******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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. 98-192 Direct Access to the INTELSAT System ) File No. 60-SAT-ISP-97 REPORT AND ORDER Adopted: September 15, 1999 Released: September 16, 1999 By the Commission: Commissioner Furchgott-Roth issuing a separate statement TABLE OF CONTENTS I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 III. PLEADINGS 8 III. DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 A. Economic, Competition, and Policy Issues. . . . . . . . . . . . 13 1. Benefits of Direct Access . . . . . . . . . . . . . . . . . 14 a. Operational Benefits . . . . . . . . . . . . . . . . . . . 14 b. Cost Savings . . . . . . . . . . . . . . . . . . . . . . . 18 c. Increased Competition. . . . . . . . . . . . . . . . . . . 21 2. Cost Recovery. . . . . . . . . . . . . . . . . . . . . . . . 25 a. Signatory-Related Expenses . . . . . . . . . . . . . . . . 26 (i) Signatory Function Expenses. . . . . . . . . . . . . . . 27 (ii) Insurance Expense . . . . . . . . . . . . . . . . . . . 29 (iii) Calculating Reasonable Surcharge for Signatory-Related Expenses. . . . . .31 b. Return on Investment . . . . . . . . . . . . . . . . . . . 32 c. Corporate Tax Liability. . . . . . . . . . . . . . . . . . 36 3. Implementation Procedures for Direct Access. . . . . . . . . 36 4. Potential Competitive Concerns Raised by Direct Access . . . . .39 a. Direct Access by Dominant INTELSAT Signatories . . . . . . 39 b. Immunity from Suit and Process . . . . . . . . . . . . . . 42 c. Immunity from Commission Jurisdiction over Rates and Practices . . . . . . . . . . . . . . . 46 d. Immunity from Taxation . . . . . . . . . . . . . . . . . . 48 5. Fresh Look . . . . . . . . . . . . . . . . . . . . . . . . . 49 6. Portability. . . . . . . . . . . . . . . . . . . . . . . . . 52 7. Potential Effects on INTELSAT Privatization. . . . . . . . . 54 B. Legal Issues. . . . . . . . . . . . . . . . . . . . . . . . . . 58 1. Commission Authority Under the Satellite Act of 1962 . . . . . .58 a. Background . . . . . . . . . . . . . . . . . . . . . . . . 58 b. Text and Purposes of the Satellite Act . . . . . . . . . . 63 c. Legislative History. . . . . . . . . . . . . . . . . . . . 70 d. Other Issues . . . . . . . . . . . . . . . . . . . . . . . 72 (i) Subsequent Legislative Actions. . . . . . . . . . . . . 72 (ii) Previous Commission and Court Decisions. . . . . . . . 75 e. Conclusions on Commission Authority Under the Satellite Act. . . . . . . . . .78 2. Constitutional Considerations. . . . . . . . . . . . . . . . 79 a. Comsat Possesses No Property Right . . . . . . . . . . . . 80 b. Comsat Establishes No Fifth Amendment "Taking" . . . . . . 84 (i) No Permanent Physical Occupation. . . . . . . . . . . . 85 (ii) No "Taking" by Partial Physical Occupation or Economic Regulation. . . . . . . 86 c. Comsat Establishes No Case for "Just Compensation" . . . . . .89 d. Conclusion on Fifth Amendment Issue. . . . . . . . . . . . 91 V. SUMMARY OF FINDINGS AND CONCLUSIONS. . . . . . . . . . . . . . . . . 91 VI. REGULATORY FLEXIBILITY ACT . . . . . . . . . . . . . . . . . . . . . 92 VII ORDERING CLAUSES . . . . . . . . . . . . . . . . . . . . . . . . . . 93 APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E I. Introduction 1. By this Report and Order, we adopt a policy to allow direct access to the International Telecommunications Satellite Organization ("INTELSAT") from earth stations located within the United States, for the purpose of providing international satellite services. "Direct access" refers to the means by which users of the INTELSAT satellite system may obtain space segment capacity directly from INTELSAT rather than having to go through an INTELSAT Signatory. 2. In our Notice, we requested comment on whether Level 3 direct access would result in benefits to carriers, other users, and end users, and whether it would enhance competition. We also tentatively concluded that the Commission has authority under the Communications Satellite Act of 1962, as amended ("Satellite Act"), and the Communications Act of 1934, as amended ("Communications Act"), to permit United States carriers and users contractual, or Level 3 direct access to the INTELSAT system. Level 3 direct access permits a customer to enter into a contractual agreement with INTELSAT for the purpose of ordering, receiving, and paying for INTELSAT space segment capacity at the same rates that INTELSAT charges its Signatories. The Notice requested comment on the legal, economic and policy ramifications of permitting U.S. carriers and users direct access to the INTELSAT satellite system, in lieu of having to go through Comsat Corporation ("Comsat"), the U.S. Signatory to INTELSAT. We initiated this proceeding as a result of requests in an earlier proceeding by U.S. carriers and other users of INTELSAT that we condition reclassification of Comsat as a non-dominant carrier in its provision of INTELSAT services, on the implementation of direct access in the United States. Although we did not require that direct access be permitted as a condition to granting Comsat non-dominant status, we committed to initiating this proceeding "expeditiously to explore the legal, economic and policy ramifications of [allowing] direct access." 3. In this Report and Order, we affirm our tentative conclusion that the Commission has the authority under both the Satellite Act and the Communications Act to permit Level 3 direct access to INTELSAT from the United States. We also conclude that permitting Level 3 direct access is in the public interest, as it will result in increased competition by enhancing the competitiveness of U.S. telecommunications service providers in the global market. We, therefore, require Comsat, as the United States Signatory to INTELSAT, to inform INTELSAT, pursuant to established INTELSAT procedures, that Level 3 direct access to INTELSAT is available in the United States to U.S. carriers and users, consistent with the terms of this Report and Order. We will permit Comsat to file a tariff with the Commission that will require Level 3 direct access customers in the United States to reimburse Comsat for certain costs it must incur in its unique role as U.S. Signatory to INTELSAT that are not recoverable by Comsat under an INTELSAT Level 3 direct access regime. We also require that under certain limited circumstances, INTELSAT waive its immunities to provide Level 3 access in the United States. We deny the requests made by carriers in this proceeding for "fresh look" of their long-term contracts with Comsat for INTELSAT space segment. We also find that the record does not support at this time requests by carriers advocating "portability" of INTELSAT space segment capacity that is held by Comsat. If necessary, we would, however, consider such relief at a later date to assure the benefits of direct access, if supported with sufficient evidence and commercial solutions appear unavailable. Finally, in order to eliminate an incentive of Signatories to reduce prices for direct access to uneconomic levels, we will not authorize any Signatory, other than Comsat, to purchase direct access in the United States for service to or from any specific foreign country in which the Signatory in question controls 50 percent or more of all INTELSAT capacity consumed in that respective country. 4. We recognize that Congress may consider legislation on the issue of direct access to INTELSAT. Comprehensive bills were passed in 1998 by the House and by the Senate this year, that would rewrite the Satellite Act. While our decision in this proceeding is based on current law, Congress retains the prerogative to legislate in this area. Congressional action clearly would supersede any inconsistent interim action taken in this proceeding. II. Background 5. INTELSAT is a 143-member cooperative that owns and operates a global satellite system over which, since 1964, much of the world's international telephone, video, data and other communications have been and continue to be transmitted. It operates 19 satellites, serving over 99 percent of the globe and accessed by over one thousand earth stations. INTELSAT had nearly $1 billion in revenues in 1998. INTELSAT is an intergovernmental organization in which an Assembly of Parties, comprised of government representatives, determines overall policy, and a Board of Governors, comprised of Signatories who are the investors in the system, make commercial decisions. Comsat is the U.S. Signatory to INTELSAT. It was created pursuant to the Satellite Act, which made it U.S. policy to create the global satellite system that became INTELSAT. Currently, access to INTELSAT satellites from the United States requires carriers and other users to go through Comsat. 6. INTELSAT operates as a cost sharing cooperative on a commercial basis with the long term objective of providing services at prices which meet its revenue requirements. Each Signatory investor contributes capital to INTELSAT and receives capital repayments and compensation for the use of capital in proportion to its investment share. Capital repayments are calculated so as to return all surplus cash to investors. Compensation for the use of capital is calculated based on a target rate or range of return, which is established by the INTELSAT Board of Governors (that includes Comsat). All investors are entitled to the target rate of return. In 1997, the INTELSAT Board of Governors decided to establish a range of 14- 18 percent as the target rate of return and to review the range annually. During 1997, the actual return on shareholders' invested capital was approximately 18 percent. 7. INTELSAT provides space segment capacity to users of its global satellite system. These users then provide telecommunications services to the public. The users include Signatories, Duly Authorized Telecommunication Entities ("DATES"), and direct access users. INTELSAT charges for use of space segment capacity are determined by the INTELSAT Board of Governors and are termed "INTELSAT utilization charges" ("IUCs"). IUCs are based on several factors, including beam coverage, spectrum capacity or data rates, and lease periods. They are listed in the INTELSAT Tariff Manual. Comsat's charges to users include the IUC component, plus an additional mark-up. 8. In 1992, INTELSAT introduced new procedures for gaining direct access to INTELSAT satellites by non-Signatory carriers and users. INTELSAT offers four types or "levels" of direct access by non- Signatories. The first two levels involve access to information while the third and fourth levels involve access to communications services. Level 1 direct access permits customers to receive operational and technical information and attend global traffic meetings as an operation representative. Level 2 direct access permits customers to meet with INTELSAT management and staff regarding capacity availability, commercial and INTELSAT tariff matters. Level 3 direct access permits customers to enter into a contractual agreement with INTELSAT for ordering, receiving, and paying for INTELSAT space segment capacity at the same rates that INTELSAT charges its Signatories. Level 4 direct access permits customers, in INTELSAT member countries only, to make a capital investment in INTELSAT in proportion to its utilization of the INTELSAT system, as well as obtain INTELSAT space segment capacity at INTELSAT tariff rates. A Level 4 customer is not accorded rights to participate in the INTELSAT governance process unless special arrangements are made by the Party and the official Signatory representing its country. 9. INTELSAT permits direct access only in countries where it is authorized by the Signatory representative. Signatory authorization may be on an individual customer basis or by "blanket authorization," whereby entities within the stated jurisdiction are authorized to directly access INTELSAT without first having to obtain specific approval from the Signatory. For both Level 3 and Level 4 direct access, a customer is required to enter into a service agreement with INTELSAT that sets forth the general terms and conditions by which INTELSAT will supply space segment capacity. So long as the service agreement remains in effect, a customer is able to access INTELSAT space segment directly. Level 3 customers have no investment obligations or rights to participate in the operation of the INTELSAT system. Furthermore, a Signatory permitting Level 3 direct access will earn a return on its investment in space segment capacity used by the Level 3 customer (currently between 14 and 18 percent). 10. Level 3 direct access is now available in 65 countries and Level 4 direct access is available in 29 countries -- for a total of 94 countries that allow direct access. Neither Level 3 nor Level 4 direct access is available in the United States. INTELSAT satellite service is only available to U.S. customers through Comsat. Comsat provides INTELSAT services to U.S. customers on a common carrier basis through tariffs and long-term contracts filed with the Commission. 11. In 1984, the Commission concluded a separate proceeding on direct access to the INTELSAT system, prior to INTELSAT developing any procedures for direct access. In that proceeding the Commission considered whether United States carriers should be permitted direct access to INTELSAT space segment capacity through two alternative forms: (1) capital leases; and (2) an indefeasible right of use ("IRU"). In terminating the proceeding, the Commission concluded that neither alternative would provide substantial benefits. The Commission indicated, however, that it would be amenable to reconsidering the issue of direct access at a future date. 12. In 1998, we reclassified Comsat as a non-dominant carrier in the provision of INTELSAT switched-voice, private line, and occasional-use video services to markets deemed "competitive." We also declared Comsat non-dominant in the provision of INTELSAT full-time video and earth station services in all markets. As a result of this finding, rate of return regulation was eliminated in those markets. In that same decision we denied Comsat's request for reclassification as a non-dominant carrier in other INTELSAT services markets that were deemed "non-competitive." A number of parties in the Comsat Non-Dominant proceeding asked that direct access to INTELSAT be made a condition to granting the regulatory relief that Comsat was then seeking. 13. In initiating the instant proceeding, we incorporated by reference the relevant portions of the record from the Comsat Non-Dominant proceeding into this proceeding. We identified legal, economic, and policy issues for comment by interested parties. We tentatively concluded that the Satellite Act and Communications Act afforded the Commission discretion to permit direct access in the United States and that exercise of this discretion would not violate the Fifth Amendment. We further asked for comment on issues related to (1) the potential benefits of direct access; (2) competitive concerns raised by direct access; and (3) the effect of direct access on United States efforts to privatize INTELSAT. As to the question of potential benefits, we requested comment on several issues, including: (1) whether Comsat should be entitled to recover costs that would not be covered by INTELSAT IUC rates and return on investment under Level 3 direct access; (2) what effect permitting Comsat such cost recovery would have on potential savings to U.S. carriers and users from Level 3 direct access; (3) whether the availability of Level 3 direct access from INTELSAT might lead us to different conclusions than the Commission made in its 1984 Direct Access Order; (4) whether permitting Level 3 direct access for services to non- competitive markets would result in consumer alternatives and benefits that do not exist now; and (5) whether it would be desirable to permit Level 3 direct access to competitive markets where Comsat is found to be non-dominant. III. Pleadings 14. a. Eighteen parties filed initial comments in response to our Notice in this proceeding. Twelve parties filed reply comments. Fourteen parties fully support permitting Level 3 direct access in the United States. Among others, these supporters include the Networks (ABC, CBS, NBC, and Turner); U.S. long distance carriers AT&T, MCI WorldCom, and Sprint; satellite service providers GE Americom, Loral, and Ellipso; and U.S. affiliates of United Kingdom service providers, BT North America and Cable & Wireless U.S.A. PanAmSat supports Level 3 direct access under certain conditions. Columbia expresses strong reservations about direct access and requests that we consider the impact on competition and the imposition of conditions to prevent harm to competition in the U.S. market. Comsat and Lockheed Martin oppose permitting Level 3 direct access. INTELSAT does not take an official position on direct access in this proceeding but submits reply comments in response to certain matters raised in the initial comments. 15. Comsat and Lockheed Martin oppose allowing direct access to INTELSAT by other users within the United States. Comsat also contends that there is no economic and policy basis for Level 3 direct access. It asserts that: (1) the findings in the Commission's 1984 decision still apply; (2) growth in competition and recent Commission findings about the current market place show no need for direct access in the United States; (3) competitive harm in the United States market would result from allowing INTELSAT to directly enter this market; and (4) any benefits from direct access would be de minimis and short lived. Comsat also contends that implementation of Level 3 direct access would require a substantial surcharge to fairly compensate Comsat for Signatory costs not covered by INTELSAT IUC rates. Lockheed Martin asserts that any benefits from direct access would be short lived and that there is no evidence that it would promote competition. Instead, it emphasizes the need for the Commission to focus on privatization of INTELSAT. Both Comsat and Lockheed Martin contend that United States policy goals in privatizing INTELSAT would be put in jeopardy if the Commission adopts Level 3 direct access in the United States. Comsat also opposes direct access as (1) a violation of the 1962 Satellite Act; and (2) an "unconstitutional taking" of property requiring compensation by the United States Government. 16. Parties advocating implementing Level 3 direct access support the tentative conclusions reached in the Notice. Several parties maintain that permitting direct access will promote competition and result in: (1) greater customer choice due to the availability of competitive alternatives for accessing INTELSAT (where INTELSAT is their system of choice); (2) opportunity for substantial cost savings as a result of competition for accessing INTELSAT, resulting in reduced end user prices; (3) greater customer control over service provision (involving service quality, performance costs, connectivity and redundancy); and (4) efficiencies in system planning and set up of circuits. Several parties assert that these commercial benefits will make United States carriers more competitive in global telecommunications markets where use of INTELSAT circuits is part of their commercial strategy. Three parties also argue that the availability of Level 3 direct access would eliminate an unnecessary and artificial incentive to send traffic over fiber to foreign earth stations to obtain lower cost INTELSAT access from locations outside the United States. Several contend that the benefits just described are available in many countries to INTELSAT users and should also be made available to United States users of the INTELSAT system. They urge the Commission to make direct access available on all routes. Furthermore, several parties challenge Comsat's contention that direct access will result in competitive harm in the United States market. They emphasize their support of privatization of INTELSAT and disagree that direct access will adversely affect United States efforts to achieve this goal. Some parties also disagree with Comsat that a surcharge must be imposed to allow Comsat to recover costs not recoverable under Level 3 direct access. The carriers request, that in its implementation of Level 3 direct access in the United States, the Commission permit a "fresh look" of existing long-term contracts with Comsat and "portability" of the INTELSAT capacity now being accessed through Comsat. Finally, most parties assert that we have authority under the Satellite Act to permit direct access to INTELSAT satellites in the United States, and that such action would not violate the Fifth Amendment as an uncompensated taking. 17. PanAmSat supports ending Comsat's monopoly over the provision of INTELSAT services in the United States, but believes that the issue should be resolved by Congress. Nevertheless, PanAmSat contends that if we were to implement Level 3 direct access we should permit direct access in all markets and all routes and regulate INTELSAT as a regular commercial satellite operator. PanAmSat also believes that the Commission should apply "fresh look" with respect to Comsat's long-term contracts with U.S. carriers. PanAmSat opposes any Comsat surcharge (over IUC rates) on Level 3 direct access users. Finally, PanAmSat maintains that the Commission has the legal authority to permit Level 3 direct access in the United States and that such action would not constitute an uncompensated taking in violation of the Fifth Amendment. 18. Columbia is concerned about the competitive concerns raised by direct access. It maintains that, at a minimum, INTELSAT should be required to waive its immunity from lawsuit and exemption from taxation as a condition of imposing any type of direct access. Columbia also asserts that we should grant direct access to INTELSAT in the United States only in the context of a pro-competitive privatization that subjects a privatized INTELSAT to U.S. competition laws and promotes open markets, consistent with the World Trade Organization Agreement on Basic Telecommunications Services ("WTO Agreement"). Columbia suggests that we analyze INTELSAT's entry into the U.S. market based on our "DISCO II" standards. 19. Finally, INTELSAT responds to certain comments of PanAmSat. It states that the Commission lacks authority to regulate INTELSAT as it would any other carrier and that its immunities remain intact, notwithstanding provisions in the recently passed International Anti-Bribery and Fair Competition Act of 1998 (the Anti-Bribery Act). It also states that Commission action on direct access will not affect progress on INTELSAT privatization efforts. IV. Discussion A. Economic, Competition, and Policy Issues 20. The issue posed in this proceeding is whether U.S. carriers and users of international telecommunications transmission facilities should be permitted the choice of obtaining satellite services directly from INTELSAT or continue to require that access in the United States occur only through Comsat, the U.S. Signatory to INTELSAT. The record demonstrates that foreign carriers and other users of INTELSAT in countries that permit direct access have realized greater cost savings, efficiencies, and service benefits by directly accessing INTELSAT rather than going solely through a Signatory. The availability of additional choices are increasingly important to U.S. carriers and users because they must compete on a global basis with their foreign counterparts who presently can obtain direct access, a choice available in 94 countries. In addition, we believe direct access will promote further competition in the international telecommunications market. The competitive nature of the global telecommunications market requires that we assure U.S. carriers and service providers the availability of choices that their foreign competitors now enjoy. 21. The Commission did not implement a direct access policy in 1984 because it determined that the options it was then considering would not result in significant cost savings or other benefits. Instead, the Commission pursued a facilities-based competition policy between and among fiber optic cable and satellite providers. The INTELSAT system continues, however, to be a key source of international satellite transmission capacity for U.S. carriers or users which find it either commercially necessary or desirable to use INTELSAT. The record demonstrates that the direct access program formally created by INTELSAT in 1992, and available today, along with the greater sophistication of INTELSAT, U.S. carriers, and other users of INTELSAT, has eliminated many of the concerns that gave rise to the conclusion in 1984 that direct access would not yield significant cost savings and efficiencies. Therefore, as discussed below, we find that direct access in the United States will result in a variety of significant benefits (including cost savings for consumers, as well as contribute to a more competitive satellite service market in the United States) and authorize its implementation. (1) Benefits of Direct Access 22. In the Notice we identified several user benefits generated by direct access (as described by INTELSAT): (1) improved responsiveness to customer inquiries on service implementation; (2) avoidance of mark-up costs charged to third parties; (3) greater control over service quality, performance costs, connectivity, redundancy, and earth station capabilities; and (4) more flexibility (than through third parties) in tailoring services in terms of bandwidth, time duration, performance standard, redundancy, and service applications. The parties supporting direct access maintain that these benefits are substantial and desirable. Comsat and Lockheed Martin contend that any benefits would be insubstantial. The record in this proceeding demonstrates that Level 3 direct access will afford opportunities for U.S. customers who utilize the INTELSAT system to realize greater efficiency, flexibility, control, and cost savings. Affording customers the opportunity to enjoy these benefits will promote competition and thus strengthen U.S. competitiveness in global telecommunications markets. (a) Operational Benefits 23. Greater Efficiency. The prior 1984 Direct Access Order proceeding, found that adopting the direct access options then under consideration would not yield significant benefits in terms of increased efficiency. We were concerned, at that time, that many functions Comsat then provided to U.S. carriers would have to be undertaken by the carriers. For example, in 1984, Comsat (rather than INTELSAT) provided most of the functions necessary to access INTELSAT, including coordination for special services, detailed billing, earth station certification and access arrangements, market research, customer surveys, and pricing analysis. Therefore, at that time, we were uncertain how U.S. carriers would achieve significant efficiencies if they had to duplicate these functions. 24. The advent of INTELSAT's formal direct access program, as well as the time that has passed since our consideration of direct access in 1984, justifies a revisiting of the 1984 conclusion. Direct access customers are now able to work exclusively with INTELSAT on all service needs -- from the initial planning stages through to the final end-to-end testing and implementation of service, without the need for any Signatory involvement. Since introducing direct access in 1992, INTELSAT has established Regional Service Centers that provide administrative, market, and technical support to direct access customers. INTELSAT now has Regional Directors and Customer Support teams that offer end-to-end billing services, consultation with customers to help them better understand the unique needs of their markets, and technical expertise, at any time, at no additional charge to IUC rates. 25. INTELSAT also now performs the administrative and technical functions to assure operational capability of earth stations with its satellites. The cost of these functions are included in the IUC rates. The technical functions include "link budget" analysis to verify the bandwidth to be used, the size of the earth station, and verification that earth station performance specifications meet INTELSAT standards. Following technical analysis, INTELSAT performs transmission or "carrier" line-up tests with the earth station to verify that the transmission performance meets the technical specifications, consistent with INTELSAT standards. The INTELSAT Operating Center monitors customer use of the satellites on a 24- hour-a-day basis to insure that satellite transmissions operate properly. If there are problems, INTELSAT will attempt to identify them, including the source, and contact all customers that might be affected. 26. Currently, Comsat technical assistance for accessing INTELSAT from the United States is minimal in most cases. U.S. carriers and other INTELSAT users own and operate the earth stations that communicate with INTELSAT satellites, or use the earth station facilities of operators that work directly, and essentially, exclusively with INTELSAT. MCI WorldCom states that although Comsat is not involved in arranging communication services in connection with MCI WorldCom's owned-and- operated earth stations, it must nonetheless pay Comsat's mark-up over IUC rates. Similarly, the Networks note that they almost always access INTELSAT directly from their own earth stations and that Comsat provides no transmission facilities of its own, but merely acts as an unnecessary intermediary between INTELSAT and the customer. 27. Unlike 1984, INTELSAT now offers three different on-line services for INTELSAT's direct access customers in order to allow it to respond quickly to their business needs: (1) The INTELSAT Business Network; (2) TVMax for on-line ordering; and (3) the Digital ESC for direct communication. The Business Network provides direct access customers 24-hour, seven-days-a-week access to INTELSAT service information regarding INTELSAT coverage and capacity, ordering and confirmation capabilities, cybercast training and INTELSAT launch videos, forums and discussion groups, and a wide range of technical information. TVMax is a web-based booking and scheduling system which gives customers real-time access to INTELSAT's occasional-use video reservation system. The Digital ESC allows customers to use their web-browser to search and view on-line documents and databases from their desktop computer, and provides a gateway to a variety of on-line operational, technical and financial services. In addition, a direct access customer can easily obtain all the information needed in order to place an INTELSAT capacity order by accessing INTELSAT's web page under the title "Become a Customer." These on-line services allow INTELSAT to respond rapidly to customer inquiries on service implementation, while allowing INTELSAT users the ability to be more efficient in their planning and use of the INTELSAT system. 28. INTELSAT also has recently started a program to provide technical consulting and training assistance to customers so that they have an opportunity to utilize the new INTELSAT services and technologies more cost effectively. The program called, "The Advantage Program Mission," offers free consultation and training resources to present the latest developments and applications in satellite telecommunications technology, as well as training fellowships through the INTELSAT On-the-Job Training Program. 29. In view of these changed circumstances since 1984, we conclude that permitting direct access will provide U.S. customers the opportunity to realize efficiencies in accessing INTELSAT satellites by obtaining administrative, market, and technical support directly through INTELSAT, from the initial planning stages for a service through service implementation, rather than having to use Comsat as an intermediary. 30. Greater Flexibility and Control. Direct access to INTELSAT from the United States today will permit greater flexibility and control for INTELSAT customers. INTELSAT states that direct access offers greater service flexibility than going through a Signatory because it is able to individually tailor services in terms of bandwidth, time duration, performance standards, redundancy and service applications. 31. Commenters agree that direct access in the U.S. would generate such service flexibilities. C&W asserts that Comsat does not offer all of the services available from the INTELSAT Tariff Manual, thereby limiting the variety of services that carriers can then provide to their customers. MCI WorldCom argues that Comsat has refused to resell services available from INTELSAT (noting a specific example in which Comsat has refused to offer preemptible leases on INTELSAT satellites). 32. In comparing INTELSAT's and Comsat's tariffs, we note that direct access customers have the flexibility to use leased transponders for any service application, i.e. voice. In contrast, Comsat leases capacity by individual service. INTELSAT also offers customers greater flexibility with regard to the length of time a transponder can be leased. INTELSAT will lease a transponder for daily, monthly, and yearly time periods, or any pro-rated time period extending up to fifteen years. In contrast, for long-term leases, Comsat offers only fixed terms of one, five, and ten year services for non-preemptible services and one, two, five, seven, and ten year terms for preemptible services. With regard to bandwidth offerings, direct access customers may have greater flexibility in the amount of bandwidth they may purchase with direct access, as they may purchase bandwidth in units of 0.1 MHz to 150 MHz, and any proportion in between, regardless of its service type. By contrast, Comsat provides a more limited offering of the various bandwidth configurations, except for internet service. We particularly note that Comsat's video services are limited in terms of duration and bandwidth offerings, relative to INTELSAT. 33. INTELSAT has also stated that direct access customers have the advantage of greater control over a number of elements that can affect their telecommunication services, such as service quality, performance costs, connectivity, redundancy, and earth station capabilities. INTELSAT states that "depending on the level of direct access, coming to INTELSAT puts the customer in charge." AT&T and C&W agree that direct access would offer it greater control over these service features and functions. According to AT&T, by eliminating the Signatory as an intermediary, customers have greater control from the initial planning stages through the final end-to-end testing and start of operation. C&W asserts that direct access in the U.K. has meant that it has greater control over the quality and variety of satellite services it can then offer to its own customers -- an advantage especially important in the highly competitive U.K. telecommunications environment. 34. The benefits of greater flexibility and control were unavailable when we considered direct access in 1984 because INTELSAT did not offer a direct access program. INTELSAT did not then offer flexible tariffs. INTELSAT also did not offer no-limit transponder leases until the early 1990's and did not offer long term channel rates to its switched-voice customers before 1989. With the introduction of a formal direct access program in 1992, and the steps INTELSAT has taken to provide its customers with greater flexibility and control over the purchase of INTELSAT services, U.S. customers should benefit from direct access. (b) Cost Savings 35. Another change since 1984 are the cost savings that now appear achievable from allowing direct access. The Notice stated that one of the main user benefits identified by INTELSAT for direct access is the avoidance of mark-up costs that a third party usually charges. We noted that AT&T and MCI WorldCom claim that Comsat's average margin over IUC rates is 68 percent, as well as an estimation that direct access would reduce this margin to 35 percent, producing a cost savings of $1 billion over a ten year period. We also noted Comsat's contention that direct access would not generate any meaningful cost savings because a surcharge would be necessary to allow for (1) a proper return on its investment and (2) recovery of costs associated with its Signatory responsibilities and carrier functions. The result of properly quantifying costs, asserted Comsat, would yield a savings of zero. 36. Most parties commenting on this issue maintain that allowing direct access will lead to substantial cost savings. They also contend that Comsat should be allowed no, or a limited, surcharge to IUC rates. C&W anticipates substantial savings in the first year of direct access in the United States, and that the savings will increase by 50 percent in each subsequent year. GE Americom states it has experienced the cost savings of direct access in Germany, where prior to direct access, its Spacenet-Europe subsidiary paid approximately a 12 percent mark-up over INTELSAT rates. Loral Orion states that direct access has reduced INTELSAT rates by 25 percent or more in Germany and the UK. MCI WorldCom asserts that the excessive nature of Comsat's mark-ups is readily apparent from the fact that Comsat charges mark-ups for services for which it provides no facilities other than INTELSAT space segment. BT North America states that the decline in Comsat's market share implies that its rates are too high and Comsat has not responded to competitive pressures. 37. We conclude that allowing Level 3 direct access will lead to significant cost savings by INTELSAT users in the United States for the provision of international satellite services. We further conclude that users, in exchange for the option of direct access, must pay Comsat a surcharge to allow it to recoup certain costs associated with its unique Signatory functions. As discussed below, we find that a Comsat surcharge of 5.58 percent over IUC rates would allow Comsat to recover Signatory-related costs not otherwise recoverable through IUC rates. While the cost savings over IUC rates will vary among different users and services, we estimate that direct access users will be able to avoid most of the mark-up currently imposed by Comsat for most services. The table in Appendix D demonstrates a range of cost savings from 16 percent to 71.4 percent for switched voice ("IDR") and private line ("IBS") leased service under a direct access regime, even after permitting Comsat to recoup a 5.58 percent surcharge. Under the longer-term IDR leases (normally 10-15 years), cost savings will range from 23.2 percent to 52 percent. Under the most often used shorter-term IBS leases (normally 1-3 years), cost savings will range from 16 percent to 42 percent. For video services, the range of cost savings under a direct access regime that includes a Signatory expense surcharge, will be from 10.7 percent to 35.2 percent. 38. We anticipate that carriers and users will pass through any cost savings from direct access to consumers. For example, recent decreases in international settlement rates have led to significant price decreases of international telephone calls from 1997 to 1998. Loral Orion states, that by avoiding Comsat's mark-ups of between 9 and 15 percent, it would be able to pass on such savings to its customers. IT&E states that given the substantial competition it faces from other carriers, it would have every incentive to pass along the cost savings it would receive by the elimination of Comsat's mark-up to its consumers. We also conclude that in a competitive telecommunications environment, U.S. carriers and service providers will have incentives to pass through cost savings to end-users. 39. In addition, direct access will potentially lead to lower costs for all users, including low volume users. We note that, based on current Comsat tariff filings, low volume users pay a much higher margin over INTELSAT IUC rates than high volume users. Direct access will likely offer low volume users a lower rate -- even with the surcharge discussed below -- for the following reasons. First, we agree with MCI WorldCom and GlobeCast that direct access will spawn numerous potential providers of INTELSAT space segment to low volume users, thus offering greater choice. Second, like MCI WorldCom and GE Americom, we find no merit in Comsat's claim that direct access will reduce economies of scale, thus producing harm to low volume users who do not purchase directly from INTELSAT. The relevant economies of scale, we believe, are those experienced by INTELSAT, and not Comsat. 40. In the prior 1984 Direct Access Order proceeding the Commission concluded that adopting direct access would yield very little cost savings. The basis for this conclusion was that direct access, at best, would redistribute, rather than reduce the costs of providing INTELSAT satellite service. However, in view of the technical and operational services now available since 1984 from INTELSAT, as well as other customer support functions now available since 1984 as described above, we find that allowing direct access will promote cost savings rather than merely causing cost shifting. We agree with the Networks and MCI WorldCom that the speculation that was required to analyze cost savings in 1984 is no longer necessary because INTELSAT has adopted formal procedures for direct access. We further agree with the Networks that "[it is not] possible to know precisely -- nor should it be -- the extent of the 'cost savings' that may be realized by customers until further competition engendered by direct access develops, [and that] the point is to allow the additional competition which does develop to wring out whatever cost saving may be achieved . . . ." (c) Increased Competition 41. There have been significant positive changes in the international telecommunications market since 1984. Notably, the market is now largely competitive in terms of availability of alternative suppliers of international transmission capacity. The existence of competitive alternatives of transmission capacity, however, is not, as Comsat suggests, a basis for precluding additional customer choice available through direct access. United States policy, both as reflected in Commission decisions and by Congress in the Telecommunications Act of 1996, is to promote competition in the provision of communications services. Competition is the underlying goal of the 1997 WTO Agreement, which resulted in market opening commitments for basic telecommunications services by many countries. Of the 72 such Signatories, the United States is one of only three WTO members that signed the WTO Agreement that took a market access limitation for direct access to INTELSAT. 42. While making Level 3 direct access available does not add another facilities-based competitor, the additional choice, flexibility, and cost savings made available by direct access to U.S. customers in use of an existing facilities-based provider -- INTELSAT -- would result in increased competition. Level 3 direct access would place competitive pressures on other satellite operators in terms of service, price, and quality. In addition, it would place competitive pressures on Comsat, particularly with respect to services for which Comsat has a markup substantially higher than INTELSAT IUC rates. 43. The benefit of direct access is especially relevant in the non-competitive switched voice, private line, and occasional use video markets, where Comsat is still dominant. In the Comsat Non-Dominant Order we determined, with respect to thin route markets, that U.S. customers must, by default, choose Comsat for services in these markets; that Comsat retains a significant cost advantage over other authorized U.S. carriers in these markets; and that it exercises market power and is dominant in the provision of services to these markets. Direct access offers an opportunity to introduce competition in these markets where it clearly does not now exist. This is especially significant given that thin route countries potentially represent some of the growth markets for telecommunication services. Imposing Level 3 direct access would serve the Satellite Act's purpose of promoting growth in communications between the U.S. and economically less developed countries by promoting competition and expanding user choice for U.S. services to these markets. We conclude that permitting Level 3 direct access to thin route markets would: (1) reduce Comsat's bottleneck over access to U.S. INTELSAT capacity that is the only service of international transmission capacity serving these markets; (2) give U.S. carriers the option of using another supplier; and (3) reduce Comsat's market power in these markets. 44. We also conclude that direct access should be made available for services to competitive markets as well as to non-competitive markets. Every party commenting on this issue, other than Comsat and Lockheed Martin, argue that direct access should be permitted in all markets. We recognize, as MCI WorldCom asserts, that direct access to competitive or thick route markets is especially significant where fiber optic cable: (1) does not provide a viable alternative to INTELSAT; (2) transmission involves complex or inefficient routing; (3) it does not reach the entire country; and (4) there is insufficient cable capacity to meet demand, or only one cable is available and satellite capacity is required to minimize the effects of network outages. In addition, permitting Level 3 direct access to all markets will give U.S. carriers more flexibility in assuring efficient utilization of satellite and cable facilities. For example, if direct access is only allowed on thin routes, then carriers would likely purchase thin route capacity from INTELSAT and be forced to purchase thick route capacity from Comsat. This approach may undermine carriers' flexibility in shifting capacity among routes and in buying transponder leases under Level 3 direct access that permit service to both "thin route" and "thick route" countries. 45. We agree with the Networks that the fact that we deemed markets competitive in reclassifying Comsat non-dominant for purposes of tariff regulation does not preclude us from permitting direct access in all markets where there are public interest benefits in doing so. Certainly, we have no policy precluding new entrants from markets that are already competitive. We find, based on the record before us, that there will be significant benefits to Level 3 direct access, as pointed out by the major commercial users of INTELSAT capacity in the United States. Choice by U.S. carriers and users as to how they access the INTELSAT system will result in competition in currently non-competitive markets and enhance competition in competitive markets. We find that the public interest is served by the competition in all markets that will result from additional choice. 46. Promoting Competition. We further find that the customer benefits and added competition that will result from introducing Level 3 direct access in the United States will promote U.S. competitiveness in the global telecommunications market. In 1962, when the Satellite Act was enacted, there existed only eight U.S. international carriers providing international voice and record communications using undersea cable of limited capacity (non-fiber) and radio facilities. AT&T was the dominant U.S. international provider. By 1984, voice and record services were provided over both higher capacity undersea cables and satellites provided by INTELSAT through Comsat in the United States. AT&T continued to be the dominant provider of international voice services with MCI, Sprint, and other carriers beginning to make progress in entering international markets. There are now over 77 U.S. facilities-based carriers operating in the United States, providing a wide array of voice, data and video services over fiber optic cable and satellite. These carriers compete on a global basis against the emerging multinational carriers, as well as traditional national telecommunications providers. They are competing to capture public, multinational business and government customers in national telecommunications markets opening around the world as a result of the WTO Agreement. In some cases, their competitors are still dominant service providers in their national markets. Many of the foreign competitors of U.S. carriers either are Signatories to INTELSAT or have direct access to INTELSAT available in the national markets in which they operate. The public interest is served by bringing the advantages of increased competition to U.S. consumers in terms of lower prices and better service. 47. U.S. telecommunication service providers face a competitive disadvantage compared to foreign carriers that can obtain INTELSAT capacity at IUC rates, either because they are INTELSAT Signatories or are operators from countries that permit direct access. The comments we have received to our Notice demonstrate that the anticipated benefits of direct access -- lower costs, greater efficiency, flexibility, and control over facility use, as well as competitive pressures on the rates of Comsat and competing satellite operators -- should enable U.S. industry to better compete with foreign competitors. And, in view of the potential for direct access to enhance U.S. competitiveness, we do not believe that any special regulatory measures are necessary to assume that cost savings resulting from direct access are passed on to customers. The increased competition resulting from direct access is more likely to result in savings to consumers than what may be realized in the absence of direct access. 48. Two examples provided by commenters that show U.S. competitiveness will be enhanced are particularly illuminating. MCI WorldCom states that the competitive advantage enjoyed by foreign carriers in being able to acquire INTELSAT capacity at IUC rates resulted in its loss of a contract for international Internet services to a foreign carrier because of an inability to match the foreign carriers pricing of INTELSAT satellite links. Similarly, Loral Orion and C&W point out that the Canadian Signatory, Teleglobe, has a competitive advantage because it can purchase INTELSAT capacity in Canada at IUC rates and deliver traffic to the United States via Teleglobe fiber links. Loral Orion and C&W state that this competitive advantage would be negated if direct access were to become available in the United States. 49. Additionally, Loral Orion and other commenters point to their experience in operating in foreign markets where direct access is available, as demonstrating its competitive benefits. Loral Orion states that it has been able to expand into markets because direct access made it economical to initiate service in these countries. BT North America states that direct access has reduced costs of INTELSAT access in the United Kingdom far below the equivalent charges in the United States, while at the same time increasing competition in the United Kingdom satellite services market. We noted above the cost savings of the GE Americom affiliate in Germany. C&W echoes other comments regarding cost savings realized from direct access in the United Kingdom, but also points out that direct access has enabled it to respond to customer needs and add flexibility to its operations to the benefit of U.K. telecommunications users. C&W, as well as other commenters, point out that a beneficiary of direct access in the U.K. is a Comsat affiliate, Comsat General (U.K.). The Networks state that the availability of direct access in other countries has provided benefits such as avoiding substantial "add-on fees" and facilitating "operational arrangements for through circuits." 50. Comsat argues that U.S. companies are already obtaining INTELSAT capacity through the Canadian company Teleglobe as an alternative to Comsat. Teleglobe offers lower rates and service alternatives for U.S. firms wishing to use INTELSAT facilities, despite having to go through land line facilities and Canadian earth stations in order to use Teleglobe. Comsat asserts that the availability of Teleglobe to U.S. carriers and users provides U.S. customers with a competitive alternative to use of INTELSAT for both competitive and non-competitive markets and demonstrates that there are "no market place facts" that justify Level 3 direct access in the Untied States. We disagree. U.S. customer use of Teleglobe demonstrates a clear market demand for lower rates for the use of INTELSAT facilities. Current U.S. policy that causes U.S. customers to satisfy commercial needs by routing traffic through another country is not in the public interest. Introduction of Level 3 direct access in the Unites States will provide an alternative for U.S. customers to satisfy their need superior to routing traffic through Canada. (2) Cost Recovery 51. The Notice noted Comsat's contention that INTELSAT IUC rates do not reflect many costs that it would continue to incur on behalf of direct access customers. We asked Comsat to specify which of these costs it believes should be added to IUC rates to allow for fair recovery, and to specify the activities or transactions that give rise to these costs and the magnitude of these costs. We also asked parties to respond to Comsat's argument that if the Commission allows direct access we should provide for a "surcharge" to allow Comsat to recover expenses that it alleges are not recoverable through IUC rates, and to comment on the cost information that Comsat provides. We sought comment from all parties on which costs, if any, should be recovered by Comsat by means of a surcharge imposed on U.S. direct access users. 52. Comsat maintains that IUC rates do not represent the true "cost" or "price" of providing INTELSAT space segment service. Comsat asserts that IUC rates do not reflect the following expenses that it will continue to incur on behalf of direct access customers: (1) direct costs undertaken in performing its Signatory functions on behalf of the U.S. government and all users of INTELSAT service; (2) corporate tax liabilities; and (3) indirect costs associated with Comsat's investment and operating liabilities. Comsat also argues that IUC rates do not provide Comsat a fair after-tax return on its statutorily-mandated investment. 53. Comsat states that the appropriate surcharge should range, on average, from 28.67 percent to as much as 45.55 percent of the applicable IUC, depending upon whether the Commission allows Comsat to earn a rate-of-return of 12.48 percent, which represents the after-tax level of return allowed by the Commission under rate-base rate of return regulation, or 15.64 percent of the weighted average rate of return earned by price cap companies. These numbers are based on 1997 data and Comsat notes that these numbers serve as proxies, and should not be substituted for a full-blown analysis. 54. Most proponents of direct access oppose imposition of any surcharge. A few parties state they would support a very limited surcharge for direct Signatory-related expenses only. (a) Signatory-Related Expenses 55. Comsat asks that the Commission permit a surcharge for expenses Comsat believes are incurred in performing its role as U.S. Signatory to INTELSAT. These expenses, asserts Comsat, include both Signatory function expenses and insurance expenses. (i) Signatory Function Expenses 56. Comsat identifies the following activities and functions as Signatory function expenses: (1) attending and preparing for INTELSAT meetings; (2) participating in the U.S. Government instructional process; (3) protecting its investment in INTELSAT; (4) representing the interests of U.S. carriers and users within INTELSAT; and (5) observing the implementation of procedures for assigning space segment capacity to users. Comsat asserts that IUC rates do not cover these expenses, which amounted to $3.005 million in 1998. 57. Comsat also identifies certain capitalized headquarter expenses attributable to carrying out the Signatory function. These include expenses for computer equipment, software, and communications equipment. Since some costs which Comsat believes should be recoverable may be incurred by functions which also generate non-recoverable costs, we asked in our Notice that Comsat discuss how it would assign its costs. In its response, Comsat stated that it had allocated 25 percent of these capitalized headquarter expenses to the Signatory function, based on the expectation that significant staffing would still be required to carry out statutorily-mandated Signatory activities under a Level 3 direct access regime. These total capitalized expenses amount to $330,000, and are in addition to the $3.005 million figure listed above. 58. Proponents of direct access have mixed views about whether the Commission should permit a surcharge for expenses identified by Comsat as Signatory function expenses. The Networks, AT&T, and MCI WorldCom state that the Commission should, at most, allow Comsat to recover costs directly attributable to its official role as the U.S. Signatory to INTELSAT. MCI WorldCom argues that a Signatory surcharge should be limited to U.S. government instructional process expenses, and should not include expenses for Comsat participation in INTELSAT governance in order to protect its commercial interest in INTELSAT. 59. In contrast, PanAmSat argues that INTELSAT's investment return to Comsat is more than adequate to compensate Comsat for its Signatory-based costs. BT North America states that British Telecom ("BT") does not impose a surcharge for costs associated with its Signatory and carrier functions because the costs associated with the administrative burden in separating Signatory costs from purely commercial costs would outweigh the benefits. BT North America states that it finds astounding that Comsat records as a direct Signatory cost 25 percent of the total costs of its headquarters facilities. Before implementing direct access in the United Kingdom, BT only added a seven percent surcharge to IUC rates to recover costs it incurred in placing orders. 60. In determining whether Comsat should be allowed to recover a particular operating expense, our functioning principle is that Comsat should not be allowed to recover any discretionary expenses unrelated to its unique Signatory functions. However, Comsat should recover costs that are unavoidable, non- discretionary Signatory-related functions and expenses that Comsat will continue to incur even after the implementation of direct access. We believe such expenses should be included in a surcharge because they are incurred as a result of the role Congress gave Comsat and mandated by the Satellite Act, and because they are likely to produce value for those customers who take advantage of direct access. 61. Based on the record before us, we find that the activities identified by Comsat constitute unavoidable, non-discretionary Signatory-related functions that Comsat cannot proportionally reduce after the implementation of direct access. We agree with the Networks' assessment that such Signatory costs are unique to Comsat. In addition, these Signatory activities directly benefit potential users of direct access because Comsat must represent all U.S. interests in connection with INTELSAT decision-making. 62. We disagree with PanAmSat that the INTELSAT return before tax is more than adequate to compensate Comsat for Signatory-related costs. Despite PanAmSat's assertion, we find that it is appropriate that Comsat be compensated for direct Signatory-related expenses in addition to IUC payments. It would be unfair to Comsat to allow an unavoidable, non-discretionary expense, such as those incurred by the Signatory function, to reduce that return. While we recognize that British Telecom does not impose a surcharge for Signatory expense to direct access users in the United Kingdom, this factor alone does not justify requiring Comsat to act as the U.S. Signatory without compensation for its unavoidable costs. (ii) Insurance Expense 63. Comsat also requests that the Commission include a surcharge for insurance expenses that Comsat has incurred on the deployment of INTELSAT satellites. Comsat states that it has traditionally purchased space-segment insurance on its own because, until very recently, INTELSAT did not fully insure total satellite deployment costs. Comsat states that it has purchased launch and post-separation insurance coverage to protect against possible losses associated with a launch or in-orbit failure of a satellite, to the extent INTELSAT had not fully purchased such insurance. Comsat also states that it purchased insurance to provide coverage against the cost of insurance premiums, to the extent INTELSAT has not chosen to cover the insurance premiums. According to Comsat, INTELSAT has underinsured or not insured the costs of satellite deployment in the past because INTELSAT did not have to raise equity in the capital market, and thus did not manage its investment risk in the same way that commercial companies do. Comsat states that as an equity investor, it bears a portion of the risk of INTELSAT launch failures or malfunctions in orbit, and thus has consistently purchased insurance to the extent INTELSAT has not. Otherwise, Comsat states, losses associated with uninsured portions of INTELSAT's space segment would reduce IUC-provided returns. Comsat argues that absent a surcharge, U.S. direct access users would obtain a free ride on Comsat's insurance payments. 64. Comsat filed a schedule listing the satellites that have been under-insured, along with the depreciation life for how much insurance expense remains capitalized on its financial statements. Comsat states it has $31 million of capitalized insurance remaining as of December 31, 1998. Comsat asserts that the actual expenses attributed to this capitalized insurance would be $13.158 million, which includes the following components: $3.872 million representing the rate of return on the capitalized insurance, assuming a 12.48 percent rate of return that Comsat asserts it could have earned; $7.777 million for depreciation expense; $1.510 million for Comsat's corporate tax liability on the $3.872 million. The total amount of $13.158 million would represent approximately 8.5 percent of Comsat's 1998 IUC payments to INTELSAT. 65. The Networks argue they should not bear the burden of Comsat's insurance expense when it is not clear why most "satellite insurance costs" are not already recovered in INTELSAT's operating expenses. MCI WorldCom and BT North America assert that INTELSAT already fully insures its satellites and launches, and thus argue against a surcharge for insurance expense. BT North America further states that BT does not incur any additional costs associated with satellite launch and insurance. 66. We find that Comsat should be entitled to a surcharge that recovers that part of Comsat's insurance expenditures attributed to INTELSAT not purchasing, or fully purchasing, launch and post-separation insurance. As we discuss below, Comsat was created by the Satellite Act to plan, initiate, construct, own, manage and operate with foreign governments a commercial communications satellite system. That system became INTELSAT. As the U.S. Signatory in this intergovernmental organization, Comsat is required to make capital investments in the satellite system under the terms of the INTELSAT Operating Agreement. In carrying out obligations particular to its role, Comsat must insure that the purposes of the Satellite Act are fulfilled. This may include taking steps to protect its investment if not otherwise protected by INTELSAT. We believe Comsat's action to purchase launch and post-separation coverage, to the extent INTELSAT does not, is prudent given the high risk nature of launching and operating satellites and the large amount of capital committed to the development, launch, and operation of INTELSAT's satellites. Otherwise, a launch or in-orbit failure could significantly jeopardize Comsat's investment in INTELSAT. As the U.S. Signatory to INTELSAT, we believe Comsat has a duty to protect its INTELSAT investment in order to serve the interests of the U.S government and INTELSAT users in the United States. As a result, we find Comsat's action to fully insure against launch and in-orbit failures to be reasonably related to its Signatory responsibilities, and do not find this insurance expense to be discretionary in nature. We believe direct access users that will gain access to INTELSAT facilities that have been partially insured by Comsat should, in turn, partially compensate Comsat for its insurance expenses. 67. Cable and Wireless states that the Commission has found in the past that permitting carriers to recover "embedded" or "opportunity" costs from rivals stifles the very consumer benefits that competition is intended to produce. The argument here by Cable and Wireless, however, is not persuasive. Comsat explains that, in the past, INTELSAT did not have to raise capital itself in the financial markets. Thus, INTELSAT faced different incentives in managing its risks, and so had an incentive to be underinsured. Each INTELSAT Signatory was left to decide for itself how much risk it would choose to bear and how much to protect itself through purchase of insurance. Further, because the size of Comsat's ownership interest in INTELSAT is not affected by customers' decisions to access INTELSAT satellites directly or through Comsat, Comsat's investment obligations in INTELSAT to fund replacement for any in-orbit failure also remains the same. Therefore, because Comsat has this continuing investment obligation, its insurance of the risk associated with any in-orbit failure can be properly viewed as a Signatory expense that Comsat continues to bear, even if all its current customers were to use direct access. 68. We do not, however, include a surcharge for any insurance purchased to provide coverage against the cost of the insurance itself in the event of a launch or in-orbit failure. Of the $30 million worth of total capitalized insurance amount stated by Comsat, approximately $8.5 million represents insurance on insurance premiums. While we recognize the importance of purchasing insurance when INTELSAT has failed to fully do so, we find that Comsat did not need to fully insure the insurance premiums. The risk associated with the need to purchase insurance on insurance premiums could have reasonably been absorbed in the course of normal business operations. (iii) Calculating Reasonable Surcharge for Signatory-Related Expenses 69. In the Notice, we asked Comsat to specify how it would allocate these recoverable costs between itself and Level 3 users if such expenses were allowed. We also asked Comsat to specify how any recoverable costs should be allocated among the different INTELSAT services. 70. Comsat submitted a variety of schedules depicting surcharge calculations. As noted above, Comsat calculated the surcharge percentages based on what portion these expenses represented of the IUC payments, using 1998 data. In its further response, Comsat argues that calculating the surcharge will be difficult, and will mirror the complex type of rate regulation that the Commission determined was unnecessary in the Non-Dominant Order, and it will necessarily entail periodic visits. Comsat argues that if the surcharge falls short, the result would be below cost access by U.S. carriers for INTELSAT space segment, and potentially divert traffic to INTELSAT from more efficient satellite service providers. 71. We find that a surcharge should be calculated by determining what percentage a given expense constitutes of the total IUC payments made by Comsat in a given year, and then applying this uniform percentage to IUC rates in the forward year. While we understand that Comsat's Signatory-related expenses and IUC revenues may change, thus affecting the size of the surcharge that Comsat receives from direct access users, we do not now anticipate any material changes in these factors. In addition, we agree with several parties who argue that the Commission should not conduct a rate proceeding to determine the reasonableness of Comsat's potentially recoverable costs. Comsat has failed to provide any evidence on how a potentially insignificant shortage in the surcharge would lead to below cost access by U.S. carriers for INTELSAT space segment, or potentially divert traffic to INTELSAT from more efficient satellite service providers. 72. We find that a uniform surcharge of 5.58 percent over IUC rates would be reasonable, for any particular service, in order to compensate Comsat for these unavoidable Signatory function expenses. This surcharge is based on the finding that Comsat's Signatory function expenses represented 1.94 percent of Comsat's IUC payments to INTELSAT in 1998. We also will allow a surcharge of .05 percent for headquarter account expenses. Likewise, for Comsat's allowable insurance expenses, we find that a uniform surcharge of 3.59 percent over IUC rates be permitted in order to compensate Comsat for these insurance expenses. In total, we find a surcharge of 5.58 percent over IUC rates to be reasonable for the purpose of compensating Comsat for Signatory-related expenses. Appendix B, hereto, provides the information on calculating this surcharge. 73. Comsat also asks the Commission to consider the additional costs that it will incur by having to necessarily wait longer for payment from U.S. users of direct access since INTELSAT will first receive the funds. It argues that this poses additional costs on Comsat We do not find this argument to have merit, as customers will pay the surcharge at the time they pay IUC rates to INTELSAT. (b) Return on Investment 74. Comsat asserts that IUC rates do not provide Comsat a reasonable, after-tax return on its investment. Comsat states that the 18 percent provided through the IUC mechanism, as cited in the Notice, actually translates into a return well below that earned by other telecommunication services companies after taking into account a number of considerations. First, Comsat argues that the 18 percent return represents a pre-tax return, and thus ignores the corporate tax liability that Comsat incurs on the return. After considering tax implications, Comsat states the post-tax return on its Signatory equity amounts to 11.2 percent. Second, the 18 percent return is on the book value of invested equity and ignores a capital base that should also include Comsat's liability for the portion of INTELSAT's debt which Comsat finances. Comsat asserts that when considering total capital, or the sum of equity and Comsat's share of INTELSAT's debt, the effective after-tax return will be less than 11.2 percent. Furthermore, asserts Comsat, when considering return on net plant as the measure for total capital employed, the post- tax return on net plant amounts to 9.2 percent. In sum, Comsat argues that whether the rate of return is based on equity, equity and debt, or net plant, the IUC-provided return is well below a compensatory return for a private firm subject to corporate tax liability, and below the return that Comsat has been allowed to earn under the Commission's rate of return policies. For these reasons, Comsat requests that the Commission permit a surcharge to allow Comsat to earn a reasonable rate of return. 75. In response, most parties contend that IUC rates already include a generous rate of return. MCI WorldCom states that INTELSAT pays Comsat an after-tax return on Signatory equity of 10.37- 12.81 percent, which falls within the 11.48 - 12.48 percent return that Comsat has been permitted to earn under rate of return regulation. In addition, MCI WorldCom states that the relevant rate of return the Commission needs to consider is Comsat's pre-tax annual rate of return of 14-18 percent on Comsat's investment in INTELSAT, and not INTELSAT's rate of return on assets. 76. MCI WorldCom asserts that Comsat's election to have excess investment in INTELSAT demonstrates the attractiveness of this return. MCI WorldCom includes a press statement made by the Comsat CEO, that discusses Comsat's recent decision to increase its investment share in INTELSAT by approximately two percent. The press release states that "Comsat's increased share in INTELSAT makes good business sense, and the corporation expects to see a strong return on this investment." 77. In the Notice, we requested comment from Comsat and other parties on how our recent decision to reclassify Comsat to non-dominant carrier status for most of its services, as well as our pending consideration of incentive-based rather than rate of return regulation of Comsat's remaining dominant services, should affect our consideration of Comsat's cost recovery beyond those costs associated with its "statutorily imposed official Signatory functions." BT North America responded that is ironic that Comsat seeks surcharges designed to provide a secure rate of return when in the Non-Dominant proceeding Comsat sought to end rate of return regulation and sought to price its services according to the demands of the marketplace. 78. Based on the record before us, we do not believe Comsat's request to permit a surcharge that would guarantee a particular rate of return above that already provided by IUC rates is reasonable for the following reasons. First, the return provided by IUC rates, which was between 14 and 18 percent in 1998, provides a market-based rate of return for Signatories, as determined by the INTELSAT Board of Governors, of which Comsat is a member. The INTELSAT Board of Governors acknowledges that a Signatory's ownership of INTELSAT may exceed its usage of INTELSAT services, and in such circumstances, IUC rates provide the only source of income on this excess ownership. We assume that the Board will establish IUC rates that reflect a market rate of return. If IUC rates yield an unreasonably low rate of return, the INTELSAT Board would have every incentive to change its pricing strategy or cost management practices to increase this return. INTELSAT evidently considers the competitive environment and the needs of its customers in determining its prices. For example, INTELSAT stated in its 1997 Annual Report that "over the past year, INTELSAT has worked to ensure that its pricing strategy is attractive to its increasingly diverse customer base." 79. Second, we agree that Comsat's election to have excess investment in INTELSAT demonstrates, at least to some degree, the attractiveness of IUC-based returns. Comsat clearly has attributed Comsat's decision to increase its investment share in INTELSAT by approximately two percent to expecting a strong return on this investment, even though it had greater ownership than its usage required at the time. While Comsat states in its comments that it holds this surplus ownership to enhance its voting power (and the influence of the United States) within INTELSAT, and not solely for investment purposes, Comsat (in a March 30, 1999 press release titled, "Comsat Increases Ownership of INTELSAT System") strongly suggests that obtaining a reasonable return is also part of this business decision to maintain excess ownership. 80. As discussed in this Report and Order, our regulatory treatment of Comsat has changed considerably since the last time we considered direct access in 1984. In the 1984 Direct Access Order, we found direct access would constrain Comsat to a post-tax rate of return well below that recognized by the Commission as necessary to its financial well-being. During that period, and up to its recent reclassification as a non-dominant carrier, Comsat had been authorized to earn between 11.48-12.48 percent, post-tax, on its INTELSAT investment. 81. That authorization changed, however, in April of 1998, when we reclassified Comsat as a non- dominant carrier on many routes, and eliminated rate-of-return regulation, so Comsat could price its services according to the demands of the marketplace. We found Comsat non-dominant after concluding that Comsat no longer held market power for services to the vast majority of its routes, and that the increasingly competitive international telecommunications market would best serve to prevent Comsat from charging unreasonable prices. Therefore, we agree with BT North America that it would not be appropriate to grant Comsat's request to permit a surcharge to secure a particular rate of return, as it is inconsistent with Comsat's request to end rate of return regulation in order to allow it the freedom to determine appropriate prices in these competitive markets. 82. In addition, we have no evidence of any Signatory receiving a surcharge so it could secure a higher rate of return than that provided by IUC rates. Parties note that there is no mark-up or surcharge to IUC rates in other countries that have permitted Level 3 direct access, such as Chile, France, Germany, the Netherlands, and the U.K. PanAmSat notes that Canada recently adopted a direct access system that does not include any surcharge fee on direct access customers. Based on PanAmSat's knowledge, no other administrations assess a surcharge. 83. Comsat also asserts that two other direct access-related factors increase Comsat's risk and thereby reduce its market return in INTELSAT. First, the limited liquidity faced by INTELSAT Signatories further increases the costs of its investment. Second, INTELSAT Signatories are jointly and individually liable for the entire system. These factors increase the risk, and the corresponding necessary market return, asserts Comsat. We do not find either of these factors to lie outside the normal business risks already assumed by Comsat today. 84. In sum, we believe that IUC rates are designed by INTELSAT to provide a reasonable rate of return. Furthermore, INTELSAT established IUC rates with the understanding that Signatories may own a greater part of INTELSAT than they actually use, and thus IUC-based returns would represent the only source of return on this excess investment. In addition, our decision to reclassify Comsat to non-dominant carrier status in April of 1998 underlies our conviction that rates should be determined by what the market will support. If Comsat believes that an IUC rate is too low, then it may work within its capacity as a Board member of INTELSAT to address any concerns it has with the return on investment provided by IUC rates. (c) Corporate Tax Liability 85. Comsat also asserts that IUC rates do not allow Comsat to recover the corporate tax expenses that it will incur on any income derived through direct access. Comsat states that its marginal corporate income tax rate in the year 1998 was approximately 37.31 percent and its effective income tax rate was 25.95 percent. This includes federal, state, and local taxes. Comsat requests that a surcharge be added to IUC rates of 7.11 percent to 13.82 percent, depending on the rate of return Comsat is allowed to earn, in order to allow Comsat to recoup its corporate income tax expenses incurred on income derived through direct access. Other commenters in the proceeding, while generally opposing any surcharge, do not address the effects of corporate tax liability on Comsat's return. 86. We decline to adopt Comsat's suggestion to include a surcharge for Comsat's corporate income tax expense that it will incur on the income produced by direct access. It is true that as a tax-paying entity, Comsat cannot avoid paying federal, state and local income taxes on income derived from INTELSAT for direct access. The rate of return on equity which INTELSAT pays to its signatories, which is currently set at between 14 and 18 percent before tax by the INTELSAT board, is equivalent to a rate of return on equity to Comsat of about 8.78 to 11.28 percent after tax, based on Comsat's marginal income tax rate of 37.31 percent. Historically, as a dominant carrier, Comsat was rate regulated and was permitted to earn a rate of return of about 11.48-12.48 percent after tax. However, in 1998 we declared Comsat to be non- dominant and eliminated rate regulation for most services on most routes. Later we replaced Comsat's rate of return regulation on its remaining services along dominant routes with incentive based price regulation. In doing so, we allowed Comsat much greater flexibility to lower prices to meet competitive service providers, but we also clearly intended that Comsat not be guaranteed any particular rate or return on its Signatory equity or rate base. For this reason, we do not see any need to explicitly compensate Comsat by an addition to its surcharge for the taxes it would have to pay on the income it receives from INTELSAT. (3) Implementation Procedures for Direct Access 87. We have determined that a Comsat surcharge of 5.58 percent over IUC rates for INTELSAT service offerings would be reasonable for purposes of compensating Comsat for Signatory function expenses and insurance expenses related to its Signatory role. As pointed out in our Notice, Comsat's current tariff "markup" (over the INTELSAT tariff rate) varies widely across services. Comsat's mark-up is based on factors such as the service provided, the length of the contract term, and the amount of capacity being purchased. The specific tariff examples cited in the Notice showed markups that varied from 18 to 63 percent for full-time video service, 38 to 270 percent for voice-international digital service, and 26 to 88 percent for data - international business service. For switched-voice service, the markup is highest for shorter term contracts, while the markup for full-time video and data - international business services is highest in long term contracts. Thus, the impact of a uniform markup of 5.58 percent may be particularly effective in lowering the rates for relatively short term switched-voice traffic contracts and long term full- time video and data contracts. 88. We conclude that, while a surcharge calculated as set forth in this Order is reasonable, based on the record in this proceeding, we do not prescribe this surcharge. Comsat may file a tariff for a different surcharge, provided its proposed surcharge is just and reasonable within the meaning of Section 201 of the Communications Act, i.e., that the surcharge will not recover more than the share of its expenses for the direct Signatory-related expenses and its insurance expense that Comsat reasonably incurs as a result of its role as the U.S. Signatory to INTELSAT. Accordingly, if any direct access customer believes that the surcharge is unjust and unreasonable, we will consider a complaint filed by that customer. If we find that the surcharge is unjust and unreasonable, we will require Comsat to issue refunds as warranted. 89. The procedures for implementing direct access to the INTELSAT system from the United States, including the surcharge element, will consist of several elements. Following release and publication in the Federal Register of this Report and Order, the International Bureau shall issue a Public Notice establishing a 21-day period (from the date of the public notice) for eligible carriers and users to notify the Commission in writing that they want Level 3 direct access to INTELSAT. The public notice also will specify the name and address for filing any such notification. The International Bureau will forward the names of all the eligible U.S. carriers and users to Comsat. Comsat shall be required to inform INTELSAT within ten days of receiving these eligible names that they are authorized to obtain Level 3 direct access from INTELSAT without further approval of the U.S. Signatory -- Comsat -- consistent with the procedures established by INTELSAT that permits "blanket authorizations" for Level 3 direct access. Any eligible carriers and users, not part of the initial "blanket authorization" request sent to INTELSAT, may request that Comsat add them to the list of carriers and users eligible for Level 3 direct access "blanket authorizations." Comsat will be required to inform INTELSAT within ten days of receiving each such subsequent request. Within 60 days after publication in the Federal Register of this Report and Order, Comsat may file, on one day's notice, a tariff of the terms and conditions of surcharges applicable to U.S. Level 3 direct access customers, consistent with the findings in this Report and Order. The carriers and users obtaining Level 3 direct access from INTELSAT shall pay Comsat the surcharge specified in Comsat's effective tariff that is applicable to the services obtained from INTELSAT. Finally, Comsat may establish reporting mechanisms with INTELSAT for the limited purpose of assuring that Comsat can identify the appropriate surcharge that U.S. direct access customers must pay Comsat upon receipt of service from INTELSAT under Level 3 direct access. Comsat may take appropriate steps through INTELSAT to terminate a customer's Level 3 direct access status for failure to pay the appropriate surcharge. 90. We also conclude that Comsat's initial surcharge rates should be in effect for no more than one year. A surcharge that is reasonable today may or may not be reasonable in the future. Comsat's Signatory-related expenses may vary from year to year, and its level of recovery of those expenses may also vary. Accordingly, we require Comsat to limit its initial surcharge to one year. If Comsat wishes to continue to impose a surcharge after that date, it may file a tariff revision reflecting a new surcharge that recovers no more than the share of direct Signatory-related expenses and its insurance expense that Comsat reasonably incurs as a result of its role as the U.S. Signatory to INTELSAT. 91. We also require Comsat to state in its tariff that this surcharge will not apply upon privatization of INTELSAT. This surcharge is intended to enable Comsat to recover its reasonable, prudently-incurred costs associated with acting as the U.S. Signatory to INTELSAT, direct Signatory-related expenses and Comsat's insurance expense reasonably incurred as a result of its role as the U.S. Signatory to INTELSAT. Once INTELSAT has been privatized, Comsat will no longer incur any costs associated with acting as the U.S. Signatory to INTELSAT, and so continuing to impose its surcharge will no longer be just and reasonable at that point. 92. In summary, we reach the following conclusions with respect to Comsat's surcharge: (1) a surcharge is just and reasonable, provided that it recovers no more than the share of direct Signatory- related expense and insurance expense that Comsat reasonably incurs as a result of its role as the U.S. Signatory to INTELSAT; (2) if Comsat wishes to impose a surcharge, it must file a tariff; (3) we find that a surcharge calculated as set forth in the appendices to this Report and Order are just and reasonable but Comsat is free to attempt to show that some other surcharge to cover the same expenses would also be just and reasonable; (4) Comsat's tariff must state that this surcharge will be in effect for no more than a year after the date that its tariff takes effect; and (5) if a Comsat customer believes that Comsat's surcharge recovers more than the direct Signatory-related expense and its insurance expense that Comsat reasonably incurs as a result of its role as the U.S. Signatory to INTELSAT, we will consider a complaint filed pursuant to Section 208 of the Communications Act. 93. Finally, a decision by Comsat not to file a tariff reflecting a surcharge to direct access users will not preclude the availability of Level 3 direct access to U.S. carriers and users of INTELSAT. Comsat's failure to file a tariff will result in direct access customers obtaining service from INTELSAT without a surcharge to Comsat. (4) Potential Competitive Concerns Raised by Direct Access 94. The Notice requested comments on whether permitting direct access would result in competitive distortions in the U.S. market. An important issue that we must consider is, to the extent that we do authorize direct access to INTELSAT, should we impose any limitations on which companies should be allowed to obtain direct access within the United States? In addition, the Notice specifically requested parties to address the potential effect of INTELSAT's immunities from suit and process and its immunity from Commission jurisdiction over rates and practices. Parties commenting on this issue address four areas: (1) foreign Signatory operation in the U.S. market through direct access; (2) immunity from suit and process; (3) immunity from Commission jurisdiction; and (4) immunity from taxation. (a) Direct Access by Dominant INTELSAT Signatories 95. Comsat contends that with the introduction of direct access in the United States, foreign Signatories, and possibly U.S. carriers, could manipulate INTELSAT IUC rates to their advantage and cause competitive distortions in the U.S. market. Comsat is concerned that a sufficient number of foreign Signatories could be enlisted by large international carriers to depress future IUCs in order to enjoy below cost access to INTELSAT. BT North America notes to the contrary, however, that downward pressure on prices, in lieu of artificially preserving high supply costs to carriers, is precisely the result the Commission would want to achieve. In any event, the INTELSAT Board of Governors would ensure that carriers with "significant bargaining power" would not be able to negotiate "preferential IUC rates" with INTELSAT. 96. While direct access will benefit U.S. carriers and users of INTELSAT services and, in turn, U.S. consumers, foreign Signatory operation in the U.S. market via direct access will pose competition concerns. There may be potential incentives for Signatories to depress IUC rates for direct access to uneconomically low levels, i.e. to levels that do not reflect INTELSAT's full costs of providing direct access in the U.S. market. As Comsat has argued, foreign Signatories desiring to begin or expand operations in the U.S. market may themselves wish to purchase direct access from INTELSAT in the United States. As such, they will find low prices for direct access in the U.S. to be in their economic interest. Because these same companies that might purchase direct access also have the ability, through their Signatory status, to influence direct access prices, they may be able to develop their U.S. activities at artificially low prices, which could have an adverse competitive impact on Comsat and other international service providers operating in the United States. The fact that the Signatories share in INTELSAT's costs and revenues will not likely offset the incentive to underprice direct access. Unlike Comsat, most foreign Signatories are vertically integrated firms for whom access to INTELSAT is not in itself the end product they sell to customers, but instead an input into telecommunications services they sell to retail consumers. Access for such Signatories is more a source of costs than a source of revenues. IUC rates are for them primarily a transfer price they pay to INTELSAT for access they use themselves, and any returns they lose due to a lower IUC they can, in turn, be made up by the lower "price" they pay for usage of INTELSAT. So long as their usage shares and ownership shares of INTELSAT are roughly balanced, Signatories who are also retail service providers will be unaffected by low IUC rates and have no incentive to resist lowering IUC rates where to do so is otherwise advantageous. 97. As we explained above, a dominant Signatory may have the opportunity to participate in an effort to reduce direct access prices to uneconomic levels based on its opportunity to exercise a vote in the INTELSAT Board of Directors. Under ordinary circumstances, such activities might raise antitrust concerns. However, in any discussions regarding reducing the IUC, this incentive is not tempered by potential antitrust liability since all Signatories enjoy immunity from antitrust liability for their Signatory related activities. 98. Because of the incentives for vertically integrated Signatories to favor artificially low direct access prices in markets where they themselves want to be direct access customers, we adopt restrictions on the participation of those Signatories in the U.S. market for direct access to INTELSAT. Specifically, we will not authorize any Signatory, other than Comsat, to purchase direct access in the U.S. for service to or from any specific foreign country in which the Signatory itself uses 50 percent or more of all INTELSAT capacity consumed in that country. This restriction will also apply to affiliates that are more than 50 percent owned by the respective Signatory. Thus, a Signatory carrier affiliate that takes for its own use 75 percent of the total INTELSAT capacity sold in a particular foreign country would, along with any more than 50 percent-owned affiliate, be unable to purchase direct access from INTELSAT in the United States for the purpose of originating or terminating traffic to that country. The purpose of this approach is to limit Signatories' incentives to reduce prices for direct access to uneconomic levels. Signatories that do not bear a cost from uneconomic direct access prices by virtue of competition in their home markets, and that can benefit from such prices by consuming direct access in the U.S. market, will have incentive to favor low direct access charges by INTELSAT. That incentive is reduced when such Signatories cannot immediately benefit in their role as direct access consumers, and is greatly weakened (regardless of whether the Signatories purchase direct access in the U.S.) when low direct access pricing is a greater benefit to their competitors than it is to themselves. 99. We limit this restriction to cover Signatories' purchases of direct access for service from the United States into territories where they are dominant, i.e., use 50 percent or more of the INTELSAT capacity consumed in that territory. Nothing in this Report and Order prevents them from using direct access to provide service between the United States and countries in which the Signatory is not the dominant provider of INTELSAT service. The ability to provide such service likely presents a far weaker incentive for the Signatory to favor uneconomic pricing because of the reduced traffic it is likely to carry between the U.S. and areas where it is not a dominant incumbent telecommunications service provider. We therefore find the potential benefits for American consumers to outweigh the risks of uneconomic pricing in such cases. However, if our competitive concerns regarding dominant Signatories are not likely to be realized, we will reevaluate this decision. However, we will continue to monitor developments regarding direct access and INTELSAT privatization to determine whether the restriction we impose in this Report and Order on dominant Signatories should be modified or eliminated. 100. We note that, as explained in this Order, our analysis in this rulemaking proceeding is based on the long-established public interest standard. Pursuant to that standard, and as exemplified in a history of cases, our public interest analysis includes consideration of competition issues. The U.S. obligations under the 1997 WTO Basic Telecommunications Agreement do not affect the Commission's statutory obligation to apply a public interest analysis, and we are "entitled to apply competitive safeguards consistent with U.S. obligations." Thus, the approach we take here is not only a lawful exercise of our public interest authority, but it is also based on previous public policy in which we explained the necessity of maintaining the public interest by avoiding competitive harm. (b) Immunity from Suit and Process 101. INTELSAT and its Signatories, including Comsat, enjoy three categories of immunities: (1) Immunity from jurisdiction, which prevents courts from considering lawsuits of any type against INTELSAT; (2) archival and testimonial immunity, which protects INTELSAT from being compelled to provide documents or testimony of its employees; and (3)immunity of assets, which prevents courts from enforcing monetary judgments against INTELSAT. INTELSAT's immunities derive from its status as an intergovernmental organization conferred upon it by the INTELSAT Agreement and by INTELSAT Headquarters Agreement. In Alpha Lyracom Space Communications v. Comsat Corp., the court found that Comsat was a "representative of the Parties" under the INTELSAT Headquarters Agreement and, therefore, was immune from any type of suit and legal process in the U.S. for acts taken in its official capacity as a Signatory, but not for those actions taken in its role as a common carrier. 102. We have twice addressed the question of Comsat's immunity as relates to the U.S. market and determined that it is a clear advantage over competitors that do not enjoy similar protection. The 1997 DISCO II Order and our 1998 Comsat Non-Dominant Order found that Comsat's immunity protects Comsat in its broad Signatory activities from suits based on antitrust, tort and contract claims. Also, these immunities protect substantial commercial activities. As the U.S. Signatory, Comsat sits on the INTELSAT Board of Governors and participates in decision making on all matters related to the commercial operation of a satellite system. INTELSAT's financial, legal, operational, commercial, and strategic decisions provide the basis upon which Comsat offers service to U.S. consumers. These decisions entail the planning and procurement of satellites and development and pricing of services to be provided over the satellites to INTELSAT Signatories and direct access users. These are the same types of commercial activities undertaken by Comsat's competitors with one key difference: Comsat's competitors have no immunity from suit and legal process for these types of activities and are subject to U.S. competition laws, including U.S. antitrust laws. As a result, absent an appropriate waiver, we declined in our DISCO II decision to permit Comsat to provide INTELSAT services into the U.S. domestic market. 103. Several parties addressed the effect of INTELSAT's immunity from suit and process on the U.S. market if we permit direct access in the United States. PanAmSat maintains that the Commission should rely on recent amendments to the Foreign Corrupt Practices Act and declare that INTELSAT has no immunity from legal process in the United States. Columbia argues that, at a minimum, the Commission should require INTELSAT to waive its immunity from law suits filed in U.S. courts if we permit direct access in the United States. Ellipso states that the U.S. should "encourage" such a waiver from INTELSAT and reserve the right to withdraw direct access if anti-competitive practices result. Lockheed Martin states that because of INTELSAT's immunities, direct access could result in unfair competition and that this concern supports its contention that the U.S. should pursue privatization of INTELSAT rather than direct access. INTELSAT comments that, contrary to PanAmSat's assertion, INTELSAT's immunities remain intact under the recently passed amendments to the Foreign Corrupt Practices Act. Comsat concurs with other parties that market distorting and anti-competitive effects would result from INTELSAT's immunities if direct access were permitted in the United States. Comsat further contends that the Commission has no authority to abrogate these immunities and the amendments to the Foreign Corrupt Practices Act do not eliminate INTELSAT's immunities. 104. MCI WorldCom contends that direct access would not raise competitive concerns for the U.S. market. MCI WorldCom states that it is the U.S. direct access customers who would be most affected by INTELSAT's immunities and INTELSAT provides recourse to these customers through arbitration in its standard direct access service agreement. MCI WorldCom also points out that, while Comsat argues against direct access based on INTELSAT's immunities, Comsat continues to maintain that the existence of its own derivative immunities should not deter the Commission from authorizing Comsat to provide INTELSAT services in the U.S. domestic market. Finally, MCI WorldCom contends that the amendments to the Foreign Corrupt Practices Act provides for reduction or elimination of INTELSAT's immunities. 105. In view of INTELSAT's immunities, we agree that we must protect competition in the U.S international market upon implementation of Level 3 direct access. Protections are necessary, however, only to the extent introduction of direct access into the U.S. market for international services results in competitive distortions greater than already exist as a result of Comsat's immunities. Through Comsat, INTELSAT already is in the U.S. market providing space segment capacity for international communications to U.S. carriers and users on a wholesale basis, by virtue of the Satellite Act and the INTELSAT Agreement. Comsat enjoys the same immunities as INTELSAT in its role as the U.S. Signatory to INTELSAT, but not in its role as a common carrier supplier of INTELSAT services. Both are protected from suit and process (including antitrust actions) in connection with INTELSAT commercial decisions described above that include development and pricing of services. The services and their prices are reflected in INTELSAT IUCs. However, U.S. carriers and users would pay IUC rates in order to take service from INTELSAT under Level 3 direct access. 106. Because immunity for the same activities extend to both Comsat and INTELSAT, we conclude that permitting Level 3 direct access in the United States is not likely to lead to any additional competitive distortions in the U.S. market for international services than already exists as a result of Comsat's provision of INTELSAT services in the U.S. market. Level 3 direct access customers would use the same services over the same facilities that result from commercial decisions for which both INTELSAT and Comsat are immune. These services are provided at IUC rates to direct access customers pursuant to standard agreements. Only if INTELSAT engages in additional commercial activities -- such as marketing to U.S. carriers services outside the terms of IUC rates -- could the current competitive situation possibly be further distorted. Any such activities, however, are consistent with that which Comsat performs in its common carrier role and for which it has no immunity. We would expect INTELSAT to voluntarily waive its immunity to cover the direct marketing of services and negotiation of agreements with U.S. carriers that would lead to the provision of services and rates not included in IUC rates or pursuant to the service agreements different from what INTELSAT generally offers under Level 3 direct access. We believe that this approach is consistent with our DISCO II decision in which we precluded Comsat from entering the U.S. domestic satellite market without a waiver of its privileges and immunities. Here, we permit Level 3 direct access only for services to and from the United States, and not for domestic service within the United States. 107. Comsat contends that its immunity as a Signatory can be distinguished because it allegedly does not involve marketplace conduct and is subject to government instruction. We have previously rejected this argument. Comsat's Signatory role entails substantial commercial decisions and activities that are necessary and common to participation in the market place. The government instructional process was neither designed nor is it capable of supplanting the antitrust law as a deterrent to anti-competitive behavior. The instructional process is intended to assure fulfillment of U.S. policy goals under the Satellite Act of 1962. 108. Finally, the provisions of the recently passed amendments to the Foreign Corrupt Practices Act ("the Anti-Bribery Act") cited by PanAmSat do not appear relevant to this proceeding. The Anti-Bribery Act amends the Securities Exchange Act of 1934 and the Foreign Corrupt Practices Act of 1977 to implement the OECD "Convention on Combating Bribery to Foreign Officials in International Business Transactions." The law includes Section 5, entitled "Treatment of International organizations providing Commercial Communications Services." Section 5 subjects INTELSAT to provisions of the Securities Exchange Act and Foreign Corrupt Practices Act until the President certifies they have been privatized in a pro-competitive manner. Section 5 also states that INTELSAT and Inmarsat shall not be accorded immunity from suit or legal process, except as required by international agreements to which the United States is a party. It requires the President to "expeditiously take full appropriate actions necessary to eliminate or to reduce substantially" all privileges and immunities of INTELSAT and Inmarsat not eliminated by the section (that is, privileges and immunities that remain as a result of existing international agreements). The President is to determine which agreements constitute international agreements for purposes of the section. In this proceeding the Commission is not authorized to make that determination. (c) Immunity from Commission Jurisdiction over Rates and Practices 109. As an intergovernmental organization, INTELSAT is not subject to the jurisdiction of any national regulatory authority. In our Notice in this proceeding, we requested comments as to the potential effect on competition in the U.S. market in view of INTELSAT's immunity from Commission jurisdiction over rates and practices. We asked whether our authority to license earth stations pursuant to the DISCO II regulatory structure would be a sufficient means of overseeing INTELSAT direct access operations in the U.S. market, or whether other regulatory protections might have to be imposed. 110. PanAmSat responded that, if we permit direct access in the United States, we should treat INTELSAT as any other similarly situated carrier, requiring it to file Title III applications with appropriate fees, subjecting it to Title II dominant carrier regulation with cost based tariff filing requirements, and enforcing our DISCO II "no special concessions policy." Columbia requests that we require INTELSAT to demonstrate that its provision of services directly to U.S. customers will not have an adverse impact on competition. Columbia contends that INTELSAT only would be able to make such a demonstration upon privatization. And Columbia contends that Commission earth station licensing authority would be inadequate to assure no competitive harm results in the U.S. market. 111. INTELSAT, in response to PanAmSat, states that it does not operate as a carrier providing communications services, but "provides space segment required for international public telecommunications services" to Signatories and direct access users. INTELSAT also points out that it is not subject to Commission regulatory procedures with respect to use of orbital location and frequencies. MCI WorldCom contends that the Commission has statutory authority to regulate and impose any needed license conditions on the U.S. entities that have direct access to INTELSAT. Ellipso points out that the Commission has the right to withdraw direct access if it results in anti-competitive practices by INTELSAT. 112. We disagree with PanAmSat that we should apply the full panoply of Commission regulatory authority to INTELSAT if we permit direct access in the United States. We decided in our DISCO II decision to permit foreign satellites to access the United States through earth station licenses. Our authority over earth station licensing provides the means by which to protect competition in the U.S. market. This is an approach readily applicable to INTELSAT in connection with direct access. Additionally, there is no basis for imposing common carrier regulation on INTELSAT. INTELSAT's operation as a provider of space segment capacity is a role similar to that of PanAmSat and other competing U.S. satellite systems. PanAmSat and other U.S. competing systems are not required to operate as common carriers. Nor do we impose common carrier regulation on non-U.S. licensed satellite operators providing service in the United States. PanAmSat provides no convincing argument why INTELSAT should be treated any differently if U.S. customers choose to obtain services directly from INTELSAT via Level 3 direct access. As MCI WorldCom noted, U.S. carriers obtaining service through Level 3 direct access will continue to be subject to the Commission's Title II jurisdiction. 113. We recognized in DISCO II that use of the INTELSAT system in the United States for international services is grounded in the policies of the Satellite Act, and concluded that we would continue to consider applications by Comsat to provide international services via INTELSAT on a case by case basis. In view of our findings above as to the limited effect of INTELSAT's immunities on the U.S. market under a direct access regime, and the need for INTELSAT to voluntarily waive these immunities in any situations in which it chooses to provide services not covered by IUC rates, we believe that we can protect competition in the U.S. market through our earth station licensing authority. We have the additional means through the U.S. government instructional process to require Comsat to inform INTELSAT that direct access must be discontinued in specific instances where competition problems arise. We therefore do not find it necessary, as Columbia contends, to await privatization of INTELSAT before allowing it direct access to the U.S. market. (d) Immunity from Taxation 114. Comsat argues that INTELSAT's tax-exempt status under U.S. law would distort competition in the United States market since INTELSAT would enjoy an artificial cost advantage over Comsat and other U.S. satellite providers. Specifically, Comsat asserts that INTELSAT's exemption from property taxes, payroll taxes, corporate income taxes, and customs duties allows it to pass along cost savings in the form of artificially lower rates. Because of this cost advantage, INTELSAT would likely capture business from other U.S. providers of space segment capacity, irrespective of whether INTELSAT is truly the most efficient services provider. Columbia argues that the Commission should require INTELSAT to remove its tax exempt status from local, state, and federal taxes on its revenues, as well as assets, before offering Level 3 direct access service to U.S. users. 115. We agree that direct access might create a temporary competitive distortion by allowing INTELSAT to provide service to U.S. users while being exempt from income taxes. However, we believe that U.S. customers of INTELSAT capacity and ultimately final consumers will gain from obtaining direct access to INTELSAT at low prices. Furthermore, by virtue of its treaty with the U.S., INTELSAT is exempt from U.S. taxes and the U.S. does not have authority to impose such taxes on INTELSAT. We are not aware of any other country in which INTELSAT pays taxes, and yet we have noted that 94 other countries permit direct access and that most of them do not impose any surcharge above the IUC for direct access. Hence, those countries have apparently found that allowing INTELSAT to have direct access even though it does not pay taxes does not raise problems sufficient to require either a tax surcharge or to prevent direct access. Thus, we do not see why INTELSAT's tax immunity in the U.S. should be sufficiently worrisome to either deny direct access or to cause us to require a surcharge payment to Comsat for taxes. In addition, when INTELSAT is privatized, it will become subject to taxes just like any other company doing business in the United States or the country in which it is incorporated. 116. We do not believe it would be appropriate to adjust for INTELSAT's immunity from taxes by adding a surcharge for those taxes that would be payable to Comsat. The only appropriate adjustment for INTELSAT's tax immunity would be for it voluntarily to make payments in lieu of taxes to the appropriate federal and state taxing authorities, something which it has not agreed to do. Because we view any competitive distortion as being small, and of short duration, and because we believe the benefits of direct access far outweigh the costs, we are authorizing direct access without requiring a surcharge for taxes. (5) Fresh Look 117. A number of proponents of direct access ask that the Commission permit a "fresh look" at long term carrier contracts between Comsat and AT&T and MCI WorldCom for the acquisition of INTELSAT space segment capacity. Fresh look would allow these carriers to either renegotiate or terminate those contracts in view of the availability of direct access to INTELSAT. Fresh look proponents contend that the full benefits of direct access will not be achieved if AT&T and MCI WorldCom remain bound by contractual obligations secured by Comsat when it was the only provider of INTELSAT service in the United States. 118. The Commission has permitted the extraordinary remedy of fresh look in limited circumstances, to promote consumer choice and eliminate barriers to competition in markets where long-term business arrangements have essentially "locked up" service with a former monopoly telecommunications carrier. For example, the Commission initially applied fresh look in the 800 Portability Order, where it allowed AT&T customers to terminate inbound 800 service from AT&T without termination liability within 90 days of 800 numbers becoming portable. This prevented AT&T from leveraging its market power in 800 service to sell other services to its customers. As a further example, the Commission also permitted fresh look in the Special Access Expanded Interconnection Order, which permitted special access customers to terminate certain long-term special access arrangements with LECs if those customers wish to obtain the benefits of new, more competitive alternatives. There, the Commission recognized that previously established long-term access arrangements would prevent customers from obtaining benefits of the new, more competitive interstate access environment. 119. In applying the fresh look doctrine in these instances, the Commission considered: (1) whether the entity holding the long-term contracts has market power and has exercised that power to create long term contracts to "lock up" the market in such a way so as to create unreasonable barriers to competition; and (2) whether the contractual obligations can be nullified without harm to the public interest. 120. Fresh look proponents argue that a direct access policy meets these standards because: (1) Comsat's provision of INTELSAT would have been open to competition through direct access; and (2) pre- existing contracts or arrangements would prevent customers from obtaining the benefits of direct access, thus inhibiting the development of a competitive market. With elimination of Comsat's de facto monopoly on the provision of INTELSAT space segment service in the United States, fresh look would allow customers to break their commitment to long-term contracts offering terms that are much less favorable than those under direct access. Absent fresh look they contend that full competition will unlikely develop until after these contracts expire, which extend up to 15 years. They also contend that Commission implementation of fresh look in this proceeding would be consistent with its previous decisions in the 800 Portability Order and Special Access Expanded Interconnection Order. 121. Comsat opposes the adoption of fresh look. Comsat argues that prior Commission decisions allowing fresh look are inapplicable here and that the proponents of fresh look do not demonstrate that the criteria established by the Commission in applying fresh look in previous instances have been satisfied. Comsat states that the first test is not met because the Commission has determined that it lacks market power in most markets and that courts have also found that Comsat lacked power to compel carriers to enter into long term agreements. Comsat argues that the second test is not satisfied because imposing fresh look will not serve the public interest. First, Comsat argues that negating these contracts would undermine its own and INTELSAT's planning and procurement of the global satellite system, since this planning was based on customer commitments under these long-term contracts. It also contends that eliminating these contracts would also undermine the benefits that these contracts have served in helping lower prices for all customers. 122. Comsat also contends that prior decisions in which fresh look was granted suggest fresh look is not applicable here. Comsat states that fresh look was applied in the Expanded Interconnection proceeding because customers lacked competitive alternatives when they entered into contracts and required relief from their long-term obligations in order to be able to benefit from competition. In contrast, Comsat states that competitive alternatives to INTELSAT have been available for many years, and INTELSAT users have entered into alternative arrangements with fiber optic submarine cable operators as well as other space segment providers. Lockheed Martin states that fresh look was granted in the 800 Number Portability proceeding so customers who were dependent on a specific 800 number could not be leveraged by AT&T into long-term commitments. Lockheed Martin states, in contrast to individualized 800 numbers, international satellite capacity is fungible. 123. AT&T and MCI WorldCom entered into contracts with Comsat that expire in 2003. The contracts provide AT&T and MCI WorldCom with discounted rates for space segment capacity over Comsat's regular rates. The contracts represent approximately 50 percent of Comsat's revenues from the provision of INTELSAT service. We recognize that these long-term contracts prevent these carriers from taking full advantage of the benefits of direct access for that traffic already committed to long-term contracts. We find, however, that permitting Level 3 direct access does not meet the standards for applying fresh look. 124. Proponents of fresh look fail to meet the first test because the contracts have not "locked up" the market to such an extent that they create unreasonable barriers to competition. In the Comsat Non- Dominant Order, we noted that Comsat estimates that the three contracts represent approximately 25 percent of the U.S. switched voice service market. On a global basis Comsat now accounts for no more than a 15 percent average global market share of the transmission capacity utilized for switched-voice and private line services. This relatively low market share suggests that these long-term contracts have not acted as a barrier to further competition through fiber optic cable and satellite alternatives. While we found in the Comsat Non-Dominant Order that Comsat continues to be dominant in 63 thin route countries for switched voice and private line service, there is no evidence on the record in this proceeding to conclude that the existence of Comsat's long-term contracts create an unreasonable barrier to competition in these markets. We noted in the Comsat Non-Dominant Order, that the contracts only obligate AT&T and MCI WorldCom to transmit part of their international switched voice traffic using Comsat. We confirmed an earlier finding that Comsat's switched voice customers possessed significant bargaining power giving them the flexibility to route a significant portion of their switched voice traffic to their own transmission facilities or those of alternative carriers as they choose. 125. We also find that the public interest is not served by nullifying MCI WorldCom and AT&T contractual obligations to Comsat. The long-term contracts between AT&T, MCI WorldCom and Comsat represent the current agreements that resulted from our 1988 decision to eliminate imposition of circuit distribution guidelines on AT&T's use of international transmission circuits in undersea cable and satellite facilities. The purpose of the guidelines had been to require U.S. international carriers to use INTELSAT in order to assure fulfillment of the objective of the Communications Satellite Act of 1962 -- establishment and operation of a global communications satellite system. Until 1988, the Commission required substantial use of INTELSAT by AT&T and other carriers which also had investment interests in submarine cables. It abandoned this policy in favor of long-term contracts between Comsat and U.S. carriers that assured continued use of INTELSAT based on carrier need, free of regulatory interference. Reliance on long-term contracts in lieu of circuit distribution guidelines was jointly proposed by Comsat and AT&T, supported by other carriers and by the Executive Branch. Accordingly, these contracts have been the basis for Comsat to in turn make commitments to INTELSAT on the acquisition of space segment capacity to be used to fulfill capacity requirements under the contracts. In view of this history, we will not apply fresh look to these contracts. AT&T and MCI WorldCom entered into them on their own accord based on business judgment, their benefit in terms of the elimination of a Commission policy they found undesirable, and for the ability to obtain discounted rates for commitments to purchase capacity over a period of years. Direct access clearly will result in significant additional benefits to U.S. carriers in use of INTELSAT. Therefore, we do not believe it would be reasoned decision-making to upset previous commitments freely entered into by all parties that formed the basis of a change in longstanding Commission policy. The historical basis for these contracts makes the issue before us here distinguishable from other instances in which we imposed fresh look. (6) Portability 126. MCI WorldCom and Sprint ask the Commission to require portability of the INTELSAT space segment capacity controlled by Comsat. They argue that portability is needed to ensure that commitments for space segment capacity between Comsat and INTELSAT do not impair the implementation of direct access because Comsat has ownership of the vast majority of INTELSAT capacity accessible by U.S. users. Without direct access carriers and users being able to obtain sufficient space segment capacity to provide INTELSAT services, Comsat will maintain its de facto monopoly status. MCI WorldCom states that requiring portability is consistent with the Commission's obligation under the Satellite Act to "ensure that all present and future authorized carriers shall have nondiscriminatory use of, and equitable access to" INTELSAT. It contends that portability of INTELSAT capacity is even more essential than number portability for local telephone service because a direct access customer cannot operate at all without availability of INTELSAT capacity. 127. Comsat opposes the Commission consideration of portability because the issue was not raised in the Notice, and thus would violate APA procedures. Comsat also maintains that since there is no factual case for fresh look, by definition there is no case for portability either. Both Comsat and Lockheed Martin note that portability has not been required in other countries where direct access has been authorized. While INTELSAT has established procedures for direct access, nowhere in these procedures are applicants for direct access permitted to assume a right to the existing capacity allotments of Signatories. Comsat states that portability would mean that Comsat would be forced to surrender INTELSAT capacity which it has already reserved for its own use under long-term "take or pay" contractual commitments to INTELSAT. Comsat states that neither the Commission nor any other national regulatory authority has the ability to abrogate the service arrangements between INTELSAT and its Signatories. Finally, Comsat argues that other cases of portability are not comparable. It asserts that 800 number portability and local number portability are not similar to direct access, as capacity on INTELSAT satellites is entirely fungible with capacity on rival satellite or cable systems. 128. We find that the record in this proceeding does not support at this time requiring the portability of INTELSAT space segment capacity controlled by Comsat. The proponents of portability have provided no evidence to support their contention that INTELSAT will be unable to provide sufficient capacity to U.S. direct access customers. Absent evidence that INTELSAT has insufficient capacity, we do not wish to interfere with Comsat's service agreements with INTELSAT. We would, however, be concerned if Comsat control of INTELSAT space segment capacity effectively denies U.S. carriers and users the benefits of direct access, or if Comsat moves to increase its control of INTELSAT capacity in order to deny availability of capacity to U.S. direct access users. We therefore may revisit this issue if there is evidence of insufficient capacity available to direct access customers or that Com