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Telmex Says Rural Rules to Cut Investments, Plans Appeal

June 10 (Bloomberg) -- Telefonos de Mexico SAB, the nation’s largest land-line phone carrier, said it won’t invest in rural zones of the country if the government doesn’t overturn new rules cutting its fees to connect calls to those areas by 95 percent.

The company will ask the Communications and Transportation Ministry to overturn the Federal Telecommunications Commission rate cut, Regulatory and Legal Affairs Director Javier Mondragon said on a conference call yesterday. The reduction is legally unfounded, he said.

Telmex and its parent company, billionaire Carlos Slim’s America Movil SAB, are contending with a series of government decisions to reduce their dominance of Mexico’s phone market. The telecommunications commission in March more than halved the fees America Movil can charge rivals to complete calls to its Mexican wireless unit.

“We can’t invest just to lose money,” Arturo Elias, Slim’s son-in-law and Telmex’s communications director, said on the conference call. The government-set fee “is way, way below our costs,” he said.

Telmex dropped 4 centavos to 9.97 pesos at 9:41 a.m. in Mexico City trading. America Movil fell 22 centavos to 28.66 pesos.

The rate cut reduces the fee Telmex can charge to complete calls in areas where it is the only phone provider to 4 centavos (0.34 cent) from 75 centavos, the telecommunications agency said in a statement yesterday.

Telmex is still calculating how the new rules would affect the company financially, Elias said.

‘Material’ Impact

The rural fee reduction and a general cut in fees charged to other carriers to connect calls could reduce Telmex’s earnings before interest, taxes, depreciation and amortization by about 7 percent, Gregorio Tomassi, an analyst at Banco Santander SA in Mexico City, said in a research note today. He said such interconnection fees represented about 13 percent of the 2010 revenue of Telmex, which he rates “underperform.”

Telmex had 1.5 million lines in areas without competition at the end of last quarter, out of a total of 15.6 million in Mexico, where it has 80 percent of the fixed-line market.

Slim, 71, visited the commission’s offices last week to present his case against the rural-fee rule change to officials. America Movil represents about 61 percent of Slim’s $68.4 billion in publicly disclosed holdings, according to data compiled by Bloomberg.

Supreme Court Decision

Telmex has concluded that a Supreme Court decision in May, which denied the company the ability to halt implementation of lower phone connection fees with rivals by filing legal injunctions, doesn’t apply to the rural-line decision, Mondragon said. This means Telmex can seek to block the rural fees, he said.

The government made the reduction in rural fees by changing the way calls to rural lines are defined legally and technically, according to the telecommunications agency.

The fee cuts would mostly benefit U.S. carriers, whose clients make 90 percent of the calls to Telmex’s rural lines, mostly from immigrants calling family, Elias said.

The Federal Telecommunications Commission continues to study other areas of the telecommunications pricing structure in Mexico. The agency plans around June 15 to apply restrictions to Telmex in the market for leasing lines to rivals, said Mony de Swaan, the commission’s president, in an interview last week. New rules for America Movil’s wireless business would come next, he said.

The agency is also analyzing the billing and collection fees land-line carriers charge to their clients for mobile calls, said Gonzalo Martinez Pous, one of the agency’s five commissioners, in an e-mail yesterday.

To contact the reporter on this story: Crayton Harrison in Mexico City at tharrison5@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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