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FCC Moves to Establish New Rules for Foreign Ownership

The FCC has opened the door to the U.S. Telecom industry with a new greeting card for foreign companies and investors. Its new rulings on foreign carriers and foreign ownership make it much easier for foreign companies not only to enter into the US marketplace, but also for foreigners to purchase up to a 100% interest or ownership in a U.S.-owned company, provided that the host county has adopted reciprocal rules, such as exists today in England. These rules significantly relax foreign ownership constraints by setting clear cut rules and guidelines for FCC approval of foreign carrier entry into the U.S. marketplace. Previously FCC approvals of foreign carriers were subject to a case-by-case analysis leading individuals and companies to suspect that a hidden agenda was in place.

In today's changing regulatory environment, this ruling goes a long way to promoting competition in the $14 billion international telecommunications marketplace and ensures that US companies are not put at a disadvantage. These rules adopted in late November 1995, but only recently, become effective. The FCC is attempting to use the lure of the lucrative US market to encourage foreign nations to liberalize and privatize their own markets, thus increasing the competitive opportunities for US telecom carriers, as well as reducing the cost to American businesses conducting business overseas.

The implementation of this ruling makes it clear that the US market is not only open to competition in telecommunications, but encourages it. Previously, foreign investors in US owned companies were subject to burdensome reporting requirements once they purchased more than a 10 percent stake in a US company; moreover, there was a 25 percent limit on equity ownerships. The burdensome requirements have been eliminated and as long as the home country has no or little restrictions on foreign investment, the FCC will most likely bless the investment. Investments below this level will still be subject to a cursory review by the FCC to ensure that these investments do not significantly impact competition for international services, endanger national security, or violate trade laws.

This ruling, however, assumes that foreign investments above 25 percent by carriers pass the FCC's new economic competitive opportunity (ECO) analysis as well as various public interest concerns. Furthermore, the FCC will aggregate multiple foreign carrier interests where alliances, such as Unisource, exist that could affect the US market for basic services. The FCC is particularly interested in whether the foreign carrier or any of its affiliates can exert control over the US carrier. So long as there is no evidence of control, the market entry and/or investment will be approved.

The passage of the telecommunications reform legislation by Congress and the successful conclusion of the World Trade Organization's Negotiating Group on Basic Telecommunication Services, scheduled for April 1996, will further promote the United States's goals of ensuring that effective competition exists in the US telecommunications marketplace, particularly in international services and by preventing anti-competitive conduct in the provision of global services and facilities.

Foreign companies can satisfy US ECO requirements if they can prove that in that particular service sector that US companies can acquire a controlling interest in the home market of a foreign investor, absent other public interest factors (national security or trade laws). This new service-by-service approach implemented by the FCC allows foreign investors not to be handicapped, by their home country's foreign investment restrictions in protected services such as voice or basic services, in investing in US companies who have acquired, or are bidding for, new spectrum.

The order spells out exactly the level of competition required in a foreign market before a foreign company, most often the monopoly telecom provider, can compete, either by itself, or through what the FCC defines as "affiliation" with another foreign company in the US marketplace. These rules are the guidelines the FCC uses in its ECO analysis. The order also redefines several other market entry issues such as what constitutes a facilities-based carrier and the rules regarding international resale, both switched and private line, by foreign carriers desiring to enter into the US market.

Although this new ECO analysis goes a long way to improving and streamlining the process whereby foreign companies can gain access to the US marketplace, it has several problems. Most notably, companies who pass the FCC's ECO and affiliation tests may still be denied entrance into the US marketplace if they fail to satisfy several additional public interests factors, such as law enforcement, national security, foreign policy and trade concerns, and presence of cost-based accounting rates. Similarly, companies who fail the ECO and affiliation tests, but whose public interest factors outweigh the lack of competition in the home market will be allowed into the US marketplace.

The ECO analysis is divided into four parts according to importance:

The order also codifies new standards on foreign control over US telecom companies; these are called affiliation requirements. Foreign companies with non-equity alliances are not considered "affiliates" for purposes of the market entry standard. However, affiliation or alliances between two or more foreign carriers that have market power over the services and facilities, which can be leveraged on international routes to the detriment of unaffiliated US carriers, are subject to the ECO test analysis. Market power is defined as the ability of the carrier to act anticompetitively against unaffiliated US carriers through the control of bottleneck service or facilities on the foreign end of a specific route. Moreover, foreign carriers are obligated to notify the FCC of any modifications to these alliances.

The FCC's new policy provides the incentives necessary to ensure foreign governments continue to privatize and liberalize their telecom sectors, resulting in increased opportunities for American companies. Governments with monopoly or closed markets risk being denied entry into the US marketplace.

Judith Hellerstein

May 1996