Certain Issues Arising From the Comments on TRAI’s Consultation Paper of 4 November 1997 on Telecom Pricing
20 February 1998
Comments on the TRAI’s Consultation Paper on "Telecom Pricing" were provided by a wide range of interested parties, including the Department of Telecommunications (henceforth "DOT"), companies with telecom interests in India, industry associations (including of specific types of services such as cellular operators, radio paging), consumer associations, and private individuals. Annex 1 contains a list of those who provided these comments.
The comments addressed the questions on tariff policy raised in the Consultation Paper and the ideas presented in the section on interconnection in that Paper. In several instances these comments went beyond the scope of tariff or interconnection policy. This note provides the main thrust of the comments with regard to the discussion on tariffs and interconnection policy in the TRAI’s Consultation Paper. The views of the DOT on a number of issues are highlighted because the DOT is the most significant contributor to the prevailing price policy. Furthermore, in certain instances the DOT’s view was significantly at variance with the more common view expressed in the comments.
A consideration of the various comments raises some additional questions. These questions are mentioned in bold print in this note, and provide a framework to focus the discussion in the Open-House meetings. Part 1 of this note addresses issues relating to tariff policy and Part 2 to interconnection policy.
Certain suggestions which are presently subject of petitions made to the Telecom Regulatory Authority of India have not been included in this note. Further, in several instances, different comments emphasized similar aspects but expressed them in different ways. For example, a number of comments sought cost orientation of prices, while some others stated that there should not be any cross-subsidization in the pricing scheme – both these sets of comments implied a similar policy response. Likewise, the idea that non-basic services should be subject to lighter regulation was expressed in a variety of ways. Rather than consider each separate expression of a particular idea, this note attempts to capture the main messages contained in the comments provided to TRAI. This helps to simplify the assessment, and to better focus on the main issues that need to be addressed.
One set of comments recalled the results of an early 1990s study on telecom tariffs by the Bureau of Industrial Costs and Prices. A number of the conclusions of that study, which was among the studies that provided a backdrop for the TRAI’s Consultation Paper on telecom pricing, were supported by several comments received by the TRAI. These studies (i.e. the prior work on telecom tariffs), as well as the comments provided on TRAI’s Consultation Papers and during its open-house discussions, will form a part of the TRAI’s transparent and consultative process to reach its own conclusions on telecom tariffs.
PART 1: TELECOM TARIFFS
This part of the note is organized in four different sections: Broad conceptual issues relating to restructuring of India’s telecom prices, general aspects of price regulation, certain specific aspects of price regulation in India, and various other comments. These sections will also summarize the main message from the comments and raise certain queries that arise from those comments.
A. TELECOM PRICE RESTRUCTURING: BROAD CONCEPTUAL ISSUES
I. Is re-balancing or restructuring of telecom tariffs warranted in Indian conditions today?
Most comments were in favour of tariff restructuring, or re-balancing, of telecom prices. However, the DOT argued that countries which embarked on tariff re-balancing (and allowed "pure competition" to come into play) did so only after saturation levels were reached in those countries regarding the provision of telephone services. The DOT stated that though cost orientation should no doubt remain as the long term goal, India had a long way to go before world average teledensity levels were reached. Hampering surplus generation at this stage by premature emphasis on cost orientation would cause serious setback to future expansion of the telecom network in India.
An important question that arises from this view is:
What are the consequences of this stance of the DOT for the Government of India’s current telecom policy, especially with regard to entry and operation of the private sector in different segments of telecom service, and with respect to infusing efficiency and dynamism in the telecom sector?
Most comments stated that re-structuring of telecom prices in India should take place in a phased manner, but the general view was that the exercise should not be postponed. In that context, the DOT stated that work on telecom tariffs should be undertaken with the available information, as scientifically collected and collated as possible.
Further, the DOT stated that restructuring of telecom prices should be approached gradually and in easy steps. It added that the DOT’s long distance revenues stood on a narrow base, and were highly sensitive to small changes in call charges. The DOT stated that any abrupt reduction would cause a sharp drop in those revenues and severely impede network development. Furthermore, the DOT mentioned that with the emerging competition in India, the narrow revenue base of the incumbent would become even narrower.
Even regarding a de-escalation of local tariffs, while the DOT agreed with the ultimate objective of replacing the structure of escalating call rates by a more simplified and unified structure, it was of the view that this exercise should be undertaken in gradual steps. The reasons provided by the DOT included: if the change were not gradual then it would adversely affect the DOT’s revenue generation and the implementation of its investment programmes to increase teledensity in India; the present call rate structure provided concessional service to low calling subscribers; this structure was based on the ability to pay principle which was in conformity with the DOT’s broad social policy objective; and, that this structure was designed to cope with existing levels of network capability for handling calls.
Relevant questions in this regard include:
How long a time period should be considered for a phased restructuring of telecom price?
Does one need to take into account the Government’s plan of prospective liberalization of long-distance and international call segments when deciding the time period within which a restructuring of telecom prices should take place in India?
Are the DOT’s fears justified that its revenues will be adversely affected if long-distance call prices are reduced or if the pattern of escalating tariffs for local calls is restructured?
Do the DOT’s assertions that the escalating tariffs provide concessional service to low calling subscribers, that it is targeted to achieve social policy objectives, and is designed to cope with existing levels of network capability for handling calls, imply that such tariffs cannot be changed quickly? How valid a constraint is imposed due to these reasons on restructuring escalating tariffs?
III. Can re-balancing/structuring of telecom tariffs be conducted without considering international call charges in the exercise?
The DOT was of the opinion that international call charges should be precluded from the tariff rationalization exercise, at least immediately, in view of the on-going debate in multilateral fora on settlement rates. The DOT stated that a view on international call tariffs could be taken after this issue is resolved.
This view of the DOT was contrary to that of most commentators (including VSNL), who strongly favoured an overall re-structuring of telecom tariffs, including international call charges.
In addition to the question mentioned above, a query arising from the DOT’s response is:
Is the discussion on settlement rates in the multilateral fora a constraint on re-structuring of international call charges?
IV. What should be the scope of a telecom tariff restructuring exercise?
In general, the comments reflected a view that all telecom prices should be considered within a telecom tariff restructuring exercise. In this regard, the DOT stated that since its overall earning was nothing more than reasonable returns on its investment, when one spoke of the need to lower long distance call charges, the question of simultaneously hiking rentals and local call charges had to be considered, or else the DOT’s operations would become unprofitable. However, the DOT cautioned against raising rentals and local call charges in the context of tariff restructuring because such a step "might have a deep impact on the popular psyche".
This raises a few questions, some of which are more relevant with regard to the specific issues discussed in the next section. Here, the more general questions that need to be addressed include:
What is the objective of low (or subsidized) rentals and local call charges? Is there no alternative method of achieving the social objective? What are these alternatives? Who should bear the cost of the subsidies to maintain low rentals and local call charges? If subsidized low rentals and local call charges are continued, what would be the implication for further investment and growth in the telecom sector?
B. GENERAL ASPECTS OF PRICE REGULATION
I. Which Telecom Operators Should Be Subject to Price Regulation
Some comments stated that price regulation should be in place only for the (basic) services provided by the incumbent operator, namely, DOT, MTNL and VSNL. In that scenario, other operators would be free of regulation.
Another question in this regard is: Would a regime which regulates only the incumbent operator achieve the objectives of generating growth, efficiency and equity in the telecom sector?
The comments focused on two criteria for determining which services should be subject to price regulation: the type of service, and the extent of competition in the market.
The general view seemed to be that basic services should definitely be regulated, while value added services might or might not be subject to price regulation, depending mainly on whether or not the service is provided in a competitive market. Some services specifically mentioned among those that should be price regulated included lease lines, e-mail, and data services.
Further, while some comments stated that two or more operators (or four or more operators) would suffice for providing adequate competition, some others argued that no single statistic was good enough to determine adequate competition. Instead, they suggested that there was a need to assess the nature of control on a bottleneck facility by any operator, and the ease of response by competitors to an increase in demand for the service.
Two sets of questions arise in this regard:
(a) Do we need to at all regulate value added services, and if so which services and why? Should cellular telephony be removed from the purview of price regulation? Do we need to price regulate data services?
(b) How do we ascertain that there is adequate competition in the market? Should there be a case-by-case determination for this purpose?
III. What Type of Price Regulation Should be Used for Telecom Services?
For basic services, a number of comments suggested that the regulator should specify a particular level of price for each service. Some stated that if basic services were supplied in a competitive environment, then a price cap, rather than a specific price level, should be used. A few others argued that in order to facilitate the regulatory process, price cap mechanism should be used for basic services after some years, irrespective of the extent of competition in the market. One prospective operator stated that a price cap mechanism, including sub-caps for particular services, should be used from the beginning itself, in view of the difficulty in obtaining the relevant data to implement other price schemes.
For other services subject to price regulation, most suggestions favoured the use of only a price cap. Some stated that both price cap and floor should be used. A few suggested that a higher mark-up (or tariff) should be used for services which provided greater use or value to subscribers (premium services).
Since a price cap mechanism figured for both basic and other services, certain questions worth considering would be:
Should a price cap mechanism be used for all telecom services that are subject to price regulation, using sub-caps for specific basic services which might require particular focus? How should mobile telephony be treated in comparison to fixed line telephony?
Alternatively, is it necessary to have a specific price level determined for basic services, rather than having a price cap mechanism with sub-caps for them?
If a specific price level is necessary for basic services, for how long should one maintain such a price regulation. Should a price cap be introduced after some years? If yes, then after how long?
IV. What Should be the Basis of Fixing Prices or Price Ceiling/Floor
Most comments favoured relying on a cost-basis for pricing. Some mentioned a need to rely on demand-basis, especially for value added services or for non-essential services. A few wanted no reliance on demand-basis for stipulating telecom prices.
(a) Cost-Based pricing
A large number of comments favoured basing prices on costs (including a reasonable rate of return on capital employed). Some also emphasized the importance of incorporating risk factor in the mark-up. The focus on costs was also reflected by several comments which emphasized that there should be no cross-subsidization.
The DOT stated that "generally, prices could be cost based and should allow for a reasonable rate of return on capital employed. A certain mark up for risk should be should also be allowed. This is particularly true for some of the new services where there is no assured market. For some services, such as leased line services, prices should be based on the earning capacity of the facility being provided. For some of the premium services e.g. ISDN, IN services etc. higher tariffs can be charged as compared to basic telephone service."
Yet another comment (from a prospective operator) was that detailed cost-based pricing would be difficult to implement. Thus, it was suggested that price caps should be used, together with some sub-baskets within the overall price cap basket. It was pointed out, nonetheless, that even with a price cap mechanism, the relevant costs would need to be calculated to ascertain the price cap.
The DOT has specifically mentioned that leased line services should be charged on the basis of earning capacity of the facility being provided. Should this principle be used to charge for leased lines, or should charging of leased lines be based on a cost basis?
The DOT stated that demand based pricing was a useful device for bringing equilibrium in a market where demand for the service, for short term reasons, temporarily outstripped supply. Further it stated that as an operator it preferred, and would continue to prefer, the option of resorting to strategic demand based pricing for specific services and for specific periods of time.
The DOT also pointed out that a tariff setting exercise involved more nuances than could be captured by emphasis only on cost orientation. For a number of services "opportunity cost" principle, or the principle of "what the service can earn", would be relevant for fixing tariffs; sometimes tariffs had to be set on the basis of "value of service to the customer"; promotional tariffs might be required in case of new telecom services; and that "ability to pay" principle could not be entirely done away with in the context of the country’s social policy.
Questions that arise in this regard are:
Which basic services, if any, should be price regulated on the basis of principles of "what the service can earn" or the "value of the service to the customer"?
How do these principles relate to those services that are subject to price regulation and for which price caps rather than specific price levels are stipulated?
V. If Cost-Basis, Then Which Costs?
(a) Many comments stated a preference for using long run incremental costs (LRIC) or total service long run incremental costs (TSLRIC) as the basis for prices. Some argued for using fully distributed costs in the short term and LRIC in the long run. Several suggested that a floor price should be based on TSLRIC and a ceiling price on stand-alone costs.
The DOT and a prospective operator stated that it would be virtually impossible to calculate, and hence use, LRIC and TSLRIC. The DOT favoured using fully distributed costs as a basis, while the prospective operator suggested that price cap mechanism be used instead.
The DOT further stated that in its case, it was not valid to object to the use of fully distributed costs methodology on usual grounds, namely on the grounds that this methodology provided perverse incentives to report higher costs in order to charge higher prices. The reason for this, according to the DOT, was that as a Department of the Government, the DOT followed established government accounting procedures and was answerable to the Comptroller and Auditor General of India. Its expenditures were voted in Parliament. Its planning and budgeting processes were overseen by the Ministry of Finance and the Planning Commission. There was thus no scope for suppression of information or accounting jugglery. Further, the TRAI had access to all relevant records of the operators.
The DOT’s view was that use of actual data from operators would be useful, and that the use of international estimates of costs might be less relevant in the Indian context. Some others suggested that in the short term, it might be necessary to benchmark whatever Indian data are available against results from other countries.
Certain questions worth pursuing include:
How long will it take to obtain the relevant information on TSLRIC? Is it not possible to obtain even rough information on these costs in the near future, and would that estimate involve a major discrepancy with a more refined estimate? What does this imply for interconnection pricing?
Since a reasonable profit will need to be provided to attract investors into the Indian telecom sector, should the regulator work with both concepts, namely fully distributed costs and TSLRIC, in order to calculate the requisite profits as well as to provide the appropriate incentives regarding the direction and level of investment in the telecom sector?
Or, should price caps be used, based initially on fully distributed costs and then be subjected to a change which reflects
(ii) a phased transition towards a level which reflects the TSLRIC levels?
Alternatively, can we use international benchmarks, or are there any persistent structural reasons for Indian costs to be significantly different from these benchmarks? If so, what are these reasons? Is it possible to use international benchmarks and make (straightforward) adjustments to them to adequately reflect the Indian situation?
(b) Several comments supported using forward looking costs as a basis for telecom prices. A few, however, argued against the use of these costs. One (a prospective operator) argued that it was not possible to calculate these costs. The DOT acknowledged that the use of forward looking costs helped to maintain a link between costs and technological and market related developments, but stated that in its network, the assessment of forward looking costs or replacement costs was fraught with difficulty because of the disparate age and technology mix of the equipment in use.
Some questions that arise in this context are:
How does disparate age and technology mix of the equipment in use prevent reliance on forward looking costs, with particular reference to the Indian context?
Could a price cap mechanism with CPI minus X factor, incorporate by proxy a phased transition from actual costs to forward looking costs? Would such a phased transition to forward looking costs still pose problems for the DOT on account of the disparate age and technology mix of its equipment? If so, why?
(c) One of the reasons for the DOT’s emphasis on fully distributed costs was the extent to which it currently bore the costs of universal service obligation (USO) and of certain other services that it provided. For instance, the DOT has stated that the USO would continue to be largely shouldered by the DOT in the foreseeable future. Also, the DOT commented that it had to bear the costs of various other services such as the provision of free/subsidized services to VIPs, high dignitaries, MPs, for discharge of special functions of the government, to the railways, defence, and for special categories of persons and establishments.
A question that arises is should the DOT bear the costs of the USO and the second type of services mentioned in the preceding paragraph.
Any consideration of the previous question has to also address the issue of whether the DOT should bear such costs when it is operating in competition with other operators which are not similarly burdened.
This aspect links up with the extent of subsidies that have to be provided and the manner in which they have to be funded.
VI. Subsidies
A number of commentators recognized the importance of providing subsidies, in particular for social reasons. However, there was an abiding concern that these subsidies should be directed or targeted properly, that they should be transparent, and that they should not adversely affect the competitive position of different operators. In most cases, the comments on subsidies related to the need for achieving Universal Service Obligation (USO).
With regard to USO, certain queries need to be addressed:
What is the definition of USO? What is the cost of providing USO, and what is the net cost burden on account of this obligation to different operators? How should the net cost of USO be made transparent, and funding be provided to those fulfilling USO so that their competitive situation is not adversely affected? How can USO be better targeted at specific groups?
Other important reasons (given by the DOT) for continuing subsidization of telecom services were a commitment to social policy and the need for deeper network penetration. For these reasons, the DOT emphasised a need for having lower tariffs in less developed regions.
Once again, we need to consider whether such a subsidy is necessary, and if so, how will it be funded?
C. CERTAIN SPECIFIC ASPECTS OF PRICE REGULATION IN INDIA
I. What Should Be The Policy For Rentals?
The DOT pointed out that rentals were highly subsidized in India. Several comments favoured a rise in rentals, arguing that, in general, capital-related charges should be recovered by way of rentals. One suggestion was that after calculating the capital-related cost of the local network, a subsidy of roughly about 20% for rental might be considered adequate.
A few comments emphasized that rentals should not be raised, and some even suggested that they should be lowered.
Some have suggested that rentals should not be linked to capacity of the exchange, i.e. the present policy should be changed. One commentator, however, argued that while the present scheme of rentals needed to be rationalized, there was a justified basis (i.e. cost basis) for charging lower rentals for exchanges with less capacity.
We need to consider whether or not the rentals should be increased, and whether the same rentals should be charged in different areas? A related question is that if rentals are not to be increased, then how will the "subsidy" provided to rental be recovered? If this would require keeping long distance and international call charges relatively high, then what would be the implication for the pattern of investment and supply of basic telecom services in the years to come?
II. Should customers be differentiated according to some criteria?
A number of suggestions (including DOT) were made to distinguish between business and non-business subscribers, and charging a higher rental for the former. This was justified, inter alia, on the grounds that those who derived a greater value from the service should be liable to pay a higher rental. It was recalled that the above-mentioned BICP study had recommended such higher rentals for business and PABX subscribers. Another suggestion (by the DOT) was that higher rentals be linked to higher category or better quality of the service.
Some comments suggested keeping the same rental for both rural and non-rural areas, while some others favoured lower rentals in rural areas.
It was suggested by some that business subscribers should be charged a higher call charge than that applied to others (in one case it was suggested that this difference should not exceed 10 per cent). Another suggestion by some was that higher tariffs should be charged also to subscribers having STD facilities, irrespective of whether or not they were business subscribers.
It was stated by some that identifying business subscribers would be a difficult task. One submission mentioned, however, the solution suggested by the BICP study, namely that all subscribers be asked to give a declaration whether they wished to be listed under the category of business or non-business. Those indicating a preference for business category would pay higher rental charges but would also be eligible for the normal deduction of this expense from their income for assessment of income tax.
Some questions which arise in this regard are:
Would it be difficult to adequately identify and cover business subscribers under the differential pricing mechanisms, including through the use of the scheme suggested by the early 1990s BICP study on telecom pricing?
Instead of charging higher rentals to business subscribers, should rentals instead be linked to the quality of service that is provided, i.e. higher rentals for higher quality of service?
Alternatively, should business be targeted with higher rental and call charges or should one use a policy of offering different combinations of rental and call charge schemes and let the subscribers themselves decide on the options that they prefer?
III. Should Flexible Tariff/Rental Combination Options Be Offered To Customers
Several comments expressed approval for using flexible tariff regimes, which would offer a number of options for combinations of rentals and call charges. One suggestion was to consider three categories of users for determining the flexible options: occasional users, regular users, and intensive users.
The DOT, in contrast, stated that there was little point in creating flexible options because, in its opinion, these options would not provide adequate return. Moreover, according to the DOT, it was not clear whether flexible price package options (at least when considered in isolation) would lend additional market advantage to the operators.
An obvious question to consider in this context is whether flexible options can be created to address the DOT’s concern, namely devise options which will be an improvement over the prevailing situation? Also, could such options be combined with the suggestion mentioned in the previous section that a higher rental could be charged for a higher quality of the service provided?
IV. Should Free Calls Be Provided, And If So, How Many Per Month?
Most comments favoured continuing with free calls. Several, however, suggest that the number of free calls should be reduced, or that their number should be rationalized so that the costs of these calls were not below rental (One suggestion was to reduce them to 100 free calls per two months). A few (including the DOT) suggested that the decision on the extent of free calls should be left to the operator.
One comment was that the entire concept of free calls needed to be re-structured, keeping in mind that the real rural poor could not afford an independent phone. At best the rural poor used the Public Call Office to make their calls in the time of necessity.
Key questions in this regard include:
Should the decision on free calls be left to the operator to make? If not, how many free calls per month should be provided?
V. Should There be A Change in the Distance Slabs For National STD Rates and/or Should the National STD Rates Be Changed
(a) Distance slabs
Several comments were in favour of rationalizing or reducing the number of these slabs.
However, some emphasized increasing the number of distance slabs. For example, the DOT stated that when considering the issue of reducing the number of distance slabs for the lower tariff range, one should also contemplate whether to introduce larger number of slabs for higher distance range. Further, the DOT stated that given the vastness of the country, there should be more than one extra (i.e. more than that existing now) tariff slab for distances in excess of 1,500 kms.
A few (including the DOT and a prospective operator) have commented that costs become independent of distance with satellite technologies, and not with other technologies presently in use in our country. Also, it was pointed out that fixed and variable costs were not linked in the same manner with distance. A need to install further transmission capacity as distance increases would imply a rise in cost with increasing distance.
The relevant questions that need to be considered include:
Does the technology presently in use justify the large number of distance slabs currently in place? If costs do increase with distance at present, then what is the link between distance covered and cost increase? When will India be in a position to consider tariffs that are largely free of distance beyond a specific distance (e.g., when will the use of fibre technology reach a level that reduces or removes the effects of distance)?
(b) National STD Rates
Most comments were in favour of adjusting national (and international) STD rates. Several support basing these rates on costs. As mentioned earlier, the DOT would prefer a gradual reduction in national long distance rates.
One comment suggested that there should be three slabs for STD. One, a uniform rate for STD calls anywhere in the same State. Two, higher STD charges for calls to the adjoining States. Three, for STD calls anywhere else in the country, a higher but uniform charge irrespective of destination.
In this context, we need to consider:
What should be the charges for different distances? What is the link between the number of distance slabs and different rates for these slabs, and whether and how the likely liberalization of the long distance sector and use of new technology will change such a link in the near future?
VI. Should the Time Slabs For Domestic Off-Peak Rates Be Altered?
A few suggested leaving the number of slabs the same, some favoured increasing their number, while some others were of the opposite view (namely that the number of slabs should be decreased).
Another suggestion was that the regulator should only regulate the rates for peak hours, and leave the decision on off-peak rates and number of slabs to the operators. This question, i.e. whether the regulator should regulate only the peak period rates, needs to be addressed?
VII. Should the Timing For International Off-Peak Rates Be Changed?
Most comments favoured the same off-peak timings for calls to all countries. One asked for dispensing with off-peak international tariffs.
D. VARIOUS OTHER COMMENTS
Most comments favoured unbundling of services, while it was also pointed out by a few that bundling of services might be required for making products commercially attractive.
Further, it was pointed that that while there should be consistency of pricing between a bundled product and the unbundled components of that product, there need not be exact equivalence of composite price of the unbundled components and the price of the bundled service because of additional administrative and technical costs involved in provision of unbundled services.
A number of comments expressed concern regarding potential anti-competitive behaviour by operators controlling bottleneck facilities, and emphasized the need for establishing competition-policy related safeguards.
There was general agreement that the tariffs for operator assisted trunk calls and STD calls should be consistent, with a surcharge for the former reflecting the additional cost arising due to the use of an operator. The DOT stated that in India, the charges for these two types of calls were broadly consistent.
Most comments were in favour of rationalizing the present structure of escalating tariffs for local calls (the incumbent operator agreed with such an objective, but suggested that this be done in gradual steps). Several suggested that volume discounts be provided instead, but some cautioned against this policy on the grounds that volume discounts would cause problems in the present situation of a capacity constraint. Another suggestion was to leave the decision on volume discounts to the operators themselves.
The DOT stated that while speaking of the virtually new network coming into existence in India in the next decade, the absolute size of the incumbent operator’s current network of 16 million lines should not be lost sight of.
One suggestion was to have rural rentals as 25 per cent less than the non-rural rentals. Another was to have a flat bi-monthly rental of Rs. 400 for exchanges with capacity above 25,000 lines, and Rs. 200 bi-monthly rental for exchanges with capacity equal to or less than 25,000 lines.
A tariff structure with an initial flat rate tariff followed by a per second charge would be technically difficult to implement because of the varied technologies in use. Also, the initial flat tariff would be a disincentive to those making short business calls. In this context, it was also suggested that progressively as electronic exchanges get installed, the concept of charging local calls on timing basis should be introduced.
One comment stated that the cost calculation should essentially be circle specific, since the cost of provisioning of service was different for different circles.
Eventually the "Telecom Pricing" Consultation should be widened to include all types of telecom services available to a citizen such as cellular radio, trunk mobile radio, radio paging, etc.; it should also include the aspects of Spectrum Fee, Wireless License Fee, which a service provider is required to pay, in addition to DOT’s license fee; and in due course, the TRAI should also look into the "pricing" aspects of Global Mobile Personal Communication Service.
Reasonable return should equal at least the prime lending rate, and should incorporate the risk factor. It was pointed out that the BICP study had stated that a 12 % return on net worth after meeting interest charges could be considered appropriate.
It was suggested by a prospective operator that, as a general matter, the TRAI should establish merely the pricing procedures and then require incumbents to submit their proposed prices supported by a demonstration that the procedures have been met. Interested parties should be given the opportunity to offer their own comments.
It was also suggested that the TRAI should require the incumbent’s tariffs to be published and to be readily available to the public.
One suggestion was to have the following tariff/pulse rate structure:
Another suggestion was that:
Another specific suggestion was to reduce domestic long distance and international call charges by 20 % and 30 %, respectively, charge Rs. 2.50 per unit call for local calls, and a rental of about Rs. 600 per month while providing 240 free calls.
Part II. INTERCONNECTION
An important comment regarding interconnection pricing was that it should be considered within a comprehensive framework addressing issues such as of the objective of interconnection policy, how interconnection prices should be determined (by commercial negotiation or regulatory directive), the basis for determining interconnect prices, how disputes between operators were to be resolved, and the extent of interconnection obligations. This section touches upon all these aspects but, in comparison to the section on telecom tariffs, focuses much more on general principles and guidelines.
To begin with, this section mentions the general principles that have been highlighted, then addresses the time period within which interconnection charges should be in place, followed by a consideration of the basis on which interconnection charges should be stipulated, and ending with a collection of other various comments.
I. General Principles and Guidelines Regarding Interconnection
Certain principles were emphasized by various comments. These included:
There must be mandatory interconnection of networks or any to any connectivity, equal access, reciprocity of interconnection charges, and unbundling of interconnection services;
Interconnection must be provided under non-discriminatory terms and conditions for providing all types of services and to all types of providers (including aspects such as non-discrimination in quality, location, ordering procedures and intervals, provisioning intervals, billing arrangements, maintenance and testing, physical characteristics of interconnection, protocol characteristics of interconnection, credit terms, warranties/guarantees);
Information on interconnection pricing and other important aspects should be publicly available (transparency), in a timely manner and subject to regulatory review.
The importance of determining the precise basis of the interconnection charge was not as great as the requirement for certainty and for timely decisions.
Interconnection charges be formulated so as to encourage efficient use of (and investment in) telecommunications infrastructure.
Regulatory agency should intervene only when essential services were involved (basically non-interventionist policies). Operators should be encouraged to settle interconnection charges through negotiations.
One comment stated that initially (for about five years), preferential treatment should be provided to new entrants. In contrast, the DOT stated that it was not the new entrant but the DOT which started with a comparative disadvantage because of its large sunk costs in the shape of old and obsolete plants not fully depreciated, large labour force, poor staff to DEL ratio, and numerous social policy obligations. Therefore, preferential treatment should not be provided to newcomers.
The DOT stated that the Guidelines issued by regulators should be in consonance with existing license conditions and should keep other legal issues in mind.
Further, the DOT mentioned that it was important to ensure that the interconnection charges were fair not only to the new entrant but also to the incumbent operator. Fixing of charges below cost, or in a manner which resulted in huge unintended revenue losses for the incumbent, harmed the viability of operations of the incumbent in the long run.
Regarding non-discrimination, the DOT stated that methodologies for interconnect charges would vary depending on the terms of the mutual agreement between the concerned operators. Hence, while the charges should not discriminate between one operator and the other, they need not always be exactly equal or based on the same pattern.
Some questions in this regard are:
What are the other concerns that need to be borne in mind about the above-mentioned principles and guidelines? What should be the level at which unbundling should be provided? Who should decide this level of unbundling?
II. How quickly should an interconnection regime be in place, incorporating the various relevant principles?
The DOT stated that so long as cross subsidies persisted in subscriber tariffs, the attempt to base interconnection charges purely or solely on actual cost would lead to distorted results and anomalies. Thus, the DOT argued that the re-structuring of subscriber tariffs and the gradual orientation of interconnection charges towards costs should go hand in hand.
In contrast, a number of comments favoured quick (even urgent) setting up of interconnect guidelines so as to impart certainty and fairness in the interconnection regime. Some argued that it would be useful for the regulatory agency to establish at the outset default prices for interconnection or initial prices for interconnection. One stated that interim interconnection charges should be established while awaiting the assembly of relevant cost details. One commentator was of the view that it was urgent to conduct a complete review of license conditions and in particular interconnect rates.
Certain questions in this regard are:
Is there such a close link between tariff re-structuring and interconnection charges based on costs that the latter cannot be determined till the former (i.e. tariff re-structuring) has taken place? If so, what is the basis of such a link?
III. On what basis should the interconnection charges be fixed?
The comments mentioned five different bases for fixing interconnection charges. Most comments favoured basing these charges on costs, a number expressed preference for revenue sharing, one combined both costs and revenue sharing, fourth emphasized opportunity costs or earning capacity of the facility, and the fifth mentioned the possibility of international benchmarking. Certain relevant questions on this issue are mentioned at the end of this section.
(a) Costs
Several comments favoured determining interconnection charges on the basis of costs.
(i) Which cost concept should be used?
A number of comments mentioned some form of forward looking, incremental costs as the appropriate basis. One mentioned that "average forward looking stand-alone costs" incurred by an efficient firm using state-of-the-art least-cost technology should be used.
The DOT has argued that even after cost orientation, interconnection prices should be based on fully distributed costs to enable the incumbent to remain in business.
Another suggestion was that the interconnection charge may be initially based on fully distributed cost, moving to long run incremental costs and total service long run incremental costs as competition evolves. Yet another suggestion was to base these charges on adjusted historical cost of the incumbent’s network, with these adjustments being made to reflect the recent and new developments also.
As in the case of tariffs, it was argued by some (including the DOT) that incremental costs were extremely difficult to estimate, and thus to use. In view of such a difficulty, some suggested that interconnection charges based on these costs could be a medium term goal (e.g., about three years), rather than relying on these costs immediately.
(ii) How should the costs be shared among operators?
The DOT stated that it was principally the seeker of interconnection who had to pay for the set-up costs of facilities.
The others presented a different view-point. Some comments stated that the basis of interconnection provision should be that interconnect link capitalization be shared equally. Specific suggestions in this regard included:
Set up cost should be completely shared between the interconnected parties, and usage charge should be shared among the interconnected parties in proportion to the cost of equipment likely to be involved to complete the call.
Each operator should pay for its own capital expenditure on the interconnect equipment on its own node, and then each operator should pay one half of the link investment costs between the two nodes.
(b) Revenue sharing
One comment stated that cost based interconnection pricing was a quagmire, required massive amount of data, and costly systems to collect, report and verify the data. It suggested that until prices for the interchange of traffic were agreed to, there could be a principle of "bill and keep" (which is basically a 100/0 revenue sharing regime). If this were not possible then there should be some form of revenue sharing. A few others also favoured a revenue sharing regime, though they did not envisage a 100/0 revenue sharing formula.
(c) On the basis of both costs and revenue
One comment stated that interconnect was mutually advantageous and therefore interconnecting operators must share the cost as well as benefits, i.e. the revenue. In this context, it was argued that the basis of interconnection charges should be that the operators each be rewarded in the proportion to the work done by them (measured on the basis of total service long run incremental costs to provide that service).
(d) Earning capacity of the facility
The DOT was of the view that if the end user tariffs were higher than cost plus reasonable return, then the interconnection price should reflect this opportunity cost (or earning capacity of the facility). Further, the DOT stated that till re-structuring of tariffs were achieved, it would be more meaningful to adopt the concept of opportunity cost for establishment of interconnection charges.
Further in support of this principle, the DOT argued that due to low teledensity in India and large hidden demand, large investments were needed for network expansion and such revenues needed to be generated from operating surpluses. Thus the DOT felt that the opportunity cost would continue to be relevant for fixing interconnection charges and tariffs for some time to come.
Another comment stated that if regulatory authorities wanted full competition at the very initial stage, then retail tariff could be a more appropriate way of charging for interconnect.
Some relevant questions in this regard are:
Should interconnection charge be fixed on the basis of earning capacity of the facility or on the other bases mentioned above?
If the other bases should be used, then how valid and/or feasible is it to use cost basis? In this context, it should be borne in mind that the general trend in the world is to fix these charges on the basis of costs.
If there has to be revenue sharing, then what should be the basis of that sharing of the revenue, e.g. should revenue sharing be decided on the basis of costs?
(e) Use international benchmarks
Some have suggested that international benchmarks be used for determining interconnection charges. The DOT was not in favour of this suggestion. In addition, the DOT argued that interconnection Guidelines issued by foreign agencies should be applied with caution.
An important question in this regard is:
What are the various reasons that make it inappropriate to rely on international benchmarks? Can these be adequately (and quickly) addressed with the available information?
IV. Various Other Comments
The DOT stated that capacity based charging system was not applicable to the DOT as the DOT did not have surplus capacity to allot to interconnecting operators.
According to the DOT, the Efficient Component Pricing Regime (ECPR) methodology had merit, though it required further study for adoption in the Indian environment. Some others, however, did not favour the use of ECPR.
With regard to ECPR, the DOT also pointed out that rather than the actual number of subscribers one must consider the revenue generating potential of the existing or prospective subscribers. Since the DOT’s total revenue earning potential stood on a very narrow base of subscribers, the loss of these subscribers would constitute a diversion of the market away from the DOT and might seriously threaten its financial viability.
The DOT stated that further studies on interconnection charges should go ahead with the available data.
One comment stated that there should be equal and fair access to spectrum.
One comment favoured a single interconnect charge for any particular service reflecting the average of differing levels of cost that applied throughout the nation. Another favoured a geographic de-averaging of interconnection charges.
Other comments included:
Financing USO through interconnection charges should be avoided.
If a great deal of the equipment were outdated, the new entrants should not be required to meet the full cost of any outdated capital or of other inefficiencies in the dominant party’s network.
Too low an interconnection cost can act as disincentive for the new operator to build its own network. The interconnection charge must be set at a level which encouraged new operators to enter the market and to invest in their own infrastructure, while discouraging wasteful duplication.
The interconnection framework must be adaptable to the evolution of competition in the market.
Interconnection should be mandatory without levying any fees.
The cost of interconnection would be lower if new operators for both basic and mobile services were permitted to establish local, national and international interconnection directly between themselves and with VSNL.
TRAI should institute special procedures to address grievances and consider new initiatives.
VSNL should be allowed to interconnect directly to other long distance operators, and also to local operators or big individual users on a high usage basis.
The incumbent operator should not refuse to accept any traffic at any point of interconnect, whether local, STD, or ISD traffic.
Annual inter-area junction charge, currently being charged at the rate of Rs. 1,500 per year per junction per km or part thereof in Metros, should not be charged as long as the MSC was within the local area of the telephone system.
Real cost of leased lines should be determined and cellular operators charged at a rate equal to the costs plus agreed rate of return.
Interconnection charging for cellular operators should be for the radial distance between points and not on a "slab" basis as followed now.
For effective operation of competition, the dominant firm should be required to pay the same charge for access to its network as charged to the other operators.
The charge for accessing the network of new entrants should be the same as that for accessing the incumbent’s network.
The DOT had one set of interconnection charges for MTNL and had imposed another set on the P-telcos. An explanation may be sought and harmonization effected.
The mark-up over incremental costs should be lower for interconnection and other essential services than for other services, given the expected benefits from the introduction of competition.
For cellular, the set-up costs would comprise the costs of the following elements: The ports at both ends (DOT exchange and MSC), the link from DOT tandem to MSC/RSM/POI, terminal equipment at both ends, interface equipment, test equipment, redundancy of interconnection (i.e. connection to two Tandems of DOT), plus the agreed rate of return (10 to 15%).
ANNEX 1
Comments on the TRAI’s Consultation Paper on Telecom Pricing were provided by: