3-1-2-5 ESTABLISHMENT OF SATELLITE SYSTEMS PROVIDING INTERNATIONAL COMMUNICATIONS

VI

B

88.

The meaning of the phase "significant economic harm" is not so apparent as to provide clear guidance from which to ascertain whether the use of non-INTELSAT space segment facilities for international public telecommunications services is economically compatible with a global INTELSAT system for purposes of the INTELSAT Agreement. Nowhere in the INTELSAT Agreement is this broad language clarified to provide qualitative or quantitative criteria as to what type or amount of economic harm is sufficient to be "significant." Further, the negotiating history of the INTELSAT Agreement, which suggests only that the modifier "significant" was employed as a compromise between "substantial" and "any" economic harm,⁵⁴ affords little help to those who must apply the "significant economic harm" test to a particular context.

90.

In favorably coordinating these systems, INTELSAT has utilized an ad hoc approach in its determination of significant economic harm.⁵⁶ The evaluation process considered the specific circumstances involving each satellite system and took into account various factors for assessing economic harm.⁵⁷ However, no qualitative concepts or numerical tests were developed to provide clear guidance as to what would constitute the threshold of significant economic harm in future coordinations. Hence, in determining, for the purposes of this proceeding, whether the authorization of the separate systems may cause significant economic harm to INTELSAT, we will develop an approach which takes into account the particular circumstances presented by the proposed systems and the Executive branch service restrictions. This approach requires that those service restrictions be clearly defined as to scope and applicability.

2. Executive Branch Restrictions

91.

As we have stated, the Executive branch has determined that, in order to ensure U.S. fulfillment of its international obligations as well as furtherance of both telecommunications and foreign policy interests, any separate satellite system authorized by the Commission "... is to be restricted to providing services through the sale or long-term lease of transponder or space segment capacity for communications not interconnected with public switched message networks (except for emergency restriction service)."⁵⁸ The Executive branch would impose this service restriction in order to avoid significant economic harm to INTELSAT. It recognizes that no regulatory regime can be "air-tight." But it believes that such restrictions are sustainable, particularly in view of the multinational character of international services and the fat that foreign PTTs police the services provided by companies serving their countries.

(b) Need for Restrictions

105.

There appears to be substantial agreement that some kind of operational restrictions on separate satellite systems will be necessary to avoid significant economic harm to INTELSAT. We conclude that operational restrictions will be necessary. We believe that the Executive branch approach to assure the avoidance of significant economic harm is a reasonable and workable approach. It properly balances the continuing U.S. commitment to INTELSAT with our goal of obtaining the benefits of competition in international communications satellite services. By prohibiting separate systems from interconnecting with public-switched networks, these restrictions would protect INTELSAT's "core" revenues obtained from supplying space segment capacity for international switched message services. Peripheral or "customized" services would be subject to competition between INTELSAT and separate satellite systems. Although the restrictions will limit customer use of separate systems, the potential benefits from introducing competition on a limited basis are still substantial, as we have described, and are worthy of pursuit.

106.

In addition, the Executive branch restrictions are an integral part of a Presidential determination that weighs foreign policy, national security, economic and trade considerations as well as telecommunications policy interest. The restrictions are intended to ensure that the United States meets its international obligations. As a result, the Commission must accord the Executive branch determination the greatest deference and should not reject or substantially modify such determination absent further consideration by the Executive branch.

INTELSAT's voice-grade offerings ..." Since it is the 14,185 figure listed for MTS which is 90 percent of the total voice-grade circuits forecast for 1988 to the 18 countries involved, services in the remaining categories are presumably not barred to separate satellite systems. This conclusion, however, would permit separate systems to provide switched telex, telegraph, and high speed data services as well as AVDs and private line services. Thus, while the White Paper's description of public switched traffic by historical revenue figures would include some non-switched services, its description of public-switched traffic in terms of projected circuit utilization would appear to exclude some switched services as well as non-switched services.

114.

We believe that a reasonable approach to clarifying what services are barred from separate systems is to identify those services that are switched services. Interconnection with the carrier networks over which these services are provided is barred. Separate systems would be permitted to provide all other services subject to the limitations set out in the Executive branch restrictions and further defined by this Commission. First, MTS is a switched service and separate systems may not interconnect any MTS switched network. All MTS is barred whether or not it is provided by AT&T or any new and smaller carrier such as MCI, GTE Sprint and SBS. Telex, TWX telegraph and teletext services generally are switched services. Interconnection with IRC networks to access these services is barred as is interconnection with carrier switched networks providing facsimile or low speed and high speed switched data services. Private line voice record services are not switched and may be provided by separate systems. AVDs have been considered from their inception to be a form of private leased line.⁶⁶ We do not agree with Comsat that the White Paper intends to regard AVDs as a switched service and bar separate systems from providing them for intracorporate use.⁶⁷ There is simply no basis to consider AVDs as a switched service. As to other services, the White Paper explicitly states that separate satellite systems may provide television transmission services which do not involve the switched network. However, videoconferencing and associated audio may involve the switched network. Separate satellite system operators may ! interconnect with the carriers' switched networks to provide the services. In sum, we regard the term "public-switched message ! works" for purposes of implementing the Executive branch restriction include those facilities established to provide switched message service such as MTS, telex, TWX, telegraph, teletext, facsimile and high speed switched data services. Generally, no communications provided over ! separate system space segment may interconnect with these network either directly or indirectly.⁶⁸ Thus, for example, separate system use! would not be permitted to interconnect their facilities to the MTS network through a PBX or by the manual interconnection of a switchboard operator. Neither would a data circuit obtained from a separate system ! permitted to interconnect with a public switched message network if terminates in a computer that can store and process the data a! subsequently retransmit it over that network.

(e) Enforceability of Executive Branch Restrictions

133.

We will also require that the "no interconnect" restriction run with the use of the facilities and not be limited only to the space and ground segment licensees. In order to achieve compliance among all levels of separate system users, we will retain jurisdiction over the use of all separate system facilities. Since, as we have stated, the "no-interconnect" restriction will apply to communications originating in foreign countries and destined for the United States as well as communications originating in the United States destined for international points, and will continue to apply at the "foreign-end" for communications originating in the United States, we must rely upon foreign authorities to take measures to enforce the restriction. We therefore will require that all operating agreements entered into by separate system licensees with foreign authorities must contain language stating that both parties will take necessary measures to enforce the "no-interconnect" restriction. We also will require separate system operators to place the "no interconnect" restriction in all lease agreements for space segment capacity and all sales contracts for the purchase of transponders.

134.

In addition, we will impose certain requirements on separate system users to foreclose opportunity for them to escape legal responsibility for adhering to the restriction. For those users which seek to resell separate system capacity on a common carrier basis, we will condition all Section 214 authorizations on compliance with the "no-interconnect" restriction and require carrier tariffs to impose the restriction on customer use of the facilities and services offered. Violation of the restrictive condition by carriers will subject them to loss of their Section 214 authority to use separate system facilities and violation of the tariff restriction by users will subject them to loss of service. We will require written agreements to be maintained between those users that seek to resell separate system capacity as enhanced service providers or to enter into sharing arrangements with other service providers and their customers and among users entering into sharing arrangements. These agreements must be filed with the Commission and contain explicit language precluding interconnection of separate system facilities to the public-switched message networks. Finally, for all those users which interconnect their separate system facilities to a PBX or similar equipment, we will require that such equipment be configured by either hardware design or through software features to block on-demand connections with public-switched message networks.⁸⁹ Each such user must file a written sworn certification by a corporate official with the Commission: (1) stating that it

3. Consideration of Significant Economic Harm

(a) Introduction

139.

As part of its ad hoc, case-by-case approach to determine significant economic harm, INTELSAT evaluates the specific circumstances of each satellite system to be coordinated. INTELSAT's current procedure for determining significant economic harm was adopted by the Board of Governors in 1977.⁹¹ This procedure requires those members seeking to coordinate under Article XIV(d) to furnish such information as the expected date of commencement of operation and expected duration of operations of the separate space segment facilities; the types of international public telecommunications services to be provided and coverage zone(s) of the separate facilities; the identity of other INTELSAT Parties or Signatories or other entities expected to utilize the separate facilities; and the identity of all existing or projected international public telecommunications traffic or services to be provided by the separate system for the period of operation (including the identification of any such traffic or service presently contained in the INTELSAT Traffic Data Base for that period). The principal indicators in assessing economic harm are to be the impact on projected INTELSAT space segment costs and utilization charges, the effect on INTELSAT planning and operations, and the resulting impact on signatories' investment. This impact is to be measured by comparing the level of projected INTELSAT costs and utilization charges, had the service requirements been met by existing or planned INTELSAT facilities, with the projected INTELSAT costs and utilization charges, absent the service requirements being met by the INTELSAT system. INTELSAT also considers the effect a separate satellite system would have on signatory investment shares and other factors that may be relevant on a case-by-case basis.

140.

Pursuant to this procedure, many factors have been considered in past Article XIV(d) consultations. Some factors have been important in more than one coordination procedure. For example, the amount of traffic likely to be diverted from the INTELSAT system was an important factor in the economic coordinations of ARABSAT, the European Communications Satellite system and its subsequent expansion, the Algerian use of Intersputnik, and the use of domestic systems for the transmission of service between the U.S. and Canada. In the case of these systems, the potential traffic diversion was determined to be small or negligible. In other coordination proceedings, some factors have been specific to the proposed satellite system. For example, PALAPA was designed to provide services between remote locations in the Philippines, Malaysia, Indonesia, Singapore, and Thailand where interconnection with the INTELSAT system would have been uneconomical. In another case involving U.S.-Bermuda TV reception, Bermuda's small size and limited economic resources were decisional factors.

141.

The INTELSAT Board of Governors has been considering alternatives to the current procedures for determining significant economic harm. The Director General has proposed criteria that would consist of five basic interrelated questions that would be addressed in turn in an assessment of significant economic harm and prejudice to the establishment of direct communications links.⁹² However, the criteria that would be applied to Article XIV(d) coordination requests go beyond the mere issue of economic harm, although this issue is an integral part of the coordination procedure. The first basic question is whether the services to be provided by a proposed separate satellite system are public international services. If the services are not public international services, no further coordination is required.⁹³ The second question is whether the proposed services can be provided by INTELSAT. If INTELSAT can provide the services, then a determination has to be made as to whether the proposed separate system is likely to prejudice the establishment of direct telecommunications links through the INTELSAT space segment among all the participants. The third question concerns ensuring mutual connectivity among all users at reasonable costs, including ground facilities, in a technically efficient manner. The fourth question focuses on the issue of economic harm. Under this criteria, if INTELSAT is providing or could provide the service that a separate system proposes to offer, then the harm inflicted on INTELSAT is identified and evaluated. The Director General identifies three factors to evaluate in order to determine harm: the amount of traffic diversion, the cap or ceiling on traffic diversion, and the impact of traffic diversion upon INTELSAT's satellite loading and deployment plans.⁹⁴ Finally, the fifth question in the proposed revised procedures involves a determination of special circumstances that may be relevant to a proposed separate system. The primary concerns with this question are transborder services and geographic coverage over short distances. Satellite communications is said to be more cost effective for longer distances, so a separate system that proposes to provide service over short distances, e.g., 1500 kilometers or less, is presumed to be established for other reasons.

142.

The Director General's proposal has been submitted for the record in this proceeding by parties filing informal comments and the applicants have commented on it. The Board of Governors did not adopt the proposal when it was considered at the Board's most recent meeting in June of this year, and it is considering alternative proposals submitted by other signatories. The United States has continued to support the existing procedures that provide for a case-by-case assessment which affords flexibility and an interactive environment which promotes good faith consideration of the needs and plans of INTELSAT members.⁹⁵ It does not support the adoption of any mechanistic procedures or criteria that rely on inflexible, quantitative criteria and that do not consider qualitative as well as quantitative factors.

161.

Break-even analysis provides another possible definition of economic viability. This short run analysis compares total revenues and total costs for different levels of output in order to determine the level of output at which revenues and costs are equal.¹⁰⁹ The analysis suggests that economic viability is defined by comparing total revenues with total costs, and significant economic harm occurs at output levels below the break-even point.

162.

These concepts of economic viability, as measures of significant economic harm, seem to be based on a firm's ability to remain in business. Significant economic harm does not arise unless a firm's very existence is threatened. Such a definition seems to be appropriate in many sectors of the economy, but in the case of INTELSAT, which is affected by public interest as well as national interest considerations, economic viability may not be an acceptable measure of significant economic harm. Economic viability, as we have interpreted the concept, does not seem to comport with signatories' deliberations on the issues. We believe that the signatories intended significant economic harm to mean something less severe than a threat to INTELSAT's continued operation. As ISI notes in its comments, " 'significant' must mean something more than 'any' or 'trivial,' and may mean less than 'disabling, incapacitating, or critical.' "¹¹⁰ We reason that significant economic harm is intended to denote a degree of harm which is less severe than harm threatening INTELSAT's very existence. However, we do not believe that INTELSAT necessarily suffers significant economic harm whenever its revenues fall below the level it might have realized if it was the only satellite system providing international telecommunications satellite service.

164.

We believe that significant economic harm results when expected revenues from an organization's overall operations in the long run cover a part of its costs, but are inadequate to pay a return on invested capital that is equal to or greater than the risk-free rate of return. In this situation, an entity's revenues are sufficient to meet a portion of its costs but it is unable to pay a return on investment that is as much as an investor could earn on a risk-free investment. Under these conditions, an organization will experience difficulty in continuing to attract the capital that it needs to finance long-term investment expenditures. Hence, economic harm encompasses a range. If an organization's expected revenues cover its expected costs, including a return on invested capital that equals or exceeds its opportunity cost, the organization suffers no economic harm. If the expected rate of return is greater than the risk-free rate of return but less than the opportunity cost of capital, then the organization experiences economic harm but not significant economic harm. However, if expected revenues meet expected costs, but are not sufficient to pay a risk free rate of return on invested capital, then economic harm exists which may be considered significant.

166.

We are fully aware of the financial arrangements that have been established by INTELSAT to account for the somewhat unusual characteristics of the organization. Consideration of the concept of economic harm in this proceeding must take into account the nature of INTELSAT as an economic organization and the peculiarities of its operations. INTELSAT signatories, as satellite system owners, make capital contributions to finance investment much like common stock owners in a private corporation. Ownership in INTELSAT, however, is generally based on relative use of the satellite system, which is adjusted on an annual basis to reflect actual use. As users of the satellite system, signatories pay a utilization charge to lease satellite circuits that are used to provide communications services to consumers. In addition, non-owner users of the satellite system pay utilization charges to lease circuits and provide service. The revenues generated from the provision of INTELSAT services to owners and non-owners are used to meet INTELSAT's operating expenses and depreciation expenses, and to compensate owners for their capital investment. The unusual situation in the case of INTELSAT, which distinguishes the organization from a private corporation, is that the owners are, with some exception, the users of the system. Thus, we realize that INTELSAT is a consortium whose owners have joined together to provide global satellite services to themselves and that its ownership and financial arrangements differ from those of a private corporation.

167.

At the same time, however, INTELSAT's business procedures are like those practiced by a privately owned regulated utility. The INTELSAT Operating Agreement provides, in part, that INTELSAT space segment utilization charges "shall have the objective of covering the operating maintenance and administrative costs of INTELSAT, the provision of such operating funds as the Board of Governors may determine to be necessary, the amortization of investment made by Signatories."¹¹¹ Article 8(a) establishes that an essential financial objective of INTELSAT is to set rates for the satellite services it offers at a level sufficient to earn revenues to meet its costs and compensate its owners, i.e., signatories, for their capital contributions. To do this, INTELSAT computes a revenue requirement which is composed of its operating expenses, overhead costs, annual depreciation and amortization charges and a return component. Rates for INTELSAT's satellite services are set to generate revenues that will equal its estimated revenue requirement. This procedure is identical to the one used by a privately owned, regulated utility, e.g., Comsat, to set its rates. The main difference is that a regulated utility identifies its return component as a rate of return on investment while INTELSAT calls it "compensation for use of funds." The function of the return component, however, is the same in both cases, i.e., to attract capital and to compensate investors for the use of their funds. Thus, INTELSAT's rates are set to cover its costs, including a return on invested capital. INTELSAT's rates, in the form of utilization charges, are cost based and, therefore, a reasonable measure of the costs INTELSAT incurs to provide satellite service. The revenues INTELSAT earns are intended to cover its total costs, including compensation on invested capital. In short, we believe INTELSAT operates its satellite system and sets rates for its satellite services in the manner of a privately owned, regulated public utility which has revenue and rate of return objectives. Notwithstanding the differences between INTELSAT's financial arrangements and those of a privately owned, regulated public utility, we believe that the comparison of INTELSAT's revenues from satellite service to the costs it incurs to provide the service is a reasonable basis for assessing the potential for significant economic harm.

⁶⁶ See AT&T Co. and Radio Corp. of Puerto Rico et al., 28 FCC 221 (1960) (authorizing the provision of private line voice-grade channels with alternate use for telephone-data-teletypewriter transmission).

⁶⁷ Comsat's claim appears to be based on a misreading by its consultant of the White Paper analysis of INTELSAT's 1988 projected voice-grade circuit utilization shown in the table above. This claim is inconsistent with both the White Paper's statement that 90 percent of INTELSAT's voice-grade offerings are barred from separate systems and the White Paper's table which shows the 90 percent figure as representing MTS, and while the remaining 10 percent included in record service, AVD and data. If the White Paper intended to bar 100 percent of INTELSAT's voice-grade offerings, then it would have so stated and no purpose would have served to single out 90! of those offerings.

⁶⁸ A customer of a separate satellite system may not have a customer premises earth station through which service could be originated and/or terminated. In such cases, some connection would have to be established between a downlink, whether owned by the separate system operator or a common carrier, and the customer's premises. This would not present a problem where the connecting circuit is a distinct channel, such as a private line, not part of a switched network.

⁸⁹ For purposes of implementing the "no-interconnect" restriction, we obtain jurisdiction over enhanced service providers and end-users which seek to interconnect a PBX or similar equipment with their separate system facilities through the full panoply of authority under Title III of the Communications Act of 1934 to license and condition the use of radio facilities and pursuant to the residual authority under Title I of the Act to ensure full effectuation of our statutory mandate. We have sufficient ancilliary authority to remedy specific abuses by enhanced service providers or end-users which undermine the policies that we are adopting today. See GET Telenet Communications

⁹¹ See INTELSAT Document, "Intersystem Coordination Procedures for Implementation of Article XIV(d) Requirements Concerning Significant Economic Harm." BG-28-63E (June 29, 1977).

⁹² See INTELSAT Document, "Policies, Criteria and Procedures for the Evaluation of Separate Systems Under Article XIV(d)," BG-60-69E (August 22, 1984).

⁹³ Orion has argued in its application that it would not be providing "public telecommunications services" and therefore need not coordinate under Article XIV(d) but need only technically coordinate under Article XIV(e). We disagree. We regard the Executive branch's Memorandum of Law on Orion's contention as conclusive.

⁹⁴ The first factor, traffic diversion caused by a separate satellite system, would be determined on a service-by-service, region-by-region, and case-by-case basis as well as on an INTELSAT system wide basis. Consideration would be given as to whether or not INTELSAT could provide comparable service, whether the diversion would be "small" or "negligible," and whether the diversion would be incidental to the natural fringe of a domestic satellite system. The second factor, the cap, is concerned with the aggregate traffic diversion from INTELSAT that is caused by all separate satellite systems planned by a country for a period of ten years. The traffic that is diverted by each separate satellite system may not inflict economic harm on INTELSAT but the combined, cumulative impact caused by several systems could result in significant economic harm. In order to prevent adverse effects from being caused by more than one system, a cap is proposed to limit the economic harm any one nation could impose on INTELSAT. The cap would be set for an operational region or for individual countries and it could differ between regions or services. The third factor, satellite loading, would involve an analysis and determination as to whether a separate satellite system would result in inefficient loading of INTELSAT satellites in a region.

⁹⁵ See INTELSAT Document, submitted by the U.S. Signatory, entitled "Comments on Proposals for the Establishment of Policies, Criteria and Procedures for the Evaluation of Separate Systems Under Article XIV(d) of the INTELSAT Agreement (BG-60-69)," BG-62-54 (March 22, 1984).

¹⁰⁹ See, e.g., Managerial Economics by Joel Dean, Prentice Hall, 1951, pp. 326-341 and Price Theory and Its Uses, (4th ed.) by Donald S. Watson and Mary A. Holman, Houghton Mifflin Co. 1977, pp. 186-187.

¹¹⁰ Comments of ISI at 48.