Study on Accounting charges

/ Updated on 24.01.2003
For the international telephone service, the originating and terminating operators have been using, generally, a system of sharing the cost of network use, known as the Accounting Rates System.

In this context, the operators come to a bilateral agreement on a certain amount per minute - the accounting rate associated with the total cost of network use. Since operators have traditionally co-operated, sharing the main investment in infrastructure, the accounting rate is normally divided equitably. The accounting rate share is known as the settlement rate.

Although the significant and continued reduction of accounting rates, as a result of recent technological developments, which led to significant reductions in costs, and of the increased degree of market liberalisation at the international level, there might still exist a discrepancy between the value of the service provision and the associated cost of network usage.

It should be noted that accounting rates have an important influence on the prices users pay for international calls, and also that accounting rates can represent a barrier to entry for new operators, who are likely to find themselves confronted with an eventual resistance of historic operators to a reduction in accounting rates.

Taking into consideration that accounting rates represent nearly 70% of the total cost of international telephone traffic, it is vital that they be reduced. This situation formed the background for the ICP's study concerning the accounting rates applied in relations between Portugal Telecom and operators of other Member States.

Similarly, due to the impact of settlement rates on end-user retail tariffs and on possible new entrants, the Directorate General for Competition of the European Commission (DGIV) launched in October 1997 an investigation concerning the accounting rates by European operators with a potentially dominant position, considering that excessive settlement rates may be perceived as abuse of dominant position.

Although the investigation does not focus on end-user prices, this analysis is relevant to end-users prices, since reductions in accounting rates should lead to substancial price reductions for consumers.

In this sense, and sharing the EC concerns, ICP's study aims to analyse in detail the present matter, complementing, at a national level, the EC investigation employing, for this purpose, basically the same methodology and criteria as used by DGIV.

Our study focuses mainly on the (i) evaluation of the main traffic flows and its relation to the evolution of settlement rates; (ii) evaluation and comparison of accounting rates reduction and (iii) verification of the orientation towards costs of the accounting rates.

(i) Evaluation of main traffic flows and its relation to the evolution of settlement rates.

Regarding traffic volume and reduction in average settlement rates, the analysis was performed . In fact, operators with incoming traffic higher than outgoing traffic may not have incentives, in the short run, to reduce significantly settlement rates, as they might benefit from the corresponding net inpayments that such traffic imbalance will cause.. This situation can be connoted with abuse of a dominant position.

We therefore evaluated the correlation between the two aspects in the case of PT, and examined the extent to which differences exist between reductions in settlement rates applied in EU routes as a whole and applied in the group of countries with which PT records the greatest traffic imbalance Comparing the weighted average settlement rate for the countries with which the greatest traffic imbalance exists relative to the weighted average settlement rate applicable for EU traffic, we can see that the difference is insignificant. The reduction of the average settlement rate for countries where the traffic imbalance exists was slightly higher than the reduction for all EU countries (27%).

It cannot be claimed, therefore, that PT is creating obstacles to the reduction of accounting rates in relations where the highest imbalance exists, and thus no indications of abuse of a dominant position are found.

(ii) Evaluation and comparison of accounting rates reduction

The rate of reduction of accounting rates, weighed by traffic volume, applied by Portugal Telecom between December 1995 and December 1998, rose to 49.5% for European routes, while the European average rate of reduction , according to the DGIV report, is around 43%.

(iii) Cost-orientation of accounting rates

To assess the cost-orientation of accounting rates, we carried out a number of tests providing a comparison between accounting rates and the underlying cost of international telephone traffic.

In performing the tests, the cost per minute of international traffic was determined on the basis of the principal cost components of an international call - national extension, international transmission and international switching. DGIV has set a limit to the difference between the settlement rate and the cost, expressed as a percentage of that cost, which must not be exceeded by the operators under investigation.

To sum up, in the face of the available evidence, it is not possible to conclude that excessive margins, as they were defined for the purposes of the present study, exist. In conclusion, we can concur that the recent accounting rates reductions introduced by PT are compatible with the principle of cost-orientation, as defined in the DGIV survey. The ICP study also concludes that no evidence of abuse of its dominant position has been found.

In the light of these conclusions, and taking into account the positive developments in respect of accounting rates applied by PT which have taken place last year, the European Commission concluded that there is no need to continue the examination and closed its investigation into Portugal Telecom, with the conclusion that no evidence exists either for the practice of excessive accounting rates by Portugal Telecom or for the abuse of dominant position.

In this context, ICP will continue to monitor the evolution of accounting rates and to endeavour that such evolution is reflected in the end-user prices of international calls, with the consumer standing to gain. See: