Committed to connecting the world

Accounting Rate Reform undertaken by ITU-T Study Group 3

This document summarizes the activities of Study Group 3 on the accounting rate reform. It has been submitted also as an informal note for the WTO Trade in Services Council, May 26 2000,¹

1. In the telecommunication sector, when an international telephone call passes from one country to another, the operator in the country that originates the call has traditionally made a compensatory payment to the operator in the country that terminates the call. These payments are made when traffic in one direction is greater that the traffic in the return direction. The level of payment is based on bilaterally negotiated "accounting rates". The so-called accounting rate regime is set out in the International Telecommunication Regulations (ITRs), an international treaty administered by the ITU, which was last updated in 1988. The ITRs are complemented by the "D-series" of Recommendations, which are the work of Study Group 3 of the ITU Telecommunication Standardization Sector.

2. The accounting rate regime contains a number of different methodologies, but in recent years the most common system of remuneration has been the "accounting rate revenue division procedure". Under this system, a net settlement payment is made on the basis of excess traffic minutes, multiplied by half the accounting rate (the accounting rate share, or settlement rate). Net settlement payments have grown larger as traffic flows have become less balanced, during the 1990s. ITU estimates that, between 1993-98, net flows of settlement payments from developed counties to developing ones amounted to some US$40 billion². However, an increasing volume of traffic now passes outside the accounting rate system (e.g., via the Internet), or is routed in such a way as to exploit the least-cost route between two end-points, which is not necessarily the most direct one.

3. In order to adapt the remuneration system to the new, more competitive telecommunication environment, and to respond to the growing expectations of the international community, Study Group 3 started an overall review of the remuneration system as from 1991. The topic has generated considerable interest and, over the past few years, delegates representing more than 80 countries exchanged opinions and participated actively in the meetings. The following represent common objectives for the work:

to develop general principles and guidelines for the establishment of accounting rates;
to determine cost components to be included in the telephone accounting rates;
to expedite work on developing appropriate costing methodologies;
to establish a transition period to avoid drastic changes, particularly for the developing countries.

4. Based on the above objectives, Study Group 3 developed ITU-T Recommendation D.140 on accounting rates principles for the international telephone service. Five principles were adopted; they are:

cost-orientation of accounting rates and accounting rate shares;
application of the cost-orientation principles to all relations on a non-discriminatory basis;
implementation on a scheduled basis of one to five years, if a transitional timeframe is necessary;
periodical review of accounting rates;
to survey and publish global accounting rates movement.

5. Recommendation D.140 was first adopted in 1992, with two annexes which contain the guidelines for the cost elements to be taken into account when determining accounting rates and other guidelines regarding the provision of information relating to accounting rates. Later on, two more annexes were added to facilitate the bilateral negotiation of accounting rates and to recommend the reduction of the total accounting rate at least to a level of 1 SDR per minute by the end of 1998.

6. With the adoption of Recommendation D.140, Study Group 3 expected a quick reduction of accounting rates towards costs. Between 1992 and 1996, the worldwide accounting rates decline was only 4 per cent per year, speeding up to a decline a 12 per cent per year between 1996 and 1998. Available information suggests that actual costs, in many countries, have been declining at a faster rate. Some countries feel that the rate of reduction in bilaterally negotiated accounting rates has been too slow, and have taken other measures to ensure a more rapid transition towards cost-oriented levels. Since 1998, the rate of reduction has accelerated to more than 20 per cent per year. Perhaps as much as half of all international traffic now passes outside the accounting rate system. Since 1998 the number of international voice circuits used for the Public Switched Telephone Network has been in decline on the busiest routes, for instance between North America and Europe, with private leased lines, which are used for carrying Internet Protocol traffic, now much more numerous.

7. With the adoption of WTO General Agreement on Trade in Services by all WTO Members and Protocol 4 (the agreement on basic telecommunication services) by many of them, those governments which made commitments to liberalize their market have seen an acceleration in the reform of accounting rates. In more liberal countries, the accounting rate regime has been superseded by a regime of facilities-based interconnection, on many routes. In a majority of the ITU’s 189 Member States, competition is not permitted in the provision of international telecommunication services. But in those Member States where competition is permitted, which account for more than three-quarters of total traffic, telecommunication services are more and more considered as a tradable commodity.

8. Study Group 3 continued its work on reform of the accounting rate system and studied new remuneration systems which better reflect the new telecommunication environment. In December 1998, Study Group 3 made important headway by approving a revision to ITU-T Recommendation D.150. It agreed on three new procedures for remunerating the party that terminates international traffic. One of these,the termination charge procedure, allows governments or operators (in ITU parlance, administrations or recognised operating agencies) to establish a single charge for terminating traffic in their country, provided the charge meets certain multilaterally agreed criteria. The second, the settlement rate procedure, allows them to negotiate cost-orientated and asymmetric settlement rates, better suited to the new market situation. The third procedure, between countries that have introduced liberalization, allows any other bilaterally negotiated commercial arrangement, which is more suited to the nature of correspondents’ relations. Recognised operating agencies will agree bilaterally on the remuneration procedure that is most appropriate to their needs.

9. The adoption of three new remuneration procedures can be regarded as a real breakthrough in the reform of the accounting rate system and should facilitate the process of market reform for the benefit of the whole telecommunication community, and particularly for users. It is also expected that the introduction of these new remuneration procedures will resolve the long-standing issue of apportionment of revenues, the rates agreed in using those procedures being, in principle, asymmetric. However, the first two procedures are not expected to be implemented immediately by all ROAs, as one of the pre-conditions for their application is the achievement of cost-orientated rates. To facilitate this task, Study Group 3 is now developing the appropriate costing methodologies. The Group viewed that agreement on a common costing model at the ITU level was not realistic and ought to be abandoned. Even so, Study Group 3 is now developing the basic principles to be observed when developing a costing methodology and also some guidelines for facilitating the accounting rate negotiation.

10. To assist developing countries in the achievement of cost orientation, Study Group 3 has also developed guidelines on transitional arrangements, as a new draft Annex to Recommendation D.140. These guidelines were intended to facilitate the transition towards cost-orientation, and to help the early introduction of new remuneration procedures.

11. However, at it’s meeting in December 1999, Study Group 3 was unable to approve these guidelines. Study Group 3 decided to request the consideration of this issue by the World Telecommunication Standardization Assembly (September – October 2000) to be held in Montreal. In the meantime, Study Group 3 decided to continue its study on the adaptation of its recommendations to the market environment, including the guidelines to facilitate the transition to new remuneration procedures during the next study period (2001-2004). Study Group 3 agreed that such guidelines should be aimed, inter alia, at discouraging the imposition of unilateral actions.

12. In addition, the regional Tariff Groups made a number of useful cost studies related to the provision of international telephone services. For example, a study realized in March 2000 by the tariff Group for Asia and Oceania has shown that, on average, the costs of providing international telephone services still partly depend on the distance, and between relations of less than 3000 km and those of more than 6000 km, the difference of costs is about 6.8 per cent. However, distance may also be correlated with other factors such as traffic volumes. Where traffic flows are thin, unit costs tend to be higher. This is confirmed by the fact that the study also showed that, within the same country, the cost of terminating international calls may differ by about 35 per cent, depending on the origin and volume of traffic on a particular route, the transmission media and the technology used.

13. It is to be noted that the secretariats of the ITU and the WTO have collaborated closely on understanding the implications of reform of the accounting rate regime for trade in telecommunication services. For instance, a member of the WTO secretariat has participated as an observer in Study Group 3 meetings and is currently serving on an expert group, appointed by the ITU Council, to advise on reform of the ITRs. In March 1998, ITU hosted a World Telecommunication Policy Forum on the topic of trade in telecommunications. Opinion A of that Forum calls upon the ITU Secretary-General to work more closely with the WTO and a draft co-operation agreement between ITU and WTO is currently under consideration. ___________________

___________________

¹ The views expressed in this paper, which has been prepared by the ITU secretariat and approved by the ITU-T Study Group 3 management team, are not intended to represent opinions or official positions of the ITU or its membership.

² See, for instance, analysis in ITU/TeleGeography Inc. “Direction of Traffic: Trading Telecom Minutes”, ITU, Geneva, October 1999, 347 pp, available at: http://1f8a81b9b0707b63-19211.webchannel-proxy.scarabresearch.com/ti/publications/