Overview (September 2000)

Introduction

The telecommunication regulatory framework in Brazil has been substantially modified since 1995 in order to stimulate the universalization of telecommunications services and introduce competition to the sector. Before the reforms, most telecommunications services were rendered by the state.

Telecommunications services are now classified according to (i) the interests that they serve (ie, collective or restricted interest) and (ii) their legal sector (ie, public or private). Only the fixed-switched telephone service (rendered by companies that were formerly state-owned companies) is a public service.

This overview describes the most important regulatory issues and telecommunications services in Brazil, with special emphasis on the regulations relevant to foreign investors' and issues related to internet access.

Provision of Services

Any natural or legal person satisfying the conditions declared in law (and, when applicable, in the notice with invitation to bid), may apply to the National Telecommunications Agency for a licence to provide telecommunications services. According to the regulations, there is no limit on the number of authorizations to be granted. However, the agency may deny authorization in cases of technical unfeasibility, or when excessive numbers of competitors may prejudice the rendering of services.

Ownership of Service Provider Companies

Decree 2,617/98 sets forth the following:

"concessions, permits and authorizations for the exploitation of community interest telecommunications services may be granted or issued only to companies organized under the laws of Brazil, in which the majority of the voting quotas or shares are in the hands of natural persons residing in Brazil or companies organized under the laws of Brazil and with their principal place of business and administration in the country."

Consequently, a foreign company wishing to provide collective telecommunications services in Brazil must establish a holding in Brazil and only its subsidiary may apply for a telecommunciations licence.

Licences for the exploitation of restricted interest services may be issued to companies that have their principal place of business and administration in Brazil, and to other entities or natural persons established or residing in Brazil.

Interconnection

Resolution 33/98 replaces the former revenue sharing (in effect during the state monopoly period) with a new mechanism for renumerating the use of telecommunications networks.

Fixed-Switched Telephone Service

Fixed-switched service is defined in the General Grants Plan (Decree 2534/98) as a telecommunications service designed for communication between fixed determinate points, using telephony processes. The fixed-switched services designed for public use are classified into local, domestic long-distance and international long-distance services.

Former state-owned companies were privatized, creating 12 holdings; four control the fixed-switched telephone service concessionaires and eight control the cellular mobile service concessionaires (Band A). The sale of the 12 holdings was completed through an auction on the Rio de Janeiro Stock Exchange on July 29 1998. A total of $22 billion was raised. Auctions were held with a view to granting new authorizations to companies (in the four regions into which the country was divided) that would exploit fixed-telephony services in competition with the incumbents. These new competitors are called mirror companies.

The mirror companies commenced their activities in January 2000. The companies are:

• Vésper S/A, competing with TELEMAR (formerly Tele Norte Leste) in local and domestic long-distance calls in region one of the General Grants Plan;

• Global Village S/A, competing with Brazil Telecom (formerly Tele Centro Sul) in local and domestic long-distance calls in region two of the General Grants Plan;

• Vésper São Paulo, competing with TELESP (TELEFONICA-SPAIN) in local and domestic long-distance calls in region two of the General Grants Plan; and

• Intelig Holding Ltda competing with Embratel (Worldcom) in domestic and international long-distance calls in region four of the General Grants Plan.

These companies (along with baby mirror companies) will provide the fixed-telephony service until at least December 31 2001. Thereafter, any company may operate in the sector, provided they obtain a licence. Concessionaires wishing to obtain authorization to provide services in different regions must fulfill the universal access goals for the service provided in the regulations.

Besides the universal access goals, the regulation establishes that providers must comply with the goals established in the General Quality Goals Plan at their own expense and risk. Providers may also be punished for their non-compliance, in order to guarantee that the National Telecommunications Agency has greater control over the quality of services.

Obligations of the fixed-switched service providers include:

• ensuring that service complies with regulations set by the agency;

• maintaining public booths in perfect working order;

• implementing all equipment and facilities necessary for the provision, continuity, modernization and expansion of the service;

• submitting the standard draft of its service provision contract and any alterations and amendments in advance to the agency;

• maintaining the accounting records of other services separately;

• respecting the commitment to secrecy and confidentiality;

• submitting all corporate restructurings, and transfer of control or alteration in the capital stock to the agency for prior approval; and

• widely disseminating prices, tariffs and discounts.

Cellular Mobile Service

Cellular mobile service is defined as:

"a terrestrial mobile telecommunications service open to the public, which uses a radio communications system with a cellular technique, interconnected to a public telecommunications network, and accessed by means of portable, transportable or vehicular terminals of individual use."

Cellular mobile service has, to date, been divided into frequency Bands A and B. Bands C, D and E which have not yet been regulated, will be used for personal communications systems.

Band B
The country was divided into 10 distinct regions for the exploitation of cellular mobile service in Band B. The competitive bidding has already taken place through the issuance of licences for 15 years, renewable for equal periods of time.

Band A
Band A cellular mobile service was granted through concessions to companies formerly under state control. The privatization auction of the respective companies was held on July 29 1998, together with the three fixed-telephony auctions (for local and domestic long-distance calls) and Embratel auctions for international and domestic long-distance calls. Use of the service was granted by means of concessions for 15 years, renewable for equal periods of time.

The cellular mobile service is not subject to universal access and service continuity obligations, and its exploitation is governed by the National Telecommunication Agency's rules, in addition to legislation pertaining to consumer protection and economic order. It is in two digital processing standards: (i) time-division multiple access and (ii) code-division multiple access.

Bands C, D and E
With the purpose of stimulating competition in the telecommunications market, the National Telecommunications Agency issued rules for the provision of personal mobile service (Public Consultation 214 of July 10 2000).

In addition to the current Band A and B operators, each of the three regions into which the country was divided will have three more operators, corresponding to Bands C, D and E. The division of the country, for purposes of granting the personal mobile service licences, coincides with the division of regions under the General Grants Plan.

The personal mobile services will operate in the 1.8 GHz frequency band.

In accordance with the president of the National Telecommunications Agency, Renato Guerreiro, the users will have the following advantages:

• competition between the new operators Bands C, D, E and the former operators Bands A and B;

• an increase in the number of mobile terminals;

• enhanced quality;

• a reduction in prices due to the existence of five providers in each region; and

• the possibility of the user selecting the long-distance provider, which is not currently possible.

In relation to the eligibility of operators, there are no restrictions on the participation of foreign companies organized and based in the country, although there are some specific restrictions for the fixed-switch telephony service concessionaires. It is not permitted to hold two licences to provide personal mobile and other services in the same geographic area. The mirror companies may compete for authorizations including for Band C.

The operators of Bands C, D and E will be required to meet minimum service goals to be stipulated in the bid notices, similar to the universal access obligations of the fixed-switch service concessionaires.

Cable Television Service

Under Law 8,977 of January 6 1995 and other applicable provisions, cable television service is defined as:

"a telecommunications service consisting of the distribution of video and/or audio signals, to subscribers, by physical transport means, being designed for the provision of universal and national culture, the diversity of sources, information, leisure and entertainment, political plurality and the social and economic development of the country."

Cable television service is provided by an operator (ie, a private law entity operating under a grant) by means of equipment and facilities that permit the reception, processing, generation and programming of signals and is distributed to subscribers located within a specific area.

Grants are for 15 years (renewable for equal and successive periods) and are awarded exclusively to private legal entities that have the provision of this service as their core activity. Head offices must be in Brazil and at least 51% of their voting capital must be with native Brazilians or those naturalized in Brazil for more than 10 years.

Cable television operators shall distribute the programming of the open UHF and VHF channels whose signals reach their operating area, without alterations. A municipal/state legislative channel shall be supplied (reserved for the shared use of city councils and state legislatures) as well as a channel for the House of Representatives, a channel for the Federal Senate, a university channel, an educational-cultural channel and a community channel.

Radio Frequency Use

The radio frequency spectrum is a public asset. Its use is controlled and supervised by the National Telecommunications Agency.

A radio frequency may only be shared between two or more holders of authorizations for radio frequency use either by alternating the antennae operating periods, or rigorously dividing the area in which the use of the same band is undertaken.

In the event of (i) technical limitation on radio frequency use and (ii) interest in its use on the part of more than one interested party, the authorization will be subject to an invitation to bid. Authorization for radio frequency use is granted for a maximum period of 20 years (renewable once) and it will expire in cases of irregular transfer, or the loss of validity, lapse, waiver or annulment of the authorization for the provision of telecommunications service.

The use of radio frequencies without the agency's authorization may constitute a criminal offence.

Price for the right to use
The price for the right to use radio frequency is established in accordance with the winning proposal of the invitation to bid. In cases when an invitation to bid is not made, the agency will define payment conditions in accordance with the Regulation for the Collection of the Public Price for the Radio Frequency Right to Use.

Internet Service Providers

On May 31 1995 the Communications Ministry published Ministerial Ordinance 148/95 (approving Rule 004/95), regulating the use of the public network media for internet access. The ordinance establishes important concepts for the regulation of internet access providers. It clarifies terms and establishes that the provision and use of internet connection service takes place through the telecommunications services (later reorganized by the Telecommunications Law and other regulatory provisions).

The General Telecommunications Law substantially changed the telecommunications sector by stating that any activity permitting the supply of transmission, emission or reception, by wire, radio electricity, optical media or any other electromagnetic process, of symbols, characters, signals, writings, images, sounds or information of any nature will be considered to be telecommunications service.

Article 61 gives a new definition for value added service, revoking the previous definitions contained in Rule 004/95 and the Minimum Law:

• value added service is not the same as telecommunications service;

• value added service differs from telecommunications service; and

• the provider of value added service is equivalent to the telecommunications service user.

Where value added service is not a telecommunications service the responsibilities of the National Telecommunications Agency to impose the conditions and establish the rights for the provision of these services must be defined. The Telecommunications Law did not confer the authority to regulate value added services upon the agency or to supervise its performance, restricting the activities of the regulatory agency to telecommunications services.

However, although the agency does not have the legal authority for regulating and supervising value added services, the law guarantees the agency the authority to assure the use of service networks for the provision of value added services. The provision of internet access is not conditioned on a grant of a licence by the National Telecommunications Agency.

The fixed-switched service supports the provision of internet connection. However, the development of new technologies has permitted the utilization of services other than fixed-switched services as paid television, digital subscriber lines, limited telecommunication service providers, and others.

Digital Subscriber Line

Digital subscriber lines enable telephone lines to be used as high-speed channels for data, video, information, entertainment and other applications. A system of modems convert the standard signals of the fixed-switched service network in a high-speed digital duct for data traffic.

A series of technical standards have been developed to target digital subscriber lines to the mass market, making it possible to achieve even greater speeds with the combined use of certain modems.

The main advantages of digital subscriber lines are as follows:

• the deployment of high-speed remote access to internet, corporate networks, and online services supported by common telephone lines;

• the parallel and simultaneous utilization of voice and data transmission in certain digital subscriber lines;

• continuous activation and connection of the digital subscriber line system;

• utilization of interactive multimedia in real time and the transmission of high-quality video (eg, television by internet, videoconferencing); and

• the possibility of using copper wire for deploying high speed for remote access to internet, corporate networks and online services.

The asymmetric digital subscriber line is an optimized system for network navigation, providing users with greater bandwidth. Modems convert common twisted pair fixed-switched service lines, in access paths for multimedia and high-speed data communication. This system has been elected as the means of transforming the existing telecommunications networks into a system capable of supporting real-time multimedia communication. The installation of a modem in the user's set is required, with another modem installed in the telephone exchange, so that the two modems remain permanently connected, permitting the continuous transmission of data and allowing for 24-hour connection with the internet access provider.

The purpose of the modem is to digitally divide the telephone line into three separate channels. One of these channels provides for voice traffic, while the other two are used for the upstream and downstream of data traffic.

Asymmetrical digital subscriber lines permit countless applications for the transmission of data. Accordingly, fixed-switch service operations have been allocating investments to the development of this technology, with the objective of providing rapid internet access for fixed-switch service users through the simultaneous use of a telephone line to begin and end calls, while constantly maintaining connection to the internet access provider.

Paid Television

With the publication of the Regulation for the Use of Paid Mass Communication Service Networks for the Provision of Value Added Services (approved by Resolution 190 of November 29 1999), the agency aimed to assure that paid television service networks provide value added services.

All providers of value addded service are guaranteed the right to use the paid television networks in a non-discriminatory manner and at reasonable prices and conditions.

The use of the paid television network for the provision of value added service may only be denied due to reasons of the capacity limitation of the system or of the conditions determined in the concession contract or authorization term. The denial of the use of paid television networks shall be justified and non-discriminatory.

Infrastructure Sharing

The National Electric Power Agency, National Telecommunications Agency and National Petroleum Agency regulate infrastructure sharing among their sectors and have set guidelines which are contained in Law 9,427 of December 26 1996, Law 9,472 of July 16 1997 and in Law 9,478 of August 6 1997. The guidelines apply to infrastructure sharing between the public electric power service exploitation agents, the providers of telecommunications services and the agents of petroleum and natural gas pipeline transport. Agents are construed as the legal entity holders of concessions, authorizations or permits for the exploitation of public services.

Agents that exploit electric energy, telecommunications, petroleum and natural gas pipeline transport services can share the infrastructure of other agents from any of these sectors, provided that (i) they satisfy certain quality, security and environmental protection rules established by the competent agencies, and (ii) they stimulate the optimization of resources, the reduction of operating costs, and other benefits to the users of the services they supply.

Agents directly or indirectly owning, managing or controlling infrastructure shall define the surplus capacity (ie, the available infrastructure for sharing with other agents from the various sectors) and the conditions for sharing. The owner shall maintain the surplus capacity under its control and management, complying with the obligations contained in the concession, permit or authorization instrument.

Article 9 of the regulation states that in order for owners to supply infrastructure for sharing they shall give advance notice in at least two national newspapers and one local newspaper over three days, defining and establishing the sharing conditions, including technical information, prices and terms. The contract shall be officially submitted to the regulatory agency of the owner's operating sector, which in turn sends it to the regulatory agency of the sector of the petitioning party. The positive reply of both agencies are required if the infrastructure sharing is to proceed.

The contract will not be approved if it is considered harmful to free and fair competition. The following are therefore not permitted:

• the use of subsidies for the artificial reduction of prices;

• the use of information obtained from competitors, with the aim of obtaining a competitive edge;

• the omission of technical and commercial information relevant to the provision of services of others; and

• the establishment of conditions that inefficiently use the infrastructure.

Multipoint Multichannel Distribution Service

The multipoint multichannel distribution service is a collective interest service that uses the microwave band to transfer signals to be received in determinate points within the service provision area. These signals may be associated to any kind of technically available telecommunication.

In accordance with Article 4 of the Telecommunications Service Regulation and Article 8 of the Regulation for the Use of the Networks of Paid Mass Communication Service for the Provision of Value Added Services, multipoint multichannel distribution service is a mass communications service with the following advantages:

• distribution or broadcast of point-multipoint or point-area signals;

• signal flow predominantly in the provider/user direction;

• content of transmissions is not generated or controlled by the user; and

• choice of transmission content is made by the service provider.

Multipoint multichannel distribution service is aimed at promoting the diversity of information sources, stimulating competition, preserving the interests of local communities and making use of the frequency spectrum.

Rule 002/94 (approved by Ordinance 254/97 of the Communications Ministry), establishes that companies authorized to provide multipoint service may:

• transmit signals or programmes originated by third parties, programs originated by third parties and edited by the authorized company;

• transmit signals of programmes generated by the authorized company; and

• broadcast commercial publicity.

The National Telecommunications Agency published Resolution 224/2000 which allocates the 2,170 MHz to 2,182 MHz frequency band to be used by the users of multipoint service as a reverse channel.

For further information on this topic please contact Ricardo Barretto or Oscar Petersen at Barretto Ferreira, Kujawski, Brancher e Gonçalves – Sociedade de Advogados by telephone (+55 11 3066 5999) or by fax (+55 11 282 8735) or by e-mail ([email protected] or [email protected]).

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