US embassy cable - 05LIMA4226

UNCLAS SECTION 01 OF 03 LIMA 004226 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/CIP 
COMMERCE FOR 4331/MAC/WH/MCAMERON AND KFERGUSON 
USTR FOR KSCHAGRIN/JMCHALE 
FCC INTERNATIONAL BUREAU FOR ETALAGA 
 
E.O. 12958: N/A 
TAGS: ECPS, ETRD, EINV, ECON, PE 
SUBJECT: PUBLIC COMMENTS ON PERU'S MOBILE TERMINATION 
REGULATION 
 
REF:  A) LIMA 4108 and previous 
 
Cable contains business sensitive information.  Not for 
internet distribution.  Please protect accordingly 
 
1.  (SBU) Summary.  On September 26, Osiptel, Peru's 
telecommunications regulator, hosted a public audience to 
hear comments on its model for the reduction of mobile 
termination rates.  Osiptel officials began the conference 
by explaining how the model was derived and justified the 
need for a three-year implementation period.  Peru's four 
mobile carriers then expressed their views.  TIM and 
AmericaMovil highlighted the need for increased investment 
to lower overall costs.  Nextel pointed out flaws in 
Osiptel's model and called for a recalculation of the 
termination rate, as well as its immediate implementation. 
Telefonica argued that any mobile termination only benefits 
Nextel's clients and hurts Peruvians by stifling investment 
and development.  During the public comment period, more 
than 25 people ranted against Osiptel, arguing that the 
regulator needed to take swifter actions to lower high 
mobile costs.  End Summary. 
 
Osiptel Explains Its Model 
-------------------------- 
 
2.  (U) After more than a year of anticipation, Osiptel, 
Peru's telecommunications regulator, held a public audience 
to entertain comments on its new mobile termination rate 
model, published July 20 (Refs A and B).  Edwin San Roman, 
President of Osiptel, opened the conference of more than 300 
people by noting that "Osiptel appreciates all public 
comments on its model, but that it will not bow to pressure 
from anyone, including foreign governments and specific 
companies."  Jamie Cardenas, General Manager of Osiptel, 
then stepped attempting to smooth ruffled feathers in the 
audience by explaining that the goal of the regulation is to 
promote competition and investment in the telecommunications 
market. 
 
3.  (U) Jose Gallardo, Osiptel Manager of Regulatory Policy, 
then spent the next 30 minutes reviewing the model and 
explaining how Osiptel derived at its cost formula. 
Gallardo preempted his discussion by highlighting previous 
efforts by Osiptel to regulate the mobile sector.  He noted 
that, with the proposed symmetrical regulation reflecting 
business costs and call traffic flows, mobile termination 
rates would drop by 41 percent.  The cost model includes 
three basic factors:  incremental long-term costs, common 
costs (10 percent for overhead, 33.5 percent for concession 
costs) and externalities (28 percent).  After a very 
technical explanation of how Osiptel determined the value of 
these three factors for each company, Gallardo highlighted 
that Osiptel believes that mobile termination rates should 
fall to between $0.11-$0.13, after a three year 
implementation period. 
 
4.  (SBU)  Gallardo justifyed the three-year implementation 
period by noting that an immediate reduction of mobile 
termination rates can cause distortion in the sector. 
Mobile termination rates, he indicated, help promote 
efficiency in price levels and help facilitate growth by 
providing capital for investment.  While acknowledging that 
unnaturally high mobile termination rates can be perceived 
as a subsidy, Gallardo pointed out that Peru's mobile 
penetration levels increased dramatically over the last 10 
years, due in part to companies setting mobile termination 
rates.  Gallardo also noted that other countries, such as 
Australia, the UK, Spain, and Chile, implemented a gradual 
reduction of mobile termination rates over an average of 
four years. 
 
The Companies Respond 
--------------------- 
 
5.  (U)  With the conclusion of Gallardo's presentation, the 
four mobile companies responded in turn to Osiptel's cost 
model.  (Note:  In reality, only three mobile providers -- 
Telefonica, AmericaMoviles and Nextel -- are operating in 
Peru.  TIM Mobiles recently sold its operations to 
AmericaMoviles.  Osiptel decided to grant AmericaMoviles two 
opportunities to react to its model.  End Note.)  Two 
representatives from AmericaMoviles initiated the comment 
period.  Geraldo Soria, General Manager of AmericaMoviles, 
expressed that Osiptel should regulate mobile termination 
rates, but only to foment competitiveness.  His presentation 
focused on the need to increase investment in Peru's 
telecommunications sector, which would drive down mobile 
costs.  He also noted that, in purchasing TIM, 
AmericaMoviles assumes all of TIM's commitments and should 
therefore be granted the same treatment as TIM (with the 
highest mobile termination rate of $0.13 by 2009). 
 
6.  (SBU)  Nextel's presentation highlighted the three flaws 
in Osiptel's cost model.  First, the Nextel representative 
noted that Osiptel's regulation is not based on actual 
costs.  He gave an example of Osiptel revaluing purchases 
included in the Nextel model to the detriment of Nextel's 
position (Ref A).  Second, he highlighted that Osiptel's 
formula incorporates externalities, such as subsidies, which 
violates Peruvian telecommunications laws.  Third, he noted 
that Osiptel's arguments in favor of a gradual reduction in 
mobile termination rates are flawed because if mobile 
termination rates only cover costs, there should be no 
distortion in the market.  Additionally, by allowing 
unnaturally high mobile termination rates to continue over a 
three-year period, Osiptel, in effect, condones anti- 
competitive subsidies.  Nextel requested that Osiptel review 
its model and incorporate three changes:  eliminate 
externalities in determining the final rate, utilize real 
costs for all companies, and immediately reduce mobile 
termination rates. 
 
7.  (U)  Telefonica, deviating from the other mobile 
carriers, expressed concern that regulation of mobile 
termination rates would only benefit Nextel's clients and 
international callers, not the majority of Peruvians. 
Telefonica's twenty-minute presentation proceeded to 
criticize Nextel and its business plan, noting that if 
Nextel were more competitive and not a next exporter of 
calls, its clients would not have to pay such high prices. 
Telefonica pointed out that 83 percent of all mobile calls 
made in Peru are made on-net, which are not affected by 
Osiptel's regulation.  The company therefore extrapolated 
that only 13 percent of Peruvians (5 percent Nextel clients 
and 8 percent other) would benefit from any reduction. 
 
8.  (U)  Telefonica continued, requesting that Osiptel 
review its model, not to further lower the mobile 
termination rate, but to increase it to at least $0.20. 
Telefonica claimed that Osiptel did not incorporate 
Telefonica's cost model (created by Charles River 
Associates) and undervalued the company's worth and overhead 
costs.  Telefonica asserted that high mobile termination 
rates help finance future investment and expansion of 
services; by Osiptel reducing the rate, it is dooming Peru 
to decreased future investment in the mobile sector. 
 
The Public Speaks 
----------------- 
 
9.  (U) Observers of the public hearing also had a chance to 
comment on Osiptel's rate.  Econoff presented the U.S. 
Government position, arguing that Osiptel should implement 
regulations in a shorter timeframe.  Econoff also 
highlighted Peru's international commercial commitments to 
administer services in a transparent and non-discriminatory 
manner.  The majority of observers commented that mobile 
termination rates are too high and that Osiptel's regulation 
did not go far enough to reduce costs for the common 
Peruvian.  Others highlighted the need for Osiptel to 
implement the model immediately.  Congressman Yohny Lescano 
opined that Telefonica's monopoly creates higher prices and 
that Osiptel should regulate Telefonica to encourage 
improved competition in the market. 
Comment: Headed in the Right Direction 
-------------------------------------- 
10.  (SBU)  The comments conveyed at the public hearing show 
that many Peruvians, other than those who work for 
Telefonica, are unhappy with high mobile prices and the lack 
of regulation by Osiptel.  After the four-hour hearing 
concluded, Osiptel officials appeared dismayed and noted 
that they will have to incorporate some of these comments 
into the model before any final regulation.  We expect that 
Osiptel will reduce its timeframe for implementation to two 
years, perhaps less.  It is unclear whether Osiptel will 
recalculate its formula to incorporate real costs of 
companies.  Vice Minister of Communications Juan Pacheco 
will encourage Osiptel to reduce the overall termination 
rate. 
 
STRUBLE