PCS IN MEXICO

BENEFITTING FROM REGULATORY GROWING PAINS

As we write, Mexico is in the midst of its auction for regional Personal Communications Services licenses, known as Aconcessions@ under Mexican law. The auction predictably has been the focus of considerable attention by investors and telecommunications players interested in Latin America. Indeed, several analysts have suggested that Mexico is likely to be one of the chief hot spots in Latin America for wireless growth over the next decade.

The expected growth in wireless telecommunications in Mexico is due to many factors: the untapped market for such services; the attractive population densities; and the expense of building wireline networks in Mexico=s unserved rural areas. It also is at least in part a result of the aggressive privatization campaign that Mexico initiated in 1990, and the development of a workable regulatory regime that it is hoped will provide new competitors with a meaningful opportunity to penetrate the market.

Of course, as the strident fracas between MCI/AT&T and Telmex, Mexico=s dominant telecommunications provider, demonstrates, Mexico=s telecommunications regulatory regime is still experiencing growing pains. Many regulations have not yet been issued, and the regulators (as well as the parties) therefore frequently must resolve disputes on an ad hoc basis. However, the high profile pressure from MCI and AT&T, and Telmex=s desire to enter the U.S. market, may produce critical modifications to the current system, not only with respect to the subject of that dispute, but more generally.

Given that, for all practical purposes, Telmex was Mexico=s sole telecommunications provider only eight years ago, the country has made significant strides toward opening the market both legally and practically. Indeed, Mexico=s cellular concessionaires have spent most of the past decade quietly growing and reaping the benefits of the Mexican telecommunications regime. Providers of paging, private network, trunking, and value added services also have proliferated. The revenues produced by many of these services are growing at a faster rate than Telmex=s, despite the disparity in the market share percentages. When the PCS concessionaires emerge from the auction, they will face more competition than their cellular brethren, but at the same time, they will have the advantage of a more fully developed regulatory framework. That framework should provide both PCS operators and their investors with a fairly clear picture of the market, and the extent to which the rules have been developed should help in making business and service plans.

The Introduction of PCS

In 1995, the Mexican government authorized auctions for wireless spectrum. Given the success of the cellular industry, Mexico, among a few other Latin American countries, was seen as an attractive market for additional development of wireless telecommunications. In January 1997, the government announced the PCS auctions for spectrum in the 1850-1990 MHz band, which were designed as simultaneous ascending auctions with successive rounds. Somewhat similar to the U.S. PCS auctions, the Mexican auctions include down payment, eligibility, waiver and withdrawal rules. There are nine regions, with two 30 MHz and two 10 MHz licenses available in each. Concessions for these licenses will be assigned to the high bidder for each of these licenses within seven days after the close of the auctions.

PCS providers will compete with the two incumbent cellular operators in each of nine wireless regions across the country -- one of which is Telcel, a Telmex affiliate. Like the cellular providers, PCS operators will enjoy nondiscriminatory interconnection rights under Mexican law. Calling party pays has been established by the Mexican government, which should encourage use of PCS by subscribers. The concessions require a modest build-out schedule: in general, 20% of the region must be covered within the first two years, and 40% of the region must be covered by the fifth year. Although some cellular operators have begun introducing digital in newer systems, PCS will be the first wholesale introduction of digital wireless telecommunications service in Mexico. TDMA is fairly entrenched, and CDMA, rather than GSM, appears to be the new technology of choice among proponents of digital service. Many of the cellular licensees are competing for PCS licenses as well, although there are limits on owning cellular and PCS spectrum in the same region.

The PCS License Rules

Cellular competitors have done well, despite the fact that the competitive regulatory playing field was defined in a mostly rudimentary fashion at the time of their entry. As noted above, PCS entrants will face a market in which many of the rules have been clarified, or at minimum are currently under discussion. Many of the initial disputes with Telmex, such as the time it took to arrange interconnection, have been resolved, at least in part. While much remains to be resolved, PCS entrants should have an easier time mapping out their business and service plans, and spotting the issues that are likely to become trouble spots in the course of their efforts to enter the market. Some of the rules that characterize the regulatory framework are as follows:

Services Covered by Concessions. When the PCS concessions are granted after the auction, the concessionaires will simultaneously receive a Apublic telecommunications network@ license permitting the operation and marketing of the PCS network for the public. The concessionaires are permitted explicitly to provide fixed and mobile wireless service, and applicable laws suggest that a PCS concessionaire may use its authorization to provide data as well as voice services. Approval from Cofetel, Mexico=s Communications Commission, must be obtained if the concessionaires wish to offer services other than those explicitly permitted, and additional fees would be required. Concessionaires are permitted to sell handsets to end-users but must maintain separate accounts for such sales and comply with applicable government technical standards.

Foreign Investment Issues. PCS and other telecommunications concessions will be awarded only to natural or juridical persons of Mexican nationality. In addition, investment in all Mexican telecommunications concessionaires (other than cellular) is limited by law to 49%. The Foreign Investment Law, however, provides that so-called Aneutral investments@ will not be considered in computing the level of foreign ownership in Mexican companies. So-called Aneutral@ shares, which are defined as Apassive@ shares with limited or no corporate rights, are not counted toward the 49% foreign ownership cap. Iusacell, Mexico=s second largest cellular company, has used this approach in order to maximize Bell Atlantic=s involvement in the company: 10% of its equity is unrestricted voting shares (5.1% owned by Mexicans, 4.9% owned by Bell Atlantic) and 90% of its equity is limited voting shares (100% owned by Bell Atlantic). Any structure involving the use of Aneutral investment@ requires prior approval by the Secretary of Commerce and Industry.

Duration of Concessions. The PCS concessions entitle the concessionaire to exclusive use of the spectrum for a 20-year term. Transfers of concessions are not permitted during the first three years of the license term. Thereafter, a concession may be transferred with the approval of the Secretary of Communications and Transport (ASCT@); a transfer to an existing licensee in the same region requires approval by the Federal Competition Commission. The PCS concessions may be extended for two additional 20 year periods, with the consent of SCT. To qualify for an extension, the concessionaire must have complied with the conditions of the concession, and it must petition for renewal at least four years before the expiration of the license term. SCT has no obligation to renew concessions, and its renewal decisions may not be challenged.

Concessions will be canceled automatically in the event of bankruptcy or liquidation. The government also may change or reclaim a concession in the Apublic interest;@ for reasons of national security; to introduce new technologies; to resolve interference problems; or to comply with international treaties. In such cases, SCT will grant the concessionaire a replacement frequency assignment for provision of the same services. Concessions may be revoked for failure to provide the authorized services; for interfering with the performance of other concessionaires; for failure to comply with the obligations set forth in the concessions (including presumably the build out requirements); for refusing to interconnect with competitors; for a change in citizenship; or for an unauthorized transfer.

Setting Up the PCS System. Concessionaires are expected to resolve frequency coordination issues on a voluntary basis. If negotiations are unsuccessful, however, either party may seek Cofetel=s intervention. Cofetel will act to resolve the issue within 60 days. If PCS concessionaires find that they must clear the spectrum they are awarded in the auction, they must submit a request for assistance to Cofetel. Cofetel will determine whether clearance is necessary, and will determine the need for compensation and/or alternative spectrum for the incumbents.

Prior approval from SCT is required for constructing the system. Clearance from local authorities also may be required. There is growing opposition to tower and antenna siting from local communities, although it is not yet as significant an issue as it is in the United States. Carriers have the right to nondiscriminatory access to poles, towers, and wires, and no carrier may contract exclusively for any such facility.

Interconnection and Resale: Rights and Obligations. Telecommunications providers have significant, if not fully developed, interconnection rights (and obligations) in Mexico. The FTL provides that failure to provide requested interconnection without just cause can result in immediate revocation of the concession. All public telecommunications network concessionaires must adopt open network architecture to allow interoperability and interconnection, and must provide nondiscriminatory treatment to their competitors. Interconnection must be permitted at any technically feasible point, and arrangements should be on a Areciprocity basis.@

Interconnection disputes are required to be resolved by agreement within 60 days, or will be resolved by the SCT. Interconnection agreements must be filed with the government. Disputes about Telmex delays in establishing interconnection largely have been resolved by an agreement under which Telmex includes a firm timeline in its interconnection agreements, including penalties for failure to comply.

While Mexican law imposes significant interconnection obligations on Telmex, MCI and AT&T have raised concerns about the high costs of interconnection, including (i) high access charges, (ii) a 58% surcharge on inbound international traffic, and (iii) high accounting rates for the exchange of international traffic. MCI and AT&T have raised such issues as grounds for opposing FCC authorization of a Telmex/Sprint Communications venture to provide service in the United States. They also have asked the U.S. government to file a complaint that Mexico is violating its commitments made in the 1997 WTO Basic Telecoms Agreement. The Mexican government returned the volley with its own claim that the United States would violate the WTO agreement by denying Telmex entry to U.S. markets.

All carriers must permit others to resell their services. Thus, a PCS concessionaire must make resale services available to other carriers and may resell others= services. Local resale regulations have been issued, but the question of who may offer pure resold international service and on what terms has not yet been fleshed out in regulations as required under the FTL.

The FTL requires carriers to make Acommercial information,@ including customer proprietary network information, available on a nondiscriminatory basis. In general, carriers submit their own data to a jointly-selected, third-party database administrator as a protection from competitive abuses. In addition, Telmex=s concession prohibits it from disclosing customer proprietary network information without prior consent.

Prices and Service to End-users. In practice, all public network concessionaires must register their tariffs with the SCT prior to implementing them. Rates must be nondiscriminatory. PCS concessionaires are required to file their service contracts with Cofetel. A current dispute, in which Iusacell and others are involved, relates to whether Telmex is permitted to charge telephone customers for making 1-800 calls; the government has been asked to resolve the issue.

Universal service is promoted by prohibiting a concessionaire from interrupting service to any area where no other concessionaire provides similar service. In addition, if a concessionaire is not using all of its spectrum, the government may make such excess spectrum available for a Asocial coverage@ program, but the concessionaire would be compensated.

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Clearly, much remains to be resolved, and there are many areas where the regulations are either ambiguous or nonexistent. However, enough has been clarified that PCS licensees should be able to use the regulatory system to their advantage in their efforts to enter the market. The framework has become considerably more defined since the advent of cellular competition, and that is likely to benefit PCS carriers, as well as consumers of wireless services in Mexico.

Lynn R. Charytan

Jacquelynn Ruff

Lynn R. Charytan is a partner and Jacquelynn Ruff is an associate in the Washington, D.C. office of Wilmer, Cutler & Pickering. They both practice in WC&P=s Communications Group, which has extensive experience in Latin America assisting PCS and other types of wireless, wireline, broadcast, satellite, and information service providers.

Copyright 1998 National Law Center for Inter-American Free Trade

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