Telecom IUC charges has drained industry lifeblood; why telcos should have been forced to come up with a rate

By: , and |
Updated: Sep 27, 2017 4:45 AM

Rather than Trai fixing IUC, it would have been better that telcos be forced to come up with an agreeable rate applicable across industry

Telecom IUC charges, Trai, TDSAT, Vodafone, Airtel, idea, Interconnection Usage Charge, reliance jio, Indian telecom, Long Run Incremental CostThe cry goes around—‘here we go again’ with another round of bitter litigation about to engulf the embattled sector. (Reuters)

By Rajat Kathuria, Mansi Kedia & Kaushambi Bagchi

Whenever an important announcement is made in Indian telecom, a gripping sense of déjà vu begins to take effect. The cry goes around—‘here we go again’ with another round of bitter litigation about to engulf the embattled sector. The battle lines are again drawn between the leaders—Vodafone, Idea and Airtel (VIA)—and the combatant Reliance Jio, while the rest of the operators may be considered benign onlookers at best and collateral damage at worst. Beneficiaries are likely to be lawyers, finding opportunity to advice on complex issues in an uncertain environment.

A minor aside. The excessive dissonance in the sector can be traced to the beginning of liberalisation in 1994 and has never really ceased, although there have been periods of relative calm such as those between 2000-02 and 2005-11. Both Trai and TDSAT are products of bruising court conflicts in 1996 and 2000, respectively, and the fallout in terms of a trust deficit has been quite damaging for the sector in general. The private sector believes regulatory institutions are biased and out to milk them for revenue, and the public sector feels the private sector games the system at the slightest provocation and opportunity. As a result, trust between public and private sectors has been at a premium, and fissures within private sector ensemble has meant litigation has become the most obvious and visible manifestation of the credibility gap. What loss this would have caused Indian telecom in terms of foregone opportunity no one will ever know, but one thing is certain—the amount, if ever estimated, will not be small.

But back to the present. Here is the nub this time. Trai ordered a 57% cut in the Interconnection Usage Charge (IUC) with effect from October 1, implying that the amount an operator originating a call must pay the network terminating the call decreased from 14 paise per minute to 6 paise. This is quite a big deal, since there is a lot riding on the level of the termination charge—a single paisa can have a vast impact on the distribution of revenue among operators. The current levels of traffic between VIA and Jio is imbalanced—Jio pumps out 9-10 times more traffic to VIA than it terminates. Accordingly, termination contributes a significant part of the revenue for VIA—about 14-18% of their operating profit—while Jio has paid about Rs 3,000 crore as IUC to incumbents since its launch last year.

Thus, termination charge, also known popularly as mobile termination charge or MTC—because of India’s obsession and success with mobile networks—has been a source of dispute not only in India, but in all liberalised telecom markets. Besides the level, what is of importance in the regulatory process is the choice of economic model to arrive at the precise rate. All economic models involve assumptions and thus subjectivity, some more and some less, and it’s next to impossible to jettison it (i.e. subjectivity) completely from the modelling exercise. Among cost-based models, there is a rising tendency among regulators to shy away from Fully Allocated Cost (FAC) model towards Long Run Incremental Cost (LRIC) methodology and variants such as LRIC Plus and Pure LRIC. It is acknowledged that cost estimates from these models are sensitive to definitions of common costs, direct costs, capital costs, but in general throw up lower estimates than FAC methodology. Trai, in its 2015 revision of termination charges, gave estimates of termination charges using, for the first time, two of the three LRIC models, LRIC Plus and Pure LRIC. Since IUC charges are contentious, the ITU recommends that regulators should try and keep regulation as simple as possible—in other words, migrate to a Bill and Keep (BAK) regime as soon as implementable, else use LRIC in the interim. ‘Implementable’ refers to balanced traffic flows across operators and Trai reckons we should reach that stage by 2020.

Operators have often underscored the need for transparency in sharing details of cost models, based on which Trai notifies IUC regulations. An aggrieved Vodafone has gone to court, calling for more transparency in the process, including the need to make the model public. In an open consultative process where multiple models are floated for discussion, demanding transparency on the regulator’s choice of the final model is mot juste.

Under the prevailing pattern of traffic, the reduction of MTC from 14 paise to 6 paise per minute will cause a redistribution of the telecom pie in favour of RJio and away from VIA, although there is nothing in telecom regulation or most regulation that mandates revenue neutrality following an intervention. A brief look at history is instructive. The evolution of termination rates in India shows a steady fall from a high of Rs 1.6 per minute in 1998 to 6 paise now, and going down to zero in 2020 (see chart). Each time the charge has been revised, its journey has been downward. But contexts are also important and the storyline around telecom is arguably a lot gloomier today than ever before. Traffic congestion is the dominant narrative, and although a billion-plus subscribers is the seductive truth, the market remains hyper-competitive with the market share distributed between three or four top players. There is no doubt that IUC is a favourite regulatory instrument to support and promote competition, but it could be thought of as being subservient to the need to preserve stability given existential troubles of the sector at this time. Hence, reducing MTC now is like using the right instrument at the wrong time.

According to Trai, the benefits of lower termination charges will be passed on to consumers and boost competition. The relationship between termination rates and retail prices is however complex, in part because of what, in the literature, is referred to as the water-bed effect—this effect examines the empirical relationship between interconnection and retail prices and it is inconclusive, implying it could go either way. While the evidence from India is not yet available, it is quite possible that financially distressed telecom operators adjust lower revenues from IUC by increasing other prices, competition permitting.

Given the sharply divided position, Trai is admittedly on a difficult wicket. Had it increased IUC against the historical trend, it would have been accused of favouring incumbents, and with the reduction of over 50%, it has been fiercely charged of being pro RJio. Perhaps maintaining the status quo was not an option, since the regulator had already committed to reviewing termination rates.

Given the issue has become a bone of contention between VIA and RJio, perhaps one course of action could have been to seek an agreeable rate from the industry, i.e. put the onus back on the industry. An ultimatum from the regulator to the industry to come up with an applicable MTC acceptable to all would have forced operators to look at own collective long-term interest and spared blushes for Trai. Of course, that would demand maturity on part of all stakeholders, including the judiciary that has often taken on cases with obvious manifestations of gamesmanship on part of operators—to delay and to equivocate—instead of nipping such attempts in the bud. A strong message from the judiciary that it is there to promote sectoral interests and not individual welfare will send a much-needed signal to reduce excessive litigation and gamesmanship the sector has been witnessing. We think this can happen, for hope springs eternal in our digital spirits!

Rajat Kathuria is director and chief executive, Mansi Kedia is consultant and Kaushambi Bagchi is research assistant at ICRIER. Views are personal

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