by Liching Sung

The International Telecommunication Union (ITU) implemented cost recovery for processing satellite network filings in 1999, in an effort to reduce the filing backlogs. Those involved agreed to cost recovery as a means to generate funds for the ITU to hire additional staff to process the backlogs. This objective has somewhat changed in the last two years. Suffering from a budget shortfall, the ITU has begun to tap into cost recovery revenues to supplement its general budget.

The ITU’s budget challenges have influenced its approach toward cost recovery, which so far remains a burden on the satellite sector. Satellite operators continue to debate the high fees, which in their view exceed the actual costs of processing filings. However, identifying the actual costs is no easy task. This is because the cost methodology used by the ITU to determine fees lacks transparency and supporting data to allow verification and identification of actual processing costs. Quarrels over what constitutes the actual costs have created tensions between the ITU and the satellite operators. The high fees have resulted in substantial non-payment, which further strains the relations between the two.

Origins of cost recovery

The roots of cost recovery can be traced back to the early 1990s when the ITU first recognized that estimated revenues from its members’ voluntary contributions would not be enough to pay for all of its activities. The 1994 Plenipotentiary Conference, ITU’s highest decision-making body, endorsed the examination of options for strengthening the financial base of the union. These included reducing costs, more effective allocation of resources, prioritizing activities, wider participation of entities and charging fees for ITU services, particularly "where these are sought on a discretionary basis or to a greater extent than the level of facilities generally provided," according to the ITU.

The impetus to impose cost recovery on the satellite industry was the filing backlogs that had become overwhelming by the mid 1990s. The backlogs were caused in large part by speculative or "paper satellite" filings. In the past, satellite-faring countries generally filed only for the capacity they needed. This civility ceased to exist in the mid 1980s when Tonga, an island country in the southwest Pacific, began to file for an excessive amount of satellite frequency assignments and orbital slots with the express intention to lease them to satellite operators. Such a practice is akin to orbital slot trafficking. This soon led to a frenzy of speculative filings. As the filings became congested, operators were forced to overfile so that at least some orbital positions could be successfully coordinated. By 2000, the backlogs had ballooned to the point that a new filing had to wait three years before it could be processed.

Underlying the "Tonga fever" was the recognition that satellite spectrum is a commodity with high commercial values. As long as satellite filings with the ITU remained free, countries would continue to abuse the system. To address the problem, the 1997 World Radiocommunication Conference (WRC-97) discussed various forms of due diligence to deter overfiling. However, the financial due diligence proposals, some of which include a refundable deposit that would be paid at the time of filing, were rejected because countries were concerned that this would create a precedent for charging fees for spectrum use. Instead, the WRC-97 adopted an administrative due diligence, which required the submission of the names of the satellite manufacturer and launch vehicle provider and the dates of satellite delivery and launch, at the time of filing. But the administrative due diligence has had little impact on the backlogs.

Cost recovery presents a more acceptable alternative to financial due diligence to combat the backlogs because it does not link fees with spectrum usage. Instead, cost recovery was considered as a tool to finance the costs associated with fighting the backlogs, such as the hiring of additional staff. Although the ITU would have preferred cost recovery as an express means to deter paper satellite filings, its members insisted that fighting paper satellites not be the objective of cost recovery. This is because member states consider satellite filing their sovereign right, and only they themselves can determine how much of the spectrum and orbital resources they would require.

The process to implement cost recovery began in June 1997 when the Council, which meets annually to manage ITU business in the interval between Plenipotentiary Conferences, adopted the principle of full recovery of processing costs for space services in Resolution 1113. To justify charging fees for satellite network filings, the ITU pointed out that 80 percent of satellite filings came from less than 10 countries, and the number of submissions was in excess of the ITU’s capacity for processing them. Subsequently, the 1998 Plenipotentiary Conference passed Resolution 88 and Resolution 91 that, respectively, approved the application of cost recovery for satellite filings, and laid out general principles for cost recovery. It is important to note that Resolution 91 required cost-recovery charges to cover only the exact cost of providing the product or service to which they relate, and prohibited cost recovery to be used to generate revenue or profit. It also called for open and transparent accounting for costs and receipts, and a means of adjusting the charge based on actual expenditure. These principles, however, are not strictly adhered to by the present cost recovery practice.

Cost recovery formally commenced following the 1999 ITU Council meeting that adopted Decision 482, which laid out the methodology for charging and scheduling fees. It was determined that satellite filings submitted after November 7, 1998, should be subject to cost recovery. In keeping with ITU’s constitutional requirement to register satellite networks, each member state is allowed one free filing per year.

ITU’s budget crisis

The shift of cost recovery’s role from fighting the backlogs to supplementing some of the ITU’s budget was precipitated by the ITU’s current budget challenges. The 2002 Plenipotentiary Conference revealed a substantial revenue shortfall for the financial plan period from 2004 to 2007. The shortfall was estimated to be 21 million Swiss francs (CHF) ($16 million) based on revenue estimates of CHF 635,589,000 ($497 million) and projected expenses of CHF 656,592,000 ($513 million) for the four-year period.

Although the slowdown in the global economy affected the ability of some member states to pay their dues, some other countries were discontented with the ITU for overstepping its bounds to assert authority over the Internet and other policy areas, and reduced their voluntary contributions. Despite the budget shortfall, the ITU is unwilling to take the steps to substantially trim its staff. The Office of the Secretary General, for example, was expanded in the 1990s as a result of the ITU’s ventures into policy areas and Internet regulations. The creation of the Strategy and Policy Unit is a case in point. To generate sufficient revenues to support all of its activities, the ITU began to turn its attention to cost recovery.

High fees

As the ITU’s financial troubles set in, it began to budget more income from cost recovery to make up for lost revenues. While the income from cost recovery for satellite filings was less than 1 percent of the 2000-2001 biennial budget, it grew to 7.6 percent for the 2002-2003 biennial budget. For 2004-2005, the ITU has budgeted CHF 26.8 million ($21 million) from filing fees, which, if all collected, amounts to 8.2 percent of the current biennial budget of CHF 328 million ($256.6 million). As the percentage of cost recovery income grew higher in the budget, the filing fees became larger.

Initially the fees for cost recovery were moderate. The average invoice for the year 2000 and 2001 was CHF 1,445 ($1,126) and CHF 4,914 ($3,829), respectively. However, the fees began to rise sharply in 2002 when the average invoice grew to CHF 16,870 ($13,146) and further jumped to CHF 40,135($31,277) in 2003. For 2004, the average so far is CHF 41,440 ($32,294).

Accompanying the higher fees was a greater disparity among charges. In 2002, for example, the highest invoice was CHF 50,720 ($39,531) while the lowest was only CHF 160 ($125). The differences in fees grew even more striking in 2003 when the highest invoice rose to CHF 407,020 ($317,291) and the lowest CHF 220 ($171). On the whole, more filings were charged with high fees than low fees. In 2002 and 2003, for example, the percentage of filings with invoices greater than CHF 10,000 ($8,000) was 61 percent and 63 percent respectively.

The sharp increase in fees in 2002 was due to the change of charging methodologies. Under the original Decision 482, the fees were calculated based on the complexity of the filing, which was measured by the number of pages published in the Weekly Circular. Filings were classified into nine categories. Each filing within a category had a flat fee that covered a certain number of pages, and for each excess page, additional charges would apply. However, a decision by the WRC-97 to distribute the Weekly Circular in CD-ROM format rendered the page-count method obsolete.

In 2002, a new methodology, which measures fees based on the number of processing units, instead of pages, was adopted. The ITU defined a unit as the product of specific components of a satellite network filing notice including frequency assignments, number of classes of stations and number of emissions. Similar to the page-count method, each filing within a category has a flat fee, which covers a certain number of units, and a variable fee, which is based on the number of excessive units.

Because of the backlogs, many filings submitted under the page-count method were not processed when the new unit methodology was introduced in 2002. The ITU’s Radiocommunication Bureau (BR), which processes the filings, decided to apply the unit method retroactively. This resulted in higher fees for some filings than they would have incurred under the page-count method. Upset by the high fees, some operators decided not to pay. As the size of the invoices grew larger in 2003, more operators forwent their payment.

Disagreements over methodologies

Alarmed by the charges and concerned that cost recovery was being used as a cash cow to subsidize the general activities of the ITU, operators began to question the methodologies used to determine the fees. The unit-based charging methodology, which yielded extremes in fees, was generally considered flawed and in need of revision. But the cost methodology, which determines the amount to recover, was deemed a more fundamental problem. Operators believed the lack of transparency in the cost structure led to the inflation of the costs, which in turn, resulted in high filing fees.

The ITU formed the Ad Hoc Group On Cost Recovery for Satellite Network Filings in 2002 to consider the application of the "unit" methodology. This group is now tasked to revise both the charging and cost methodologies, and to make recommendations to the Council. The group is made up largely of satellite operators, with participation and input from the BR. As operators delved deeper into the methodologies, tensions between them and the BR began to develop.

The two sides could not agree on how to revise the "unit" methodology. In an attempt to reduce disparities among fees, the BR proposed a flatter fee structure by charging a higher flat fee and lower variable fee. Under such a scheme, fees for very large and complex filings would decrease moderately; however, fees for small filings would increase. Since operators tend to optimize their filings to fit the flat fee, this proposal would essentially increase fees for most filings. Operators, who already considered the current level of fees too high, opposed it.

The BR also proposed to rectify an earlier mistake of omitting the costs of the General Secretariat from the flat fee. (Currently, the costs of the General Secretariat are only reflected in the variable fee.)

By adding the costs of the General Secretariat, the flat fee would increase by 80 percent for all filings. Although operators sympathized with the need to harmonize the costs for both the flat fee and variable fee, they could not accept any significant increase in fees that had already been too high. Due to the lack of time to study the unit methodology, operators persuaded the Ad Hoc group to recommend the retention of the current methodology until 2005.

Operators and the BR also disagreed how to account for the actual costs in processing satellite filings. Operators consider the term "actual costs" as the labor costs directly incurred in processing individual satellite network filings. This is known as the "individual network" approach. The current approach, favored by the BR, views actual costs as the costs of the relevant departments and divisions in the ITU that are associated with satellite filing. This approach, called "budget recovery," effectively equates cost recovery to the budgeted costs of these departments and divisions. The BR prefers this approach because it provides a constant income regardless of the number of filings. Following this approach, the fees could continue to grow as the number of filings is expected to reduce over time due to the elimination of the backlogs.

In fact, the filing backlogs are disappearing. By ITU’s own estimation, the backlog for unplanned Fixed Satellite Service (FSS) bands will be eliminated by the end of 2004, although it will take longer to remove the backlog for planned bands. While cost recovery was an important factor in reducing the backlogs, the additional hirings by the BR in the late 1990s and the ongoing automation of the satellite filing process have all contributed to bringing the level of the backlogs down. Yet, the current cost methodology has no mechanism to adjust fees in order to account for the reduction of the BR’s workload as the backlogs shrink.

Operators also challenged the allocation of costs from various ITU departments and divisions. The allocation of the costs from the General Secretariat especially raised eyebrows. Under the current approach, 41.72 percent of the filing fees are to recover the costs of the General Secretariat. Since the Secretary General’s office is only marginally involved in the filing process, operators could not see why more than 40 percent of the value of processing a satellite filing is generated in this office.

However, the BR so far has provided very little information to allow verification of the activities that are related to the processing of the filings. Even when support data are provided, they are not in the form that would allow audit. As a result, it has been difficult to challenge the claims of the BR. Frustrated by the lack of data to verify actual costs, operators proposed that time recording be implemented in all departments and units associated with processing satellite filings in both the BR and the General Secretariat. The time recording information will then be used for future revisions of the cost structure.

Nonpayment

Operators and the BR are also at odds over the issue of nonpayment. Delinquent payments arose in 2002 after the implementation of the unit methodology that resulted in substantial increases in fees. To date, there are 152 overdue invoices totaling CHF 10 million ($7.8 million), and the amount is expected to rise further by year’s end. Nineteen countries are responsible for these unpaid invoices, including most of the major satellite-faring countries.

As of now, a filing is canceled if the fee is not paid. However, the invoice remains outstanding. A question arose as to whether the invoice should also be canceled. Operators believed it should be. They argued that the cancelation of the filing alone was severe enough a punishment that no further punitive action should be taken. When a filing is cancelled, it loses its position in the queue. The operator has to submit a new filing to re-enter the queue.

The BR, on the other hand, considered the member states, instead of the operators, as liable for the invoice since there is no legal relationship between the ITU and the operators. It hinted that unpaid invoices could lead to the loss of the right to vote, even the right to submit new filings. BR’s strong-arm tactics to scare operators into paying invoices greatly incensed them.

Free filing

Free filing is yet another issue that operators and the BR do not see eye to eye on. Decision 482 provides each member state a free filing per year. As of July, 93 satellite networks from 35 countries have been nominated for annual entitlement. Operators long assumed that the cost of the free filing was paid from the ITU’s general budget. But it now appears that the ITU is recovering the cost of free filings from those satellite network filings subject to the fee. Some operators were disgusted at the prospect that countries with more than one filing are subsidizing the free filings of other countries. They insisted that free filings should be borne by the regular income of the ITU; otherwise, the concept of free filings should be abolished.

Another new twist on the notion of free filing is whether member states can store or accumulate free entitlements if their annual rights to free filing are not used. Here, operators and the BR had a rare agreement that if the free entitlement is not claimed by the end of the year, it is considered lost. They also agreed that the free entitlement could not be applied to a filing previously canceled for nonpayment. However, some countries continued to press for the right to accumulate free entitlements.

Where we are

The Ad Hoc Group On Cost Recovery for Satellite Network Filing was tasked with making recommendations to the 2004 Council on how to revise cost recovery methodology. The group recommended no change to the current charging method until 2005 to allow more time to thoroughly examine the costs associated with satellite filing. It also recommended the implementation of time recording in the BR and the General Secretariat, and paying for the free filing from ITU’s general income. However, the group left more thorny issues such as the treatment of overdue invoices and the right to accumulate free entitlements for the Council to decide.

The 2004 Council held lengthy debates on these recommendations. The Council agreed that time recording should be implemented in both the BR and the General Secretariat, and set December 31, 2004, as the deadline for its implementation. It further decided that time recording shall be conducted on a daily, instead of weekly basis as originally proposed, in order to yield sufficiently detailed information for cost recovery activities, and ruled that the costs for time recording should be borne by the BR and the General Secretariat themselves.

On the issues of free filing, the Council affirmed that the nomination of free filing must be made annually, thus removing the ability to accumulate free entitlements. Yet, the Council did not clarify whether the ITU or satellite operators should bear the cost for processing free filings. The Council also failed to conclude whether the member state or the satellite operator is ultimately liable for unpaid invoices. This issue was deferred to Council-05, in the hope that the nonpayment trend would abate. Because the issue potentially involves member states’ right to vote, it is also to be taken up by the Plenipotentiary Conference, to be held in 2006. The Council did decide that no interest would be charged to unpaid invoices. Yet, despite a zero percent interest rate, it is doubtful that operators, whose filings had been canceled, would pay up.

Importantly, the Council recognized that the current charging methodology suffered from many problems and more time was needed to develop a replacement methodology. It agreed that there was no acceptable alternative but to retain the current charging methodology until Council-05. This decision effectively rejected the BR’s fee increase proposals, at least for now. The Council asked the group to continue its work on revising the charging and cost methodologies, and affirmed that any future change will not be applied retroactively. While operators were delighted by the decision to freeze the level of charges until 2005, the ITU claimed it would lose 50 percent of estimated income from cost recovery for satellite filings if charges are not increased. During the Council meeting, ITU’s Secretary General issued a stern warning that the failure to adopt the BR’s proposed changes to the fee schedule would lead to a shortfall of CHF 9.2 million ($7.1 million) for 2004-2005 and CHF 6.9 million ($5.5 million) for 2006-2007. Such shortfalls would have to be offset by increasing contributions from member states, an issue to be addressed at Council-05.

The road ahead

Although Council-04 decisions temporarily halted the quarreling between satellite operators and the ITU, the tension between the two persists. The operators continue to view the ITU as actively trying to steer the direction of the debate on cost recovery, while the ITU considers satellite operators as a club of wealthy corporations trying to protect their own commercial interests. Such distrust and the adversarial relationship between the operators and the ITU are unfortunate and unnecessary.

The satellite industry and the ITU need each other. Satellite operators have long benefited from the ITU system of coordinating satellite networks. The ITU has also gained prestige from its role as an international spectrum regulator.

Maintaining such a role today is particularly important for the ITU because the agency has lost its pre-eminence in telecommunication standardization as industry-sponsored standards for a proliferated in recent years. Spectrum management is now "the only game in town" for the ITU. Yet, the disputes between satellite operators and the ITU over cost recovery could threaten this ITU franchise.

If the cost recovery fee issue remains unresolved, operators may be forced to look for an alternative to coordinate satellite networks. Without the participation of satellite operators, the ITU cannot sustain its role as an international spectrum manager.

Satellite operators have accepted cost recovery as a way of life. There is, however, a need for a transparent process and reasonable fee structure. This will ease operators’ concerns that they are being singled out for shouldering the burden of the ITU’s budget woes, and may put an end to the debating between the international regulator and the commercial satellite industry.

Editor’s Note: For more information on the work of the Ad Hoc Group of Council on Cost Recovery for Satellite Network Filings, visit http://www.itu.int/council/adhoc-snf/index.html.

Related articles on cost recovery covered in Via Satellite magazine can be found in the May 1998 and June 2003 issue’s regulatory review columns.

Liching Sung is a satellite regulation specialist and a research faculty member at the Center for Wireless Telecommunications, Virginia Tech.