United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 23, 1998 Decided January 12, 1999
No. 97-1612
Cable & Wireless P.L.C.,
Petitioner
v.
Federal Communications Commission and
United States of America,
Respondents
Sprint Corporation, et al.,
Intervenors
Consolidated with
Nos. 97-1613, 97-1614, 97-1615, 97-1620, 97-1621,
97-1640, 97-1643, 97-1652, 97-1655
On Petitions for Review of an Order of the
Federal Communications Commission
---------
Philip V. Permut argued the cause for petitioners Cable &
Wireless, P.L.C., et al. Clifford M. Sloan argued the cause
for petitioners GTE Service Corporation, et al. With them on
the joint briefs were Robert J. Aamoth, R. Michael Senkow-
ski, M. Edward Whelan, III, Gail L. Polivy, Gregory C.
Staple, R. Edward Price, Jonathan Jacob Nadler, Kenneth S.
Geller and Erika Z. Jones. Donald M. Falk, Harold S.
Reeves and Joan M. Griffin entered appearances.
Alan Y. Naftalin, Gregory C. Staple and R. Edward Price
were on the briefs for petitioner Telstra Corporation Limited.
Joel Marcus, Counsel, Federal Communications Commis-
sion, argued the cause for respondents. With him on the
brief were Joel I. Klein, Assistant Attorney General, U.S.
Department of Justice, Robert J. Wiggers and Robert B.
Nicholson, Attorneys, Christopher J. Wright, General Coun-
sel, Federal Communications Commission, and John E. Ingle,
Deputy Associate General Counsel.
David W. Carpenter argued the cause for intervenors
AT&T Corporation, et al. With him on the brief were Gene
C. Schaerr, Mark C. Rosenblum, James J.R. Talbot, Ann M.
Kappler, Matthew B. Pachman, Leon M. Kestenbaum, H.
Richard Juhnke and Robert S. Koppel. Ann J. LaFrance
and John M. Scorce entered appearances.
Philip V. Permut, Robert J. Aamoth, Raul R. Rodriguez,
Jeffrey P. Cunard and Lothar A. Kneifel were on the joint
briefs for intervenors from developing countries. Joan M.
Griffin entered an appearance.
Before: Randolph and Tatel, Circuit Judges and Buckley,
Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge: In order to strengthen the bargain-
ing position of domestic telecommunications companies in
negotiations with their foreign counterparts over the price of
completing international long-distance calls, the Federal
Communications Commission issued an Order prohibiting
U.S. companies from paying more than certain benchmark
rates for such "termination" services. Petitioners, a group of
foreign telecommunications companies, claim that the Com-
mission lacks authority to issue the Order and that the
benchmark rates are unreasonable. Rejecting petitioners'
argument that the Order directly regulates foreign carriers
as well as their alternative argument that it unlawfully regu-
lates domestic carriers, we hold that the Order was a valid
exercise of the Commission's regulatory authority under the
Communications Act. We also hold that because the record
shows that the Commission justified its method for calculat-
ing rates, and because petitioners failed to demonstrate that
the rates do not adequately compensate foreign carriers for
providing termination services, the Order was neither unsup-
ported by substantial evidence nor arbitrary or capricious.
Rejecting petitioners' other challenges, we uphold the Order
in its entirety.
I
Completion of international telephone calls requires the
cooperation of several telephone companies in different coun-
tries. When a U.S. caller places a call to Japan, for example,
the call is first connected to a local telephone company, such
as Bell Atlantic, which then passes it to a domestic long-
distance carrier, such as AT&T or MCI, which in turn passes
it to a Japanese telephone company, which then completes or
"terminates" the call to its recipient. The foreign carrier
terminates the call pursuant to an operating agreement with
the domestic carrier. The operating agreement contains an
"accounting rate," which is the price the two telephone com-
panies have negotiated for handling each minute of interna-
tional long-distance service. The FCC requires the two
carriers to divide the accounting rate evenly; each carrier's
share of the accounting rate is called the "settlement rate."
For example, if the accounting rate between a U.S. carrier
and a Japanese carrier is $1 per minute, the U.S. carrier
would pay the Japanese carrier a settlement rate of $0.50 per
minute to terminate calls from the United States to Japan.
Likewise, the Japanese carrier would pay the U.S. carrier
$0.50 per minute for each call originating in Japan and
terminating in the United States.
Instead of paying each other every time a call is made,
domestic and foreign telephone companies make payments at
scheduled times on an aggregate net basis. Suppose in our
example that during a specified settlement period, U.S. call-
ers make 500 minutes of calls to Japan, while Japanese callers
make 300 minutes of calls to the United States. Because
there are 200 minutes of net calling outflow from the United
States to Japan, U.S. carriers will make a net settlement
payment to their foreign counterparts of $100 ($0.50 per
minute times 200 minutes). The calling outflow from the
United States to all foreign countries except for Canada and
Cuba typically exceeds the amount of traffic going the other
direction. Thus, in the aggregate, net settlement payments
consistently run from U.S. to foreign carriers.
Although the U.S. telecommunications industry has become
more competitive, the industry remains non-competitive in
much of the rest of the world. This competitive differential
has two important consequences for this case. First, in
negotiating settlement rates, foreign monopoly carriers can
pit competing U.S. carriers against one another, exploiting
the fact that U.S. carriers unwilling to pay settlement rates
demanded by foreign carriers will lose business on those
routes to higher-bidding domestic competitors. Known as
"whipsawing," this practice drives up the price of termination
services to levels that exceed not only actual costs, but also
the price that foreign carriers charge their own subscribers
for comparable local services. Through excessive net
settlement payments to foreign carriers, U.S. carriers
and their U.S. customers effectively subsidize
government-owned telephone services in foreign countries.
The Commission estimates that in 1996, 70% of the $5.4
billion in total U.S. settlement payments, or $3.78 billion,
represented an above-cost subsidy from U.S. consumers to
foreign carriers.
Second, foreign carriers with U.S. affiliates can use their
monopoly power to distort competition in the United States.
This occurs when a foreign carrier and its U.S. affiliate act
together as an integrated firm, competing in the U.S. market
as a provider of international long-distance services while
serving as a monopoly supplier of a necessary input, i.e.,
termination services in the foreign country. By extracting
above-cost settlement rates from U.S. carriers, the foreign
carrier enables its U.S. affiliate to undercut its competitors,
since the above-cost portion of the settlement rate is essen-
tially an internal transfer for the foreign-affiliated U.S. carri-
er; for other competitors, it represents a real cost. Economi-
cally, this "price squeeze" behavior has the same effect as if
the foreign carrier engaged in price discrimination by charg-
ing its U.S. affiliate a lower settlement rate than it charged
all other U.S. carriers.
The FCC has long sought to protect U.S. carriers and U.S.
consumers from the monopoly power wielded by foreign
telephone companies in the international telecommunications
market. In 1980, the Commission adopted a Uniform Settle-
ments Policy, requiring that all domestic carriers on a given
international route establish the same accounting rate with
the foreign correspondent, that all settlement rates equal 50%
of accounting rates, and that each domestic carrier carry
incoming traffic on the route in proportion to its share of
outgoing traffic. See Uniform Settlement Rates on Parallel
International Communications Routes, 84 F.C.C.2d 121
(1980). Although this policy initially applied only to interna-
tional telegraph and telex services, the Commission extended
it to international telephone service in 1986. See Common
Carrier Services; Implementation and Scope of the Uniform
Settlements Policy, 51 Fed. Reg. 4736 (1986). These mea-
sures helped prevent foreign carriers from whipsawing com-
peting U.S. carriers. But because they did not deter foreign
carriers from charging above-cost settlement rates, the Com-
mission issued further orders encouraging domestic carriers
to negotiate cost-based settlement rates. See Regulation of
International Accounting Rates, 6 F.C.C.R. 3552, 3552 p 1
(1991) (report & order) (adopting "procedural reforms that
remove any U.S. regulatory impediments to lower, more
economically efficient, cost-based international accounting
rates"); Regulation of International Accounting Rates, 7
F.C.C.R. 8040 (1992) (second report & order) (setting volun-
tary benchmark settlement rates).
In 1997, finding that its efforts to date had not driven
settlement rates to cost-based levels, the Commission issued
the Order challenged here, mandating the maximum settle-
ment rates that U.S. carriers may pay to their foreign
counterparts. See International Settlement Rates, 12
F.C.C.R. 19,806 (1997) (report & order). According to the
Commission, its primary concern in issuing the Order was
"not ... the absolute level of U.S. net settlement payments
per se or the contribution of settlement payments to the U.S.
trade deficit," but rather "the extent to which those payments
reflect rates that substantially exceed the underlying costs of
providing international termination services." Id. at 19,822-
23 p 36. "[A]bove-cost settlement rates," the FCC explained,
"contribute to the inflated rates paid by U.S. consumers for
international services, create the potential for competitive
distortions in the U.S. market for [international telephone
service], and produce inefficiencies in the global telecommuni-
cations market." Id. at 19,823 p 36. While acknowledging
that "changing market conditions have ... helped to reduce
settlement rates," the Commission determined that "[m]onop-
oly conditions prevail in most [foreign countries]" and that
benchmark rates are necessary to ensure "reduc[tion] [of]
settlement rates on a timely basis to a more cost-based level."
Id. at 19,824-25 p 39.
Under the FCC's Order, the settlement rates negotiated by
U.S. carriers may not exceed $0.15 per minute for foreign
carriers in upper income nations (per capita GNP of $8,956 or
more), $0.19 per minute for foreign carriers in middle income
nations (per capita GNP between $726 and $8,955), and $0.23
per minute for foreign carriers in lower income nations (per
capita GNP of less than $726). See id. at 19,850 p 90, 19,860-
61 p 111. Unable to obtain actual termination cost data from
foreign carriers, the Commission calculated these benchmark
rates using a "tariffed components price" methodology, which
adds together estimated prices for three services--interna-
tional transmission, international switching, and national ex-
tension--necessary to complete international long-distance
calls. See id. at 19,827-50 pp 45-89. According to the FCC,
the benchmarks "are substantially below most prevailing
settlement rates and represent progress toward achieving
cost-based rates." Id. at 19,827 p 44. At the same time, the
Commission claims, the rates are high enough to compensate
foreign carriers for their termination costs. See id. If not,
"any carrier may ask [the Commission] to reconsider, in a
specific case, the benchmarks on the grounds that they do not
permit the carrier to recover [its costs]." Id. at 19,842 p 74.
The Order allows U.S. carriers to achieve compliance with the
benchmark rates over a transition period of one to four years,
depending on the per capita income of the foreign country in
which the negotiating foreign carrier operates. See id. at
19,885 p 165.
The Order also contains special provisions applicable only
to foreign-affiliated U.S. carriers. Under existing FCC rules,
"a U.S. carrier is considered to be affiliated with a foreign
carrier when a foreign carrier owns a greater than twenty-
five percent interest in, or controls, the U.S. carrier." Id. at
19,901 n.358 (citing 47 C.F.R. s 63.18(h)(1)(i) (1997)). In
order to prevent such carriers from engaging in price squeeze
behavior, the Order requires them to comply immediately
with the benchmarks as a condition of obtaining approval to
provide international long-distance service to the affiliated
country. See id. at 19,901 p 207.
Petitioners, various parties representing over 100 foreign
governments, regulators, and telecommunications companies,
challenge the Order on several grounds. First and foremost,
they claim that the FCC, by limiting the settlement rates
that foreign carriers may charge U.S. carriers, has asserted
extraterritorial jurisdiction over foreign carriers and foreign
telecommunications services, thereby exceeding its authority
under the Communications Act and the International Tele-
communications Union Treaty. Petitioners further argue
that even if the Order does not regulate foreign carriers, it
unlawfully regulates domestic carriers by restricting the
prices they may pay to non-FCC-regulated entities. Petition-
ers also argue that the benchmark settlement rates are
arbitrary, capricious, and unsupported by substantial evi-
dence, and that the Commission's restrictions on foreign-
affiliated U.S. carriers are unlawfully discriminatory and in-
adequately justified. Finally, a single petitioner, Telstra
Corporation, contends that the FCC violated the Administra-
tive Procedure Act by failing to respond to comments urging
the Commission to curb allegedly anti-competitive practices
of U.S. carriers in providing Internet-related telecommunica-
tion services. We take up each claim in turn.
II
We begin with petitioners' complaint that the FCC's Order
unlawfully asserts regulatory authority over foreign telecom-
munications services and foreign carriers wishing to serve the
U.S. market. According to petitioners, the Commission is-
sued the Order to force foreign carriers to reduce their
settlement rates. Because "it is clearly within the interest of
a U.S. international carrier to negotiate rates at or below the
relevant benchmark," 12 F.C.C.R. at 19,894 p 186, petitioners
argue, it is implausible to characterize the Order as imposing
any regulatory burdens on domestic carriers. Petitioners
point to the FCC's enforcement scheme as confirmation that
the Order directly regulates foreign carriers. "When a for-
eign [carrier] fails to respond to a U.S. international carrier's
efforts to achieve a settlement rate that complies with the
[benchmarks]," the Order permits the domestic carrier to file
a petition with the FCC "request[ing] enforcement mea-
sures." Id. The complaining U.S. carrier must serve its
petition on the uncooperative foreign carrier, which then has
35 days to respond. See id. These procedures, petitioners
argue, effectively treat foreign carriers as defendants in a
lawsuit, exposing them to enforcement actions that would
directly or indirectly compel them to accept lower settlement
rates.
The Communications Act authorizes the Commission to
regulate "foreign telecommunications." See 47 U.S.C.
ss 152(a), 201. The Commission claims no authority to di-
rectly regulate foreign carriers. See id. at 19,951 p 312 ("We
at no time in this Order assert that we have the authority to
compel directly a foreign carrier to charge a certain rate for
terminating U.S.-originated traffic."). Instead, the Commis-
sion explained that "the rules we adopt here apply only to the
settlement rates that carriers subject to our jurisdiction may
pay for termination of U.S.-originated traffic." Id. Since
neither the statute nor legislative history makes clear wheth-
er the Commission regulates domestic or foreign carriers
when it prescribes settlement rates, we must sustain the
Commission's view as long as the Order reasonably repre-
sents an exercise of its statutory authority to regulate domes-
tic carriers engaged in foreign telecommunications. See
Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837, 842-43 (1984).
We recognize that regulating what domestic carriers may
pay and regulating what foreign carriers may charge appear
to be opposite sides of the same coin. But by focusing only
on the Order's effects on foreign carriers, petitioners overlook
the crucial economic reality that makes the Commission's
position that it is only regulating domestic carriers reason-
able: Because domestic carriers operate in a competitive
market, they face a serious dilemma when they bargain with
monopolist foreign carriers. As a group, U.S. carriers would
be best off if each decided not to accept settlement rates
higher than FCC benchmarks. But if one U.S. carrier main-
tained this position to the point of impasse in negotiations
with a foreign carrier, a competing U.S. carrier would make
the foreign carrier a higher offer. As the intervenors on
behalf of the FCC explain, the Order "requir[es] domestic
carriers to take 'a unified bargaining position,' and thereby
prevent[s] each carrier from acting in its own self-interest."
Intervenors' Br. at 15 (quoting Atlantic Tele-Network, Inc. v.
FCC, 59 F.3d 1384, 1386 (D.C. Cir. 1995)). Indeed, contrary
to petitioners' claim that the enforcement scheme targets
foreign carriers, the Order authorizes "enforcement measures
... to ensure that no U.S. carrier pays that foreign corre-
spondent an amount exceeding the lawful settlement rate
benchmark." 12 F.C.C.R. at 19,894 p 186 (emphasis added).
Far from threatening foreign carriers with enforcement ac-
tions, the Order at most states that the FCC will contact
"responsible [foreign] government authorities" to "seek their
support in lowering settlement rates." Id. at 19,893 p 185.
Given the structure of the global telecommunications industry
and its resulting incentives, we find reasonable the Commis-
sion's view that the Order regulates domestic carriers, not
foreign carriers.
To be sure, the practical effect of the Order will be to
reduce settlement rates charged by foreign carriers. But the
Commission does not exceed its authority simply because a
regulatory action has extraterritorial consequences. See Ra-
dio Television S.A. de C.V. v. FCC, 130 F.3d 1078, 1082 (D.C.
Cir. 1997); R.C.A. Communications, Inc. v. United States, 43
F. Supp. 851, 854-55 (S.D.N.Y. 1942); In re Mackay Radio &
Telegraph Co., 2 F.C.C. 592, 598-99 (1936). Indeed, no canon
of administrative law requires us to view the regulatory scope
of agency actions in terms of their practical or even foresee-
able effects. Otherwise, we would have to conclude, for
example, that the Environmental Protection Agency regulates
the automobile industry when it requires states and localities
to comply with national ambient air quality standards, or that
the Department of Commerce regulates foreign manufactur-
ers when it collects tariffs on foreign-made goods.
We thus hold that the Commission's Order does not regu-
late foreign carriers or foreign telecommunications services
and therefore does not violate the Communications Act. For
the same reason, we reject petitioners' claim that the Order
violates the doctrine of "half-circuit jurisdiction," which allows
the Commission to exercise jurisdiction over international
calls only from a point within the United States to the
midpoint between the United States and the foreign country.
By capping the amount that U.S. carriers may pay for foreign
termination services, the Commission has not thereby regu-
lated those services.
Nor does the Order violate the International Telecommuni-
cations Union treaty regime, International Telecommunica-
tions Regulations, S. Treaty Doc. 102-13 (Melbourne 1988).
Although the treaty provides that carriers "shall by mutual
agreement establish and revise accounting rates to be ap-
plied between them," id. s 6.2.1; see id. s 1.5 (same), a
separate provision "recognize[s] the right of any member,
subject to national law ... to require that administrations
and private operating agencies, which operate in its territory
and provide an international telecommunication service to the
public, be authorized by that member," id. s 1.7(a). We
agree with the Commission that "[t]he right to authorize a
carrier to provide service in a given country necessarily
includes the right to attach reasonable conditions to such
authorization" to safeguard the public interest. 12 F.C.C.R.
at 19,950 p 311. Indeed, the treaty's preamble makes clear
that "it is the sovereign right of each country to regulate its
telecommunications." ITU Regulations (preamble).
Petitioners contend that the Order frustrates international
comity because it subjects foreign carriers to conflicting
obligations if their governments prescribe minimum settle-
ment rates that exceed the maximum rates allowed by the
FCC. But since no foreign carrier in this litigation has
complained that it actually faces such a predicament, we see
no need to decide whether the Order would be valid in such
circumstances. In any event, we note that during the rule-
making process, both the U.S. Department of State and the
U.S. Trade Representative filed comments supporting the
Order.
III
Having concluded that the Order regulates domestic carri-
ers, not foreign carriers, we turn to petitioners' alternative
claim that the Commission lacks authority to set the prices
that U.S. carriers may pay to foreign carriers for termination
services. According to petitioners, the Communications Act
allows the Commission to regulate only the terms on which
U.S. carriers offer telecommunication services to the public
(including retail rates), not the prices U.S. carriers pay to
non-FCC-regulated entities for goods and services. We dis-
agree.
At least three provisions of the Communications Act autho-
rize the FCC to regulate the settlement rates that U.S.
carriers pay to foreign carriers. First, section 201 provides:
(a) It shall be the duty of every common carrier engaged
in interstate or foreign communication by wire or radio
to furnish such communication service upon reasonable
request therefor; ....
(b) All charges, practices, classifications, and regulations
for and in connection with such communication service,
shall be just and reasonable, and any such charge, prac-
tice, classification, or regulation that is unjust or unrea-
sonable is declared to be unlawful.... The Commission
may prescribe such rules and regulations as may be
necessary in the public interest to carry out the provi-
sions of this chapter.
47 U.S.C. s 201 (1994). "Foreign communication" means
"communication or transmission from or to any place in the
United States to or from a foreign country...." Id.
s 153(17). Petitioners say that section 201(b), when read
together with section 201(a), covers only the rates, terms, and
conditions on which U.S. carriers furnish foreign communica-
tion service to their customers. We discern no such limita-
tion in the statute's text. The statute nowhere defines the
"practices ... in connection with" foreign communication
service covered by section 201(b), and the Commission has
interpreted such "practices" to encompass negotiation and
payment of settlement rates by U.S. carriers. See 12
F.C.C.R. at 19,937 p 283. Because the Commission's inter-
pretation is reasonable, we uphold it under Chevron's second
step. See 467 U.S. at 843.
The second relevant provision of the statute, section 205(a),
provides:
Whenever, after full opportunity for a hearing, upon a
complaint or under an order for investigation and hear-
ing made by the Commission on its own initiative, the
Commission shall be of opinion that any charge, classifi-
cation, regulation, or practice of any carrier or carriers is
or will be in violation of [the Act], the Commission is
authorized and empowered to determine and prescribe
what will be the just and reasonable charge or the
maximum or minimum, or maximum and minimum,
charge or charges to be thereafter observed, and what
classification, regulation, or practice is or will be just,
fair, and reasonable, to be thereafter followed....
47 U.S.C. s 205(a). The Commission may declare a practice
unlawful upon finding that it is "unjust, unreasonable, unduly
discriminatory, or preferential." Western Union Telegraph
Co. v. FCC, 815 F.2d 1495, 1501 n.2 (D.C. Cir. 1987). Here,
because the Commission determined that "it would be an
unjust and unreasonable 'practice' ... for a U.S. international
carrier to pay settlement rates above the relevant benchmark
rate," 12 F.C.C.R. at 19,941 p 291, it set enforceable bench-
mark rates. Deferring to the Commission's determinations of
what practices are "just" or "unjust," "reasonable" or "unrea-
sonable," see Capital Network System, Inc. v. FCC, 28 F.3d
201, 204 (D.C. Cir. 1994), we hold that the Commission, in
capping settlement rates, lawfully exercised its broad powers
under section 205(a).
Finally, section 211(a) also gives the Commission authority
to regulate settlement rates. It requires "[e]very carrier
subject to this chapter [to] file with the Commission copies of
all contracts, agreements, or arrangements ... with common
carriers not subject to the [Act]." 47 U.S.C. s 211(a). For
all contracts filed with the FCC, it is well-established that
"the Commission has the power to prescribe a change in
contract rates when it finds them to be unlawful and to
modify other provisions of private contracts when necessary
to serve the public interest." Western Union, 815 F.2d at
1501 (citing Federal Power Comm'n v. Sierra Pacific Power
Co., 350 U.S. 348, 353-55 (1956), and United Gas Pipe Line
Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344 (1956)).
According to petitioners, section 211(a)'s filing requirement
for agreements with "common carriers not subject to the
[Act]" applies only to agreements between U.S. telecommuni-
cations companies and other U.S. carriers not engaged in
telecommunications, such as railroads. But neither the stat-
ute nor any of the legislative history cited by petitioners, see
H.R. Rep. No. 73-1850, at 5 (1934), indicates that Congress
intended the phrase "common carriers not subject to the
[Act]" to refer just to other domestic carriers. Instead, the
statute leaves this phrase open to interpretation, and in our
view, the Commission has reasonably construed section 211(a)
to apply to settlement rate agreements between U.S. and
foreign carriers. Under the Sierra-Mobile doctrine, the
Commission may modify such agreements as it deems neces-
sary to serve the public interest. See 12 F.C.C.R. at 19,939
p 286 (finding settlement rates exceeding the benchmarks
"not in the public interest"). Giving Chevron deference to the
Commission's interpretation of section 211(a) and "substantial
deference" to its judgments regarding the public interest,
Mobile Communications Corp. of America v. FCC, 77 F.3d
1399, 1406 (D.C. Cir. 1996), we hold that the Commission had
ample authority under section 211(a) to limit settlement rates
paid by U.S. carriers.
Petitioners cite various authorities, see R.C.A., 43 F. Supp.
at 854-55; Separation of Costs of Regulated Telephone Ser-
vice from Costs of Nonregulated Activities, 2 F.C.C.R. 1298,
1312 (1987) (report & order); AT&T Charges for Interstate
Telephone Service, 64 F.C.C.2d 1, 80 (1977) (final decision &
order), for the proposition that the FCC cannot set prices
that U.S. carriers pay to non-FCC-regulated suppliers of
goods and services. To be sure, in those cases the Commis-
sion sought to lower prices paid by U.S. carriers for goods or
services not by regulating those prices directly, but by regu-
lating retail rates ultimately paid by consumers. But nothing
in those cases suggests that the Commission lacked authority
to regulate such prices directly; they simply never addressed
the issue. Given the expansive powers delegated to the
Commission under sections 201(b), 205(a), and 211(a), we have
no doubt that the Commission has authority to prescribe
maximum settlement rates.
IV
We next consider petitioners' claim that the Commission's
settlement rate prescriptions violate the Administrative Pro-
cedure Act, 5 U.S.C. s 706 (1994). Using a "tariffed compo-
nents price" ("TCP") methodology, the Commission calculated
its benchmark rates by summing the estimated prices for
three services--international transmission, international
switching, and national extension--necessary for terminating
an international long-distance call. See 12 F.C.C.R. at
19,827-30 pp 45-50. Arguing that the TCP methodology fails
to produce cost-based settlement rates because it does not
use data on the actual cost of foreign termination services,
petitioners claim that the calculated rates undercompensate
foreign carriers. Petitioners further allege that in making its
calculations, the Commission relied on non-record data.
Again, we disagree.
As we read the record of these proceedings, the Commis-
sion meticulously documented and carefully considered a wide
range of public comments concerning the TCP methodology.
See id. at 19,830-50 pp 51-89. The final Order contains
several passages explaining why the method more than fully
compensates foreign carriers. See, e.g., id. at 19,840-41 p 70
(noting that TCP method includes costs, such as "uncollectible
billings, general overhead expenses associated with retail
service, and marketing and commercial expenses," that would
not be included in cost-based settlement rates); id. at 19,841
p 71 (noting that data used to price international switching "is
substantially above cost"); id. at 19,845 p 80 (noting that
benchmark rates assume higher switching costs for develop-
ing countries, despite lack of evidence that such costs are
actually higher in developing countries).
Throughout the rulemaking process, moreover, petitioners
withheld the very cost data that would have enabled the
Commission to establish precise, cost-based rates. In its
published notice proposing the TCP methodology, the Com-
mission repeatedly invited commenters to suggest alternative
methods for calculating settlement rates. See International
Settlement Rates, 12 F.C.C.R. 6184, 6200-07 pp 39, 43, 44, 46-
50, 52-56 (1996) (notice of proposed rulemaking). At one
point, agreeing with petitioners' view that "the appropriate
cost standard for establishing benchmark settlement rates is
the incremental cost of terminating international traffic," id.
at 6204 p 50, the Commission explicitly stated: "We encour-
age foreign and U.S. carriers to submit data on their costs."
Id. at 6205 p 52. Yet in its final rule, the Commission
reported that "no commenter has provided cost data in the
record about the costs of providing international termination
services." 12 F.C.C.R. at 19,827 p 42; see id. at 19,830-31
p 51 (noting "the dilemma ... that, on the one hand, settle-
ment agreements should contain settlement rates that are
cost-based, but on the other, the data necessary to calculate
costs for each foreign carrier are not available"). Since
petitioners refused to let the Commission see their cost data,
and since the Commission thoroughly explained why "the
TCP methodology provides a reasonable basis for establishing
settlement rate benchmarks in the absence of carrier-specific
cost data," id. at 19,839 p 66, we have no firm basis for
accepting petitioners' claim that the benchmark rates are not
fully compensatory.
Petitioners allege that some foreign countries did provide
data showing that the prescribed rates would be below cost,
citing Hong Kong as an example. The Commission's Order
assigns Hong Kong's international carrier, HKTI, a settle-
ment rate of $0.15 per minute--a rate which, according to
petitioners, cannot possibly compensate HKTI for the $0.29
per minute government-mandated charge that it must pay
Hong Kong's local carrier for terminating each incoming
international call. But, according to the intervenors on behalf
of the FCC, HKTI is a wholly owned subsidiary of Hong
Kong Telecom, and Hong Kong Telecom owns Hong Kong
Telephone Company, the monopoly provider of local service in
Hong Kong. The $0.29 per minute charge is therefore simply
a "left pocket-right pocket" transaction between two subsid-
iaries of the same company. Intervenors' Br. at 31. Asked
about this at oral argument, petitioners had no response.
In any case, if HKTI or another foreign carrier could
credibly show that the benchmark rates prohibit it from fully
recovering its termination costs, the Order [specifically] al-
lows such a carrier to ask the Commission to adjust the
relevant rate to better reflect actual costs. See 12 F.C.C.R.
at 19,842 p 74, 19,848 p 85, 19,849-50 pp 88-89. Recognizing
the proprietary nature of foreign carrier cost data, the Order
makes clear that "under the Commission's rules, a party may
request confidential treatment of any cost data it submits to
justify a different settlement rate benchmark." Id. at 19,850
p 89 (citing 47 C.F.R. s 0.459 (1997)). In the absence of
record evidence showing that the benchmark rates systemat-
ically undercompensate foreign carriers, we think the Com-
mission's regulatory approach--prescribing general rules
while allowing for exceptions--is not arbitrary or capricious.
Turning to petitioners' claim that the Commission used
non-record data to set the benchmark rates, we first consider
their allegation that the Commission used U.S. outgoing call
distribution data provided by AT&T on a confidential basis to
calculate country-by-country prices for national extension ser-
vices (one of the three TCP components) and then returned
the data to AT&T without affording the parties an opportuni-
ty to review it. The record shows, however, that the Com-
mission made summaries of the AT&T data available under
seal for a two-week period prior to issuing its final Order,
that it refused to lengthen the comment period on the
grounds that the data was concise and easy to understand,
and that at least one party submitted comments criticizing
the Commission's reliance on the data. See id. at 19,846-47
pp 83-84 & nn.138-43. During the rulemaking proceeding,
moreover, petitioners never challenged the Commission's con-
fidential treatment of the data, nor did they contest the
Commission's refusal to extend the comment period. Com-
plaining only that the summary data contained no underlying
figures or assumptions, they argued that it was impossible to
verify the national extension prices calculated by the Commis-
sion. The Commission disagreed, stating in its Order that
"the data is complete" and that "[t]here is no further data
that the [FCC] relied upon to calculate the national extension
TCPs that is not in the record." Id. at 19,847 p 84. Instead
of summoning and sorting through AT&T's confidential data
to resolve this issue, we simply note that foreign carriers had
in their hands all the incoming call distribution data they
needed to contest the accuracy of the Commission's calculated
price for national extension services. In other words, even if
the Commission's handling of the AT&T data was less than
ideal, it did not impair the ability of foreign carriers to
challenge the national extension component of the benchmark
rates.
We think the same logic refutes petitioners' claim that in
calculating international switching costs, the Commission un-
reasonably relied on a study published by the International
Telecommunications Union (the TEUREM study) without
examining its underlying data and assumptions. Although
the data was unavailable to the Commission and the public,
foreign carriers had access to data about their own switching
costs and therefore did not lack the means to challenge the
switching costs calculated by the Commission. Furthermore,
as far as compensating foreign carriers is concerned, we
believe the Commission reasonably relied on the TEUREM
study in light of the fact that the Commission had other
evidence indicating that the study substantially overestimated
switching costs. See id. at 19,845 p 80.
V
Next, we consider petitioners' objections to the conditions
imposed on new entrants into the U.S. telecommunications
market that have a 25% equity affiliation with a foreign
carrier. To deter price squeeze behavior, the Order requires
foreign-affiliated U.S. carriers to comply immediately with
the benchmark settlement rates in order to obtain section 214
permission to provide international service to the affiliated
country. See id. at 19,901 p 207. In contrast, the Order
gives non-foreign-affiliated U.S. carriers a transition period of
one to four years (depending on the per capita income of the
foreign country) to achieve compliance. See id. at 19,885
p 165.
According to petitioners, the section 214 conditions repre-
sent an inadequately explained change in the Commission's
regulatory policy. While it is true that the Commission in
1995 declined to impose similar conditions on foreign-
affiliated carriers seeking to enter the U.S. market, see
Market Entry and Regulation of Foreign-Affiliated Entities,
11 F.C.C.R. 3873, 3898-99 pp 65-70 (1995) (report & order),
we think the Commission adequately justified its policy shift
in the 1997 Order. In 1995, the Commission believed that
section 214 conditions were unnecessary because the "effec-
tive competitive opportunities" test, which requires foreign-
affiliated market entrants to show that the foreign country
has taken sufficient steps to create a competitive international
market, served to reduce the monopolist leverage essential
for price squeeze behavior. See id. at 3881-94 pp 19-55. By
1997, the Commission observed, at least two things had
changed. First, because the United States had committed to
allowing foreign competitors freer entry into the U.S. market
pursuant to the World Trade Organization Basic Telecom
Agreement of February 1997, the Commission had proposed
eliminating the effective competitive opportunities test. See
12 F.C.C.R. at 19,905 p 218, 19,908 p 223 (citing Foreign
Participation in the U.S. Telecommunications Market, 12
F.C.C.R. 7847, 7861 p 32 (1997) (order & notice of proposed
rulemaking)). Second, despite the Commission's expectation
that increased global competition would drive rates toward
cost-based levels, see id. at 19,905 p 217; 11 F.C.C.R. at 3899
p 71, "settlement rates remain[ed] far above cost-based lev-
els," 12 F.C.C.R. at 19,905 p 218. In light of these changed
conditions, we think the Commission reasonably adopted its
current section 214 authorization policy to deal with the
heightened risk of price squeeze behavior.
Petitioners' remaining challenges require little discussion.
They claim that the immediate compliance requirement dis-
criminates against foreign-affiliated U.S. carriers compared to
non-foreign-affiliated carriers, but we see no grounds for
disturbing the Commission's informed judgment that the risk
of price squeeze behavior presents a timely problem requiring
immediate preventive measures. See id. at 19,905 p 218.
Nor is there merit to petitioners' claim that a 25% equity
affiliation does not indicate common control and is therefore
an arbitrary proxy for anti-competitive threats. Not only did
petitioners fail to raise this issue during the rulemaking
process, but the Commission has reasonably adhered to its
established view that "a less-than-controlling [ownership] in-
terest can provide a carrier with the incentive and ability to
engage in anticompetitive conduct," 11 F.C.C.R. at 3903 p 80.
Finally, petitioners challenge the Order's penalty provision
under which foreign-affiliated carriers found to engage in
price squeeze behavior may be required to lower their settle-
ment rates on the affiliated routes to the "best practice rate,"
i.e., the lowest settlement rate between the United States and
any foreign country (currently $0.08 per minute). See 12
F.C.C.R. at 19,908 p 224. According to petitioners, this provi-
sion discriminates against foreign-affiliated U.S. carriers be-
cause it does not apply to non-foreign-affiliated carriers that
fail to comply with the benchmark rates. But the penalty's
purpose is to deter anti-competitive conduct, and nothing in
the record suggests that non-foreign-affiliated carriers have
an incentive to engage in anti-competitive conduct. Petition-
ers' further claim that the "best practice rate" undercompen-
sates foreign carriers likewise misses the mark. Because the
penalty rate is meant to deter and punish anti-competitive
conduct, we find it neither surprising nor unreasonable that it
undercompensates foreign carriers.
VI
This brings us finally to petitioner Telstra's claim that, in
the course of prescribing international settlement rates, the
Commission should have set rates for Internet-related tele-
communication services. An Australian carrier, Telstra ex-
changes both telephone and Internet traffic with U.S. carri-
ers. Although it receives net payments from U.S. carriers for
terminating telephone calls from the United States to Austra-
lia, it makes net payments to U.S. carriers for terminating
Internet traffic from Australia to the United States. Telstra
alleges that U.S. carriers charge above-cost rates for termi-
nating Internet traffic and that the Commission ignored its
comments urging a reduction in these rates. Claiming that
the Commission had invited comments during the rulemaking
process and that its comments were directly relevant to the
issues decided in the final Order, Telstra accuses the Com-
mission of violating the Administrative Procedure Act, 5
U.S.C. s 553(c). We disagree.
The Commission's notice of proposed rulemaking gives no
indication that the agency sought comments on Internet-
related issues. The paragraph cited by Telstra in support of
its position reads:
We invite interested parties to submit comments on
our proposals for revising the benchmark settlement
rates, including the methodology for calculating the rates
and our proposal for periodic revisions to the rates. We
also invite comments on our plan to implement the
revised benchmark settlement rates in a manner that will
promote our goal of achieving the cost-oriented, nondis-
criminatory, transparent settlement rates necessary for
the development of competition in the global telecommu-
nications services market.
12 F.C.C.R. at 6195 p 29. Although it may be true, as Telstra
says, that "the global telecommunications services market"
includes Internet services, the Commission's request for com-
ments occurred in the context of a notice that--from the very
first paragraph--declares its subject to be "benchmark settle-
ment rates for international message telephone service
(IMTS) between the United States and other countries." Id.
at 6185 p 1 (emphasis added). The notice made clear that the
Commission sought to regulate the provision of ordinary
telephone service under "the traditional accounting rate sys-
tem," id., and that Internet traffic "is exchanged outside of
the traditional accounting rate system," id. at 6189 p 13. The
mere fact that Internet traffic and international voice traffic
are becoming increasingly interconnected does not oblige the
Commission to regulate both spheres of telecommunications
services simultaneously.
VII
We deny the petition for review and affirm the Commis-
sion's Order in all respects.
So ordered.