Reforms in Brazilian Telecommunications Regulations and their Impact on Sector Competition

Until the late 1980s, public telecommunications services were a state monopoly under the control of the Telebrás System. The system comprised the Brazilian public entities Telebrás (holding) and its controlled companies, including Embratel (for long-distance and international services), plus 27 local companies for each of the 27 states in the Federation. In 1988, the sector was included in the privatisation programme, giving rise to an amendment to the Federal Constitution, which ended the legal monopoly in this sector.
In 1997, Law No. 9,742 (General Telecommunications Law, GTL) was enacted. It is the legal milestone for the sector model transition, whereby the state shifted from service provider to telecommunications sector regulator, playing a supervisory role and promoting public policies to attract private investment and create conditions for the symmetric development of that sector, in addition to promoting competition, service diversity and consumer welfare.
GTL also established the National Telecommunications Agency (ANATEL), the regulatory and supervisory body for the sector. As well as its typical role as a regulatory body, ANATEL was also assigned express competences in the area of protection of competition to ensure free competition, consumer protection and suprepression of abuse of economic power, except for those competences specific to the Administrative Council of Economic Defence (CADE) in this area. As such, ANATEL has been operating effectively, both in cases of investigations of anti-competitive behaviour and analyses of concentrations among companies. In practice, the role played by ANATEL in the sector has been strictly technical and directly associated with regulatory issues, without performing detailed market analysis from a competition standpoint.

Recent developments

In 2007, Brazil continued to discuss technological convergence, its implications for the definition of relevant markets, and the challenges for CADE in the analysis of future operations related to this issue. These discussions were motivated by mergers and acquisitions recently submitted to CADE and to ANATEL, and the need to review competition and regulatory impacts more carefully.
Another important issue that is being discussed is the announcement of the purchase of an indirect controlling interest in Brasil Telecom by Telemar Norte Leste SA, the operator of Oi, which puts the concession plan currently in force in Brazilian law on the agenda.

Competition law and technological convergence - CADE's Public Audiences

In case No. 53500.019422/2004 (Teléfonos de México SA de CV and Globopar Comunicações e Participações SA), the full CADE board recommended holding public hearings to obtain more information on the impacts of 'technological convergence' on the competitors and consumers of companies offering internet access, pay-TV and telephony services integrated into a single package, and the effect on market competition.
The market indicates that a variety of different content (voice, data and video) will be distributed through a single service, received through a single device. Or rather, when contracting a service package, the consumer will have access to different types of content. Given this new reality, CADE decided it needed to understand these changes better.
Thus, from April to September 2007 there were 12 public hearings that engendered a broad discussion of the sector.
In addition to the officers of the principal companies in the Brazilian market, public authorities, regulatory agencies and specialists also participated in these debates. The principal topics discussed were summarised in a report prepared by Commissioner Luiz Carlos Delorme Prado and released in March 2008. This report provides a history of the four principal markets studied (fixed telephony, mobile telephony, subscription TV and broadband internet) in Brazil, presenting the principal players and the technologies they use for each segment, in addition to an examination of regulations from the competition perspective.
The report indicates that the Brazilian telecommunications model is in a process of great transformation, 'redefining old objectives and developing new goals, horizons, sectors and new public policies for the sector'. Thus, in this new scenario, the question is how to ensure a competitive environment when companies that previously offered services with distinct characteristics and business models now compete among each other.
The report also highlights the responsibility of the state in promoting innovation, incentivising investments and developing a healthy, competitive environment. There are no doubts that the process of convergence cannot be contained due to the dynamics of the innovation process in this area. Society will certainly be the greatest beneficiary of this process.
In this document, CADE does not provide a solution for the interaction between enforcement of competition law and technological convergence markets. The public hearings have identified the need to build a stable regulatory framework with means and instruments to liaise with the various service segments, but with sufficient flexibility to allow for change whenever necessary due to the rapidity of technological evolution.
According to the report, this new regulation would have to address complex competition and regulatory issues, such as:

The Oi/Brasil Telecom transaction

On 25 April 2008 the acquisition of indirect controlling interest in Brasil Telecom by Telemar Norte Leste SA, operator of Oi, was announced, motivating a public discussion in the telecommunications sector.
Both Brasil Telecom and Oi are fixed-telephony service operators for the general public, including local, national and international long-distance services. Brasil Telecom is the concessionaire for switched fixed-telephony service in area II,1 while Oi is the concessionaire for this same service in area I.2 This transaction is being seen as a possible turning point for a new configuration of telecommunications sector regulations, reflecting the various discussions that the cited CADE report already mentioned.
Purchase of controlling interest in Brasil Telecom by Oi can only take place if ANATEL's General Concession Plan is changed, which has been debated on a national level. This is because the current plan restricts acquisition of control of one concessionaire providing switched fixed-telephony services in one concession area by another provider of the same type of service in another concession area in the regions delimited by the plan.
On the other hand, this restriction is not absolute, since ANATEL can remove this obstacle according to article 19, item XXX and 202, article 1 of the GTL, if it decides that the restriction is no longer necessary for fulfilment of the General Telecommunications Plan.

Revision of the General Concession Plan: ANATEL proposals

Given this scenario, the debate on whether or not telecommunications sector regulations should be changed has accelerated, with two proposals being presented by the ANATEL Board of Commissioners with direct impact on the Brazilian competition environment. From the competition viewpoint, they affect two important issues.
The first is the proposal for the General Revision Plan of Brazilian telecommunications regulations (GRP), the objective of which is a general revision of Brazilian telecommunications regulations. It establishes short, medium, and long-term goals not just to improve the quality of services provided to the consumer, but also to expand services through network integration, improved competition, restructuring of ANATEL and specific regulations for pay-TV services.
One of the short-term goals outlined in the GRP is the preparation of a General Competition Goals Plan (GCGP), with the objective of establishing measures that ensure appropriate levels of competition and functional separation between networks and services, forcing companies with significant market power to sell content services (voice, video and data) separately from facilities services (infrastructure and network).
The second proposal is a revision of the General Concession Plan for telecommunications services provided to the public (General Concession Plan), which directly affects the Oi/Brasil Telecom transaction. This revision includes, for example, the possibility of transfers of concession or control that result in a group providing services in up to two distinct concession areas, so that the performance of the concession agreement is not placed at risk.
The proposal also provides for regulation of the concept of "significant market power", defining not only the relevant geographic and product markets, but also the criteria that identify when a group holds greater market power.
It also includes norms related to increasing the size and universalisation of telephony and broadband networks, norms related to access to these networks by other operators under fair, non-discriminatory conditions, and preparation of a full or shared Network Unbundling Regulation, also with the objective of increasing competition in the telecommunications arena.
Lastly, the introduction of exclusivity in the provision of various types of switched fixed-telephony services by concessionaires is also being discussed. The idea of exclusivity, which is intended to increase competition between concessionaires, is still regarded with some reserve by some sector companies. It should be noted that the term for those who wanted to suggest modifications on both proposals ended 29 July 2008. This means that ANATEL is about to decide the future of the new configuration of Brazilian regulation in the telecommunications sector.

A challenge for ANATEL and the Brazilian government - achieving balance between the need to update regulations and maintain the competitive environment The recent Brazilian telephony company transactions have created an environment favourable to changes in the sector regulations, especially the announcement of the acquisition of controlling interest in Brasil Telecom by Telemar/Oi.
As the CADE Digital Convergence Report pointed out, change in these regulations is necessary, not only because of this transaction, but especially to introduce network unbundling measures and promote expansion of broadband and pay-TV services for the benefit of consumers.
In other words, the regulations must contain mechanisms that can adequately regulate the new reality of the sector, and must simultaneously create incentives for competition between the important players. In this document, the challenge for CADE and for ANATEL can be summarised as:
In the case of Brazil, the trend is to have a few, strong players at the national level. The model is oligopolistic competition, with strong rivalry, which leads to product diversity and competitive price pressure. In this scenario, in addition to the action of regulatory agency, agencies protecting competition must also play an important role.
The proposals for regulatory changes mirror a more intense positioning of the regulatory agency with respect to competition questions, treating them as one of the essential pillars for development of the sector in Brazil, together with the universalisation of the multiplicity of services and consumer satisfaction.
In other words, the current panorama marks the consolidation of the process of transition from a sector limited to a state monopoly to a regulated, free competition regime in which ANATEL's role - in cooperation with CADE - is indispensable.

Notes

1 Area II includes the states of Santa Catarina, Paraná, Mato Grosso do Sul, Mato Grosso, Tocantins, Goiás, Rondônia, Acre, Rio Grande do Sul and the Federal District, and the cities in sectors 20 (Paraná), 22 (Mato Grosso do Sul) and 25 (Goiás) defined in the Concession Plan.

2 Area I includes the states of Rio de Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amapá, Amazonas and Roraima, excluding the cities in Sector 3 (Minas Gerais) defined in the Concession Plan.