NO EVIDENCE OF "WHIPSAWING" BY PANAMANIAN TELCOMS

UNCLAS SECTION 01 OF 02 PANAMA 002139

SIPDIS

DEPT FOR EB/CIP - AYALA
ALSO FOR WHA/CEN - SCHIFFER

E.O. 12958: N/A
TAGS: ECON ECPS ETRD PGOV PREL XM PM ECONOMIC AFFAIRS
SUBJECT: NO EVIDENCE OF "WHIPSAWING" BY PANAMANIAN TELCOMS

REF: 177365

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED


1. (SBU) SUMMARY: Econoff and Econ Specialist delivered
reftel points to Jose Galan, Director President of Panama's
Public Utilities Regulatory Agency (Ente Regulador) on
October 14th. Galan confirmed that circuit blockages by
Panamanian telecommunications companies to place price
pressure on international carriers ("whipsawing") had not
been an issue here thus far. Galan stated that the legal
framework governing the telecommunications industry does
support a free and fair market. However, the current
regulatory and enforcement situation (for all public
utilities in Panama) has not yet achieved the level of
autonomy and independence required to declare a level playing
field. De facto monopoly Cable & Wireless (C&W) continues to
dominate both the mobile and fixed line markets and regularly
engages in tactics designed to block or undermine competitive
threats and regulatory enforcement. 49 percent ownership of
C&W by the GOP provides a disincentive to support the Ente
Regulador when regulation or penalties might reduce C&W
profitability and by extension, GOP revenue. END SUMMARY

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TELECOM INDUSTRY STATE OF PLAY
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2. (U) The Ente Regulador (ER) estimates 43 percent of
Panamanians will have mobile telephones by the end of 2005.
Of the 856,000 mobile telephones in Panama, the ER calculates
that 86 percent are prepaid and 14 percent are billed. At
this time, C&W and Spanish telcom Telefonica Moviles
(Movistar) have an exclusive monopoly on the mobile phone
market until 2008. Movistar estimates its mobile telephone
market penetration at 45 percent with a target of 50 percent
by the end of 2005. C&W claims 70 percent of the mobile
telephone market, with 800,000 mobile telephone clients.
(Comment: As these combined claims exceed 100 percent,
Econoff suspects both companies have overestimated their
market penetration for media affect. A 60-40 ratio appears
more likely at this time. End Comment.)


3. (SBU) For C&W, the main game is not the mobile telephone
market which accounts for only 25-30 percent of their total
income, but the fixed land line. All fixed wire accounts
are held by C&W which claims 327,500 residential and 83,500
commercial accounts. Although the legal monopoly previously
held by C&W ended several years ago, the company maintains
its de facto monopolistic position through its ownership of
the infrastructure. While more than 20 alternate providers
are available for international calls, access to these
providers is via phone cards or billing code. C&W provides
the dial tone and the billing services. Secondly,
substantial government ownership gives the GOP a financial
interest in the market performance of C&W and a disincentive
to support regulatory activity which erodes C&W's
profitability and, therefore, the GOP's annual dividend.

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C&W TACTICS - SUBTERFUGE AND LAWSUITS
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4. (SBU) Galan believes C&W engages in anti-competitive
practices making it difficult for new entrants to the market
to function effectively. He said their tactics were subtle
and specific to the competitive threat such as, failing to
show up for meetings, requiring network connection equipment
or configurations which may be difficult to obtain or vague
in their specifications. As their tactics were different for
each situation, it was impossible to establish a regulation
to impede this activity. Galan stated that C&W's standard
response to regulation and/or punitive action on the part of
his agency was to sue the ER in court. At this time, the ER
faces 22 suits brought by C&W against his agency. While the
regulators do sometimes win a favorable ruling, it may be
after several years of legal activity. This often makes the
issue obsolete or too late for a fledgling competitor to wait.


5. (SBU) For example, the Ente Regulador was able to
establish that C&W for 2 years had changed the definition of
a minute to start at 40 seconds and had been billing its
customers accordingly. However, the maximum fine the ER can
assess against any public utility is capped at $1 million
USD. The ER estimates that C&W profited from this tactic by
$20 to $60m. Thus the maximum fine offers little
disincentive. The case is still pending court action. The
ER wants C&W to rebate the overcharges to its affected
customers over time. Ironically, this has the
anticompetitive effect of locking existing customers into C&W
as only by remaining subscribers would they be able to
receive any refund from previous overcharges. Galan would
welcome the presence of a large international
telecommunications company, including U.S. firms to counter
C&W's weight.

6. (U) Galan was unable to meet with Econoff prior to the
expiration of the comment period for the FCC Notice of
Inquiry. However, Econoff advised Mr. Galan that should he
have any comments they would still be forwarded to the
appropriate FCC contact on his behalf. Given the absence of
"whipsawing" activity here in Panama, Embassy does not
anticipate that Panama will comment on this FCC document.


7. (U) Comment: Neither C&W, Movistar or the ER have
commented on the impending impact of Voice over IP and appear
completely unprepared for this new competitive challenge.
End Comment.
EATON