No. 4 — January 28, 2000


Weekly Review


Japan and the United States are headed for a showdown over the internationally steep rates that Nippon Telegraph and Telephone Corp.'s two regional units charge competing communications carriers to access their local networks to initiate or terminate traffic. Working-level talks held in Washington January 18 and January 19 underscored once more that the definition of market-based pricing of interconnection fees adopted by the Ministry of Posts and Telecommunications is not on the same page of the dictionary as the U.S. government's. As part of the May 1998 status report on the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy (see JEI Report No. 20B, May 22, 1998), Tokyo agreed in effect to slash interconnection expenses before yearend 2000 by employing a so-called long-run incremental cost methodology to calculate these tariffs.

Going into the latest round of discussions, MPT officials signaled that Japan was prepared to trim interconnection charges by 16.7 percent over three years or so, followed by deeper cuts once Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp. had had time to adapt to the new rate schedule. That offer reflected the ministry's late September stab at LRIC pricing. Arguing that major methodological flaws were built into MPT's new rate-setting model (see JEI Report No. 47B, December 17, 1999), negotiators in the Office of the U.S. Trade Representative put out the word that their bottom line was a reduction of roughly half &emdash; all made within 2000.

By the time the talks broke up January 19, both governments had conceded some ground but not enough to make their differences bridgeable. Tabling what they called their last and best offer, the MPT participants proposed lowering NTT interconnection tariffs by 22.5 percent over four years. The USTR-led team demanded a 41.1 percent cut implemented by the end of 2000. This number was the result of a second LRIC model constructed by MPT. Tied to it, though, was the assumption that some ¥300 ($2.50 at ¥120=$1.00) would be added to the ¥1,700 ($4.15) fixed service charge that NTT East and NTT West customers pay each month. An increase on this order would be required, MPT said, because a 41.1 percent drop in access fees could cost the two carriers up to ¥700 billion ($5.8 billion) in lost annual revenues. Needless to say, the American side did not buy the linkage. Nor is it likely to accept Tokyo's alternative scenarios of "massive" layoffs of NTT personnel or "drastic" cuts in capital spending should rates be sliced over a fairly short time.

No follow-up talks have been scheduled, even though two deadlines loom. The March 31 target date for completion of the third and final report on progress under the Enhanced Initiative &emdash; a key element of which will be the resolution of the interconnection-rate issue &emdash; can be pushed back if necessary. As soon as the end of February, though, MPT must submit a bill to the Diet embodying the adoption of the LRIC pricing methodology for computing NTT access fees so that changes can be made retroactively for FY 1999. That move will be paired no doubt with the announcement of a rate cut. Right now, the odds would seem to favor a multiyear reduction between 16.7 percent, the figure an influential MPT advisory group endorsed January 21, and the ministry's 22.5 percent offer.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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