USTR DISCUSSES MOBILE TERMINATION RATES WITH

UNCLAS SECTION 01 OF 02 LIMA 002027

SIPDIS

SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/CIP
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR KENNETH SCHAGRIN, JONATHAN MCHALE
FCC INTERNATIONAL BUREAU FOR ETALAGA

E.O. 12958: N/A
TAGS: ECPS ECON ETRD EINV PE
SUBJECT: USTR DISCUSSES MOBILE TERMINATION RATES WITH
MINISTRY, OSIPTEL

Ref: Lima 2205


1. (SBU) Summary. During the ninth round of U.S.-Andean
Free Trade negotiations, USTR lead telecommunications
negotiator Ken Shagrin met with both the Ministry of
Communications (MTC) and Osiptel (Peru's telecommunications
regulator) to discuss the lack of competition in the
telecommunications sector, as a result of Peru's high mobile
termination rates. Both MTC and Osiptel officials
highlighted that the new provisions established for
Telefonica's takeover of BellSouth, as well as the expected
entrance of America Movil by the end of the year, should
improve sectoral competition. Osiptel, which is currently
establishing a new cost model for mobile termination rates,
indicated that the new rate should be in place by the end of
June. End Summary.

Meeting with MTC
--------------


2. (SBU) USTR lead telecommunications negotiator Ken
Shagrin met with Vice Minister of Communications Juan
Pacheco on April 18 to discuss the competitiveness of Peru's
telecommunications sector. Shagrin noted that Peru's
abnormally high mobile termination rates, which average $.21
per call, make the market uncompetitive. While
acknowledging that Osiptel is planning to regulate the rate,
Shagrin expressed concern that Osiptel would not meet its
deadline. Vice Minister Pacheco agreed that Osiptel must
remedy the situation quickly, which would allow for more
competition and therefore penetration in the mobile market,
and promised to put pressure on Osiptel.


3. (SBU) Pacheco acknowledged that Telefonica currently has
an unfair advantage in the market but pointed out that the
"conditional" fusion of Telefonica and BellSouth seeks to
limit Telefonica's advantage (see reftel) and improve
competition in the market. Pacheco continued, stating that
Telefonica can lose all of its licenses if it incurs too
many infractions. He also cautioned that Nextel must expand
its services and coverage to become more competitive. He
expressed disappointment that Nextel did not bid on the
fourth band, claiming that it could have improved Nextel's
position vis-a-vis the other carriers (reftel).

Then on to Osiptel
--------------


4. (SBU) Shagrin, accompanied by Commercial Counselor, then
met with Edwin San Roman (president) and Jaime Cardenas
(acting General Manager) of Osiptel. San Roman began the
meeting by noting that Osiptel has been working to regulate
the mobile termination rate since July 2004. Osiptel has
received cost data from all companies and, working with
several consultants (including a former FCC employee),is
analyzing the data to establish the new cost methodology.
San Roman expects to publish the new rate and cost
methodology for public comment by May. Assuming all goes
according to plan, the new rate should be in place by the
end of June.


5. (SBU) Shagrin noted that while mobile termination rates
are decreasing around the world, Peru's rates have yet to
change. San Roman reiterated that Osiptel does not set the
rates, but rather companies negotiate the rate among
themselves. Despite conventional thought, competition
between the companies has not driven the rates. Since 2004,
Osiptel, worried about the consumers, has requested all
mobile companies to lower their prices by 30 percent.
Shagrin, offering the Philippines as a model, argued that
mobile carriers have to know that the regulators are willing
to act decisively; otherwise they are not inclined to lower
rates.


6. (SBU) San Roman emphasized that Peru is moving toward a
cost-based rate. Shagrin then inquired as to what the costs
actually are. He noted that during a recent meeting between
USTR and Telefonica, Telefonica complained that doing
business in Peru is expensive due to terrain, the high
percentage of people living under the poverty line (and are
thus unable to pay for service),and the MTC's build out
requirements. San Roman stated that Telefonica was not
requesting a higher rate, although he declined to pinpoint
which company was. He noted that the different technologies
in Peru keep costs high. Citing a Chilean study, San Roman
claimed that if Peru had only one type of mobile technology
that could be mass-produced, costs would be lower. San
Roman also confirmed that although the MTC does not oblige
companies to build out services, MTC recently required that
Telefonica expand services to poorer localities. Any new
operators that enter the market, however, must meet new MTC
regulations requiring mobile companies to expand services to
15 provinces.

7. (SBU) But will the new mobile termination rate model
show whether any of the mobile competitors builds in
additional costs? San Roman indicated that the model would
establish a reasonable mobile termination rate. Shagrin
inquired as to whether Osiptel would periodically review
each company's obligations. San Roman reiterated that
Osiptel is independent, but it plans on becoming more
involved in the regulation of the market. Osiptel will also
review each company's technical studies in an effort to link
them to the future development of the telecommunications
sector.

Comment
--------------


8. (SBU) Both the Ministry of Communications as well as
Osiptel understand their WTO obligations to improve
competitiveness in the mobile sector. MTC took the bull by
the horns when it established competition prerequisites for
Telefonica's take over of BellSouth. San Roman appears
confident that the new rate, which should be in place by the
end of June, will level the playing field among mobile
providers.

STRUBLE