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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) ntta.com inc. ) File No. ITC-97-528 ) Application for Authority under ) Section 214 of the Communications ) Act of 1934, as amended, to Resell ) Non-Interconnected Private Line ) Service between the United States ) and Japan ) ORDER, AUTHORIZATION AND CERTIFICATE Adopted: January 23, 1998 Released: January 26, 1998 By the Chief, Telecommunications Division: I. INTRODUCTION 1. In this Order, we grant ntta.com inc. ("ntta.com") authority, pursuant to Section 214 of the Communications Act of 1934, as amended, to resell non-interconnected international private lines ("IPLs'") between the United States and Japan. We previously found that, on balance, Japan provides U.S. carriers effective competitive opportunities to resell non-interconnected IPL services in Japan. We reaffirm that finding here. We have reviewed our analysis of the market conditions in Japan in light of the affiliation of ntta.com with Nippon Telegraph and Telephone Corporation ("NTT"). We conclude that authorizing ntta.com to provide non-interconnected IPL services will serve the public interest, providing additional choice for consumers leading to heightened price and service competition and thus improving competition in the U.S. international services market. II. BACKGROUND 2. Ntta.com is a wholly-owned subsidiary of NTT America, Inc. ("NTT America"), which in turn is a wholly-owned subsidiary of NTT, a corporation which is organized and operated under the laws of Japan and which provides domestic facilities-based telecommunications services in Japan. NTT has recently been authorized by the Ministry of Posts and Telecommunications ("MPT") to provide international services through a subsidiary, NTT Worldwide Telecommunications Corporation ("NTT Worldwide"). 3. On October 3, 1997, we granted ntta.com authority pursuant to Section 214 of the Act to provide facilities-based and resold switched and private line services to all eligible international points, except Japan and Sri Lanka. On September 4, 1997, ntta.com filed an application to obtain section 214 authority to resell non-interconnected IPLs to Japan without seeking classification at this time as a non-dominant carrier. Ntta.com requested a capacity of four T3 circuits in connection with its application. We received no petitions in opposition to this application. III. DISCUSSION 4. Ntta.com's affiliation with a foreign carrier in Japan with market power requires us to review its application under the framework established in the Commission's Foreign Carrier Entry Order. In that Order, the Commission stated that carriers seeking to provide international services to countries in which they have an affiliate with market power must demonstrate that the affiliated market offers effective competitive opportunities ("ECO") for U.S. carriers seeking to offer like services. The Commission also stated in the Foreign Carrier Entry Order that it will continue to consider other public interest factors that may weigh in favor of, or against, granting the application. 5. Ntta.com concedes that its application is subject to an ECO analysis. While we concluded in the KDD America Order that ECO existed in Japan for non-interconnected IPL service, our analysis focused on KDD's market position and its ability to discriminate in favor of its affiliate, KDD America. We did not focus on the major role played by ntta.com's affiliate, NTT, in the Japanese market. In this Order, we conclude that, although there are significant concerns arising from NTT's market position and government ownership, we continue to find that, on balance, Japan offers ECO for the resale of non-interconnected IPLs. We also find no additional public interest reasons to deny the application and conclude that we should grant the application. Finally, we determine that, while ntta.com should be granted entry to the U.S. market, it must be regulated as dominant for its service to Japan because its affiliate, NTT, possesses sufficient market power in the underlying facilities-based market to enable it to discriminate against competing IPL resellers. A. EFFECTIVE COMPETITIVE OPPORTUNITIES ANALYSIS 6. We analyze the resale IPL market because the ECO analysis requires us to look at whether the destination country, Japan, offers ECO for U.S. carriers offering like services, which in this case is resale of non-interconnected IPLs. Under the ECO analysis framework established in the Foreign Carrier Entry Order, we examine the: (1) legal ability of U.S. carriers to provide the relevant service in the destination market where the applicant possesses market power; (2) practical barriers to entry, including the existence of reasonable and nondiscriminatory charges, terms and conditions for the provision of such service; (3) competitive safeguards to protect against anticompetitive and discriminatory practices affecting the service including fair and transparent regulatory procedures; and (4) separation between the regulator and operator of international services. 1. Resale Entry 7. The first factor we consider is the legal ability of U.S. carriers to provide the relevant service in the destination market where the applicant possesses market power. In the KDD America Order, we concluded that Japan affords open entry for U.S.-based non-interconnected IPL resale carriers due to the absence of legal, regulatory or other restrictions on foreign or U.S. companies entering this market and minimal licensing barriers. Our conclusion was supported by the presence of non-Japanese carriers operating in Japan. Nothing in the record causes us to question that conclusion and therefore we find the first element of the ECO test to be satisfied. 2. Interconnection 8. The second factor we consider is whether there are reasonable and nondiscriminatory charges, terms and conditions for local termination of international services in Japan. In addition, there must be adequate means to monitor and enforce these conditions. Thus, in the context of non- interconnected IPL services, we consider whether local private line termination terms and conditions are publicly available on a nondiscriminatory basis at reasonable prices. Publication of such terms and conditions hinders a foreign carrier from favoring its affiliated U.S. carrier over competing unaffiliated carriers in terms of both economic and technical local termination access to its facilities. We emphasize that NTT's switched per minute interconnection rates are not at issue in the context of non-interconnected IPL resale services. Therefore, we need not consider the concerns with NTT's high interconnection rates at this time. 9. NTT has market power in the domestic market for terminating private lines. Nonetheless, ntta.com argues that U.S. resellers can and do obtain inter-city and local private line circuits needed to provide service on reasonable terms and conditions and without discrimination. To support this, ntta.com contends that the statutory and regulatory scheme in Japan extends access on a nondiscriminatory basis to all Special Type II carriers without regard to foreign ownership to the private line circuits of Type I carriers throughout Japan. Ntta.com cites to the Telecommunications Business Law ("TBL") and MPT regulations, noting the TBL guarantees Special Type II carriers nondiscriminatory access to the facilities of all Type I carriers and MPT's ability to investigate and remedy any discrimination. In addition, ntta.com points to MPT's authority to review intercarrier contracts to ensure that the terms and conditions are reasonable and nondiscriminatory, as well as to order any Type I carrier to provide the necessary capacity to a Special Type II carrier if negotiations fail to be conducted or agreement cannot be reached. Finally, ntta.com notes that inter-city and local leased line rates are set on the basis of MPT's detailed cost-allocation rules and are closely reviewed by MPT. 10. Our conclusion in the KDD America Order to authorize KDD to provide non- interconnected IPL resale was based in part on the KDD's lack of presence in the local market and the fact that NTT had an insufficient ownership interest in KDD to give NTT an incentive to favor KDD in providing terminating private line services. But NTT has more than 95 percent of the local services market and 60 percent of the domestic long distance market. At the same time, it owns 100 percent of ntta.com. So NTT's ability and incentive to discriminate in favor of its U.S. affiliate are much greater than KDD's. Ntta.com points to the existence of alternative carriers to NTT from which resellers can obtain the necessary lines. But these "new common carriers" have only a token presence in the local market. In the domestic long distance market, none of the new common carriers has significant market share. This is evident from the fact that NTT's private line rates remain extremely high, particularly compared to those of the United States. We therefore look to see whether there are adequate safeguards in place to prevent NTT from favoring ntta.com in terminating private line service. 11. Ntta.com points to the structural separation requirements imposed on NTT and ntta.com. We also note that MPT has the power to review intercarrier contracts to ensure that the terms and conditions are reasonable and nondiscriminatory and that MPT can require any Type I carrier to provide the necessary capacity to Special Type II carriers at the request of a party if negotiations fail to be conducted or agreement cannot be reached. There are now 78 Type II carriers registered with MPT, 56 of which are Special Type II carriers providing international services. This is a significant increase from the 32 resellers operating in Japan when we issued the KDD America Order. The number of new market entrants leads us to conclude that IPL resellers are able to obtain access to domestic IPL termination offerings at prices that make service possible in Japan despite the relatively high private line rates. We also find support for this conclusion in the absence of any objections to this application. Therefore, we conclude that the second prong of ECO is satisfied. 3. Competitive Safeguards 12. The third factor we examine is whether competitive safeguards exist to protect against anticompetitive and discriminatory practices affecting non-interconnected IPL resale. The safeguards we consider important include: (1) the existence of cost-allocation rules to prevent cross- subsidization; (2) timely and nondiscriminatory disclosure of technical information needed to use, or interconnect with, carriers' facilities; and (3) protection of carrier and customer proprietary information. 13. Cross-Subsidization. We are concerned that, absent adequate competitive safeguards, NTT could favor ntta.com by subsidizing its competitive offerings. The question is whether there are adequate safeguards in place to prevent such action. Ntta.com points to accounting safeguards in the TBL; detailed cost-allocation rules promulgated by MPT; and MPT review of Type I carrier cost data and charges. In addition, ntta.com argues that the stringent structural separation rules imposed by MPT on NTT and NTT Worldwide prohibit NTT from gaining any improper advantage over other carriers through cross-subsidization. 14. We note that NTT Worldwide and ntta.com are separate corporations from NTT and that MPT has imposed conditions regarding their relationship with NTT, including a requirement for NTT to provide identical treatment to other companies. In addition, NTT Worldwide and ntta.com must take service from NTT pursuant to non-tariff-based contracts at the same rates as other Special Type II carriers or end-user customers who subscribe to service under tariff. Furthermore, we note that MPT has promulgated cost-allocation rules and other regulations that require NTT to keep accounts in accordance with prescribed procedures. Finally, we note that MPT must approve all charges for services of Type I carriers; requires charges to be fair, impartial and nondiscriminatory in consideration of proper costs; and has the authority, specifically with regard to NTT, to appoint auditors and audit specific items. There is nothing in the record of this proceeding to indicate that existing safeguards are inadequate to prevent NTT from subsidizing the offerings of ntta.com. We note however, that NTT has only just begun to restructure so it is difficult to say whether current safeguards will indeed be adequate. While we conclude for now that there are sufficient safeguards in place to prevent anticompetitive cross-subsidization by NTT, we will closely monitor the relationship between NTT, NTT Worldwide and ntta.com to ensure that those safeguards are actually effective. 15. Disclosure of Network Information. Ntta.com points to a number of reasons why competitors have access to the network information needed to use or interconnect with NTT's facilities. First, NTT maintains a central resource for technical information about NTT's network. In addition, the TBL requires NTT to specify and release technical information in its tariffs and to provide necessary information upon request. MPT can also order NTT to rectify its operations when the carrier hinders other carriers' operations. We found in the KDD America Order that the regulations governing NTT's disclosure of network information were sufficient to satisfy this prong of the ECO test and there is no evidence in the record that this conclusion was incorrect. 16. CPNI Safeguards. Ntta.com states that customer proprietary network information ("CPNI") is strictly protected in Japan under the TBL and through MPT regulations. MPT requires NTT to establish internal procedures to protect CPNI, through the creation of a separate division within NTT for CPNI matters and the maintenance of controls upon dissemination of CPNI within NTT and to the public. In addition, ntta.com points out that MPT can enforce CPNI rules in a number of ways. Finally, ntta.com notes that one of the conditions imposed by the law authorizing establishment of NTT Worldwide is nondiscriminatory treatment with regard to the provision of customer information and other information. We conclude that these CPNI rules governing NTT are adequate to prevent NTT from misusing customer proprietary information to benefit NTT Worldwide or ntta.com. 17. In the absence of any evidence in the record to the contrary, we conclude that Japan's competitive safeguards are sufficient, on balance, to prevent NTT from discriminating against unaffiliated IPL resale carriers. The structural separation and other requirements imposed on NTT and NTT Worldwide by MPT, if fully enforced, are important safeguards against anticompetitive activity. MPT also has other powers to address problems regarding discrimination or cross-subsidy that might arise. We note again, however, that NTT is just beginning to restructure. We will be watching the outcome of restructuring carefully and if we receive information contradicting our conclusion, we will reconsider this finding. Based on the record, however, we find that Japan's rules are sufficient to satisfy this element of the ECO test for the non-interconnected IPL resale market. 4. Regulatory Framework 18. The fourth factor of the ECO analysis is whether there is an effective regulatory framework in the destination country to develop, implement and enforce legal requirements, interconnection arrangements and other competitive safeguards. There must be sufficient separation between the operator and the regulator to ensure that the regulator is independent, empowered, and does not have a conflict of interest in regulating the operator. Transparent procedures are important also to allow competitors to know precisely what obligations are required of the dominant carrier and what rights they have to seek enforcement of such obligations. Fair and transparent procedures that allow public input into the decision-making process help ensure that the resulting rules are effective and nondiscriminatory. 19. We have expressed concern in the past that MPT is not sufficiently separate from operators in Japan. This is particularly the case with NTT because the Government of Japan continues to own two-thirds of NTT. Ntta.com argues that government ownership does not affect MPT regulation of NTT because NTT shares are held by the Ministry of Finance and not MPT. We conclude, however, that this fact does not significantly reduce the possibility that MPT may favor NTT because of the Japanese Government's interest in the carrier. The Government of Japan retains an enormous financial interest in NTT that cannot help but shape MPT policy towards NTT. 20. There are, however, a number of reasons advanced by ntta.com that lead us to conclude that there are constraints on MPT's ability to grant NTT or ntta.com preferential treatment. The TBL was amended in June 1997 to require nondiscriminatory and cost-based interconnection and give MPT the power to enforce these interconnection obligations. The amended TBL also mandates new complaint and hearing procedures related to MPT's enforcement of interconnection obligations. There are also requirements in the TBL for public participation in cases, such as complaints that a Type I carrier has engaged in improper discrimination against a Special Type II carrier. The record indicates that MPT has the power to address problems through tariff review and arbitration. Furthermore, given the competitiveness of the IPL resale market, we conclude that MPT appears to be sufficiently effective in its enforcement and regulatory activities affecting IPL resale. We will continue, however, to monitor whether MPT does in fact grant NTT preferential treatment and whether MPT takes adequate action to remedy any anticompetitive conduct that might occur. 21. On balance, we find that Japan satisfies the ECO test for the limited field of resale of non-interconnected IPLs. Although we continue to be concerned about the lack of separation of MPT and NTT and the possibility that NTT could favor NTT Worldwide or ntta.com, there is no evidence in the record that this lack of separation is currently adversely affecting the ability of non- interconnected IPL resellers to compete in the Japanese market. Thus, we reaffirm that Japan offers effective competitive opportunities to U.S. carriers wishing to offer non-interconnected IPL resale. B. OTHER PUBLIC INTEREST FACTORS 22. The additional public interest factors that we consider include the general significance of the proposed entry to the promotion of competition in the U.S. telecommunications market and any national security, law enforcement, foreign policy or trade concerns raised by the Executive Branch. We find that there are no countervailing public interest reasons to deny grant of NTT's application. The Executive Branch has not raised any national security, law enforcement, foreign policy or trade with this application. We also believe that U.S. consumers will benefit by authorization of a new non-interconnected IPL reseller serving Japan. IV. CONCLUSION 23. We find that grant of authorization to ntta.com to resell non-interconnected IPL circuits for service to Japan is in the public interest and consistent with Section 214 of the Act. As a result of ntta.com's affiliation with NTT, we will classify ntta.com as dominant on the U.S.-Japan route for providing IPL resale services. Authorizing ntta.com to provide non-interconnected IPL resale service to Japan will benefit U.S. consumers by adding an additional resale carrier on the U.S.- Japan route. V. ORDERING CLAUSES 24. In view of the foregoing, IT IS HEREBY CERTIFIED that the present and future public convenience and necessity require grant of this application. 25. Accordingly, IT IS ORDERED that application File ITC-97-528 IS GRANTED and ntta.com is authorized to resell international four T3 circuits not interconnected to the public switched network for the provision of international private line service between the United States and Japan. 26. It is FURTHER ORDERED that ntta.com will be regulated as a dominant carrier pursuant to Section 63.10 of the Commission's rules, 47 C.F.C.  63.10, and will comply with the requirements of paragraph (c) of that section. 27. It is FURTHER ORDERED that ntta.com shall comply with Section 203 of the Act, 47 U.S.C.  203, Part 61 and Sections 43.51 and 43.61 of the Commission's Rules, 47 C.F.R. Part 61 and  43.51 and 43.61, and shall file annual reports of circuit additions in accordance with the requirements set forth in Rules for Filing of International Circuit Status Reports, CC Docket No. 93- 157, Report and Order, 10 FCC Rcd 8605 (1995). 28. It is FURTHER ORDERED that this authorization of ntta.com is limited to the resale of non-interconnected private line service only between the United States and Japan, that is, private lines that originate in the United States and terminate in Japan, or that originate in Japan and terminate in the United States. In addition, ntta.com may not -- and ntta.com's tariffs must state that its customers may not -- connect private lines provided over these facilities to the public switched network at either the U.S. or Japanese end or both, for the provision of international switched basic services, unless authorized to do so by the Commission. 29. This Order is issued under Section 0.261 of the Commission's Rules, 47 C.F.R.  0.261, and is effective upon adoption. Petitions for reconsideration under Section 1.106, 47 C.F.R.  1.106, or applications for review under Section 1.115 of the Commission's Rules, 47 C.F.R.  1.115, may be filed within 30 days of the date of the public notice of this Order, Authorization and Certificate (see 47 C.F.R.  1.4(b)(2)). FEDERAL COMMUNICATIONS COMMISSION Diane Cornell Chief, Telecommunications Division