International Settlement Rates and U.S. Exportation of “Procompetitive Deregulatory Principles” After the WTO Agreement on Telecommunications Services

Paul W. MacAvoy & J. Gregory Sidak

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On February 15, 1997, seventy countries working within the framework of the World Trade Organization (WTO) agreed on a multilateral reduction of regulatory barriers to competition in international telecommunications services. The signatory nations to the WTO agreement, representing markets generating 95 percent of the $600 billion in global telecommunications revenues in 1997, are now legally bound to open their telephone markets to competition. Within months, however, the Federal Communications Commission (FCC) injected controversy into the new multilateral arrangement by proposing to dictate the prices that other nations may allow their domestic telephone companies to charge to international long-distance carriers for terminating incoming calls from the United States. Those charges for terminating access, known as settlement rates, involve billions of dollars annually and are set pursuant to an international regime that is one of the more arcane niches in the foreboding sprawl of telecommunications regulation.

The FCC justified its 1997 benchmarks policy by noting that, at the time, “international calling rates remained high because in many countries, competition was non-existent or insufficient to drive settlement rates down to cost-based levels.” The goal of that policy was to reduce “above-cost settlement rates paid by U.S. carriers to foreign carriers for the termination of international traffic, where market forces had not led to that result.” However, the FCC eventually acknowledged that its 1997 policy had shortcomings. The rigid benchmarks of the 1997 policy “prevented U.S. carriers from negotiating flexible, individualized rates and terms that are responsive to changing market conditions and beneficial to U.S. customers.” Consequently, in 2004, the FCC revised its international settlement rates policy to relax its benchmark requirements for cases in which U.S. carriers had negotiated benchmark-compliant rates. In 2012, the FCC went further, finding that regulation of international settlement rates was “no longer necessary” and could, in some cases, be “unnecessarily burdensome.” The FCC therefore eliminated such regulation between U.S. carriers and carriers in international countries, with the exception of Cuba. Then, in February 2016, the FCC proposed eliminating the Cuba exception, which, if adopted, will mark the end of the FCC’s policy of regulating international settlement rates. The eventual demise of international settlement rate regulation confirms our diagnosis in 1997 that such regulation has had little, if any, benefit for U.S. consumers.

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Paul W. MacAvoy & J. Gregory Sidak, International Settlement Rates and U.S. Exportation of “Procompetitive Deregulatory Principles” After the WTO Agreement on Telecommunications Services, 1 Criterion J. on Innovation 501 (2016).

Paul W. MacAvoy (1934–2016) was the Williams Brother Professor Emeritus and former dean of the Yale School of Management. His many books and journal articles included The Unsustainable Cost of Partial Deregulation (Yale University Press, 2007) and The Failure of Antitrust and Regulation to Establish Competition in Long-Distance Telephone Services (The AEI & MIT Press, 1996). MacAvoy was the founding editor of the Bell Journal of Economics and Management Science (now called the RAND Jounal of Economics). A member of President Johnson’s Task Force on the Antitrust Laws, MacAvoy subsequently served as member of the Council of Economic Advisers and as co-chairman of the President’s Task Force on Regulatory Reform during the Ford administration. President Carter appointed MacAvoy to the Council of the Administrative Conference of the United States, and President Reagan appointed him to the National Productivity Advisory Committee. MacAvoy served on the boards of directors of the Chase Manhattan Bank Corporation, the Alumax Corporation, the American Cyanamid Corporation, the LaFarge Corporation, and other companies. After receiving his doctorate in economics from Yale in 1960, MacAvoy taught at the University of Chicago and was appointed the Luce Professor of Public Policy at the Massachusetts Institute of Technology in the 1970s. After his first appointment at the Yale School of Management from 1977 to 1981, when he was the Milton Steinbach Professor of Organization and Management, MacAvoy served as the Frederick William Beinecke Professor of Economics in the Yale Department of Economics from 1981 through 1983. From 1983 to 1990, he was dean and John M. Olin Professor of Public Policy and Business Administration at the University of Rochester’s William E. Simon Graduate School of Business Administration. He returned to the Yale School of Management to serve as dean from 1992 through 1994 and was the Williams Brothers Professor of Management Studies from 1994 to 2004. MacAvoy was elected to the American Academy of Arts and Sciences and received Yale University’s Wilbur Cross Medal in 1982.

J. Gregory Sidak is the chairman of Criterion Economics. He testifies as an expert economic witness in complex business disputes throughout the Americas, Europe, Asia, and the Pacific, and he has twice served as Judge Richard Posner’s court-appointed neutral economic expert on patent damages. Sidak held the Ronald Coase Professorship of Law and Economics at Tilburg University in The Netherlands and the F.K. Weyerhaeuser Fellowship in Law and Economics at the American Enterprise Institute for Public Policy Research. He has also been a senior lecturer at the Yale School of Management and a visiting professor at Georgetown University Law Center. Sidak received A.B. and A.M. degrees in economics and a J.D. from Stanford University. He was Judge Posner’s first law clerk, served on the senior staff of the Council of Economic Advisers in the Executive Office of the President, and was deputy general counsel of the Federal Communications Commission. Sidak has published six books and roughly 200 articles or book chapters. The Supreme Court of the United States, the Supreme Court of Canada, the European Commission, state supreme courts, the U.S. Courts of Appeals, and many other courts and regulatory bodies have cited his writings approvingly.