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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 ) ) CABLE & WIRELESS, INC. ) ) Application for Authority Pursuant to) Section 214 of the Communications Act) File No. ITC-97-290 of 1934, as Amended, to Provide Resold and) Facilities-Based Switched and Private Line) Service between the United States and Russia) and to Be Held Non-dominant for All Services) on This Route. ) ORDER, AUTHORIZATION, AND CERTIFICATE Adopted: April 1, 1998 Released: April 2, 1998 By the Chief, International Bureau: I. Introduction 1. In this Order, we grant Cable & Wireless, Inc. (CWI) authority to provide facilities-based switched and private line international telecommunications services between the United States and Russia. We classify CWI as a dominant carrier in its provision of service to the Sakhalin Island region of Russia. II. Background 2. CWI is a common carrier that is authorized to provide international switched and private line services on a resale basis between the United States and numerous countries throughout the world, including Russia. Presently, CWI is classified as a dominant carrier in its provision of resold private line service to Russia. CWI also is authorized to provide switched and private line services on a facilities basis to numerous countries, but not yet to Russia. 3. CWI requests authority, pursuant to Section 214 of the Communications Act of 1934, as amended, to operate as a facilities-based carrier for the provision of international telecommunications services between the United States and Russia. CWI also requests that it be granted unlimited private line resale authority or, in the alternative, that it be classified as a non-dominant carrier for the provision of international services on the U.S. Russia route. Under Commission rules in effect at the time the application was filed, CWI's classification as a dominant carrier prohibited it from adding capacity on the U.S. Russia route without seeking prior Commission approval. We placed CWI's application on public notice, and no comments were received. III. Discussion 4. The rules and standards adopted in the Commission's recent Foreign Participation Order apply to this application. Because Russia is not a member of the World Trade Organization, CWI's application is subject to the Commission's "effective competitive opportunities" (ECO) test if it is affiliated within the meaning of Section 63.18(h)(1)(i)(B) of the Commission's rules with a carrier with sufficient market power in Russia to affect competition adversely in the U.S. market. If we grant CWI's Section 214 authorization to provide facilities-based service to Russia, we also must determine whether to regulate CWI as dominant along the route due to the market power of an affiliated carrier operating in Russia. Because both inquiries involve an initial evaluation of the market power of CWI's Russian affiliates, we discuss this issue first. A. Market Power of Affiliates Operating in Russia 5. CWI certifies that it has five affiliates operating in Russia that meet the Commission's definition of "affiliation": Sakhalin Telekom (ST) and Sakhalin Svjaz' (SS), operating exclusively in the Sakhalin Island region; Peterstar and Baltic Communications Ltd. (BCL), operating in St. Petersburg; and Nakhodka Telekom (NT), operating in the Nakhodka and Vladivostok region bordering on North Korea and China. 6. The Commission defines market power as a carrier's ability to raise price by restricting the output of its services. In the international context, our regulatory approach addresses the ability of a carrier operating in a foreign market to discriminate against unaffiliated carriers through the control of an input that is necessary for the provision of international services. The relevant input markets on the foreign end of a U.S. international route are the markets that involve services or facilities necessary for the provision of U.S. international services. Those relevant markets generally include international transport facilities or services, inter-city facilities or services, and local access facilities or services at the foreign end. The Commission recognized in the Foreign Participation Order that, for purposes of identifying relevant input markets on the foreign end, it may be appropriate in some instances to examine a discrete geographic region rather than the national market of a foreign country. 7. In the Foreign Participation Order, the Commission concluded that it is appropriate to presume, subject to rebuttal, that a foreign carrier with less than 50 percent market share in each of the relevant input markets on the foreign end of a U.S. international route lacks sufficient market power to affect competition adversely in the U.S. market. If an applicant demonstrates that its foreign carrier affiliate lacks 50 percent market share in the international transport and local access markets on the foreign end of the route, the applicant is presumptively classified as non-dominant. In the absence of such a demonstration, however, the applicant is presumptively classified as dominant on a route where it has an affiliation. 8. In the instant case, competitive characteristics in the Sakhalin Island region are sufficiently distinct from the Russian national market to warrant treating the region as a distinct geographic market for purposes of our market power analysis. Both ST and SS operate exclusively in the Sakhalin Island region and together control 70 percent of international traffic in that region. SS also controls the local PSTN. We are concerned that, in these circumstances, ST and SS may have sufficient market power in that region to affect competition adversely in the U.S. market. 9. ST, which is 60 percent owned by C&W plc, is licensed to provide local and international services through an access code to the local PSTN or dedicated network in the Sakhalin Island region, and it has approximately 50 percent of the market share of international traffic originating and terminating in that region. ST transmits international traffic through the AsiaSat-2 satellite system, which hubs traffic through Hong Kong to international destinations. ST terminates U.S. international service in Sakhalin, and its current settlement rate which it negotiates separately with U.S. carriers is $1.00. This rate has not changed since service to Sakhalin was initiated in 1992. SS controls the local PSTN and has approximately 20 percent of the market share of the international traffic that originates and terminates on Sakhalin. By law, SS must send its international traffic through Rostelecom, the government-controlled long-distance and international operator that has direct connectivity to the United States. U.S. carriers may also route traffic to Sakhalin via Rostelecom (whose settlement rate is $1.06) or Kriljon, both of which must also terminate their traffic via SS. Thus, if we grant CWI's authorization, it will be able to provide facilities-based service to a region where it has one affiliate that terminates 50 percent of the international switched traffic and another affiliate that terminates 20 percent of the international switched traffic and controls the PSTN. We are concerned that, in these circumstances, SS and ST may have the ability and incentive to discriminate in favor of CWI in its provision of service between the United States and the Sakhalin Island region and that this discrimination could harm competition in the U.S. market. We conclude that CWI has not shown that its affiliates operating in Sakhalin lack sufficient market power to affect competition adversely in the U.S. market. 10. By contrast, CWI's three other affiliates, Peterstar, BCL, and NT, do not possess sufficient market share or control of bottleneck facilities in their areas of operation to enable them to discriminate against unaffiliated U.S. carriers. The St. Petersburg market is highly competitive. Peterstar is one of approximately one dozen local overlays, i.e., competitive local exchange carriers (CLECs), in that city. Peterstar does not operate the local public switched telephone network (PSTN) but has interconnection agreements in order to provide local and long-distance service. BCL is a dedicated international operator that does not connect to the local PSTN but handles local traffic between subscribers on its limited network in St. Petersburg. It is one of five similar carriers operating in St. Petersburg. Finally, NT does not control the PSTN and is one of many carriers offering competitive local and international service in the Nakhodka and Vladivostok region. B. Section 214 Authorization 11. The Commission applies the ECO test to Section 214 applications to serve non-WTO countries where the applicant, or a company that owns more than 25 percent of the applicant, owns a controlling interest in a carrier that has market power in that non-WTO country. The Commission has found that such affiliations with carriers that hold market power in a destination market raise the greatest potential of anticompetitive conduct, particularly if U.S. carriers are not allowed to compete effectively in their markets. The Commission also recently found that continuing to apply the ECO test to non-WTO countries may encourage some of those countries to take steps toward opening their markets to competition. Because C&W plc owns a controlling interest in ST, we consider whether to apply the ECO test to CWI's application. 12. We find that it would not serve the purposes of the ECO test to apply it in these circumstances. Although we find that CWI's affiliates may have market power within a region on the foreign end of the U.S. Russia route, waiving the ECO requirement will best serve the public interest. ST's and SS's market power is confined to a small area of a very large country: Russia has approximately 150 million potential customers, but the licensed operating area of ST and SS includes no more than 700,000 potential customers. Furthermore, according to CWI, Rostelecom, the government-controlled carrier that operates the long-distance and international backbone, controls over 75 percent of Russia's international traffic. In these circumstances, denying CWI's authorization to provide facilities-based service to Russia because of its affiliates' market power in such a small region would deny U.S. consumers the benefits of an additional carrier serving the large Russian market. If we were to limit our application of the ECO test to the Sakhalin region and deny the authorization on that ground, that denial would impose an unnecessary burden on CWI by increasing its costs to hand off traffic bound for Sakhalin to another carrier. We see no evidence that either the traffic volumes to Sakhalin or the community of interest in the United States for calls to Sakhalin is great enough to warrant application of the ECO test to Sakhalin. We are confident that, in these circumstances, our regulatory safeguards described below will be sufficient to prevent any anticompetitive effects that might otherwise result. Also, in these circumstances, application of the ECO test would not advance the Commission's goal of promoting the opening of foreign markets because denying CWI's application to serve Sakhalin would be unlikely to encourage the Russian government to change any relevant market entry policies. 13. Finally, we consider other public interest factors that may weigh in favor of, or against, granting the application. These factors include the general significance of the proposed entry to the promotion of competition in the U.S. telecommunications market, any national security, law enforcement, foreign policy, or trade concerns raised by the Executive Branch, and the presence of cost-based accounting rates. The Executive Branch has not raised any national security, law enforcement, foreign policy, or trade concerns with this application, and we know of no other countervailing public interest considerations. Although we are concerned by the high accounting rates of carriers that terminate international traffic in Russia, we do not believe that concern warrants denying CWI's authorization. The Commission's benchmark settlement rate condition, together with the Commission's other competitive safeguards, sufficiently address our concerns raised by the high accounting rates on the U.S. Russia route. We believe that CWI's entry will increase competition in the United States and Russian markets and thus benefit U.S. consumers. Consequently, we find that the public interest would be served by granting CWI Section 214 authority to provide facilities-based telecommunications services between the United States and Russia. C. Regulatory Classification 14. Pursuant to Section 63.10(a)(3) of the Commission's rules, an authorized carrier that is affiliated with a foreign carrier that is not a monopoly in a destination country and that seeks to be regulated as non-dominant on that route bears the burden of submitting information sufficient to demonstrate that its foreign affiliate lacks sufficient market power on the foreign end of the route to affect competition adversely in the U.S. market. 15. We have found that CWI's affiliates may have sufficient market power in the Sakhalin Island region to affect competition adversely in the U.S. market. We therefore find, on the record before us, sufficient basis to warrant regulating CWI as dominant in its provision of switched and private line service between the United States and the Sakhalin Island region. We classify CWI as non-dominant in its provision of service to all other regions of Russia. This dominance classification requires only that CWI be structurally separate from SS and ST and that it file certain reports on a quarterly basis regarding its provision of service along the U.S. Sakhalin route. 16. Until CWI initiates switched service to Sakhalin as a facilities-based carrier, it is entitled to a presumption of non-dominance for its provision of switched services along that route so long as it provides switched services to Sakhalin only through the resale of unaffiliated U.S. carriers' international switched services. Therefore, our classification of CWI as dominant for its provision of switched services along the route will not take effect until CWI actually initiates facilities-based switched service on the route. However, because CWI is affiliated with a carrier that we find may have sufficient market power to affect competition adversely in the U.S. market and that collects settlement payments from U.S. carriers, it is required to file quarterly traffic reports for its switched resale service to Sakhalin pursuant to Section 43.61(c). 17. Furthermore, because we find that ST and SS have sufficient market power to affect the provision of U.S. international service to Sakhalin, no U.S. carrier may agree to accept special concessions from those carriers with respect to the services that they provide in the Sakhalin region. D. Benchmark Settlement Rate Condition 18. In the Benchmarks Order, the Commission adopted a benchmark settlement rate condition, effective January 1, 1998, for authorizations to provide facilities-based switched or private line services to destination markets where the authorized carrier is affiliated with a foreign carrier. The Benchmarks Order requires that we condition these authorizations on the affiliated foreign carrier offering U.S. international carriers a settlement rate for the affiliated market that is at or below the relevant benchmark settlement rate adopted in that order. 19. The competitive harm that this condition addresses is the ability of a foreign-affiliated carrier to engage in predatory price squeeze behavior on the affiliated route 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. As the Commission explained in the Benchmarks Order, 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 international message telephone service ("IMTS") in competition with other carriers. Because the foreign carrier's international termination services are a necessary input for providing IMTS, the foreign carrier can create a situation where the relationship between its "high" international settlement rates and its affiliate's "low" prices for IMTS forces competing carriers either to lose money or to lose customers even if they are more efficient than the affiliate. 20. In the Benchmarks Order, the Commission used the term "affiliated market" to refer to a market in which an affiliated carrier provides terminating service and collects settlement rates. We find that, for this purpose, a "market" is not necessarily an entire country but may be the geographic region served by a particular carrier or group of carriers, particularly where that region maintains a distinct accounting rate with U.S. carriers. Otherwise, the benchmarks condition would preclude CWI from providing facilities-based service to all of Russia merely because it has affiliations with carriers that terminate international traffic only in small parts of Russia and have settlement rates above the Commission's benchmark. 21. There is a risk of predatory price squeeze behavior only to the extent CWI terminates U.S. international traffic in regions served by affiliates that terminate U.S. international traffic Sakhalin, St. Petersburg, Nakhodka, and Vladivostok and collect above-cost settlement rates from unaffiliated U.S. rivals. We also find a risk of predatory price squeeze behavior to the extent CWI routes U.S. international traffic through those affiliated markets to other regions of Russia. There is no risk of price squeeze behavior, however, where CWI otherwise routes U.S. international traffic to unaffiliated regions of Russia, because in its provision of facilities-based service to those regions, its settlement payments are made to unaffiliated carriers. Thus, we authorize CWI to provide facilities-based service between the United States and Sakhalin, St. Petersburg, Nakhodka, Vladivostok, and beyond subject to the condition that CWI's affiliates terminating international traffic in each of those regions offer to U.S. carrier correspondents settlement rates at or below $0.19, the benchmark settlement rate established for Russia in the Benchmarks Order. CWI's provision of facilities-based service to unaffiliated markets in Russia will not be subject to such a condition. 22. We recognize that this approach will result in CWI not being able to serve some parts of Russia using its own facilities, but we believe it is necessary to prevent anticompetitive conduct. We also believe this narrowly tailored approach is a sounder policy than treating all of Russia as a single market for purposes of applying the benchmarks condition, which would require that CWI not serve any part of Russia on a facilities basis until its affiliates' settlement rates are at or below the benchmark. Because of CWI's small presence in Russia, the potential that it could abuse its position and defeat the purpose of the benchmarks condition is remote. IV. Ordering Clauses 23. Accordingly, IT IS HEREBY CERTIFIED that the present and future public interest, convenience, and necessity require a grant of the present application. Therefore, IT IS ORDERED that application File No. ITC-97-290 IS GRANTED, and CWI is authorized to provide international basic switched, private line, data, television, and business services between the United States and Russia on a facilities basis, subject to all current and future Commission regulations, including those specifically listed below, as well as the conditions set out below. 24. IT IS FURTHER ORDERED that CWI shall comply with the requirements specified in Sections 43.82, 63.14, 63.15(b), 63.19, and 63.21 of the Commission's Rules, 47 C.F.R.  43.82, 63.14, 63.15(b), 63.19, 63.21. 25. IT IS FURTHER ORDERED that CWI may not and CWI's tariffs must state that its customers may not connect their private lines to the public switched network at either the U.S. or foreign end, or both, for the provision of international switched basic services unless the Commission has authorized the provision of such service. See 47 C.F.R.  63.18(e)(2)(ii)(c), (e)(3) (4); 63.21(a). 26. IT IS FURTHER ORDERED that CWI's authorization to provide facilities-based service to Russia is subject to the conditions specified in International Settlement Rates, IB Docket No. 96-261, Report and Order, FCC 97-280 (rel. Aug. 18, 1997), that is, CWI may provide facilities-based service to a region served by an affiliate that terminates U.S. international switched traffic only if that affiliate has in effect a settlement rate with U.S. international carriers that is at or below the Commission's relevant benchmark for Russia. See id.  231. 27. IT IS FURTHER ORDERED that CWI shall be regulated as a dominant carrier under Section 63.10 of the rules and shall comply with the requirements of paragraph (c) of that section for services between the United States and the Sakhalin Island region, and CWI shall be regulated as a non-dominant carrier for services between the United States and other regions of Russia. 28. IT IS FURTHER ORDERED that CWI shall comply with the requirements of Section 43.61(c) of the rules with respect to its provision of resold switched services to the Sakhalin Island region and that it shall not agree to accept special concessions from SS and ST for the provision of service between the United States and the Sakhalin Island region. "Special concessions" is defined in Section 63.14(b) of the Commission's rules as amended by the Commission's Foreign Participation Order, FCC 97-398. 29. This Order is issued under Section 0.261 of the Commission's Rules and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commission's Rules may be filed within 30 days of the date of public notice of this Order (see Section 1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief International Bureau