TELECOMS REGULATOR PUBLISHES IMPROVED MOBILE

UNCLAS SECTION 01 OF 02 LIMA 005073

SIPDIS

SENSITIVE

DEPT FOR WHA/AND, WHA/CEN, WHA/EPSC, EB/CIP
COMMERCE FOR 4331/MAC/WH/MCAMERON AND KFERGUSON
USTR FOR KSCHAGRIN/JMCHALE
FCC INTERNATIONAL BUREAU FOR ETALAGA

E.O. 12958: N/A
TAGS: ECPS ETRD EINV ECON PE
SUBJECT: TELECOMS REGULATOR PUBLISHES IMPROVED MOBILE
TERMINATION RATE

REF: A) LIMA 4226 B) LIMA 4108 C) LIMA 2509 and previous


1. (SBU) Summary. The Peruvian telecommunications
regulator, OSIPTEL, published its new mobile termination
rate on November 24. The new rate is based on cost factors
including the value of a company's network investment and
the spectrum value. Under the new plan, OSIPTEL will lower
the mobile termination rate by 25 percent over the next
three years, beginning in January 2006. By 2009, the new
mobile termination rate will be set at between $0.1056-
$0.0922, 54 percent lower than current mobile termination
rates. The new rate will be finalized on December 13; until
then, companies can comment to OSIPTEL on the new rate. End
Summary.

New Mobile Termination Rate
--------------


2. (U) On November 24, OSIPTEL published its new mobile
termination rate, incorporating suggestions and public
comments (Ref A). The new mobile termination rates are
asymmetrical, with different rates for each operator.
According to Edwin San Roman, General Manager of OSIPTEL,
the new rate is based on costs -- mobile traffic, and number
of antenna stations -- and, unlike the model published in
July, does not include externalities or subsidies.


3. (U) Under the model, the rate for the remainder of 2005
for all companies will be $0.2053, which was established in
June as a temporary rate (Ref C). Beginning on January 1,
2006, OSIPTEL will implement the new rate, between $0.1804-
$0.1770, which will decrease by 25 percent annually over a
three-year period. By January 1, 2009, the mobile
termination rates will average $.095 -- a 54 percent
reduction. (Note: All costs are in dollars and do not
include Peru's 19 percent value added tax. End Note.) The
new mobile termination rate applies to mobile-to-mobile
calls.

-------------- --------------
Company Original Temp Rate 2006 2007 2008 2009
Rate Jun 2005
-------------- --------------
Nextel $.250 $.2053 $.1772 $.1491 $.1210 $.0929
TdP $.207 $.2053 $.1770 $.1487 $.1204 $.0922
America $.250 $.2053 $.1804 $.1555 $.1305 $.1056
Movil/TIM
-------------- --------------
Source: OSIPTEL


6. (U) Under Peruvian regulations, the new mobile
termination rate will not become final until December 13.
OSIPTEL can entertain comments from companies on the rate
and make changes.

Positive Development for U.S. Competitor
--------------


7. (SBU) We spoke to Ernesto Montagne, Regulatory Counsel
at Nextel Peru, to hear Nextel's views on the new model.
According to Montagne, Nextel Peru believes that the new
rate is a positive development from the previous model.
First, the rate is cost oriented, unlike the July model that
included externalities and subsidies. Second, the new rate
encourages competition in the market by allowing the smaller
companies to charge a higher mobile termination rate. In
the previous model, Telefonica (TdP) was able to charge a
higher mobile termination rate, enabling it to recover its
investment costs. Nextel previously alleged that OSIPTEL
established a model that benefited the dominant carrier,
which undermined the idea of regulation (ref B). OSIPTEL's
new rate allows Nextel and America Movil, which are smaller
but expanding companies, to charge a higher fee for mobile
termination than Telefonica, fostering competition with the
dominant provider and enabling the smaller companies to earn
higher profits. Third, by 2009, Peru will have some of the
most competitive mobile termination rates in the region.


8. (SBU) Montagne underscored that Nextel is not 100
percent happy with the new rate. While OSIPTEL based the
new rate on cost analysis, it only reflects 2004 costs; the
2009 rate will not reflect current costs but rather costs
from five years earlier. Because the final rate will not
incorporate current costs, Nextel argues that OSIPTEL is
still noncompliant with its own regulations. Additionally,
Nextel is still unsure why OSIPTEL needs three years to
reduce the mobile termination rate instead of implementing a
cost-based rate immediately.

Comment: Rival Telefonica Livid
--------------

9. (SBU) The new mobile termination rate is a clear
departure from OSIPTEL's previous model -- an indication
that OSIPTEL not only heard the public comments against its
model but incorporated several public suggestions. The new
rate, when finally implemented, will encourage competition
in the market. Telefonica, Peru's dominant provider with
more than 65 percent of the market, has publicly stated its
opposition to the rate and will no doubt attempt to reverse
OSIPTEL's decision. One popular television program over the
weekend ran a story about how U.S. Embassy presence at the
September OSIPTEL public hearing and a recent Trade
Development Agency (TDA) grant placed undue pressure on
OSIPTEL to favor Nextel. We remain confident that San Roman
will not bow to Telefonica's antics and will meet with him
next week to discuss the new rate.

STRUBLE