Mexico’s Telecommunications Reform and the Role of the Supreme Court

Mexico initiated a series of structural reforms in 2013, including major changes to policies governing telecommunications. Part of the motivation for this reform was the high concentration of the market share in the hands of América Móvil—the holding company of Telmex and Telcel, the major providers of fixed line and cellular telephony in Mexico—which did not allow for effective competition in the telecommunications market.

To reform the telecommunication sector, Congress changed the Mexican Constitution with three major objectives in mind: (1) to foster competition by declaring companies that control more than 50 percent of the telecommunications and broadcasting markets as “preponderant actors” and imposing uneven tariffs on them; (2) to establish access to information technology and telecommunications as a human right, in view of the fact that accessing information is a requirement for the full exercise of other human rights; and (3) to create the Federal Telecommunications Institute (abbreviated as IFT in Spanish) as a regulatory agency to oversee telecommunications and broadcasting and foster competition, and giving it the greatest degree of independence granted by the Mexican state to any public entity.

After the approval of the structural reform—which was intended to eliminate monopolistic practices and introduce greater competition in the Mexican telecom and broadcasting markets—foreign investment may reach 100% in the telecommunications sector and up to 49% in the broadcasting sector, subject to the principle of reciprocity by the country of origin of the investing company.

By March 2014, the IFT was fully functional and, as an exercise of its mandate, it determined that América Móvil and its affiliates were a preponderant actor in the telecommunications market and imposed uneven tariffs on the company. These uneven tariffs consist of the application of stricter obligations on the preponderant market actor, well beyond those required for other players. The IFT also mandated that América Móvil charge its competitors a smaller fee for the use of its physical infrastructure—a fee known as an interconnection termination tariff.

Three months later, however, the Mexican Congress passed a new telecommunications law establishing—among other things—that América Móvil could not charge its competitors for said interconnection. This came to be known as a “zero tariff.” Telmex and Telcel’s competitors, however, were allowed by the same law to charge América Móvil affiliates a fee for the use of their physical infrastructure. The Mexican Congress argued that this “uneven tariff” was required to correct market distortions, given that Telmex and Telcel had profited handsomely from monopolistic practices in the telecom market prior to the reform. The Mexican Congress also argued that they could change the law in the future, and that these affiliates could recoup some of their revenue from their other business practices (via some type of cross-subsidy). Shortly thereafter, AT&T entered the Mexican telecommunications market through the acquisition of Iusacell/Unefón in November 2014 and Nextel in January 2015.

In September 2014, Telcel filed a suit asking the federal judiciary for an injunction against the new law, specifically against the imposition of the zero tariff. It also sued to retroactively recover fees for the use of its physical infrastructure by its competitors.

On August 16, 2017, the Mexican Supreme Court finally ruled on the lawsuit in a decision that can only be described as mixed. It granted Telcel the injunction, nullifying the zero tariff and allowing it to charge for the use of its physical infrastructure pursuant to the tariff that IFT would determine, but it denied the retroactive recovery of tariffs from 2014 to 2017. Moreover, it ruled that only the IFT could set such tariffs, not Congress, since that legislative body had created the IFT precisely for the purpose of issuing such regulations.

What are the implications of this ruling by Mexico’s Supreme Court for the telecommunications sector and potentially for other nontelecommunications markets?

The first question is whether this ruling endangers the attractiveness of the Mexican markets and might curb foreign investment in the country, by making it appear that the telecommunications market was not subject to regulations intended to limit monopolistic behavior. The answer is no, because the Supreme Court’s ruling clearly states that pursuant to the Constitution, it is up to IFT to determine who is a preponderant player in the market and to impose uneven tariffs to correct market distortions, not up to Congress. In voiding the law, the Supreme Court simply remanded such regulation to the IFT. Thus, it does not create a regulatory void; rather, the ruling states that the zero tariff law passed by Congress is tantamount to usurping the mandate of the IFT. Congress must follow the Constitution and should not use a back door to overrule the provisions in the Constitution, which grants the IFT that specific authority.

The second question is whether the Supreme Court ruling changes the regulations imposed by Congress. The answer is mixed: it did overturn the zero tariff law passed by Congress, but it granted the IFT the right to impose a similar penalty if necessary.

The third question is whether the overturning of the zero tariff will seriously affect AT&T. This is a pertinent issue because AT&T entered the Mexican telecom market after the zero tariff was already in effect. Thus, it is worth asking whether the ability to use Telcel infrastructure without paying a fee was crucial in AT&T’s decision to enter the telecom market in Mexico. It was probably a variable considered in AT&T’s business model; however, AT&T is a large corporation that stands to gain a reasonable share of the Mexican market, and it should be able to adjust its business model to account for new conditions. The zero tariff was likely not a major factor in AT&T’s decision to invest in Mexico; moreover, it is likely that AT&T´s business model for the acquisition of Iusacell/Unefon/Nextel took into account the large amount of spectrum rights held by the acquired companies.

In any event, the interconnection tariffs that companies charge each other for the use of their infrastructure must be based on market calculations—that is, costs and profit margins—not on a congressional perception of tariffs as a remedy that could correct market distortions, a view that had not previously been implemented in any other country. In the United States, for example, a similar zero tariff could be considered a “taking.” In any event, the Supreme Court ruling merely stated that it was up to the IFT to determine tariffs and their levels, not Congress.

Fourth, does this ruling affect NAFTA renegotiations? The U.S. government wants to make the telecommunications sector a central part of the NAFTA renegotiations currently taking place. U.S. negotiators have demanded market access for U.S. companies, transparency, an independent regulator, interconnection access, and freedom to choose any technology to provide telecom services. These elements are already provided for in Mexican law, and there should be no difficulty in ensuring their presence in a new version of NAFTA.

In conclusion, the Supreme Court’s decision sets a precedent that favors technical deliberations over political decisions in setting regulations. Important decisions concerning complex market sectors such as telecommunications, energy, or finance cannot be made solely by politicians with vested interests—not even by a body that represents the general will, such as the Mexican Congress. Rather, such deliberations require extensive analyses of the costs and benefits of providing these services. Thus, the IFT is currently in the best position to make such decisions for the telecommunications sector, particularly as it builds upon its expertise in the years to come.

Clara Luz Álvarez, Ph.D., is a nonresident scholar at the Baker Institute Mexico Center, a member of the Mexican National Researchers System, and a professor at the Universidad Panamericana. Previously, she was commissioner for Mexico’s Federal Telecommunications Commission and head of the Legal Affairs Office.

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