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November 17, 1997


Call termination fee may replace settlement rates system

A uniform call termination fee could replace the settlement rates system for settling dues among international telephony companies.

That is, if the current argument among certain sections of the International Telecommunications Union, including India, reaches a conclusion.

The termination charge concept was strongly supported by India at a recent Asia-Pacific Telecommunications Colloquium where it was proposed as an acceptable replacement for the current system of bilateral settlement rates.

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A uniform termination fee would mean that the charge for terminating a call in India, be it from the US or Russia, would be the same. The concept is gaining ground, especially after the August 1997 unilateral US Federal Communications Commission order, mandating US carriers to pay no more than 23 cents per minute to international carriers for completing a call.

This will hurt developing countries like India, which gain substantial revenues from the net settlement payments made by US carriers. The carrier that originates a call pays the settlement price. The carrier, which originates more calls than it receives, will make a net payment to the carrier in the destination country.

Since US tariffs to India are 91 cents (weighted average), compared to the $2.25 paid by an Indian making a call to the US, there is a skew in traffic flow. Currently, for one call delivered by VSNL to a US carrier, the latter delivers nine calls.

Consequently, India gained $209 million in 1995 as payments from US carriers. India's Department of Telecommunications uses this revenue to partly fund its national telecom network's expansion.

According to an estimate, lower income countries could stand to loose $927 million if the FCC order is implemented. It is also estimated that some countries finance up to 50 per cent of their network expansion from settlement payments.

While the FCC order is being challenged in court, ITU's Study Group III, which deals with tariffs, is looking at several options to reform the settlement rate system.

The settlement rate system evolved in an era when all carriers were monopolies in their own countries and there was parity in traffic flow. Now, however, the system is under pressure as there is competition in markets such as the US and monopolies in developing markets such as India. Tariffs reflect the different levels of competition across the world.

DoT maintains that India needs revenues from its inflated long-distance tariffs to finance its network expansion and increase telephone density (number of phones per 100 population) from today's level of 1.3.

Termination charges, which are fixed by every country for calls being completed within its borders, would ensure its sovereign right to determine its telecommunication tariffs.

Countries like India do not want termination charges to reflect costs. The current bilaterally negotiated settlement rates also do not reflect costs since a settlement rate is an internally agreed price between two carriers for completing and delivering an international call.

The rate bears no relation to distance between two countries and is by far an arbitrary rate. For instance, the settlement rate for calls between US and India is much higher than calls between India and Singapore. While the costs of international telephony are coming down due to advances in technology, settlement rates have not always reflected this trend.

Since it is also a bilateral rate very few countries, apart from the US and New Zealand, publish their settlement rates with different countries.

It was to remove anomalies resulting in the settlement rate regime that reform was mooted and ideas such as termination charges were conceived of.

India has maintained at international forum that cost-based international rates - be they settlement rates or termination charges - are possible only when domestic tariffs are also cost-based.

Since tariff regimes in several developing countries are used to create cross-subsidised systems, an immediate shift to a cost-based tariff regime may not be palatable.

- Compiled from the Indian media


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