possible settlement rates that are at or below the benchmarks we adopt in this Order. However, we are also cognizant of the adjustment problems a rapid transition to more cost-based settlement rates could cause for U.S. carriers' foreign correspondents. These problems are particularly pronounced for carriers in lower income countries. We therefore adopt a transition schedule for U.S. carriers to negotiate settlement rates within the benchmarks that takes into account the level of economic development of the country in which a foreign carrier is located. We also adopt additional measures to ensure a smooth transition from current settlement rates to our benchmarks for those foreign carriers facing the most severe adjustment problems. We discuss these transition measures and the schedule we adopt below in Section III.B.2. 1. Impact of Benchmark Settlement Rates on Developing Countries a. The Notice 137. In the Notice, we acknowledged the argument of some that substantially above-cost settlement rates may be justified because they are used to subsidize network development in lower income countries. We noted, however, that settlement rate reductions would not necessarily result in a significant loss of revenues for foreign carriers, even those with very high settlement rates. This is because, we stated, bringing settlement rates closer to costs will, in the long run, lead to lower calling prices. Lower calling prices, in turn, will stimulate traffic flows. We also noted that the growing capabilities and incentives to bypass the traditional accounting rate system mean that settlement revenues no longer provide secure financing for investment in telecommunications infrastructure. We concluded that open and competitive markets that welcome private capital offer a more reliable and sustainable means to finance infrastructure development than the traditional monopoly-based accounting rate system. b. Positions of the Parties 138. Many developing countries and their carriers express concern that our settlement rate benchmarks will eliminate an important source of revenue for developing countries' telecommunications markets. These commenters argue that in many developing countries, settlements revenues are used to fund universal service programs and network infrastructure development. For example, the Government of St. Vincent and the Grenadines states that our benchmarks will "effectively cripple" telecommunications network development in its country. Similarly, Telekom Malaysia states that the benchmarks will have "dire economic ramifications" for developing countries. Panama states that it relies on revenues from international operations to attract investors for modernization and development of its telecommunications infrastructure. Telmex similarly argues that a precipitous drop in settlement rates could undermine the procompetitive results that its regulator has achieved to date. CANTO notes that settlement revenues are used as collateral to obtain access to capital and argues that as a result, reduced settlement revenues will have a negative impact on the ability of carriers in developing countries to obtain capital for network development. Some commenters assert an entitlement to maintain excessive settlement rates to fund universal service requirements and network buildout. For example, GT&T asserts that "foreign countries are entitled to support universal service through settlement revenues." 139. MCI, however, states that there is no evidence in the record that above-cost settlement rates result in any increase in infrastructure development or connectivity to the international telecommunications network. The European Union expresses concern about the potential impact of the benchmark settlement rates on developing countries, noting that some countries "have traditionally seen settlements in-payments as a form of foreign aid." However, it notes that as a form of aid, settlement payments are not transparent and do not permit accountability. The European Union suggests the World Bank's adjustment program may be a useful form of assistance as settlements revenues decrease. 140. AT&T also argues that the settlement rates paid by U.S. carriers to their foreign correspondents should not include any universal service subsidies. AT&T asserts that U.S. carriers should pay only the cost of international termination, not "the cost incurred by foreign carriers to use the domestic network for purely domestic services, or for international calling between the foreign carrier and a country other than the United States." Brazil notes that all countries have subsidized network development and many still do. It states that in light of this fact, it is important to identify the level of subsidy and then work to reduce it to a "fair" level. 141. Some commenters disagree with our statement in the Notice that "reductions in the price of international telephone service would significantly stimulate traffic flows, thereby increasing revenues for U.S. and foreign carriers." Telef˘nica del PerŁ and COMTELCA argue that elasticities of demand do not remain constant across all cultures and levels of economic development. They contend that the demand for telecommunications services has significantly less price elasticity in developing countries than it does in industrialized countries. As a result, they argue that carriers in developing countries will not see enough of a revenue increase from traffic stimulation to offset the loss they believe they will incur from reductions in settlement rates. c. Discussion 142. We agree with commenters that the transition to more cost-based settlement rates will be difficult for countries and carriers that currently rely on excessive settlement rates to generate revenues. We disagree, however, that this difficulty should be avoided by allowing U.S. carriers to maintain the status quo in the international accounting rate system. As discussed in Section I, supra, the global telecommunications market is changing in ways that cannot accommodate the outmoded, monopoly-based, accounting rate system. 143. We acknowledge the concerns of many commenters that settlement revenues are necessary to fund network development and universal service requirements. However, we also recognize that settlement revenues are no longer a stable source of funding for network infrastructure development as a result of changes in the global telecommunications market. Thus, to the extent that settlement payments have been used for telecommunications infrastructure development, alternative funding mechanisms, from both public and private sources, must be identified. 144. Because of the changing nature of the international telecommunications market, we believe that open and competitive markets that welcome private capital offer a more reliable and sustainable means to finance infrastructure development than the traditional accounting rate system. There is widespread agreement on this principle. For example, ITU Secretary-General Tarjanne has stated that "[t]here is now overwhelming evidence from developing and developed economies alike to support the contention that competition and private enterprise, tempered by regulation, provide the best recipe for telecommunications development. Procompetitive policies and market mechanisms should be favoured wherever feasible." Moreover, there is ample evidence that allowing additional carriers to compete with an incumbent carrier leads to greater network penetration. For example, a recent study of the implications of competition on universal service and employment shows an increase in network and service availability with the introduction of competition. That study notes that in China, after the announcement of the entry of a second carrier in 1993, network growth skyrocketed to 58.9 percent in one year and the waiting period for new wireline connections dropped for both business and residential customers by as much as 50 percent. In the Philippines, the announcement of competition in 1993 led to a 1,530 percent increase in the annual installation of main lines. 145. We also recognize, as the European Union suggests, that there are other public sources of funding and technical assistance to which countries may turn. The World Bank, for example, has indicated a willingness to strengthen its existing assistance mechanisms. Specifically, the World Bank has stated that it would be prepared to provide assistance at the following three levels within the framework of its Country Assistance Strategy discussion with national governments: (1) advice and assistance in handling the transition to economically rational settlement rates, financed either directly through technical assistance loans or grants, or through the World Bank's infoDev Program; (2) assistance in offsetting the macro-economic costs of transition in those countries hardest hit, as part of the World Bank's regular macro adjustment programs; and (3) assistance with network development through loans and guarantees, within the framework of the World Bank's current telecommunications sector policies which promote private investment. 146. Other multilateral lending agencies such as the Inter-American Development Bank and organizations such as the ITU also have programs to provide governments that make a commitment to competition with technical assistance on critical issues such as the establishment of independent regulatory agencies, interconnection policies, tariff rebalancing, and universal service policies. These public sector sources of revenue and assistance provide an important mechanism for easing the transition away from the current international accounting rate system toward a system where prices are more closely related to costs. 147. Panama and Mexico concur with the need for competitive reforms and both countries have embarked on steps to introduce competition in their telecommunications markets. They argue, however, that our benchmarks could impede the further development of competition in their markets by restricting an important source of revenue for new entrants. ABS-CBN also argues that "the status quo should be maintained until competitive telecommunication carriers in the Philippines are more firmly established." Bolivia requests the Commission to take into account its needs as it introduces competition. We recognize, as these commenters urge, that the adjustments necessary for the successful introduction of competition cannot be made overnight. Especially difficult is the process of rebalancing rates so that services are priced in accordance with the underlying costs of providing them. For these reasons, we think it is appropriate to adopt a transition period for U.S. carriers to negotiate settlement rates at or below the benchmarks. 148. We disagree with commenters who argue foreign carriers are entitled to require that universal service requirements be financed disproportionately through settlement revenues. As discussed above in response to commenters' claims that the TCP methodology should be adjusted to include an additional universal service component, we believe that universal service subsidies must be nondiscriminatory and transparent. Moreover, the Reference Paper on Procompetitive Regulatory Principles negotiated as part of the WTO Basic Telecom Agreement states that universal service obligations must be "administered in a transparent, non-discriminatory and competitively neutral manner." Hidden subsidies such as those contained in settlement rates and subsidies borne disproportionately by one service, or in the case of settlement rates, by consumers from net payer countries, are not consistent with these principles and cannot be sustained in a competitive global market. We also disagree with those commenters that compare the hidden subsidies in settlement rates to domestic universal service policies in the United States, which rely on explicit and transparent funding mechanisms. Universal service in the U.S. market is based on and uses end user telecommunications revenues in the United States, not settlements revenues paid by foreign carriers. 149. There is no doubt that reform of the international accounting rate system will require many carriers, especially those in developing countries, to make painful adjustments. However, we believe that the effect of lower settlement rates will be at least partially, if not fully, offset by growth in the market for international services. The current system of inflated accounting rates artificially restricts growth in the global IMTS market. As settlement rates are decreased, international calling prices should decrease. In turn, reduced calling prices for international telephone service should significantly stimulate traffic flows. This would provide increased revenues from two sources: collection revenues from outgoing calls and settlements revenues from incoming calls. We disagree with commenters that express doubt that demand for international services in developing countries is price elastic. As the United Kingdom states, while it may be difficult to calculate reliably the price elasticity of international traffic, it is "clear that such elasticity is present in the market." In fact, there is evidence from both industrialized and developing countries that calling volumes would increase with reductions in IMTS collection rates. In Chile, for example, prices for international calls declined by about 30% after competition was introduced in 1994 and demand grew in one year from about 70 million minutes to 140 million minutes. On the Chile-U.S. route alone, traffic from Chile to the United States increased from 17.3 million minutes in 1993 to 45.6 million minutes in 1995. Telef˘nica de Espa¤a notes that a recent 43 percent reduction in international rates in Argentina has resulted in "more calls being placed to the United States." 150. All players in the global telecommunications market must work together to ensure a smooth transition from the current accounting rate system to a system in which prices are more closely related to costs. Carriers and countries that currently rely on above-cost settlement rates do not deny that reform of the accounting rate system is necessary. At the same time, we cannot deny that reform will require difficult adjustments in many countries, especially lower income countries. We therefore adopt policies that take into account the impact of our settlement rate benchmarks on other countries. We believe that such policies are appropriate and are consistent with our statutory authority. As many commenters point out, it is in the public interest to take measures to ensure that the networks of U.S. carriers' foreign correspondents are not unduly disrupted by the implementation of our benchmark settlement rates. 151. To address the adjustment concerns articulated in the record by many developing countries, we take into account the impact on developing countries of moving to a more cost-based system in calculating and implementing our settlement rate benchmarks. As discussed in Section II.A.2., supra, one of the ways in which we take into account the impact of our benchmarks on lower income countries is by establishing separate benchmarks based on countries' level of economic development. As discussed in the next section of this Order, we also adopt a transition schedule for U.S. carriers to negotiate settlement rates at or below the benchmarks we adopt here. This schedule will provide additional time for countries and carriers to make the adjustments necessary to transition to a more cost-based system of settlement rates. 2. Transition to Benchmarks a. The Notice 152. In the Notice, we proposed a transition schedule for U.S. carriers to negotiate settlement rates within the benchmarks. We proposed a transition schedule based on countries' level of economic development because we believe that a U.S. carrier's ability to negotiate a charge that complies with our benchmarks without undue disruption of its or its foreign correspondent's operations diminishes as the level of economic development decreases. We noted, for example, that carriers in many developing countries have significantly distorted rate schedules involving cross-subsidies from users of international services to those using domestic services and that many of these carriers also may have substandard telecommunications infrastructure. We concluded that an immediate shift to cost-oriented settlement rates could create adjustment problems for carriers in these countries while they are trying to rebalance rates and upgrade their network. We further noted that implementation of the benchmarks will require greater reductions in current settlement rates for developing countries than for upper income countries. 153. We proposed a transition schedule that will enable U.S. carriers to achieve rates at or below the benchmarks with all foreign carriers in a four to five year period. Specifically, we proposed to require that U.S. carriers' settlement rates with foreign carriers from high income countries be at or below our benchmarks within one year of the effective date of our order in this proceeding; for upper middle income and lower middle income countries, within two years; and for low income countries, within four years. Alternatively, we requested comment on whether the transition schedule for upper, middle, and lower income countries should be two, three, and five years, respectively, or whether the transition schedule for lower middle income countries should be three years and for upper middle income countries, two years. 154. We also sought comment on whether we should provide an additional period of transition in negotiations with foreign carriers for which annual reductions in the spread between their current settlement rate and their benchmark will exceed a certain percentage, such as twenty- five percent. Alternatively, we sought comment on whether we should provide additional transition time for negotiations with foreign carriers for which transition to the relevant benchmark would entail a loss of greater than a certain percentage of their annual revenue. 155. Finally, we sought comment on whether U.S. carriers should be asked to make reasonable progress in negotiating settlement rates at or below the benchmarks throughout the transition periods. We noted, for example, that carriers could be asked to negotiate a certain percentage reduction annually of the spread between current settlement rates and the relevant benchmark. b. Positions of the Parties 156. Commenters generally support the Commission's proposed approach of providing a transition schedule based on countries' level of economic development, but they disagree on what the duration of the transitions should be. MCI and Sprint both agree with the Commission's proposed transition schedules, although MCI urges the Commission to adopt the shortest of the proposed transition periods. The Alexis de Tocqueville Institution states that the Commission's proposals allow "time for countries to plan and adjust" and give "ample opportunity for countries to accelerate the introduction of competition to their markets." Sprint states that a waiver from compliance with the schedule should be allowed where extraordinary hardship is shown. 157. AT&T, Coalition of Service Industries, and WorldCom argue that the proposed transition periods are too long. AT&T urges the Commission to require that U.S. carriers negotiate rates within the benchmarks with carriers in upper income countries by June 1, 1998, with carriers in middle income countries by January 1, 1999, and with carriers in lower income countries by January 1, 2000. WorldCom supports a transition schedule of 18 months for upper income countries, two years for upper middle income countries, 30 months for lower middle income countries, and three years for lower income countries. Coalition of Service Industries argues that the benchmark settlement rates should be implemented by January 1, 1998 for upper income countries and by January 1, 2000 for middle and low income countries. Both WorldCom and AT&T oppose any exceptions to the transition schedules such as providing longer transition periods for negotiations with foreign carriers most severely affected by the benchmarks. 158. On the other hand, several commenters contend that the proposed transition periods are unrealistic for developing countries and should be lengthened for lower and middle income countries. GTE argues that for almost all developing countries, the transition periods must be longer than the proposed 2 to 4 years. It further argues that, at a minimum, the transition period for middle income countries should be four years. Tricom argues that the transition period for lower middle income countries should be at least 4 to 5 years. COMTELCA argues for even longer transition periods, 7 to 10 years. France Telecom argues that some flexibility should be retained to allow longer transition periods where "reasonably necessary." CANTO and GTE contend that transition periods should be tailored to individual countries' needs. GTE suggests that the gap between current settlement rates and a country's benchmark could be the basis for establishing transition periods, while CANTO argues that a country's transition should not end before a rate rebalancing plan has been enacted and completed. GTE also contends that countries committed to lowering accounting rates and rebalancing tariffs should be given a longer transition period. Telef˘nica de Espa¤a also argues that the transition periods must be tied to rate rebalancing. It further states that if the transition periods are not adjusted in this manner, the Commission should double the transition schedule for upper income countries and even further lengthen the transition schedule for other countries. Israel argues that the transition periods can be unreasonable for upper income countries, depending on their economic situation. 159. Several commenters urge the Commission to require U.S. carriers to negotiate proportionate annual reductions in settlement rates during the transition periods. Sprint states that a 4 to 5 year transition for low income countries would be too long unless the Commission requires U.S. carriers to negotiate proportionate annual reductions during the transition period. WorldCom states that the Commission should consider mandating a "glide path" for negotiations with any country eligible for a transition period of two or more years. KDD, on the other hand, urges the Commission to reject a glidepath approach because "it would be inherently arbitrary as well as a nightmare for the FCC and carriers to monitor and administer." 160. MCI, WorldCom, and AT&T oppose providing an additional transition period for negotiations with foreign carriers for which annual reductions in the spread between their current settlement rate and their benchmark will exceed a certain percentage. AT&T notes that the beneficiaries of any such measure would be the carriers that have been most resistant to reducing their accounting rates to comply with Commission and ITU policies. WorldCom similarly notes that additional transition time would benefit carriers that maintain the highest rates. MCI, however, states that a waiver should be available if a U.S. carrier can show that the carrier with whom it is corresponding would be subject to extraordinary hardship due to the benchmark settlement rates. c. Discussion 161. The substantial discussion in the record about the potential negative impact of our settlement rate benchmarks on lower income countries supports the need for a transition schedule for implementation of the benchmarks. Nonetheless, we remain committed to achieving settlement rates within the benchmarks as soon as feasible without forcing undue disruption of both U.S. and foreign carriers' operations. Therefore, we adopt transition periods and other adjustment mechanisms that balance these competing concerns of providing time for carriers to make adjustments and expeditiously reducing rates to a more cost-based level. 162. We adopt a transition schedule that is based primarily on the categorization of countries we use to calculate our settlement rate benchmarks, the World Bank and ITU's GNP per capita classifications. As discussed in Section II.A.2, supra, we believe this classification scheme provides a reasonable basis for determining a country's ability to transition to a more cost-based system of settlement rates without undue disruption to its telecommunications network. 163. We agree with commenters who argue that basing our transition periods solely on the World Bank and ITU's GNP per capita categories may not provide sufficient consideration of the adjustment problems that the poorest countries will encounter. In most of the poorest countries, telecommunications infrastructure is severely underdeveloped. We agree with commenters that the transition to a more cost-based system could be most severe for those countries with very low levels of telecommunications network development. We therefore establish a separate category for the "least telecommunications developed" countries for purposes of transitioning to our settlement rate benchmarks. 164. We base this additional category on countries' level of teledensity as measured by lines per one hundred inhabitants, rather than GNP per capita. We believe that GNP per capita is generally an accurate indicator of a country's level of telecommunications network development. However, GNP per capita may not adequately reflect the level of telecommunications network development for the least developed countries. The ITU has also observed that the generally strong correlation between level of economic development, as measured by GNP per capita, and telecommunications development, as measured by level of teledensity, is substantially weaker among the poorest countries. For this reason, we will consider countries' level of teledensity, as suggested by some commenters, for purposes of determining which countries are the "least telecommunications developed." We will include countries with a teledensity of less than one in this "least telecommunications developed" category. As the ITU has noted, a level of teledensity less than one is generally a strong indication that a country's telecommunications infrastructure is severely underdeveloped. 165. We will require U.S. carriers to negotiate settlement rates with their foreign correspondents in accordance with the following schedule: carriers in upper income countries 1 year from implementation of this Order carriers in upper-middle income countries 2 years from implementation of this Order carriers in lower-middle income countries 3 years from implementation of this Order carriers in lower income countries 4 years from implementation of this Order carriers in countries with teledensity less than 1 5 years from implementation of this Order 166. AT&T, Coalition of Service Industries, and WorldCom urge the Commission to adopt shorter transition periods than those proposed in the Notice -- AT&T and Coalition of Service Industries for all countries and WorldCom for lower income countries. We are sensitive to the concerns raised by these commenters that the transition periods proposed in the Notice are too long. We also would like to see settlement rates within the benchmarks as soon as possible. In fact, we fully expect that for many countries, market forces unleashed by the WTO Basic Telecom Agreement will bring settlement rates within the benchmarks before the end of the transitions periods we adopt here. U.S. carriers already have settlement rates at or below the benchmarks with several countries, including the United Kingdom, Sweden, and Canada. However, for many countries, we do not believe it is feasible to expect U.S. carriers to negotiate rates within the benchmarks in a shorter time frame than the transition periods proposed in the Notice. As the record demonstrates, a rapid shift to more cost-based rates could create adjustment problems for carriers in countries with significantly distorted rate schedules. A rapid shift to more cost-based rates could also have a short-term impact on telecommunications network development in those limited cases where settlement revenues are a major source of funding for network development. We note that it is in the best interest of U.S. carriers and consumers to avoid undue disruption of foreign carriers' operations. A well developed global telecommunications network provides the telecommunications infrastructure necessary to support international commerce and trade. 167. GTE and Tricom urge the Commission to adopt longer transition periods -- GTE for middle income countries and Tricom for lower middle income countries. Other commenters express concern that the transition periods proposed in the Notice are unrealistic for developing countries. We have lengthened the transition periods for lower middle income countries and those with teledensity less than one in response to the concerns in the record. We believe that the schedule we adopt here, with additional transition time for lower middle income countries and countries with teledensity less than one, provides a reasonable balance between the need to achieve settlement rates that are more cost-based as soon as feasible and the need to ensure that accounting rate reform does not unduly disrupt both U.S. and foreign carriers' operations. 168. Cable and Wireless and GTE argue that the transition periods are unrealistic and do not take into account the experience to date of countries introducing competition, including the United States. Cable and Wireless cites the examples of the United States where, it states, the introduction of competition took 15 years, the United Kingdom, which had a similar timeframe, and the European Union, with timeframes of 12-17 years. We recognize that the transition to competition takes time and requires difficult adjustments. However, the transition periods we adopt here are not intended to be schedules for implementation of competition in other countries. Rather, they are intended to provide some time for carriers in all countries, even those that have not introduced competition, to make the adjustments necessary to transition to a more cost-based system of accounting rates. 169. GTE suggests that the gap between current settlement rates and a country's benchmark could be the basis for establishing transition periods. We disagree. Such a policy would be unfair and tend to favor carriers with the highest settlement rates. GTE further contends that countries committed to lowering settlement rates and rebalancing tariffs should be given a longer transition period. Telef˘nica de Espa¤a also urges us to tie the transition periods to rate rebalancing. Telef˘nica de Espa¤a goes on to argue that, if we do not tie transition schedules to the rebalancing of tariffs, we should double the transition schedule for upper income countries and even further lengthen the transition schedule for other countries. The transition periods we adopt, however, are intended to address the concern of GTE and Telef˘nica de Espa¤a by balancing the need for providing carriers time to make adjustments with the need for reducing rates expeditiously to a more cost-based level. 170. Telef˘nica de Espa¤a, Telef˘nica Larga Distancia de Puerto Rico, and KDD argue that the transition periods are inconsistent with the five year transition period in our Access Charge Reform Order for independent local exchange carriers to reduce their interstate access rates to reflect forward-looking costs. KDD further states that the Commission should adopt a transition period of at least five years beginning from the effective date of the WTO Basic Telecom Agreement. We do not find our decision with regard to transition periods here inconsistent with our Access Charge Reform Order. In the Access Charge Reform Order we provided for a five year transition period to give competition in the local market sufficient time to develop. In this proceeding, however, the transition periods for settlement rate benchmarks have a different intent - - to ease the transition to a more cost-based system of settlement rates where competitive forces cannot achieve this goal. As discussed throughout this Order, we believe that we cannot rely on the market in all instances to reduce settlement rates to more cost-based levels. Moreover, we note that the transition schedule we adopt today provides additional time to reach more cost-based accounting rates after the end of the transition set forth in ITU Recommendation D.140, which had called for more cost-based rates by this year. 171. GT&T cites our Universal Service Order in arguing that the proposed transition periods are inconsistent with the Commission's domestic policy. Specifically, GT&T cites to our decision not to require U.S. incumbent local exchange carriers serving rural and/or insular environments to calculate their costs based upon forward-looking economic costs for a period of at least three years. It states that this decision "repudiates [our] proposal to require foreign carriers serving rural and/or insular countries to comply with FCC-prescribed settlement rates subject to a one- to four-year transition period." We are not, however, basing our benchmarks on a TSLRIC methodology. Rather, the benchmarks are calculated using the TCP methodology, which, as shown in Section II.A.1. of this Order, results in benchmarks that are substantially above any reasonable measure of incremental costs. 172. We agree with commenters who contend that a schedule of annual percentage reductions is necessary to ensure that progress is made in negotiating settlement rates within the benchmarks. As these commenters note, annual percentage reductions would avoid a situation where U.S. carriers are unable to negotiate settlement rate reductions until the end of the applicable transition period. This situation would delay any benefits from the settlement rate benchmarks until several years from the effective date of this Order. We therefore expect U.S. carriers to negotiate proportional annual reductions in settlement rates. Under this schedule of reductions, U.S. carriers should negotiate twenty percent reductions annually of the spread between a carrier's current settlement rates and the relevant benchmark for carriers with a five year transition period. For carriers with a four year transition period, the difference should be reduced by 25 percent annually; for carriers with a three year transition period, the difference should be reduced by thirty-three percent annually; and for carriers with a two year transition period, the difference should be reduced by fifty percent per year. 173. We will not, however, mandate that U.S. carriers meet these annual reduction targets. We believe such a requirement would place unnecessary restrictions on the ability of U.S. carriers to negotiate settlement rate arrangements with their foreign correspondents that take into account the needs of both parties and, as KDD notes, would be difficult to administer and monitor. U.S. carriers should retain some flexibility in their negotiations during the transition period. For example, if a U.S. carrier negotiates an accounting rate agreement that would achieve a settlement rate within the relevant benchmark by the end of the transition period, we would be less concerned about whether progress is made in negotiating annual reductions. We emphasize, however, that we may take enforcement action if a U.S. carrier is unable to make any progress in negotiating settlement rate reductions during the transition periods and settlement rates remain well in excess of our benchmarks. 174. In addition to the transition schedules, we will consider providing additional transition time for negotiations with foreign carriers in countries for which annual reductions in settlement rates, according to our transition schedule, would entail a loss of greater than 20 percent of the country's annual telecommunications revenue. In considering the need for additional transition time, we will assume U.S. carriers negotiate proportionate annual reductions in the difference between the current settlement rate and the applicable benchmark rate. Thus, for example, if a U.S. carrier is negotiating with a carrier in a country with a four year transition period, we will look at whether a reduction of 25 percent of the difference between the current settlement rate and the applicable benchmark will entail a loss of greater than 20 percent of the country's annual telecommunications revenue. A U.S. carrier providing service to a country that meets this standard may file a request with the International Bureau seeking a waiver of the applicable transition period. Allowing additional transition time for countries that meet this standard will prevent countries facing significant declines in their telecommunications revenues as a result of our benchmarks from experiencing undue disruptions in their networks. 175. We proposed in the Notice to provide additional flexibility in implementation of the benchmarks beyond our transition periods for U.S. carriers and their correspondents in developing countries that have demonstrated an actual commitment to fostering entry and promoting competitive market environments. We stated that such additional flexibility would serve two purposes: it would recognize the challenges to developing countries posed by the introduction of cost-based rates and encourage the development of competitive markets necessary to achieve cost- based settlement rates. Telef˘nica de Espa¤a agrees with this proposal, arguing that we should not apply benchmarks to developing countries that have set a date certain for introducing competition. AT&T, on the other hand, opposes this proposal, arguing that the proposed transition periods already take into account the needs of developing countries by providing those countries higher benchmarks and longer transition periods. WorldCom also opposes this proposal, arguing that it is inherently contradictory. It states that if a route is competitive, settlement rates will drop below the benchmarks, and if a route is not competitive, the settlement rate benchmarks are necessary. 176. We agree with AT&T that our transition periods adequately take into account the challenges faced by developing countries in moving to more cost-based rates, especially given the longer transition periods we adopt here for lower-middle income countries and countries with teledensity lower than one. The transition periods are intended to provide carriers an opportunity to make necessary adjustments, such as rate rebalancing, to move to a more cost-based settlement system. These same adjustments are required to implement competitive reforms successfully. We also note that the WTO Basic Telecom Agreement significantly advances our goal of encouraging the development of competitive markets. Moreover, we are concerned that a policy which would create an exemption based on market conditions in the destination market from our requirement that U.S. carriers negotiate settlement rates within our benchmarks may not be consistent with our MFN obligations under the GATS. We thus decline to adopt our proposal in the Notice to permit additional flexibility in the application of our benchmarks beyond the transition periods for U.S. carriers serving developing countries that have committed to introducing competitive reforms. 3. Enforcement of Benchmarks a. The Notice 177. We stated in the Notice that we would consider taking enforcement measures to ensure that U.S. carriers make adequate progress in negotiating settlement rates at or below the benchmarks. We proposed, as an initial measure, to identify foreign carriers that are reluctant to engage in meaningful progress toward negotiating settlement rates at or below the relevant benchmark and to convey to the responsible government authorities our concern about continued high settlement rates and the lack of meaningful progress, and to seek their support in lowering settlement rates. 178. We also proposed stronger steps that we would consider in those cases where a foreign carrier fails to respond to a U.S. carrier's efforts to achieve settlement rate progress. We emphasized that in each case our actions would apply to U.S. carriers within our jurisdiction, not to their foreign correspondents. Specifically, we sought comment on the following measures: (i) directing U.S. carriers to negotiate settlement rate agreements that provide for a fixed expiration date until a foreign carrier agrees to a reasonable schedule of reductions aimed at reaching the benchmark level; (ii) directing U.S. carriers to settle at a rate that is no higher than the transition rate goals until a foreign carrier agrees to a reasonable schedule of reductions aimed at reaching the benchmark level; (iii) directing U.S. carriers to settle at or below the benchmark rate and to continue paying at that rate until we determine that meaningful progress in the form of accounting rate reductions is being made; and (iv) directing U.S. carriers to pay a settlement rate no higher than the benchmark rate. b. Positions of the Parties 179. Several commenters urge us to adopt clear and effective mechanisms to achieve the benchmark settlement rates. AT&T argues that only through active enforcement can we obtain compliance with the benchmarks adopted in this Order. MCI states that if a U.S. carrier makes a showing that it has been unable to reach an agreement that meets the relevant benchmark within a reasonable time frame, a U.S. carrier could request us to use our statutory authority to facilitate compliance with this Order. Frontier asserts that we can, and should, utilize each of the enforcement options proposed in the Notice as individual circumstances dictate. 180. AT&T recommends that we establish a "complaint" process with expedited procedures, including a time frame for our decision. AT&T argues that we should require such filings to show "only that the foreign carrier has not complied with the applicable benchmark rate, or has not made the necessary interim step toward that rate during the transition period." Upon such a showing, AT&T contends that we should prescribe the settlement rate to be paid to that foreign carrier by all U.S. carriers. Both WorldCom and AT&T argue that the remedy we order should be a prescription of rates, rather than agreements to schedules of reductions or determinations of adequate progress. 181. A number of commenters oppose the enforcement of our settlement rate benchmarks. Indonesia argues that we should use benchmarks only, if at all, as "guidelines for U.S. carriers as their initial offered-rates to negotiate with their corresponding relations, subject to bilateral agreements between the parties involved." KDD contends that we cannot adopt an enforcement procedure because Section 208 of the Act, which governs complaints, applies only to acts or omissions of a "common carrier subject to this Act." KDD asserts that because a foreign carrier would not qualify as a "common carrier subject to this Act" it cannot be subject to a Section 208 complaint. SBC argues that our enforcement proposals will likely prove harmful to relationships between U.S. international carriers and their foreign correspondents. SBC argues that "directing U.S. carriers to take certain actions -- some of which are likely to appear hostile from the foreign carriers' perspectives -- . . . would potentially undermine the ability of U.S. carriers to continue negotiations and to develop creative, potentially beneficial solutions to any international accounting disputes." France Telecom expresses concern that the proposed enforcement measures could have a "chilling effect" on multilateral discussions of accounting rate reform. 182. ACC asserts that if we decide to adopt our benchmarks proposals, we must protect smaller carriers from foreign carriers' reprisals so that the larger U.S. carriers are not the only beneficiaries of our action. Justice Technology also expresses concern about a potential backlash against new international carriers as a result of our benchmark settlement rates. TRA argues that we should not require "small to mid-sized" carriers to abrogate an existing operating agreement in order to protect them from retaliation by foreign carriers. TRA states that, while adoption of our benchmarks proposals may "serve a broad public policy purpose, the global benefits will be lost on small to mid-sized carriers whose businesses are lost or damaged during the process." For enforcement to be effective, though, AT&T argues that our exercise of prescription authority must apply to all U.S. facilities-based carriers. 183. We also note that in our Accounting Rate Flexibility Proceeding, AT&T suggested that carriers would be assisted in their accounting rate negotiations if we required all accounting rate agreements to have annual expiration dates. Several parties -- including MCI, WorldCom and TRA -- opposed AT&T's proposal of time-bounded rate agreements, arguing that it would harm small carriers or could be disruptive to carrier negotiations. We stated that we would consider that issue in this Order. 184. Some commenters have raised the issue of time-bounded agreements in their comments filed in this proceeding. To protect "small to mid-sized" carriers from foreign carrier retaliation, TRA argues that we should not require such carriers to enter only into short-term settlement rate agreements. WorldCom also opposes our proposal to require U.S. carriers to negotiate settlement rate agreements that provide for a fixed expiration date until a foreign carrier agrees to a reasonable schedule of reductions. WorldCom contends that certain foreign administrations would be unwilling to renew such operating agreements with all but the one or two largest U.S. carriers. c. Discussion 185. Because we have found that settlement rates above the relevant benchmarks after the relevant transition period will not produce just and reasonable rates, we will take appropriate enforcement measures as may be necessary to ensure that U.S. carriers satisfy our benchmark requirements. As an initial measure, we will identify foreign carriers that are reluctant to engage in meaningful progress toward negotiating settlement rates at or below the relevant benchmark. We will convey to the responsible government authorities our concern about continued high settlement rates and the lack of meaningful progress, and seek their support in lowering settlement rates. In our contacts with the responsible government authorities, we will emphasize the need for cooperation in achieving the goal of cost-based rates, enlist their active support in achieving that goal, cite relevant ITU recommendations such as Recommendation D.140, and suggest further discussions that may be necessary. 186. When a foreign correspondent fails to respond to a U.S. international carrier's efforts to achieve a settlement rate that complies with the requirements of this Order, we will allow the U.S. international carrier to ask us to consider stronger steps. As it is clearly within the interest of a U.S. international carrier to negotiate rates at or below the relevant benchmark, we believe that we can rely primarily on such a carrier-initiated enforcement process. Pursuant to the procedures we adopt in this Order, a U.S. international carrier may file a petition that: (1) demonstrates that it has been unable to negotiate a settlement rate with its foreign correspondent that complies with the rules and policies we adopt in this Order; and (2) requests enforcement measures be taken to ensure that no U.S. carrier pays that foreign correspondent an amount exceeding the lawful settlement rate benchmark. The U.S. international carrier should file its petition with the Office of the Secretary, Federal Communications Commission, 1919 M Street, NW, Room 222, Washington, DC 20554. The petitioning carrier must serve the foreign correspondent with a copy of the petition and a copy of the procedural rules governing replies to the petition. The foreign correspondent or other interested party will have thirty-five days from the date on which we place the petition on public notice to file comments or an opposition to the U.S. international carrier's petition. We will allow ten additional days for replies to any comments or oppositions. 187. We will ensure compliance with our settlement rate benchmarks. We believe that we have the authority to use any of the enforcement measures proposed in the Notice to respond to a carrier's petition. As we discuss in Section II.E. of this Order, our authority includes the ability to prescribe a change in settlement rates whenever we determine such rates to be unlawful. We do not at this time adopt any set enforcement mechanism, but will instead consider the individual circumstances surrounding each carrier-initiated petition to determine the appropriate enforcement action to take. We agree with AT&T that whatever enforcement action we take with regard to a complaint about a foreign correspondent's unwillingness to negotiate a settlement rate at or below the relevant benchmark must apply to all U.S. international carriers' dealings with that foreign correspondent in order for enforcement of our benchmarks to be effective. 188. Some commenters express concern that enforcement of the benchmark settlement rates will lead to reprisals against smaller carriers. We will continue to safeguard U.S. carriers against discriminatory treatment by foreign carriers by vigorously enforcing our ISP. 189. Although we decline at this time to anticipate exactly which enforcement measure would be appropriate in a given situation, we do agree with those commenters that argue that we should refrain from using one particular proposed enforcement mechanism. We believe that requiring U.S. international carriers to negotiate settlement rate agreements that provide for a fixed expiration date until a foreign carrier agrees to a reasonable schedule of reductions would impose unnecessary financial burdens on U.S. international carriers. Such an action by us would require carriers to be continually engaged in negotiations for short-term agreements. We find that the other proposed enforcement mechanisms will provide us with the ability to ensure compliance with our benchmarks. 190. The benchmark requirements we adopt in this Order will become effective on January 1, 1998. The transition periods for U.S. carriers to negotiate settlement rates at or below the benchmark rates will begin on that date. However, we will consider, on a case-by-case basis, grandfathering settlement rate agreements that were negotiated prior to the effective date of this Order that do not comply strictly with the benchmark requirements we adopt here. Our standard for grandfathering such agreements will be whether approval of the agreement is in the public interest. We will find an agreement to be in the public interest if it serves the same goals we have set forth in this Order and if it achieves settlement rates at or below the relevant benchmark within a reasonable period of time. We reiterate that if, in the future, there is a multilateral consensus on a substantially equivalent international measure to achieve our goals of a cost-based system of settlements in a timely manner, we will waive enforcement of the benchmark settlement rates. C. Section 214 Authorization Conditions 191. We proposed in the Notice to apply the settlement rate benchmarks to address potential distortions in the U.S. market for IMTS that could be created by the current system of above-cost settlement rates. We proposed to address these potential market distortions because they impede our policy of creating greater competition in the IMTS market in order to lower international calling prices for U.S. consumers. 192. We identified in the Notice two types of market distortions that could be created by above-cost settlement rates. The first is the potential for a foreign carrier and its U.S. affiliate to execute a "price squeeze" against other carriers in the U.S. IMTS market. A price squeeze is a predatory tactic in which the U.S. affiliate sets its prices so close to the international settlement rates charged by the foreign carrier that the other carriers cannot match the prices without losing money, even if they are more efficient than the U.S. affiliate. Such a strategy would be made possible by the fact that the foreign carrier controls an essential input for providing service in the U.S. IMTS market, and the price charged for that input -- the international settlement rate -- is substantially above the economic cost of providing the service. Although the U.S. affiliate might pay the same settlement rate paid by its competitors, it would consider the actual economic cost incurred by the foreign carrier rather than the above-cost settlement rates when setting its IMTS prices. 193. The second type of market distorting behavior that could be created by above-cost settlement rates is one-way bypass of the settlements system. This could occur if a foreign carrier collecting above-cost settlement rates is able to send its switched traffic over private lines into the United States, but U.S. carriers are unable to send their traffic over private lines in the reverse direction, and must continue to pay a relatively high settlement rate. We have stated on several occasions that such one-way bypass of the settlements system is not in the public interest because it would greatly exacerbate the traffic imbalance, and, therefore, the U.S. net settlements deficit on the route where it is occurring. An increase in the U.S. net settlements deficit would ultimately lead to higher collection rates for IMTS on the affected route as carriers pass through to consumers increased settlement costs. 194. To address these potential market distortions that could result from above-cost settlement rates, we proposed to condition various types of authorizations to provide international services from the United States on compliance with the benchmark settlement rates. We adopt the proposed conditions with certain modifications in response to the record, as described in the next two sections. We address separately our conditions for carriers that seek to serve affiliated markets as facilities-based switched or private line carriers and our rules that will govern all U.S. carriers in their use of facilities-based or resold private lines for the provision of switched services. 1. Condition for Service to Affiliated Markets a. Notice 195. We proposed in the Notice to condition the facilities-based switched and private line authorizations of carriers seeking to serve affiliated foreign markets from the United States on the affiliated foreign carrier offering U.S. international carriers a settlement rate for terminating U.S.-originated traffic on the affiliated route that is at or below the appropriate benchmark. We further proposed that if, after the foreign-affiliated carrier has commenced service to the affiliated market, we learn that the carrier's service offering has caused a distortion of competition on the affiliated route, we would order that the affiliated foreign carriers' settlement rates on that route be reduced to the bottom of the range or revoke the authorization of the carrier to serve the affiliated market. An authorization granted to a facilities-based carrier would thus be granted subject to a condition to this effect. 196. We sought comment on what mechanism or approach we should use to determine when there has been a distortion of competition in the IMTS market and the lower settlement rate should be applied. We also requested comment on how our proposal would affect the effective competitive opportunities test ("ECO") we adopted in the Foreign Carrier Entry Order. b. Positions of the Parties 197. Commenters disagree about our proposal to use the settlement rate benchmarks to condition authorizations to provide international facilities-based service from the United States to an affiliated foreign market. Some commenters support our proposal, some oppose it on the ground that it is not necessary, and others seek to modify it because it is not stringent enough. 198. WorldCom supports our proposal "because it is a narrowly-tailored remedy that addresses potential competitive distortions without limiting the ability of foreign carriers to enter the U.S. market." WorldCom states that in addition to the proposed authorization condition, we should continue vigorously to enforce the ISP on all routes. The Alexis de Tocqueville Institution concurs that revenues from artificially high settlement rates could be used to subsidize a facilities- based affiliate competing in the U.S. market. It states that such a subsidy could be used "to unfair competitive advantage through marketing efforts or predatory pricing." 199. AT&T supports the concept of using settlement rate benchmarks to condition authorizations, but argues that, as proposed by the Commission, the conditions are not sufficient to prevent anticompetitive behavior in the U.S. market for IMTS. AT&T argues that foreign carriers are able to impose a price squeeze on U.S. carriers by cutting their U.S. prices potentially as low as the foreign carriers' TSLRIC of U.S. origination and foreign market termination. AT&T states that such conduct would harm competition by limiting the participation of existing carriers and by discouraging further market entry. AT&T also expresses concern about the ability of foreign carriers to use a U.S. affiliate to lower prices in the U.S. market for IMTS. According to AT&T, this price-cutting strategy would enable a foreign carrier to earn additional settlements revenue by stimulating additional U.S.-outbound traffic to its home market from all carriers from the United States to its home market. 200. AT&T argues that because the proposed benchmark ranges still exceed economic cost, our proposed condition would not remove the "strategic pricing advantages" enjoyed by carriers serving affiliated foreign markets from the United States. Thus, AT&T argues, we should condition a carrier's authorization to provide facilities-based service to an affiliate on that carrier's offering U.S. carriers settlement rates at or below the low end of the benchmark range. ICA also supports such a condition. AT&T opposes any attempt to identify anticompetitive behavior through regulatory monitoring, as proposed in the Notice, on the ground that it would require the reimposition of burdensome reporting requirements recently removed by the Commission. AT&T concludes that the only viable alternative to its proposal is to continue to limit U.S. market entry for the provision of facilities-based and switched resale services to foreign carriers meeting the ECO test. 201. In contrast to AT&T, HKTI and GTE argue that the proposed condition is not necessary. HKTI asserts that the potential relationship between above-cost accounting rates and any anticompetitive behavior in the U.S. market for IMTS is "totally attenuated." HKTI asserts that there has been no demonstration that foreign carriers are in fact receiving significant "transfer payments" through settlements. HKTI further asserts that "a proper calculation of net settlements, correcting for the diversion of direct revenues to U.S. carriers as a result of refile, callback and other reverse charge services, may show that deficits are actually incurred by foreign carriers. HKTI also states that any company can cross-subsidize an affiliate through profits and there is no way the Commission could effectively separate out the specific effects of above-cost accounting rates from profits. 202. GTE states that it is implausible that a foreign carrier would cross-subsidize a U.S. affiliate in order to offer below-cost prices in the U.S. market because it will never be able to recoup, in the form of later monopoly profits, the losses it suffered. GTE contends that increasing competition in the U.S. market for IMTS means that it would be impossible for a foreign carrier to gain a monopoly position, much less retain that monopoly long enough to recoup excess profits. GTE concludes that it would be irrational under these circumstances for a foreign carrier to offer below-cost service offerings in an attempt to monopolize a segment of the U.S. market for IMTS. 203. ABS-CBN states that the condition is not necessary in all circumstances. ABS- CBN cites its own situation, where according to ABS-CBN, it could not cross-subsidize a foreign affiliate with settlement payments from U.S. international carriers because per minute U.S. settlement rates are barely enough to cover its per minute payout to the incumbent Philippine carrier for local termination services. It further states that the "subsidies" most likely to frustrate competition in the U.S. market are those which major U.S. carriers obtain by virtue of their domestic long-distance businesses. ABS-CBN states that major U.S. carriers have a cost structure that is hard to match because they can spread their joint costs over more customers and have more pricing flexibility on individual rates. 204. The United Kingdom suggests that the Commission make a distinction between liberalized and monopoly markets for purposes of applying the authorization condition. It states that the real anticompetitive behavior to be avoided would involve the ability of a foreign carrier terminating its own traffic to charge its affiliate a lower or no settlement rate. The United Kingdom states that such behavior is not a concern where the foreign market is open and other carriers on the route can self-terminate. 205. Sprint also opposes our proposed condition for authorizations to provide facilities- based switched service to affiliated markets on the ground that it is not necessary. Sprint states that "the Commission can under all circumstances rely on its benchmarks as a basis for exchanging traffic for any foreign carrier." It further argues that foreign carrier entry and investment in the U.S. market generally should be encouraged. With respect to the question of mechanisms to detect distortion in the U.S. market, Sprint urges us to approach this question "with great care," as one party's perception of competition distortion may be viewed as robust competition by another party. 206. MCI disagrees with our proposal to condition carriers' authorizations to provide facilities-based service to affiliated markets as proposed in the Notice. Instead, MCI urges us to retain the ECO test to address potential distortion concerns. c. Discussion 207. We are not convinced by commenters who argue that our proposed authorization condition is unnecessary. We believe it is appropriate to prevent potential anticompetitive distortions in the U.S. market for IMTS by conditioning a carrier's authorization to provide facilities-based switched or private line services to a market in which its affiliated foreign carrier provides service on that foreign carrier offering U.S. carriers a settlement rate to terminate U.S.- originated traffic on the affiliated route that is at or below the relevant benchmark. We are also not convinced by AT&T's arguments that the condition should be more stringent. We therefore adopt the conditions for facilities-based switched and private line service to affiliated markets as proposed in the Notice. We also adopt a rebuttable presumption to determine when there has been a distortion of competition in the U.S. market for IMTS and we should take enforcement action. 208. Before we address foreign carriers' incentives to engage in price squeeze behavior, we conclude that a U.S.-licensed carrier does have the ability to engage in price squeezes that create distortions in the U.S. market for IMTS when it provides facilities-based service to a market in which its affiliated foreign carrier provides the terminating service and collects above-cost settlement rates. We refer to such markets as "affiliated markets." A price squeeze refers to a particular, well-defined strategy of predation that would involve the foreign carrier setting "high" (above-cost) international settlement rates while its U.S. affiliate offers "low" prices for domestic IMTS services in competition with the other carriers. Because the foreign carrier's international termination services are a necessary input for providing IMTS services, the foreign carrier can create a situation where the relationship between its "high" international settlement rates and its U.S. affiliate's "low" prices for IMTS services forces competing carriers either to lose money or to lose customers even if they are more efficient than that affiliate at providing international services. This unprofitable relationship between the input prices and the affiliate's prices, not the absolute levels of those prices, defines a price squeeze. 209. A U.S. affiliate of a foreign carrier will still set its own prices based on the foreign carrier's economic cost of providing international termination services because this will maximize their combined profits. In this sense, a price squeeze would have much the same effect as price discrimination in which the foreign carrier charged its U.S. affiliate lower settlement rates than it charged all other carriers. The affiliate will also take into account the effect of its prices on the settlement revenues earned by the foreign carrier. 210. We sought comment in the Notice on whether a foreign carrier has the incentive to use revenues from above-cost settlement rates to subsidize an affiliate providing international services in the U.S. market. We noted that a foreign carrier may not have this incentive because in serving its home market directly through a U.S. affiliate, the foreign parent would no longer receive the settlement payment it formerly received from other U.S. carriers to terminate traffic to that market. In its comments, AT&T asserts that foreign carriers collecting above-cost accounting rates do have an incentive to enter the U.S. market and undercut competitors. According to AT&T, the incentives lie in three additional sources of profit for a U.S. affiliate of a foreign carrier: (1) the foreign carrier may earn profits from terminating U.S.-inbound traffic; (2) to the extent that its U.S. collection rate exceeds costs, the foreign carrier may use its affiliate to earn profits on U.S.-outbound traffic; and (3) by using its affiliate to lower price in the U.S. market, the foreign carrier may earn additional settlements revenue for the foreign carrier by stimulating additional U.S.-outbound traffic to its home market from all carriers. GTE, on the other hand, argues that it would be irrational for a foreign-affiliated carrier to offer below-cost service offerings in the U.S. market because it would be impossible for a foreign carrier to gain a monopoly position in the U.S. market, much less retain that monopoly long enough to recoup excess profits lost by offering below-cost service. GTE thus concludes that our benchmark conditions are not necessary. 211. We agree with AT&T that in markets that are not fully competitive and are characterized by substantial margins between costs and prices, such as some segments of the U.S. market for IMTS, a foreign carrier collecting above-cost settlement rates would have the ability and incentive to enter the U.S. market and charge lower prices for IMTS. As AT&T notes, such a strategy could generate additional revenue for the foreign carrier by stimulating additional U.S.- outbound traffic to its home market from all carriers. To the extent that its U.S. affiliate's prices remain above its costs, the lower prices are consistent with increased competition or more efficient operation, and consumers clearly benefit from the development. On the other hand, where the U.S. affiliate sets its prices below its own costs of providing service, the lower prices may be the result of a predatory price squeeze and distort competition. Nonetheless, we do not agree with GTE that our benchmark conditions are unnecessary. The consequences of carriers opting to engage in a price squeeze strategy are serious enough for us to take preventive measures. As long as foreign carriers are possibly able to engage in predatory price squeeze behavior, we find that the public interest is best served by adopting the Section 214 authorization condition we proposed in the Notice to prevent such behavior and protect competition in the U.S. market for IMTS. 212. ABS-CBN states that the condition for provision of facilities-based service to affiliated markets is not necessary for carriers like itself whose settlement revenues barely cover local termination costs. While it may be true that some carriers have greater ability than others to engage in anticompetitive behavior, we believe a rule of general applicability is more administratively efficient, and more importantly, would result in greater regulatory certainty for Section 214 applicants than a case-by-case determination. In addition, case-by-case determinations of the need for competitive conditions could lead to long delays in processing Section 214 applications. 213. We note that in our recent Access Charge Reform Order and Classification of LEC Long Distance Service Order, we addressed the potential for BOCs to engage in price squeeze behavior when providing in-region interLATA services. In the Access Charge Reform Order, we concluded, following analysis similar to that here, that an incumbent LEC and its interexchange affiliate could potentially implement a price squeeze once the incumbent LEC began offering in-region, interexchange toll services. In the Access Charge Reform Order, however, we concluded that we have in place adequate safeguards against such conduct, and in the Classification of LEC Long Distance Service Order, we concluded that imposing advance tariffing and cost support data requirements on BOC interLATA affiliates would not be an efficient means of preventing the BOCs from engaging in a price squeeze strategy. In the Access Charge Reform Order, we also took comfort from current market conditions and regulatory developments. In particular, we noted that: (1) interexchange carriers could respond to an incumbent LEC's attempted price squeeze by entering the local market through the use of unbundled network elements priced at cost-based rates; (2) it is unlikely, given the presence of excess sunk network capacity, that an incumbent LEC could successfully engage in predatory conduct aimed at gaining market power in markets for interexchange services; and (3) domestic antitrust laws offer a measure of protection against a predatory price squeeze. 214. The conditions we adopt today are consistent with our recent treatment of price squeeze concerns in other contexts. For example, our requirement that a foreign carrier's settlement rates be at or below the relevant benchmark as a condition of Section 214 authorization for a carrier to provide IMTS service on an affiliated route is analogous to the approach we adopted with respect to an incumbent LEC's interstate exchange access rate -- an important component reflected in the rates charged to end users. In the Access Charge Reform Order, we concluded that rates preferably should be set by competition, not regulation. If access markets were competitive, predatory price squeezes could not be used profitably to distort competition in interexchange markets. Because incumbent LECs currently have little or no competition in the provision of access to their exchange access facilities, however, we have taken, and continue to take, action to ensure that the incumbent LEC access rates continue to move toward the underlying cost of providing access services. In that Order, we determined that where competition does not develop over the next several years, we will require carriers to file cost studies that will enable us to ensure that all customers receive the benefit of more efficient prices. 215. Settlement rates similarly represent a cost component that is reflected in the rates charged to end users. As with access charges, U.S.-owned carriers do not, for the most part, have a competitive international market from which to purchase international termination services. While we believe that the WTO Basic Telecom Agreement will lead to the development of increased competition in foreign carriers' markets, this process has just begun, and competitive alternatives are not currently available. Consequently, international settlement rates generally remain far above competitive levels. Moreover, unlike in the domestic interexchange market, we have no jurisdiction over the foreign provider of termination services, and we do not have the same range of regulatory tools available as we have in the domestic context to address competitive distortions. We thus have only a limited ability to affect the development of competition in the international termination services market. 216. We believe there are several factors that suggest that predatory price squeezes may be potentially a greater problem on international routes than they are in the domestic interexchange context. First, on many international routes, the margin of settlement rates above cost is greater than the margin for interexchange access charges. At the same time, there may be less competition for end users than in the domestic interexchange context. On such routes, the potential for distortion is higher. Second, in the domestic interexchange context, interexchange carriers can mitigate the effects of a price squeeze and avoid access charges by winning local customers and serving them by means of unbundled network elements set at cost-based rates. No comparable mechanism is available on international routes. Third, in the Access Charge Reform Order, we recognized that the existence of four established interexchange networks made it unlikely that predatory price squeezes could be successful. In contrast, on certain international routes, there is little excess capacity available to competitors. Moreover, if an international carrier were forced to exit, the foreign carrier's affiliate might be able to take control of the other carrier's facilities, which would make new entry less likely and thus increase the likelihood that predation would be successful. For these reasons, we believe predatory price squeezes pose a potentially more serious threat on international routes than in the interexchange context. Our benchmarks will help to protect competition in U.S. IMTS markets by reducing the extent to which foreign carriers and their U.S. affiliates can manipulate price-cost margins (the margin between the price of the good and the price of the inputs needed to produce the good) in ways that distort markets. 217. Our assessment of the need to adopt a Section 214 authorization condition to address the potential for price squeezes has changed since we first reviewed this issue in the Foreign Carrier Entry proceeding. We there concluded that it was unnecessary to impose such a condition. We did not find on that record persuasive evidence that foreign carriers that entered our market pursuant to our ECO framework could successfully engage in a price squeeze. We reasoned that foreign carriers could not unilaterally set settlement rates because they are established through negotiation with U.S. carriers; that high settlement rates could be offset by lower prices for other inputs or by carrier efficiencies; and that the benefits of additional price and service competition from foreign carriers entering our market after an ECO finding offset the possibility of economic harm to unaffiliated U.S. carriers. We also stated our belief that increased global competition itself would encourage foreign carriers to move toward cost-based levels. 218. The balance of considerations has changed significantly since the Foreign Carrier Entry Order. As we stated earlier in this Order, our action here comes after the time period for implementation of ITU Recommendation D.140 has concluded, yet settlement rates remain far above cost-based levels. Against this backdrop, the prospect of freer entry into the U.S. market after January 1, 1998 pursuant to our rulemaking proposals implementing the WTO Basic Telecom Agreement increases our concern that foreign carrier entry could create competitive distortions in the U.S. market. We find on this record that foreign carriers have the ability to engage in a price squeeze and that the consequences of carriers opting to engage in such a strategy are serious enough for us to take the preventive measure of adopting a Section 214 authorization condition at this time. 219. We disagree with HKTI that the potential relationship between above-cost settlement rates and anticompetitive behavior in the U.S. market is attenuated. The relationship is in fact straightforward. Settlement rates are an essential input for international termination services. The rates charged for that essential input are in most cases substantially above-cost. When a provider of that above-cost essential input enters the retail market that uses that input (the market for IMTS), it has the ability to price its retail services so that the relationship between "high" input prices and "low" retail prices forces competing retail providers either to lose money or to lose customers even if they are more efficient. HKTI states that there is no way the Commission could separate out the specific effects of above-cost settlement rates from other intracorporate cross subsidies. But, as discussed here, our concern is specifically with the potential market-distorting impact of above-cost settlement rates as an essential input for international termination services. HKTI further states that we cannot determine "distortion" in the international marketplace solely based on the level of settlement rates. It thus concludes that the Section 214 authorizations could not be applied in a nondiscriminatory and fair way and would be arbitrary and capricious as a result. We disagree. We have specifically defined the competitive harm we seek to address through the authorization conditions: that a foreign-affiliated carrier can engage in price squeeze behavior on the affiliated route by virtue of its dual role as a provider of an above-cost essential input and a competitor in the retail market using that input. 220. We note that AT&T expresses a broader concern about the effect a foreign- affiliated carrier providing service to its home market will have on the U.S. market. AT&T is concerned not only about predatory price squeezes, but also has a more general concern about all price-cutting behavior of foreign-affiliated carriers. AT&T believes that foreign carriers have an "unbeatable cost advantage" due to their parent's collection of above-cost settlement rates. To the extent that AT&T argues that all price-cutting by U.S. affiliates of foreign carriers is anticompetitive, we disagree. Such pricing behavior becomes detrimental to U.S. consumers' interests only when it could ultimately reduce the level of competition on particular international routes. A pricing strategy that undercuts competitors' prices but that is neither discriminatory nor potentially harmful to competition may be deemed unfair by some commenters since it would increase the profits of foreign carriers and reduce the profits of carriers in the domestic IMTS market. It does not, however, create distortions in the U.S. market for IMTS that require us to impose conditions. 221. While we believe that carriers serving affiliated markets have the ability to engage in market-distorting price squeeze behavior by pricing below cost, we do not agree with AT&T that the only way to prevent such behavior is by conditioning a carrier's authorization to provide facilities-based service to an affiliated market on the affiliated foreign carrier offering U.S. carriers settlement rates on the affiliated route at or below a TSLRIC-based rate. Such a condition is not necessary to prevent distortions in the U.S. market for IMTS services, and in fact, it could harm the development of further competition in that market. We believe AT&T's proposed condition could effectively deter many carriers from providing facilities-based service from the United States to affiliated markets. This result would impede our goal of increasing competition in the U.S. market for IMTS to the detriment of U.S. consumers. 222. We agree with AT&T's assertion that because settlement rate benchmarks based on the TCP methodology are above-cost, the facilities-based condition as proposed in the Notice does not completely eliminate the ability for foreign-affiliated carriers to execute a price squeeze. Requiring that a carrier's settlement rates be at or below the relevant benchmark before it may provide facilities-based service to an affiliated market, however, substantially reduces the above- cost termination charges that could be used to execute a price squeeze. We also note our conclusion that foreign carriers collecting above-cost settlement rates are potentially able to engage in anticompetitive price squeeze behavior. We conclude that AT&T's proposal would be an overreaction to the potential for price squeeze. Moreover, to the extent carriers retain the ability to execute a predatory price squeeze, our authority to take enforcement action, including ordering that a carrier's settlement rates on an affiliated route be reduced to the level of our best practice rate, $0.08, or revoking a carrier's authorization will be a strong deterrent. We also note that in our Foreign Participation Notice we questioned whether we should impose certain competitive safeguards, including structural separation, to guard against anticompetitive behavior in the U.S. market for IMTS. Any such safeguards would be applied in addition to the Section 214 authorization conditions we adopt here. 223. AT&T asserts that, if we do not adopt its proposal to strengthen the condition for the provision of facilities-based switched service to affiliated markets, then we should retain the ECO test. MCI also argues in favor of retaining the ECO test. We will consider these arguments in our Foreign Participation proceeding, where we have sought comment on whether to apply the ECO test in light of the WTO Basic Telecom Agreement. In that Notice, we tentatively concluded that we should eliminate the ECO test as part of our public interest analysis of pending and future Section 214 applications filed by foreign carriers from WTO Member countries. 224. We adopt a trigger to determine when market distortion has occurred, at which time we will take enforcement action. Such enforcement action may include requiring a carrier to lower its settlement rates on an affiliated route to the level of our best practice rate or revoking its authorization to provide service on the affiliated route. We establish a rebuttable presumption that a carrier has engaged in price squeeze behavior that creates distortions in the U.S. market for IMTS if the conditions of our bright line test are met. The bright line test we adopt is whether any of a carrier's tariffed collection rates on an affiliated route are less than the carrier's average variable costs on that route. For purposes of this bright line test, we define a carrier's average variable costs on the affiliated route as the carrier's net settlement rate plus any originating access charges. These are the two primary expenses that a carrier would not incur in the short term if it stopped providing IMTS from the United States to its affiliated market. Most other expenses are fixed in the short term, and would be incurred regardless of whether the carrier provided service. If any tariffed collection rate is less than average variable costs, we will presume that the carrier is engaging in anticompetitive price squeeze behavior and we will take enforcement action. Such enforcement action may include a requirement that the carrier reduce its settlement rates on the affiliated route. Alternatively, we could revoke the carrier's authorization to serve the affiliated market. 225. We believe that recovery of average variable costs is an appropriate threshold standard for determining the existence of price squeeze behavior because in the short run carriers can increase their profits (or minimize their losses) by offering service at a price at or above average variable costs. Thus, any price below that floor would indicate that the carrier is losing money by providing service. Alternatively, in the case of a U.S. affiliate of a foreign carrier, any price below the floor could indicate that the U.S. affiliate is attempting a price squeeze. Because the U.S. affiliate's net settlement payments are an intracorporate transfer and not a true cost, the U.S. affiliate could price its service in the U.S. market below average variable costs. We therefore believe that any price below average variable costs is suspect and that we should establish a rebuttable presumption of market distorting behavior. The presumption of market distortion can be rebutted by a showing that there is an economically justifiable reason for pricing below average variable costs. For example, a carrier could show that its pricing strategy is a time limited promotion in order to gain market share. 226. Data from which a U.S. carrier's net settlement rate can be calculated will be filed as part of the quarterly traffic reports we adopt in this Order. As discussed in Section II.C.2., the quarterly reports will contain the same data that are required in the existing Section 43.61 reports, including actual traffic and revenue data, but for facilities-based switched services and facilities- based switched resale services only. Information on U.S. carriers' access charges is available in tariffs filed with the Commission and in the Commission's annual Monitoring Report in CC Docket No. 87-339. We believe these reporting requirements will be sufficient to enable us to detect market-distorting price squeeze behavior. However, we will develop additional monitoring mechanisms in the future if necessary. 227. We may make a finding that the trigger for determining the existence of market distortion has been met on our own initiative or pursuant to a written request by any carrier providing IMTS on the route in question. Such written requests must provide evidence that any of a carrier's tariffed collection rates on an affiliated route is less than the carrier's average variable costs (average net settlement rate payments plus access charge payments) on the route. Such evidence may be based on the data filed pursuant to the Section 43.61 quarterly traffic report filing requirement that we adopt here, the annual Monitoring Report in CC Docket No. 87-339, a carrier's tariffs, or other sources. If we find, either on our own initiative or by request, that the presumption of market distortion has been met on an affiliated route, we will issue a public notice and notify the carrier providing service to the affiliated route. Once we make a finding, the carrier providing service to the affiliated route will be prohibited from using its authorization to provide switched services until it complies with our enforcement action or successfully presents evidence sufficient to rebut the presumption of market distortion. 228. In the Notice, we sought comment on whether we should impose the conditions for facilities-based service to affiliated markets on existing Section 214 certificate holders that serve affiliated markets. We conclude that we should apply the conditions to existing Section 214 certificate holders. We see no reason to exempt carriers with existing authorizations from complying with conditions that will apply to all other carriers providing facilities-based service to affiliated markets. The same concerns about anticompetitive behavior we seek to address through our conditions apply equally to carriers with existing authorizations. We will therefore require existing Section 214 certificate holders that serve affiliated markets to negotiate with all U.S. international carriers a settlement rate for the affiliated route that is at or below the appropriate benchmark. The settlement rate must be negotiated and in effect within ninety days of the effective date of this Order. 229. We also sought comment in the Notice on a proposal to establish a presumption that carriers from countries that have opened their markets to meaningful competition have fulfilled our Section 214 conditions. We reasoned that our conditions would not be necessary under these circumstances because effective competition will best ensure that settlement rates are set at cost-based levels and thereby eliminate the potential for anticompetitive behavior from above-cost rates. We conclude, however, that we should apply the Section 214 conditions to all carriers, including those from countries that have opened their markets to competition. The conditions are necessary to address the potential for market distorting behavior created by the existence of above-cost settlement rates. Even in countries which have meaningful competition, the potential exists for a carrier with a significant market share to create distortions in the U.S. market for IMTS if it is collecting above-cost settlement rates. We thus conclude that the Section 214 conditions should be applied to all carriers, including those from countries that have introduced competition. We note, however, that in markets where there is fully developed competition, settlement rates will likely be at or below the benchmarks we adopt in this Order. Thus, foreign-affiliated carriers providing service to those markets will not have to take any further action to comply with our conditions unless they engage in anticompetitive behavior. 230. AT&T argues in an ex parte communication that we should apply the same condition we proposed in the Notice for authorizations to provide facilities-based switched service from the United States to an affiliated market to authorizations to provide switched resale service from the United States to an affiliated market. AT&T first raised this argument in an Ex Partedated July 10, 1997, to which it attached its comments in the Foreign Participation proceeding. We believe that AT&T's argument is better addressed in the Foreign Participation proceeding, where we will have a more complete record on the issue of applying the benchmark condition to facilities-based switched service. AT&T raised the issue in its initial comments in that proceeding, and parties will have an opportunity to comment in their reply comments, which are not due until after the adoption date of this Order. 231. In summary, we will condition authorizations to provide international facilities- based switched or private line service from the United States to an affiliated market in order to restrain the ability of foreign-affiliated carriers to engage in anticompetitive price squeeze behavior in the U.S. market. Specifically, we will condition any such authorization to serve an affiliated market on the affiliated carrier offering U.S. international carriers a settlement rate for the affiliated market at or below the relevant benchmark adopted in this Order. If, after the carrier has commenced service to the affiliated market, we learn that the carrier's service offering has distorted market performance on the route in question, as determined by the rebuttable presumption we adopt here, we will take enforcement action. That action may include a requirement that the settlement rate of the affiliated carrier for the route be at a level equal to or below the best practices rate we adopt in this Order, $0.08, or a revocation of the authorization of the carrier to serve the affiliated market. We adopt a rebuttable presumption that a carrier's service offering has distorted market performance if any of the carrier's tariffed collection rates on the affiliated route are less than the carrier's average variable costs on that route. 2. Condition for Provision of Switched Services over Private Lines a. Notice 232. We also proposed in the Notice a competitive safeguard to address the potential market distortions resulting from one-way bypass of the accounting rate system. Specifically, we proposed to grant carriers' applications for authority to resell international private lines to provide switched services on the condition that settlement rates on the route or routes in question are at or below the appropriate settlement rate benchmark. Under the proposed condition, if any settlement rate on the route in question is higher than the appropriate benchmark, a resale carrier would not be permitted to use its private line resale authorization to provide switched, basic services until such time as all settlement rates on the route are at or below the benchmark. We noted that this condition would apply to any U.S. carrier seeking to provide switched, basic services via resold private lines regardless of whether the carrier is operating on a particular route in correspondence with an affiliated foreign carrier. We reasoned that even an unaffiliated U.S. carrier would have the ability to distort competition on the route to the extent it accepted one-way bypass traffic from a foreign carrier. We also proposed to order all U.S. international carriers to pay a cost-based settlement rate if, after a carrier has commenced switched service via a resold private line, we learn that competition on the route has been distorted -- i.e., that one-way bypass is occurring. We asked for comment on what mechanism or approach we should use to determine when competition has been distorted. We also sought comment on whether these proposed conditions should replace our current private line resale policy or whether that policy should be modified to ensure that it is compatible with the proposed conditions. 233. In our recent Foreign Participation Notice, we concluded that it might be necessary to supplement the condition that we proposed in the Notice to cover facilities-based carriers' use of their authorized private lines to route U.S. inbound and outbound switched traffic. We noted that facilities-based private line carriers also have the ability to distort competition on a particular route to the extent they terminate one-way bypass traffic from a foreign carrier. We therefore proposed to prohibit a U.S.-licensed facilities-based private line carrier from originating or terminating U.S switched traffic over its facilities-based private lines until all U.S. carriers' settlement rates for the country or location at the foreign end of the private line are at or below the appropriate benchmark. In a Public Notice accompanying our Foreign Participation Notice, we invited interested parties to file supplemental comments on this proposal in this proceeding. b. Positions of the Parties 234. Many commenters agree that the settlement rate benchmarks should be used to condition authorizations to provide switched services over facilities-based or resold international private lines. They agree that such conditions are necessary to address possible distortions in the U.S. market from one-way bypass. Some commenters, however, urge us to strengthen the proposed conditions, while others urge us to loosen restrictions on the provision of international simple resale ("ISR"). 235. ACC and Primus, for example, state that they would prefer us to permit ISR on all routes immediately because encouraging carriers to engage in ISR will enhance competition in the global IMTS market. However, they support the proposed conditions as a way to address our concern about one-way bypass. ACC agrees with us that the proposed conditions address the concern that one-way bypass could distort competition. 236. TNZL opposes our proposed conditions on the basis of a similar concern to that raised by ACC and Primus, that the proposed conditions could undermine our objective of exerting downward pressure on the level of settlement rates. TNZL notes that the logical effect of the provision of switched services over resold international private lines is to put pressure on settlement rates. TNZL concludes that we "should not require that the effect exist before the cause." The United Kingdom also cites the procompetitive benefits of ISR and urges us to consider extending the ability to provide ISR services to as many routes as possible. The United Kingdom suggests that we consider permitting ISR on routes where the benchmarks have not been reached, provided other safeguards against one-way bypass are in place. Viatel also cites the procompetitive benefits of ISR services and further argues that the proposed condition is not necessary because there has been no evidence to date of one-way bypass in the U.S. market. 237. Japan recognizes there is a possibility of "trade distortion caused by monopolist carriers bypassing the international settlement rate system in non-liberalized countries." Nonetheless, Japan objects to the proposed condition on resale of private lines to provide switched service. Japan notes in particular that the proposal that all settlement rates must be within the benchmark range before a carrier can use its authorization to provide switched services over private lines is too restrictive and means that market entry for some carriers would be contingent upon the level of accounting rates over which they have no control. TNZL is concerned that this aspect of our proposed conditions could give U.S. carriers' foreign correspondents effective control over whether they will face competition in switched services from international private line resellers. TNZL notes that any foreign carrier could block the entry of a competitor providing ISR simply by refusing to reduce the settlement rate on the route. 238. GTE objects to our proposal to apply the resale condition to the provision of switched services over facilities-based private lines. GTE states that the proposal is unnecessary in light of the fact that market forces created by the WTO Basic Telecom Agreement will drive down settlement rates. GTE further argues that there is no demonstrated link between above-cost settlement rates and competitive distortion. GTE notes that we claim only that one-way bypass could occur, not that it has or will. 239. AT&T and MCI, on the other hand, urge us to strengthen the proposed condition by requiring that settlement rates on the route or routes in question be at the low end of the benchmark range as a condition of carriers' authorizations to resell international private lines to provide switched service to the United States. AT&T also argues that this more stringent condition should apply to the provision of switched services over facilities-based private lines. AT&T argues that this more stringent condition is necessary because the settlement rate benchmarks exceed the incremental costs of providing international service. As a result, foreign carriers would still have an incentive to send their traffic to the United States over private lines while continuing to collect above-cost benchmark rates. According to AT&T, this is problematic because the difference between ISR rates a carrier would pay to terminate traffic in the United States and the benchmark settlement rates a carrier would receive to terminate traffic from the United States "would provide significant margins for foreign carriers on every minute delivered to the U.S." AT&T concludes that if we adopt the conditions as proposed, it would be necessary to retain the present equivalency test to protect against one-way bypass. 240. WorldCom agrees generally with our proposed conditions. However, it suggests some modifications to the proposals. Specifically, WorldCom proposes a three-prong test where ISR would be allowed on a route if any one prong is satisfied. Under WorldCom's proposed test, ISR would be allowed under any one of the following circumstances: (1) where ISR is already authorized on the route as of the effective date of the Order; (2) where the settlement rate for more than 50% of outbound traffic on a particular route is within the benchmark; or (3) where the Commission determines that the foreign market offers equivalent opportunities for ISR. WorldCom states that the second prong of its proposed test is a clarification of our proposed conditions to address situations where there are multiple foreign correspondents on a route. With respect to the third prong, WorldCom states that there could be situations where the prevailing settlement rate is not within the benchmark, but the country offers equivalent opportunities for U.S. carriers to engage in ISR. In those situations, WorldCom submits, permitting ISR would put additional pressure on high settlement rates and should be allowed. 241. WorldCom also suggests a mechanism for detecting competitive distortion, i.e., one-way bypass, that is based on the aggregate inbound/outbound ratio of settled traffic on a route. WorldCom suggests that if the percentage of outbound traffic relative to inbound increases by a 10 or more percent across two measurement periods, there should be a presumption that inbound traffic is being disproportionately diverted from the settlement process to ISR routing. WorldCom states that the 10 percent threshold should provide sufficient leeway for routine traffic shifts. AT&T, however, is skeptical that such monitoring procedures would provide an effective remedy for market distortions. AT&T is concerned that reliance upon the Commission's only existing monitoring activities, the annual Section 43.61 reporting process, would delay action for at least nine months after the end of the calendar year in which bypass occurred. The introduction of more frequent reports would, according to AT&T, impose costly compliance burdens and could disclose competitively sensitive information. AT&T also notes that existing Commission reporting requirements for carriers authorized to provide switched services over international private lines have been widely ignored. Finally, AT&T questions how the Commission could distinguish traffic shifts resulting from one-way bypass from those resulting from callback, refile, or other procompetitive market changes. c. Discussion 242. The comments reflect the dilemma faced by the Commission. The provision of switched services over private lines has strong procompetitive effects in the marketplace. As we stated in the International Resale Order, a more liberal policy with respect to resale of international private lines will allow new entities to enter the market and offer services such as IMTS. This new entry will compel carriers at both ends of the circuit to bring their prices closer to cost to avoid losing their current customers to resale providers. But at the same time, the procompetitive effects of private line resale must be weighed against the market distorting effects of one-way bypass. The threat of one-way bypass of the accounting rate system cannot be ignored. It has significant implications for competition in the U.S. market for IMTS, and consequently, for U.S. consumers. One-way bypass exacerbates the U.S. net settlements deficit and ultimately increases the burden on U.S. ratepayers through higher rates for IMTS. Contrary to Viatel's claim, the fact that we have not had to take action against carriers for one-way bypass in the past does not mean the concern about one-way bypass is speculative. The reason we have been able to avoid one-way bypass in the past is our equivalency policy. That policy permits private line resale only to countries that afford resale opportunities equivalent to those available under U.S. law. However, in our recent Foreign Participation Notice, we tentatively concluded that it is no longer necessary to continue to apply the equivalency test to applications to provide such service to WTO Member countries. 243. We believe the condition we proposed in the Notice, with some modifications, balances our desires to encourage ISR and at the same time limit the potential for one-way bypass. Accordingly, we adopt the condition as proposed in the Notice with two modifications. The first modification is that we will authorize carriers to provide switched services over resold international private lines between the United States and foreign destination countries on the condition that settlement rates for at least 50 percent of the settled U.S. billed traffic on the route or routes are at or below the appropriate benchmark, as proposed by WorldCom. If we learn that competition on the route in question has been distorted, i.e., carriers are engaging in one-way bypass, we will take enforcement action. Such enforcement action may include a requirement prohibiting carriers from using their authorizations to provide switched services over private lines on that route until settlement rates for at least 50 percent of the settled U.S. billed traffic on the route are at or below the level of our best practice rate of $0.08, or revocation of a carrier's authorization. 244. In the Notice, we proposed to require that all settlement rates on the route in question be within the benchmarks. Our proposal to require that all settlement rates on the route be at the appropriate benchmark levels, rather than only the resale applicant's settlement rates, was intended to address the situation where the Section 214 applicant was a pure reseller. In that case, it would be meaningless to require a pure reseller to comply with settlement rate benchmark conditions because a pure reseller would not have established a settlement rate with any U.S. correspondent. Upon further consideration, however, we do not believe it is necessary to require all settlement rates on the route in question to be within the benchmarks. Our concern, as discussed above, is with the potential for one-way bypass and its effects on the U.S. net settlements payment and U.S. consumers. To the extent carriers providing service outbound from the United States have low cost alternatives to terminate their traffic on the route in question, one- way bypass would not have a significant effect on the U.S. net settlements payment and prices paid by U.S. consumers. We believe that any carrier or combination of carriers with 50 percent of the market for termination of outbound traffic from the United States would have sufficient capacity to handle all traffic from U.S. carriers. Thus, even if no other carrier on the route had settlement rates at or below the relevant benchmark, U.S. carriers would be able to terminate all of their outbound traffic on the route with a carrier whose rates are at or below the benchmark. Moreover, it is likely that if the settlement rates for 50 percent of the settled U.S. billed traffic were at or below the relevant benchmark, the rates for the rest of the traffic would be at that level also. We note that requiring settlement rates for only 50 percent of the settled U.S. billed traffic on the route in question to be at or below the benchmarks will alleviate the concerns stated by TNZL and Japan that facilities-based carriers could control resellers' ability to provide services. 245. The second modification we make to the proposed condition is to apply it to U.S. facilities-based carriers' use of their authorized private lines for the provision of switched, basic services. As we stated in the Foreign Participation Notice, facilities-based private line carriers also have the ability to distort competition on a particular route to the extent they terminate one-way bypass traffic from a foreign carrier. Because the same concerns exist for both facilities-based private line carriers and carriers that provide service over resold private lines, the same condition should apply to both services. We therefore will permit carriers to use their authorized facilities- based private lines to originate or terminate U.S. switched traffic on the condition that settlement rates for at least 50 percent of the settled U.S. billed traffic on the route or routes in question are at or below the appropriate benchmark. If we learn that competition on the route in question has been distorted, i.e., carriers are using their authorized private lines to engage in one-way bypass of the accounting rate system, we will take enforcement action as described in this Order. 246. We disagree with GTE that there is no link between above-cost settlement rates and competitive distortion from one-way bypass over facilities-based private lines. Above-cost settlement rates create the financial incentive for carriers to avoid the settlements system by sending traffic over private lines. We also disagree that the condition for the provision of switched services over facilities-based or resold private lines is not necessary because market forces are creating downward pressure on settlement rates. GTE is correct in asserting that competitive market forces, driven in large part by the WTO Basic Telecom Agreement, are creating downward pressure on settlement rates. However, even where there are competitive pressures, rates are not always at cost-based levels. Moreover, many markets are still dominated by monopoly providers. 247. We disagree with AT&T and MCI that we should require accounting rates to be at the low end of the benchmark before carriers may use their authorizations to provide switched services over facilities-based or resold private lines. Such a condition is not necessary to prevent distortions in the U.S. market for IMTS services, and in fact, it could harm the development of further competition in that market. We believe that AT&T and MCI's proposed conditions could effectively deter many carriers from providing switched services over facilities-based or resold private lines. As discussed above, and as many commenters note, these services exert downward price pressure on both ends of a route. We should therefore encourage the development of these services to the greatest extent possible consistent with our goal of preventing the market distortions that result from one-way bypass. 248. AT&T and MCI are correct in asserting that because the settlement rate benchmarks are above-cost, the condition as proposed in the Notice does not completely eliminate the incentive for carriers to engage in one-way bypass. However, the requirement that settlement rates be at or below the relevant benchmark before carriers may use their authorizations substantially reduces the financial incentive to engage in one-way bypass. In addition, we believe that our authority to take enforcement action if we detect market distortion will be an effective deterrent to one-way bypass. Finally, to the extent incentives to engage in one-way bypass remain, the mechanism we adopt in this Order for detecting market distortion will provide a timely remedy. We discuss this mechanism below. 249. We adopt WorldCom's proposal that the mechanism for detecting whether there has been competitive distortion on a particular route be based on the aggregate outbound/inbound ratio of settled traffic on the route. Similar to WorldCom's suggestion, we will adopt a presumption that market distortion exists, i.e., inbound switched traffic is being diverted from the accounting rate system to facilities-based or resold private lines, if the ratio of outbound (U.S.- billed) to inbound (foreign-billed) settled traffic increases 10 or more percent in two successive quarterly measurement periods. For example, the presumption of market distortion would be met if the traffic ratio at the beginning of a quarterly measurement period was 60 percent outbound traffic and 40 percent inbound traffic and the traffic ratio at the end of the subsequent quarterly measurement period (i.e., six months later) had changed to 65 percent outbound traffic and 35 percent inbound traffic. 250. We agree with WorldCom that a 10 percent threshold should provide sufficient leeway in most cases for routine traffic shifts. We also believe, contrary to the concerns raised by AT&T and KDD, that increases in the traffic imbalance due to callback, refile, or other procompetitive market changes generally will not trigger the 10 percent threshold. In most cases, these services would not contribute to a 10 or more percent increase in the traffic imbalance over the course of two reporting periods. Moreover, the presumption of market distortion can be rebutted by a showing that 10 or more percent increase in the traffic imbalance is due to factors other than one-way bypass, such as callback. 251. We amend our reporting requirements in Section 43.61 of our rules to enable us to detect market distortion. Section 43.61 requires each common carrier that provides international service between the United States and any foreign country to file an annual report. The annual report includes actual traffic and revenue data for each service provided by a common carrier, divided among service billed in the United States, service billed outside the United States, and service transiting the United States. We will amend this reporting requirement to require that quarterly traffic reports be filed by certain common carriers in addition to the annual report. Specifically, we will require common carriers subject to the existing Section 43.61 requirements to file traffic reports for each quarter in which their traffic meets any of the following thresholds: (i) their aggregate U.S.-billed minutes of switched telephone traffic exceeds 1 percent of the total of such minutes of international traffic for all U.S. carriers (as published in the most recent Section 43.61 traffic data report); (ii) their aggregate foreign-billed minutes of switched telephone traffic exceeds 1 percent of the total of such minutes of international traffic for all U.S. carriers; (iii) their aggregate U.S.-billed minutes of switched telephone traffic for any country exceeds 2.5 percent of the total of such minutes for that country for all U.S. carriers; or (iv) their aggregate foreign-billed minutes of switched telephone traffic for any foreign country exceeds 2.5 percent of the total of such minutes for that country for all U.S. carriers. Limiting the quarterly filing requirement to carriers that meet these criteria will reduce the burden on small carriers, while enabling us to identify distortions in the balance of payments. The filing of these reports also makes unnecessary the filing of the semi-annual reports we have required to be filed by carriers providing switched services over resold private lines for the first three years following an equivalency determination. 252. We will require carriers that are subject to this quarterly reporting requirement to provide the same data called for in the existing Section 43.61 reports. However, we will require that carriers file this data only for switched facilities-based telephone services and switched facilities resale telephone services. This data will enable us to detect whether one-way bypass is occurring. We note that some carriers may be carrying non-settled switched traffic over their private line facilities and reporting this traffic as facilities-based switched traffic in their Section 43.61 reports. We take this opportunity to clarify that only settled traffic should be included in the Section 43.61 reports as facilities-based switched service. We define settled traffic for purposes of these reports as all traffic settled under an arrangement that meets the requirements of our ISP or has been approved as an alternative settlement arrangement under our Accounting Rate Flexibility Order. Carriers that are carrying non-settled traffic over their private line facilities should report that traffic as switched facilities resale service. 253. Each carrier covered by this new quarterly filing requirement shall file a quarterly traffic report with the Commission no later than April 30 for the prior January through March quarter; no later than July 31 for the prior April through June quarter; no later than October 31 for the prior July through September quarter; and no later than January 31 for the prior October through December quarter. 254. Contrary to the concerns raised by AT&T, we do not believe these quarterly reports will be unduly burdensome. We are not changing the substance of our current Section 43.61 reporting requirement. We are simply increasing the frequency with which a subset of the data must be consolidated and reported. Carriers subject to our Section 43.61 annual reporting requirement should already be collecting the data on an ongoing basis. Moreover, we believe these traffic reporting requirements enable us to strike a reasonable balance between encouraging entry and competition and preventing one-way bypass. With these reporting requirements, we believe it is not necessary to adopt AT&T's proposed alternative that we grant authorizations to provide switched services over facilities-based or resold private lines on the condition that all accounting rates on the route in question are at or below the low end of the benchmarks. We note AT&T's concern that more frequent traffic reporting could disclose commercially sensitive information. We find such concerns outweighed, however, by the compelling public interest benefits of permitting ISR once settlement rates for at least 50 percent of the settled U.S.-billed traffic on a particular route are at or below the level of the appropriate benchmark. We also note AT&T's concern that many carriers do not comply with the Commission's current reporting requirements. We emphasize that we have authority to issue fines to those carriers that do not comply with our reporting requirements. We intend to enforce these requirements and will take all action necessary to ensure that the quarterly traffic reports are filed in a timely manner. 255. The presumption of market distortion can be rebutted by any carrier whose authorization to provide switched services over facilities-based or resold private lines is affected by the determination that there is market distortion. The presumption can be rebutted by a showing that the change in the inbound/outbound ratio is caused by factors other than one-way bypass, such as an increase in callback traffic. 256. We may make a finding that the rebuttable presumption of market distortion we adopt in this Order has been met on our own initiative, or pursuant to a written request by any carrier providing IMTS on the route in question. Such written requests must provide evidence that the percentage of outbound traffic relative to inbound traffic increased 10 or more percent in two successive measurement periods. If we find, either on our own initiative or by request, that the presumption of market distortion has been met on a particular route, we will issue a public notice and notify all carriers authorized to provide switched services over facilities-based or resold private lines on that route of our finding. Commencing on the date we issue a public notice that the presumption of market distortion has been met, carriers will be prohibited from using their authorizations to provide switched services over facilities-based or resold lines until they comply with our enforcement action or provide evidence sufficient to rebut the presumption of market distortion. 257. We believe that our rebuttable presumption based on a 10 or more percent change in the inbound/outbound ratio in two successive reporting periods will detect most instances of one-way bypass. However, it is possible that there may be instances where this mechanism for detecting one-way bypass is not effective. For instances in which market distortion is not evidenced by the 10 or more percent test, we may need to look at other market or individual carrier trends, similar to our process in determining that the rebuttable presumption has been met. We thus reserve the right to investigate other market or individual carrier trends that could indicate one-way bypass. We may undertake such an investigation either on our own initiative or pursuant to a written request by any carrier providing IMTS on the route in question. If, based on our investigation, we conclude that one-way bypass is occurring, we will issue a public notice and notify all carriers authorized to provide switched services over facilities-based or resold private lines on the route in question of our finding. Once we make a finding of market distortion based on an investigation, carriers must comply with our enforcement action until they submit evidence sufficient to rebut our finding of market distortion. 258. WorldCom and the United Kingdom suggest that we permit carriers to provide ISR where we determine that the foreign market offers equivalent opportunities for ISR, even if settlement rates on the route in question are not within the relevant benchmark. TNZL also urges that the Section 214 authorization conditions not apply on routes we have found to be equivalent. ACC and Primus argue that we should permit ISR on any route where it would result in market-based pricing and enhanced competition, and where it would not result in a carrier abusing its dominant market position. ACC and Primus state that such a policy should replace, not supplement, our equivalency policy. GTE, on the other hand, argues that we should retain the equivalency test instead of adopting the Section 214 conditions we proposed in the Notice. We will consider these suggestions about retaining or replacing our equivalency test in our Foreign Participation proceeding, where we have sought comment on whether we should continue to apply our existing equivalency test in light of the WTO Basic Telecom Agreement. We note, however, that the Section 214 conditions we adopt in this Order may become effective before we determine in the Foreign Participation proceeding whether to eliminate the equivalency test. Therefore, until we issue a decision in the Foreign Participation proceeding, carriers seeking authorization to provide switched services over facilities-based or resold private lines must comply with both the Section 214 conditions we adopt in this Order and our existing equivalency test. We will amend Section 63.18 of the rules to require that applications for authority to provide switched services over resold or facilities-based international private lines between the United States and a particular country include, in addition to the required equivalency showing, a showing that settlement rates for at least 50 percent of the settled U.S. billed traffic on the route in question are at or below the appropriate benchmark. We will also amend Section 63.21 of the rules to set forth the conditions that we adopt in this Order for the provision of switched services over resold or facilities-based international private lines. 259. In summary, we will condition the Section 214 authorizations of carriers to provide switched basic services over international facilities-based or resold private lines in order to prevent one-way bypass of the accounting rate system. Specifically, we will authorize carriers to provide switched services over international facilities-based or resold private lines on the condition that settlement rates for at least 50 percent of the settled U.S. billed traffic on the route or routes in question are at or below the relevant benchmark adopted in this Order. If we learn that the rebuttable presumption of market distortion, i.e., one-way bypass, has been met, we will take enforcement action. That enforcement action may include a requirement that carriers be prohibited from using their authorizations to provide switched services over private lines until settlement rates for at least 50 percent of the settled U.S. billed traffic on the route are at a level equal to or below the best practice rate of $0.08 adopted in this Order or a revocation of carriers' authorizations to provide service. We adopt a rebuttable presumption that one-way bypass is occurring if the percentage of outbound traffic relative to inbound traffic increases by 10 or more percent in two successive quarterly measurement periods and reserve the right to investigate other shifts in the inbound/outbound ratio to determine whether one-way bypass is occurring. 3. GATS Obligations a. Notice 260. In the Notice, we invited parties to comment on whether our proposed Section 214 authorization conditions would be consistent with any commitments made by the United States, including most favored nation obligations, in the event the WTO's Group on Basic Telecommunications reached an agreement on liberalizing trade in basic telecommunications service. As noted above, the WTO Basic Telecom Agreement was concluded on February 15, 1997. b. Positions of the Parties 261. Some commenters contend that the Commission's proposed authorization conditions would constitute barriers to entry, in violation of the U.S. General Agreement on Trade in Services obligations. Japan states generally that the proposed conditions will hamper the promotion of competition because they will make entry into the U.S. market for IMTS difficult. In Japan's opinion, the proposed conditions are a practical barrier to entry. KDD states that while it is legitimate for a country to have laws against anticompetitive conduct, it must implement those laws on a post-entry, not a pre-entry basis. HKTI similarly asserts that the proposed conditions are "market entry controls" in that they would have the same effect as conditioning entry. The European Union states that the proposed conditions "may well result in a disguised market access barrier detrimental to competition by imposing constraints more burdensome than necessary on carriers seeking access to the U.S. market." The European Union further states that we have not provided a clear and transparent definition of market distortion that would justify imposing the conditions. 262. Japan also argues that "only foreign-related carriers are subject to the benchmark condition" for facilities-based service to affiliated markets. Japan thus concludes that the condition could be inconsistent with the national treatment principle of the GATS. GTE similarly argues that the condition would treat foreign-affiliated carriers differently and concludes that this would be a violation of the MFN principle of the GATS. Telef˘nica de Espa¤a contends that both conditions would discriminate among services and service suppliers of different countries in violation of the U.S. MFN obligation because they would restrict IMTS on routes with settlement rates not in compliance with the benchmarks. 263. Some commenters assert that the Commission's concerns about anticompetitive behavior can be met by less restrictive means. With respect to the proposed conditions for authorizations to provide facilities-based service to affiliated markets, Japan argues that cross- subsidization can be avoided by less restrictive measures such as "proper application of regulations on users' rates." Japan further argues that the concern about one-way bypass should only be a temporary problem, if one at all, between liberalized countries. Thus, it argues, "excessive government intervention" should be avoided. GTE argues that the concern about one-way bypass could be addressed in a less burdensome manner than the condition we proposed in the Foreign Participation Notice for the provision of switched services over facilities-based private lines. GTE proposes that we require U.S. facilities-based carriers to furnish the Commission with sufficient information about traffic volumes and revenues on private lines for switched services and any impact on settlements and prices to permit us to make a judgment about actual competitive harm resulting from one-way bypass. AT&T disagrees, arguing that the traffic reporting requirements advocated by GTE would be unduly burdensome. Viatel asserts that to the extent the Commission is concerned about one-way bypass, it should limit its proposed condition to U.S.- inbound services where the U.S. end is open to the PSTN. c. Discussion 264. The GATS imposes a number of obligations on WTO Members. All WTO Members are required to accord MFN treatment to like services and service suppliers of all other WTO Members, no matter what specific commitments a Member has made. MFN is essentially a nondiscrimination rule that requires each WTO Member to treat like services and service suppliers from all other WTO Members similarly. As a result of the WTO Basic Telecom Agreement, many Members, including the United States, also took on national treatment obligations. National treatment is a nondiscrimination rule that requires a WTO Member to treat like services and service suppliers from other WTO Members as it treats its own services and service suppliers. The GATS also requires measures related to domestic regulation to be reasonable, objective, impartial, and transparent. All WTO Members retain the right under the GATS to maintain laws or regulations to protect competition in their markets, as long as the laws or regulations are applied in a manner consistent with the provisions of the GATS. Our Section 214 authorization conditions are consistent with these obligations. They are reasonable measures based on objective analysis designed to protect competition in the U.S. market for IMTS, and they apply to all carriers providing service in the United States. 265. The Section 214 authorization conditions apply to all U.S. carriers, whether U.S. or foreign-owned, and apply to all routes. Contrary to the arguments of GTE and Japan, all facilities-based carriers operating in the United States would face the same conditions on service to routes on which they have affiliation on the foreign end. Similarly, the resale condition applies to all carriers, U.S. or foreign-owned, seeking to provide switched services over resold international facilities-based or private lines. Moreover, contrary to Telef˘nica de Espa¤a's argument, the conditions do not discriminate among services and service suppliers of different countries or discriminate in favor of U.S.-owned service suppliers. The conditions apply equally to all routes. The fact that the universally-applied conditions may be met on some routes and not on others does not mean that the conditions are inconsistent with our MFN and national treatment obligation. 266. We disagree with commenters who assert that our benchmarks conditions are more burdensome than necessary and are an effective barrier to entry. We believe that the conditions we adopt in this Order are necessary to protect competition in the U.S. market for IMTS. As discussed above, above-cost settlement rates create a potential for distortion in the U.S. market. These are not merely hypothetical distortions. Moreover, contrary to the European Union's assertions, we have clearly defined market distortion in both the facilities-based and resale context. We have shown that the collection of above-cost settlement rates gives foreign- affiliated carriers the ability to price below the level of its costs on affiliated routes. We have also shown that the above-cost accounting rate system creates the potential for one-way bypass if a carrier outside the United States is able to send its switched traffic over private lines into the United States, but carriers in the United States must continue to send their traffic over the accounting rate system. Consistent with our GATS obligations, we are taking measures to protect competition in the U.S. market by adopting authorization conditions to prevent these market distortions created by above-cost settlement rates. 267. Japan argues that anticompetitive behavior in the market for facilities-based services could be avoided by "less restrictive measures" such as rate regulation. We disagree. We do not believe that regulation of end-user rates is a less restrictive measure than the conditions we adopt in this Order. In fact, rate regulation is extremely burdensome and would require extensive cost data from all carriers providing service in the U.S. market, including foreign-affiliated carriers. Viatel contends that if we believe we must address the concern about one-way bypass, we should limit our Section 214 condition to U.S.-inbound services where the U.S. end is open to the public switched network. We do not believe that such a condition would effectively address the concern about one-way bypass because it would be difficult to monitor carrier's traffic flows with such a limited condition. Once a carrier starts providing service, it is difficult to detect whether the carrier is providing inbound or outbound services only. We also disagree with GTE's claim that harm from one-way bypass can be avoided by requiring U.S. carriers to file information that would enable us to determine whether such harm has actually occurred. We do not believe this approach would be sufficient to address our concern. One-way bypass can substantially increase the U.S. net settlements deficit in a very short period of time. Thus, to the extent possible, we believe we must eliminate the incentive of carriers to engage in one-way bypass. The Section 214 authorization condition we proposed in the Notice substantially reduces foreign carriers' incentive to engage in one-way bypass by eliminating the financial advantages of doing so. We believe it is appropriate, and consistent with our right under the GATS to maintain reasonable measures to prevent market distortions in order to protect competition in the U.S. market. Our condition for the provision of switched services over facilities-based and resold private lines represents a reasonable balance between encouraging private line services and preventing distortions in the U.S. market. D. Effect of Settlement Rate Savings on U.S. Consumers 1. The Notice 268. We sought comment in the Notice on how to encourage U.S. carriers to reflect the reductions they receive in their settlement rates in their prices to consumers. We stated that our goal in reforming the settlement rate system was to provide U.S. consumers with just and reasonable rates for IMTS service. We noted that reductions in U.S. international carriers' rates to reflect settlement rate reductions would stimulate calling volume. We said that not only would this benefit U.S. international carriers by increasing their collection revenues, but also would benefit foreign carriers because they could offset lower settlement rate levels with an increase in the number of minutes terminated. 2. Positions of the Parties 269. Many foreign commenters argue that we should focus on collection rates rather than settlement rates. They argue that high U.S. collection rates deter outbound calling and reduce the ratio of outbound to inbound calls to the detriment of foreign carriers. Several commenters contend that U.S. international carriers have not passed on settlement rate reductions to consumers in the past and there is no assurance that any reduction in settlement payments that results from adoption and enforcement of benchmarks will be passed on to U.S. consumers. Many of these commenters urge us to require that U.S. international carriers pass on any reductions in settlement rates to U.S. consumers. Telstra recommends that we require U.S. international carriers to report to us annually the average tariffed rates for IMTS on July 31 and December 31 for the top fifty routes on which U.S. international carriers have settlement deficits. Some carriers argue that we should regulate the level of U.S. carriers' rates for international services. For example, KDD states that we should require U.S. carriers to offer rates for international direct dial service that are no higher than the applicable rates they would charge to their callback customers in a foreign country for calls to the United States. AT&T states that it will ensure that net savings in settlement costs are passed on to U.S. consumers. WorldCom argues that a mandatory flow-through requirement is unnecessary in the "highly competitive" U.S. telecommunications market -- especially in the markets for carrier-to-carrier and commercial services. 3. Discussion 270. We agree with those commenters that contend U.S. consumers should benefit from the settlement rate reductions that result from our adoption and enforcement of settlement rate benchmarks. We expect that settlement savings as a result of the rules we adopt here will be substantial and will therefore significantly lower U.S. carriers' cost of providing IMTS. However, we disagree with those commenters that argue that competition in the U.S. market for international services may be insufficient to ensure that settlements savings are fully reflected in reduced collection rates. As we noted in the AT&T International Nondominance Order, competition in the U.S. market for IMTS is not as robust as we would like. However, we anticipate that the U.S. market for IMTS will become increasingly competitive as a result of the WTO Basic Telecom Agreement. The Section 214 authorization conditions we adopt here will help promote further competition in the U.S. market for IMTS by addressing potential market distortions created by above-cost settlement rates. Moreover, the eventual entry of new entrants such as the Bell Operating Companies into the international services market will further increase competition. We believe that we should, to the extent possible, preserve the ability of U.S. carriers to make pricing decisions in response to these competitive market forces. We thus find that it is not in the public interest at this time to mandate a particular approach U.S. carriers should take to pass through to consumers reductions in net settlements that occur as a result of the settlement rate benchmarks we adopt in this Order. 271. We are committed to ensuring that U.S. consumers receive the full benefits of settlement rate savings. We will therefore monitor closely carriers' prices to ensure that the U.S. market for IMTS is sufficiently competitive and carriers are passing on to U.S. consumers the full extent of savings in net settlements that occur as a result of the benchmarks we adopt here. If, in the future, there is evidence that U.S. consumers are not receiving the full benefits of settlement rate savings, we will review the performance of the U.S. market for IMTS to determine whether we should revisit our conclusion that the market is sufficiently competitive to ensure that carriers pass settlement savings on to consumers. 272. We expect to see U.S. carriers pass on to consumers the savings in net settlements payments on a route-by-route basis because settlement costs, and consequently, savings, are incurred on a route-by-route basis. U.S. customers that make calls on routes on which foreign carriers lower their settlement rates should enjoy the benefits of such reduced rates. Moreover, a route-by-route pass through of net settlement savings would provide incentives for foreign carriers to reduce their settlement rates. This is because a route-by-route pass through of net settlement savings would ensure that foreign carriers that reduce their settlement rate with U.S. carriers enjoy the benefits of stimulated demand that results from lowered collection rates. Without a flow-through of net settlement savings on a route-by-route basis, traffic on such routes could remain static if U.S. carriers apportion settlement savings from such routes to other routes. 273. In reviewing the experience of the past several years, it appears that competition in the U.S. market for IMTS has caused U.S. carriers to direct the cost savings they have realized from settlement reductions more toward higher-volume residential customers than toward basic rate customers. We are concerned that competition alone will not produce lower rates for low- volume residential customers taking service from basic rate schedules. Therefore, in our monitoring of U.S. carriers' collection rates, we will pay particular attention to whether U.S. carriers pass on net settlement savings to residential basic rate schedules. 274. Many of the commenters that argue that reductions in settlement rates have not resulted in commensurate reductions in collection rates compare reductions in the nominal settlement rate (i.e., the per minute settlement rate level) to collection rates. This is, however, an inappropriate comparison because the proper basis for calculating any pass through of savings is the net settlement payment. When a settlement rate is reduced, carriers' settlement savings are not equal to the reduction in the per minute settlement rate times the volume of traffic on the affected route. Rather, because settlement payments are made on a net basis, settlement savings on each route are reflected in the reduction of net settlement payments. Thus, in determining whether U.S. carriers have passed settlement savings on to consumers, we will take into account reductions in net settlements, not reductions in the level of settlement rates. E. Legal Basis For Establishing Benchmark Settlement Rates 275. As noted above, we conclude that we have the authority under the Act, relevant case law, and international regulations to adopt settlement rate benchmarks. In this section, we respond to the legal arguments of the commenters in detail. 1. The Communications Act and Relevant Case Law a. Jurisdiction Over Foreign Communication that Originates or Terminates in the United States i. Positions of the Parties 276. U.S. carriers generally agree that the Act gives us the statutory authority to adopt our benchmarks proposals. Specifically, AT&T and Sprint argue that Section 2(a) of the Act gives us jurisdiction over "all interstate and foreign communication by wire or radio." Sprint notes that Section 3(17) of the Act defines "foreign communication" as "communication to or from any place in the United States to or from a foreign country." Sprint contends that, because traffic settled under accounting rates either originates or terminates in the United States, it squarely falls within the Act's definition of "foreign communication" as that term is used in Section 2(a). 277. Other commenters, including many foreign carriers and governments as well as GTE, argue that, despite the language of the Notice, we are attempting to exercise jurisdiction over the foreign end of international telecommunications services. Telef˘nica de Espa¤a argues that Section 2(b) of the Act expressly prohibits us from exercising jurisdiction over a carrier "engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with such carrier." Cable and Wireless notes that we have previously acknowledged that the Act generally limits our jurisdiction over international telecommunications services to the U.S. end of the service only. It claims our benchmarks proposals would exceed this jurisdiction by effectively dictating the rates a foreign carrier could charge to terminate U.S.- billed international switched traffic in its own country. GTE and Telef˘nica de Espa¤a argue that a showing of an affirmative Congressional intent to apply the Act's enforcement provisions extraterritorially is necessary to overcome the presumption against such extraterritorial effects of legislation. They contend that no provision of the Act shows an intent by Congress to do so. KDD argues that we do not have authority to adopt the benchmark settlement rates because their adoption would not afford a foreign country the same degree of regulatory authority as we would be exercising over settlement rates. ii. Discussion 278. This proceeding continues our more than sixty years of regulatory oversight of international settlement arrangements. We initially conclude that the Act provides us with the authority to reform U.S. carrier participation in international settlement rate practices in the manner we adopt in this Order. In Sections 1 and 2(a) of the Act, Congress indicated its affirmative intent to give us jurisdiction over "all interstate and foreign communication by wire or radio . . . which originates and/or is received within the United States . . . ." Such an affirmative Congressional intent to give us jurisdiction over "foreign communication" overcomes the general presumption against the extraterritorial effect of a statute argued by GTE and Telef˘nica de Espa¤a. "[F]oreign communication," as that term is defined in the Act, refers to "communication from or to any place in the United States to or from a foreign country." International telecommunications services that are settled under a settlement rate agreed to by a U.S. carrier and its foreign correspondent clearly fall within the definition of "foreign communication" used in the Act because such telecommunications services either originate or terminate in the United States. 279. The rules adopted here do not constitute the exercise of jurisdiction over foreign carriers. Instead, we establish in this Order the rate at which a settlement rate agreed to by a U.S. carrier satisfies that carrier's obligation to comply with the "just and reasonable" requirements of Sections 201 and 205. As such, it is a direct constraint on our U.S. carriers. Where U.S. carriers and their foreign correspondents cannot agree to a settlement rate that falls at or below the relevant benchmark, we will use our powers under the Act to take enforcement actions that will, as proposed in the Notice, "apply to U.S. carriers within our jurisdiction, not to their foreign correspondents." 280. We have taken similar action to ensure that a carrier does not pay excessively for an individual component of an end user rate where one of the parties to the transaction falls outside of our jurisdiction. Under our rate-of-return regulation of AT&T, we made sure that AT&T did not pay an unreasonable amount for goods it purchased from its Western Electric affiliate without ever exercising jurisdiction over the latter. There, we disallowed "from AT&T's interstate rate base the relevant portions of any excess earnings Western receives from sales to the Bell System." We have taken a similar approach here by restricting what U.S. international carriers can pay for a service provided by a foreign carrier that falls outside of our jurisdiction. Obviously, in the context of international telecommunications services, our actions will have an indirect effect on foreign carriers. Such services, by their very nature, require one end of the communication to be handled outside of the United States, and thus rules regarding the U.S. end of the communication may have an impact on the foreign end as well. 281. An indirect effect on foreign carriers does not preclude us from adopting settlement rate benchmarks. In RCA Communications, the District Court for the Southern District of New York reviewed a Commission order involving the ratio between the charges for handling "Urgent" and "Ordinary" telegraph messages. International agreements had established the charges for "Urgent" messages at twice the level of those for "Ordinary" messages. We directed RCA Communications and other telegraph companies to cease and desist from the practice of charging amounts for "Urgent" messages "which bear any greater ratio than 1 1/2 to 1 to the charges for Ordinary . . . messages, respectively." The court held that, although our order indirectly affected foreign carriers, "it operate[d] directly only on persons within the United States and an indirect effect on outsiders d[id] not militate against its validity." We reach the same conclusion here. b. Application of Section 201's "Just and Reasonable" Requirement to Accounting Rates i. Positions of the Parties 282. AT&T argues that U.S. carriers' settlement arrangements with foreign correspondents clearly constitute "practices" and "charges" for and in connection with "foreign communication by wire or radio" subject to Section 201's "just and reasonable" requirement. Opponents of our benchmarks proposals contend that, even if we are exercising jurisdiction only over U.S. international carriers as we have stated, the Act does not authorize us to adopt benchmark settlement rates. GTE and Telef˘nica de Espa¤a argue that, while Section 201 generally gives us the authority to regulate intercarrier charges where both carriers are subject to our jurisdiction, the second proviso of Section 201(b) limits our authority with regard to international settlement rate agreements. GTE states that this authority is "narrower than the authority to determine whether U.S. carriers' charges or other practices are 'just and reasonable' under the main body of Section 201(b)." Both GTE and Telef˘nica de Espa¤a assert that Section 201(b) limits our authority to determine whether settlement rate agreements are contrary to the public interest and does not extend to the authority to prescribe or otherwise modify contract terms. Argentina Telintar argues that the second proviso of Section 201(b) does not apply to contractual relations where one carrier compensates another for carrying its traffic in order to complete international calls. Argentina Telintar states that the plain meaning of the term "exchange of services" in Section 201(b) is a "barter arrangement or provision of one service in exchange for another service." ii. Discussion 283. Section 201 of the Act requires that "all charges, practices, classifications, and regulations for and in connection with [interstate or foreign communication by wire or radio] shall be just and reasonable . . . ." We find that, because an accounting rate is the charge negotiated between a U.S. international carrier and its foreign correspondent for handling one minute of international telephone service, the plain language of Section 201 gives us jurisdiction over such charges. "Charges" and "practices," as those terms are used in the Act, refer to more than just the end charges to customers. In Louisiana Public Service Commission v. FCC, the United States Supreme Court rejected such a narrow reading of the words "charges," "classifications," and "practices" in Section 2(b) of the Act, finding that such terms encompassed depreciation. Similarly, we conclude that a U.S. international carrier's agreement to a particular settlement rate constitutes a "practice," as well as perhaps a "charge" subject to the just and reasonable requirement of Section 201. Section 201(b) declares any "charge" or "practice" that is "unjust or unreasonable . . . to be unlawful." 284. We disagree with those commenters that argue that Section 201(b)'s requirement that "[a]ll charges, practices, classifications, and regulations for and in connection with [interstate or foreign communication by wire or radio] be just and reasonable" excludes "charges" and "practices" agreed to by a U.S. international carrier in the form of an above-cost accounting rate just because the other party to the contract is a foreign carrier. As discussed above, the Act defines "foreign communication" to include international telecommunications services that are settled under an accounting rate where such services either originate or terminate in the United States. "Foreign communication" by its very nature requires one end of the communication to be handled outside of the United States, and thus rules regarding the U.S. end of the communication may have an impact on the foreign end as well. The reading of Section 201 suggested by some commenters would effectively negate Congress' inclusion of "foreign communication" in Section 201. 285. Moreover, we do not believe that the second proviso of Section 201 applies to settlement agreements between a U.S. international carrier and its foreign correspondent. That proviso states that "nothing in this Act . . . shall be construed to prevent a common carrier subject to this Act from entering into or operating under any contract with a common carrier not subject to this Act, for the exchange of their services, if [we are] of the opinion that such contract is not contrary to the public interest." Congress designed the proviso, taken from the Interstate Commerce Act, to legitimize arrangements between telegraph carriers and railroads for the provision of free services to each other. As the Supreme Court has held, "'exchange' is barter and carries with it no implication of reduction to money as a common denominator." A settlement agreement between a U.S. carrier and its foreign correspondent does not involve any type of barter arrangement or provision of one service in exchange for another. Instead, the agreed-upon settlement rate sets the monetary amount to be paid each carrier for handling one minute of international telephone service. Thus, we agree with Argentina Telintar that such an agreement does not constitute a "contract . . . for the exchange of services" covered by the second proviso of Section 201(b). Even if that proviso did apply to a settlement rate agreement, the language of the proviso "seems clearly to give us the authority to measure any applicable contract against the public interest and nullify or modify those that are found wanting." 286. As we note above, in recent years, a multilateral consensus has developed that the traditional accounting rate system must be reformed in part because it results in settlement rates that are substantially above costs. To the extent that the above-cost portion of settlement rates paid by U.S international carriers to their foreign correspondents leads to those settlement rates being "unjust or unreasonable," Section 201 requires us to declare such "charges" or "practices" unlawful. Settlement rates are in most cases substantially above cost-based levels because effective competitive market conditions do not exist in many foreign markets at this time. The lowest prevailing settlement rate between the United States and a carrier in a competitive overseas market is $0.08. Yet, the average settlement rate U.S. carriers pay their foreign correspondents is approximately $0.35. The benchmark settlement rates we adopt in this Order place a cap on the amount that U.S. international carriers can pay to their foreign correspondents to terminate U.S.- originated traffic. These benchmarks reduce the above-cost portion of settlement rates, but do not eliminate it entirely. In the discussion of our prescription of our benchmarks settlement rates under Section 205 below, we analyze in detail why the benchmark settlement rates we adopt in this Order represent the highest amount at which we consider a settlement rate to be presumptively just and reasonable. We find that any settlement rates that exceed the relevant benchmark constitute an unjust and unreasonable "charge" or "practice" under Section 201. As a result, we declare settlement rates in excess of the relevant benchmark to be unlawful and not in the public interest. c. Section 205 Authority to Set Settlement Rate Benchmarks i. Positions of the Parties 287. Finding settlement arrangements subject to our regulation, AT&T and Sprint argue that we have the power under Section 205 "to determine and prescribe what will be the just and reasonable charge . . . and what classification, regulation, or practice is or will be just, fair, and reasonable." Argentina Telintar, however, argues that Section 205 only authorizes us to prescribe the rates those domestic carriers subject to our jurisdiction may charge their customers, not the prices that a U.S. carrier charges its foreign supplier. 288. AT&T states that our power under Section 205 includes the authority to order a carrier to "cease and desist" where we find that a charge or practice violates the Act. Sprint contends that, while we cannot require a foreign carrier to agree to a particular settlement rate, we can find that a foreign carrier's refusal to exchange traffic at that rate renders the service provided by the U.S. carrier contrary to the public interest. In that circumstance, Sprint argues that we can refuse to allow a U.S. carrier to exchange traffic with the foreign carrier. 289. Sprint does state, however, that the lack of cost data in the record could make it difficult to sustain a prescription of a particular benchmark rate or range of rates. Sprint argues that we could use benchmarks as "presumptively reasonable settlement rates and . . . afford the public, including any foreign carriers who might be affected by such a prescription, an opportunity to rebut this presumption of reasonableness." Sprint contends that such an approach would be similar to one implemented by the former Federal Power Commission ("FPC") for prescribing natural gas rates based on composite cost data and ultimately upheld by the Supreme Court in the Permian Basin Area Rate Cases. Cable & Wireless and KDD contend that, while the FPC in Permian Basin lawfully prescribed natural gas rates based on composite cost data, we do not have any data, composite or otherwise, on the costs incurred by foreign carriers in terminating international switched traffic. ii. Discussion 290. We find that Section 205 of the Act gives us the authority to require U.S. international carriers to pay settlement rates at or below the relevant benchmark that we adopt in this Order. We disagree with Argentina Telintar that Section 205 only gives us authority to prescribe the rates that U.S. international carriers charge their customers and not the charge that a U.S. carrier agrees to pay its foreign correspondent for handling one minute of international telephone service. For the same reasons discussed in our analysis of Section 201 above, we find that an accounting rate constitutes a "practice" or "charge" under Section 205. As such, we have the authority to "determine and prescribe what will be the just and reasonable charge or the maximum or minimum or maximum and minimum charge or charges to be thereafter observed, and what . . . practice is or will be just, fair, and reasonable, to be thereafter followed . . . ." Section 205 authorizes such action "under order for investigation and hearing made by [us] on [our] own initiative." Under the Sierra-Mobile doctrine, established by judicial decisions interpreting analogous provisions of the Federal Power Act and the Natural Gas Act, we find that we have the "undoubted power" to prescribe a change in contract rates -- such as settlement rates - - "whenever [we] determine[] such rates to be unlawful." 291. We have concluded in this Order that it would be an unjust and unreasonable "practice" or "charge" for a U.S. international carrier to pay settlement rates above the relevant benchmark rate. The relevant settlement rate benchmark represents the highest presumptively just and reasonable amount a U.S. international carrier can pay its foreign correspondent for handling one minute of an international call under Sections 201 and 205. Thus, we prescribe under Section 205 that U.S. international carriers adhere to the benchmarks we adopt in this Order. As discussed in Section II.B.2. of this Order, we have established procedures whereby any affected party can rebut this presumption by demonstrating that the relevant benchmark fails to allow a carrier to collect its incremental costs for providing international termination services. 292. We agree with Sprint that the Supreme Court's decision in Permian Basin lends support for our approach of using tariffed components prices. In Permian Basin, the Court rejected the argument that the FPC had to derive its maximum natural gas rates from prevailing field prices, instead allowing the FPC to rely on "composite cost data, obtained from published sources and from producers through a series of cost questionnaires." Similarly, our TCP methodology uses publicly available tariff and ITU data for the three elements of international termination service identified by the ITU in Recommendation D.140. Thus, the TCP methodology relies in large part on the same rates that foreign correspondents charge their domestic customers. We see no justifiable economic basis for allowing our U.S. international carriers to pay foreign carriers more than those carriers charge their domestic customers for the same service, and thus the relevant benchmark rate represents the maximum reasonable "practice" or "charge" for a U.S. international carrier. 293. We agree with Cable & Wireless, KDD, and Sprint that our TCP data are not pure composite cost data. We do not have such cost data because we do not have the ability to compel foreign correspondent carriers to provide us with data about their costs. We note that, despite our invitation to do so in the Notice, foreign correspondent carriers have not submitted such information in this proceeding. We do, however, have an obligation under the Act, because of our oversight of rates charged to U.S. consumers, to ensure that U.S. carriers do not pay unjust and unreasonable settlement rates to their foreign correspondents. We emphasize that we do not attempt to set foreign carriers' costs in this Order. Rather, we set a cap on the amount U.S. carriers may pay for a component of providing international service that is directly reflected in U.S. consumer rates for that service. This cap is based primarily on foreign carriers' tariffed rates. Because a foreign carrier's rates in almost all cases reflect a foreign carrier's incremental costs plus a significant contribution to common costs, settlement rate benchmarks based on those rates will still be substantially above the costs incurred by foreign carriers to terminate international traffic. Nonetheless, they will significantly reduce the above-cost portion of most current settlement rates. We thus believe that our use of the publicly-available tariff and ITU data to establish our benchmark rates will produce settlement "charges" or "practices" that satisfy the "just and reasonable" requirement of Section 205. 294. As described in more detail in Section II.B.2. of this Order, we adopt an averaging approach for establishing settlement rate benchmarks instead of adopting country-specific benchmarks based on the TCP data. We find that the averaging approach we adopt for our TCP methodology produces a just and reasonable amount for the benchmark rates. We adopt an averaging approach for two reasons. First, because our TCP methodology relies in large part on foreign carriers' tariffs to calculate benchmarks, any inefficiencies captured in those tariffs will be captured in an individual country benchmark. These inefficiencies reflect the fact that many countries use long distance and international rates to cross-subsidize rates for local service and because telephone service in many countries is provided by monopoly or dominant carriers whose tariffed rates may reflect protected market positions and an ability to charge prices not related to underlying costs. An averaging approach will mitigate the impact of these inefficiencies on our benchmark settlement rates. Second, an averaging approach is necessary to counter the incentive of a carrier to influence the level of its benchmark by raising its tariffs. Using the average as the basis for our benchmark rates will reduce the above-cost portion of the U.S. international carriers' settlement payments, but still permit all foreign carriers to recover their incremental cost of terminating international traffic plus a substantial contribution to common costs. Thus, we are confident that the benchmark rates come nowhere close to going below the "just and reasonable" level required by Section 205. 295. Courts have recognized that "non-cost" factors may play a legitimate role in the setting of just and reasonable rates. We believe that non-cost factors are relevant in evaluating a carrier's "practices" and "charges" as well. This provides the basis for the actions we take in this Order in two areas: (1) establishing benchmark rates based on countries' level of economic development; and (2) establishing different transition periods based on countries' economic development. With regard to the former, we begin by recognizing that lower income countries have on average significantly higher TCPs than upper income countries. Thus, if we averaged the TCPs of lower income countries with those of upper income countries to establish one benchmark rate, lower income countries would experience a much greater differential between the new benchmark rate and current settlement rates than would a higher income country. We believe that such extreme differentials would be unfair and could prove too difficult for some foreign carriers to absorb -- creating a risk of harm to some lower and middle income countries' overall economic welfare as well as increasing the chance of disruptions to their telecommunications networks. Establishing separate benchmarks rates based on level of economic development would mitigate this effect. We therefore set different rates based on the World Bank's classification of countries by GNP per capita, which we believe to be an objective and administrable measurement of countries' levels of economic development. 296. In establishing different transition periods for the different economic development categories, we also factored in that adoption of our benchmarks will, in many cases, substantially reduce the amount a U.S. international carrier can pay its foreign correspondent to terminate a call. An immediate move to such a lower rate could produce the same result that we are trying to avoid by establishing different TCPs averages for the benchmark rates depending on a country's economic development category--disruptions to the telecommunications networks in foreign countries. Such disruptions would likely prove harmful to U.S. carriers and consumers. We conclude that economic development level, as determined by reference to the World Bank categories, provides a reasonable measure of a country's ability to transition to a more cost-based system of accounting rates without undue disruption to its network. Thus, to safeguard against such disruptions, we have established transition periods based on the economic development category of a country. Although this will delay the movement to a settlement rate at or below the relevant benchmark rate, we believe that the use of transition periods will likely serve the public interest more than an immediate move to the relevant benchmark rates. 297. In addition to our settlement rate benchmarks, we adopt a "best practice rate" that is closer to a cost-based level than our settlement rate benchmarks that we will apply to prevent market distorting behavior. As discussed in the Notice, and in Section II.C. of this Order, above- cost settlement rates create certain distortions in the U.S. market for IMTS. However, if settlement rates are at cost-based levels, carriers will not have the ability to engage in market distorting behavior. The best practice rate will be applied only to the extent carriers seek authorization to provide facilities-based service from the United States to affiliated markets and to provide private line resale service, as discussed in Sec. II.C., infra, and only if the Commission detects market distortion on the route or routes in question. 298. The use of our "best practice" rate in cases where we detect market distortions also satisfies the just and reasonable requirement of Section 205. Because we do not have data to establish an accurate cost-based rate, we use a market-based rate as a substitute. We look to competitive markets to find a rate that can be applied in cases of market distortion in lieu of a rate based on an estimate of incremental costs. We adopt a "best practice" rate that is based on the lowest settlement rate paid by U.S. carriers to an overseas carrier from a competitive market. We will consider, on a case-by-case basis, other factors that may influence the level of the best practices rate as applied to individual carriers. d. Benchmarks Proceeding Satisfies Section 205's Procedural Requirements i. Positions of the Parties 299. Argentina Telintar and Telef˘nica de Espa¤a argue that this proceeding fails to satisfy the procedural requirements of Section 205 that we must afford an opportunity for a hearing and make a finding that a prescribed rate is just and reasonable. Telef˘nica de Espa¤a cites the decision of the Court of Appeals for the Second Circuit in AT&T v. FCC for the proposition that we may not "circumvent the statutory hearing requirements on the basis of [our] claimed broad inherent regulatory power." ii. Discussion 300. We disagree with the contentions of Argentina Telintar and Telef˘nica de Espa¤a that establishing our settlement rate benchmarks and "best practice" rate in the context of this rulemaking violates the procedural requirements of Section 205 of the Act. Section 205 requires that a rate prescription take place "after full opportunity for hearing, upon a complaint or under an order for investigation and hearing made by [us] on [our] own initiative." In United States v. Florida East Coast Railway, the Supreme Court held that such language does not trigger the detailed oral hearing requirements of Section 556 and 557 of the Administrative Procedures Act. Instead, the Court held that the notice and comment provisions of Section 553 of the APA satisfy a general hearing requirement such as that contained in Section 205. Because this proceeding satisfies the procedural requirements of Section 553 of the APA, we find it to be fully consistent with the Court's decision in Florida East Coast Railway. 301. We are also not persuaded by the argument of Telef˘nica de Espa¤a that adoption of settlement rate benchmarks and "best practice" rates in this proceeding is inconsistent with the decision of the Second Circuit in AT&T v. FCC. The AT&T case involved a requirement -- which we based on our inherent regulatory power under Section 4(j) of the Act -- for prior Commission permission to file new rates. The Second Circuit held that such a requirement violated the procedural requirements of Section 205 because it amounted to a Section 205 rate prescription without following the statutory requirements of a full hearing and specific findings. We find that case inapplicable to the circumstances here. In the AT&T case, our action rested on our inherent regulatory power under Section 4(j) of the Act. We do not in this instance dispute that Section 205 governs our action in this proceeding, but rather find that the notice and comment provisions of Section 553 of the APA, under which this proceeding is conducted, satisfy the hearing requirement of Section 205. e. Contractual Nature of Settlement Rates Does Not Insulate Them from Requirements of the Act i. Positions of the Parties 302. AT&T argues that the fact that settlement arrangements are memorialized in inter- carrier contracts does not insulate them from our review. AT&T notes that Section 211 of the Act requires "[e]very carrier subject to this chapter [to] file with [us] copies of all contracts, agreements, or arrangements with other carriers, or with common carriers not subject to the provisions of this chapter." Because of that requirement, AT&T asserts that we can review settlement arrangements and, where the public interest requires it, modify them. 303. According to AT&T, the fact that one party to an agreement establishing an accounting rate is a foreign carrier not subject to our jurisdiction does not diminish our authority to require the other carrier subject to our jurisdiction to comply with the requirements of Section 201 of the Act. Sprint notes that we previously exercised our jurisdiction over AT&T to ensure that it did not pay excessive prices for goods it purchased from its Western Electric affiliate without ever exercising jurisdiction over Western Electric itself. Both AT&T and Sprint cite RCA Communications, Inc. v. United States for the proposition that we have the authority to regulate the rates of U.S. carriers even where those rates are established by agreements with foreign correspondents. 304. Certain commenters attempt to distinguish the RCA Communications case cited by AT&T and Sprint from the proposals made in this proceeding. GTE states that RCA Communications cannot be relied on as authority to adopt our benchmarks proposals because that case involved regulations that limited the rates U.S. carriers could charge U.S. consumers, not what they could pay foreign carriers. Several foreign carriers contend that RCA Communications stands for the proposition that if we find that a U.S. carrier has entered into an agreement with a foreign correspondent at an excessive rate, our only recourse is to adopt a prescription lowering the rates a U.S. carrier charges its U.S. customers for the service. 305. Several commenters cite to the Supreme Court's decision in Regents of the University System of Georgia v. Carroll for the proposition that the Act does not "give authority to [us] to determine the validity of contracts between [entities subject to our jurisdiction] and others." AT&T responds by arguing that the Court in Carroll actually held that we did not have the authority "to determine the validity of contracts between [Title III] licensees and others," not between Title II common carriers and others. AT&T notes that the Court stated that its conclusion "was the inevitable result of the statutory scheme of licensing." ii. Discussion 306. We agree with AT&T that the fact the settlement arrangements agreed to by U.S. international carriers are memorialized in inter-carrier contracts does not insulate them from our review. Section 211 of the Act requires "[e]very carrier subject to this chapter [to] file with [us] copies of all contracts, agreements, or arrangements with other carriers, or with common carriers not subject to the provisions of this chapter." We find that Section 211's filing requirement gives us the means by which to ensure that the settlement arrangements agreed to by U.S. international carriers serve the public interest--allowing us to review and modify them where necessary such as here, where we find that they are in violation of Section 201. We have long held that we have the authority to determine whether the terms and conditions of contracts filed pursuant to Section 211's requirement are consistent with other provisions of the Act. If we did not have the "authority to pass on the contracts which must be filed . . . , [Section 211's] filing requirement would be a meaningless exercise." 307. With the statutory powers discussed above, it is not surprising that the one court to consider the issue found that the Act allows us to regulate the charges of U.S. carriers even where those charges are established by agreements with foreign correspondents. As we discuss above, the district court in RCA Communications recognized that our order in that case had an indirect impact on foreign carriers, but found that such an impact did not preclude us from issuing an order that "operate[d] directly only on persons within the United States." 308. We disagree with those commenters that contend that the Supreme Court's decision in Carroll in any way limits our ability to take such action. At the time of the Court's decision in Carroll, we had no power under Title III of the Act to issue "cease and desist" orders. Instead, we had "at [our] disposal only the cumbersome weapons of criminal penalties and license refusal and revocation." Title II of the Act gives us much more expansive powers than we had over broadcast licensees when the Court decided Carroll. These powers include the power to issue "cease and desist" orders found lacking in Carroll. As a result, we conclude that the Court's holding that we did not have the authority "to determine the validity of contracts between [Title III] licensees and others" does not apply to our enforcement powers against common carriers under Title II at issue here. 2. International Regulations a. Positions of the Parties 309. Many foreign commenters argue that our settlement rate benchmark proposals violate the regulations of the International Telecommunication Union ("ITU") as well as general international law principles of comity and national sovereignty. These parties argue that our proposals represent unilateral action by the United States and contradict ITU regulations, such as Articles 1.5 and 6.2.1 of the International Telecommunication Regulations ("ITR"), that require accounting rates to be negotiated pursuant to mutual agreement. Several foreign commenters argue that adoption of benchmarks would amount to an extraterritorial assertion of our jurisdiction. They urge us to seek a negotiated, multilateral solution to accounting rate reform issues within the framework of the ITU. 310. In contrast, U.S.-owned carriers generally support the Commission's proposal and argue that we possess sufficient authority to review negotiated agreements. They point out that nothing in the obligations of the United States under the ITU precludes us from exercising oversight over agreements negotiated by U.S. carriers to determine whether such agreements are in the public interest. b. Discussion 311. We find that requiring U.S. carriers to pay no more than a benchmark settlement rate is consistent with international law and the regulations of the ITU. Many foreign governments and carriers argue that adoption of our benchmark proposals would violate sections 1.5 and 6.2.1 of the ITR. We reject these arguments. Although the sections cited require administrations to negotiate accounting rates "pursuant to mutual agreement," the ITR do not suggest that governments cede sovereignty over telecommunication carriers that operate in their markets. The preamble to the ITR recognizes that "it is the sovereign right of each country to regulate its telecommunications." Indeed, Article 1.7(a) of the ITR states "[t]hese regulations recognize the right of any member, subject to national law and should it decide to do so, to require that administrations and private operating agencies, which operate in its territory and provide an international telecommunication service to the public, be authorized by that member." The right to authorize a carrier to provide service in a given country necessarily includes the right to attach reasonable conditions to such authorization to ensure that the actions of such carriers are consistent with the public interest. We cannot accept the view of certain foreign governments and carriers that the U.S. government must agree to allow U.S. carriers to settle their traffic at whatever rates the foreign carrier deems appropriate regardless of the impact on the U.S. public interest. 312. Several commenters also argue that our adoption of settlement rate benchmarks would violate national sovereignty by dictating the rate that a foreign carrier may charge for termination of traffic on the foreign network. The Philippines notes that Article 6.1.1 of the ITR recognizes the level of toll charges as a "national matter." We agree that toll charges are a national matter and note that the rules we adopt here place no constraints on the rates that foreign carriers charge foreign end-user customers. We at no time in this Order assert that we have the authority to compel directly a foreign carrier to charge a certain rate for terminating U.S.- originated traffic. Instead, the rules we adopt here apply only to the settlement rates that carriers subject to our jurisdiction may pay for termination of U.S.-originated traffic. We recognize that our settlement rate benchmarks may over time reduce the settlement revenues that many foreign carriers receive from U.S. carriers, and this could in turn lead some foreign carriers to change the rates they charge their consumers. However, our responsibility must be to address the inequity and inefficiency of an accounting rate system that subsidizes foreign carriers at the expense of U.S. consumers. We believe it is fundamentally unfair and inconsistent with the public interest for U.S. consumers to continue to pay high IMTS rates because of above-cost settlement rate payments to foreign carriers. 313. We note that Article 6.2.1 of the ITR requires carriers to negotiate accounting rates "taking into account relevant CCITT recommendations and relevant cost trends." ITU Recommendation D.140 goes further to state that "accounting rates for international telephone services should be cost-oriented and should take into account relevant cost trends." We find that these sections support the action that we take here. 314. Many commenters argue that we should reject our benchmarks proposals and, instead, wait until a negotiated solution to above-cost accounting rates can be reached within the structures established by the ITU. The U.S. Government has contributed actively to the work of the ITU and other multilateral fora on accounting rate issues for many years. While we have seen some progress in these fora, the movement toward fundamental reform has been very slow. We believe that we must take action now to fulfill our statutory mandate to ensure that U.S. consumers receive telecommunications services at reasonable rates and to address the potential for competitive distortions in the U.S. market for international services as we move forward with implementation of the U.S. commitments made in the WTO Basic Telecom Agreement. We would prefer to achieve a multilateral solution to the problem of above-cost settlement rates. Thus, we will continue our efforts to achieve reform of the accounting rate system in the ITU and other multilateral organizations. We emphasize that if, in the future, meaningful progress is made in a multilateral forum to achieve significant reform of the accounting rate system and reduce settlement rates to a more cost-based level, we will reconsider at that time the need to enforce our settlement rate benchmarks. III. Conclusion 315. In this Order we establish settlement rate benchmarks that will govern the international settlement rates that U.S. carriers may pay to terminate international traffic originating in the United States. Our action is necessary to reduce the inflated margins on international termination fees that contribute to high international calling prices in the United States and create competitive distortions in the U.S. market for IMTS. We will continue, however, to work in the ITU and other international organizations to achieve multilateral agreement on reforming the international accounting rate system and encourage other countries that have expressed interest in achieving reform to work with the United States toward achieving that goal. We emphasize that if a multilateral agreement is reached that achieves substantially equivalent results as the benchmarks policy we adopt in this Order, we could waive enforcement of our benchmark settlement rates. IV. Procedural Issues A. Final Regulatory Flexibility Analysis 316. Pursuant to the Regulatory Flexibility Act of 1990, 5 U.S.C.  601-612, the Commission's Final Regulatory Flexibility Analysis with respect to the Report and Order is as follows: 317. Reason for Action: The Commission issues this Report and Order adopting changes in the benchmark settlement rates for international message telephone service between U.S. facilities-based carriers and foreign carriers and related issues. The Commission believes that its benchmark rates should be revised to reflect recent technological improvements, their associated cost reductions, and the market structure changes occurring in the global telecommunications market. We also believe these revisions, and related actions taken here, are necessary to move settlement rates closer to the actual costs of providing international termination services. 318. Objectives: The objective of this proceeding is to attain reform in the international accounting rate system and thereby help ensure lower international calling prices for consumers and protect competition in the U.S. IMTS market. The Commission will achieve this objective by revising its benchmark settlement rates so that they more closely resemble the underlying costs of providing international termination services. 319. Legal basis: The Report and Order is adopted pursuant to  1, 2, 4(i), 201, 205, 214 and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 152, 154(i), 201, 205, 214, 303(r). 320. Description, potential impact, and number of small entities affected: The Commission has not developed a definition of small entities applicable to international common carriers. We therefore have used as the applicable definition of small entity the definition under the Small Business Administration (SBA) rules applicable to Communications Services, Not Elsewhere Classified. This definition provides that a small entity is expressed as one with $11.0 million or less in annual receipts. Based on preliminary 1995 data, at present there are 29 international facilities-based common carriers that qualify as small entities pursuant to the SBA's definition. The number of small international facilities-based common carriers has been growing significantly, and by the end of 1996 that number could increase to approximately 50. The revised benchmark rates will apply to all international facilities-based common carriers, including small entities, that enter into an operating agreement with a foreign carrier that provides for the payment of settlement rates. We note that the revised benchmark rates should result in lower settlement rates for carriers. This Report and Order also requires that a foreign carrier's settlement rates be at or below the relevant benchmark as a condition of Section 214 authorization for that carrier, or an affiliate, to provide U.S. international facilities-based services between the United States and the affiliated destination country. This condition will apply to all U.S. international facilities-based carriers, including small entities, that are affiliated with foreign carriers. The Commission has concluded that this condition is necessary to prevent potential anticompetitive distortions in the IMTS market. 321. The Order also imposes an additional requirement on carriers that seek to provide switched services using resold or facilities-based private lines. Carriers must demonstrate that settlement rates for 50 percent of the settled traffic between the United States and the country at the foreign end of the private line are at or below the relevant benchmark for that country. The Commission believes that at most 635 small international carriers, both facilities-based and resale carriers, could be affected by this requirement. The Commission has concluded this requirement is necessary to prevent potential anticompetitive distortions in the IMTS market. We base our estimate of the number of small entities potentially affected on the number of toll carriers filing Telecommunications Relay Service Fund (TRS) worksheets. In 1995, 445 toll carriers filed TRS fund worksheets. We believe that between 50 and 200 carriers failed to file TRS fund worksheets. We also believe that fewer than 10 toll carriers were not small entities (based on the SBA's definition of small entity as one with fewer than 1,500 employees). Thus, at most 635 international carriers would be classified as small entities. The Secretary shall send a copy of this Report and Order to the Chief Counsel for Advocacy of the Small Business Administration in accordance with Section 603(a) of the Regulatory Flexibility Act, Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C.  601, et seq. (1981). 322. Reporting, recordkeeping and other compliance requirements: In its Initial Regulatory Flexibility Analysis the Commission did not propose any reporting requirements. The Notice, however, raised the issues of possible anticompetitive behavior and market distortions, and sought comment on how the Commission's reporting system could be modified in order to make monitoring and enforcement more effective. To address the concerns of commenters, the Report and Order contains certain mechanisms to detect potential market distortions. In this regard, the Commission amends its rules to impose an additional reporting requirement. Section 43.61 of the Commissions rules currently requires that carriers file annual reports that include actual traffic and revenue data. Common carriers subject to the existing Section 43.61 requirements will be required to file traffic reports for each quarter in which their traffic meets any of the following thresholds: (i) their aggregate U.S.-billed minutes of switched telephone traffic exceeds 1% of the total of such minutes of international traffic for all U.S. carriers (as published in the most recent Section 43.61 traffic data report); (ii) their aggregate foreign-billed minutes of switched telephone traffic exceeds 1% of the total of such minutes of international traffic for all U.S. carriers; (iii) their aggregate U.S.-billed minutes of switched telephone traffic for any country exceeds 1.5% of the total of such minutes for that country for all U.S. carriers; or (iv) their aggregate foreign-billed minutes of switched telephone traffic for any foreign country exceeds 2.5% of the total of such minutes for that country for all U.S. carriers. Limiting the quarterly filing requirement to carriers that meet these criteria will reduce the burden on small carriers, while enabling us to identify distortions in the balance of payments. The Report and Order only imposes an increase in the frequency with which the report must be filed. It will contain the same data that must be included in the current required annual report. Thus, the reporting requirement should not impose a significant economic burden, and no additional outside professional skills should be required in complying with this requirement. 323. Federal rules which overlap, duplicate or conflict with the Commission's proposal: None. 324. Any significant alternatives minimizing impact on small entities and consistent with stated objectives: The Notice solicited comments on a variety of alternative methodologies for calculating benchmark settlement rates, but these have no impact on small entities. The Notice also solicited comments on enforcement mechanisms that may be necessary to support U.S. carriers, including small entities, in their negotiations with foreign carriers and in their provision of international service. We did not receive any comments on the impact of these alternatives on small entities. 325. Comments solicited: Written comments were requested on the Initial Regulatory Flexibility Analysis in accordance with the same filing deadlines set for comments on the other issues in the Notice, but we did not receive any comments. B. Paperwork Reduction Act of 1995 Analysis 326. This Report and Order contains either a new or modified information collection. As part of its continuing effort to reduce paperwork burdens, we invite the general public and the Office of Management and Budget (OMB) to take this opportunity to comment on the information collections contained in this order, as required by the Paperwork Reduction Act of 1995, Pub. L. No. 104-13. Public and agency comments are due 60 days from date of publication of this Order in the Federal Register. Comments should address: (1) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (2) the accuracy of the Commission's burden estimates; (3) ways to enhance the quality, utility, and clarity of the information collected; and (4) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology. Written comments must be submitted on the proposed and/or modified information collections on or before 60 days after date of publication in the Federal Register. In addition to filing comments with the Secretary, a copy of any comments on the information collections contained herein should be submitted to Judy Boley, Federal Communications Commission, Room 234, 1919 M Street, N.W., Washington, DC 20554, or via the Internet to jboley@fcc.gov. For additional information concerning the information collections contained in the Report and Order contact Judy Boley at 202-418-0214. V. Ordering Clauses 327. Accordingly, IT IS ORDERED that, pursuant to Sections 1, 2, 4(i), 201, 205, 214 and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 152, 154(i), 201, 205, 214, 303(r), the rules, requirements and policies discussed in this Order ARE ADOPTED and Part 43 and 63 of the Commission's Rules, 47 C.F.R. Parts 43 & 63, ARE AMENDED as set forth in Appendix B. 328. IT IS FURTHER ORDERED that the rules, requirements and policies established in this decision shall take effect on January 1, 1998. The new information collection requirements adopted in this Order will become effective following OMB approval. The Commission will publish a document at a later date establishing the effective date. Federal Communications Commission William F. Caton Acting Secretary August 7, 1997 Separate Statement by Chairman Hundt on International Settlement Rates Report and Order Today's actions establishing new benchmarks to guide the prices U.S. carriers pay to terminate international calls will result in billions of dollars in savings for United States consumers and will help promote a more competitive, vibrant international telecommunications market. Currently, the average price of an international call is 88 cents a minute, compared to a price of 13 cents a minute for a domestic long distance call. This difference stems principally from the monopoly cartel that has long insisted on settlement rate payments that exceed the underlying cost of providing service by a factor often as large as five to ten times. This order and the World Trade Organization Agreement to open the world's telecommunications markets will work together to stimulate greatly the growth and competitiveness of the international market to the benefit of consumers and carriers alike worldwide. This order will bring extraordinary benefits to consumers here in the United States and worldwide. We estimate in the United States alone that consumers will save over $17 billion over the next six years, based on current market trends. Along with our access reform order earlier this year, this represents the greatest single consumer benefit ever delivered to American consumers in the history of this agency. As a result of this order and the WTO Agreement, we predict that the average price of an international call will drop from 88 cents today to 20 cents five years from now -- a decrease of almost 80%. And, we predict the United States market for international services will more than double over the next four years as a result of this order. The world market should enjoy a similar increase. Over the last several years, an international consensus has developed on the need to reform the antiquated settlement rate system. This system dates back over 100 years to the age of the telegraph and historically served as the mechanism for national monopoly telecommunications carriers to set international settlement rates. The ITU and other international organizations have devoted considerable effort to studying settlement rate reform. We have worked closely with foreign countries in these efforts and will continue to do so. We encourage our friends overseas to move forward with us to reform the settlement rate system because it is an integral part of a successful transition to the post-WTO world. We are convinced that a multilateral solution is the best way to reform and we have pledged in the Report & Order we adopt today to reconsider these benchmarks should such a satisfactory multilateral solution be reached. Today, the Commission is saying that the solution to financing the global communications network cannot be an ever escalating subsidy from American consumers to foreign telephone companies. We are also saying that the global network must be built, and the only way to do so is by following the same laws of competition and market financing that apply everywhere. In 1996, the total net outpayment from US carriers to foreign carriers was $5.4 billion. Over 70% of this outpayment represents a subsidy from US consumers to foreign telecommunications carriers. Whether we are talking about termination for domestic or international services, there are certain principles that are constant. The principles governing competition in telecommunications, like the laws of physics, are the same whether one is in South Dakota or South Korea. In last year's Telecommunications Act, Congress set forth a number of principles to guide the introduction of competition for local telephone service. Among these principles was the requirement that prices for competitors to interconnect to the incumbent local exchange companies' networks be cost-based and nondiscriminatory. International settlement rates are simply a specialized form of interconnection involving services that cross national borders. The benchmarks we adopt today provide a framework to foster competition in international services by promoting cost-based and nondiscriminatory pricing for international termination services. They also take into account the needs of developing countries by giving carriers from such countries a higher benchmark and a significantly longer period of time to meet their benchmark. Consumers around the world will receive higher quality service, more service options, and lower rates as settlement rates are reduced to a more cost-based level. Settlement rate reform will also benefit every carrier that provides international services by stimulating growth for international services. The current accounting rate system suppresses global demand by contributing to inflated international calling prices. As settlement rates, and in turn calling prices, are reduced, demand for international services will be stimulated. More importantly, settlement rate reform is essential if carriers that currently benefit from and rely on artificially high settlement rates are to remain viable. Without settlement rate reform, these carriers face being marginalized by a global telecommunications market that will increasingly bypass artificially high-cost routes, either by least-cost routing practices such as call-back, refile and reorigination, or technological innovation such as Internet telephony (which is not subject to the settlement rate system). Only the discipline of a competitive markets can attract the stores of global capital needed to build the global information infrastructure. August 7, 1997 Separate Statement by Commissioner Susan Ness on International Settlement Rates Report and Order That current settlement rates are significantly higher than the actual cost of terminating international long distance telephone service is widely accepted. Even the foreign carriers who benefit by receiving these large annual subsidies from U.S. carriers -- and ultimately U.S. consumers -- have generally acknowledged that current settlement rates are disproportionate to actual costs. Therefore, a multilateral consensus exists -- and has existed for several years now -- that the settlement rate imbalance should be remedied. It was in 1992 that the ITU adopted Recommendation D. 140, which called for a reduction in these rates within five years, or by 1997. While progress has been made during that time, the pace of reform in settlement rates thus far has been inadequate. Thus, despite general international agreement that a remedy has long been in order, we have been unable to reach consensus internationally as to how to achieve more cost-based rates in a timely manner. The need to achieve meaningful accounting rate reform has taken on greater urgency in light of the WTO Basic Telecommunications Services Agreement, which will take effect on January 1 of next year. In the context of the market opening commitments that will soon take effect under the WTO Agreement, the current inflated settlement rate structure has even greater potential for market distortion and anti-competitive effects. The WTO Telecom Services Agreement is a landmark in trade liberalization, and the international community is to be commended for taking this great leap forward. The time is due, however, for the international community to give full effect to the great promise of this Agreement by remedying the accounting rate imbalance. The ITU is to be commended for its efforts in this regard, and I commend the work of Study Group 3, in which the United States will continue to participate vigorously. But the time to act is upon us and that is why the FCC takes this action today. I would like to point out that the Commission has thoroughly reviewed the comments it has received from over 90 foreign governments and foreign carriers relative to this proceeding, and has taken these comments into account in issuing this Order. I would emphasize, however, that the Order we adopt today specifically provides that the Commission may forbear from enforcment if a multilateral agreement is reached which achieves substantially equivalent results in a timely manner. So the FCC does not by its action today foreclose a multilateral solution. Rather it invites one -- and it is my personal hope that this Order may spur timely multilateral action to achieve our common goals.