Telecoms - Mexico
New telecommunications law – understanding the landscape
Author
Contributed by DLA Piper Mexico SC
Carlos R Valencia
October 01 2014
Introduction
Lessons learned
Regulators
Foreign investment restrictions
Concessions
Licences
Preponderant carrier
Participation
Wholesale wireless network (90MHz of the 700MHz frequency band)
Ifetel's discretionary authority
Introduction
During the past 18 months Mexico has substantially revamped its telecommunications and economic
competition framework, which remains a work in progress as the new telecommunications regulator
– the Federal Telecommunications Institute (Ifetel) – continues to implement the new legal
framework. On June 13 2013 the Constitution was amended to give certain fundamental features
constitutional status in order to lay the groundwork for the legislation to follow. Following this, two key
pieces of legislation were enacted: the Antitrust Law on May 23 2014 and the Federal
Telecommunications and Broadcasting Law on July 14 2014. The Antitrust Law and the Federal
Telecommunications and Broadcasting Law replace the current statutes, which have been in place
since 1992 and 1996, respectively. These three events constitute the pillars of the new
telecommunications regulatory framework.
Lessons learned
The constitutional amendments have:
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eliminated the multiplicity of regulators;
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provided Ifetel with constitutional status (Ifetel's structure, authority and powers were often
questioned as part of carriers' litigation strategy, even after 18 years of existence);
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conceptualised 'preponderance' in the telecommunications sector; and
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strengthened the concept of dominance (ie, substantial power) by market segment.
The Antitrust Law has included in the law key policies and resolutions that the Antitrust Commission
had applied by interpreting the old antitrust statute, particularly those related to its two main areas of
interest:
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rules related to the approval of concentrations; and
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the process, scope and breadth needed to determine substantial power over a relevant market.
Finally, the Federal Telecommunications and Broadcasting Law has shifted its philosophy from being
market oriented, with limited regulatory interference in telecommunications (where the regulatory
authority was trifurcated(1)), to a more robust regulatory environment where Ifetel is the single
regulator. Ifetel has powers to regulate the use and exploitation of telecommunications services,
networks and spectrums, and influence and impose market conditions in order to:
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foster a competitive market;
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impose preponderance regulatory restrictions by sector (and lift all such restrictions);
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determine the existence of relevant market dominance (and lift all such restrictions); and
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police and sanction conducts or omissions prohibited by the Federal Telecommunications and
Broadcasting Law and Antitrust Law.
This update addresses 10 key issues that foreign investors should consider as part of their strategy
to enter or expand their presence in the Mexican telecommunications sector.(2)
Regulators
Pursuant to the Federal Telecommunications and Broadcasting Law, Ifetel is a collegiate body, which
must now be transparent and have full participation of its members. Its internal structure has been
modified to incorporate an autonomous fact-finding and inspection arm, which will independently
assess violations of the Federal Telecommunications and Broadcasting Law. Further, Ifetel will hear
arguments from both sides and resolve conflicts.
Ifetel is the sole regulator of the telecommunications sector.(3) The Constitution gives it authority to:
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regulate networks;
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use the spectrum (including the imposition of national or regional limitations);
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access active(4) or passive(5) infrastructure and essential resources(6);
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regulate the crossover ownership and operation of telecommunications and broadcasting assets
which serve the same market;
regulate the provision of telecommunications services; and
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in certain circumstances, order the divestiture of assets, but only to the extent necessary to
eliminate the anti-competitive effects.
Ifetel may enact generally applicable rules as well as specific (individualised) rulings. Under the
Federal Telecommunications and Broadcasting Law, Ifetel must be fully transparent, all meetings
with industry participants must be recorded and resolutions must be uploaded promptly to Ifetel's
webpage.
In a conscious effort to streamline Ifetel's decision-making processes and provide certainty to
industry participants, Ifetel's interim or procedural decisions are not subject to appeal. Only its final
decisions can be challenged, and stayed subject to certain limitations, before specialised federal
courts.
On the other hand, the Ministry of Communications assumes the role it should have had since 1996 –
that of policymaker. The Federal Telecommunications and Broadcasting Law's clear distinction
between the functions and authority of Ifetel and the ministry eliminates controversies related to their
roles and is intended to streamline the regulatory decision-making process.
Similarly, as stated above, the Antitrust Commission is no longer an active player in these sectors. By
giving all regulatory authority and powers to Ifetel, the nightmare of the triple filing counter has been
eliminated.
Foreign investment restrictions
The Federal Telecommunications and Broadcasting Law has removed the foreign investment
restrictions in the telecommunications sector (including satellite communications), which were
formerly limited to 49% (except for mobile telephony, which was subject to a regulatory waiver). Now,
foreign investors need not be part of a joint venture with a Mexican investor.
Where a foreign investor desires to have a majority Mexican partner, neutral equity(7) (which dates
back to the early 1980s) is still available in order to shift the economic benefits of the investment
without disturbing the control and applicable majority investment percentage allotted to the Mexican
partner.
Similarly, the implementation of minority protection rights via supermajority voting rights and vetoes at
either the equity holders'(8) level or the board of directors' level is still an option where a foreign
investor takes a minority position in a Mexican telecommunications company.
Concessions
The provision of telecommunications services continues to be subject to the granting of a
concession. New participants in the sector will be required to apply for a single concession (see
below).
In the case of spectrum, frequency bands are subject to auction and a bid process. The only change
is that the main consideration for the award may not be the economic component of the bid. The
Federal Telecommunications and Broadcasting Law has shifted the focus of the determination of the
floor price of bid processes, which the Ministry of the Treasury used to determine. Ifetel now
determines the floor price, with the Ministry of the Treasury's prior non-binding opinion, in order to
move from a revenue collection focus to an industry development driven focus.
Ifetel will publish an auction plan annually. Industry participants may comment on the plan and
request additional frequency bands be added or that the plan be refocused to address specific
needs.
As in the past, the state maintains sovereign domain over the means of communications within the
telecommunications networks.
A new feature incorporated into the Federal Telecommunications and Broadcasting Law is that of
single concession. Carriers that hold more than one concession may:
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apply for the granting of a single concession, thereby consolidating all of the services being offered
(which historically are more likely than not the subject matter of more than one concession) into
one concession; and
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petition to have additional converging services included in the single concession.
The single concession will be effective for up to 30 years(9) and is renewable, subject to:
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a ruling by Ifetel to the effect that the applicant is complying with its obligations under its existing
concessions; and
the carrier's acceptance of Ifetel's terms and conditions.
The acquisition of spectrum via a bid is not the only means for a concession holder to provide
telecommunications services. The Federal Telecommunications and Broadcasting Law provides two
additional alternatives:
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the leasing of spectrum between concessionaires; and
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the acquisition of spectrum from a competing carrier.
Both options require Ifetel's prior approval and the acceptance of certain obligations by the lessee or
the purchaser of the spectrum, primarily:
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the joint and several liability of the lessee in connection with obligations provided for in the
concession of the leased frequency bands; and
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continuity of service obligations where the purchase of spectrum comes with pre-existing
obligations and additional obligations imposed by Ifetel.
Ifetel's decision will include analysis of the competitive effects of the lease or sale of spectrum.
Licences
Resellers and mobile virtue network operators(10) must obtain a licence (not a concession) from Ifetel
in order to operate. A licence will be granted for up to 10 years and entitles its holder to:
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access wholesale services offered by concessionaires;
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sell its own services and resell those contracted on a wholesale basis; and
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access its own numbering or that of the wholesaler.
The preponderant carrier (see below), or its affiliates that hold concessions, may not have an interest
in a licence holder.
In addition, satellite-landing rights are now subject to a licensing process,(11) whereas the prior
telecommunications law required a concession.
Financing ventures – structure and restrictions
The Telecommunications and Broadcasting Law fails to address the financing 'belts and
suspenders' usually available in other markets.(12)
The typical structure encompasses the pledge of the equity of the concessionaire and the
implementation of either a floating lien or a collateral trust structure with a Mexican trustee institution.
The frequently used telecommunications mortgage(13) derives from a few isolated provisions of the
General Means of Communications Law of 1940. While most of this law is no longer in effect, in the
telecommunications sector, the telecommunications mortgage is still an important component of the
collateral structure of any financing transaction of a concession holder, as it permits the creation of a
floating lien over the totality of the assets of a concessionaire.(14)
As in the past, where implementation of a collateral trust structure is appropriate,(15) the trustee must
be a Mexican banking institution qualified to act as a trustee in financial transactions.
While the Telecommunications and Broadcasting Law does not specifically address the prior
authorisation of a pledge of the equity of a concessionaire and of the implementation of a floating lien
or collateral trust, it is prudent practice to subject the corresponding transaction agreements to the
regulator, as they could ultimately result in a change of ownership of the concessionaire or of the
assets of the concession. The new owners are required to obtain Ifetel's prior approval to acquire
either the equity interests of a concession holder(16) or apply for a concession to operate the
foreclosed assets. Foreclosure on a telecommunications company's assets is neither automatic nor
ministerial, since its approval requires Ifetel's analysis of the applicant's credentials and its
satisfaction of the legal, technical and financial requirements necessary to hold a concession and the
competition-related affect the applicant will have on the corresponding sector and markets as the new
owner or concession operator.
The Telecommunications Registry operates under Ifetel's structure. Concessions and licences (eg,
liens and all types of encumbrance affecting them and capital structure or concession holders) must
be filed in the Telecommunications Registry. However, the registry comes short of the mark, as it is
expressly limited as a means to serve notice on third parties, not to create per se priority or preference
over other collateral.(17)
The amendments to the Reorganisation Law have severely limited the voting rights of related parties
in connection with the approval of a restructuring plan.
Preponderant carrier
Pursuant to the Telecommunications and Broadcasting Law, a 'preponderant economic agent' is
defined as any person or group which – by virtue of its involvement in the provision of
telecommunications services considered a sector – holds, directly or indirectly, a participation
(measured nationwide) in excess of 50%. Participation is measured by either the number of
customers, subscribers, audience or traffic or the used capacity of its network, based on the
information available to Ifetel.
To further its constitutional mandate, Ifetel has issued rulings determining the existence of a
preponderant economic agent in the telecommunications sector.(18)
Pursuant to the Telecommunications and Broadcasting Law, the preponderant economic agent
status and measures will cease when Ifetel issues a ruling determining that its participation
(considering the same elements used for its determination as such) in the sector is below 50%. At
such time, Ifetel will determine whether the asymmetrical regulation moves to a dominant carrier
status (see "Dominant carrier" below), addressing the specific markets that remain unsatisfactorily
open to competition.
In the telecommunications sector, preponderance requires (among other things):
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the publication of 'services reference offers', of a framework interconnection agreement, sharing of
infrastructure, unbundling of the local loop, access on a non-discriminatory basis, resale services
and roaming – all with Ifetel's prior approval;
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accounting separation;
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Ifetel's approval of unbundled tariffs to end customers, intermediate services to carriers and
licence holders and those charged to operate alone in order to avoid cross-subsidisation;
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disclosure of the network topology, including its specifications, functionalities and capacities; and
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in connection with government procurement processes, an obligation to provide intermediate
services to competing carriers or licence holders that are awarded government contracts but lack
the infrastructure to provide those services which can be supplied only by the preponderant
economic agent.
In addition, the preponderant economic agent may submit a divestiture plan to Ifetel at any time in
order to reduce its participation in the sector below 50% by transferring assets (or group companies)
to unrelated third parties, provided such divestiture effectively generates competition in the various
markets that constitute the sector.(19) Ifetel may approve the proposed plan (as amended during the
course of its process) once it confirms such assumptions and that the proposed plan does not affect
the social coverage obligations of the preponderant economic agent. Once the divestiture plan is
implemented (within a pre-defined term imposed by Ifetel) and on further confirmation by Ifetel of its
pro-competitive effects in the sector and that none of the participating persons in the transaction
emerge as a substitute preponderant economic agent (in which case the subsitute may become a
successor of the original agent until Ifetel issues a dominant carrier resolution to regulate the market
or markets affected by the divestiture – ie, those acquired by the third party), Ifetel will issue a ruling,
cancelling the original preponderant economic agent declaration.
It is unclear whether Ifetel, while processing the petition described above, will permit the competing
carries to participate in and opine on the proposed plan. The Telecommunications and Broadcasting
Law is silent on this subject, but given the implications the termination of such asymmetrical
treatment (affecting, among other things, settlements, unbundling, access to elements of the network
and tariffs) would have on the competing carriers – which are likely to continue to rely on the
preponderant economic agent – where the carrier will continue to participate in the sector (up to
49.9%), but will be free of preponderant economic agent status.
Pursuant to the Telecommunications and Broadcasting Law, the preponderant economic agent
status may be reinstated if the conditions revert and the sector share surpasses 50%.
Dominant carrier
The declaration and effects of dominant carrier status (ie, an economic agent with substantial power
over one or more markets of the telecommunications sector) is separate and independent from the
declaration and effects of the preponderant economic agent's declaration.
Ifetel can impose dominant carrier status on telecommunications concession or licence holders.
Ifetel's analysis and rulings must be issued pursuant to the Telecommunications and Broadcasting
Law and the Antitrust Law. Where agents not subject to the Telecommunications and Broadcasting
Law are, directly or indirectly, involved in the analysis of anti-competitive practices, the Antitrust
Commission will participate and rule on the non-Telecommunications and Broadcasting Law
subjects.
Dominant carrier regulations are market specific, not sector specific, and focus primarily on market
participation restrictions, unbundling, information, quality, commercial offerings, access in nondiscriminatory terms, billing and tariffs. While the restrictions and regulatory restraints may be as
ample as those available to regulate the preponderant economic agent, they are limited to the
corresponding markets.
Ifetel has recently commenced ex officio processes to identify and impose dominance in various
markets.
Ifetel must consider certain factors when determining dominance. In order to determine the relevant
market, Ifetel must consider:
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domestic or international service substitution possibilities;
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associated costs of the service, its components and the essential resources associated with the
provision of the services; and
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regulatory restrictions.
To determine whether an economic agent has substantial power in the relevant market, Ifetel must
consider:
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its participation in the market and its ability to determine prices and restrict access to the services
in question;
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commercial and regulatory barriers and other related indicia;
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the existence and number of competitors and their real or potential ability to adopt measures to
counter such power;
access to essential resources; and
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the recent behaviour of market participants.
For Telecommunications and Broadcasting Law purposes, 'essential resources' are defined as the
elements of the network or services that are provided by one concession holder or a limited number
of concession holders that cannot be replicated due to technical, regulatory or economic reasons and
which are crucial for the provision of the telecommunications services in question and have no direct
substitutes or like replacements.
Therefore, dominance may prove to be a relevant and efficient regulatory constraint if properly and
timely implemented by Ifetel.
Participation
Pursuant to the Telecommunications and Broadcasting Law, where concession holders provide
telecommunications and broadcasting services in the same markets or geographic area that are
deemed to impede or limit access to information in such markets or areas, Ifetel may require the
transmission of additional (up to three) television channels by paid television systems. If the
concession holder fails to comply with Ifetel's ruling, Ifetel may impose additional limitations to the:
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concentration limits related to holding of spectrum;
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granting of additional concessions for spectrum; or
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overlapping ownership of economic agents which, as concession holders control more than one
means of communication serving the same markets or geographic area.
While the Telecommunications and Broadcasting Law is silent on the subject, these measures are
not exclusive to Ifetel's ability to impose dominant carrier measures.
Wholesale wireless network (90MHz of the 700MHz frequency band)
Ifetel will grant a concession for the operation of a wholesale wireless network, which will be subject
to Ifetel's conditions related to coverage, quality and pricing. By statute, the wholesale wireless
network's infrastructure must be shared and its services and elements offered on an unbundled
basis to other concessions or permit holders. Recipients of these services may resell the elements
or services under the same terms and conditions.
Preponderant economic agents or dominant carriers may have access to the wholesale network with
Ifetel's prior authorisation, subject to specific terms and conditions that Ifetel finds appropriate.
Ifetel's discretionary authority
A recurring theme – which was prevalent in the old regulatory framework and which is still present in
the Telecommunications and Broadcasting Law – is the statutory discretional authority afforded to
Ifetel on multiple fronts. While law requires that government regulators use their discretionary
authority in an objective, fact-related manner and base their decisions on specific provisions of law,
Ifetel will certainly be scrutinised as it tackles the complex challenges related to the implementation of
the Telecommunications and Broadcasting Law through the enactment of regulations and specific
rulings.
For further information on this topic please contact Carlos R Valencia at DLA Piper Mexico SC by
telephone (+52 55 5002 8100), fax (+52 55 5002 8110) or email ([email protected]). The
DLA Piper Mexico SC website can be accessed at www.dlapiper.com.
Endnotes
The old Federal Telecommunications Commission, Antitrust Commission and the Ministry of
Communications.
(1)
(2) Due
to the breadth and scope of this update, it should not be construed as an in-depth analysis of
the Federal Telecommunications and Broadcasting Law and excludes the broadcasting sector.
Although not formally, it appears that Ifetel is taking the position that its regulatory authority includes
not only the telecommunications services per se, but also all other activities conducted by a regulated
telecommunications company.
(3)
(4)
Network elements which function is to store, process, transmit or receive data of any kind.
(5) Ancillary
network elements supporting the active infrastructure and its services, such as racks,
cabling, ducts and towers.
(6) As
further defined below.
(7) Capital
of a company with limited or no voting rights.
Includes shareholders of a corporation or partners in a limited partnership. Equity interest refers to
shares in a corporation or equity interest in a partnership.
(8)
(9)
For spectrum, 20 years.
It is unclear whether Ifetel will treat mobile virtual network enablers as licencees or require them
to obtain a concession.
(10)
(11) For
up to 10 years – renewable.
The Telecommunications and Broadcasting Law prohibits only the encumbrance or assignment
of telecommunications concessions or of rights to assets and services associated with such
concessions to foreign governments.
(12)
The telecom mortgage (a floating lien) should not be confused with the common mortgage
limited to real estate provided by civil law or with the industrial mortgage (also a floating lien), which is
available only to Mexican financial institutions.
(13)
(14) Depending
on the financing structure, additional collateral structures may be implemented, such
as a non-possessory pledge. Other collateral registrations may also come into play.
(15) To
secure further, for example, bank accounts or accounts receivable on a lockbox-like structure.
The Telecommunications and Broadcasting Law requires that any transfer (or acquisition via
subscription or otherwise) of 10% or more of the equity interests in a concession holder requires
Ifetel's prior authorisation. This authorisation extends to the parent company and ultimate
shareholder structure, but does not apply in connection with 'neutral equity' capital increases that do
not change the voting equity percentage participation of the investors, or intra-corporate group
restructurings.
(16)
This issue is compounded by the fact that the Public Registry of Commerce's position is that to
the extent that there is a special registry for acts or transactions, it will not consider the registration of
the same act or transaction.
(17)
Ifetel resolutions dated March 6 2014 and March 26 2014. The preponderant economic agents
that were the subject of these rulings were Grupo Televisa and America Movil (and their affiliates).
America Movil (and its affiliates) have filed constitutional protection lawsuits, which are pending
resolution.
(18)
(19) In
the case of America Movil, the Telecommunications and Broadcasting Law requires that the
divestiture plan be real (ie, concrete and specific transaction with an identifiable party) with respect to
specific assets.
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