PERU SECTION 1377 TELECOM REVIEW

UNCLAS LIMA 000149

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EB/CIP/BA, WHA/EPSC, WHA/AND
USTR FOR CATHERINE HINCKLEY

E.O. 12958: N/A
TAGS: ECON ECPS ETRD USTR PE
SUBJECT: PERU SECTION 1377 TELECOM REVIEW

REF: STATE 1035

SUMMARY
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1. (U) Per reftel, Econoff provided Peruvian telecom
regulator OSIPTEL with NII Holdings' (Nextel) public comments
and informed OSIPTEL of USTR's deadline for voluntary
replies. As a follow-up, Econoff met with OSIPTEL's Manager
for Regulatory Policies and Strategic Planning Jose Gallardo
and seven other OSIPTEL representatives on January 16 to
inquire whether the GOP had plans to reevaluate the current
three-year maximum mobile termination rate (MTR) reduction
scale, highlighting the concerns laid out by Nextel.
Gallardo responded that OSIPTEL does not plan to review MTRs
until 2009, after the current gradual reductions are
complete. He explained that other mobile providers opposed
MTR reductions, that Nextel had recommended a three-year
approach, and that the mobile telecom sector in Peru was
growing well. End Summary.

OSIPTEL'S PERSPECTIVE
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3. (SBU) Gallardo explained that in its November 2005 decree,
OSIPTEL decided upon a gradual maximum MTR reduction scale as
a balanced way to address industry's diverging business
models. According to Gallardo, TIM (now America Movil)
wanted increased MTRs, Telefonica (the dominant provider)
wanted to maintain existing rates, and Nextel wanted rates
cut. While the advantages of lowering rates was clear,
OSIPTEL also recognized that higher rates encouraged
infrastructure investments in under-served geographic areas,
a key GOP priority. Therefore, OSIPTEL announced that the
2005 average MTR of USD 0.2053 would be lowered to 0.1782 in
January 2006, 0.1511 in January 2007, 0.1240 in January 2008,
and 0.0969 in January 2009. If dissatisfied with the decree,
industry had the option to request "administrative
reconsideration" as well as to pursue judicial action within
three months. According to Gallardo, Nextel did not pursue
either option. On the other hand, Telefonica did pursue the
judicial course in an effort to stop the reductions, but,
after considering opinions submitted by Nextel and others,
the court upheld the reductions.


4. (SBU) Gallardo also provided Econoff a copy of a letter
from Nextel to OSIPTEL dated March 2, 2005, through which
Nextel submitted a report on MTRs done by Analysis Consulting
to support Nextel's efforts to get OSIPTEL to reduce MTRs.
In the section entitled "Best-Practice Considerations in
Reducing MTRs," the report said, "it would be inadvisable to
implement adjustments to (MTR) costs in their entirety
immediately or over the very short term... even in markets
where the discrepancy between cost and current rates is less
significant than in Peru, regulators proposing cost
orientation have generally adopted medium-term price controls
and limited initial reductions in rates... in the UK, for
example, a three-year glide path was used." In its
conclusion, the report recommended that OSIPTEL use a
three-year glide path for reducing MTRs.


5. (U) Finally, Gallardo noted that OSIPTEL's policies seemed
to be positively affecting the mobile telecom market. He
said there were 8.9 million mobile lines in 2006, compared
with 2.93 million in 2003, 4.09 million in 2004, and 5.58
million in 2005. He also noted that new lines had stagnated
at under 300 million per quarter from the last quarter in
2003 until the third quarter of 2005, but have skyrocketed
since then (when OSIPTEL issued the decree),reaching 1.326
billion new lines in the fourth quarter of 2006. Gallardo
was also pleased that the number of geographic districts in
Peru with mobile coverage has more than doubled from 434 in
December 2005 to 983 in December 2006.

POST COMMENT
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6. (SBU) The November 2005 decree establishing a three-year
gradual reduction in MTRs was an important step towards
improving competition in the mobile telecom market and
reducing costs for users. Before the reform, dominant
provider Telefonica charged the highest MTRs; with the
reform, competitors Nextel and America Movil can now charge
higher rates than Telefonica. OSIPTEL overcame stiff
challenges from Telefonica in enacting these decreases, and
selected the three-year approach in part because of
information provided by Nextel. There were even media
accusations of undue USG influence on OSIPTEL, causing them
to favor Nextel's views over Telefonica's.


7. (SBU) That said, there are currently only three mobile
telecom providers in Peru, and the current average maximum
MTR in Peru (USD 0.1511 as of January 1, 2007) is still above
the regional average and above cost. Post feels that in the
current environment, it is unlikely that OSIPTEL can be
convinced to accelerate MTR reductions before January 2009.
If the pending U.S.-Peru Trade Promotion Agreement (PTPA),
referred to in NII Holdings' filing, is approved by the U.S.
Congress, it may be possible to seek additional MTR
reductions as the agreement calls for "reasonable rates."
Furthermore, the GOP is in the process of selecting a new
head of OSIPTEL, which will also likely lead to staffing
changes throughout the organization. Nextel might be able to
convince the new OSIPTEL team to consider further MTR
reductions.
POWERS