GT&T's problem with AT&T A direct consequence of its phone sex business - the outlook is grim By Joseph A. Tyndall Guyana Chronicle January 12, 2000 THE Guyana Telephone and Telegraph Company (GT&T)'s blocking of telephone calls made from the United States through AT&T, in the first few days of the new millenium, reflects a desperate attempt by the local telephone company to protect its lucrative audiotext business in the U.S. market. The viability of GT&T's audiotext business, which, predominantly if not exclusively, is an international phone sex service, depends heavily on the high settlement rates prevailing between Guyana and the U.S. The U.S. is by far GT&T's biggest audiotext market. The settlement rate represents a fifty/fifty split of the accounting rate - the per minute charge agreed by the two telephone companies at each end of an international route, on the basis of which payment will be made for the completion of telephone calls from one country to the other. At present, the settlement rate under GT&T's agreement with AT&T is 85 US cents per minute. Under U.S. Federal Communication Commission (FCC) regulations, the same charge applies to calls exchanged with other U.S. carriers, such as Sprint and MCI. Beginning more than a decade ago, there was a gathering momentum in the developed world, led primarily by the U.S., to reduce accounting rates to cost based levels. In addition to the per-minute costs, the U.S. was concerned that the considerable imbalance in its international telephone traffic, with the volume of outgoing calls being far greater than the incoming traffic, resulted in a significant outflow of foreign exchange. The move was resisted by developing countries on the ground that the surplus earned by their telephone companies was needed for the development of their telecommunications infrastructure. In August 1997, the FCC issued an order mandating settlement rate benchmarks for four categories of countries, classified according to their levels of development. The benchmarks are to be achieved over a transition period that varied from one year for high income countries to five years for countries at the lowest level of development (low income countries). Guyana is one of the low income countries for which the benchmark rate is US$0.23, with a transition period of five years. This means that GT&T is expected to implement the benchmark rate by January 1, 2002. There was considerable opposition from foreign administrations to the FCC decision. The Caribbean telephone companies mounted a valiant effort with the support of the Caribbean Association of National Telecommunications Organisation (CANTO), their umbrella organisation. But, despite all opposition, the FCC proceeded to enforce the scheme on schedule, with the first reductions made by high income countries on January 1, 1998. FCC regulations require that foreign telephone companies with a transition period in excess of two years should make annual reductions on a proportionate basis over the transition period. Accordingly, AT&T entered into negotiations with GT&T (in reality the U.S. Virgin Islands-based parent company Atlantic Tele-Network [ATN]) for a phased reduction of the settlement rate. The present impasse came about as a result of GT&T's refusal to implement any reductions before the very last moment, that is, January 1, 2002. GT&T was concerned that any significant reduction in the settlement rates would signal the end of its audiotext business. GT&T'S PREDICAMENT - THE AUDIOTEXT CONNECTION GT&T's predicament reflects the fact that the revenues claimed for its audiotext business are not generated from payments made by audiotext users. The FCC's benchmark decision does not apply to the charges paid by audiotext users for their consumption of the services provided by audiotext providers. The revenues are, in fact, the settlement payments made by AT&T (as well as other foreign telephone companies in countries to which GT&T provides phone sex services) for completing (receiving and forwarding) international telephone calls. GT&T's problem is that lowering of the settlement rates would reduce the revenues that it transfers, without any apparent justification, to its audiotext business. More about this later. Guyana is not the only Caribbean country that has found itself in a predicament with respect to its audiotext services. The Dominican Republic and the Netherland Antilles (Aruba in particular), once among the leading phone sex providers in the world, also had this problem. The Dominican Republic began to put its house in order, following the efforts of the FCC in 1994 to suppress the transmission of illegal phone sex services to the U.S. Unlike Guyana, the telephone authorities of the Dominican Republic cooperated with the FCC to suppress these services. The result is that, unlike Guyana, the Dominican Republic, having freed itself of the audiotext impediment, had no difficulty complying with the benchmark decision. Its accounting rate was reduced from US$0.70 in 1997 to US$0.60 on 01/01/98, to US$0.52 on 01/01/99, to US$0.44 on 01/01/00 to US$0.38 from 01/01/01. This will bring it into full compliance with the FCC settlement rate benchmark of US$0.19 (half of the accounting rate). Aruba, like GT&T, refused to initiate a phased reduction of its accounting rate and eventually decided to seek a solution through government to government negotiations. But this was to no avail and on December 8, 1999, the Netherland Antilles notified the FCC of its agreement to reduce its accounting rate from US$0.70 to US$0.30, thereby fully complying with the settlement rate benchmark of US$0.15, with retroactive effect from January 1, 1999. Retroactivity means that Aruba will have to refund to the U.S. telephone companies all overpayments made in 1999. The FCC has the authority to enforce such refunds and had previously done so in relation to two other holdouts - Cyprus and Kuwait. The FCC had moved successfully against Kuwait, even though the government had enacted a law prohibiting its telephone company from complying with the FCC's benchmark order. The foreign telephone companies are at a disadvantage because the U.S. telephone companies can simply withhold the payment of settlement rate revenues, until the overpayments have been liquidated. OTHER CARICOM COUNTRIES HAVE BEGUN TO LOWER THEIR ACCOUNTING RATES All Caribbean Community (CARICOM) countries, except Guyana, have taken some action to implement the benchmark rates. The Bahamas is already in full compliance, having reduced its accounting rate from US$0.60 peak (US$0.30 off-peak) to US$0.30, since 01/01/99. Its benchmark rate is US$0.15 - a half of the settlement rate. Seven CARICOM countries have notified reduction schedules that will bring them into full compliance - Antigua, Dominica, Grenada, Montserrat, St Kitts-Nevis, St Lucia and St Vincent, which have decided to reduce their accounting rates from US$0.81 on 01/01/99 to US$0.73 on 01/01/00 to US$0.38 on 01/01/01, the final rate corresponding to the US$0.19 benchmark rate. Trinidad and Tobago has made two accounting rate reductions, so far - from US$1.00 to US$0.90 on 04/01/99 to US$0.83 on 07/01/99. Barbados has gone from US$1.10 in 1997 to US$1.00 on 04/01/98. No further notifications from these two countries are on record, so far. Jamaica has filed a six-phase reduction from US$1.20, at the beginning of 1999, to US$0.70 on 07/01/00. Suriname reduced its accounting rate from US$2.16 (maximum) and US$1.95 (minimum) to US$1.14, as of 05/01/99. The benchmark rate (a half of the accounting rate) for these four countries is US$0.19. The Guyana accounting rate has remained unchanged at US$1.70, since 01/01/87. It would make good sense for GT&T to agree to a phased reduction, as other CARICOM countries have done, instead of waiting until 2002 to absorb the full weight of the rate adjustments. The only circumstance in which it would be prudent to wait, in so far as consumers are concerned, is if the settlement revenue bonanza is applied to telecommunications development and the exploitation of scale economies. There is scant evidence that this has been happening in the past, and there is little justification for believing that it will happen in the future. GT&T'S ALBATROSS AUDIOTEXT BUSINESS GT&T has claimed that it is acting under CANTO's umbrella in its refusal to comply with the settlement rate benchmarks. But GT&T is the only CANTO and CARICOM country that has shown no movement in its settlement rates since the implementation of the benchmark decision. CANTO had advised its members to stand up to the FCC on the ground that implementation of the settlement rate benchmarks would deny them the financial inflows needed for telecommunications development. But Guyana has a problem that no other CARICOM country has - the albatross of GT&T's audiotext business. The FCC is aware that its benchmark rates would lead to the elimination of the international phone sex business from the U.S. market. The FCC obviously saw this as a welcome bonus from its benchmark decision. In a meeting held at FCC headquarters on April 3, 1995 to consider measures to deal with the problem of the international phone sex business, Mr Scott Blake Harris, Chief of the International Bureau, stated very clearly that one means of suppressing the phone sex trade was to eliminate the slack in the settlement rate which allowed the foreign telephone companies to enter the business. At that meeting, Guyana was fingered as the second largest phone sex provider in the world. The Dominican Republic and Aruba were close behind. The enforcement action against Aruba should surprise no one. IMPLICATIONS FOR SUBSCRIBERS VERY GRIM GT&T faces a daunting situation and the implications for its subscribers are very grim, not to mention the prospects for telecommunications development in Guyana. It is hardly likely that the FCC would be willing to offer a dispensation to GT&T, in as much as it knows that GT&T's main concern is to protect its phone sex business in the U.S. market. The case of Aruba does not hold out any comfort. A significant reduction of the settlement rates, as a first installment, would lead to a drastic reduction in GT&T's revenues, especially if the FCC decides to enforce retroactive implementation. A second installment will most likely eliminate GT&T's phone sex business in the U.S. market. GT&T and ATN have been signalling, for more than four years now, that, if its audiotext business was phased out it would have to be granted a steep increase in the rates for its ordinary telephone services to compensate for the inevitable revenue loss. In a document issued in April 1995, GT&T stated that if it had to give up its audiotext business, it "would have to have an overall increase of 68%, which would include a 1000% increase in local rates and tariffs". At that time, the exchange rate was around G$135 to the US dollar. With the rate now standing at more than G$180 to the US dollar, not to mention other factors, revised figures will be significantly higher. This is not to suggest that GT&T's estimates are just and reasonable. According to GT&T's rate making expert, "despite unrealistically low domestic rates, more than 33 per cent of the subscribers that obtain wireline service lose it for non-payment of bills". With the steep increases mentioned above, the disconnections would far exceed this figure, with obvious consequences for rate stability. RATE INCREASES TO COMPENSATE FOR LOST AUDIOTEXT REVENUES OUT But GT&T will have considerable difficulties justifying increases to compensate for the loss of phone sex revenues. GT&T's audiotext business is not authorised by its licence. (This problem is bound to be a major rate case issue). GT&T has neglected the development of its authorised telecommunications business in the unlawful pursuit of profits from the provision of phone sex services to foreign countries. In the exploitation of these opportunities, GT&T has invested disproportionately in facilities to expand its capacity to provide the services, while the list of persons waiting for telephone connections grew longer and longer and the public dissatisfaction with its services grew louder and louder. In shifting its priorities to satisfy the needs of the foreign phone sex market, GT&T missed a golden opportunity to rapidly increase telephone penetration, thereby enhancing its capacity to adjust to the decline in accounting rates. The movement to reduce accounting rates dates back to the 1980's and GT&T should have been prudent enough to develop the domestic market for telephone services to maximise its capacity to absorb the shocks. An important consideration in this regard is that most of the income derived from the telephones installed by GT&T comes from incoming international calls. In this connection, it would make sense for GT&T to subsidise the installation of telephones simply as a means of attracting overseas telephone revenue. It is this kind of thinking that has led to the subsidisation of cellular telephones in the U.S. which has now gone to the extremes, under certain plans, of giving free handsets to new subscribers. The policy has contributed significantly to the expansion of mobile services in the U.S. A MAJOR ISSUE A major problem that has been highlighted by GT&T's problems with AT&T and the FCC benchmarks is the fact that the revenues that GT&T is seeking to protect are not revenues collected for the use of its audiotext services, as GT&T would like the public to believe. The FCC has no authority to reduce the rates that audiotext providers charge for their services. An audiotext provider could charge whatever rate it feels the market could bear and the FCC could do nothing about it. The FCC's benchmarks apply to the settlement rates, that is, the rates which its telephone companies have to pay foreign telephone companies for receiving calls made from the U.S. and transmitting these calls to their final destinations. The settlement rates do not include any component for audiotext services. The revenues that GT&T claims as audiotext revenues are, in reality, revenues paid to GT&T by foreign telephone companies, for GT&T's services, not as an audiotext provider, but for services performed under the accounting rate agreements. No part of these revenues has been collected from persons who have dialled GT&T's audiotext service. This fact has been confirmed by ATN's Washington attorneys in a letter to the Federal Trade Commission (FTC)which was considering the introduction of legislative amendments to control the provision of international audiotext services. In a letter dated May 12, 1997, the attorneys (Kelley Drye and Warren LLP) informed the FTC that in GT&T's audiotext service "the end-user does not pay any charge greater than, or in addition to, the U.S. carrier's IDD collection rate for transmission of the call". What then is the source of GT&T's audiotext revenues? In the light of the statement of ATN's attorneys, GT&T has a major question to answer. On what basis has it been transferring the settlement rate revenues paid to it by AT&T from the accounts of its ordinary telephone business to the accounts of its audiotext business? GT&T's accountants should be called upon to justify what appears to be an obvious misallocation of GT&T's telephone revenues. They should also be called upon to justify the distributions from these revenues to third parties who have no connection whatever to the performance of accounting rate services. The implications for GT&T's tax obligations are enormous. The Government of Guyana, as a major consumer, can file a complaint with the Public Utilities Commission (PUC) requesting it to investigate GT&T's allocation of its settlement revenues. MAJOR CHALLENGES FOR THE GOVERNMENT AND THE PUC It is not unlikely that the government will be approached to help GT&T to resolve its benchmark problem. The government will have to weigh very carefully any initiative it may be requested to take. The likelihood of prevailing against the FCC does not seem promising, in the light of the Cyprus, Kuwait and Aruba cases. The PUC will be faced with the inevitable task of considering an application from GT&T for an increase in tariff to compensate for the decline in audiotext revenues. It would be absolutely unreasonable to require the consumers to shoulder the burden of the financial consequences of GT&T's involvement in an unlicensed (and, therefore, unlawful) business. Finally, in the face of overwhelming evidence that GT&T does not collect any payments from audiotext users, including the conclusive testimony of ATN's Washington's attorneys, the PUC cannot postpone any longer an examination of the way in which GT&T has accounted for its settlement rate revenues. This will, most definitely, be a major rate case issue. (Mr Tyndall is a former Chairman of the Public Utilities Commission, the regulatory body which oversees GT&T's rates and related issues.) 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