Telmex, Rivals Reach Accord to Cut Phone Fees

Mexico’s former phone monopoly and its two U.S.-backed competitors reached a sweeping agreement Tuesday that ends numerous costly disputes and partly resolves a rancorous U.S.-Mexico trade conflict as well.

Telefonos de Mexico, or Telmex, as the former national phone company is known, agreed to cut interconnection fees for the two other major long-distance providers in Mexico--both backed by U.S. phone giants--by more than half, to 1.25 U.S. cents per minute. That could lead to significant savings for customers and help the nation’s economic growth.

Telmex and its two bitter foes, Alestra and Avantel, also agreed to drop a complex web of lawsuits and counter-suits that have snarled Mexico’s telecommunications market and discouraged investment. Alestra and Avantel in turn agreed to pay Telmex a total of about $137 million in fees the companies had withheld as they squabbled over alleged Telmex abuses.

Analysts called the accord a sign that President Vicente Fox, who took office Dec. 1, intends to live up to his pledge to press hard for regulation that fosters more open competition in key industries where dominant players have long called the tune. The deal was brokered by Fox’s communications minister, Pedro Cerisola.

“I don’t think I exaggerate when I say a new era of telecommunications is being initiated here today,” Cerisola said. Referring to the date of Fox’s election victory, he added, “This is a palpable demonstration of the changes that began on July 2.”

The accord also could deliver a final victory to the Clinton administration’s trade representative, Charlene Barshefsky. She has leaned hard on Mexico and Japan to open their telecommunications markets. Japan took substantial steps to do so in July, but the Mexican market remained locked in strife until Tuesday’s accord.

Alestra, 49% owned by AT&T;, and Avantel, 45% held by WorldCom, have lost tens of millions of dollars since they entered the Mexican long-distance market in 1996. They accused Telmex of thwarting competition and ignoring regulatory measures. Telmex answered that it played by the rules and that rival companies struggled because of poor management and flawed strategies.

Telmex, which was privatized in 1990 and retains nearly 80% of the long-distance market, provides virtually all the “last-mile” connections to phone lines in homes and offices throughout Mexico. That gives it powerful leverage over competitors.

In November, Barshefsky asked the World Trade Organization panel to take up a U.S. complaint against Mexico for failing to meet its WTO commitments to open its $12-billion telecommunications market.

Brendan Daly, a trade representative spokesman, called Tuesday’s agreement “encouraging.” He said the pact announced in Mexico City “addresses a lot of [the U.S. concerns] but not all of them, and it doesn’t address the international issues.”

Daly said the U.S. would continue to press its WTO case, which could lead to sanctions against Mexico, although he added, “We plan to talk soon with the Mexican government to hear about plans they have to resolve the outstanding issues.”

The steep reduction in the interconnection fee, which other long-distance companies pay Telmex for originating and terminating calls, addressed one major concern of the Mexican competitors.

The other key international issue will be addressed next week in negotiations between U.S. and Mexican phone companies in New York. That is the “settlement rate”--the per-minute rate that phone companies pay to foreign counterparts that complete calls to the dialed party.

The settlement rate for U.S.-Mexican traffic is currently 19 cents per minute. U.S. companies, including AT&T; and WorldCom, would like it cut to 5 cents. Telmex wants it to be at least 15 cents.

For the first time, Telmex Chief Executive Jaime Chico Pardo said, Mexican rivals Avantel and Alestra will join Telmex in negotiating the settlement rate.

Industry analyst Leslie Arathoon of Pyramid Research in Cambridge, Mass., noted that the settlement rate generated about $500 million for Telmex and other Mexican phone companies in 2000. The balance is so heavily in favor of calls to Mexico because of the number of Mexicans living in the United States who phone home frequently.

Arathoon said that ending the stream of lawsuits would be a major step toward creating a credible Mexican regulatory climate, a key U.S. goal. She noted that Mexico’s Federal Telecommunications Commission, known as Cofetel, had lost credibility because “every decision it made was taken to court, and then just sat there and sat there.”

Damian Fraser, an analyst for UBS Warburg, said the end of the constant battles between Telmex and its rivals “is important from a business point of view because Fox has argued in the past that lack of a competitive telecommunications market is an important obstacle to growth and efficiency in Mexico. To the extent that this paves the way to greater competition, that’s very good for the economy.”

Telmex’s U.S.-traded shares fell 75 cents to $44.38 Tuesday.