wrong signals about costs. That is, although satellite costs may be below
the cost of cable facilities, Comsat’s prices may exceed the cost of cable
facilities. If this were the case AT&T would not choose the least costly
facility even if it were a perfectly competitive profit maximizing firm. An
example of an argument of this form is that Comsat charges above cost on
dense routes in order to cross-subsidize low density routes. Thus the
prices on the dense routes may attract inefficient entry. In other
contexts, such entry has been referred to as "creamskimming" or "uneconomic

bypass."

Now we will consider several specific arguments that have been made for

involving the Commission in AT&T“s loading of international facilities.

A. To offset distortions caused by AT&T’s market powers

AT&T’s market dominance and Comsat’s reliance upon AT&T for almost all of
its traffic are cited by the Commission as the main reasons it must continue
to mandate the distribution of AT&T’s circuits between cable and satellite
facilities. "That is, the market is not now sufficiently competitive to
assure that loading decisions are based on the price and availability of

a particular facility rather than on some other, non~marketplace

factors... Our analysis indicates that as of year-end 1984, AT&T employed
approximately 89 percent of all circuits in service between the U.S. and

CEPT {Conference for Evropean Poste & Telegraph] and 99.8 percent of all

-~12-


estimates of satellite prices. Predict ing satellite prices requires one to
predict FCC regulation of Comsat’s prices If rate-of-returo regulation
were strictly followed, the observed price of satellite circuits would be an
overestimate of the price AT&T would pay for additional circuits. Assuming
Comsat were initially earning its allowed rate-of-return, the cost to AT&T
of using additional satellite circuits would be just the additional cost to
Comsat of providing these circuits. This would be approximately Comsat ‘8
cost of acquiring the circuits from INTELSAT. As @ first approximation this
is $390, the current level of the INTELSAT utilization charge 29 The
actual marginal cost to Comsat of acquiring circuits might be somewhat lower
than the current pert circuit charge- As the total usage of INTELSAT
circuits increased, INTELSAT would be able to reduce the charge per circuit.

Only a portion of the benefits of the reduction would accrue to Comsat,

19 With minor exceptions, the total cost to an owner of using INTELSAT
circuits is its share of INTELSAT’s capital and operating expenses. The
marginal cost to & member of obtaining additional circuits under such such &
financial arrangement is approximately the average cost of an INTELSAT
circuit. (See footnote 15 for & detailed discussion of this point.)
INTELSAT has also established a “utilization charge” to cover cases where
ownership is not perfectly aligned with usage- The utilization charge is
set to approximate the average cost of an INTELSAT circuit. "The level of
the utilization charge is set 80 46 to recover amortization of capital
(depreciation), the operating expenses of the system and compensation for
use of capital at a designated rate." (Testimony of Richard Colino, before
Senate Foreign Relations Committee, October 1983, Appendix No.12.) To the
extent that the interest rate paid on capital by INTELSAT equals @ members
opportunity cost of capital, the utilization charge is a good approximation
of the members cost of obtaining @ circuit by expanding its ownership
share.

-33-


price its circuits above the cost of cable circuite (assuming the quality of
satellite circuits was not superior). But by requiring AT&T to allocate a
share of its traffic to satellite, the FCC may have induced Comsat to set
the price of its circuits above the cost of constructing new cable circuits

on dense routes.

Higher prices on dense routes may have been the intended result of a policy
designed to foster the development of 4 global satellite system that
cross-subsidized high cost routes. But Commis sion-specified circuit loading
may also have had the unintended consequence of allowing Comsat to earn
above normal profits and to incur excessive costs. Whether this actually
occurred depends on how well the FCC was able to regulate Comsat’s rates and
expenses. In any case, if circuit loading requirements raised the price
carriers paid for acquiring circuite on high volume routes, this would have

tended to increase the price paid by users for end-to-end service on those

routes.

The FCC’s circuit loading policies may also have inadvertently raised the
cost of providing international service by giving AT&T the wrong signals
about the relative cost of cable and satellite circuits. Requiring AT&T

to use satellites gave Comsat the incentive to set ite prices above the cost
of cable circuits. Faced with high prices for satellite circuits, AT&T
would have an incentive to build cable facilities even if satellites were

technologically the least costly mode. Without the Fcc guaranteeing it

- 29 -


Office of Telecommunications Policy, International Facilities Study, (May
1971), National Technical Information Service, U.S. Dept. of Commerce
Accession No. PB-208 670

Owen, Bruce and Ronald Braeutigam. The Regulation Game. Cambridge, Mass.:
Ballinger Publishing Co., 1978.

Peck, Merton. "The Single-Entity Proposal for International

Telecommunications." American Economic Review, Papers a and Proceedings,
Yo1.60, No.2 (May 1970), pp. 199-203.

Scherer, F.M. Industrial Market Structure and Economic Performance, Second
Edition. Chicago: Rand McNally, 1980.

U.S. General Accounting Office. FCC Needs to Monitor a Changing
Internationa] Te lecommunicat ion Market. Report to the Chairman, Subcommittee
on Government Operations, House of Representatives. Washington, U.S.
Government Printing Office, 1983. "RCED - 83-92, March 14, 1983"

-75-


TABLE 2
AT&T’s (Before Tax) Cost of TAT-8 for 1987-1991
vB.
The Cost it Would Incur if it Were to Pay Satellite Lease Charges
For the Circuits Expected to be Loaded on TAT-8
1987 1988 1989 1990 1991

TAT-8 COSTS $M

TAT-8 investment 123 0 0 0 0
CME 6 2.3 3 5.7 5.3
O&M 0 2.5 2.5 2.5 2.5
Transit 0 0.2 0.5 0.8 1.2
Total TAT-8 cost 129.0 5.0 6.0 9.0 9.0
Present Value of Costs 129 4.4 4.7 6.3 5.6
Cumulative PV of Costs 129 133.4 138.2 144.4 150.0

COST IF WERE TO LEASE
SATELLITE CIRCUITS
No. TAT-8 Circuits
At End of Year
Added During Year
Average Ckts. in Service
Sat“l Chgs/Half Ckt Sk
Sat’l Lease Charges $M
Pres. Value Sat‘l Charges
Cumulative PV Sat“l Chgs

2413 5318 8770 »©=—-:12924
2413 2905 3452 4154
1207 3866 7044 10847
10.7 10.4 10.1 9.8
12.9 40.2 71.1 106.3
11.4 31.6 49.6 65.8
11.4 43.1 92.7 158.5

e
eoorco0eo

Notes

1. Data source for cable costs and projections of annual tariff rate for
satellite half circuits : Comments of AT&T, CC Docket No. 79-184, May
10, 1985, Attachments 2, and 5.

2. All cable CME (circuit multiplication equipment) investment expenses
starting in 1987 were attributed to TAT-8.

3. Transit expenses attributable to TAT-8 were estimated as the increase
over the level in 1987.

4. Interest rate used in present value calculation was 12.75%

5, Traffic on TAT-8 was estimated as all new cable traffic starting in
1988 under the FCC’s "2 percent increased flexibility per year" loading
guidelines as described in CC Docket 79-184, Second Notice of Proposed
Rulemaking, Appendix 2.

36-B



the level prevailing at the time current loading plans expire. The loading
requirements would gradually be phased out on a fixed schedule. Second,
rate-of-return regulation of Comsat should be ended. It would be necessary,
however, to maintain some form of price regulation during the transition
period for those circuits subject to FCC loading requirements. One way to
do this would be to set a price ceiling at the current lease rate for those
circuits AT&T is required to lease from Comsat. Comsat would be free to set
the terms, charges, and conditions for those circuits not subject to loading
requirements. The third element of the plan is to eliminate possible
sources of bias in carriers” choices of facilities. If there is any such
bias, the most likely cause is rate~of-return regulation. The best way to
correct this potential problem is to eliminate rate-of-return regulation of
all international service carriers, including AT&T. If this is not
feasible, another option would be to allow Comsat to sell limited ownership
shares in satellites (IRUs) and permit these investment shares to enter

carriers’ rate bases. Other options are discussed as well.
+

The final portion of Section VIII addresses three difficult issues raised by
our proposal for deregulating international facilities. The first is
whether foreign telecommunications authorities will be able to appropriate
most of the benefits of competition among U.S. providers of international
transmission services. The second issue is whether it is in the national
interest to subsidize certain international routes, and if so what is the

best way to finance such a subsidy. The third is how should the Commission


high.

As part of this proposal the FCC should end all rate-of-return regulation of
Comsat. This, along with a policy of promoting free entry, would eliminate
Comsat’s incentive to support INTELSAT‘s investing in unneeded satellite
facilities.44 As INTELSAT’s largest member, Comsat is likely to have &
significant degree of influence on INTELSAT’s decisions. An end to
rate-of-return regulation would be a two-edged sword for Comsat. The
benefit would be an end to regulatory limitations on its maximum profits.
The cost would be an end to the Commission’s practice of guaranteeing that

Comsat have sufficient traffic to earn its allowed rate-of-return.

44 Tables 4 and 5 suggest that there has been excessive capacity in both
the Atlantic and Pacific ocean regions. The Commission’s circuit loading
requirements do not explain why INTELSAT persistently invested in 80 much
capacity, given that AT&T continued to build cables. It is possible that
early circuit loading formulae contributed to the problem by using capacity
as a factor in determining traffic distributions. For example, a formula
that attempts to equalize utilization percentages on all facilities
allocates more traffic to larger facilities. The balanced loading formula,
which attempts to equalize the amount of traffic on all independent
pathways, does not allocate more traffic to larger facilities (except when 4
facility is so small that it is no longer allocated traffic because it has
reached capacity). This formla does, however, create an incentive to
launch additional satellites since it automatically allocates traffic to
each new path. But there is no evidence that INTELSAT has pursued a policy
of splitting its traffic over an excessive number of small satellites. It
has generally attempted to use 4 single primary satellite to handle most of
its traffic in a region. Rate-of-return regulation may have given Comsat an
incentive to support INTELSAT‘s rapid expansion of its capital base. Such
regulation does not, however, explain why other INTELSAT members supported
such growth in capacity, because these other members were not subject to
such regulation.

~ -


some specialized services at any price. The Commission recently authorized
RCA American Communications, Pan American Satellite Corp., and International
Satellite Corp. to provide international private line service. The

Commission deferred action on the applications by Orion Satellite Corp. and
Cygnus Satellite Corp.29 The Commission has also determined that Tele-Optik
and Submarine Lightwave Cable Company meet its requirements for receiving a

Cable landing license for an Atlantic fiber optic cable system.30

Given that under Authorjzed User IL, Comsat can directly serve users, one
can rule out the possibility that the only reason these firms wish to enter
ie to avoid additional markups imposed by international carriere.3! Prior

to the Authorized User II, policy most end users could not purchase

satellite circuits directly from Comsat. Instead they had to go through a
carrier. Under that regime, it would have been possible that private
systems would have wished to enter the market to avoid ea markup by

international carriers, and not because of an excessive markup by Comsat.

29 Report and Order, CC Docket No. 84-1299, July 25, 1985.

30 Tele-Optik Limited, 100 FCC 2d 1033 (1985); SLC, Cable Landing
License, mimeo No. 5241, released June 19, 1985.

31 Second Report and Order, Reedopting the Commission’s Authorized User
II Policy, CC Docket No. 80-170, December 19, 1984.

= 4h -


One might argue that Comsat and INTELSAT were not serving only this market
so that euch an analysis is irrelevant. But this reaction would be wrong.
INTELSAT could have served this route using such a separate system, put it
chose not to do so. Presumably the added cost of serving this route as part
of a global system was less than establishing a stand-alone system. In any
case, the issue is whether Comsat’s prices on the North Atlantic route
exceeded the least costly method of serving that route via satellite. The

NAE study suggests that Comsat’s prices did.

A later study by the Office of Telecommunications Policy (OTP) also found
that satellites cost the same or less than cables for serving the Atlantic
Ocean region.25 The study compared the per circuit cost of a hypothetical
point-to-point satellite system with two alternative cable systems. One
system used a "SF" cable, similar to TAT-5, and the other a "SG" cable,
similar to TAT-6. The satellite aystem used INTELSAT IV satellites and was
designed to have 100% redundancy through the deployment of a spare
satellite. The launch failure rate was assumed to be one in four launches.
The study found "that a point-to-point satellite system using existing
technology can be built and operated over 24 years at a cost per circuit in
use which is less than the cost of SF cable technology for the same quality

of service, by a ratio of about 3 to 1, at 1976 traffic levels. In this

25 Office of Telecommunications Policy (1971).

- 42-




TABLE 7

MAJOR AT&T CABLES

TAT-5 TAT-6 TAT-7 TPC-2 HAW-3 Total
Date in Service 1970 1976 1983 1975 1974
Voice Circuits non-TASI 845 4000 4200 845 845
INVESTMENT COST
Original Dollars ($m) 79 197 180 123 69.6
1984 Dollars2
Total Cost ($M) 205.2 353.3 196.5 241.7 148.4 1145.2
Cost per Circuit ($K) 243 88 4] 286 176
Present Value
In 1985 ($m)3 342.1 549.6 259.2 372.7 226.2 1749.8
1 NTIA, 1984 World’s Submarine Telephone Cable Systems
2 Calculated using the Gross National Product implicit price deflator:
Council of Economic Advisers, Economic Report of the President, tables B-3.

Investment costs were assumed to be incurred in the year prior to the date
of service.

3 Total value in 1985 if the original investment cost of each cable
had instead been invested in Aaa rated corporate bonds. The source of
bond yields was: Council of Economic Advisers, Economic Report of the
President, table B-66.

47-D


B. Have Comsat‘s prices given AT&T the wrong signals about costs?

1. Has Comsat charged above cost on certain routes?
There are three sources of evidence that Comsat’s prices exceeded cost on
certain routes. One is engineering studies of the cost of satellite
systems. The second is the existence of unregulated (and presumably
unbiased) firms wishing to compete with Comsat. The third is comparison

with domestic satellite rates.

a. Cost studies.
Cost studies may provide evidence that Comsat circuits were priced above
cost. This would be the case if satellite prices exceeded cable costs on a
given route, but a cost study indicated that satellites could have provided
service on that route at a lower cost than cable. A cost study by a
Committee of the National Academy of Engineering (NAE) supports such a
conclusion. In 19%8 the President’s Task Force on Communications Policy
requested that the NAE establish a committee on communications to examine
the relative costs of cable and satellite communication facilities.22 As
part of its study the Committee compared the cost of TAT-5 with that of a
modified INTELSAT III system providing point-to-point transmissions between

the United States and England. It was assumed that four identical

22 Committee on Telecommunications, National Academy of Engineering
(1968).


In the short run, AT&T might view much of the cost of cable manufacture as
fixed, so to minimize cost it would compare the variable cost of
constructing and operating a new cable with the cost of acquiring satellite
circuits. This cost comparison would result in the economically efficient
choice provided that satellite circuits are also priced close to variable
cost. In the short run, Comsat would have an incentive to negotiate such

a price schedule, since its profit would be higher if it provided circuits
at.a price that slightly exceeded variable coste than if it charged more but

lost all the traffic to cable.

In the long run, AT&T would not consider any of the cable manufactur ing

costs fixed. It would not remain in the cable manufacture business if it
were certain that it could acquire equivalent satellite circuits for less
than the cost of cable circuits. In other words, the fact that it could

manufacture cable circuits would not bias its choice.

C. To offset distortions caused by rate-of-return regulation o£ AT&T.

In theory, rate-of-return regulation could bias AT&T towards cable
facilities because cable circuits enter its rate base while satellite
circuits do not. As a regulated firm, AT&T is entitled to a return on its
capital investment but not on its expenses. By expanding its rate base with
additional capital expenditures, a regulated firm can increase its profits,
provided that the cost of capital is less than the allowed rate of return,

and that regulation has kept the firm’s price below the profit -maximizing

~16-


however, since the reduction would apply to all INTELSAT half-circuits while

Comsat uses only about 23% of the half-circuits.

In other words, under strict rate-of-returno regulation, as AT&T used more
circuits the FCC would require Comsat to lower its price on all circuits,

so that the effective marginal cost to AT&T of the satellite circuits would
be the marginal cost to Comsat (including its allowed rate of return).
There is one minor qualification to this. AT&T’s marginal cost of acquiring
satellite circuits would be slightly higher than Comsat’s marginal cost when
one takes into account the fact that the Comsat price reductions would apply
to some circuits not used by AT&T. But since about 85% of Comsat’s revenue
is from AT&T, most of the benefit of a general rate reduction would accrue to
AT&T. In any case, this is an idealized version of rate-of-return
regulation. Given that it took the Commission 13 years to settle its firet
investigation into Comsat’s charges there is little reason to expect

Comsat’s rates to be set in precisely this way.20

Third, if AT&T is risk averse, showing that the expected cost of cable is

greater than the expected price of satellites is not sufficient to show a

20 The FCC began an investigation into Comsat’s charges in June 1965 (38
FCC 1296). An agreement between FCC and Comsat staff was reached in
February 1978. The Commission approved the agreement in May 1978 (68 FCC
2d 941).

- 34-


To avoid creating such artificial incentives, it would be better to
establish a schedule for phasing out loading requirements that is
independent of satellite deployment decisions. A fixed schedule could be
established that allowed Comsat to recoup most of its sunk costs. For
example, the transition might begin by requiring AT&T to use the number of
satellite circuits currently forecast for the last year of the current
loading plan, and then allow AT&T to reduce its usage of satellite circuits
by ten percent of that amount over the next ten years. Such a gradual

transition would ease the adjustment to the end of all circuit loading

requirements.
B. Dereguiating Comsat.

Lf the Commission is to allow free competition with Comsat it is absolutely
essential that Comsat have downward flexibility in pricing on those routes
on which it is facing actual or potential competition. The sooner the
Commission announces that it will encourage such pricing flexibility the
petter. AT&T and investors in private satellite and cable systems appeat to
have based their investment plans on the assumption that Comsat’s prices
will remain high. If, however, Comsat were to announce price cuts
(guaranteed by long term contracts) before these facilities are built, many
might not be built and much investment cost could be saved. The public
would still benefit since it would be able to obtain lower prices from
Comsat. But once private facilities are in place, their owners are likely

to put severe pressure on the Commission to assure that Comsat’s prices stay


Il.

Til.

Iv.

vi.

VII.

CONTENTS

Introduction and Summary-

Regulatory Barriers to Competition Between Cables and Satellites.-.7
Objectives of Facility pegulation..ccsscsceceseerersessssesss ste

Rationale for Mandating the Use of Satellite Facilities.+++se eeoll

A. To Offset Distortions Caused by AT&T’s Market Power.ee-> 12
B. To Offset Distortions Caused by the Fact, that AT&T is 8
Manufacturer of Submarine Cables. +++-+- cevecccesaeseeeeehe

Cc. To Offset Distortions Caused by Rate-of-return Regulation

Of AT&Tsceeececcccseseresete®
D. To Offset Distortions Caused by Artificial Differences

in Contractual ArrangementS..cccorrssreseres tet weveceee el ®
E. To Subsidize the Development of @ Worldwide Satellite

System dine the Deve oie cectaeenssnenssee st eee)
F. To Permit Cross-subsidies Within the Worldwide Satellite
eeceeeneeedh

cae e eee e seen eee e eee eee 6

Systems s-csecceecceetrereense ese sty

G. INTELSAT is an Unsustainable Natural Monopoly--
H. To Assure High Reliability of Servicesserses
I. To Offset Biases of Foreign Correspondents. -++++rer*

Unintended Consequences of the Circuit Loading Policy
A. High Prices and High Costs.---
B. Inhibits Comsat from Entering the IMTS Market.

Evidence. sseeseseesereee®
A. Is AT&T Biased?.seeoe
B. Have Comsat’s Prices Given AT&T the Wrong Signals About
Gosts2ecesececersseee® .
1. Has Comsat Charged Above Cost on Certain Routes
a. Cost Studies. eee
b. Entry-
c. Comparison With Domestic Satellite Rates
2. If So, How Did Comsat Use the Excess Revenue?..+- 2 M6
Cc. Has Circuit Loading Policy Distorted Investment ?.-+eseereere® 6

veceeeeoeeoeeead

Major Policy Alt ernatives: Regulate Better or Deregulate.+-+++°"" 51


circuits could be priced independently.45 Any circuit price above marginal
cost would add to Comsat’s profits. Setting a low price for long term
satellite circuits may attract traffic that would otherwise go to private
facilities such as the proposed Orion satellite or the Tel-Optik cable, or
to future common carrier cable facilities such as TAT~9. Providing
additional service with existing satellite facilities instead of
constructing new facilities could save hundreds of millions of dollars.
Some of these savings would accrue to potential users of the proposed
alternative facilities because the price of Comsat“s circuits would need to
be lower than the price that would be charged by these alternative

facilities if customers are to buy Comsat’s circuits.

Despite the efficiency benefits of Comsat offering idle capacity at close
to marginal cost, it is inevitable that potential entrants will characterize
such pricing as predatory. For example, PanAmSat has recently complained to

the FCC that INTELSAT’s plan to sell Venemela a transponder for domestic

45 This difference in prices could be considered reasonable under Section
202(a) of the Communications Act if limited to the transition period. See
CC Docket No. 83-1145, FCC 84-524, November 9, 1985 in which the Coumission
proposed a phase~in of special access tariff rates. The Commission adopted
the phase-in on March 1, 1985 in a Memorandum Opinion and Order in the same
docket. It was argued that the transition was justified because of the
unique circumstances of the OCCs.

- 59-


Some form of price regulation, however, would be necessary for those

circuits that continue to be covered by any FCC loading requirements.

Absent any price regulation, Comsat could extract AT&T’s entire profits from

IMTS by setting @ sufficiently high price for those satellite circuits AT&T

is required to use. Setting a price ceiling at the lease rate in force

prior to deregulation would be a simple v

ay to protect AT&T and ite

customers from Comsat exploiting the market power derived from FCC circuit

loading requirements. As circuit loading requirements are phased out, the

number of circuits covered by price controls would fall. The price controls

vould end completely when the loading requirements are completely phased

out.

Under this proposal Comsat would have complete freedom in setting charges,

terme and conditions for circuits not covered by loading requirements.

Comsat would have a strong incentive to set a low price for these circuits

on all routes on which it faced potential competition. Lowering the price of

the deregulated circuits would not reduce Comsat’s revenue on those

circuits covered by the FCC loading requirements since the two classes of

~ 58 ~


C. Eliminating distortions in carriers” choices of facilities.

l. Deregulate in ternational service carriers.
The best way to eliminate the possibility that rate-of-return regulation
biases carriers towards cable is to eliminate such regulation for all
international service carriers. This would require an accounting separation
of AT&T’s unregulated international telecommunications services from its
regulated domestic long distance business (until such time as the domestic
business is also deregulated). The assets used in providing international
service would be assigned to the international business. The costs assigned
to the international business would include settlements payments to foreign
PTTs, payments to Comsat for facilities, as well as the costs of
international facilities and personnel involved in providing international
services. The cost incurred by the international business in using AT6T
Communications’ (ATT-C) domestic network in completing international calls
could be estimated for accounting purposes using one of the ATT-C’s bulk

rate tariffs such as WATS or the proposed SDN or Megacom tariffs.

It is doubtful that eliminating rate-of-return regulation for AT&T’s
international business would result in higher prices. There are two reasons
for this. First, as firme such as MCL, GTE, and SBS continue to enter the
international market, competition will increasingly limit the amount that
AT&T can charge. Second, rate-of-return regulation does not protect the
interests of U.S. consumers of international telecommunications. The

current system of rate-of-return regulation does not determine prices on

-61-


other words, the PIT can reduce its contribution to INTELSAT’S

fixed costs by cutting back on ite usage-

The best way to address this issue would be for INTELSAT to revise its
financial structure to more closely parallel that of cable facilities. Then
INTELSAT‘s prices would provide correct signals about costs to both foreign
and U.S. carriers. Comsat has proposed & revision of INTELSAT’s charging
policy that would move in this direction. Comsat suggested that INTELSAT
offer "an integrated lease through which Signatories would obtain access to
a share of the overall space segment resource. This share would consist of
a mix of different types of transponder capacity on different satellites in
different operating regions, all under a single lease payment. Such leases
would offer Signatories the option of acquiring their space segment capacity

from INTELSAT on 8 bulk package basis rather than cireuit-by-circuit or

(Footnote 15 continued.) This can be illustrated mathematically.
Suppose INTELSAT’s total costs are given by Ftex, where F is the fixed cost
of the system, ¢ is the marginal cost of using a circuit, and x is total
system usage- A member’s payments are assessed in proportion to its usage.
Thus a member’s total payments are por(xj/x)@+ex), where xj is the members
usage. If it uses an additional unit its total payments are

piel p+) / (xs DUE +e Gee DT Ite marginal cost of using the additional unit
is given by py-poml (x-xy)/ (e+ DxlF ec Thus if the member is the sole user
of the system xj=x, 80 P1-PO*C> INTELSAT’s marginal cost. But if the member
were not using any circuits initially, xj=0, 80 P1-P =F /(x+1l)+c, INTELSAT’s
average cost per circuit, since iA 9 i ecipee et )l/ G+) Finally, if
O<xj<x the member’s cost of using another circuit is greater than INTELSAT’s
marginal cost, but less than INTELSAT’s average cost.

-2-


circuits used for IMTS between the U.S. and cept."7

Suppose for the sake of argument that AT&T were the sole U.S. provider of
international telecommunications and that it were also Comsat’s only
customer. To focus on the issue of market power, assume that AT&T is not
subject to any regulation and acts in concert with its foreign
correspondents to maximize joint monopoly profits. We will also temporarily
ignore the role of INTELSAT and assume Comsat is the sole producer of
international satellite services and has complete flexibility in setting
charges and contractual terms for its circuits. Finally, assume for the
moment that satellites and cable circuits are equivalent (i.e., there are

no quality differences).

As a profit maximizing monopolist, AT&T would wish to minimize the cost of

providing whatever output it chose to produce .8 Thus dominance in the
7 CC Docket No. 79-184, Second Report and Order, August 7, 1985, para.
48.

8 Most western economists find the profit maximization hypothesis a

useful description of firm behavior. There is a considerable literature
examining this hypothesis. In his industrial organization textbook, Scherer
(1980, p41) concludes that “after examining the voluminous published
evidence and interviewing many managers, the author believes that assuming
profit maximization provides a good first approximation in describing
business behavior. Deviations, both intended and inadvertent, undoubtedly
exist in abundance, put they are kept within more or less narrow bounds by
competitive forces, the self-interest of stock-owning managers, and the
threat of managerial displacement by important outside stockholders and
takeover raiders." He does point out, however, that “there is reason.to

-13-


term basis. “Long term contracts for satellites would provide AT&T with the
correct basis for comparing the cost of satellites and cables. When AT&T
invests in a cable facility it has 6 good notion of what its costs will be
over the life of the facility. But, when it chooses to forego a cable
facility in favor of satellites, it has little assurance of its long term
costs. To some extent, rate-of-return regulation is a substitute for long,
term contracts. Under rate-of-return regulation of Comsat, the current
price of satellites reflects the average cost of satellite circuite at
current loading. If AT&T chose to load substantial additional traffic on
satellite, the price per circuit should fail provided INTELSAT did not
decide to add costly capacity. But AT&T cannot be sure that the Commission
will indeed make Comsat lower its price as average costs fall or that

INTELSAT will refrain from adding unneeded capacity.

Even if the current monthly tariffs for satellite services were Very much
leas than the monthly cost of owning shares in cable facilities, ATAT might
still prefer ownership of cable to avoid being vulnerable to price increases
by Comsat in the future. AT&T can avoid such dependence on Comsat by owning
enough facilities to handle a substantial portion of their traffic. The
scale of cable investment may be relatively large because of the substantial
economies of scale in producing cable circuits. Moreover, the long time lag
in building new cable facilities does not permit carriers the luxury of
waiting until after Comsat increases its prices to start planning 4 cable

facility.

-19-


bargaining between AT&T and Comsat would be that Comsat and AT&T (and the
foreign PTTs) would maximize joint profits. Under this scenario, Comsat
would extract @ share of the profits in a way that would not reduce output
below the level chosen by & fully integrated monopolist. For example,
Comsat might charge AT&T some annual fee not based on usage, plus the
marginal cost of any satellite facilities it used. Comsat would not mark up
the price of satellite circuits over marginal cost because that might cause

AT&T to produce less than the profit maximizing level of end-to-end service.

B. To offset distortions caused by she fact thet ATST ie 2 manufactrst ur
of submarine cables.

It has been argued that “AT&T can be expected to prefer cable use a6 a cable
manufacturer," regardless of relative cost.!9 To separate out the influence
of rate-of-return regulation, we will first examine this proposition on the
assumption that AT&T is an unregulated monopolist + Would such a firm favor
the use of inputs it manufactured itself over purchased inputs, regardless
of relative cost? Clearly it would not if it wished to maximize its

profits, since profit maximization requires cost minimization.

—

10 CC Docket No. 79-184, Second Report and Order, August 7, 1985, para.
48.

-15-


transponder~by-transponder."16

Some PTTs may also favor cables over satellites to support domestic
manufacturing interests. England and France both have large cable
manufacturers while satellite manufacture is dominated by U.S. firms. Part
of TAT-8 will be constructed by "STC" of the United Kingdom and “Submarcom"
of France. It may be politically advantageous for PITs to support these
domestic cable interests even if equivalent international service could be
provided for less using satellites. This possible bias does not, however,
justify the FCC requiring AT&T to use satellite circuits. It would be
better to create the conditions for unbiased choices by U.S. carriers and
to let them jointly represent U.S. interests in direct negotiations with

PITs.

v. UNINTENDED CONSEQUENCES OF THE CIRCUIT LOADING POLICY
A. High prices and high costs.
The FCC’s circuit loading policies have given Comsat the incentive to charge
higher prices than if AT&T had been free to substitute cable circuits for

satellite circuits. Absent such regulation Comsat would have been unable to

16 Contribution of Comsat (the U.S. Signatory) to INTELSAT’s review of
charging policy, INTELSAT document BG-60-85E W/9/84, September 17, 1984,
pel.

- 28-



III. OBJECTIVES OF FACILITY REGULATION
One objective of FCC policy towards international facilities should be to
minimize the cost of providing a given level and quality of service. The
major determinant of the cost of international transmission services is
investment -~ both the mix of satellite and cable capacity and the total
level of capacity. The allocation of usage among existing facilities has
little direct effect on total cost, since most of the cost is fixed. In
other words, shifting a circuit from cable to satellite will have virtually
no influence on total short run cost. The cost saving to AT&T from
deactivating a cable circuit would be approximately zero, while the added
cost to INTELSAT of activating an additional circuit would also be

approximately zero (assuming circuits are available).

Regulation of new construction can, in principle, directly influence cost by
shaping both the mix and total level of facility investment. Circuit
loading policy, however, has little direct effect on cost because it
regulates only the allocation of circuits among existing facilities.
Nevertheless, in the long run, circuit loading policy may be an important
determinant of cost through its indirect influence on investment decisions.
For example, mandating that AT&T must load a given percentage of its traffic
on satellites may give Comsat an incentive to charge more for satellite

circuits, which in turn may increase AT&T‘s incentive to invest in cable

-10-


Deregulation is not without risks, however. The benefits of deregulation
will not materialize without the cooperation of foreign PTTs. U.S. firms
cannot unilaterally decide on the level or mix of international facilities.
All such decisions must be made jointly with foreign telecommunications
authorities. Introducing competition for the U.S. share of international
facilities has the potential to benefit both U.S. consumers and foreign
PTTs, by reducing the cost of providing service. Nevertheless, we cannot
guarantee that PTTs will in fact cooperate in agreeing to @ more efficient
structure of international facilities. Cooperation of foreign governments
will also be necessary to forge new policies towards INTELSAT. It is
inevitable that promoting competition among international facilities will
place new pressures on INTELSAT. It will no longer be possible to charge
above cost on certain routes in order to charge below cost on others. If it
is deemed desirable to continue such subsidies, new methods of financing
them must be developed. Finally, it is possible that, in the short term,
deregulation may result in higher prices on those few routes currently
served only by INTELSAT facilities. But, as we argued above, it would be

unwise to let 7% of the circuits determine policy for the remaining 93%.
Weighing the potential pitfalls with the likely benefits to the public, we

believe that the Commission should deregulate international facilities and

international carriers along the lines proposed in Section VIII.

- 73 -


use is predatory .4 PanAmSat has just received FCC authorization for
providing domestic satellite service in Latin America and presumably does
not want to compete with INTELSAT. Earlier this spring, Orion Satellite
Corporation, another potential competitor, argued that "INTELSAT should be
permitted to offer non-switched services only on 4 fully allocated cost
basis, including all direct costs of service, a full allocation of common
costs and an appropriate return on capital. Under no circumstances should
INTELSAT be permitted to price on an incremental or short term marginal cost
basis. One can argue about the precise process for assuring that rates sre
based on fully allocated costs, put the full allocation of costs is
essential to promote the public interest, ensure a modicum of equity, and

prevent predatory pricing ."47

The Commission should treat such claims of predation with great skepticism.
It would seem far better to allow the public to benefit now from low prices
for transponders (or low long term Jease charges) than to maintain a floor

on prices in order to protect the public against possible price increases in

the future.

—

46 Washington Post (September 13, 1985), p-El.
47 Letter to William Schneider Jr. of the State Department and David

Markey of NTIA from Christopher Vizas Il of Orion Corporation, April 12,
1985.

- 60 -


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Section IV. examines nine possible reasons for requiring AT&T to use Comsat
facilities for a portion of its traffic. One approach is to ask why AT&T
might choose cable facilities when satellites are the least costly mode.
The reason cited most often is that AT&T is biased towards using facilities
under its control because it has market power both as a major supplier of
international telephone service and as Comsat’s primary customer. Another
common allegation is that AT&T has an incentive to favor cable because it is
a manufacturer of cables. It is argued here that absent rate-of-return
regulation AT&T would have no incentive to behave in this way. It is
possible, however, that under certain conditions rate-of-return regulation
could induce AT&T to favor cable over satellite circuits because cable

investments enter in its rate base while satellite lease charges do not.

Even if AT&T were not biased there may be a public policy rationale for
requiring it to use Comsat circuits. One reason might be to subsidize the
establishment of a worldwide satellite system. But, now that this system
has been operating for twenty years it is questionable whether such a
subsidy is still appropriate. Another possibility is to permit
cross~subsidies within that worldwide satellite system. We argue that if
such subsidies are desirable they should be financed in some other way.
Several additional reasons for mandating that AT&T use Comsat‘s circuits are
examined, including the possibility that it is necessary to offset biases of
foreign Administrations of Posts, Telegraph, and Telephones (PTTs), with

whom AT&T must jointly plan its international facilities.


upon failure of a major transmission facility ."13 Before concluding that
FCC regulation is needed to assure high reliability of service, one must
firet demonstrate that carriers would be unlikely to provide sufficient
reliability absent such regulation. But the conventional wisdom is that
AT&T has tended to put too much emphasis on reliability .14 In any case,
the Commission’s balanced loading methodology does not maximize
reliability, given investment decisions. it takes no account of differences
in reliability across facilities, or the existence of restoration equipment
that allows one facility to act as @ backup for another. For example, if
there were two facilities, balanced loading would put an equal number of
circuits on each even if one facility were 99.9 percent reliable and the

other 10 percent reliable.

I. To offset biases of foreign correspondent s«
It is important to remember that U.S. carriers cannot unilaterally decide

on international facilities investments and circuit loading- All such

_—

13 CC Docket No. 79-184, Second Report and Order, August 7, 1985, para.
51.

14 “perhaps the largest overinvestment occurs, therefore, because the
trade-off between cost and service quality has not been made in the market.
If service reliability has been set at 4 level at which the costs exceed
the value consumers place on reliability, all who subscribe are paying more
than necessary for the service, and some may fail to subscribe because less
costly options are unavailable." Cornell, Kelley, and Greenhalgh (April
1980), p-20- .

-25-


and pricing more heavily. The other path would liberalize regulation and
place increased reliance on improving the incentives of the affected
companies. Either path might produce better outcomes than the Commis sion’s
current approach of heavily involving itself in the allocation of usage
among facilities, but exercising little control over investment and pricing.
We will argue that restructuring the incentives of carriers and suppliers of
facilities is more likely to be a successful strategy>s given the limit ations
on the FCC’s authority and the limited ability of any regulatory agency to

determine costs.

More extensive regulation would involve better control of both new
construction and the prices charged by regulated firms. Tight control over
entry is particularly important if the FCC wishes to allow Comsat and
INTELSAT to price above cost on certain routes in order to cross-subsidize
other routes. Without such entry restrictions, firms whose costs are below
Comaat’s prices will enter. Some of these “creamskimmers" may even have
costs above those of Comsat. For regulation of investment to be effective,
the FCC must have control over construction of all satellite and cable

systems, including private systems. But the FCC has only indirect control

-52-


conditions for unbiased choices of international facilities. If carriers
are not biased, and cross-subsidies are either dropped a6 @ policy objective
or financed directly, there is no justification for future Commission
involvement in circuit loading. Without regulatory entry barriers INTELSAT
and Comsat will be under competitive pressure to minimize costs and to align

their prices with the cost of serving each route.

VIII. PROMOTING UNBIASED INTERMODAL COMPETITION
A. Phasing ot Conmission-specified sixcuit wit loading.
To achieve the efficiency benefits of deregulation it may be sufficient
to end all Commission involvement in the loading of future facilities.
There would be Little additional cost savings from immediately terminating
all circuit loading requirements because to 4 large extent the costs of
current facilities are eunk.42 But @ sudden end of circuit loading

requirements for existing facilities might result in Comsat losing

—e

42 Facilities under construction or contract for construction present
some complications for phasing out circuit loading requirements. The costs
of such facilities are only partially sunk. In deciding whether to complete
such projects 88 originally scheduled, only the variable costs should be
considered. In some cases it would be economically efficient to cancel a

contract to construct a satellite or to sell the satellite to another user-

- 54-


subetantial traffic and revenue. 43

Some form of transition is needed to move from the current loading
requirements to the absence of such requirements when all existing
facilities are no longer in service. The precise form of the transition is
largely a question of equity, but may also have efficiency implications. A
simple transition methodology would be to guarantee each Comsat facility
the number of circuits in place at the expiration of current loading plan
that applies to that facility. The loading requirement would expire when
the facility is replaced. Literally following this plan might, however,
provide Comsat and INTELSAT with perverse incentives. First, they would
have an incentive to prematurely replace satellites prior to the expiration
of the current loading plans. Having new facilities in place at the
expiration of the current loading plan would extend the time AT&T would be
obliged to use Comsat facilities because the new facilities would operate
longer than the ones they replaced. Second, after the expiration of the
current loading plans, INTELSAT would have an incentive to excessively

extend the life of facilities in order to extend the loading requirements.

43 Without mandated circuit loading, Comsat would be likely to lose
traffic because carriers own cables but lease satellite circuits on a short
term basis. See Section IV. D. above for a discussion of why this
difference in contractual arrangements could result in a large shift from
satellites to cables in the short run.

- 55 -


if satellite prices give it the wrong signale about costs. One reason
satellite prices may not be aligned with coste is that INTELSAT‘s globally
averaged pricing structure tends to charge above cost on high traffic routes
and below cost on low volume routes. In the short run, allowing AT&T to
freely choose ite mix of facilities might result in it constructing cable
when satellites were the least costly mode. In the long run, allowing AT&T
to "creamskim" on the high density routes would limit INTELSAT’s ability

to cross-subsidize its light routes. These routes tend to involve traffic
originating in or terminating in relatively small and lesser developed

countries.

To assess this argument one must first determine the magnitude (if any) of
such cross“subsidies, and then evaluate whether it is in the U.S. interest
to maintain these subsidies. Even if the subsidies turned out to be large
and were generally going to countries the U.S. wished to support, it is
doubtful that this is the best system for providing the subsidies. Some
form of direct aid financed from general revenues would likely be better
than "taxing" users of heavy international routes to subsidize users of

light ones.

G. INTELSAT is an unsustainable natural monopoly.

A firm is a “natural monopoly” if the market demand can be produced at the

lowest cost by a single firm. Under these circumstances it would be

inefficient to have more than one firm supplying a market. One would think

- 22 -


2. Options within the framework of rate base regulation.

If it is decided not to deregulate international carriers at this time, it
may still be possible to correct potential investment biases caused by
rate-of-return regulation. One option would be to allow satellite
investments in carriers” rate bases. Under this option carriers would be
able to own satellite circuits in a manner analogous to the current
ownership arrangement for international cables. A carrier can now acquire
the use of a cable circuit by making a one-time purchase of an IRU
(indefeasible right of user) and paying an annual fee for its share of the
the operating and maintenance costs. An IRU guarantees the owner the right
to use a circuit for the life of the facility but gives him no voice in the
day-to-day management of the facility. The new ownership rules would apply
only to new investment, that is, facilities not currently in operation or
under contract for construction. There is no benefit to changing
ownership rules for existing investment, since decisions on past investment
have already been made and cannot be undone. Moreover, allowing existing
satellite circuits to enter carriers’ rate bases might have the effect of
increasing their revenue requirements, and hence regulated prices. As under
the complete deregulation proposal, Comsat would be free to set the prices

and terms of the new circuits.
Another alternative would be to establish an international cable carrier

analogous to Comsat and require AT&T and the international record carriers

(1RCs) to divest themselves of their cable holdings. This policy would also

-65-


Table 1

Table

Table

Table

Table

Table

Table

7

LIST OF TABLES

Page

AT&T’s (Before Tax) Cost of TAT-5 for 1970-1984 vss
The Cost it Would Have Incurred if it Had Paid Satellite
Lease Charges For the Circuits Actually Loaded on TAT-5. 4062 -36-A

AT&T’s (Before Tax) Cost of TAT-8 for 1987-1991 vs.

The Cost it Would Have Incurred if it Had Paid Satellite

Lease Charges For the Circuits Expected to be Loaded

on se Charees FOr the arn eceeeneenensesnenessse tess

AT&T’s (Before tax) Cost of HAW-3 AND TPC-2 for Australia

and Japan for 1974 to 1988 vs. The Cost it Would Have

Incurred if it Had Paid Satellite Lease Charges For the

Circuits Loaded on WAW-3 and TPC-2 for Australia and Japan. ..36-C

Atlantic Ocean Region Capacity and Message Service Usage

(Full Time Voice Circuits at End of Year)acosececncnenons ese AT®

Pacific Ocean Region Capacity and Message Service Usage
(Full Time Voice Circuits at End of Yearecscecscecseere® oe AT B

Comparison of Unused Capacity on INTELSAT Operational
Satellites with AT&T’s Cable Usage (Full Time Voice
Circuite at End of Bee eee enneceasneceenresenese teense dG

Major AT&T Gablesssceccececcescesencencesseesnsessns sss 207 D

iii


VIII. Promoting Unbiased Intermodal Competition. ..csscsseececes
Phasing Out Commis sion-specified Circuit Loading...-
Deregulating Comsat.-..++-e>
Eliminating Distortions in Carriere

Ix.

A.
B.
Cc.

D.

1.
2.

Deregulate International Service CarrieTS..cseseees
Options Within the Framework of Rate Base Regulation......65

Issues Raised by Promoting Intermodal Competition. ..sseeeesers 67

1.
2.

3.

Will PTTs Be Able to Appropriate All the Benefits

of Intermodal Competition?...scececesescccerscscnceeeesesO7
Alternative Policies to Subsidize INTELSAT or
Cross-subsidize Specific ROUteSscccecccesccccsecsceseeess 009
How Should the FCC deal with Routes Served Only

By Satellite?..csersssecerreccerverseeers aeceeel0

Conclusions and Recommendation. .ssscseescecececeeensetsesereeeesed

Referencessscoscececccseccsscsccccssssereseresceee

sececeenee ed

ii


facilities. We shall elaborate on this point later in the paper .©

The Commission should also be concerned about pricing of international
facilities. Even if international transmission services were produced at
the least cost, there could still be a social loss if carriers could not
acquire those services at cost. To the extent that carriers face
excessively high prices for international facilities and pass these costs on
to customers, the prices of international services would be too high, and

output too low.

Iv. RATIONALE FOR MANDATING THE USE OF SATELLITE FACILITIES
Before examining specific arguments that have been made for requiring AT&T
to use satellite circuits, it is helpful to distinguish between two general
reasons that AT&T might wish to use cable facilities even if satellites are
the least costly mode. First, AT&T may be biased, so that it would choose
incorrectly even if satellite facilities were correctly priced. That is,
AT&T might choose cable facilities even if satellite facilities were priced
below the cost of cable facilities. An example of an argument of this form
is that AT&T is biased in favor of cable because cables enter its rate base

while satellite circuits do not. Second, Comsat’s prices may give AT&T the

6 See Section V- A.

-ll-


PROMOTING COMPETITION BETWEEN
INTERNATIONAL TELECOMMUNICATION CABLES AND SATELLITES

January 8, 1985

I. INTRODUCTION AND SUMMARY
The FCC’s regulatory policies have prevented competition between
international satellite and cable facilities. Instead of letting AT&T
freely choose between cables and satellites, the Commission has required
AT&T to send a share of its international traffic on satellite circuits

leased from the Communications Satellite Corporation (Comsat).

This policy may have served some historical purposes, such as fostering the
establishment of @ worldwide satellite system. But, it is argued here that

there is little justification for its continuation.

The paper is organized a8 follows: Section Il provides background
information on the history of FCC regulation of international facilities.
Section I11 discusses the objectives of facility regulation. It suggests
that policy should focus on the cost and pricing of international facilities
and not on the allocation of profits among U.S. firms. Since the major
determinant of the cost of international transmission services is
investment, a key element in evaluating regulatory policies should be their

effect on future investment decisions.


X. REFERENCES

Averch, Harvey and Leland Johnson. "Behavior of the Firm Under Regulatory
Constraint." American Economic Review, (December 1962), pp. 1053-1069.

Baumol, William, Panzar, John and Willig, Robert. Contestable Markets and
the Theory of Industry Structure. New York: Harcourt Brace Jovanovich,
Inc., 1982.

Brock, Gerald. "Bypass of the Local Exchange: A Quantitative Assessment."
U.8. Federal Communications Commission, Office of Plans and Policy, Working
Paper No. 12 (September 1984).

Brock, William. "Contestable Markets and the Theory of Industry Structure:

A Review Article." Journal of Political Economy, Vol.91, No.6 (December
1983), pp. 1055-1066.

Committee on Telecommunications, National Academy of Engineering, Reports on
Selected Topics in Tele nications, Final Report to the Department: of

Housing and Urban Development under Contract No. H-952, November 1968,
Revised December 1968.

Cornell, Nina, Daniel Kelly and Peter Greenhalgh. “Social Objectives and
Competition in Common Carrier Communications: Incompatible or Inseparable?"

U.S. Federal Communications Commission, Office of Plans and Policy, Working
Paper No. 1 (April 1980).

Dinneen, Patricia. "Departures from Efficiency in Regulated Industries: The
Case of International Telecommunications." (unpublished Ph.D dissertation,
Department of Economics, M.I.T.), April 1980.

Hatfield Associates, Dale. "An Analysis of Comsat International
Communications Rates," March 28, 1985. A study commissioned by Turner
Broadcasting and submitted in CC Docket No. 84-1299, April 1, 1985

Hinchman, Walter. "The Economics of International Satellite Communications."
(Report Prepared for INTELSAT), May 18, 1984.

Kwerel, Evan. "Promoting Competition Piecemeal in International

Telecommunications." U.S. Federal Communications Commission, Office of
Plans and Policy, Working Paper No. 13 (December 1984).

-74-


marginal cost for using cable circuits, ite profit maximizing price for

end-to-end service would be higher than if it were a fully integrated

firm. 51

D. Issues raised by promoting intermodal competition.
1. Will PTTs be able to appropriate all the benefits of intermodal
competition?

Foreign telecommunications administrations are bottlenecks in the provision
of international telecommunications. They control distribution within their
countries. In OPP Working Paper 13, Kwerel (1984) argued that there is a
long term danger that PTTs will appropriate the gains from competition among
U.S. firms. Competition among suppliers of transmission facilities "will
tend to drive the price of that component down to cost. But the price of
the total service may remain the same if some other essential component of
the service is controlled by a monopolist. The PTTs have a monopoly on
access and may be willing to exercise their market power in order to provide
revenues to subsidize domestic telephone and postal rates."52 In other

words, competition may do nothing more than shift profits to PTTs.

51 Note that the same argument applies to the current prohibition against
AT&T providing international satellite circuits. Allowing AT&T (and PTTs)
to (jointly) provide satellite circuits would avoid the potential of
INTELSAT/Comsat marking up the price of such circuits above marginal cost.

52 Kwerel (1984), p.2 executive summary-

-67 -


very careful about what is taxed. As we have seen in the domestic market,
charging carriers for each minute of access to local switches has not proved
to be a trouble free method of financing the fixed costs of local exchanges-
Such usage-based charges may have created incentives for uneconomic "bypass"
of such switches because the total access charges large users must pay
exceeds the cost of using private lines to connect these users directly to a

long distance carrier. 54

3. How should the ECC deal with routes served only by satellite?
This paper has argued for replacing FCC regulation of Comsat with the
discipline of competition. Yet competition between satellite and cable
facilities may not be feasible on certain routes. In 1985, 26.2% of the
countries served by AT&T were served only by satellite. But they accounted
for only 6.9% of AT&T’s international circuits. Most of these countries

were in Africa and South America.

There are three basic options for dealing with this dilemma. One is to
deregulate all markets despite the fact that some may not be competitive in
the short term. The second is to continue regulating Comsat in all markets
because a small percentage of the markets may not be competitive. The

third is to deregulate only those markets that are deemed competitive.

54 See Brock (1984).

-70-


level. In other words, under these conditions, & regulated firm can
increase its allowed revenue by more than its costs by enlarging its rate
pase.!! This suggests that AT&T may have an incentive to favor investing in

cable facilities over leasing satellite circuits.

It is important to note that if the allowed rate-of-return were just equal
to the cost of porrowing, there would be no advantage to investing in cable
relative to leasing satellites. And if the allowed rate were below the cost
of borrowing, this theory suggests that AT&T would prefer leasing satellite
cirevite over owning cable circuits (provided it stayed in business). In
practice the allowed rate-of-returo is adjusted infrequently but the cost of
borrowing fluctuates 80 the allowed rate js sometimes above, sometimes
equal, and sometimes pelow the cost of borrow ing- In this situation, AT&T
must compare the expected profits over the life of a cable with the expected
profits of leasing satellites. A bias in favor of cable would generally

require that, on average, the allowed rate were above the cost of borrow ing-

For the Averch-Johnson effect to bias AT&T towards cable it must also be
true that the Commission enforces its rate-of-returno regulations. If the
Commission infrequently reviews AT&T’s earnings and does not require it to

give back profits that exceed the allowed rate, AT&T might have little

—

ll See Averch and Johnson (1962).

-ll-




Deregulating all markets appears to be the best option. Under the plan
proposed in this paper, only Comsat circuits not subject to loading
requirements ("new circuits") would be deregulated. A price cap would
temain on those circuits covered by the loading requirements (“old
circuite"). Thue price increases, if any, would be limited to new circuits.
Any such price increases would gradually increase the average cost of
serving these points as circuit loading requirements were phased out. If
the price increases were substantial, there would be strong pressure from
U.S. carriers and PTTs in the affected countries to avoid using Comsat
circuits. One way of doing this would be to construct additional cables.
Another would be to develop alternative satellite systems. If Comsat tried
to price well above the cost of separate satellite systems on these routes,
there would be great pressure both in the U. S. and abroad to allow private
satellite systems to provide switched message service. The Commission would
then need to directly face a restructuring of the INTELSAT arrangement.
INTELSAT would no longer have a monopoly on the provision of switched voice
satellite communications. At that point there would seem to be no reason to
bar AT&T from having its own international satellite facilities. The fear
of fostering such an unraveling of INTELSAT may constrain Comsat from
setting excessive prices on routes now served only by satellite. If not, in
the long run there is likely to be actual competition in virtually all

markets.

-71-




Between 1974 and 1988, it cost AT&T $16.6 million more to serve Australia
and Japan by HAW~3 and TPC-2 than if it had leased satellite circuits from

Comsat.

There are three sources of evidence that Comsat’s prices have exceeded cost
on certain routes. The first is engineering cost studies. Two cost studies
found that during the 1970s satellites cost the same or less than cable for
serving the Atlantic Ocean region. Yet Comsat“s prices exceeded cable costs
in the Atlantic for this period. This suggests that satellite circuits were
priced above cost on this route. The second source of evidence is that
several unregulated satellite firms have recently applied to provide
international private line service in competition with Comsat. There is

no reason to expect that these firms would wish to enter unless they
believed that they could provide some services at a lower price than Comsat.
This does not prove that Comsat is charging more than its own cost. But it
does suggest that Comsat is charging more than the minimum cost of
providing those services. The third source of evidence is that Comsat’s

rates for video service exceed the rates for equivalent domestic service.

The third major issue addressed in Section VI is whether circuit loading
policy caused excessive investment in cable facilities. We were not able
to empirically prove that Commission policy distorted investment, but we
were able to provide evidence that there was excessive investment. We found

that the entire demand in both the Atlantic and Pacific ocean regions for


Section V makee the theoretical argument that the FCC’s circuit loading
policies may have increased both the costs and prices of international
facilities. The requirement that AT6T send a portion of its traffic by
satellite gave Comsat the incentive to set higher prices for its circuits.
Faced with high prices for satellite circuits, AT&T had the incentive to
build additional international cables, even when satellites were
technologically the Jeast costly way to transmit international telephone

Section VI examines empirical evidence that sheds light on three of the
central questions discussed in the previous sections. The questions are:
Is AT&T biased towards cable? Has Comsat charged above cost on certain
routes? And, have the Commis sion’s circuit loading policies lead to

excessive investment in cable facilities?

To test whether AT&T is biased we compared AT&T’s cost of three cable
systems with estimates of the cost it would have incurred if it had leased
satellite circuits. There is no evidence of bias for either of the Atlantic
cables that we examined (vAT-5 and TAT-8). Between 1970 and 1984, the
present value of AT&T’s savings from construct ing TAT-5 was approximately
$36 million. Similarly, TAT-8 is likely to pay for itself within the first
five years of its twenty-five yeat life expectancy- In contrast, the

Pacific cable system is consistent with the view that AT&T is biased.


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To gain more insight into the question of bias we compared AT&T’s (before
tax) cost of three cable systems with the (before tax) cost it would have
incurred if it had paid satellite lease charges. For historical periods we
used the actual satellite lease charge. As was discussed above, this is
only an estimate of the charges AT&T would have paid to use more satellite
circuits. For future periods we used AT&T’s forecasts of Comsat charges.
Using thie methodology, there was no evidence of bias for the two Atlantic
cables that we examined. Both TAT-5, an old generation cable, and TAT-8,
the latest generation fiber optic cable, were unambiguously cheaper for AT&T

than the satellite lease charges.

Table 1 compares AT&T’s cost of TAT-5 for 1970-1984 with the cost it would
have incurred if it had paid satellite lease charges for the circuits
actually loaded on TAT-5. Yearly lease charges if AT&T had used satellites
were estimated by multiplying the average number of circuits in service on
TAT-5 times the Comsat charge per (half) circuit for that year. Between
1970 and 1984, the cumulative present value of the expenditures AT&T made
for circuits on TAT-5 was $39 million. The cumulative present value of the

satellite lease charges for this period would have been about $74.5 million.

Given our assumptions about satellite prices, this difference may understate
the amount AT&T saved by using cable. First, the cable is expected to
operate for another 10 years at minimal expense. Second, the actual number

of circuits carried by TAT-5 is somewhat greater than indicated in Table 1.

- 36 -


This unfortunate outcome is unlikely for two reasons. First, the model on
which it is based does not allow for efficiency gains from competition. The
model assumed that prior to the introduction of competition, the joint
suppliers of international telecommunications were acting as if they were a
single profit maximizing monopolist (i.e. maximizing joint profits). As
discussed in Working Paper 13, if the suppliers were not maximizing joint
profits, introducing competition for a component of a service might increase ©
economic efficiency and reduce the price of end-to-end service for U.S.
users.53 In particular, increasing competition in the supply of
international facilities would be likely to increase economic efficiency
because U.S. carriers, Comsat, and INTELSAT do not appear to be acting
cooperatively. If they were, we would not observe the construction of cable
facilities when virtually equivalent service could have been provided at
lower cost by satellites. Under the current arrangement, AT&T sets ite
prices for international service based on Comsat’s charges, not on
INTELSAT’s marginal cost of providing additional satellite circuits. This
may have resulted in the current price of end-to-end service being above the
long term profit maximizing level of a single supplier of end-to~end
international telecommunicatons. Elimination of loading requirements would

reduce the marginal cost to AT&T of expanding its international services,

53 See Kwerel (1984), pp. 13-16.

- 68 -


The existence of an unsustainable natural monopoly could, however, be used
to justify the establishment of a single provider of international
facilities. This single entity would be free to choose between satellites
and cables, and would be protected from competition. There are several
reasons to be cautious about accepting such a conclusion. ‘First, Brock
(1983) has raised serious questions about whether an unsustainable natural
monopoly could exist. He argues that in the model developed by Baumol,
Panzar, and Willig, the incumbent is limited to maintaining an announced
price when faced with potential entry. If the incumbent is allowed to cut
his price when faced with entry, a natural monopoly may always be
sustainable. Second, in practice, it may be virtually impossible to
determine whether the conditions for unsustainability are met. Finally,
while there may be benefits to restricting entry, there are also costs. The
major cost is the loss of the discipline of the market. Competition places
pressure on a firm to hold down costs and prices. Eliminating the
possibility of entry increases burden on the regulatory process to prevent
the single entity from charging excessive prices and incurring excessive

costs.

H. To assure high reliability of service.
One justification the Commission gave for adopting balanced loading as the
circuit loading formula was that it would “provide service reliability

benefits such as reducing to a minimum the number of circuits interrupted

-24-


The table shows cable capacity without the use of time assignment speech
interpolation equipment (TASI). This “circuit multiplication equipment"
doubles the number of voice conversations carried on a basic voice circuit.
Beginning in 1981 TASI was used on some circuits. If these TASI derived
circuits had been included in the number of TAT-5 circuits in service shown
in table 1, the cumulative present value of satellite lease charges would

have been greater, as would be the amount AT&T saved by using cable.

Table 2 compares AT&T’s cost of TAT-8 for 1987-1991 with the cost it would
incur if it pays satellite lease charges for the circuits expected to be
loaded on TAT-8. TAT-8 has not yet been constructed, 80 actual satellite
lease charges cannot be used as an estimate of the cost saving to AT&T of
not using satellites. Based on AT&T’s forecast of satellite charges, Table
2 shows that TAT-8 will pay for itself within the first five years of its
twenty-five year Life expectancy. That is, the cumulative present value of
ATG&T’s expenditures on TAT-8 between 1987 and 1991 are projected to be $150
million. In contrast the cumulative present value of the satellite lease
charges for these circuits would be approximately $158.5 million. This
assumes that AT&T follows the circuit loading plan specified by the

Commission in its meeting of August 7, 1985. If AT&T were allowed to load

»

greater number of circuits on cable, the cost savings overt satellite lease

charges would be greater.

-37-


that if a firm were @ natural monopoly, there would be no need for the
government to restrict entry gince the incumbent firm would be able to set &
price which would deter additional firms from entering. Nevertheless,
Baumol, Panzer, and Willig (1982) have shown that under certain conditions
a natural monopoly may be unable to deter entry, that is, the natural
monopoly may be “ynsustainable". If this were 80, restrictions on entry may

be justified.

This argument could not possibly justify the FCC’s circuit loading policy-
To simplify the analysis we will initially assume that satellite and cable
circuits are perfectly equivalent and that there are large economies of
scale in both satellite and cable facilities. If this were the case, the
economically efficient outcome would be for all service to be provided by
a single firm, using either all satellites or all cables, whichever is
cheaper. But FCC circuit loading policies have attempted to spread traffic
between satellite and cable facilities. Alternatively, assume that cable
and satellite circuits are not perfectly fangible- In this case, the issue
of natural monopoly is whether, because of “economies of scope," both types
of circuits could be produced at least cost by & single firm. But the
circuit loading policy is not designed to establish a single firm providing
poth cable and satellite circuits. Thus, the possibility that INTELSAT is
an unsustainable natural monopoly cannot justify existing circuit loading

policies.

-23-


light traffic.

Our theoretical analysis suggests that the Commission’s circuit loading
policy and rate~of-return regulation could have lead to such investment
distortions. Absent Commission involvement in circuit loading, it is likely
that AT&T would have constructed fewer cables, and used more satellite
facilities. And absent rate-of-return regulation, it unlikely that there
would have been such excessive total investment in cable and satellite
facilities. Unfortunately, theory does not provide us with a method for
estimating the degree to which loading policy and rate-of-return regulation

individually or jointly contributed to these distortions.

VII. MAJOR POLICY ALTERNATIVES: REGULATE BETTER OR DEREGULATE
It has been argued above that most of the traditional reasons for regulating
the loading of international facilities cannot withstand careful scrutiny.
And that such regulation may have raised the price of satellite circuits and
distorted investment decisions. Nevertheless, one cannot completely dismiss
the possibility that AT&T may be biased in favor of cables because of
rate-of-return regulation or that INTELSAT‘s globally averaged pricing

structure may give AT&T the wrong signals about costs.
There are two divergent paths the Commission might follow if it wishes to

promote a more efficient structure for international transmission

facilities. One path would have the Commission regulate business investment

-51-




IMTS market would not bias AT&T towards cable facilities. Nor would the
fact that AT&T is the only buyer necessarily create a distortion. Comsat
would be the sole seller of international satellite services facing a single
buyer. Economists refer to such a situation as a bilateral monopoly.? It
is clear that under voluntary bargaining AT&T would not pay more for using
satellites than the cost of providing the service using cables. But if
Comsat offered AT&T a long term contract guaranteeing AT&T ‘satellite
circuits for less than the cost of constructing and operating a new cable,
AT&T would have the incentive to use satellites because doing so would
increase its profits. Moreover, if satellites were truly less costly than
building a new cable, it would be in Comsat’s interest to make AT&T such an
offer. Thus it is quite likely that absent regulation, AT&T would choose

the least costly mode.

The negotiations between Comsat and AT&T could affect the level of output

as well as the cost of producing that output. One possible outcome of the

expect greater leeway for departure from profit maximization when firms
enjoy appreciable monopoly power than when competition is intense” (p.39).
In assessing whether a deregulated AT&T is likely to profit maximize, one
should not place much weight on observations of AT&T’s past behavior under
regulation. As a regulated firm AT&T had little incentive to minimize
costs. With its profits limited by regulation, it was quite rational for
AT&T to pursue other objectives than cost minimization. Regulation could
well have induced AT&T to invest in the development of cable technology and
manufacture beyond the profit maximizing level.

9 See Scherer, 1980, pp.299-303.

-14-



leading it to reduce its prices. In this case, such a price reduction may
also be in the interest of the PITs since it might increase the total

profits available for redistribution.

The second reason that such a shift in profits is unlikely to occur is that
even with increased competition among U.S. suppliers of international
facilities PTTs will still face some bottleneck (regulatory or market power)
at the U.S. side of international circuits. No matter how competitive the
U.S. international telecommunication industry becomes, the FCC can still
assert its power over facilities authorization and settlements rates to
assure that the efficiency gains from increased competition are shared

fairly between the U.S. and its foreign correspondents.

2. Alternative policies to subsidize INTELSAT or crose-subsidize
specific routes.

If maintaining a subsidy to certain routes, countries, or services is
considered an essential U.S. policy objective, it is still possible to do so
without restricting competition with Comsat /INTELSAT as a means of permitting
Comsat /INTELSAT to cross~subsidize these activities. Ideally, the foreign
aid objectives should be met through direct aid financed from general tax
revenue. If this is not possible, the subsidy to high cost satellite routes
could be financed by taxing all suppliers of international telecommunication
services, including private carriers. This would permit financing the

subsidy without excluding highly efficient entrants. Of course one must be

- 69 -


and cable investment.

Tables 4 and 5 show capacity and message service usage for satellite and
cable facilities in the Atlantic and Pacific Ocean regions respectively. In
both regions, utilization rates have tended to drop when new facilities were
put in service and have gradually risen as demand has caught up to capacity.
Utilization rates were more variable in the Pacific than the Atlantic. In
the Pacific total utilization ranged from a low of 13% in 1975 to a high of
72% in 1981. In the Atlantic it ranged from a low of 24% in 1976 to a high
of 62% in 1980. These figures tend to overstate utilization because they
understate available capacity. Cable capacity is shown without the use of
TASI, which doubles the capacity of the circuits on which it is used. Not
accounting for TASI also explains the fact that in 1984 cable utilization in
the Pacific was 116%. Satellite capacity is understated a6 well. The
figures presented in tables 5 and 6 exclude what INTELSAT calls "limited
performance satellites." These tend to be older satellites that are no
longer being used. While these satellites cannot operate at their maxinum
designed capacity, they may still have a significant number of usable

circuits.

These utilization figures suggest that there has been serious excess
capacity in international facilities. Another way to illustrate the
possible excess capacity is to note that between 1970 and 1984 unused

satellite capacity consistently exceeded cable usage. (See table 6).

-4 -


put both modes on an equal basis. But in contrast to the previous
alternative it would do so by ensuring that neither satellite nor cable

would enter 4 carrier’s rate base, and neither would be under the control of

a carrier.

Requiring cable divestiture is & bad idea for two reason. First, it would
result in the loss of the advantages of vertical integration. Vertical
‘integration may allow a company to design specialized products, such 8s
suboceanic cables, at lower cost and to better meet its internal
requirements than if it were to purchase the inputs from an out side
supplier. In the case of international facilities, vertical integration
also allows greater operational coordination between domestic and
international haul. AT&T has traditionally considered such control over
design and operation of facilities extremely important for maintaining a

high level of service quality.

Second, requiring such a divestiture might also create an additional
bottleneck in the provision of international communications. Vertical
integration assures that AT&T faces the marginal cost of providing
additional cable facilities. If cables were provided by @ separate entity
analogous to Comsat, it is possible that an efficient bargain could be
worked out between the entity and AT&T so that AT&T would make decisions

based on marginal costs. It is also possible however, that such an

efficient arrangement will not be arrived at. Lf AT&T paid more than

- 66 -


The second option of continuing to regulate Comsat in all markets appears to
be the least attractive. It would be a mistake to forego the benefits of
competition in all markets because a number of low volume markets are
currently served only by Comsat circuits. It is highly unlikely that the
losses associated with price increases in markets with approximately 7% of
the traffic would outweigh the benefits of price decreases in markets

with 93% of the traffic.

The third option of market-by-market deregulation would be attractive
except for the fact that it would present great administrative problems.
Because satellites provide a joint product, there is no meaningful way to
apportion costs to separate markets. Thus the Commission could find itself
bogged down in endless debates about cross-subsidies between regulated

and unregulated markets.

m. CONCLUSIONS AND RECOMMENDATIONS
This paper makes a case for deregulating international telecommunication
facilities. It proposes phasing out FCC circuit loading requirements, and
ending rate~of-return regulation of Comsat and the international service
carriers, including AT&T. It is argued that such deregulation would result
in a more economically efficient level and mix of facilities investment,

and in lower prices for using international facilities.

-72-


Of course there are other criteria besides cost minimization. Satellites
and cables may differ in service characteristics, reliability, and security.
Because of the time delay in satellite transmissions, satellites may be
inferior for transmitting high speed data between machines that must "talk"
to each other in order to check for errors. This time delay may also make
it difficult for the non-speaking party to interrupt a conversation. But
high speed data traffic would not justify the current proportion of cable
circuits because it comprises only several percent of total traffic.37 Nor
would the theoretically superior quality of cable circuits for transmitting
voice conversations. A recent study by Washington Consumers” Checkbook
(1984) rated SBS best in the quality of connection despite its heavy
reliance on satellites.38 Proponents of cables have also argued that cable
facilities are necessary to provide high reliability of service. Diversity

of modes and of facilities will increase reliability, but the increase is

37 At the end of 1984, 89% of U.S.-CEPT circuits were used for message
telephone service. The remaining 11% was used for telex, telegraph, leased
voice lines, and high speed data.

38 Washington Consumers” Checkbook (Summer 1984) p.50. The study
compared the quality of connection of AT&T, GIE Sprint, ITT, MCI, SBS,
Western Union, Allnet, and Telesaver. Both test calls and a consumer survey
were used to rate the service quality. Test calls were rated on six
criteria: echo, static, crosstalk, tinny or metallic sounding voice,
extraneous noise, or low volume. In the consumer survey customers were
asked to compare the quality of connections to those of AT&T.

- 49 -


There is another ways however, that Commis sion-specified circuit loading can
inhibit Comsat from entering the IMTS market. The Commission seems to be
conditioning its withdrawal from circuit loading upon competition in the
IMTS market. In its recent Second Report and Order on North Atlantic
facilities the Commission concluded that "We affirm our tentative finding
that the U.S.-CEPT message telephone service market is not yet sufficiently
competitive to permit us to withdraw from decisions concerning the
distribution of AT&T circuits used to provide that service."18 But, the
circuit joading requirements have benefitted Comsat, so linking their
termination with increased competition in the IMTS market would penalize

Comsat for entering this market.

VI. EVIDENCE
A. Is AT&T biased?
In the previous section we discussed the theoretical possibility that ATéT
might be biased in favor of cable circuits. In this section we will examine
whether there is any evidence of such & pias. If cable and satellite
circuits were perfectly equivalent one could say that AT&T were biased if it

chose cable ‘circuits when it could obtain the same number of circuits at

—

18 CC Docket No. 79-184, Second Report and Order, August 7; 1985, para.
49.

-31-


individual international routes. The constraint applies only to firms”
overall rates-of-return. Even if rate-of-return regulation were strictly
enforced, a firm could earn above a competitive rate-of-return on all its
international routes 46 long as its domestic routes were earning below the
allowed rate-of-return.48 At the moment the FCC does not routinely collect
sufficient information to determine whether this is the case. The FCC no
longer requires AT&T to separately report the rate-of-return for its
international pusiness on a regular basis. However, in 1979, the last year

such data was regularly reported, AT&T had a 36.5 percent rate of return on

—

48 Such an accounting separation may be helpful in promoting competit ion
in domestic ae well as international markets. An account ing separation
reduces the possiblity that AT&T will use high international profits to
cross-subsidize domestic rates.

It would be unwise, however, to create such an accounting separation
solely for the purpose of preventing such cross-subsidizat ion. Applying
traditional rate-of-return regulation separately to AT&T’S international
business could exacerbate AT&T’s possible incentive to overinvest in its
international rate pase. Resale activities constitute a large part of
AT&T“S international business. Settlements payments for foreign
connections, payments to Comsat, the cost of domestic Jocal distribution and
ATT-C long haul distribution absorb most of the revenue from this business.
They are large relative to the investment in international facilities and
other capital devoted exclusively to the international business. Moreover,
much of the value of AT&T’s international business arises from its efforts
to develop long-term working relationships with the foreign correspondents
with whom it jointly provides IMTS service. Any attempt to reward AT&T for
its "intangible investments” by setting a high rate-of-return on its
"tangible" capital base would give AT&T an incentive to excessively expand
ite tangible capital, including international facilities.

-62-


less cost using satellites. It is important to realize that this historical
analysis will only tell us whether AT&T preferred cable to satellites given
the regulatory regime that existed when it chose between the modes. If we
were to find no evidence of bias when AT&T was subject to rate-of-return
regulation, we surely would expect no bias when such regulation were removed.
If, however, we were to find some evidence of bias in past decisions, this
would not imply that AT&T will show such bias if rate~of-return regulation

were removed.

There are several difficulties carrying out such en analysis. Firat,
satellite and cable circuits may not be perfectly fungible. For example, it
takes conversations about one quarter of a second to be transmitted via
satellite because satellites are twenty two thousand miles from the earth.
This delay can result in one party continuing to talk without realizing that
the other party has already begun to respond. Some telephone users find
this problem objectionable. Suboceanic cables do not have this delay
problem since the distance a message must travel via cable is much shorter.
Cable messages may also be less susceptible to interception by third
parties. Consequently, the military generally prefers cable circuits to

satellite circuits.
Second, since there were no long term contracts for satellites, there is no

way of knowing precisely what it would have cost AT&T to use satellites.

Thus, to determine whether AT&T was biased one must compare cable costs with

-32-


same range of traffic, INTELSAT IV technology and SG cable technology are

sufficiently close in cost that we can reach no conclusion on their relative

merits."26

The OTP study also compared the cost of a cable system between the U.S. and
Europe with "that part of the global satellite system which serves the same
traffic and routes."27 It concluded that "INTELSAT IV satellite systems can
provide the required quality of service at relevant traffic levels more
cheaply than SF cable technology. Indeed, in this mode, INTELSAT IV costs
are lower than SF costs for all levels of capacity utilization. As before,
comparative INTELSAT IV - SG cable costs appear to be within the margin of

uncertainty of the data used in the analysis."28

b. Entry.

The fact that private, unregulated, cable and satellite systems wish to
enter the international facilities market suggests that the new entrants
believe they can provide certain services at less cost than Comsat. This
may be either because the prices Comsat is charging for its exist ing

services exceed the new entrants’ costs or because Comsat is not offering

26 —oTP: (1971), p-43.
27 «OTP (1971), p-54-
28 OTP (1971), p-56-

- 43 -


The lack of long term satellite contracts is not a reason for requiring AT&T
to use satellites but may instead be a result of the circuit loading policy.
If Comsat had to attract AT&T’s business it would have a strong incentive

to offer long term contracts. Moreover, without FCC mandated circuit
loading, INTELSAT would want long term contracts to assist it in planning
its investments and to assure high utilization of its facilities. Absent
regulation or long term contracts, the demand for satellite circuits might
be highly unstable. Every time a new cable facility is put into service,
carriers would have an incentive to offload satellite circuits onto the
cable. From the viewpoint of an owner of an idle cable circuit, the cost of
using the circuit is approximately zero, while the cost of leasing a
satellite circuit is the rental payment that can be saved by terminating the
satellite lease. Given free choice, carriers would drop most leased
satellite circuits in favor of idle cable circuits they already own. They
would keep only the minimum number of satellite circuits necessary to serve
routes not connected by cable and to meet the concerns they and foreign

telecommunications authorities have about diversity of routes.

Nevertheless, some (but not all) satellite circuits might still be offered
on a short term basis. One would expect there to be a price at which Comsat
would be willing to supply satellite services on a short term basis even in
the absence of FCC circuit loading requirements. Comsat would wish to

charge a premium to compensate it for bearing the risk of allowing carriers

- 20 -


2. I£ so, how did Comsat use the excess revenue?
Evidence suggests that Comsat did charge above the minimum cost of serving
the Atlantic market by satellite. This conclusion raises the question of
how Comsat used the excess revenue. There are three possibilities: (1)
Comsat kept the revenue as profits. (2) Comsat used the revenue to
cross-subsidize high cost routes. (3) Comsat used the revenue to pay high

costs. One possible source of high costs may be chronic excess capacity.

From the viewpoint of public policy, there would be little concern about
allowing cables to compete freely with satellites if any revenue in excess
of cost were currently going to monopoly profits or wasteful expenditures.
In that case, competition would do no more than elimate such profits and
waste. There might be some concern about allowing free entry if, instead,
the revenue were being used to hold down prices to "worthy" parties
communicating on high cost routes. In this case, competition would

eliminate the current source of funding for such subsidies.

C. Hae circuit loading policy distorted investment?

Based on the discussion above, it appears that circuit loading policy
has permitted Comsat to charge above cable costs. It is likely

that this in turn induced AT&T to increase its investment in cable
facilities. There is no simple way to measure the magnitude of the
investment distortion caused by FCC circuit loading requirements. The

first step in addressing this issue is to examine the history of satellite



small. The INTELSAT system has proved to be virtually 100% reliable.39
Finally, the Department of Defense has argued that cables are needed for
national security because satellites can be jammed aad conversations
intercepted. But cables can be cut by trawlers and satellite conversations
can be scrambled to avoid interception. Moreover, the entire volume of
military traffic in the Atlantic could have been met by a single cable .40
In any case, there is no way of knowing whether the value the Department

of Defense places on & cable is sufficient to justify puilding it, since the

DOD is not required to contribute directly to its construction cost-

This discussion suggests that investment in international facilities has not
been optimal. From the viewpoint of providing service at the least cost,
all the trans-Atlantic and trans-Pacific cables constructed between 1970 and
1984 appear to have been unnecessary- Perhaps the other considerations
discussed above were important enough to justify constructing one
trans-Atlantic cable during the period. But it is doubtful that they would

justify the trans-Pacific cables given the high cost of these cables and the

—

39 Between 1979 and 1984 the lowest figure for system continuity of
service was 99.753% for 1983, “INTELSAT System Status Report for November
1984, Signatory Report gp/85-1-1, 23 January 1985, p- 8

40 All secure military traffic is on Jeased private lines. At the end of
1984 there were 1442 U.S.-CEPT leased channels. Military traffic is under
one-half of this total. Thus a cable of the size of TAT-5 could handle

the entire ¥.S.-CEPT military traffic.

- 50 -




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over INTELSAT’s investment.4! While it does have direct authority over
common carrier cable facilities, in the end it has never rejected
authorization of any of AT&T’s international cables. ‘And in approving the
Tel-Optik and SLC licenses the FCC indicated it was not going to exercise

firm control over private systems.

Even if the FCC were willing and able to control all facility construction
and use, there is a fundamental problem with entry prohibition. It may
exclude efficient as well as inefficient entry. Some new entrants may be
able to provide service at lower cost than the incumbents. Moreover,
restrictions may allow the protected firms to earn excessive profits or to
incur excessive costs. In other words, entry barriers shelter the protected
firms from the discipline of competition. This would not be a problem if the
FCC could accurately determine Comsat‘’s costs and do a good job of

regulating its prices, but it cannot.

In the next section we will discuss alternative paths to a more efficient

structure for international facilities. The idea is to create the

41 The Commission’s leverage over INTELSAT comes through its authority
over Comsat. Comsat must obtain the Commission’s permission to participate
in the launches of INTELSAT satellites. The Commission has never denied
such permission. It is unclear what would happen if permission were denied.
INTELSAT could carryout launches and other investment without Comsat‘s
approval and Comsat would still be obliged to pay its share of the costs
under the provisions of the INTELSAT agreements.

- 53 -


deal with routes served only by Comsat, in designing a plan for deregulating

Comsat.

Section IX provides several concluding remarks and reiterates our

recommendations.

Il. REGULATORY BARRIERS TO COMPETITION BETWEEN CABLES AND SATELLITES
In 1962 Congress enacted the Communications Satellite Act to promote the
establishment of & global satellite communications system. The Act created
Comsat, @& Congressionally chartered private Corporation. Comsat negotiated
with foreign telecommunications administrations to establish an
international satellite communications cooperative. In 1964 the
International Telecommunications Satellite Organization (INTELSAT) was
created under Interim Arrangements. Definitive Arrangements were reached in
1973. Comsat is the only United States signatory to these Arrangements.

Carriers wishing to use INTELSAT circuits must £0 through Comsat.

In 1965 INTELSAT put into service the first commercial telecommunications
satellite. One year later, the Commission authorized the construction of
both a Comsat earth station on Puerto Rico and an additional submarine cable
between the United States mainland and Puerto Rico. To assure Comsat @

share of the traffic the Commission required carriers to activate one Comsat


c. Comparison with domestic satellite rates.
The rates for domestic satellite circuits may be 4 useful benchmark to
compare with Comsat rates. The domestic market appears to be relatively
competitive and thus rates should tend to be driven down to cost.32 We have
no data on domestic rates for voice circuits. But a recent study by Dale
Hatfield Associates compared rates charged by four U.S. domestic satellite
companies for video transponder service with (double) Comsat’s half-circuit,
rates for international television service. They found that "a video
service customer may have to pay more than twice as much for international
service than he would pay for domestic service," and that “there are no
technical differences between domestic and international satellite service
that would cause one to predict such a large price differential. In fact,
satellite space segment costs are not sensitive to distance, 80 that it
would not be unreasonable to expect domestic and international satellite

space segment rates to be approximately equai."33

32 In the Fifth Report and Ogder of the Competitive Common Carrier
Rulemaking, the Commission deregulated domestic satellites (ice., the FCC
will "forebear" from regulating their rates) based on evidence that domseats
do not possess market power (98 FCC 2d 1191).

33 Dale Hatfield Associates (1985), pp-2-3-

- 45 -


TABLE 6

Comparison of Unused Capacity on INTELSAT Operational Satellites
with
AT&T’s Cable Usage
(Full Time Voice Circuits at End of Year)

TLANTIC_ OCEAN REGION PACIFIC OCEAN REGION.

Unused Cable Ratio Unused Unused Cable Ratio Unused
Satellite Usage Capacity to Satellite Usage Capacity to
Capacity Usage Capacity Usage
Year
1965 165 —
1966 154 —
1967 351 425
1968 200 349
1969 526 988
1970 1324 610 2.17 544 136 4.00
1971 4643 691 6.72 373 144 2.59
1972 56 26 720 7.81 3076 150 20.51
1973 4855 749 6.48 4074 155 26.28
1974 8153 1089 7.49 3070 168 18.27
1975 7569 1112 6.81 7037 180 39.09
1976 18609 1661 11.20 7014 266 26.37
1977 23498 2155 10.90 6885 317 21.72
1978 17873 2633 6.79 6530 444 14.71
1979 15547 2856 5.44 2050 497 4.12
1980 8235 3187 2.58 1662 609 2.73
1981 25054 3659 6.85 1010 647 1.56
1982 22368 4019 5.57 8371 700 11,96
1983 32648 4698 6.95 7894 956 8.26
1984 37065 6337 5.85 7166 1209 5.93

47-C


balanced loading methodology until the end of 1985. Recently the Commission
decided that AT&T should be allowed to increase Atlantic Ocean region
traffic on either satellite or cable by two percent per year for three years
(1986-1988). "Prior to the end of this three year period [the Commission]
will review the Joading question to determine what, if any, methodology
should be utilized after 1988 in the North Atlantic region for circuits used

by AT&T to provide imts."4

In addition to allocating traffic, the FCC regulates the construction of new
facilities. Under Section 214 of the Communications Act, common carriers
must obtain FCC approval to construct and operate telecommunication
facilities. Such regulatory control over new construction could be used to
prevent competition among alternative international facilities. In
practice, regulation of new construction does not appear to have been a
significant barrier to entry- The FCC has never ultimately rejected 4
request to puild a major international common carrier cable or satellite
facility. The Commission did initially reject the TAT-7 submarine cable as
unnecessary but reversed itself under intense political pressure from

foreign PTTs and U.S. carriers.>

——

4 CC Docket No. 79-184, Second Report and Order, August 7; 1985,
para. 2-

5 TAT-7 rejected, Overseas Communications, 67 FCC 2d 358 (1977), but
later approved, Overseas Communications, 71 FCC 2d 1178 (1979).


PROMOTING COMPETITION BETWEEN
INTERNATIONAL TELECOMMUNICATION CABLES AND SATELLITES

Evan Kwerel
James McNally

January 1986

Office of Plans and Policy
Federal Communications Commission
Washington, D.C. 20554

ee

The opinions and conclusions expressed jn this paper are those of the
authors. They do not necessarily reflect the policies or views of the
Federal Communications Commission or any other organization oT individual.
We wish to thank Peter Ppitsch, Tom Spavins, Janice Obuchowski, Albert
Halprin, Stuart Chiron, and staff members of the Office of Plans and Policy,
and the Common Carrier Bureau for comments, information, and suggestions;

and J. A. McEntee, Jr- of AT&T and Beverly Andrews of Comsat for providing
valuable data ‘and information. .


traffic, Comsat might have offered AT&T long tern contracts on satellite
circuits priced below the cost of new cable facilities. Faced with euch an
offer, AT&T might have chosen the satellite facilities. Ironically, the
FCC’s regulation of loading, which limited AT&T’s ability to use cable
facilities, may have ult imately resulted in AT&T constructing and using more

cable circuits than if it had been free to use as many cable circuits as it

wished.
B. Inhibits s Comsat from entering the IMTS market.

In arguing against the continuation of the balanced loading methodology,
the Commission stated that ‘we are not persuaded that guidelines which
guarantee Comsat and INTELSAT approximately one-half of AT&T’s growth
circuits provide a strong enough incentive for Comsat vigorously to pursue
entry into the U.S. CEPT message telephone market..."17 The Commission
never explains the basis for this conclusion. Presumably, the Commission
is assuming “satisficing" behavior on the part of Comsat. That is, if
Comsat is achieving some acceptable level of profits it will not bother to

enter new markets even if doing so would increase its profits.

wv CC Docket No. 79-184, Second Report and Order, ‘August 7, 1985, para.
51.

- 30-


its overseas MIS investments. 49

More importantly, rate-of-return regulation of U.S. international service
carriers does not protect U.S. customers against the market power of foreign
PTTs. A PTT’s market power arises from its control over access to its
domestic network.50 At present, U.S. carriers as a group make net
settlements payments to foreign PTT’s. Under traditional rate-of-return
regulation, any increase in a regulated carrier’s payments to a PTT should
increase the firm’s allowed revenue requirement by an equivalent amount. As
a result, a carrier regulated in this way would have little incentive to
resist attempts by PTTs to raise settlements rates. Thus, instead of
protecting U.S. consumers, rate-of-return regulation might only encourage
PTTs to negotiate for higher settlements rates, thereby shifting profits

abroad.

49 U.S., Government Accounting Office (1983), p.7. While the Commission
does not require that AT&T report a separate IMTS rate-of-return either as
part of its Annual FDC Report or with its tariff filings, the Commission has
on occasion specifically requested such information. For example, the Chief
of the Common Carrier Bureau asked AT&T to report ite IMTS rate-of-return in
May 1984 to assist the Commission in its investigation of AT&T’s request to
offer international video teleconferencing (Overeas High Speed Switched
Digital Service).

50 See Kwerel (1984).

- 63 -


incentive to excessively favor inputs that enter its rate base. In other
words, to the extent that rate-of-return regulation is not binding, AT&T

would not be biased towards cable investments.

If, however, rate-of-return regulation were binding, AT&T might be biased
in its choice of whether to manufacture cables as well as in its choice
between satellites and cables. The AT&T division that manufactures cables,
AT&T Technologies, is not regulated, while the division that paye for the
cable, AT&T Communications, is. It is possible that ATéT could shift
profits from a regulated division to an unregulated one by paying AT&T
Technologies more than the true cost of manufacturing the cable. In other
words, manufacturing its own cables might help AT&T evade rate-of-return
regulation. It is difficult for regulators to completely prevent this even
with jurisdiction over transfer prices because they cannot easily determine
the cost of manufacturing a specialized cable. It should be noted, however,
that AT&T’s ability to charge more than cost for the manufacture of cables
is limited by the desire of the other cable co-owners to minimize their
costs. AT&T has generally been required to bid against foreign

manufacturers for the contract to manufacture international cables.

D. To offset distortions caused by artificial differences in contractual
arrangements. -- AT&T owns cable circuits but leases satellite circuits on a
monthly basis.

Carriers can own cable facilities but lease satellite circuits on a short

- 18-




In contrast to the Atlantic cables, the Pacific cables do not appear to have
saved AT&T more in satellite lease charges than they cost. Table 3 compares
AT&T’s cost of HAW-3 and TPC-2 for circuits to Australia and Japan for
1974-1988 with the cost it would have incurred if it had paid satellite
lease charges for these circuits. Between 1974 and 1988 the cumulative
present value of the expenditures on HAW-3, TPC-2 (and related cable IRUs)
was $35.4 million. The cumulative present value of the satellite lease
charges on these circuits would have been $18.8 million. Extending these
calculations over the entire projected life of the cables, even assuming no
further reduction in satellite lease charges, does not reverse the result
that these cables cost AT&T more than satellites. Whether one concludes
that this shows AT&T was biased depends, however, not on the actual
experience, but on what AT&T expected when it planned the cable. There is
greater reason to believe that AT&T overestimated future satellite lease
charges in the Pacific than in the Atlantic. There are two reasons for
this. This is because the reduction in satellite lease charges during the
mid-nineteen seventies was much greater for circuits in the Pacific than the
Atlantic. When HAW-3 and TPC~2 were being planned Comsat‘’s annual lease
charge per half circuit was $34,000 in the Atlantic region and $58,800 in
the Pacific. But in 1976, one year after the Pacific cables were put into

service Comsat adopted a uniform tariff of $22,400 per half-circuit for both

- 38 -


decisions must be made jointly with their foreign correspondents. One might
think that PTTs would have the incentive to choose the least costly mode

since they own both satellites and cables. This would be true if the

ownership arrangement for satellite circuits were the same as for cable
circuits, but it is not. While PTTs can purchase shares of individual cable
facilities, they must pay the average cost of circuits in the entire
INTELSAT system. To the extent that the INTELSAT system cross-subsidizes
high cost routes and incurs excessive costs, PTTs may prefer owning cable
facilities to acquiring space segment from INTELSAT for dense routes such as

the North Atlantic.

Moreover, once a PTT has invested in a cable, it has the incentive to shift
traffic from satellites to the cable since the marginal cost of using
additional cable circuits it owns is zero, while the cost of using INTELSAT

circuits is approximately the average cost of an INTELSAT cirevit.15 In

15 INTELSAT is a cooperative whose expenses are shared in proportion to
each members usage. Because of this financial arrangement, the cost to an
individual member of using an additional circuit depends on how many
circuits it is already using. If a member were using no circuits, the
(marginal) cost of using one circuit would be INTELSAT’s average cost per
circuit. If it were already using some circuits, the member’s cost of using
an additional circuit would be somewhat less, because it would benefit from
a slight reduction in the amount it was paying per circuit on the circuits
it was already using. The reduction in the price per circuit would be the
result of spreading INTELSAT‘’s fixed costs over a larger number of circuits.
Finally, if the member were the sole user of INTELSAT capacity, its cost of
using an additional circuit would be INTELSAT’s marginal cost of providing
that circuit, since the member would be fully responsible for paying
INTELSAT‘s fixed costs regardless of its usage.

-~ 6 -


bies. One must also take into account the greater uncertainty about

satellite prices than cable costs.

Finally, a full analysis of the issue should account for differences in tax
treatment of capital jnvestments versus expenses- Whether tax
considerations favor cable investments over satellite lease charges depends
in part on the rate at which AT&T is allowed to depreciate its investments
and on the size of various tax incentives for jnvestment such a6 the
investment tax credit. A preliminary analysis sugests that from AT&T’s

viewpoint there is no significant tax advantage of one mode over the other-

In light of this discussion it should be clear that no unambiguous
determination of a bias is possible. Nevertheless, we shall present some
observations that shed some light on the question. First, we note that if
there were & strong bias in favor of cable one would expect AT&T to have
proposed cable service to all coastal countries with significant
communications with the U.S. If rate-of-return regulation were binding but
assured AT&T an above normal profit on all investments, why would AT&T have
passed up the opportunity to expand its rate base? Yet AT&T has passed up
opportunities for laying more cables. For example, in 1985 AT&T planned to
use 226 satellite circuits to South Africa. Why hasnt it proposed cables

to such points if it prefers cable to satellite “regardless of cost"?

-35-




to end leases on short notice. Gomsat’s need for such a premium, however,
might be partially offset by the advantage of being able to raise prices in

the future.

Carriers too might wish to hold some short term leases of satellite
circuits. While ownership or long term leases protect carriers against
future price increases, such contracts may lock carriers into holding
facilities in the face of unexpected declines in traffic or reductions in
the costs of new facilities. A carrier would weigh these risks in

considering the contractual arrangements for obtaining facilities.

E. To subsidize she development of a woriivide satellite szaten CHEELEAD: SAT
The purpose of the Communications Satellite Act of 196212 was to establish
a global communications satellite system. Requiring AT&T to use satellite
circuits may have been a way of subsidizing the development of such a
system. Now that satellite technology is well established and INTELSAT has
been providing service for twenty years there would seem to be little need

for a general subsidy.

F. To permit cross-subsid jes within the worldwid: le satellite system.

AT&T may not choose the least costly mix of satellite and cable facilities

12 47 U.S.C~ 701-744.

-21-




the period 1970-1984 could have been handled using only the satellite
facilities in place during that period and no cable facilities. Moreover, a
National Academy of Engineer ing study (1968) found that investing only in
satellites would have been the least costly way to meet demand during that
period. Thus, from the viewpoint of cost minimization, all the cable

facilities built during this period were unnecessary +

Since shortly after the first INTELSAT satellite went into service, the
Commission has been actively involved in the allocation of traffic among
international facilities, but has exercised only limited control over
pricing and investment of these facilities. In Section VII it is argued
that if the Commission wishes to create a more economically efficient system
of international communications facilities it must either exercise more
active control over investment and pricing of international facilities, or
it must create the conditions under which the private sector will
voluntarily invest and price more efficiently. It is argued here that
deregulation will create the conditions for efficient private choices, and

that this approach is preferable to increased regulation.

Section VIIL provides & possible plan for deregulating international
facilities. There are three basic elements to the plan. First,

Commis sion-specified circuit loading should be phased out. An essential
objective of the plan is to free future facilities from circuit loading

requirements. It is proposed that circuit loading requirements be frozen at


This means that the entire demand during the period could have been met
even if none of the cable facilities had been built. The cost of these
cable facilities to AT&T (present value in 1985) was approximately $1.75

pillion (see table 7).34

There is some evidence that placing all new traffic on satellites during
that period would have been the least costly way of meeting demand. The
Committee on Telecommunications of the National Academy of Engineering
examined the cost of various methods of meeting demand between 1975 and 1985
in the Atlantic Ocean region. If demand grew at 20% per year, dividing
investment between cable and satellites wae estimated to be about 50% more
costly than concentrating all investment on satellites. And if traffic grew
at only 10% per year the mixed strategy wae approximately twice a8 expensive
as the satellite-only strategy-?> Actual traffic growth turned out to be

somewhere between 10% and 20%.36

34 Alternatively, given the cables that were constructed, INTELSAT‘’s
construction program could have been substantially scaled back.

35 Committee on Telecommunications, the National Academy of Engineering
(1968), pp. 109 and 112.

36 Under their 10% growth forecast traffic was projected to be 17,9%

circuits in 1984, and under the 20% growth forecast it was projected to be
45,307. Actual traffic in 1984 was 29,272 circuits.

- 48-


It may be possible to eliminate rate-of-return regulation without ending
all Commission regulation of AT&T’s international tariffs. The Commission
might establish 4 band within which AT&T must set its prices. The floor of
the band might be set at the current average variable cost of service. This
would include direct variable costs, Comsat lease charges, imputed domestic
distribution costs, and settlement payments- Assuming average variable and
average total costs are both declining, & ceiling might be based on the
average variable costs during some previous period (say five to seven
years). This system would give AT&T a strong incentive to negotiate for
better settlement agreements since it could keep the gains for several
years. Under this plan, investing in international facilities would not
increase the ceiling except to the extent that it increased variable costs.
Thus AT&T would not have an incentive to excessively invest in cable
facilities. Indeed, the plan might even bias AT&T towards leasing satellite
facilities, since such lease charges would be an element in determining the
ceiling. A similar band could be established for the international record
carriers. An alternative method of maintaining some FCC control over prices
without creating the distortions associated with rate-of-return regulation
would be to establish a percentage limit on the amount AT&T could adjust its

prices upward or downward within a specified time period.

- 64 -


the Atlantic and the Pacific.21 Another reason that benefits from building
the Pacific cables may have been less than expected is that AT&T may have
greatly overestimated demand. It is unlikely that AT&T foresaw the abrupt
end of U.S. involvement in Vietnam in 1975, and the resulting drop in
communications with the Pacific region. Nevertheless, the evidence suggests
that AT&T constructed the Pacific cables when it was likely that using
satellites would have been less expensive. Satellite lease charges would
have had to remain at $58,000 per year through 1982 for the cumulative ;
present value of cable costs to have been less than that of satellite lease
charges (at actual traffic levels). As discussed in Section IV,
rate-of-return regulation is the most likely reason AT&T invested in cables
in the Pacific despite the fact that leasing satellite circuits would have

been cheaper.

21 At the end of 1975 the Commission ordered Comsat to file new rates.
These rates were to generate less revenue than the existing rates and were
not to be distance gensitive (56 FCC 2d 1101 (1975)). The decision was
stayed by the Court pending Court review (Communications Satellite Corp. V-
FCC, D.C. Cir. No. 75-2193, June 16, 1976). The District of Columbia
Circuit generally upheld the FCC decision of 1975, but remanded several
issues to the Commis sion (Communications Satellite Corp. v- FCC, 611 F.2d
883 (1977)). Finally, in 1978 the Commission adopted 4 negotiated
cO. of the Comsat rate structure investigation (68 FCC 24 941
1978)).

-39-


satellites, each lasting five years, would be used to provide service for
the same twenty year period as the cable. The cost of the satellite system
included two earth stations and an jn-orbit spare satellite. Allowances
were made for launch failures. The TAT-5 cable has a capacity of 720
circuits, while the modified INTELSAT III satellite would have @ capacity of
about 10,000 circuits. The Committee chose this capacity because “the
saving in cost for a smaller capacity would be neg ligible."23 The Committee
concluded that "up to 720 circuits msy be provided for 20 years for
trans-Atlantic distances at approximately the same annual cost, whether @
satellite system or & cable system is used. The slight saving due to the
satellite system (especially at higher interest rates) may be improved, if
only 720 circuits are required, by using smaller earth antennas and less
costly equipment. However, if more than 720 circuits are required, the
satellite system has a decided cost advantage."24 In fact, Comsat was
providing more than 720 full time circuits between the U.S. and Europe from
1972 onward. Thus if Comsat were serving only this market it should have

been able to price ite circuits below the cost of TAT-5.

23 Committee on Telecommunications, National Academy of Engineering
(1968), p-100.

24 Committee on Telecommunications, National Academy of Engineering
(1968), p-10l.

- 41 -


circuit for each circuit activated on the new cable.! In 1968, the
Commission ruled that carriers must activate five satellite circuits for
every circuit activated on the proposed trans-Atlantic cable, TAT-5. In
1971 the Commission changed this formula. AT&T was subsequently required to
activate only one satellite circuit for each cable circuit. The
international record carriers were permitted to activate twenty percent of

their remaining TAT-5 circuits every six months.2

In 1977, and upon reconsideration in 1978, the Commission adopted the
“balanced loading" methodology for allocating traffic among international
facilities.3 Balanced loading is designed to equalize the number of
circuits on each transmission facility between the U.S. and a given foreign
country. Under balanced loading new facilities are allocated all new
traffic until they are carrying the same amount of traffic as existing
facilities. Once this level is reached, additional traffic is allocated
equally among all facilities that have not reached capacity. Traffic in the

Atlantic Ocean region will continue to be allocated according to the

1 ITT Cable & Radio Inc.-Puerto Rico, 5 FCC 2d 823, 8 RR 2d 1314 (1966),
AT&T, ITT, RCA, 7 FCC 2d 959 (1967).

2 Proposed TAT-5 project, 11 FCC 2d 957 (1968), AT&T, ITT, RCA, 13 FCC
2d 235 (1968), Comsat, AT&T, ITT, 29 FCC 2d 252 (1971), Comsat, AT&T, ITT,
32 FCC 2d 103 (1971).

3 Overseas Communication, 67 FCC 2d 358 (1977), Memorandum Opinion and
Order, Overseas Communications, 71 FCC 2d 1090 (1978).