Introduction

With the opening up of the telecom service market (basic/value added) in the 90s for private sector participation, the authority notified its first telecommunication tariff order in March 1999 and a regulation on interconnection charge and revenue share in may 1999. Subsequent to these notifications, the National and International Long Distance Markets have also been opened up to competition. These policy measures have resulted in significant reduction in long distance tariffs due to competitive pressures. This has drastically reduced the margin available to fund the Access deficit incurred by the Basic Service Operators due to rentals being significantly lower than costs.

Networks interconnect to exchange traffic and supply inputs in situations where the operators both compete and cooperate. As explained above, such inputs are “essential facilities” and as the (Organisation for Economic Co-operation and Development) OECD observes: “the regulation of the terms and conditions under which competing firms have access to essential inputs provided by rivals has become the single biggest issue facing regulators of public utility industries. This issue is both theoretically complex and inherently controversial. Since the development of competition and the success of liberalization often depend on the access terms and conditions chosen, there is also a strong public policy interest in getting these terms and conditions “right”. At the same time, new entrant firms and incumbents often have a substantial financial stake in the outcome and therefore a strong interest in negotiating aggressively.”

In a multi-operator environment, it is important to specify an (Interconnection User Charge) IUC regime which gives greater certainty to the Inter-operator settlements and facilitates interconnection agreements. The total IUC for carriage of a call in a multi-operator environment are to be shared for origination, transit and termination on the basis of work done in each segment for the carriage of the call. Thus, there is a need for a cost-based IUC for origination, transit and termination in a Multi-Operator environment. Framework of the IUC regime has already been established by TRAI in its Regulation on Reference Interconnect Offer (RIO). IUC has to be determined based on minutes of usage for various unbundled network elements and the cost of these elements. As brought out in the Reference Interconnect Offer (RIO) , the IUCs for origination, transit and termination are based on the principles of element based charging i.e. one operator charging the other for the resources consumed for carriage of its calls in terms if minutes of use.

Like other countries in Europe, America, Asia and Australasia, India has decided to regulate the level of IUC to address the commonly understood economic problem that the owner of a telecom network to which others must interconnect in order to provide retail telecom services to their customers has an incentive or either deny others the right to access or to charge them a very high price, well in excess of cost, to do so. In those circumstances, the absence of competition means that some form of regulation is needed to facilitate interconnection at prices that would prevail if competition existed. As explained by Professor Alfred Kahn, regarded as the founder of modern regulatory economics

“The essence of regulation is the explicit replacement of competition with governmental orders as the principal institutional device for ensuring good performance. The regulatory agency determines specifically who will be permitted to serve and when it licenses more than one supplier, it typically imposes rigid limitations on their freedom to compete. So the two prime requirements of competition as the governing market institution- freedom of entry and independence of action- are deliberately replaced. Instead the government determines price, quality and conditions of service, and imposes an obligation to serve.”

The problem that then arises from an economic policy point of view is that while interconnection of the various telecom network is socially desirable, there is a need to be cautious that the type of regulation imposed does not deprive entrepreneurs of an appropriate return on their investments and the recovery of investment thereby creating disincentives to further investment or destroy efficiency. This problem is addressed in mainstream economic theory by the adoption of efficient pricing. The following are two general principles pertaining to efficient pricing:

The Termination Charge is one of the number of IUC that the Authority is empowered to impose under the statutory telecommunication regulatory regime. Telecom Regulatory Authority of India (TRAI) has fixed the termination charges at 20 paise according to the Telecommunication Interconnection Usage          Charges Regulation vide its Tenth Amendment dated 9.3.2009. This move has been contested by various service providers. The basis of their argument lies on the method of calculation followed by TRAI in arriving at this value. The TRAI’s decision to issue the Impugned Regulations and to impose an MTC of 20p. per minute is well below the economic cost, which the Service Providers incur in providing the termination services and the same will:

a) deny them the opportunity to recover the entire economic cost of building and operating its networks including a fair return on its investment as the wholesale MTC rate is below cost;

b) provide telecom operators who have not made, or do not intend to make significant investments in networks in rural and other areas with a significantly depart from the basic principles of cost fixation, especially with the statutory requirement of maintaining transparency.

Hence, there are very important reasons why MTC should be increased.

Non Transparent Methodology

TRAI recognised that an important objective of IUC is to make the widest range of telecommunications services available in the most economically efficient manner. This includes fostering an efficient new entry and ensuring that charges are justified from an economic perspective. It also recognised that this means a cost based approach to determining termination rates should be adopted. TRAI was established under the TRAI Act to, interalia, regulate telecommunication services and to protect the interests of service providers and consumers. Under S. 11(b)(ii) to (iv) of the TRAI Act, the TRAI can fix the terms and conditions of inter-connectivity between the services providers, ensure technical compatibility and effective interconnection between service providers for sharing revenues derived from providing telecommunication services. The regulation violates the mandate of transparency ordained under S.11(4) of the TRAI Act, 1997.

The data, model, assumptions, calculations etc on the basis of which MTC was determined is not shared with the stakeholders. In the impugned regulation though some data and modicum has been given, the same is not only inadequate, but has been given post-facto. Sharing of data/information with the stakeholders during the consultation process would have enabled all to engage more constructively with the Authority rather than having the same disclosed after amending the Regulation, this making the entire exercise, fait accompli. In COAI v. UOI the tribunal held that TRAI had failed to observe the prescription in the TRAI Act that it should observe the prescription in the TRAI Act that it should observe principle of transparency.”

Exclusion of CAPEX and Inclusion of VAS

The IUC is based on the annual Capital Expenditure or CAPEX and OPEX of different network segments. Cost of CAPEX is an integral element of cost. By ignoring it, an unlawful subsidy has been extended to a competing originating operator at the cost of the terminating operator’s subscribers. This is detrimental to the growth of the telecom industry since instead of giving benefit to the one’s own subscribers, the operators will be forces to extend such benefits to the subscribers of a competing operator.  Though the TRAI professed the Termination Charge was to be fixed on the basis of costs, the same were only about one-tenth of the total costs that were actually incurred by Cellular Mobile Service Providers for terminating a call on their network. It was further pointed out that the TRAI had used incomplete data and that the same had resulted in this incorrect assessment of termination charges. In a highly capital intensive industry such as telecom, CAPEX/cost of capital is a vital element of cost, and its complete exclusion whilst determination of termination charges, defeats the very objective of the IUC/MTC which is to have a cost based regime. Depreciation, finance charges etc are important elements of cost and by excluding the same from the determination of MTC, the fundamental principles of cost model are being violated.

On the one hand, a deduction has been made towards Value Added Services (VAS) costs, however, revenues accruing from the same have not been deducted from ARPU thereby resulting in a skewed approach. Instead TRAI should have either included both VAS costs and VAS revenues or excluded both. TRAI’s view that the cost can be recovered  from origination charge or rentals that are under forbearance or from the revenues earned from VAS is not only against its own statements and “service provider needs to be fairly compensated for its investments and operational expenses” and that “IUC imply setting of charges to compensate explicitly one operator for the costs imposed on him by other operators use of his network to originate or terminate a call” but is seriously anti-consumer and against all tenets of national telecom policy and government objectives of affordable telecom services.

FLLRIC Model-International Best Practices

 The fixation of MTC by TRAI is also against the fundamental principles of cost based interconnection that are enshrined in the WTO Reference Paper and the GATT framework and which have also been reportedly enunciated by TRAI since 1999 and even most recently in the impugned Regulation. The decision of the Authority not to follow the International Best Practice FLLRIC Model is a case of abdication of duties cast upon it. The desirability/suitability of the FLLRIC methodology has been recognised by the Authority ever since 2003 when the Authority had opined that a “change over to FLLRIC model is imperative” and has proposed that a full shift to FLLRIC cost would be achieved in a gradual manner over a few years rather than a single year change. However, despite the fact that over 6 years have elapsed since the above principle was enunciated by the Authority, there has been no shift to this model. The reasons given by TRAI are based on conclusions unsupported by evidence.

Termination Charge on International Calls

Another significant question is regarding the fixation of termination charges on international calls. A proposition has been made by the access providers that they should be permitted to negotiate termination charges with the International Long Distance Operators (ILDOs). The Authority took into account of all points made in favour and against allowing the access providers to negotiate the termination charges with the ILDOs. The authority recalled the situation few years ago, where such negotiation was allowed and the uncertainty and dispute that was created in the market at that time.
In this context, the Authority notes that the moment the negotiation process becomes a dispute, which is likely; the prevailing legal framework is such that the Authority will not be in a position to take steps to address the matter. This will imply lack of certainty and increased possibility of discord in the market, which possibility may get further enhanced as BSNL has already entered the market as an ILDO itself. Termination is a monopoly, therefore an access provider may ask for a high termination charge which could lead to non-settlement of termination charges between access provider and ILDO.

Rural tele-density

Another reason is the welfare of the rural population and encouraging and increase in rural tele-density. There is an obvious link between public policy and IUC. The objectives of increasing the rural tele-density and cost based mobile termination charge usage rate are interlinked. Economic incentives are required to increase investment in rural areas to extend rural telecom coverage to bridge the rural-urban divide. Subscribers in rural areas typically receive more calls than they make. As a result, service provider revenues come from incoming calls. To justify investing in expanding their network operators have to be sure that there is sufficient revenue from the expansion to cover the cost. The Capital Expenditure (CAPEX) charge in rural areas ranges from 1.5-4 times the CAPEX in urban areas. The IUC regime must act as an incentive, rather than a disincentive, to ensure penetration in rural areas, to connect the unconnected. An operator would make such investments only if he was assured of adequate returns on investment. The aggregated model followed by TRAI is not representative of either urban/rural India.

Conclusion

TRAI’s prior decisions drastically understated the MTC. Even in 2003, IUC was fixed to be 30 p. for the metros and 40 p.  for other circles. Thus there seems to be a clear contradiction in TRAI’s actions itself. Ultimately, it is imperative to conclude that the MTC of 20 p. per minute is not based on a cost based approach and is unjustified, as:

a) The view that CAPEX is to be recovered from rentals fails to appreciate that over 90% of the subscribers are prepaid and there is no concept of rentals. The argument in the Impugned Regulation that the tariffs are under forbearance or that in the present tariff packages it is very difficult to estimate the revenue generated from the rental and the call charges is an untenable argument and goes against the TRAI’s own principle that IUC charges should explicitly compensate one operator for the costs imposed on him by other operator using his network to originate or terminate a call.

b) the TRAI further artificially reduced the estimated cost of providing termination by allocating otherwise unrelated VAS revenues in flagrant disregard of basic economic principles of cost causation. This is a significant departure from the normal practice followed by the other economic regulators in the world.

c) in exercising its discretion under the TRAI Act to set the MTC, the TRAI was required to determine the MTC using a well accepted method- FLLRIC

d) The MTC fixed by TRAI does not cover all elements of cost in accordance with law. The downward revision is on a pre-determined basis. This has been done only on account of a prior objective of ‘helping’ new operators. The entire exercise to re-fix MTC has been selectively picked up so that the process fits the end objective, rather than following an objective established methodology which would empirically dictate the end result. As a result, Service Providers can’t

e) in discharging its statutory function to determine the MTC under the TRAI Act and its stated objective of using a fully allocated costs approach to calculating the MTC, the TRAI was required to estimate the economic cost of network providers supplying termination services. The economic cost of supplying termination services necessarily includes the capital costs that network facilities, as well as an appropriate return on capital and return of capital employed.

f) there seems to be a disjunct between TRAI’s dated reasons for issuing the impugned regulations set out in the Explanatory Memorandum dated 9th March, 2009 and its decision to reduce MTC. The reasons indicate that the TRAI’s main objective in determining the MTC was to reduce the termination rate for the purpose of lowering the costs of a small sub-section of industry participants at the expense of the mobile telecommunication network operators on whose network operators on whose networks the majority of subscribers call are terminated.