October 2, 1997

Mr. Okazaki
Telecommunications Tariff Division
Telecommunications Business Department
Telecommunications Bureau
Ministry of Posts and Telecommunications
1-3-2 Kasumigaseki
Chiyoda-ku, Tokyo 100-90

Dear Mr. Okazaki:

　　　　I am pleased to deliver the U.S. Government's comments on your draft ordinance for implementing the Telecommunication Business Law. We are grateful for the opportunity to offer our views on your draft. Should you have any questions on our comments, we would be happy to discuss them with you.

Sincerely, Patricia Scroggs First Secretary

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The United States submits these comments to the Government of Japan regarding the draft Ministerial Ordinance on interconnection that was released by the Ministry of Posts and Telecommunications (MPT) on September 22, 1997. The United States is following closely the Government's efforts to introduce an interconnection regime that will further advance competition in Japan.

We applaud the MPT for soliciting comments from interested parties. The Federal Communication Commission's (FCC) experience is that an open and transparent process enables potential commenters to understand the impact of the regulatory proposal, improves the debate, and results in sound regulatory decisions. Regulatory decisions often are very complex and impact many parties. In the United States, the FCC typically allows 30 days for initial comment and another 30 days for reply comment. The United States recommends that MPT consider longer public comment periods in the future to achieve maximum benefit from this process.

The United States appreciates the opportunity to highlight some areas that may become problems as Japan establishes a new interconnection regime. The United States comments are based on our experiences in trying to implement a procompetitive regulatory environment.

I. Reducing Regulatory Uncertainty

Obligation to interconnect: The United States is concerned that the draft Ministerial Ordinance notes there are various reasons to deny interconnection. In order to encourage competition effectively in the market, it is far better to emphasize the carriers' obligation to interconnect. If carriers encounter difficulties in negotiating interconnection agreements, regulators should intervene on behalf of the carrier seeking interconnection, not on behalf of the carrier that wishes to deny interconnection.

In light of a dominant carrier's disincentive to negotiate with potential competitors, the United States believes that interconnection rules should promote competition by equalizing the bargaining strength between competitors and the dominant carrier. According to FCC rules, all carriers are required to negotiate in good faith. Dominant carriers and competitors may voluntarily agree to terms and conditions without regard to the Commission's rules. However, at any point in the negotiations, parties can seek mediation. Furthermore, after 135 days from the original request for negotiation, parties can seek arbitration.

A properly constructed interconnection regime provides a starting point for commercial negotiations and also ensures an ending point for commercial negotiations. Under the regime, rules for interconnection establish a starting point for negotiations. Dispute resolution mechanisms ensure an ending point.

Forward-looking costs: The United States notes that in a March 1997 press release, MPT stated it will not decide whether to adopt a long run incremental cost (LRIC) methodology until April 2000. The United States notes that, by waiting three years to make a decision on forward looking costs, MPT creates uncertainty that will affect investment in the Japanese telecommunications market. The United States respectfully suggests that MPT announce now its intention to adopt LRIC in the future. In the meantime, with parties' assistance MPT can develop the details of the model. This will permit telecommunications businesses in Japan to predict more accurately the regulatory environment they will face in the near future.

II. Enabling Competitive Access

Relevant Costs for interconnection: When regulating dominant carriers, it is critical to distinguish between costs that are essential for interconnection and other costs of the dominant provider, such as research and development. MPT must examine carefully proposals from the dominant carrier that would require competitors to be charged for costs not directly attributable to providing interconnection. In the United States, the FCC determined that prices for interconnection and unbundled elements should be equal to LRIC of an element, plus a reasonable allocation for common cost. Interconnection based on forward-looking costs will not enable a dominant carrier to recover costs resulting from inefficiencies, such as maintaining a very high cost directory assistance program.

The FCC decided that any charges for a universal service program or recovery of stranded investment cannot be recovered from the price of interconnection or the price of inputs (such as unbundled elements) charged to competitive service providers. Instead, these costs should be recovered through a competitively neutral mechanism, such as an independently administered universal service program. A transparent universal service program would publicly allocate funds to support certain telecommunications services in high cost areas. This kind of program makes the costs of universal service clear. As a result, a dominant carrier will not be able to claim that it bears indeterminate universal service costs that can be passed on to competitors through rates for interconnection and exchange of traffic. Additionally, collection of funds for a universal service program should be through a competitively neutral mechanism, such as a tax on end user revenues.

Unbundling the Network: In the U.S., an incumbent local exchange carrier is required to provide requesting telecommunications carriers nondiscriminatory access to network elements on an unbundled basis at any technically feasible point and on rates, terms, and conditions that are just, reasonable, and non discriminatory. Furthermore, competitors should be allowed to combine elements to offer service. In the first instance we expect carriers to privately negotiate interconnection contracts within the framework of these requirements. Nonetheless, we believe that it is crucial that the regulator have the authority to determine cost based rates for any requested unbundled element. Thus we believe that MPT should determine which elements under its interconnection tariff regulation are technically feasible in response to bona fide requests from competing carriers.

Rights of way, conduit. and poles: Although rights of way, conduit, and poles are not unbundled elements in the United States, access to them on reasonable terms is critical to the development of competition. The incumbent local exchange carriers must provide non discriminatory access to any pole, duct, conduit, or right of way that it owns or controls. The issue to include or exclude the cost of land should depend upon whether the incumbent had to purchase the rights of way, or if the government gave these rights to the incumbent free of charge. In general, the standard is one of non discrimination. Basically, this means that access to right of ways, conduit, and poles should not have a significant impact on the relative competitive positions of telecommunications carriers, in the same way that access to roads is not significant to competition among trucking companies.

Rate of return regulation for interconnection: The United States suggests caution in using rate of return regulation. Almost all countries recognize that establishing a sound interconnection regime is critical for the development of competition. We are concerned that rate of return regulation will not produce competitive interconnect on prices, particularly since it has been ineffective way of regulating dominant carriers in many countries. Lastly, rate of return regulation (including activity based costing) uses historical costs to calculate rates and does not accurately reflect forward looking costs. Rate of return regulation does not produce economically rational investment incentives. This is why the United States favors a LRIC costing methodology.

III. Information Gathering and Disclosure

Key to the decisionmaking process is the availability of verifiable facts, particularly information about the network structure and the costs of designated carriers and facilities. We encourage MPT to carefully consider the issue of information disclosure and need for independent auditing. In particular, interconnection costs claims need to be supported by detailed, credible data. In the United States, we have the advantage of being able to benchmark the costs and performance of multiple independent local exchange carriers against one another. We believe that, given the structure of the industry in Japan, more attention should be paid to ensuring that the regulator, as well as customers, independent analysts, and competitors, receive accurate and credible information.