Breaking Mexico's monopoly: U.S. giants back affiliate carriers

While monopolies slowly break down inside the U.S., carriers and regulators face a different fight outside the country. Troubles brewing in Mexico last week underscored why the globalization of telecommunications still is far off.

Early last week, Mexican telephone operator Alestra - a venture formed by AT&T, Mexican banking concern Bancomer and conglomerate ALFA - said negotiations between Telmex and other carriers conducted by the Mexican Federal Telecommunications Commission, Cofetel, had broken off.

Under dispute are the interconnection fees that Telmex charges competitive carriers. Long-distance operator Avantel, which is 45% owned by MCI WorldCom, also was taking part in the suspended talks.

In a statement, Alestra, the second largest carrier in Mexico, said its seeks "healthy competition through banning predatory practices and crossed subsidies, the adoption of real cost-based interconnection fees that are consistent with international references and the exclusion of other anti-competitive practices."

"Competitive carriers in Mexico have essentially been mugged by Telmex, the dominant telecommunications carrier, which has used its monopoly position to maintain its stranglehold on Mexican consumers," said John Stupka, president of ventures and alliances for MCI WorldCom.

MCI WorldCom accuses Telmex of engaging in a "classic price squeeze" by not offering a spread between retail and wholesale prices. Competing carriers are charged interconnection fees that are higher than the retail price Telmex offers consumers, Stupka said. Interconnection fees are the rates incumbent carriers charge others to access their local phone lines. Telmex owns about 11 million fixed-line connections to homes and business in Mexico.

MCI WorldCom also claimed Telmex used its control of facilities to hinder competitors' ability to provision lines and circuits. But the most damning accusation U.S. carriers have leveled against Mexico is that Cofetel is ineffectual and uninterested in opening the Mexican market to local and foreign competitors.

"The Mexican government has been repeatedly urged by U.S. government agencies, international private industry groups and independent researchers to meet its international commitments," Stupka said. "Despite this chorus, the regulator has been more concerned with the financial health of Telmex."

When talks broke down on March 27, Cofetel issued a statement that it started regulatory proceedings to prevent monopolistic behavior by Telmex. Cofetel would impose standards in relation to prices, quality of service and fair competition, the statement said. But U.S. carriers claim the same promises already have been made and Cofetel has failed because of numerous court injunctions won by Telmex.

MCI WorldCom executives recently met with the U.S. Trade Representative, which is set to issue its annual report on competitive practices in telecommunications worldwide. AT&T and MCI WorldCom have lobbied the USTR about the Telmex problem, and the USTR reportedly is deciding whether to take the conflict to the World Trade Organization for arbitration.

"We're convinced [the report] is going to say there are serious problems down there," Stupka said.

The FCC also has become involved. In January, the FCC fined Telmex's U.S. resale operations $100,000 for violating long-distance agreements by refusing connections in Mexico. The company has not paid the fine, and the matter still is pending before the FCC.

Mexico is not the only international market where interconnection fees are straining international relations. The USTR also has been vocal about interconnection rates charged by NTT, which controls more than 90% of the local lines into Japanese homes.

The whole matter begs the question of how far the influence of U.S. regulators should extend into international markets. At least one analyst said regulators have overextended their authority.

For example, the FCC "has virtually mandated reduction of settlement rates, when over time, the free market will lower them, said Ron Cowles, principal analyst at Dataquest. "The rates should come down, but there are other things you can do besides arm-twisting. Nobody has the chutzpa to combat it."