public policy telecommunications in mexico telefonica mÉxico francisco gil diaz april 2008

PUBLIC POLICYTELECOMMUNICATIONS IN MEXICO

TELEFONICA MÉXICOFRANCISCO GIL DIAZAPRIL 2008

2TELEFONICA MEXICOPRESIDENCIA

The Network International Rankings Price Gauging Network Costs The Price Cap Local Area Dialing Costs Accounting Separation Apportionment Of International

Settlements Regulatory Capture

INDEX


The Network

TELMEX is Mexico’s telecommunications hub. After 18 years of its privatization some service indicators have had remarkable improvements: phones are reliable, the network is modern, there is fiber optic all over the country and subscribers are not required to buy shares of TELMEX, bribe, pay a fortune and wait months for installation.

01


The Network But if this outcome is judged by what it should

have been, by its unfulfilled potential, by its comparison with what other countries have accomplished in a short time despite starting at a much later date, we have a dismal failure.

The national network was turned into the private sphere without putting in place the public policies, legislation and specially enforcement to prevent it to prey upon competitors and ultimately upon consumers.

Beyond the disproportionate cash flows captured by the incumbent, lack of national competitiveness and an epidemic of depredatory practices, we have a State within the State. A power within itself that can influence and block policies to its advantage.

01


International Rankings

Charts 1a, 1b and 1c and Charts 2a, 2b, 2c portray telecommunications indexes for Latin America. The first set show unadjusted ranks. The second set uses per capita income to “normalize” them. Mexico’s ranking then tumbles, to last, before last and third from last respectively, way below countries with per capita incomes far under it.

02

Jen ranks as top celebrity cover girl…


International Rankings02 Fixed Telephone Lines per 100 inhabitants

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Cost

a R

ica

Uru

guay

Arg

entin

a

Bra

sil

Chile

Mˇx

ico

Surinam

e

Colo

mbia

Venezu

ela

Salv

ador

Guya

na

Panam

a

Ecu

ador

Belic

e

Guate

ma

la

Hondura

s

Per

Boliv

ia

Para

guay

Nic

ara

gua

CHART 1a

Mobile Lines per 100 inhabitants

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0A

rgent

ina

Chile

Sur

inam

e

Ven

ezue

la

Uru

gua

y

Colo

mbi

a

Ecu

ador

Guat

em

ala

Sal

vado

r

Bra

sil

Méxi

co

Pan

ama

Par

agu

ay

Bel

ice

Guya

na

Cost

a

Nic

ara

gua

Per

ú

Hond

uras

Bol

ivia

CHART 1b


International Rankings02 Internet Subscribers per 100 inhabitants

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Co

sta

Ric

a

Pe

r

Ch

ile

Bra

sil

Uru

gu

ay

Gu

ya

na

Arg

en

tin

a

Mˇx

ico

Ve

ne

zu

ela

Co

lom

bia

Be

lice

Ecu

ad

or

Gu

ate

ma

la

Sa

lva

do

r

Su

rin

am

e

Pa

na

ma

Bo

livia

Ho

nd

ura

s

Pa

rag

ua

y

Nic

ara

gu

a

CHART 1c

Internet Subscribers per 100 inhabitants

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Co

sta

Ric

a

Pe

r

Ch

ile

Bra

sil

Uru

gu

ay

Gu

ya

na

Arg

en

tin

a

Mˇx

ico

Ve

ne

zu

ela

Co

lom

bia

Be

lice

Ecu

ad

or

Gu

ate

ma

la

Sa

lva

do

r

Su

rin

am

e

Pa

na

ma

Bo

livia

Ho

nd

ura

s

Pa

rag

ua

y

Nic

ara

gu

a

CHART 2a


International Rankings02 Fixed Telephone Lines per 100 inhabitants

0.0

20.0

40.0

60.0

80.0

100.0

Gu

ya

na

Ho

nd

ura

s

Bo

livia

Co

lom

bia

Co

sta

Ric

a

Sa

lva

do

r

Su

rin

am

e

Uru

gu

ay

Arg

en

tin

a

Ecu

ad

or

Nic

ara

gu

a

Bra

sil

Gu

ate

ma

la

Pa

rag

ua

y

Be

lice

Pe

r

Ch

ile

Pa

na

ma

Ve

ne

zu

ela

Mˇx

ico

CHART 2a

Mobile Lines per 100 inhabitants

0.0

40.0

80.0

120.0

160.0

200.0

240.0

280.0

Para

gu

ay

Guyana

Nic

ara

gua

Bolivia

Hond

ura

s

Colo

mbia

Ecuad

or

Surin

am

e

Salv

ado

r

Guate

ma

la

Arg

entina

Uru

gua

y

Belice

Venezue

la

Bra

sil

Chile

Panam

a

Per

Mˇx

ico

Costa

Ric

a

CHART 2b


International Rankings02

Internet Subscribers per 100 inhabitants

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Gu

yan

a

Pe

r

Bo

livia

Costa

Ric

a

Colo

mb

ia

Bra

sil

Uru

gu

ay

Ecu

ad

or

Arg

entin

a

Gu

ate

ma

la

Hon

dura

s

Sa

lva

do

r

Chile

Be

lice

Pa

ragu

ay

Nic

ara

gua

Ve

nezu

ela

Mˇx

ico

Su

rin

am

e

Pa

na

ma

CHART 2c

Source: International Telecommunication Union, World Bank


Price GaugingVincent Price

High prices explain low quantities demanded. The poorest segment of the population, the one that never exceeds the 100 calls per month included in the monthly basic rent, pays 4.85 pesos per call, almost half a US dollar[1].

Notwithstanding the above, with a great sense of humor the incumbent dares to complain about alleged local monopolies that compete unfairly against it: cable operators that provide telephony, Internet and television, even though the latter rely on TELMEX for transportation and call delivery.

But market shares and the number of firms are irrelevant under a monopolist supplier of an essential backbone and last mile termination. Imagine 2 possible situations. One a highway network owned by a single proprietor who charges for its use. To label its situation as a monopoly, does it matter if the owner owns no trucks or buses? The same would be true of an airport network owner with no airplanes. In both cases there will be monopoly prices for the final consumer.

[1] It is not a price as such; it is arrived at by dividing the amount spent by consumers by the number of calls.

03


Price Gauging

Another egregious example of favoritism: in the same year TELMEX was privatized, with no charge for the frequencies to be used, and through a direct grant sans competitive bidding, it was granted a concession to operate a nationwide wireless operation.

03


Price Gauging

Under its prerogatives the government can tackle the monopoly problem by pricing services that are essential as if there were a competitive market. The concession title of TELMEX also contains provisions related to competitive requirements. However, legislation, international treaties and title provisions have not mixed with enforcement

03


Network Costs04Network Cost Structure

Chart 3 is constructed such that equal distances from Mexico City to other cities are considered. One route is from Mexico City to a fixed line in Tepic compared with a Mexico City call to a fixed line in Compostela. There is interconnection to Tepic while TELMEX refuses to interconnect Compostela and collects what it labels a “resell charge”. Green labels are used to depict TELMEX’s costs and/or the charge made by a competitive provider.


Network Costs04

Chart 3 Tx Link Costs and Termination Fees

Call Termination Cost per minute (MXN)

TxLink(n/C)+LDCM$2.248

TxLink(n/C)+LTr +MLT$1.742

TxLink(w/C)+LDCF$0.838

TxLink(w/C)+FLT$0.266

Total

TxLink(n/C)$0.288

TxLink(n/C)$0.50

TxLink(w/C)$0.088

TxLink(w/C)$0.156

Tx Links

Mobile onNEA

Mobile onEA

Fixedphone on

NEA

Fixedphone on

EA

Calling to:

TxLink(w/C)+CLTr +CMLT$0.678

LDCM$1.96

TxLink(w/C)+CLTr +CMLT$0.678

LTr + MLT$1.242

Tx link(w/C) + CFLT$0.216

LDCF$0.75

TxLink(w/C)+CFLT$0.216

FLT$0.11

Should be paying(regulated fee)

CallTermination

Cost

CFLI: Cost-based Fixed Local Termination Fee (Regulated)CMLI: Cost-based Mobile Local Termination Fee (Regulated)CLTr : Cost-based Local Transit Cost(Regulated)TxLink(w/C): E1s link cost with competitive providers

FLT: Fixed Local Termination FeeMLT: Mobile Local Termination FeeLTr: Local Transit FeeLDCF: LD resell charge terminating on fixedLDCM: LD resell charge terminating on mobileTxLink(n/C): E1 cost without competitors at Telmex current prices

NOTES:Tx LinkÕs monthly rates are proportional to distance and band-capacity allotted. The cities consideredon the diagram represent routes with similar distance from Mexico City, in order to facilitatecomparison.* The cost per minute assumes an E1 link is leased from a competitive provider at current prices.These costs could be lower if COFETEL imposes a regulated interurban transit fee based onTelmexÕs costs and/or if more competition in the long-haul market is encouraged (e.g. if CFE offersblack fiber).** EA: means equal access for cities with interconnection to TELMEX network

NEA: means non-equal access for cities without interconnection to TELMEX network

Total: $0.266 p/m

Total: $0.216 p/m

vs.

Total: $0.216 p/m

Total: $0.838 p/m

vs.

Total: $1.742 p/m

vs.

vs.

Total: $0.678 p/m

Total: $0.678 p/m

Total: $2.248 p/m

Current Scenario (Current termination fees and TxLinks rates leased to TELMEX)

Proposed Scenario (Cost-based termination feesand Tx Links rates leased to competitive providers)

MovistarSuscriber

Guadalajara

Coatzacoalcos

CFLT $0.06 p/m

FLT$0.11 p/m

CFLT$0.06 p/m

LD Ņresell chargeÓ$0.75 p/m

CMLT$0.50 p/m

MLT$1.21 p/m

CMLT$0.50 p/m

LD Ņresell chargeÓ$1.96 p/m

Tx link* (E1) $0.068 p/m

D.F.Movistar

Tx Links w / competition (E1)Aprox . $22,000 / month

Aprox. $ 0.088 p/m

Veracruz (EA**)

Alvarado (NEA**)

Tepic (EA**)

Compostela (NEA**)

Tx Links w / TELMEX (E1)Aprox . $72,000 / month

Aprox. $0.288 p/m

Tx Links w / competition (E1)Aprox . $17,000 / month

Aprox. $0.068 p/m

Tx Links w / TELMEX (E1)Aprox . $53,000 / month

Aprox. $0.212 p/m

LTr$0.032 p/m

CLTr$0.022 p/m

Tx link* (E1)$0.068 p/m


Network Costs04 Costs faced by a competitor are 26.6 centavos per

minute under competition (Tepic termination) versus 83.8 centavos under the resell charge. It costs therefore 3.15 times more to deliver a call when TELMEX refuses to recognize that what it provides is an essential input. With TELMEX in control of 60% of the national backbone and 94% of last mile terminations, its charges prevail.

If TELMEX’s costs, including a competitive return to capital, are taken into account, the interurban transit fee falls to 4 centavos per minute and the termination interconnection fee to 6 centavos. With these numbers the relevant comparison is between the 83.8 centavos already mentioned and 18.8 centavos, or a ratio of 4.5 times instead of the already high one of 3.15 times.


Network Costs04 Regulatory paraplegia has also protected TELMEX

from fulfilling a prerequisite for a competitive market: physical interconnection. Competitors wait up to two years. AVANTEL received its concession for local services in 1998 to achieve interconnection only 2 years later. GTM waits since February 2006 for the monopoly’s deference. Cable operators who provide broadband Internet, TV signals and telephony have suffered similar delays.

4 D’s that illustrate the behavior of a monopolist regarding interconnection: DENY --- DELAY --- DETERIORATE --- DUMP. TELMEX honors them all.


The Price Cap

The powerful instrument provided by a required price cap revision of TELMEX has been neglected. The authorities have not taken into account TELMEX’s productivity increases. The pallid adjustments required in Mexico are striking when compared with what similar countries have imposed on the incumbent

05


The Price Cap

Chile imposed a 30 percent adjustment in 1999 and is currently going over the next one. Peru required a 10.4 % adjustment over 2004-2007 with a further one of 6.4 percent per year for 2007-2010. The accumulated change will be 41 percent for the 6-year period. In Mexico the adjustment factor for the same 6 years is of only 3 percent.

Chile and Peru post processes in the Internet while Mexico’s is a closed-door process with the result announced at its termination.

05


Local Area Dialing Costs

expensive - the cost of one call ...

Because the marginal cost of transporting a call over long distances has fallen to practically zero, local area dialing zones (LAD) have been eliminated in most of the world. To benefit the incumbent (LAD’s) have not been eliminated in Mexico. Some LAD’S were eliminated in 2007 but even these timid regulatory efforts have been successfully challenged in court by TELMEX

06


Accounting Separation The avoidance of cross subsidies

is a key competitive issue. TELMEX has never complied with its title’s or legislation requirements to apportion the costs of its diverse services. Some examples:

— In 2005 it introduced a retail long distance tariff of 50 centavos while charging wholesale operators 75 centavos

— TELMEX packages unlimited LD calls with its local service, an offer impossible to replicate by the other operators since they are forced to pay TELMEX for LD services in half of the LAD’s.

07


Apportionment Of International Settlements

.. International Telecom

International long distance settlements favored Mexico in the late seventies by 1 billion dollars. To benefit TELMEX the authorities devised a concept labeled proportional return. Under this formula an operator could not compete with TELMEX to capture incoming traffic, it had to accept to share the pie according to its proportion in outside calls. The starting rules (1996) stated that the system would last only three years, it went on for seven, and only because the government lost an arbitration panel before the WTO

08


Regulatory Capture

Peter-Paul-Rubens-The-Capture-of …

We have a perfect case of regulatory capture, of a giant economic machine created by a government, one that commands a cash flow of several billion dollars per year that has allowed it to prey upon suppliers, competitors and consumers. It has allowed it as well to branch out and to dominate or attempt to dominate other areas of economic activity. It is a case of lost welfare in a competitive global environment. In a flat world Mexico is surrounded by huge artificial mountains.

09


HOPE

Hope on the Horizon


HOPE

However, there is hope in the horizon, President Calderón has announced his firm

intention of providing competitive conditions for all Mexican markets

public policy telecommunications in mexico telefonica mÉxico francisco gil diaz april 2008

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