Grumblings from Down Under: Telstra seeks settlement rates for Internet traffic

Australia's dominant carrier has gone to court to try to force the Federal Communications Commission to adopt international settlement rates for Internet traffic, as it has for regular telephone calls. Critics say the complaint is doomed.

"It's an interesting issue, but it doesn't have anything to do with benchmarks," said an FCC attorney, referring to new, lower settlement rates set by the FCC in August.

Settlement rates are fees that U.S. and foreign carriers pay each other to terminate calls that begin in one country and end in another. They apply to calls on public switched networks but not to the private lines that carry most Internet traffic.

Settlement rates will drop dramatically over a five-year-period starting Jan. 1, bringing them closer to cost and according to the FCC, eliminating a $5.4 billion annual "subsidy" paid by U.S. carriers to their foreign counterparts.

Telstra Corp. Ltd., Australia's largest phone company, wants the FCC to impose a similar rate system for Internet calls to fix the lopsided payment scheme. Internet users worldwide subsidize U.S. carriers and Internet service providers by about $300 million a year, Telstra contends. Telstra's share of that total is about $15 million.

The FCC ignored Telstra's comments on the Internet issue in its "arbitrary and capricious" settlement rate order, which appeared in a petition for review filed Oct. 3 in the U.S. Court of Appeals in Washington. The effect is that U.S. carriers will pay Telstra less to terminate U.S.-to-Australia phone calls-from 21 cents a minute to 15 cents by Jan. 1, 1999-while Telstra will continue to pay "unreasonable amounts" to U.S. carriers to handle a growing volume of Internet traffic, the petition says.

"We're saying to the FCC, 'You can't consider the switched network apart from the Internet network," said John Stanton, Telstra's regional director for Americas and satellite arrangements, from the company's Sydney headquarters.

Critics say Telstra is raising an important issue-the lack of Internet capacity in Asia and the Pacific Rim-but it's barking up the wrong tree.

The FCC doesn't regulate the Internet and has no plans to investigate pricing of the global database network, an agency attorney said. "It's off the deep end," said Washington telecom attorney Albert Halprin of Telstra's lawsuit. "It's not a regulatory issue."

Internet calls are carried over private lines whose rates are negotiated by the carriers and ISPs that use them. For global traffic, each country provides half of the backbone capacity needed, but non-U.S. carriers bear all of the cost, said John Hibbard, Telstra's managing director of international carrier business.

Because the Internet has grown so quickly, some regions, notably Asia, are running out of capacity. That means someone has to add-and pay for-additional half-circuits.

Historically, American carriers have forced their foreign peers to shoulder the cost of carrying Internet traffic. Because most ISPs and World Wide Web sites originate here, most Internet traffic flows from the United States to other countries as foreign users access and download information.

"The problem is really about where the content is," said Barbara Dooley, executive director of the Commercial Internet Exchange, an association of ISPs based in Alexandria, Va. "The fact is that the content is in the United States and the 'lingua franca' of the world is English. At least 80% of the connectivity goes through the U.S. because the content and customers are here."

But that situation is starting to change as more U.S. Internet users access Web sites abroad, Telstra says. For example, about 30% of all Internet traffic between the United States and Australia now flows from Australia to the United States, according to Telstra.

"We are a very significant player," said Hibbard. Australia is the fifth-largest generator of Internet traffic and has about 450 Internet providers. In contrast, about 3000 ISPs call the United States home, according to the Commercial Internet Exchange.

Despite this shift in Internet traffic, Telstra-and other foreign carriers-still pay for 100% of the carrying cost, Hibbard said. Telstra's proposed solution-to regulate prices now controlled by the open market-is sure to raise objections.

Telstra claims support from carriers around the world, especially in Asia. Other carriers, including Japan's KDD and the Philippines Long Distance Telephone Co., are challenging the FCC's benchmark rates, but only Telstra raised the Internet issue officially.

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