1. The objective of this paper

1. This paper introduces various concepts, principles and methodologies for determining telecom tariffs and interconnection charges (i.e. charges paid by one operator to another for use of the latter’s network in delivering the telecom service). The purpose is to provide a basis for comments and suggestions from interested parties and the public to take forward the process of developing pricing mechanisms for telecom tariffs and to provide guidelines for interconnection charges. Besides explaining the main features of different methodologies, a number of options have been listed and questions posed to focus attention on clarifying various aspects for discussion on a comprehensive pricing methodology for the telecom sector.


(b) The background: vast and increasing opportunities available through telecom

2. Technological progress in the twentieth century has brought about changes and opportunities which were earlier visualized only in the realm of make-believe or science fiction. As we approach the twenty-first century, the pace of this change continues unabated. There is a widespread perception now that telecommunication technologies and products will have a dominant influence upon business and social behaviour during the next century. The dynamics of telecommunications are expected to provide a fast-track for uplifting the technological capabilities of whole societies. However, at the dawn of an information age when the limits imposed by time, distance and space are increasingly turning into memories of the past, there are great differences in the preparedness of various nations to benefit from the extensive, and in several instances still unfolding, opportunities that arise through a state-of-the-art telecom network. The capacity of any nation to benefit from the telecom opportunities at its most basic level is shown by that nation’s teledensity (i.e. telephone lines per 100 inhabitants). Table 1 compares the situation regarding India’s teledensity (including its estimated level for the year 2000) with the levels achieved in some other countries.



(c) Need for increasing teledensity and telepropensity

3. A striking feature of the cross-country comparison in Table 1 is the extremely low teledensity of India (see also Chart 1). This picture does not change even if we consider the number of residential telephone connections per household (Chart 2). Moreover, the relative divergence that characterizes India’s teledensity is much more marked than the relative situation with respect to certain other technical and social parameters. For example, a significantly large proportion of India’s university students enroll in natural and applied sciences, and the life expectancy and GDP per capita (in terms of purchasing power parity) are relatively much higher than the comparative situation for teledensity. In view of the immense potential contribution that telecommunications can make to economic growth of our country, and for integrating different parts of our nation in the economic and social mainstream, a need to focus on increasing our teledensity is clearly imperative.


4. Particularly for nations with low teledensity, an important consideration is the extent and nature of the telecom use by its people -- we could call this the "telepropensity" of that nation. A high telepropensity is likely to structurally alter the manner in which economic and social interactions are conducted, and help people better integrate with the information age by being more conversant with the use of diverse and modern technology. The telepropensity of India is reflected by, for example, the comparatively small number of internet users and low telephone revenues per line and per inhabitant (Table 1 and Charts 3 and 4). Furthermore, not only does India have a low teledensity, about one-fifth of the

subscribers make less than three calls a day (Table 2).


(d) Link with the price mechanism

5. Teledensity depends on both demand for telephone connections as well as the availability of those connections through new investment and efficient operation of the network; private entry to augment the capacity of networks is now common in a number of countries. Telecom tariffs and interconnection charges have a crucial effect upon these developments.

6. Telepropensity, even more than teledensity, is affected by the price mechanism. Telecom prices therefore have an extremely important role to play in promoting the extension and use of telecom, and for increasing the likelihood of the adoption and diffusion of modern and innovative telecom technologies and services.


(e) Pricing mechanisms for telecom: the main focus of this paper

7. The important point about prices is that they are not an end in themselves, but are a means to achieve an end – the end may be the development of telecom network in the country, efficient operation of that network, and the provision of universal telecom services. The next section of this paper, therefore, begins with a summary of the main objectives of telecom tariffs, and then summarizes how these tariffs are likely to contribute to these objectives.


8. The discussion then addresses different principles and methodologies considered by regulators for pricing telecom services, and mentions the points in favour of or against the use of each such methodology (Section III). The methodologies are discussed under five broad categories: prices based on costs, mark-up on costs, subsidized prices, demand-based prices, and flexibility of the price system. On the basis of this discussion, options for pricing telecom services are suggested in the concluding part of this section. A likely conclusion from this discussion is that a combination of different methodologies may be more appropriate than reliance on any single methodology.


9. Section IV of the paper considers the specific situation of India. Based on the conclusions of the previous section, it provides some options for the general framework to determine telecom tariffs in India. In addition, it raises questions regarding a need to reconsider certain specific aspects of the prevailing tariffs, namely escalating tariffs linked to the number of calls made, tariffs applied for national STD and operator-assisted trunk calls, and the off-peak rates for national and international STD calls. This section also provides a basis for considering the tariff structure applied to international calls.


10. Section V deals with interconnection charges. It begins with a summary of the procedures used for setting interconnection charges, then addresses the objectives of interconnection pricing, followed by a discussion of the different methodologies for fixing interconnection charges and mark-up. It ends with some conclusions regarding interconnection charges, which are presented in the form of possible guidelines.


11. Annex 1 of the paper summarizes certain salient features of telecom services and costs; Annex 2 provides a simplified picture of the demand and supply situation for telecom in India; and Annex 3 discusses the deficits arising due to the need to meet social objectives.


12. Among the conclusions emerging from this paper is that eventually telecom prices should be based on costs. If cost-based tariffs were to be truly implemented, it is necessary to have information in much greater detail than is presently available. Collection and collation of the required data would take time, and therefore an important question to answer is whether the work on telecom tariffs should remain suspended due to inadequacies of existing data, i.e. until these inadequacies are removed, or the question of telecom tariffs should be addressed on the basis of the available, albeit imperfect, information.

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