Luis Ortiz Partner Costa Rica | lortiz@blplegal.com

Gloriana Alvarado Senior Associate Costa Rica | g.alvarado@blplegal.com

The famous English economist John Hicks was once asked: What is monopoly? The Nobel Prize winner replied: The quiet life (Hicks, 1935).

On the other hand, competition, as the famous American judge Learned Hand said at the time, is constant stress; the lack of competition acts as a narcotic, while rivalry is the stimulant of economic progress [United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945)].

Precisely to avoid losing customers, the entrepreneur strives to do everything possible to reduce costs, lower prices, and improve the quality of service and customer treatment, all of which generate two benefits: productivity and efficient distribution. The first is the cake and the second is the eating of it. (Ordóñez, 2000).

In Costa Rica, one faced a waiting list not long ago to acquire a cellular line. Obtaining an Internet connection at home or office took months. However, with the opening of the telecommunications market, starting in 2011, all this changed. It is not a cliché or hyperbole, nor is it mere rhetoric or a fallacious hypothesis, but the hard facts show that our telecommunications market is finally open to competition.

Now, as Zegarra (2005) has rightly pointed out, the introduction of competition poses the challenge that the companies that are dominant in liberalized markets or those in which competition has been introduced, without the State having gotten rid of them, abuse their dominant position and turn what was previously a legal monopoly into a de facto monopoly. In effect, something similar to what Professor Zegarra suggests has happened in Costa Rica, where the former monopolist, Instituto Costarricense de Electricidad (ICE), a state company, has on some occasions abused its dominant position.

Therefore, it is instructive to review the legal formula that Costa Rica has implemented to go from a legal monopoly in force for more than 60 years to a state of competition in 10 years since the opening of the telecommunications market and expose both its virtues and vices (Ariño, Cuétara, & Noriega, 2005).

For such purposes, we will examine how the opening process took place, as well as analyze the cornerstones of the paradigm shift from monopoly to a competitive market, namely, convergence and technological neutrality, the role of the regulator, universal service, and access to and interconnection within the system. Finally, we will take stock of the decade of change since the paradigm shift occurred.

Historically, Costa Rica provided telecommunications services as a legal monopoly. Article 121, paragraph 14, of our Constitution, enumerates a list of assets that cannot permanently leave the State’s domain, among which is the radio spectrum and the possible methods of its exploitation. As a result, the Legislative Assembly, or the Executive Power, granted a concession to develop and use the Radioelectric Spectrum (“RS), which includes all the radio frequencies between 9 kHz and 3000 GHz that propagate through space without artificial help. For over 60 years, only the Costa Rican Institute of Electricity (ICE) and Costa Rican Radiographic (RACSA) held the right to use such spectrum in the country.

In 2006, just one year before the country decided to open the telecommunications market to competition, data from the National Institute of Statistics and Censuses (INEC) revealed that about a fifth of the households in the country (approximately 220,000) did not have a telephone and 35% did not have cell phones. As for Internet services, less than a third of households had a computer, and only 10% had an Internet connection at home.

Furthermore, according to a study by the Advisory Commission on High Technology (Hewitt, 2006), the digital divide between the country’s poorest and wealthiest families was more significant. Thus, while 86% of the richest quintile of households in the country had a landline telephone and 83% had at least one cell phone, in the poorest quintile, these percentages were 42% and 17%, respectively, with only 6% having a computer at home and 1% an Internet connection.

In general, according to data from the International Telecommunications Union (ITU) for 2005, the telephone density in Costa Rica barely reached the world average, while its cell phone density was significantly lower than average. In comparison to 35 other countries in the Americas, our country was among the weakest in telephone densities (position 13 among 36 countries), as well as the lowest in the growth rate of cellular telephony during the first half of the 2000s (18 among 36) (Source: Regulatory Authority for Public Services, 2007).

However, it was the Free Trade Agreement between the Dominican Republic, Central America, and the United States (FTA), approved by Costa Rica through a referendum held on October 7, 2007, which promoted and formalized the country’s commitment to a selective opening of the telecommunications market, specifically in mobile telephony, Internet, and broadband business services.

To implement the FTA, a regulatory package was approved that established the necessary legal framework to comply with the commitments made, namely: Law No. 8642, General Telecommunications Law (LGT), and Law No. 8860, Law for the Strengthening and Modernization of the Public Entities of the Telecommunications Sector (LFMEPST). Later, in 2011, this first opening phase was completed with the entry of 2 new operators to the Costa Rican market, winners of a public tender promoted by the Costa Rican government.

Thus, the LGT, whose essential principle is service provision in a regime of effective competition and non-discrimination, governs the telecommunications market in Costa Rica. As a result, adequate mechanisms enable operators and suppliers to compete under equal conditions and deny favorable treatment to any public or private operator, supplier, or user. Therefore, it is no longer the traditional model of regulation in which the regulator replaced the market and took charge of most of the decisions that preside over public services, but rather a model that promotes competition and, at the same time, protects the interests of users (Ubico, 2008).

This regulatory body is complemented by the LFMEPST, which formally created the Telecommunications Sector and separated the three roles corresponding to the State: governing body, regulator, and market operator. The former incumbent monopolist, ICE, was strengthened through this regulation, at the same time as it was granted more extraordinary powers and freedoms for its development as one more operator in a competitive market, for which it must comply, as well as the other operators, with the legal provisions in force.

In addition, an impartial third party was created, the Superintendence of Telecommunications (SUTEL), as an independent regulatory agency of the Government, to monitor competition in the market, regulate the activity of operators, oversee the correct operation and provision of the service, as well as impose sanctions in case of infractions that put market competition at risk.

Finally, the Vice-Ministry of Telecommunications of the Ministry of Science and Technology was created, which, as an additional overseer in conjunction with SUTEL, must promote effective competition in the market and encourage investment.

The LGT went beyond Costa Rica’s original commitment under NAFTA Annex 13. Besides establishing the opening of mobile telephony, Internet, and broadband business services, the agreement also included the concept of convergence to promote the inclusion of a supply of multiple networks and services, enabling the same enterprise to provide additional services such as interactivity and interoperability with any type of network.

One of the most essential features of convergence regulation is eliminating the classification of telecommunications services. For this reason, in this context, it makes no sense to restrict the enabling titles for the operation of the operators to certain types of telecommunications services since the same thing is that new services emerge every day and those that already existed vary; hence, the services they cannot be subject to a legal description or a type of technology.

Nor does it make sense to restrict the qualifying titles to the offer of a single service since current technologies allow multiple services to be offered through the same network and terminal equipment. That is why the LGT provides that public network operators and service providers can expand the range of services they provide by simply informing SUTEL in advance. With this, the LGT adopts the principle of technological neutrality, which is vital for regulating telecommunications in a context of convergence. In this sense, the LGT establishes the possibility that network operators and telecommunications service providers have to choose the technologies to be used, provided that they have shared and guaranteed standards, meet the requirements to attain the goals and objectives of the sectoral policy, and adequate quality and price conditions are guaranteed.

Following this philosophy, the LGT classifies qualifying titles into three categories:

Concessions: for the use and exploitation of frequencies of the Radioelectric Spectrum.

Authorizations: to operate and exploit public and private telecommunications networks that do not require the use of the radio spectrum, to provide telecommunications services available to the public through public telecommunications networks that are not under its operation, and to operate private networks of telecommunications that do not require RS use.

Permits: for the use of frequency bands for temporary, experimental, scientific operations, private radio communication services, citizen bands, amateur radio or telemetry networks of public institutions, and security, relief, and emergency.

SUTEL is the Costa Rican State agency primarily responsible for promoting effective competition in telecommunications. It must ensure that no network operator or telecommunications service provider manipulates the market to the detriment of others, impacting market conditions, restricting its efficient operation, and harming users. However, once the market is declared open to effective competition, its function becomes ex-post. Consequently, in the recently approved Law No. 9736, Law to Strengthen the Competition Authorities of Costa Rica (LFACCR), the measures that the LGT had previously established are ratified. In the specific case of the telecommunications sector, SUTEL is responsible for the defense and promotion of competition and free concurrence in telecommunications but with exclusive rights to exclude competition in the industry if so decided.

Accordingly, SUTEL is responsible for applying the necessary mechanisms to guarantee equal conditions for market operators through all the powers established by law. Consequently, it must use the constitutional principle of equality under Article 33 of the Costa Rican Constitution, which provides the regulatory path to impose upon, or suppress, faculties to market operators that have greater or lesser benefits, through unequal treatment by using preventive measures as deemed warranted (asymmetric regulation).

In this way, the legal system of telecommunications, in light of the constitutional principle of equality, was designed to allow and promote asymmetric regulation until there is a stable and mature market that does not require positive discrimination since it is not enough to allow the freedom of entry of operators, or access to networks and infrastructures if there are no legal mechanisms that allow entrants to function in a market that guarantees optimal conditions of equality and stability. As the doctrine has pointed out:

…the principle of free competition does not only require that any interested party may access the status of operator in a given market. In addition, it is necessary that once they have agreed to it, and as a condition for the freedom and effectiveness of competition between the participants, all of them are placed in an equal position. Well, the LGT also tries to satisfy this requirement, generally subjecting all operators to the same conditions, which is ensured by their normative nature and the consequent impossibility that, in principle – and to the contrary of what would occur in the previous regulation in the case of individual licenses, the Administration may impose particular conditions on certain operators. Notwithstanding this, the effectiveness of the principle of equality – an essential requirement for competition to qualify as free – requires unequal treatment of those who are unequal. For this reason, and assuming the reality that the starting point is not always the same, the LGT allows the imposition of specific conditions and obligations on certain operators, but always to ensure that free competition is not distorted. (…) The imposition of specific duties on operators with significant power in the market, which is conditional on the existence of an environment of effective competition in it, those must be eliminated when the presence of such an environment is confirmed. (Quadra, 2004).

Worth noting is that, in the Costa Rican market, only a few services have been declared, in effect, competition by SUTEL. However, the transition process has not been completed since the incumbent concentrates more than 50% of the radio spectrum available in the country, a situation requiring the existence of an asymmetric regulation to avoid monopolistic practices or abuse of a dominant position.

A. FUNCTIONS OF THE REGULATOR TO PROMOTE COMPETITION

As we have already noted, it is up to SUTEL to promote competition in the telecommunications market, both with affirmative actions and with the imposition of obligations on operators in order to prevent, avoid, or suppress a situation that leads as a result to distortion in the market and the impact on the essential service provided, as well as through the exercise of its sanctioning power (Chloe, Stewart, Sunstein, Vermule, & Herz, 2011).

Specifically, SUTEL is responsible for exercising the following functions: i) Promote the principles of competition in the national telecommunications market; ii) Analyze the degree of effective competition in the markets; iii) Determine when the operations or acts that are executed or celebrated outside the country, by operators or suppliers, limit effective competition in the national market; iv) Guarantee the access of operators and providers to the telecommunications market under reasonable and non-discriminatory conditions; v) Guarantee access to essential facilities under equitable and non-discriminatory conditions; vi) Avoid abuses and monopolistic practices by operators or providers in the market; vii) Identify ex officio or by complaint, as well as correct or sanction, when appropriate, monopolistic practices committed by operators or providers that have the purpose or effect of limiting, reducing, or eliminating competition in the telecommunications market.

The Superintendence is also concerned with the exercise of other functions that directly or indirectly have an impact on the regulation of competition, such as, for example, the normative function, sanctioning, the setting of maximum rates, the granting of title enablers when appropriate, and the preventive control of concentrations, among others.

SUTEL is also empowered to request the information it deems pertinent from the operators, who in turn are obliged to provide it whenever the Regulator considers that there is or may be a monopolistic practice that must be corrected or prevented or that they must protect the rights of users. After the request for information, SUTEL analyzes and rules on the elements obtained, assessing whether or not there are absolute or relative monopolistic practices in light of the LGT.

Similarly, it analyzes the degree of effective competition in telecommunications. To do this, it must review and classify the existing markets and establish, based on telecommunications regulations, the existence of a competitive market, since from this, it can select – prior motivation – the operators that have significant power and point out those markets that require more or less regulation when their stability is or is not subject to risk.

Once the reference markets have been analyzed, and the operator with significant market power has been selected – as long as the market has not been declared, in effect, competitive – then the obligations must be imposed on that operator to guarantee competition and avoid distortion of the same, within which, according to article 75 of the LGT Regulation, the operator can be ordered to refrain from engaging in monopolistic practices and give free access to the networks and to the services provided through them, under reasonable conditions in a timely manner.

Specifically, the SUTEL Council defined the relevant markets and the critical operators for the first time through its resolution No. RCS-307-2009, of December 9, 2009, defined 18 relevant needs and a single dominant operator in all of them: ICE and its companies (ICE Group) since, at that time, it was the only operator present in the market.

Despite the foregoing, and anticipating that the opening of the telecommunications market was about to occur, some measures and obligations were imposed, such as making certain public information requested by SUTEL; maintaining separate cost accounting; submitting the regulation scheme, and determining cost-oriented access and interconnection charges; communicating beforehand the prices and conditions applicable to the services offered; giving free access to their networks promptly and under reasonable and non-discriminatory conditions to other operators, providers, and users of telecommunications services, as well as to operators and providers of information services; facilitating timely access to its essential facilities, making relevant technical information regarding these facilities available to operators and suppliers, and complying with the obligations of the key and interconnection regime.

As expected, with the opening to competition, the market situation changed, and for this reason, precisely, through resolution RCS-245-SUTEL-2012, of August 16, 2012, the Guidelines for the definition of relevant markets and operators with significant market power were adopted, incorporated into the study carried out in each of the processes used to define and analyze the relevant markets and operators with significant market power. These guidelines constitute internationally recognized criteria and techniques and, therefore, should be considered as part of the Costa Rican legal system, in addition and complementary to existing legal and regulatory parameters.

These Guidelines set forth the characteristics or indicators that, in turn enable a degree of competition in the market, such as, for example, the criteria related to the substitutability of supply and demand, as well as the establishment and delineation of geographical areas.

The Guidelines help determine an operator’s market power, including its market share, and its trends, infrastructure control and essential facilities for the period under study, technological advantages that are not feasibly obtainable, operator investment projects, control of distribution channels, bargaining and purchasing power, and economy of scale, among others.

B. MANAGEMENT OF SCARCE RESOURCES: THE RADIOELECTRIC SPECTRUM

The Radioelectric Spectrum is the essential public good in the provision of telecommunications services, constitutionally and legally protected by article 121, paragraph 14 of the Political Constitution, and article 7 of the LGT, for which wireless services cannot leave the domain of the State, and for which its exploitation requires a concession.

In this sense, the Constitutional Chamber, in its resolution number 4329 of March 30, 2011, held that the RS is a public domain asset, indicating that the ethereal waves are part of the spectrum, which is a public domain asset belonging to the Nation; and, in addition, the State has the right and the duty to ensure the conservation of the public domain.

In accordance with article 2, paragraph g) of the LGT, the RS is a scarce asset. Therefore, only a certain number of frequencies can be used and exploited, and their correct use is defined through the National Plan of Frequency Allocation (PNAF), which designates how RS bands are used.

Since RS is the asset that allows the provision of telecommunications services, its exploitation and distribution are of fundamental importance, since the behavior of the market and the correct provision of the service will directly depend on how the asset is used. For this reason, SUTEL is responsible for the technical verification of radioelectric emissions, as well as the inspection, detection, identification and elimination of harmful interference. Likewise, SUTEL must sanction behavior that may affect the correct management or exploitation of the Radioelectric Spectrum and carry out the corresponding analysis requested by the Executive Power on how the spectrum is distributed, and if necessary, denounce its concentration, underutilization, and misuse.

Likewise, under no circumstances can its management be left to the discretion of Public Administration. On the contrary, the administrative bodies that intervene in its management must always value, except for legal exceptions, the opinion of the regulator, since it is the latter that has the technical knowledge and can also interpret the legal parameters with which Costa Rica must comply. Therefore, all the regulation that revolves around the RS must be aimed at a correct distribution as it is a scarce resource, essential to the provision of telecommunications services, and also to the realization of a competitive market.

However, in Costa Rica, the functions related to the correct distribution of the radio spectrum are carried out jointly by SUTEL and the Vice Ministry of Telecommunications. Pursuant to article 10 of the LGT, the Executive Branch must issue the PNAF, after considering the recommendations of the International Telecommunications Union (ITU) and the Inter-American Telecommunications Commission (CITEL), as well as allocate, reassign, or redeem frequencies, in accordance with the provisions of the PNAF, in an objective, timely, and non-discriminatory manner. SUTEL, for its part, is responsible for the technical verification of radioelectric emissions, as well as the inspection, detection, identification, and elimination of harmful interference.

In both cases, SUTEL and the Executive Branch must take into account the inspiring principles of the telecommunications market, since only in this way is its correct use and equitable distribution guaranteed. As established in article 8 of the LGT, the two entities must optimize RS use in accordance with the needs and the possibilities offered by technology, to guarantee a fair, equitable, independent, transparent, and non-discriminatory allocation, as well as ensure that the exploitation of frequencies is carried out efficiently and without disturbances caused by harmful interference.

By virtue of what has been indicated, it is clear then that inadequate regulation of the RS, or its incompetent use, can have an impact and directly affect the behavior of the operators and the market, since it can generate or allow the creation of entry barriers or abuses of dominant power, among others.

In relation to the exploitation of the Radioelectric Spectrum itself, it is necessary to point out that, according to the provisions of article 11 of the LGT, there must be a concession that enables its use, for which a bidding procedure instructed by SUTEL must be held that culminates in an adjudication in favor of an operator. In accordance with article 12 of the same legal body, SUTEL is also responsible for carrying out the necessary price studies to determine the need and feasibility of granting concessions in accordance with the National Plan for the Development of Telecommunications and Policies. Sectoral (PNDTPS).

SUTEL is also responsible for keeping the information in the Telecommunications Registry, as well as allowing the extension of services provided by the operators because if considered pertinent, before the prior communication of the interested operator, in accordance with the Article 27 of the LGT, SUTEL may require additional information or clarifications, within 15 business days following the presentation, as well as the adjustments it deems necessary so that the provision of new services conforms to the provisions of that Law, or to the concession or authorization granted, and to the PNDTPS. Failure to comply with the obligation to inform SUTEL is subject to an administrative sanction, in accordance with the provisions of articles 65 and 70 of the LGT.

Therefore, SUTEL’s participation plays a fundamental role in the management of the RS since in addition to measuring wavelengths and monitoring correct exploitation, the agency has a fundamental role in making the spectrum available to the public since it is responsible for carrying out the feasibility studies and thereby must keep in mind the use of the bands, analyze the situation of the frequencies, monitor the asset’s correct use, and indirectly promote through its management competition in the market and the effective provision of the telecommunications service in strict adherence to the principles of universality and solidarity.

Using these powers, SUTEL, prior to the public tender that allowed the entry of new mobile operators to Costa Rica, issued its report No. 251-SUTEL-2009 in which it concluded that, in order to guarantee effective competition in the telecommunications market and avoid underuse of the RS, the spectrum should be deconcentrated to allow access by new operators and providers. Under that premise, then, SUTEL recommended that the Executive Power recover some of the bands (because they were all in the hands of the incumbent) to carry out an adequate assignment, and thereby allow the entry of new operators.

Currently, however,  the concentration of radio spectrum warned by SUTEL since 2009 remains. In this sense, as Rivera (2000) has warned:

So, the first thing we must understand is that moving towards 5G is necessary to enable the digital revolution and the connectivity of things and productive sectors, not so much to improve the connection of people itself. For this reason, when we think about reducing the digital divide or covering rural areas that need to improve their coverage, it does not mean that it is necessary to go to 5G, but rather that we have to strengthen the current 4G networks and the capillarity of fixed networks.

Understanding this point, how do we move towards 5G in Costa Rica? There are three central elements to draw a roadmap (which does not exist or at least has not been openly disclosed): the radio spectrum, the passive or support infrastructure, and the transmission network, that is, the deployment of fiber optics throughout the country. Because of the need to extend each point, let’s focus on the first.

Contrary to previous generations of mobile technology, the full development of 5G involves combining different frequencies of the radio spectrum: low (below 1Ghz), medium (from 1Ghz to 6Ghz), and high (above 6Ghz). The different developments of 5G will require telecommunications networks to combine these various bands to optimize the different applications: those that may require connecting large areas such as agricultural or agri-food applications, those that allow ultra-speed and quasi-elimination of latency, and others that massify technology in cities and towns. Without the spectrum, there will be no 5G. In high bands, the MICITT is doing its task correctly, and proof of this is the recent proposal to reform the National Frequency Allocation Plan.

However, in Costa Rica, some of the so-called central bands for the development of 5G are concentrated in the ICE Group. This happens with the 3.5Ghz band, a band that has been identified internationally as a pivot in the 5G deployment strategy. This implies that from now on, devices for people, cell phones, tablets, and “wearable” devices as well as “things” themselves, are being produced to function in this band.

Let me be clear: if the Government -the MICITT- does not assume with determination to recover this band to make it available to the market, under the mechanisms established by the General Telecommunications Law, we can only have two possible scenarios of 5G in the country: a monopoly development of 5G or a forced shared development on the basis of a single wholesale operator. It is our opinion that none of these options ensures that the country adopts technology in a competitive and timely manner for the benefit of society, consumers, and the productive sectors.

A similar situation was experienced in 2013 with the development of 4G, specifically in relation to the 2600 band -the band par excellence for the deployment of the 4G network. Unfortunately, faced with the hoarding of the ideal RS band by the incumbent operator (ICE), the Contentious Administrative and Civil Court of the Treasury, in its Res. No. 2343-2013 of nine hours and fifty minutes of October 30, two thousand and thirteen, considered that, although the case presented by the incoming operator enjoyed the appearance of good law and had effectively demonstrated the existence of potential or eventual damage that could be caused by the competitive disadvantage in favor of the incumbent, the balance had to tip toward the public interest, since the public state entity (incumbent) was in the arena of the interests at stake (Ortiz, 2021).

As can be seen, the Court assimilated the public interest with the interest of the Public Administration, even though article 113 of our General Law of Public Administration states:

Article 113

  1. The public servant must carry out his functions in such a way that they primarily satisfy the public interest, which will be considered as the expression of the coincident individual interests of those administered.
  2. The public interest will prevail over the interest of the Public Administration when it may be in conflict.
  3. In assessing the public interest, first of all, the values of legal certainty and justice for the community and the individual will be taken into account, over which mere convenience cannot under any circumstances prevail.

As it were, when the country adopted the decision to liberalize the telecommunications market, it leaned towards a model that seeks to promote effective competition as a means to increase the availability of services, improve their quality and ensure affordable prices. Consequently, the purpose of the opening was to benefit users, who have the right to obtain quality telecommunications services, with more and better coverage, as an alternative where their power to choose the operator must prevail and be respected, in a form continuous, non-discriminatory, and efficient at a price that corresponds to the market price.

Therefore, it is clear that the prevailing public interest in the telecommunications market is the correct provision of the service in order to guarantee universal access, but not the protection of the state operator just because it manages public funds since private companies contribute to the provision of the service and are not the enemy to defeat (Ariño, 2004).

C. RATES AND PRICES

On the occasion of the market analysis that it is responsible for carrying out, SUTEL must determine if there is effective competition, in order to define the origin of the fixing of rates. Specifically, in the event of effective competition, it must leave prices to the market; but otherwise, when it determines that there are not sufficient conditions to ensure effective competition, it must intervene by setting the rate through the price cap system.

Initially, through its resolution RCS-615-2009, SUTEL defined as maximum rates those issued by the Regulatory Authority for Public Services (ARESEP), thereby supporting progress in the process of transition to effective competition, since this allowed the incursion of new operators into the market and avoided the creation of entry barriers of this type. The aforementioned resolution agreed to define as maximum rates those that were approved at the time by ARESEP, to clarify that these rates would apply to all operators and providers that had the respective license to provide the service, and establish temporarily the conditions and maximum rates approved and in force for the conventional fixed telephony system. These maximum rates would govern IP telephony services, regardless of the payment method (pre- or post-payment), and establish applicable rates for point-to-point channel services and multipoint points, as well as the amounts charged for internet services and sending messages.

However, with time and a slightly more mature market, through RCS-248-2017, SUTEL declared that the relevant market for retail mobile telecommunications services is in reality competition, taking into consideration for such a conclusion that in this specific market, no network operator or provider of telecommunications services, or group of any of these, can set prices or market conditions unilaterally, restricting efficient operation to the detriment of the users. Consequently, from the publication of the aforementioned resolution, the prices of the access service to the public telecommunications network, the service of calls originating in a mobile location and national destination, the short messaging service originating in a location mobile and with a national destination and the data transfer service through mobile networks ceased to be set by SUTEL and are now defined by the market.

D. PREVENTIVE CONTROL OF CONCENTRATIONS

The criterion for attributing jurisdiction in merger control is subjective, that is, it falls on certain actors and not on certain activities. In this regard, article 56 of the LGT submits to SUTEL those concentrations carried out between network operators and telecommunications service providers, as well as those in which anyone acquires control of two or more independent telecommunications operators or providers.

Concentration is understood, in the terms of article 56 of the LGT and numeral 23 of the Competition Regulation, as the merger, the acquisition of share control, or any other act by virtue of which the companies, associations, shares, capital stock, trusts or assets in general shared or carried out between network operators and telecommunications service providers that have been independent of each other.

As the concentration is a merger of assets, functions, companies, or associations that provide telecommunications services, it must be borne in mind that such concentration can undoubtedly represent a substantial impact on the market, both in the short and long term, and it is precisely for this reason that an authorization is required, subject, in most cases, to essential conditions and obligations that guarantee effective competition in the market.

SUTEL, according to numeral 28 of the Competition Regulation, may impose conditions in order to overcome those obstacles that arise when a merger may substantially affect competition. It must even assess whether the concentration results in a situation of substantial power or an increase in the possibility of exercising power in the relevant market, according to the terms established in the Law for the Promotion of Competition and Effective Consumer Protection (LPCDEC). To this end, the prerequisites established in article 15 of the LPCDEC must be considered to determine the substantial power of the market, since its existence can only be considered when the operator’s participation in that market allows it to fix prices unilaterally, or restrict the supply in the reference market, without potential competition being able to counteract that power; existence of barriers to entry to the market and the elements that are likely to affect both these barriers and competitive offers; the existence and power of competitors; restriction of access to economic agents and their competitors; recent anti-competitive behavior, and other conduct designed to stifle competition.

From the foregoing, it should be clear then that SUTEL has the power and legal conditions -as well as the corresponding discretion- to authorize concentrations and impose or eliminate obligations in charge of one or several operators in order to protect telecommunications from competition in the best possible way, always considering the particularities that each market represents.

Despite the broad powers that SUTEL has in relation to the imposition of obligations, it is important to remember that its function is subject to the principle of legality and, therefore, it cannot impose obligations that are the responsibility of other institutions involved in the telecommunications market. For example, it is prevented from requesting the waiver of a concession or the return of frequencies, since these are in the exclusive domain and competence of the Executive Branch.

In the same order of ideas, the procedure to follow to approve the concentration is as follows:

Network operators and service providers request the respective authorization from SUTEL and provide at that very moment, all the information required for it.

SUTEL has a period of 30 business days, from the request (complete, along with additional information), to resolve the solicitation. In a case of special complexity, this period may be extended only once, up to fifteen additional business days.

Prior to issuing its resolution, SUTEL must request technical criteria from the Competition Commission, since this competence corresponds exclusively to it by virtue of the recent reform already mentioned. Although the technical data is not binding, in order to deviate from it, a reasoned resolution must be submitted.

Once concentration is authorized in a reasoned manner, indicating the measures to be adopted and the term for their implementation, such measures must be applied for the maximum term granted to the operator or supplier in the concession or authorization.

The measures that can be imposed on operators to authorize the concentration of their operations, in light of numeral 57 of the LGT, as well as numeral 103 of the LFACCR, are the following: i) assignment, transfer or sale of one or more of its assets, rights, actions, distribution systems or services to an authorized third party, ii) the limitation or restriction of providing certain services or selling certain goods, or the delimitation of the geographical area in which these can be provided or to the type of customers to whom they can be offered, iii) obligation to supply certain products or provide certain services under non-discriminatory terms and conditions to specific customers or other operators, iv) introduction, elimination or modification of clauses contained in written or verbal contracts that govern  business relationships with customers or suppliers, v) separation or spin-off of economic agent, vi) limitation or restriction to acquire any concessions or authorizations, vii) any other structural or behavioral condition that is necessary to prevent, reduce, or counteract a merger’s anticompetitive effects.

In addition to the foregoing, SUTEL, in accordance with articles 58 of the LGT and 119 subparagraphs a), b) and f) of the LFACCR, may impose corrective measures on operators, without prejudice to the corresponding sanction, when they carry out concentrations not authorized by law, such as the suspension, correction or suppression of the practice in question, and the partial or total de-concentration of the unduly concentrated.

It may be instructive to comment below on two merger cases that have occurred in the Costa Rican telecommunications market since its opening.

1. Merger of Grupo ICE with CABLEVISION:

First of all, it is worth mentioning that the Costa Rican Institute of Electricity (ICE, hereinafter), a former monopolist, today an operator of the telecommunications market, requested from SUTEL authorization for the merger with Cable Vision of Costa Rica, intending thereby to acquire 100% of its shares.

SUTEL carried out the market analysis and, in what matters, requested technical criteria from the Commission to Promote Competition, and also carried out an analysis of the reference market (television), and approved the merger with the imposition of measures in order to guarantee effective competition in the sector and avoid the abuse of the position of dominance that Grupo ICE could eventually have, providing that the concentration was authorized subject to compliance with several requirements, such as abstention of sales tied between the different services they offer, including television. In the same way, it provided that they could not jointly offer services, ensuring that acceptance of the offer by consumers is totally free and voluntary.

Observe how the Costa Rican regulator tried, through the appointment resolution, to allow a concentration in the market, but without this implying, by itself, a substantial affectation for it. In the meantime, it is clear that the measures imposed were all intended to prevent abuses by the ICE Group, but also to guarantee the access of new competitors to the market, without allowing the creation of barriers to entry, or the adoption of monopolistic practices that benefit consumers, and current or future operators.

It should also be noted that, in a reasoned manner, SUTEL considered that the ICE Group should guarantee access to the infrastructure for other operators, protect the right of choice of its consumers as ultimate beneficiaries of the market, and, furthermore, correctly, forced the Group to submit its packaged promotions and services for prior approval. This last measure is striking because, although we are only in the presence of the cable television market, the truth is that the bundling of services that the ICE Group can now provide (television, internet, and fixed telephony) could undoubtedly affect associated markets and even create a de facto monopoly, the same as the Constitution, as noted at the beginning of this section, prohibits. The foregoing makes it possible to demonstrate the function that the regulator fulfills in the face of market concentrations, in order to guarantee ex-ante, the existence of an optimal market in equal conditions, applying the already analyzed asymmetric regulation in the face of those situations where there is an operator whose privileged position could distort or limit effective competition.

2. RACSA’s acquisition of the Asset and Client Base of Virtualis, S.A.

The agreement of the SUTEL Council, No. 002-005-2014, of January 24, 2014, Resolution No. RCS-017-2014 approved the concentration authorization request submitted by Radiografica Costarricense (RACSA), for the acquisition of the  asset base and clients of Virtualis, a virtual mobile operator. Said request was approved, following the technical criteria of the Commission for Competition.

Of interest here is that SUTEL, due to the absence of a pronouncement by RACSA, had to determine on its own, the relevant market in question. Without considering that RACSA, as part of the ICE Group, provided data transfer services and wholesale access services, while Virtualis only provided mobile telephony services, SUTEL ruled that the relevant market for the purposes of this case was the mobile phone service (Internet access, international calls, call termination).

Despite the fact that RACSA and the Costa Rican Institute of Electricity form part of the same Economic Interest Group, Grupo ICE, SUTEL maintained that among the operators that competed in the telecommunications market, which RACSA intended to enter, its services were similar to those of the Costa Rican Institute of Electricity. In addition, SUTEL carried out an analysis of market shares discovering that the ICE Group had at that time a 65% share in the mobile telephony market, much more than the 25% required by the Interconnection Regulation to consider an operator to have significant market weight, which leads us to conclude that it is an operator with substantial power in the market, in the terms of article 54 of the LGT.

Notwithstanding the foregoing, and given the evident situation of possible market damage, SUTEL used as a reference to assess the effects of this concentration the parameters used by the US Department of Justice and the FCC (Commission, 2010), through which different ranges are designed and a different value is attributed to each acquisition to determine the how a merger affects a market (Mota, 2004).

The question then remains as to whether it was appropriate to implement the use of techniques from a market with dissimilar conditions to those existing in Costa Rica, or if, on the contrary, this is a measure that allows the creation of a competitive market in the Costa Rican case just 3 years after its material opening. There is not yet a concrete answer, but it may be doubtful whether a regulator has the power to vary the application criteria, from one case to another at its discretion, and also, an uncertainty whether the use of US methodology rather than European standards was appropriately applied to the merger of Grupo ICE with Cablevisión as was done in this case. European standards and legislation are basically the same as ours. Many European countries had a gradual roll-out as did we. Europe also went from a monopoly to an opening of the telecommunications market and, unlike us, later privatized old monopolists. Therefore, why did our regulator choose to use a different methodology? Justification is missing in the aforementioned resolution because, in addition to being non-existent, it does not give reasons or indications that allow us to conclude the importance and relevance of US practice in our case.

However, the impact of the analysis carried out by SUTEL on the telecommunications market is also very striking, considering that there was no significant change in the relevant mobile phone communications market. We may presume, from the analysis carried out based on the methodology used in the United States, that SUTEL’s reasoning will not have an anticompetitive effect on the market.

It also argued that ICE’s competitors –Claro and Telefónica- offer similar services, packages, and promotions, enabling them to compete effectively with ICE. However, this position cannot be shared, especially since ICE, according to the analysis carried out by SUTEL in the same resolution, had a market share of 65% at that time, a percentage much higher than the minimum established by the regulator, leading to the assumption that its position as an operator with power over a significant market share was undeniable. Yet SUTEL only briefly referred to such share, and also justified its existence by considering that it is the incumbent operator, and that, therefore, it would not significantly affect competition, while ICE already received income before because Virtualis provided the services through its network. At this point, SUTEL forgot that the income that ICE would obtain is greater than the amount obtained in the past from renting the network to Virtuals since it would also receive the income corresponding to the provision of the service to the end-user.

Finally, SUTEL authorized the merger without imposing any conditions on the resulting operation as requested by Radiografica de Costa Rica pertaining to the acquisition of VIRTUALIS’ customer base and assets.

Telecommunications include a plurality of essential services, which the current political-social sensitivity considers unavoidable to develop a human life in adequate conditions. The provision of these services in acceptable conditions of quality and price must, therefore, be guaranteed to all citizens, regardless of their geographical location or the profitability of the services rendered. This is something that the public service regime previously sought to ensure and that now must be guaranteed by public service obligations (López, 2001). This is reflected in the concept of “universal service,” understood as a defined set of services whose provision is guaranteed to all end users, regardless of location, with a certain quality and at an affordable price (Arroyo, 2010). It is, therefore, an offer of services in decent and adequate conditions.

An example of this is the European community regulations (Ruiz, 2007), which contemplates two general alternatives for its fixation, namely:

  1. National authorities may introduce a compensation mechanism charged to public funds;
  2. The net cost of universal service obligations is shared among service providers and electronic communications networks. Thus, it is possible for the fund to be borne by all the operators in the sector, or to be fed by a parafiscal rate or special tax, which is charged to all users of telecommunications services (Paz, 2007).

With regard to the Costa Rican legal system following the line of most European countries and the United States, the financing of the universal service corresponds to the operators of the sector. This, as is well known, arises from the commercial opening in the telecommunications market, on the occasion of the signing of the FTA, through which the bases of the “new” regulations regarding the subject were established.

Based on these bases, the LGT created the National Telecommunications Fund (FONATEL) as an instrument for administering -by SUTEL- the resources destined to finance the fulfillment of the fundamental objectives of the established universal access, universal service, and solidarity regime in the same Law, as well as the goals and priorities defined in the PNDT. The special parafiscal contribution to the Fund represents a contribution that falls on the gross income obtained directly from the operation of public telecommunications networks or from providing the services available to the public.

The aforementioned objectives are regulated in ordinals 31 to 33 of Title II – “Fundamental Guarantees Regime”-, Chapter I – “Universal Access, Universal Service and Telecommunications Solidarity”- of the LGT; while the aspects related to the administration of FONATEL, the forms of allocation of resources, the execution of funds, the sources of financing and the mechanisms of accountability in relation to it, are regulated from article 34 to numeral 40 of the aforementioned chapter.

In light of such guidelines, in order to achieve its objectives, FONATEL maintains a management trust for its projects and programs, whose assets are the product of the different sources of financing of the Fund (article 38 of the LGT), being its main recurring income, the aforementioned special parafiscal contribution. In what matters, numeral 38 provides that FONATEL resources may not be used for any purpose other than that established in the PNDT, in compliance with the aforementioned objectives, and that these must be allocated in full each year. However, the administrative costs of FONATEL will be covered with the resources of the same Fund, for which an amount greater than one percent (1%) of the total resources may not be allocated. The administration of such resources is subject to the control of the Comptroller General of the Republic and the General Directorate of Taxation of the Ministry of Finance.

In accordance with article 39 of the LGT, this parafiscal contribution is justified by the individualizable benefit that for the aforementioned operators and providers represents the maximization of the use of telecommunications networks and the increase in users of communications services driven by the execution of access, universal service, and solidarity projects.

Regarding its payment procedure, this is determined by the same taxpayer through a sworn statement that corresponds to a calendar year fiscal period, distributing the resulting amount in four equivalent tranches, payable on the fifteenth day of the months of March, June, September and December of the year after the corresponding fiscal period.

The rate of said contribution must be calculated and set by SUTEL no later than November 30 of the respective fiscal period. This is set within a band with a minimum of one point five percent (1.5%) and a maximum of three percent (3%) and said setting must be based on the estimated goals of project costs to be executed for the following budget year and in the estimated income goals for that year. In the event that the Superintendence does not set the rate at the expiration of the indicated period, the rate executed in the immediately preceding fiscal period will be applied.

The implementation of competition requires opening existing networks, thereby allowing new operators to enter the market. Access and interconnection are then inherent in the process of liberalization and implementation of competition in the telecommunications market, because otherwise an entry barrier would be created that would not allow operators to build all their networks in a short time such that they would not be able to use the same characteristics that the historical operator had been deploying for more than 60 years.

As the existing network cannot be replicated, new telecommunications service operators must be allowed to use pre-existing networks, and for this reason, specific obligations are imposed in relation to network access and interconnection. Only in this way can new operators begin to operate in a market under conditions of effective competition, since this access must be promoted in a transparent and non-discriminatory manner.

As established in article 59 of the LGT, access and interconnection are intended to ensure efficiency, effective competition, optimization of the use of scarce resources and greater benefit for users. SUTEL must ensure, therefore, that access and interconnection are provided in a timely manner and in non-discriminatory, reasonable, transparent terms and conditions, proportionate to the intended use that do not imply more than what is necessary for the proper operation of the service provided.

SUTEL is responsible, in accordance with the aforementioned numeral 59, for the imposition of access and interconnection obligations in such a way as to allow the proper operation of the service provided. It must be taken into account that the access and interconnection agreements are freely negotiated by the telecommunications operators, with prior approval, or intervention when appropriate, of SUTEL. In effect, operators must notify SUTEL when negotiations for access and interconnection begin and disclose the interconnection agreements they have signed.

When SUTEL is notified of an agreement, it will review it and, as expressed in numeral 60 of the same legal body, it may add, eliminate or modify all those clauses that in its opinion need adjustment in accordance with the telecommunications regulations, to guarantee in turn, effective competition in the market.

Otherwise, if the operators do not reach an agreement, or if any of them does not wish to sign an interconnection contract, SUTEL may, within the three months following the notification, ex officio or at the request of a party, determine the form, terms, and conditions under which the agreement will materialize. In case of urgency, it has the power to set the conditions provisionally until the situation is definitively resolved.

These special characteristics of access and interconnection contracts raise questions about their legal nature. Are they really contracts? The doctrine has replied to this question, basically with two theses: the one that proclaims that it is a private law contract and the one that postulates its legal nature as public law (Farfán, 2005).

However, from our perspective, the rules applicable to access and interconnection are obviously not those of private law, but the rules of a sectoral nature, that is, the regulatory framework of the telecommunications market, since the obligation does not arise as a result directly from the will freely expressed by the parties. Rather, the fundamental elements of the contract are previously established by law and even in those secondary aspects, the Regulator can intervene in order to modify, complement, or even annul and replace the declaration of will of the parties with its own. Consequently, it cannot be said that its nature is contractual, but what is verified is an administrative-regulatory intervention, so that the legal relationship of access and interconnection that arises as a result of a contract or agreement of access and interconnection is public law.

However, it is up to the Costa Rican Institute of Electricity, as incumbent operator and owner of the network, in accordance with article 59 of the Access and Interconnection Regulation, to publish its Reference Interconnection Offer, through which it expresses the technical and economic conditions that will govern the access and interconnection that it intends to offer to other operators. This offer must always be approved by SUTEL and, furthermore, it can be modified by SUTEL itself.

In addition to this, the regulatory body of the telecommunications sector also has the responsibility, in light of what is analyzed in this work, to approve the prices of access and interconnection of networks to guarantee access under equal conditions, without granting advantages to some operators. In this regard, numeral 61 of the General Telecommunications Law establishes that interconnection prices must be cost-oriented, in accordance with subsection 13) of article 6 of this Law, and freely negotiated by the operators among themselves, based on the methodology established by SUTEL. This methodology must guarantee transparency, objectivity, non-discrimination, financial feasibility, and breakdown of costs.

The regulator must also ensure compliance with the access and interconnection agreements, as well as sanction when appropriate any violation or breach of the aforementioned contract, since such conduct, in light of the regulations of the telecommunications sector, corresponds to a serious fault.

If we start from the fact that the telecommunications service in Costa Rica was provided by the State in a legal monopoly regime for more than 60 years and there were waiting lists to acquire a cellular line or an Internet connection, the new model promoted by the Free Trade Agreement between the Dominican Republic, Central America and the United States and consummated through the General Telecommunications Law and the Law for the Strengthening and Modernization of Public Entities in the Telecommunications Sector has meant a true paradigm shift (Kuhn, 1970).

In this sense, as is easily verified from the study of the Regulator’s statute, the vast majority of SUTEL’s functions, in one way or another, have an impact on the realization of competitive markets. Likewise, the legal mechanisms established, mainly by the LGT and its regulations, aim to create a competitive telecommunications market, but without forgetting the social purpose that assists it; hence, an entire regulation for universal service was foreseen, which is satisfied mainly through the National Telecommunications Fund (FONATEL).

All in all, it is clear that the transition period from monopoly to competition is a slow process and requires an enormous effort from all the players, especially since, in our telecommunications market, the incumbent is a state company that continues to hold an undeniable significant weight of the market, so that the regulation of competition must be deep, incisive, and constant to avoid – paraphrasing (Taruffo, 2006), continuing to live in one system while believing to be in another.

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Luis Ortiz
Partner
Costa Rica
lortiz@blplegal.com

Gloriana Alvarado
Senior Associate
Costa Rica
g.alvarado@blplegal.com