Copyright 1995 Kelley Drye & Warren

Reproduced with permission for the InterAm Database

National Law Center for Inter-American Free Trade

K E L L E Y DRYE

M E M O R A N D U M

TO: Clients and Friends

FROM: Kelley Drye & Warren

DATE: November 20, 1995

RE: Mexico

The following is a Country Memo describing the salient features of Mexico's Federal Telecommunications Law. The Law regulates the use and operation of communications frequencies, telecommunications networks and satellite communications within Mexico. It is a dramatic attempt to develop and promote competition within the Mexican telecommunications industry and widens permissible private investment, including foreign investment.

The Law's application and implementation will depend on forthcoming regulations to be issued by the Mexican Ministry of Communications and Transportation.

KELLEY D R Y E

COUNTRY MEMO

Telecommunications in Mexico: Recent Developments

On June 8, 1995, Mexico enacted the Federal Telecommunications Law (the "Law") which supersedes Mexico's prior Communications Law with respect to telecommunications and related regulations promulgated in 1990. The Law regulates the use and operation of communications frequencies, telecommunications networks, and satellite communications within Mexico. Similar to the telecommunications bills which the United States Senate and House have recently voted, the Law is a dramatic attempt to develop and promote competition within the Mexican telecommunications industry in order to create more diverse and better quality services at affordable rates. To achieve this stated purpose, the Law widens permissible private investment including foreign investment, within specific parameters. Similar to the prior Communications Law, the Law expressly reserves regulation of telecommunications activities to the Federal government. The Law allows for the introduction of services derived from emerging technologies such as PCS, and includes a new licensing structure and new auction process in order to provide greater legal certainty to investors. While the Law's application and implementation will depend on forthcoming regulations to be issued by the Mexican Ministry of Communications and Transportation (the "Ministry"), the salient features of the Law provide a framework for the development of Mexico's burgeoning telecommunications industry.

I. TELECOMMUNICATIONS REGULATION GENERALLY

The Law regulates the entire Mexican telecommunications industry including all emission, transmission or reception of signals, text, images, voice, sounds or information of any nature effected through wire, radioelectricity, optical or physical mediums, or other electromagnetic systems. Similar to the United States Federal Communications Commission ("FCC"), the Ministry is charged both with implementing the Law and promulgating regulations based upon the Law. Unlike the FCC, however, the Ministry is also charged with acquiring and operating telecommunications networks. This provision continues Mexico's well established practice of governmental ownership of telecommunications networks. In the exercise of its regulatory authority the Ministry may impose penalties for a violation of the law of up to 100,000 times the minimum daily wage for one worker for the Federal District (now equal to 18 pesos per day, approximately $2.50), with repeat offenders facing a fine of up to twice the original amount.

II. FOREIGN INVESTMENT

While limited foreign investment has previously been permissible in the Mexican telecommunications industry, the Law now allows such investment to a maximum of 49% where a license is required. The investment may even be greater with respect to cellular telephone services upon approval by the National Commission of Foreign Investment. As a result of expected competition from both foreign and domestic

competition, Telefonos de Mexico's ("Telmex") 49 year monopoly on Mexico's telephone service will end. The Law also repeals Article 5, Section VI of the Foreign Investment Law which had previously reserved activities related to satellite communications exclusively to the Mexican Federal government. As discussed below, under the Law, the Ministry will now regulate such activities.

III. LICENSES

A. In General

Licenses are required from the Ministry to: (i) utilize frequency bands, except for non-restricted and official uses; (ii) install, operate or utilize public telecommunications networks; (iii) occupy geostationary orbital positions and satellite orbits assigned to Mexico, and operate related frequency bands; and (iv) utilize emission and reception rights of signals from foreign satellite systems that cover Mexico. Determination of whether a license is required under the Law for the use of frequency bands depends on the proposed use. Entities which provide telecommunications services without the appropriate license, however, may forfeit the goods, installations and equipment used in providing such services.

B. Public Telecommunications Networks

In order to obtain a license to install and operate a public telecommunications network (through which commercial telecommunications services are provided), an applicant must submit information reflecting the nature of the services to be rendered, technical specifications of the project, and programs and investment commitments. Along with the inherent benefits of conducting telecommunications services within Mexico, only entities granted licenses by the Ministry to operate public telecommunications networks or other persons expressly authorized by the Ministry will be permitted to install telecommunications equipment and means of transmission that cross the Mexican border. Agreements to interconnect public telecommunications networks with foreign networks must be submitted to the Ministry, and if such agreements are deemed to prejudice the interests of Mexico, or of the users, or of other holders of licenses for public telecommunications networks, the Ministry may modify their terms. Under the Law, entities granted licenses by the Ministry or others will not be able to provide long distance and local services after August 10, 1996. Until then, Telmex continues to hold its official monopoly. Telmex will not be required to enter into interconnection agreements, however, until January 1, 1997 and may negotiate such agreements prior to January 1, 1997 on highly favorable terms. All interconnection agreements must be approved by the Ministry.

While the Law requires the Ministry to grant the license if the specific requirements are satisfied, it is unclear whether the Ministry may exercise any discretion in its review. Once granted, a notice is to be published in the Mexican Official Gazette. While the original term of the license is not to exceed 30 years, it may be extended for similar terms at the discretion of the Ministry. For the Ministry to grant such extensions, however, it is necessary that the applicant comply with the conditions of the original license, that it solicit such a request for extension before the start of the last one fifth of the original term, and that it accept any new conditions established by the Ministry.

C. Private Telecommunications Networks

A license, permit or registration is only required for private telecommunications networks where such networks utilize radio frequencies. A private telecommunications network is defined as a telecommunications network that provides telecommunications services to specific users without commercial implications.

D. Satellite Communications

One of the most important achievements of the Law is the granting of licenses to private companies to build and operate private satellites and providing satellite services in Mexico using foreign satellites. Under the Law, a license for satellite communications must be awarded through public bidding. The control and operations center for the satellites must be in Mexico and operated preferably by Mexican nationals. In addition, the Ministry may grant licenses to emit to and receive signals from foreign satellites that provide services in Mexico, so long as a bilateral agreement with the other nation allows for reciprocity to Mexican satellites. As of this writing, the U.S. and Mexico have not entered into such an agreement.

E. Specific Use

Similar to satellite communications, licenses for frequency bands for specific uses, such as cellular phones, air to ground services and trunking services, are to be granted through public bidding. In fact, in some cases the Ministry may honor a request that a particular frequency band be offered for public bidding.

In order to provide a public record of the frequencies granted, the Ministry must publish in the Mexican Official Gazette and in a newspaper located in the geographic zone of the frequency including the specific frequency bands offered, its term and selection criteria for its award. The notice is to contain information relating to the requirements to be met by applicants, including, among others: (i) the investment amount; (ii) a business plan; (iii) technical specifications; and (iv) a favorable opinion of the Mexican Antitrust Commission.

The original term of the license is not to exceed 20 years, and may be extended for similar terms at the discretion of the Ministry. Similar to the license for the public telecommunications networks, entities receiving an extension license must comply with the conditions of the original license, must solicit such a request for extension before the start of the last one fifth of the original term, and must accept any new conditions established by the Ministry.

The Ministry may modify or recover a frequency or a band of frequencies subject to a license if in the public interest, for reasons of national security, for the introduction of new technologies, to solve problems of detrimental interference and to comply with international treaties signed by the government of Mexico. In these instances, the Ministry may grant new frequency bands through which the original services may be rendered.

IV. PERMITS

Although similar to licenses, permits are required by the Ministry to establish and operate a commercial telecommunications service which is not a public telecommunications network and to install and operate

ground transmission stations. Under the Law, a commercial enterprise is defined as an entity not owning or possessing transmission facilities which provides third parties telecommunications services. A commercial telecommunications service uses the capacity of public telecommunications networks. Similar to a reseller under U.S. law, such entities which have been granted a license for public telecommunications networks may not own directly or indirectly such a commercial enterprise except with the express consent of the Ministry.

Entities interested in obtaining a permit must submit an application to the Ministry similar to the application necessary to obtain a license for a public telecommunications network. As discussed above with respect to public telecommunications networks, it remains unclear what discretion may be employed by the Ministry in evaluating the applications.

V. ASSIGNMENT OF RIGHTS

Under the Law, the Ministry may authorize the sale or transfer requiring the partial or total assignment of the rights and obligations under licenses or permits. The assignee must undertake present obligations and assume any conditions established by the Ministry for the transfer. In cases in which the assignment is to transfer rights to operate a public telecommunications network or a band of frequencies to another license or permit holder that provides similar services in the same geographic zone, the Federal Competition Commission must issue a favorable opinion as a condition of the Ministry's authorization. Finally, an assignment may only be requested three years after the granting of the original license or permit.

VI. TERMINATION, REVOCATION AND REQUISITION

Because of the turbulent history of nationalization in both Mexico and Latin America generally, the termination, revocation and requisition of licenses and permits is expressly delineated in great detail under the Law. Under the Law, licenses and permits may terminate for the following reasons: (i) completion of the term; (ii) relinquishment by licensee or permit holder; (iii) revocation; (iv) recapture; and (v) liquidation or bankruptcy of licenseaire or permit holder. Licenses or permits may be revoked in a number of instances including: (i) non use for a period of 180 calendar days from the date of the granting of such license or permit; (ii) interruptions in operations without justifiable cause or authorization from the Ministry; (iii) the assignment, encumbrance or transfer of a license or permit without the consent of the Ministry; or (iv) nonpayment of compensation due the Mexican federal government.

At the end of the term of a license or permit or of any extensions, frequency bands and geostationary and orbital positions and satellite orbits revert to the Mexican federal government. In addition, at the end of the term, the Mexican federal government may acquire the installations, equipment and other goods utilized directly in the utilization of the frequency bands, orbital positions or satellite orbits that are the subject of the license.

In the event of a natural disaster, war, public disorder or imminent danger to the national security, the internal peace of the country or the national economy, the Mexican federal government through the Ministry may conduct a governmental requisition (through an administrative procedure to obtain property) of the general communications networks and the real or personal property assets necessary to operate such networks. The governmental requisition may continue so long as the conditions which precipitated the requisition exist. It is particularly significant that the Law requires the Mexican federal government to indemnify interested parties to the extent of real damages and losses except in the case of war. If there is disagreement as to the amount of the indemnification, the damages are to be fixed by experts named by both parties, and with respect losses, the net revenues of the previous year are to be taken into account.

VII. TARIFFS

Pursuant to the Law, the Ministry may establish tariffs on public telecommunications networks that have substantial market share. The regulated tariffs are to be such as to permit at a minimum the recovery of the long term average incremental cost. The Law is silent as to the determination of such tariffs, thus, leaving some ambiguity as to how and at what level the tariffs will ultimately be set. The enthusiasm of potential entrants to the market will depend considerably on the tariff rebalancing program the government is expected to announce in January. Finally, in an attempt to prevent the circumvention of these tariffs, entities holding licenses may not grant cross subsidies related to services provided in competition with or through their subsidiaries or affiliates.

VIII. FINAL COMMENTS

Mexico's new telecommunications law provides an outline of a structure that will allow significantly greater opening to foreign investment and to the introduction of new technologies. The nervous foreign investor should be aware that while the Law attempts to limit both government regulation and ability to nationalize the telecommunications, the Law leaves significant opportunities for governmental intervention. Nonetheless, Mexico offers opportunities in the telecommunications industry which will be dramatically expanded by the Law .

If you have any questions regarding the foregoing, please call:

Eugene E. Mulhern or Yves Miedzianogora in New York at (212) 808 7800

Patrick Del Duca or Francisco J. Aparicio in Los Angeles at (213) 689-1300

Eliot C. Abbott or Ignacio E. Sanchez in Miami at (305) 372 2400

or any of the other members of Kelley Drye's Project Finance and Infrastructure Group listed below:

Alan M. Epstein in New York at (212) 808-7616

Terrance W. Schwab in New York at (212) 808-7878

Stuart T. Solsky in New York at (212) 808-7824

Stephen W. Stein in New York at (212) 808-7794

William A. Wilson III in Hong Kong at (011) 85-2-2869 0821

Kyuhong Yuh in New York at (212) 808 7655

If you have any questions about the Country Memo, please call:

Eugene E. Mulhern (New York) 212-808-7800

Yves Miedzianogora (New York) 212 808 7829

Patrick Del Duca (Los Angeles) 213 688 8203

Eliot C. Abbot (Miami) 305 372-2427

William A. Wilson III (Hong Kong) 011 85-2-2869 0821

or any of the following members of Kelley Drye's Project Finance and Infrastructure Group:

Alan M. Epstein (New York) 212 808 7676

Talat M. Ansari (New York) 212-808 7605

William A. Escobar (New York) 212-808-7771

Ignacio E. Sanchez (Miami) 305-372-2448

Terrance W. Schwab (New York) 212-808 7878

Stuart T. Solsky (New York) 212 808 7824

Stephen W. Stein (New York) 212 808 7794

Kyuhong Yuh (New York) 212 808 7655

November 1995

reproduced with permission for the InterAm database