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Cablegate: Public Comments On Peru's Mobile Termination

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

REF: A) LIMA 4108 and previous

Cable contains business sensitive information. Not for
internet distribution. Please protect accordingly

1. (SBU) Summary. On September 26, Osiptel, Peru's
telecommunications regulator, hosted a public audience to
hear comments on its model for the reduction of mobile
termination rates. Osiptel officials began the conference
by explaining how the model was derived and justified the
need for a three-year implementation period. Peru's four
mobile carriers then expressed their views. TIM and
AmericaMovil highlighted the need for increased investment
to lower overall costs. Nextel pointed out flaws in
Osiptel's model and called for a recalculation of the
termination rate, as well as its immediate implementation.
Telefonica argued that any mobile termination only benefits
Nextel's clients and hurts Peruvians by stifling investment
and development. During the public comment period, more
than 25 people ranted against Osiptel, arguing that the
regulator needed to take swifter actions to lower high
mobile costs. End Summary.

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Osiptel Explains Its Model

2. (U) After more than a year of anticipation, Osiptel,
Peru's telecommunications regulator, held a public audience
to entertain comments on its new mobile termination rate
model, published July 20 (Refs A and B). Edwin San Roman,
President of Osiptel, opened the conference of more than 300
people by noting that "Osiptel appreciates all public
comments on its model, but that it will not bow to pressure
from anyone, including foreign governments and specific
companies." Jamie Cardenas, General Manager of Osiptel,
then stepped attempting to smooth ruffled feathers in the
audience by explaining that the goal of the regulation is to
promote competition and investment in the telecommunications

3. (U) Jose Gallardo, Osiptel Manager of Regulatory Policy,
then spent the next 30 minutes reviewing the model and
explaining how Osiptel derived at its cost formula.
Gallardo preempted his discussion by highlighting previous
efforts by Osiptel to regulate the mobile sector. He noted
that, with the proposed symmetrical regulation reflecting
business costs and call traffic flows, mobile termination
rates would drop by 41 percent. The cost model includes
three basic factors: incremental long-term costs, common
costs (10 percent for overhead, 33.5 percent for concession
costs) and externalities (28 percent). After a very
technical explanation of how Osiptel determined the value of
these three factors for each company, Gallardo highlighted
that Osiptel believes that mobile termination rates should
fall to between $0.11-$0.13, after a three year
implementation period.

4. (SBU) Gallardo justifyed the three-year implementation
period by noting that an immediate reduction of mobile
termination rates can cause distortion in the sector.
Mobile termination rates, he indicated, help promote
efficiency in price levels and help facilitate growth by
providing capital for investment. While acknowledging that
unnaturally high mobile termination rates can be perceived
as a subsidy, Gallardo pointed out that Peru's mobile
penetration levels increased dramatically over the last 10
years, due in part to companies setting mobile termination
rates. Gallardo also noted that other countries, such as
Australia, the UK, Spain, and Chile, implemented a gradual
reduction of mobile termination rates over an average of
four years.

The Companies Respond

5. (U) With the conclusion of Gallardo's presentation, the
four mobile companies responded in turn to Osiptel's cost
model. (Note: In reality, only three mobile providers --
Telefonica, AmericaMoviles and Nextel -- are operating in
Peru. TIM Mobiles recently sold its operations to
AmericaMoviles. Osiptel decided to grant AmericaMoviles two
opportunities to react to its model. End Note.) Two
representatives from AmericaMoviles initiated the comment
period. Geraldo Soria, General Manager of AmericaMoviles,
expressed that Osiptel should regulate mobile termination
rates, but only to foment competitiveness. His presentation
focused on the need to increase investment in Peru's
telecommunications sector, which would drive down mobile
costs. He also noted that, in purchasing TIM,
AmericaMoviles assumes all of TIM's commitments and should
therefore be granted the same treatment as TIM (with the
highest mobile termination rate of $0.13 by 2009).

6. (SBU) Nextel's presentation highlighted the three flaws
in Osiptel's cost model. First, the Nextel representative
noted that Osiptel's regulation is not based on actual
costs. He gave an example of Osiptel revaluing purchases
included in the Nextel model to the detriment of Nextel's
position (Ref A). Second, he highlighted that Osiptel's
formula incorporates externalities, such as subsidies, which
violates Peruvian telecommunications laws. Third, he noted
that Osiptel's arguments in favor of a gradual reduction in
mobile termination rates are flawed because if mobile
termination rates only cover costs, there should be no
distortion in the market. Additionally, by allowing
unnaturally high mobile termination rates to continue over a
three-year period, Osiptel, in effect, condones anti-
competitive subsidies. Nextel requested that Osiptel review
its model and incorporate three changes: eliminate
externalities in determining the final rate, utilize real
costs for all companies, and immediately reduce mobile
termination rates.

7. (U) Telefonica, deviating from the other mobile
carriers, expressed concern that regulation of mobile
termination rates would only benefit Nextel's clients and
international callers, not the majority of Peruvians.
Telefonica's twenty-minute presentation proceeded to
criticize Nextel and its business plan, noting that if
Nextel were more competitive and not a next exporter of
calls, its clients would not have to pay such high prices.
Telefonica pointed out that 83 percent of all mobile calls
made in Peru are made on-net, which are not affected by
Osiptel's regulation. The company therefore extrapolated
that only 13 percent of Peruvians (5 percent Nextel clients
and 8 percent other) would benefit from any reduction.

8. (U) Telefonica continued, requesting that Osiptel
review its model, not to further lower the mobile
termination rate, but to increase it to at least $0.20.
Telefonica claimed that Osiptel did not incorporate
Telefonica's cost model (created by Charles River
Associates) and undervalued the company's worth and overhead
costs. Telefonica asserted that high mobile termination
rates help finance future investment and expansion of
services; by Osiptel reducing the rate, it is dooming Peru
to decreased future investment in the mobile sector.

The Public Speaks

9. (U) Observers of the public hearing also had a chance to
comment on Osiptel's rate. Econoff presented the U.S.
Government position, arguing that Osiptel should implement
regulations in a shorter timeframe. Econoff also
highlighted Peru's international commercial commitments to
administer services in a transparent and non-discriminatory
manner. The majority of observers commented that mobile
termination rates are too high and that Osiptel's regulation
did not go far enough to reduce costs for the common
Peruvian. Others highlighted the need for Osiptel to
implement the model immediately. Congressman Yohny Lescano
opined that Telefonica's monopoly creates higher prices and
that Osiptel should regulate Telefonica to encourage
improved competition in the market.
Comment: Headed in the Right Direction
10. (SBU) The comments conveyed at the public hearing show
that many Peruvians, other than those who work for
Telefonica, are unhappy with high mobile prices and the lack
of regulation by Osiptel. After the four-hour hearing
concluded, Osiptel officials appeared dismayed and noted
that they will have to incorporate some of these comments
into the model before any final regulation. We expect that
Osiptel will reduce its timeframe for implementation to two
years, perhaps less. It is unclear whether Osiptel will
recalculate its formula to incorporate real costs of
companies. Vice Minister of Communications Juan Pacheco
will encourage Osiptel to reduce the overall termination


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