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Cablegate: Supreme Court Rules in Favor of Competition in Mexico's

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DE RUEHME #4399/01 2282221
ZNR UUUUU ZZH
P 162221Z AUG 07
FM AMEMBASSY MEXICO
TO SECSTATE WASHDC PRIORITY 8458

UNCLAS MEXICO 004399

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INFO ALL CONSULATES IN MEXCIO COLLECTIVE PRIORITY
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NTIA FOR JANE COFFIN

E.O. 12958: N/A
TAGS: ECPS ECON EINV PGOV MX
SUBJECT: SUPREME COURT RULES IN FAVOR OF COMPETITION IN MEXICO'S
BROADCASTING AND TELECOM SECTORS

REF: A. MEXICO 4344
B. MEXICO 4291
C. MEXICO 3931
D. MEXICO 2506
E. 06 MEXICO 6542
F. 06 MEXICO 1716

1. (U) SUMMARY: Below is an analysis and English-language summary
of the 900-page final decision by Mexico's Supreme Court (SCJN) that
some provisions of the April 2006 Radio and Television Law are
unconstitutional. The Court threw out the most blatant
anti-competition measures that led the 2006 Law to be dubbed the
"Televisa" law because it favored the duopolies Televisa and TV
Azteca that dominate broadcasting in Mexico. The Court decision
supports competition because it has prevented this broadcast duopoly
from becoming stronger by eliminating those provisions that most
favored them. We will have to see if President Calderon and Congress
will use the space opened by the Court's decision to make changes to
actually promote competition in broadcasting and/or other telecom
services. The Calderon Administration and Congress will have to
decide how public bidding for frequencies can proceed in light of
the Supreme Court's ruling against public auctions. The Ministry of
Communications and Transport (SCT) is seeking support from the
August 20-21 North American Leader's Meeting in order to facilitate
its efforts to promote competition at least in some parts of
Mexico's telecom sector. End Summary

--------------
EMBASSY ANALYSIS OF THE SUPREME COURT'S DECISION:
-------------

The key points of the Court's ruling are:

The April 2006 Radio and TV Law is Valid
--------------------

2. (U) The Court ruled that the April 2006 Radio and Television Law
is valid, and only declared certain articles invalid.

Foreign Investment Still Not Allowed in Broadcasting
-------------------------

3. (U) The Court declined to comment on foreign investment in
broadcasting. The 47 Senators who filed the Constitutional challenge
to the Radio and TV Law opposed foreign investment in broadcasting,
and believed that the Radio and TV law would allow foreign
investment in broadcasting allowing broadcasting companies to
provide triple play services (video, data and phone). Their
reasoning was that the Radio and TV law's provision allowing
broadcasting companies to render "additional telecommunications
services" would enable these companies to use the more flexible 2006
Telecommunications Law to allow foreign direct investment in
broadcasting. The Court ruling did not give the Senators the
explicit rejection of foreign investment in broadcasting that they
wanted, but the Court's silence on this point leaves matters under
the Foreign Investment Law, which does prohibit foreign investment
in broadcasting.

COFETEL, The Telecom Regulator,
is strengthened (But Not Enough)
--------------------

4. (U) By approving those provisions of the 2006 Radio and TV Law
that strengthened Cofetel, the Court has given Cofetel more teeth
and autonomy. Analysts have said, however, that the Radio and Law
TV did not do enough to strengthen Cofetel or make it into a fully
independent regulator.

5. (U) The Court's decision that the Senate cannot object to the
appointment of Cofetel Commissioners was widely expected, but it is
unclear what will happen to the legal challenges filed by current
Undersecretary for Communications Rafael Del Villar and SCT Director
of Legal Affairs Gonzalo Martinez Pous. Rumors abound that the two
Commissioners who took Del Villar's and Gonzalez's place when the
Senate rejected their nominations will have to step down and
President Calderon will bill able to appoint two Commissioners, who
would presumably be close to him rather than to former-President Fox
or to Televisa and TV Azteca. Del Villar and Gonzalez have said

publicly that they would not seek to become Cofetel Commissioners if
they win their challenge.

6. (U) The Court ruled that those Cofetel Commissioners who were
replaced by new Commissioners under the Radio and TV Law could have
been eligible to remain at Cofetel. The Court, however, did not say
that the new Cofetel Commissioners should step down, nor that all
Cofetel Commissioners must be replaced. Post does not think all
Cofetel Commissioners would be replaced because such a move would
negatively affect investment.

The Broadcast Duopolies Lose Some Power
------------

7. (U) The Court's elimination of Article 28 of the April 2006 Radio
and TV law is a step forward for competition. Article 28 would
have given broadcasting companies already holding spectrum a strong
competitive advantage over new competitors. As digitalization
proceeds, Televisa and Azteca would have been able to retain
freed-up spectrum and use it for new telecommunications services
without bidding and without being explicitly obliged to pay. New
market entrants would have had to bid and pay for such spectrum. The
Senators who filed the Court challenge believed the Radio and TV Law
also favored Telmex by allowing it to instantly provide video
services without bidding or having to pay. Telmex, however, is
still waiting for government permission to provide video services
under the Convergence Accord approved by the Fox Administration (Ref
E). (In December 2006, a court rejected the injunction filed by one
cable TV company that had blocked Telmex from providing video
services. Telmex expects to meet the Accord's requirements for
number portability and interconnection, and start providing video
services in early 2008.)

The Ruling Promotes Competition
-----------------

8. (U) The ruling on the Radio and TV Law is believed to be the
first time the Supreme Court has over-ruled laws that blatantly
favor one company, in this case Televisa and TV Azteca. It was also
the first time a Supreme Court ruling like this was made completely
public, including broadcast on the judicial TV channel of a public
hearing before the Supreme Court, and publication on the internet of
the Court's 500-page draft decision and its 900-page final decision.
Throughout its ruling, the Court stressed the importance of free
competition and made the Federal Competition Commission (Cofeco) a
mandatory part of the process of allocating broadcast frequencies.

Unclear how Congress and the
President Will Decide to Allocate
Frequencies
-----------------

9. (SBU) In the short run, however, public bidding for frequencies
will remain disrupted by the Court's actions. It remains unclear
how public bidding for spectrum will work now that the Court has
eliminated "subastas publicas" (public auctions). One of the
justifications for the Radio and TV Law was that the old process for
allocating spectrum was completely non-transparent, bids for
spectrum were not made public and the Ministry of Communications and
Transportation (SCT) had complete discretion on which bid to choose.
Public auctions is a more transparent process. In fact, one U.S.
broadcasting company interested in entering the TV market through
partnership with Mexican broadcasters told Embassy Officers that the
court challenge to public auctions was a step backwards, because it
suspended what progress the government was making in opening at
least regional television frequencies for public bidding. The Court
did affirm public bidding, however. But since the Court rejected
public auctions, the Calderon Administration and the Congress will
have to decide how to conduct public bidding for frequencies.

Loopholes Remain
----------

10. (U) One of the nine Supreme Court judges Genaro Gongora
Pimentel, published his own interpretation of the Court's ruling to
explain why he did not agree with the majority. Post agrees with
Pimentel that the final ruling was not sufficiently detailed on some
key points and left some loopholes that could be misinterpreted by

lawyers. Post expects that the Congress will have to fill in these
gaps.

Embassy Comment:
-------------

11. (U) The April 2006 Radio and TV Law, despite its flaws, was a
much-needed measure to replace the obsolete radio and television law
of 1960. It would have been better for Congress to have passed a
more comprehensive reform that did not so blatantly benefit the
handful of broadcast companies that already dominate Mexican media
and telecommunications. Rather than having been rushed leading into
the July 2006 Presidential elections, reforming Mexico's
telecommunications and broadcasting should have been a more careful
process used to promote competition and allow triple play and
technological convergence. Instead, the April 2006 Law was done on a
fast track, pushed by Televisa and other economic and political
interests. Now that the Supreme Court has eliminated those parts of
the April 2006 law that most blatantly stifled competition, it will
be up to the Calderon Administration and Congress to pass a new law
that allows the competition needed for Mexico's telecom and
broadcast systems to move into the modern age.

12. (SBU) As indicated by its recent proposal for the North American
Leaders Meeting August 20-21 (refs A and B), SCT seems to want to
promote some competition in telecommunications. On August 3, during
the HLCC U.S.-Mexico telecom negotiations, SCT Secretary Tellez and
Undersecretary Del Villar said they were trying to convince
Calderon's Office to make a bold proposal at this August Security
and Prosperity Partnership (SPP) summit that the Presidents of the
U.S. and Mexico and Canada's Prime Minister announce a goal of
making the necessary policy and regulatory changes so that telecom
carriers can have low cost "local" calling rates regardless of
whether the call is within a country or across the U.S.-Mexico
border. SCT wants to do this to pressure Telmex to dramatically
lower its international "interconnection" rates it charges U.S.
carriers to complete a call from the U.S. to Mexico. SCT hopes to
strengthen its efforts to promote competition by linking them to
efforts under the Security and Prosperity Partnership (SPP) to
improve competitiveness in North America. While they may be willing
to take on Telmex at least to some extent in order to meet President
Calderon's goal of modernizing telecommunications, SCT is not yet
willing to take on Televisa and TV Azteca. SCT officials have been
careful to say both publicly and privately that allowing a third
national television network would have to be a decision by President
Calderon himself.

13. (U) Begin Embassy Summary of the Final Ruling:
------------------------------

Title of Ruling: "Constitutional violations and Supreme Court of
Justice's ruling re. Telecommunications and Broadcasting Laws"

(1) Complaint from the 47 Senators that filed the challenge): The
process in which the law was approved violates the Constitution
because it was approved by the Chamber of Deputies with mistakes in
the text and sent to the Senate, which changed the text with only a
notice from the Chamber.

Ruling: The Court did not agree. The Court ruled that corrections
made by the Chamber did not modify the general content of the law,
but made it more accurate.

(2) Complaint: The creation of Cofetel is an exclusive faculty of
the Executive, and Congress cannot intervene.

Ruling: The Court did not agree. The Court said Cofetel was created
by the Executive in a previous decree, so Cofetel as an independent
body was not created in this April 2006 Radio and TV Law by
Congress.

(3) Complaint: Senators cannot ratify or object to the appointment
of Cofetel's commissioners. (Article 9-C)

Ruling: The Court agreed with the accusing party that Senators
cannot object to the appointment of commissioners, since this is the

Executive's exclusive right. The Court ruled that the Senate can
only ratify the following Executive's appointments: the Attorney
General, Ministry of Finance high-level officials; the Army; and
Ambassadors. The Court ruled that the Executive will appoint
Commissioners.

(4) Complaint: Congress cannot force the Ministry of Communications
and Transport (SCT) to issue Cofetel's regulations in a period of 30
days. Congress cannot tacitly eliminate SCT regulations and
transfer them to Cofetel, such as broadcasting regulations, which
were under the Department of Radio and Broadcasting under SCT.

Ruling: The Court did not agree. The Court ruled that a law is
more important than regulations. The Court said that when a previous
law is eliminated, its regulations are automatically eliminated.
The Court also said that there is no need to establish a period of
30 days since the Constitution obliges the Executive to implement a
law. (Embassy Comment: Cofetel and the industry have loudly
complained that SCT has so far failed to issue Cofetel regulations
for implementing either the 2006 Radio and TV Law, or the 2006
Telecommunications Law. End Comment)

(5) Complaint: The way Congress decided on Cofetel Commissioners
over a staggered period violates the Constitution. Although
staggered terms is a positive measures to protect Cofetel from the
pressure of elections and give continuity to its operations, by
approving the reform legislators just wanted to protect Cofetel
Commissioners selected by broadcasting companies (duopolists
Televisa and TV Azteca) from the new Mexican President (since it was
possible that Andres Manuel Lopez Obrador could have won). (Embassy
Comment: Obrador was a leftist candidate strongly opposed to most
business monopolies in Mexico, and critical of Televisa and Azteca
for favoring the ruling party in their TV broadcasts. End
Comment).

Ruling: The Court agreed with staggered terms for Cofetel
Commissioners.

(6) Complaint: It goes against democracy and equal opportunity of
employment that former Commissioners were not eligible to remain in
Cofetel. Congress invaded the Executive's scope of action.

Ruling: The Court agreed with this complaint, ruling that former
commissioners could have been eligible to remain in Cofetel.
(Embassy Comment: The Court did not say that the former
Commissioners should be re-instated. End Comment.)

(7) Complaint: By excluding broadcasting services from the
Telecommunications Law and including them under a different law (the
2006 Radio and TV Law), legislators created an exemption regime
preventing technological convergence. The reform created a special
telecommunications regime for broadcasting services. Under this
provision, Telmex would have been allowed to provide "additional"
video services not established in its concession contract via its
network without being forced to comply with content regulations.
The existence of two laws would make it difficult for the Federal
Competition Commission (Cofeco) to determine "relevant markets,"
i.e. to determine monopolies or anti-trust practices. Monopolies
would allege that convergent services provided by them were covered
by two different laws. On the other hand, existing broadcasting
companies would have been allowed to provide telecommunication
services through the spectrum assigned to them for broadcasting
purposes only, without paying anything in exchange and without
bidding for that spectrum (which will be released after the
digitalization process). They would have been able to keep the
spectrum. Article 28 of the Radio and TV Law provided a
preferential treatment to existing broadcasting companies and
discriminated against, and represented a trade barrier against,
those companies interested in obtaining frequencies to provide
telecommunication services since they alone would have to
participate in a bidding process.

Ruling: The Court agreed that allowing broadcasting companies to
keep and use at no cost the spectrum freed up through
digitalization, thereby getting free concessions to provide
telecommunications services, would stimulate the creation of
monopolies and prevent fair competition particularly for
telecommunications companies and new competitors that had to

participate in bidding.

(8) The power granted to Cofetel to sanction dominant companies
violates the Constitution because Cofetel cannot determine relevant
markets (monopolies and anti-trust practices) in the
telecommunications sector. The only authority that can do that is
the Federal Competition Commission (Cofeco). The law also failed to
determine the sanctions to be applied to dominant companies.

Ruling: The Court did not agree. It said that the 2006 Federal
Telecommunications Law establishes in what cases Cofetel can impose
sanctions, and that Cofetel can use the concepts established in the
Federal Competition Law to determine relevant markets. The Court
said it would not be invading Cofeco's scope of action because the
Constitution also establishes a prohibition of monopolies.

(9) Complaint: The power granted to Cofetel to collect fees for the
right to use spectrum violates the Constitution since this power
belongs to the Ministry of Finances.

Ruling: The Court did not agree. The Court said the Constitution
does not specify that Ministry of Finance is the only agency in
charge of collecting fees for use of such rights. Other government
agencies can collect such fees.

(10) The power granted to Cofetel to intervene in international
telecommunication violates the Constitution because a responsibility
of the Executive Power.

Ruling: The Court did not agree. The Court said that Cofetel, as
an independent body but hierarchically subordinated to SCT, can
intervene in international matters, and along with the Foreign
Ministry to accede to agreements. The Court said this power will be
included in Cofetel's internal regulation.

(11) The power granted to Cofetel with regard to broadcasting
issues violates the Constitution because it is an issue under the
responsibility of the SCT.

Ruling: The Court did not agree. The Court said that Cofetel, as
an independent body but hierarchically subordinated to SCT, can
oversee broadcasting issues. The Court said that the power to
oversee broadcasting issues will be included in Cofetel's internal
regulations, and that international standards establish that
broadcasting and telecom issues should fall under the same
regulator.

(12) Complaint: The fact that broadcasting companies could obtain
permission to provide telecommunications services by merely
requesting it from the authority without paying anything in
exchange, or having to compete for the frequencies, violates the
Constitution. The government has the right to administer the
spectrum, recover and bid frequencies. (Article 28)

Ruling: The Court agreed. The Court ruled that frequencies have to
be granted through public biddings to guarantee free competition and
prevent the creation of monopolies. In addition, the government has
the right to receive a payment in exchange.

(13) Complaint: The 2006 Radio ant TV Law violates equity
principles since it discriminates between broadcasting concessions
(commercial companies) and permits (social companies). Those
requesting permits have to comply with more requirements.

Ruling: The Court partially agreed.

(14) Complaint: The reform violates the rights of community and
indigenous radio broadcasters.

Ruling: The Court did not agree.

(15) Complaint: The accusatory party questioned the use of public
auctions based only on economic considerations as the mechanism to
grant concessions for the use of spectrum. (Article 17-G)

Ruling: The Court agreed. The Court said this aspect of the law
was unconstitutional because it ignored the "social side" of
broadcasting services by allowing concessions to be granted only on

the basis of economic power and not the public/social role of the
broadcaster, the programming, and the effective use of the spectrum.
The Court said that granting concessions based only on economic
criteria violates the Constitution because it stimulates the
creation of monopolies. The Court determined that concessions will
be granted according to the congruence between the program and the
use of the frequency, as well as the result of the public bidding
process.

(16) Complaint: Having two laws, one for telecommunications and one
for broadcasting, becomes an obstacle for the Federal Competition
Commission (Cofeco) to determine monopolies and implement sanctions
in a technological convergence market. Some companies considered to
be dominant companies (monopolies) for some services
(telecommunications or broadcasting) could use their power to block
the entrance of competitors in other markets (telecommunications or
broadcasting). Monopolies can allege that there are two different
markets: telecommunications and broadcasting.

Ruling: The Court did not agree. The Court said that although
there are two laws, both coincide in technological convergence. The
Court said that technological convergence will allow a company to
provide triple play services. The Court said the April 2006 Radio
and TV law links the regulation of broadcasting and
telecommunications in accordance with by international standards.
The Court said the existence of two laws will not prevent Cofeco
from determining monopolies or relevant markets since there are
clear rules for such determinations.

(17) Complaint: The fact that broadcasting companies can renew
their concessions automatically and keep their spectrum over
interested third-parties without the need to bid for it or to comply
with new quality requirements violates the Constitution, especially
because telecommunication companies have to comply with certain
obligations and even new ones imposed by the authority. (Article 28
and 28-A)

Ruling: The Court agreed. Although the Court said that concessions
can be renewed, broadcasting companies have to participate in a
public bidding process to renew their concessions.

(18) Complaint: To bid for a concession, companies must have the
favorable opinion that the company would not become a monopoly from
the Federal Competition Commission (Cofeco). The Radio and TV Law
only required that the company provide evidence that it had
requested Cofeco's opinion. (Article 17-E V)

Ruling: The Court agreed that this violates the Constitution. The
Court said companies must provide a favorable opinion from Cofeco
when participating in public bidding for a concession.

(19) Complaint: The reform authorized neutral foreign investment in
the broadcasting sector. Only Mexicans can invest in the
broadcasting sector (with the exception of cable TV). Since the
April 2006 Radio and TV Law considered the provision of "additional
telecommunication services," foreigners could use this to invest
more than 49% in broadcasting.

Ruling: The Court side-stepped this issue by saying the analysis of
this Article is not needed since Article 28, in which broadcasting
companies were allowed to provide telecommunication services without
bidding for them, was considered to be illegal.

(20) Complaint: Concessions are for 20 years.

Ruling: The Court agreed that concessions for 20 years violate the
government's right over the spectrum and its responsibility to
administer the adequate and effective use of the spectrum. The
Court said that not even the investment made by the industry
justifies the 20-year term. The Court suggested changing the text
to "grant concessions up to 20 years" in order to give to the
government the possibility of not renewing a concession and
recovering the spectrum. (Article 16)

(21) Complaint about electoral propaganda/advertising: Only
political parties and not their candidates can purchase publicity
time from broadcasting companies.

Ruling: The Court did not agree.


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