Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-97-01620/USCOURTS-caDC-97-01620-0/pdf.json

Parties Involved:
Federal Communications Commission
Respondent
Telstra Corporation Limited
Petitioner
United States of America
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 23, 1998 Decided January 12, 1999

No. 97-1612

Cable & Wireless P.L.C.,

Petitioner

v.

Federal Communications Commission and

United States of America,

Respondents

Sprint Corporation, et al.,

Intervenors

Consolidated with

Nos. 97-1613, 97-1614, 97-1615, 97-1620, 97-1621,

97-1640, 97-1643, 97-1652, 97-1655

On Petitions for Review of an Order of the

Federal Communications Commission

---------

Philip V. Permut argued the cause for petitioners Cable &

Wireless, P.L.C., et al. Clifford M. Sloan argued the cause

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for petitioners GTE Service Corporation, et al. With them on

the joint briefs were Robert J. Aamoth, R. Michael Senkowski, M. Edward Whelan, III, Gail L. Polivy, Gregory C.

Staple, R. Edward Price, Jonathan Jacob Nadler, Kenneth S.

Geller and Erika Z. Jones. Donald M. Falk, Harold S.

Reeves and Joan M. Griffin entered appearances.

Alan Y. Naftalin, Gregory C. Staple and R. Edward Price

were on the briefs for petitioner Telstra Corporation Limited.

Joel Marcus, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the

brief were Joel I. Klein, Assistant Attorney General, U.S.

Department of Justice, Robert J. Wiggers and Robert B.

Nicholson, Attorneys, Christopher J. Wright, General Counsel, Federal Communications Commission, and John E. Ingle,

Deputy Associate General Counsel.

David W. Carpenter argued the cause for intervenors

AT&T Corporation, et al. With him on the brief were Gene

C. Schaerr, Mark C. Rosenblum, James J.R. Talbot, Ann M.

Kappler, Matthew B. Pachman, Leon M. Kestenbaum, H.

Richard Juhnke and Robert S. Koppel. Ann J. LaFrance

and John M. Scorce entered appearances.

Philip V. Permut, Robert J. Aamoth, Raul R. Rodriguez,

Jeffrey P. Cunard and Lothar A. Kneifel were on the joint

briefs for intervenors from developing countries. Joan M.

Griffin entered an appearance.

Before: Randolph and Tatel, Circuit Judges and Buckley,

Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: In order to strengthen the bargaining position of domestic telecommunications companies in

negotiations with their foreign counterparts over the price of

completing international long-distance calls, the Federal

Communications Commission issued an Order prohibiting

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U.S. companies from paying more than certain benchmark

rates for such "termination" services. Petitioners, a group of

foreign telecommunications companies, claim that the Commission lacks authority to issue the Order and that the

benchmark rates are unreasonable. Rejecting petitioners'

argument that the Order directly regulates foreign carriers

as well as their alternative argument that it unlawfully regulates domestic carriers, we hold that the Order was a valid

exercise of the Commission's regulatory authority under the

Communications Act. We also hold that because the record

shows that the Commission justified its method for calculating rates, and because petitioners failed to demonstrate that

the rates do not adequately compensate foreign carriers for

providing termination services, the Order was neither unsupported by substantial evidence nor arbitrary or capricious.

Rejecting petitioners' other challenges, we uphold the Order

in its entirety.

I

Completion of international telephone calls requires the

cooperation of several telephone companies in different countries. When a U.S. caller places a call to Japan, for example,

the call is first connected to a local telephone company, such

as Bell Atlantic, which then passes it to a domestic longdistance carrier, such as AT&T or MCI, which in turn passes

it to a Japanese telephone company, which then completes or

"terminates" the call to its recipient. The foreign carrier

terminates the call pursuant to an operating agreement with

the domestic carrier. The operating agreement contains an

"accounting rate," which is the price the two telephone companies have negotiated for handling each minute of international long-distance service. The FCC requires the two

carriers to divide the accounting rate evenly; each carrier's

share of the accounting rate is called the "settlement rate."

For example, if the accounting rate between a U.S. carrier

and a Japanese carrier is $1 per minute, the U.S. carrier

would pay the Japanese carrier a settlement rate of $0.50 per

minute to terminate calls from the United States to Japan.

Likewise, the Japanese carrier would pay the U.S. carrier

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$0.50 per minute for each call originating in Japan and

terminating in the United States.

Instead of paying each other every time a call is made,

domestic and foreign telephone companies make payments at

scheduled times on an aggregate net basis. Suppose in our

example that during a specified settlement period, U.S. callers make 500 minutes of calls to Japan, while Japanese callers

make 300 minutes of calls to the United States. Because

there are 200 minutes of net calling outflow from the United

States to Japan, U.S. carriers will make a net settlement

payment to their foreign counterparts of $100 ($0.50 per

minute times 200 minutes). The calling outflow from the

United States to all foreign countries except for Canada and

Cuba typically exceeds the amount of traffic going the other

direction. Thus, in the aggregate, net settlement payments

consistently run from U.S. to foreign carriers.

Although the U.S. telecommunications industry has become

more competitive, the industry remains non-competitive in

much of the rest of the world. This competitive differential

has two important consequences for this case. First, in

negotiating settlement rates, foreign monopoly carriers can

pit competing U.S. carriers against one another, exploiting

the fact that U.S. carriers unwilling to pay settlement rates

demanded by foreign carriers will lose business on those

routes to higher-bidding domestic competitors. Known as

"whipsawing," this practice drives up the price of termination

services to levels that exceed not only actual costs, but also

the price that foreign carriers charge their own subscribers

for comparable local services. Through excessive net

settlement payments to foreign carriers, U.S. carriers

and their U.S. customers effectively subsidize

government-owned telephone services in foreign countries.

The Commission estimates that in 1996, 70% of the $5.4

billion in total U.S. settlement payments, or $3.78 billion,

represented an above-cost subsidy from U.S. consumers to

foreign carriers.

Second, foreign carriers with U.S. affiliates can use their

monopoly power to distort competition in the United States.

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This occurs when a foreign carrier and its U.S. affiliate act

together as an integrated firm, competing in the U.S. market

as a provider of international long-distance services while

serving as a monopoly supplier of a necessary input, i.e.,

termination services in the foreign country. By extracting

above-cost settlement rates from U.S. carriers, the foreign

carrier enables its U.S. affiliate to undercut its competitors,

since the above-cost portion of the settlement rate is essentially an internal transfer for the foreign-affiliated U.S. carrier; for other competitors, it represents a real cost. Economically, this "price squeeze" behavior has the same effect as if

the foreign carrier engaged in price discrimination by charging its U.S. affiliate a lower settlement rate than it charged

all other U.S. carriers.

The FCC has long sought to protect U.S. carriers and U.S.

consumers from the monopoly power wielded by foreign

telephone companies in the international telecommunications

market. In 1980, the Commission adopted a Uniform Settlements Policy, requiring that all domestic carriers on a given

international route establish the same accounting rate with

the foreign correspondent, that all settlement rates equal 50%

of accounting rates, and that each domestic carrier carry

incoming traffic on the route in proportion to its share of

outgoing traffic. See Uniform Settlement Rates on Parallel

International Communications Routes, 84 F.C.C.2d 121

(1980). Although this policy initially applied only to international telegraph and telex services, the Commission extended

it to international telephone service in 1986. See Common

Carrier Services; Implementation and Scope of the Uniform

Settlements Policy, 51 Fed. Reg. 4736 (1986). These measures helped prevent foreign carriers from whipsawing competing U.S. carriers. But because they did not deter foreign

carriers from charging above-cost settlement rates, the Commission issued further orders encouraging domestic carriers

to negotiate cost-based settlement rates. See Regulation of

International Accounting Rates, 6 F.C.C.R. 3552, 3552 p 1

(1991) (report & order) (adopting "procedural reforms that

remove any U.S. regulatory impediments to lower, more

economically efficient, cost-based international accounting

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rates"); Regulation of International Accounting Rates, 7

F.C.C.R. 8040 (1992) (second report & order) (setting voluntary benchmark settlement rates).

In 1997, finding that its efforts to date had not driven

settlement rates to cost-based levels, the Commission issued

the Order challenged here, mandating the maximum settlement rates that U.S. carriers may pay to their foreign

counterparts. See International Settlement Rates, 12

F.C.C.R. 19,806 (1997) (report & order). According to the

Commission, its primary concern in issuing the Order was

"not ... the absolute level of U.S. net settlement payments

per se or the contribution of settlement payments to the U.S.

trade deficit," but rather "the extent to which those payments

reflect rates that substantially exceed the underlying costs of

providing international termination services." Id. at 19,822-

23 p 36. "[A]bove-cost settlement rates," the FCC explained,

"contribute to the inflated rates paid by U.S. consumers for

international services, create the potential for competitive

distortions in the U.S. market for [international telephone

service], and produce inefficiencies in the global telecommunications market." Id. at 19,823 p 36. While acknowledging

that "changing market conditions have ... helped to reduce

settlement rates," the Commission determined that "[m]onopoly conditions prevail in most [foreign countries]" and that

benchmark rates are necessary to ensure "reduc[tion] [of]

settlement rates on a timely basis to a more cost-based level."

Id. at 19,824-25 p 39.

Under the FCC's Order, the settlement rates negotiated by

U.S. carriers may not exceed $0.15 per minute for foreign

carriers in upper income nations (per capita GNP of $8,956 or

more), $0.19 per minute for foreign carriers in middle income

nations (per capita GNP between $726 and $8,955), and $0.23

per minute for foreign carriers in lower income nations (per

capita GNP of less than $726). See id. at 19,850 p 90, 19,860-

61 p 111. Unable to obtain actual termination cost data from

foreign carriers, the Commission calculated these benchmark

rates using a "tariffed components price" methodology, which

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tension--necessary to complete international long-distance

calls. See id. at 19,827-50 pp 45-89. According to the FCC,

the benchmarks "are substantially below most prevailing

settlement rates and represent progress toward achieving

cost-based rates." Id. at 19,827 p 44. At the same time, the

Commission claims, the rates are high enough to compensate

foreign carriers for their termination costs. See id. If not,

"any carrier may ask [the Commission] to reconsider, in a

specific case, the benchmarks on the grounds that they do not

permit the carrier to recover [its costs]." Id. at 19,842 p 74.

The Order allows U.S. carriers to achieve compliance with the

benchmark rates over a transition period of one to four years,

depending on the per capita income of the foreign country in

which the negotiating foreign carrier operates. See id. at

19,885 p 165.

The Order also contains special provisions applicable only

to foreign-affiliated U.S. carriers. Under existing FCC rules,

"a U.S. carrier is considered to be affiliated with a foreign

carrier when a foreign carrier owns a greater than twentyfive percent interest in, or controls, the U.S. carrier." Id. at

19,901 n.358 (citing 47 C.F.R. s 63.18(h)(1)(i) (1997)). In

order to prevent such carriers from engaging in price squeeze

behavior, the Order requires them to comply immediately

with the benchmarks as a condition of obtaining approval to

provide international long-distance service to the affiliated

country. See id. at 19,901 p 207.

Petitioners, various parties representing over 100 foreign

governments, regulators, and telecommunications companies,

challenge the Order on several grounds. First and foremost,

they claim that the FCC, by limiting the settlement rates

that foreign carriers may charge U.S. carriers, has asserted

extraterritorial jurisdiction over foreign carriers and foreign

telecommunications services, thereby exceeding its authority

under the Communications Act and the International Telecommunications Union Treaty. Petitioners further argue

that even if the Order does not regulate foreign carriers, it

unlawfully regulates domestic carriers by restricting the

prices they may pay to non-FCC-regulated entities. Petitioners also argue that the benchmark settlement rates are

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arbitrary, capricious, and unsupported by substantial evidence, and that the Commission's restrictions on foreignaffiliated U.S. carriers are unlawfully discriminatory and inadequately justified. Finally, a single petitioner, Telstra

Corporation, contends that the FCC violated the Administrative Procedure Act by failing to respond to comments urging

the Commission to curb allegedly anti-competitive practices

of U.S. carriers in providing Internet-related telecommunication services. We take up each claim in turn.

II

We begin with petitioners' complaint that the FCC's Order

unlawfully asserts regulatory authority over foreign telecommunications services and foreign carriers wishing to serve the

U.S. market. According to petitioners, the Commission issued the Order to force foreign carriers to reduce their

settlement rates. Because "it is clearly within the interest of

a U.S. international carrier to negotiate rates at or below the

relevant benchmark," 12 F.C.C.R. at 19,894 p 186, petitioners

argue, it is implausible to characterize the Order as imposing

any regulatory burdens on domestic carriers. Petitioners

point to the FCC's enforcement scheme as confirmation that

the Order directly regulates foreign carriers. "When a foreign [carrier] fails to respond to a U.S. international carrier's

efforts to achieve a settlement rate that complies with the

[benchmarks]," the Order permits the domestic carrier to file

a petition with the FCC "request[ing] enforcement measures." Id. The complaining U.S. carrier must serve its

petition on the uncooperative foreign carrier, which then has

35 days to respond. See id. These procedures, petitioners

argue, effectively treat foreign carriers as defendants in a

lawsuit, exposing them to enforcement actions that would

directly or indirectly compel them to accept lower settlement

rates.

The Communications Act authorizes the Commission to

regulate "foreign telecommunications." See 47 U.S.C.

ss 152(a), 201. The Commission claims no authority to directly regulate foreign carriers. See id. at 19,951 p 312 ("We

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at no time in this Order assert that we have the authority to

compel directly a foreign carrier to charge a certain rate for

terminating U.S.-originated traffic."). Instead, the Commission explained that "the rules we adopt here apply only to the

settlement rates that carriers subject to our jurisdiction may

pay for termination of U.S.-originated traffic." Id. Since

neither the statute nor legislative history makes clear whether the Commission regulates domestic or foreign carriers

when it prescribes settlement rates, we must sustain the

Commission's view as long as the Order reasonably represents an exercise of its statutory authority to regulate domestic carriers engaged in foreign telecommunications. See

Chevron U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837, 842-43 (1984).

We recognize that regulating what domestic carriers may

pay and regulating what foreign carriers may charge appear

to be opposite sides of the same coin. But by focusing only

on the Order's effects on foreign carriers, petitioners overlook

the crucial economic reality that makes the Commission's

position that it is only regulating domestic carriers reasonable: Because domestic carriers operate in a competitive

market, they face a serious dilemma when they bargain with

monopolist foreign carriers. As a group, U.S. carriers would

be best off if each decided not to accept settlement rates

higher than FCC benchmarks. But if one U.S. carrier maintained this position to the point of impasse in negotiations

with a foreign carrier, a competing U.S. carrier would make

the foreign carrier a higher offer. As the intervenors on

behalf of the FCC explain, the Order "requir[es] domestic

carriers to take 'a unified bargaining position,' and thereby

prevent[s] each carrier from acting in its own self-interest."

Intervenors' Br. at 15 (quoting Atlantic Tele-Network, Inc. v.

FCC, 59 F.3d 1384, 1386 (D.C. Cir. 1995)). Indeed, contrary

to petitioners' claim that the enforcement scheme targets

foreign carriers, the Order authorizes "enforcement measures

... to ensure that no U.S. carrier pays that foreign correspondent an amount exceeding the lawful settlement rate

benchmark." 12 F.C.C.R. at 19,894 p 186 (emphasis added).

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Far from threatening foreign carriers with enforcement actions, the Order at most states that the FCC will contact

"responsible [foreign] government authorities" to "seek their

support in lowering settlement rates." Id. at 19,893 p 185.

Given the structure of the global telecommunications industry

and its resulting incentives, we find reasonable the Commission's view that the Order regulates domestic carriers, not

foreign carriers.

To be sure, the practical effect of the Order will be to

reduce settlement rates charged by foreign carriers. But the

Commission does not exceed its authority simply because a

regulatory action has extraterritorial consequences. See Radio Television S.A. de C.V. v. FCC, 130 F.3d 1078, 1082 (D.C.

Cir. 1997); R.C.A. Communications, Inc. v. United States, 43

F. Supp. 851, 854-55 (S.D.N.Y. 1942); In re Mackay Radio &

Telegraph Co., 2 F.C.C. 592, 598-99 (1936). Indeed, no canon

of administrative law requires us to view the regulatory scope

of agency actions in terms of their practical or even foreseeable effects. Otherwise, we would have to conclude, for

example, that the Environmental Protection Agency regulates

the automobile industry when it requires states and localities

to comply with national ambient air quality standards, or that

the Department of Commerce regulates foreign manufacturers when it collects tariffs on foreign-made goods.

We thus hold that the Commission's Order does not regulate foreign carriers or foreign telecommunications services

and therefore does not violate the Communications Act. For

the same reason, we reject petitioners' claim that the Order

violates the doctrine of "half-circuit jurisdiction," which allows

the Commission to exercise jurisdiction over international

calls only from a point within the United States to the

midpoint between the United States and the foreign country.

By capping the amount that U.S. carriers may pay for foreign

termination services, the Commission has not thereby regulated those services.

Nor does the Order violate the International Telecommunications Union treaty regime, International Telecommunications Regulations, S. Treaty Doc. 102-13 (Melbourne 1988).

Although the treaty provides that carriers "shall by mutual

agreement establish and revise accounting rates to be applied between them," id. s 6.2.1; see id. s 1.5 (same), a

separate provision "recognize[s] the right of any member,

subject to national law ... to require that administrations

and private operating agencies, which operate in its territory

and provide an international telecommunication service to the

public, be authorized by that member," id. s 1.7(a). We

agree with the Commission that "[t]he right to authorize a

carrier to provide service in a given country necessarily

includes the right to attach reasonable conditions to such

authorization" to safeguard the public interest. 12 F.C.C.R.

at 19,950 p 311. Indeed, the treaty's preamble makes clear

that "it is the sovereign right of each country to regulate its

telecommunications." ITU Regulations (preamble).

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Petitioners contend that the Order frustrates international

comity because it subjects foreign carriers to conflicting

obligations if their governments prescribe minimum settlement rates that exceed the maximum rates allowed by the

FCC. But since no foreign carrier in this litigation has

complained that it actually faces such a predicament, we see

no need to decide whether the Order would be valid in such

circumstances. In any event, we note that during the rulemaking process, both the U.S. Department of State and the

U.S. Trade Representative filed comments supporting the

Order.

III

Having concluded that the Order regulates domestic carriers, not foreign carriers, we turn to petitioners' alternative

claim that the Commission lacks authority to set the prices

that U.S. carriers may pay to foreign carriers for termination

services. According to petitioners, the Communications Act

allows the Commission to regulate only the terms on which

U.S. carriers offer telecommunication services to the public

(including retail rates), not the prices U.S. carriers pay to

non-FCC-regulated entities for goods and services. We disagree.

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At least three provisions of the Communications Act authorize the FCC to regulate the settlement rates that U.S.

carriers pay to foreign carriers. First, section 201 provides:

(a) It shall be the duty of every common carrier engaged

in interstate or foreign communication by wire or radio

to furnish such communication service upon reasonable

request therefor; ....

(b) All charges, practices, classifications, and regulations

for and in connection with such communication service,

shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful.... The Commission

may prescribe such rules and regulations as may be

necessary in the public interest to carry out the provisions of this chapter.

47 U.S.C. s 201 (1994). "Foreign communication" means

"communication or transmission from or to any place in the

United States to or from a foreign country...." Id.

s 153(17). Petitioners say that section 201(b), when read

together with section 201(a), covers only the rates, terms, and

conditions on which U.S. carriers furnish foreign communication service to their customers. We discern no such limitation in the statute's text. The statute nowhere defines the

"practices ... in connection with" foreign communication

service covered by section 201(b), and the Commission has

interpreted such "practices" to encompass negotiation and

payment of settlement rates by U.S. carriers. See 12

F.C.C.R. at 19,937 p 283. Because the Commission's interpretation is reasonable, we uphold it under Chevron's second

step. See 467 U.S. at 843.

The second relevant provision of the statute, section 205(a),

provides:

Whenever, after full opportunity for a hearing, upon a

complaint or under an order for investigation and hearing made by the Commission on its own initiative, the

Commission shall be of opinion that any charge, classification, regulation, or practice of any carrier or carriers is

or will be in violation of [the Act], the Commission is

authorized and empowered to determine and prescribe

what will be the just and reasonable charge or the

maximum or minimum, or maximum and minimum,

charge or charges to be thereafter observed, and what

classification, regulation, or practice is or will be just,

fair, and reasonable, to be thereafter followed....

47 U.S.C. s 205(a). The Commission may declare a practice

unlawful upon finding that it is "unjust, unreasonable, unduly

discriminatory, or preferential." Western Union Telegraph

Co. v. FCC, 815 F.2d 1495, 1501 n.2 (D.C. Cir. 1987). Here,

because the Commission determined that "it would be an

unjust and unreasonable 'practice' ... for a U.S. international

carrier to pay settlement rates above the relevant benchmark

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rate," 12 F.C.C.R. at 19,941 p 291, it set enforceable benchmark rates. Deferring to the Commission's determinations of

what practices are "just" or "unjust," "reasonable" or "unreasonable," see Capital Network System, Inc. v. FCC, 28 F.3d

201, 204 (D.C. Cir. 1994), we hold that the Commission, in

capping settlement rates, lawfully exercised its broad powers

under section 205(a).

Finally, section 211(a) also gives the Commission authority

to regulate settlement rates. It requires "[e]very carrier

subject to this chapter [to] file with the Commission copies of

all contracts, agreements, or arrangements ... with common

carriers not subject to the [Act]." 47 U.S.C. s 211(a). For

all contracts filed with the FCC, it is well-established that

"the Commission has the power to prescribe a change in

contract rates when it finds them to be unlawful and to

modify other provisions of private contracts when necessary

to serve the public interest." Western Union, 815 F.2d at

1501 (citing Federal Power Comm'n v. Sierra Pacific Power

Co., 350 U.S. 348, 353-55 (1956), and United Gas Pipe Line

Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344 (1956)).

According to petitioners, section 211(a)'s filing requirement

for agreements with "common carriers not subject to the

[Act]" applies only to agreements between U.S. telecommunications companies and other U.S. carriers not engaged in

telecommunications, such as railroads. But neither the statUSCA Case #97-1620 Document #408627 Filed: 01/12/1999 Page 13 of 21
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ute nor any of the legislative history cited by petitioners, see

H.R. Rep. No. 73-1850, at 5 (1934), indicates that Congress

intended the phrase "common carriers not subject to the

[Act]" to refer just to other domestic carriers. Instead, the

statute leaves this phrase open to interpretation, and in our

view, the Commission has reasonably construed section 211(a)

to apply to settlement rate agreements between U.S. and

foreign carriers. Under the Sierra-Mobile doctrine, the

Commission may modify such agreements as it deems necessary to serve the public interest. See 12 F.C.C.R. at 19,939

p 286 (finding settlement rates exceeding the benchmarks

"not in the public interest"). Giving Chevron deference to the

Commission's interpretation of section 211(a) and "substantial

deference" to its judgments regarding the public interest,

Mobile Communications Corp. of America v. FCC, 77 F.3d

1399, 1406 (D.C. Cir. 1996), we hold that the Commission had

ample authority under section 211(a) to limit settlement rates

paid by U.S. carriers.

Petitioners cite various authorities, see R.C.A., 43 F. Supp.

at 854-55; Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, 2 F.C.C.R. 1298,

1312 (1987) (report & order); AT&T Charges for Interstate

Telephone Service, 64 F.C.C.2d 1, 80 (1977) (final decision &

order), for the proposition that the FCC cannot set prices

that U.S. carriers pay to non-FCC-regulated suppliers of

goods and services. To be sure, in those cases the Commission sought to lower prices paid by U.S. carriers for goods or

services not by regulating those prices directly, but by regulating retail rates ultimately paid by consumers. But nothing

in those cases suggests that the Commission lacked authority

to regulate such prices directly; they simply never addressed

the issue. Given the expansive powers delegated to the

Commission under sections 201(b), 205(a), and 211(a), we have

no doubt that the Commission has authority to prescribe

maximum settlement rates.

IV

We next consider petitioners' claim that the Commission's

settlement rate prescriptions violate the Administrative Procedure Act, 5 U.S.C. s 706 (1994). Using a "tariffed components price" ("TCP") methodology, the Commission calculated

its benchmark rates by summing the estimated prices for

three services--international transmission, international

switching, and national extension--necessary for terminating

an international long-distance call. See 12 F.C.C.R. at

19,827-30 pp 45-50. Arguing that the TCP methodology fails

to produce cost-based settlement rates because it does not

use data on the actual cost of foreign termination services,

petitioners claim that the calculated rates undercompensate

foreign carriers. Petitioners further allege that in making its

calculations, the Commission relied on non-record data.

Again, we disagree.

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sion meticulously documented and carefully considered a wide

range of public comments concerning the TCP methodology.

See id. at 19,830-50 pp 51-89. The final Order contains

several passages explaining why the method more than fully

compensates foreign carriers. See, e.g., id. at 19,840-41 p 70

(noting that TCP method includes costs, such as "uncollectible

billings, general overhead expenses associated with retail

service, and marketing and commercial expenses," that would

not be included in cost-based settlement rates); id. at 19,841

p 71 (noting that data used to price international switching "is

substantially above cost"); id. at 19,845 p 80 (noting that

benchmark rates assume higher switching costs for developing countries, despite lack of evidence that such costs are

actually higher in developing countries).

Throughout the rulemaking process, moreover, petitioners

withheld the very cost data that would have enabled the

Commission to establish precise, cost-based rates. In its

published notice proposing the TCP methodology, the Commission repeatedly invited commenters to suggest alternative

methods for calculating settlement rates. See International

Settlement Rates, 12 F.C.C.R. 6184, 6200-07 pp 39, 43, 44, 46-

50, 52-56 (1996) (notice of proposed rulemaking). At one

point, agreeing with petitioners' view that "the appropriate

cost standard for establishing benchmark settlement rates is

the incremental cost of terminating international traffic," id.

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at 6204 p 50, the Commission explicitly stated: "We encourage foreign and U.S. carriers to submit data on their costs."

Id. at 6205 p 52. Yet in its final rule, the Commission

reported that "no commenter has provided cost data in the

record about the costs of providing international termination

services." 12 F.C.C.R. at 19,827 p 42; see id. at 19,830-31

p 51 (noting "the dilemma ... that, on the one hand, settlement agreements should contain settlement rates that are

cost-based, but on the other, the data necessary to calculate

costs for each foreign carrier are not available"). Since

petitioners refused to let the Commission see their cost data,

and since the Commission thoroughly explained why "the

TCP methodology provides a reasonable basis for establishing

settlement rate benchmarks in the absence of carrier-specific

cost data," id. at 19,839 p 66, we have no firm basis for

accepting petitioners' claim that the benchmark rates are not

fully compensatory.

Petitioners allege that some foreign countries did provide

data showing that the prescribed rates would be below cost,

citing Hong Kong as an example. The Commission's Order

assigns Hong Kong's international carrier, HKTI, a settlement rate of $0.15 per minute--a rate which, according to

petitioners, cannot possibly compensate HKTI for the $0.29

per minute government-mandated charge that it must pay

Hong Kong's local carrier for terminating each incoming

international call. But, according to the intervenors on behalf

of the FCC, HKTI is a wholly owned subsidiary of Hong

Kong Telecom, and Hong Kong Telecom owns Hong Kong

Telephone Company, the monopoly provider of local service in

Hong Kong. The $0.29 per minute charge is therefore simply

a "left pocket-right pocket" transaction between two subsidiaries of the same company. Intervenors' Br. at 31. Asked

about this at oral argument, petitioners had no response.

In any case, if HKTI or another foreign carrier could

credibly show that the benchmark rates prohibit it from fully

recovering its termination costs, the Order [specifically] allows such a carrier to ask the Commission to adjust the

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relevant rate to better reflect actual costs. See 12 F.C.C.R.

at 19,842 p 74, 19,848 p 85, 19,849-50 pp 88-89. Recognizing

the proprietary nature of foreign carrier cost data, the Order

makes clear that "under the Commission's rules, a party may

request confidential treatment of any cost data it submits to

justify a different settlement rate benchmark." Id. at 19,850

p 89 (citing 47 C.F.R. s 0.459 (1997)). In the absence of

record evidence showing that the benchmark rates systematically undercompensate foreign carriers, we think the Commission's regulatory approach--prescribing general rules

while allowing for exceptions--is not arbitrary or capricious.

Turning to petitioners' claim that the Commission used

non-record data to set the benchmark rates, we first consider

their allegation that the Commission used U.S. outgoing call

distribution data provided by AT&T on a confidential basis to

calculate country-by-country prices for national extension services (one of the three TCP components) and then returned

the data to AT&T without affording the parties an opportunity to review it. The record shows, however, that the Commission made summaries of the AT&T data available under

seal for a two-week period prior to issuing its final Order,

that it refused to lengthen the comment period on the

grounds that the data was concise and easy to understand,

and that at least one party submitted comments criticizing

the Commission's reliance on the data. See id. at 19,846-47

pp 83-84 & nn.138-43. During the rulemaking proceeding,

moreover, petitioners never challenged the Commission's confidential treatment of the data, nor did they contest the

Commission's refusal to extend the comment period. Complaining only that the summary data contained no underlying

figures or assumptions, they argued that it was impossible to

verify the national extension prices calculated by the Commission. The Commission disagreed, stating in its Order that

"the data is complete" and that "[t]here is no further data

that the [FCC] relied upon to calculate the national extension

TCPs that is not in the record." Id. at 19,847 p 84. Instead

of summoning and sorting through AT&T's confidential data

to resolve this issue, we simply note that foreign carriers had

in their hands all the incoming call distribution data they

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needed to contest the accuracy of the Commission's calculated

price for national extension services. In other words, even if

the Commission's handling of the AT&T data was less than

ideal, it did not impair the ability of foreign carriers to

challenge the national extension component of the benchmark

rates.

We think the same logic refutes petitioners' claim that in

calculating international switching costs, the Commission unreasonably relied on a study published by the International

Telecommunications Union (the TEUREM study) without

examining its underlying data and assumptions. Although

the data was unavailable to the Commission and the public,

foreign carriers had access to data about their own switching

costs and therefore did not lack the means to challenge the

switching costs calculated by the Commission. Furthermore,

as far as compensating foreign carriers is concerned, we

believe the Commission reasonably relied on the TEUREM

study in light of the fact that the Commission had other

evidence indicating that the study substantially overestimated

switching costs. See id. at 19,845 p 80.

V

Next, we consider petitioners' objections to the conditions

imposed on new entrants into the U.S. telecommunications

market that have a 25% equity affiliation with a foreign

carrier. To deter price squeeze behavior, the Order requires

foreign-affiliated U.S. carriers to comply immediately with

the benchmark settlement rates in order to obtain section 214

permission to provide international service to the affiliated

country. See id. at 19,901 p 207. In contrast, the Order

gives non-foreign-affiliated U.S. carriers a transition period of

one to four years (depending on the per capita income of the

foreign country) to achieve compliance. See id. at 19,885

p 165.

According to petitioners, the section 214 conditions represent an inadequately explained change in the Commission's

regulatory policy. While it is true that the Commission in

1995 declined to impose similar conditions on foreignaffiliated carriers seeking to enter the U.S. market, see

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Market Entry and Regulation of Foreign-Affiliated Entities,

11 F.C.C.R. 3873, 3898-99 pp 65-70 (1995) (report & order),

we think the Commission adequately justified its policy shift

in the 1997 Order. In 1995, the Commission believed that

section 214 conditions were unnecessary because the "effective competitive opportunities" test, which requires foreignaffiliated market entrants to show that the foreign country

has taken sufficient steps to create a competitive international

market, served to reduce the monopolist leverage essential

for price squeeze behavior. See id. at 3881-94 pp 19-55. By

1997, the Commission observed, at least two things had

changed. First, because the United States had committed to

allowing foreign competitors freer entry into the U.S. market

pursuant to the World Trade Organization Basic Telecom

Agreement of February 1997, the Commission had proposed

eliminating the effective competitive opportunities test. See

12 F.C.C.R. at 19,905 p 218, 19,908 p 223 (citing Foreign

Participation in the U.S. Telecommunications Market, 12

F.C.C.R. 7847, 7861 p 32 (1997) (order & notice of proposed

rulemaking)). Second, despite the Commission's expectation

that increased global competition would drive rates toward

cost-based levels, see id. at 19,905 p 217; 11 F.C.C.R. at 3899

p 71, "settlement rates remain[ed] far above cost-based levels," 12 F.C.C.R. at 19,905 p 218. In light of these changed

conditions, we think the Commission reasonably adopted its

current section 214 authorization policy to deal with the

heightened risk of price squeeze behavior.

Petitioners' remaining challenges require little discussion.

They claim that the immediate compliance requirement discriminates against foreign-affiliated U.S. carriers compared to

non-foreign-affiliated carriers, but we see no grounds for

disturbing the Commission's informed judgment that the risk

of price squeeze behavior presents a timely problem requiring

immediate preventive measures. See id. at 19,905 p 218.

Nor is there merit to petitioners' claim that a 25% equity

affiliation does not indicate common control and is therefore

an arbitrary proxy for anti-competitive threats. Not only did

petitioners fail to raise this issue during the rulemaking

process, but the Commission has reasonably adhered to its

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established view that "a less-than-controlling [ownership] interest can provide a carrier with the incentive and ability to

engage in anticompetitive conduct," 11 F.C.C.R. at 3903 p 80.

Finally, petitioners challenge the Order's penalty provision

under which foreign-affiliated carriers found to engage in

price squeeze behavior may be required to lower their settlement rates on the affiliated routes to the "best practice rate,"

i.e., the lowest settlement rate between the United States and

any foreign country (currently $0.08 per minute). See 12

F.C.C.R. at 19,908 p 224. According to petitioners, this provision discriminates against foreign-affiliated U.S. carriers because it does not apply to non-foreign-affiliated carriers that

fail to comply with the benchmark rates. But the penalty's

purpose is to deter anti-competitive conduct, and nothing in

the record suggests that non-foreign-affiliated carriers have

an incentive to engage in anti-competitive conduct. Petitioners' further claim that the "best practice rate" undercompensates foreign carriers likewise misses the mark. Because the

penalty rate is meant to deter and punish anti-competitive

conduct, we find it neither surprising nor unreasonable that it

undercompensates foreign carriers.

VI

This brings us finally to petitioner Telstra's claim that, in

the course of prescribing international settlement rates, the

Commission should have set rates for Internet-related telecommunication services. An Australian carrier, Telstra exchanges both telephone and Internet traffic with U.S. carriers. Although it receives net payments from U.S. carriers for

terminating telephone calls from the United States to Australia, it makes net payments to U.S. carriers for terminating

Internet traffic from Australia to the United States. Telstra

alleges that U.S. carriers charge above-cost rates for terminating Internet traffic and that the Commission ignored its

comments urging a reduction in these rates. Claiming that

the Commission had invited comments during the rulemaking

process and that its comments were directly relevant to the

issues decided in the final Order, Telstra accuses the ComUSCA Case #97-1620 Document #408627 Filed: 01/12/1999 Page 20 of 21
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mission of violating the Administrative Procedure Act, 5

U.S.C. s 553(c). We disagree.

The Commission's notice of proposed rulemaking gives no

indication that the agency sought comments on Internetrelated issues. The paragraph cited by Telstra in support of

its position reads:

We invite interested parties to submit comments on

our proposals for revising the benchmark settlement

rates, including the methodology for calculating the rates

and our proposal for periodic revisions to the rates. We

also invite comments on our plan to implement the

revised benchmark settlement rates in a manner that will

promote our goal of achieving the cost-oriented, nondiscriminatory, transparent settlement rates necessary for

the development of competition in the global telecommunications services market.

12 F.C.C.R. at 6195 p 29. Although it may be true, as Telstra

says, that "the global telecommunications services market"

includes Internet services, the Commission's request for comments occurred in the context of a notice that--from the very

first paragraph--declares its subject to be "benchmark settlement rates for international message telephone service

(IMTS) between the United States and other countries." Id.

at 6185 p 1 (emphasis added). The notice made clear that the

Commission sought to regulate the provision of ordinary

telephone service under "the traditional accounting rate system," id., and that Internet traffic "is exchanged outside of

the traditional accounting rate system," id. at 6189 p 13. The

mere fact that Internet traffic and international voice traffic

are becoming increasingly interconnected does not oblige the

Commission to regulate both spheres of telecommunications

services simultaneously.

VII

We deny the petition for review and affirm the Commission's Order in all respects.

So 

ordered.

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