US embassy cable - 05PANAMA2139

UNCLAS SECTION 01 OF 02 PANAMA 002139 
 
SIPDIS 
 
DEPT FOR EB/CIP - AYALA 
ALSO FOR WHA/CEN - SCHIFFER 
 
E.O. 12958: N/A 
TAGS: ECON, ECPS, ETRD, PGOV, PREL, XM, PM, ECONOMIC AFFAIRS 
SUBJECT: NO EVIDENCE OF "WHIPSAWING" BY PANAMANIAN TELCOMS 
 
REF: 177365 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED 
 
1. (SBU) SUMMARY:  Econoff and Econ Specialist delivered 
reftel points to Jose Galan, Director President of Panama's 
Public Utilities Regulatory Agency (Ente Regulador) on 
October 14th.  Galan confirmed that circuit blockages by 
Panamanian telecommunications companies to place price 
pressure on international carriers ("whipsawing") had not 
been an issue here thus far.  Galan stated that the legal 
framework governing the telecommunications industry does 
support a free and fair market.  However, the current 
regulatory and enforcement situation (for all public 
utilities in Panama) has not yet achieved the level of 
autonomy and independence required to declare a level playing 
field.  De facto monopoly Cable & Wireless (C&W) continues to 
dominate both the mobile and fixed line markets and regularly 
engages in tactics designed to block or undermine competitive 
threats and regulatory enforcement.  49 percent ownership of 
C&W by the GOP provides a disincentive to support the Ente 
Regulador when regulation or penalties might reduce C&W 
profitability and by extension, GOP revenue.  END SUMMARY 
 
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TELECOM INDUSTRY STATE OF PLAY 
----------------------------- 
 
2.  (U) The Ente Regulador (ER) estimates 43 percent of 
Panamanians will have mobile telephones by the end of 2005. 
Of the 856,000 mobile telephones in Panama, the ER calculates 
that 86 percent are prepaid and 14 percent are billed.  At 
this time, C&W and Spanish telcom Telefonica Moviles 
(Movistar) have an exclusive monopoly on the mobile phone 
market until 2008.  Movistar estimates its mobile telephone 
market penetration at 45 percent with a target of 50 percent 
by the end of 2005.  C&W claims 70 percent of the mobile 
telephone market, with 800,000  mobile telephone clients. 
(Comment:  As these combined claims exceed 100 percent, 
Econoff suspects both companies have overestimated their 
market penetration for media affect.  A 60-40 ratio appears 
more likely at this time.  End Comment.) 
 
3.  (SBU) For C&W, the main game is not the mobile telephone 
market which accounts for only 25-30 percent of their total 
income, but the fixed land line.   All fixed wire accounts 
are held by C&W which claims 327,500 residential and 83,500 
commercial accounts.  Although the legal monopoly previously 
held by C&W ended several years ago, the company maintains 
its de facto monopolistic position through its ownership of 
the infrastructure.  While more than 20 alternate providers 
are available for international calls, access to these 
providers is via phone cards or billing code.  C&W provides 
the dial tone and the billing services.   Secondly, 
substantial government ownership gives the GOP a financial 
interest in the market performance of C&W and a disincentive 
to support regulatory activity which erodes C&W's 
profitability and, therefore, the GOP's annual dividend. 
 
------------------------------------- 
C&W TACTICS - SUBTERFUGE AND LAWSUITS 
------------------------------------- 
 
4. (SBU) Galan believes C&W engages in anti-competitive 
practices making it difficult for new entrants to the market 
to function effectively.  He said their tactics were subtle 
and specific to the competitive threat such as, failing to 
show up for meetings, requiring network connection equipment 
or configurations which may be difficult to obtain or vague 
in their specifications.  As their tactics were different for 
each situation, it was impossible to establish a regulation 
to impede this activity.  Galan stated that C&W's standard 
response to regulation and/or punitive action on the part of 
his agency was to sue the ER in court.  At this time, the ER 
faces 22 suits brought by C&W against his agency.  While the 
regulators do sometimes win a favorable ruling, it may be 
after several years of legal activity.  This often makes the 
issue obsolete or too late for a fledgling competitor to wait. 
 
5.  (SBU)  For example, the Ente Regulador was able to 
establish that C&W for 2 years had changed the definition of 
a minute to start at 40 seconds and had been billing its 
customers accordingly.  However, the maximum fine the ER can 
assess against any public utility is capped at $1 million 
USD.  The ER estimates that C&W profited from this tactic by 
$20 to $60m.  Thus the maximum fine offers little 
disincentive.  The case is still pending court action.  The 
ER wants C&W to rebate the overcharges to its affected 
customers over time.  Ironically, this has the 
anticompetitive effect of locking existing customers into C&W 
as only by remaining subscribers would they be able to 
receive any refund from previous overcharges.  Galan would 
welcome the presence of a large international 
telecommunications company, including U.S. firms to counter 
C&W's weight. 
6.  (U) Galan was unable to meet with Econoff prior to the 
expiration of the comment period for the FCC Notice of 
Inquiry.  However, Econoff advised Mr. Galan that should he 
have any comments they would still be forwarded to the 
appropriate FCC contact on his behalf.  Given the absence of 
"whipsawing" activity here in Panama, Embassy does not 
anticipate that Panama will comment on this FCC document. 
 
7.  (U) Comment:  Neither C&W, Movistar or the ER have 
commented on the impending impact of Voice over IP and appear 
completely unprepared for this new competitive challenge. 
End Comment. 
EATON