Rajat Kathuria, Mansi Kedia, Kaushambi Bagchi & Gangesh Varma
The old order changeth, yielding place to new, And God fulfils Himself in many ways, Lest one good custom should corrupt the world
–Idylls of the King, Alfred Tennyson
The context of tariff regulation and the principles of tariff assessment are vastly different today from the time when tariff regulation was first introduced in Indian telecom in the late 1990s. The changes are manifest in technology, market structure, competition dynamics, service offerings and, above all, in the shift in attention from voice to data. This shift is visible both on the supply and demand sides and is likely to further accentuate with time, because technological change and content creation privilege data over voice. Because of this structural shift, the Telecom Regulatory Authority of India (Trai) is consulting stakeholders on whether the old principles of tariff fixation are relevant in the new regime. Telecommunication Tariff Order (TTO) of 1999 was decidedly the point d’appui of price regulation in the telecommunication sector in India, and it naturally embraced principles that dominated regulatory thinking at that time. It focused on ‘command and control’ to address the prevailing market failures. These market failures related to limited competition in the market, information incompleteness and distributional considerations. Against this background, TTO 1999 adopted prescriptive regulation through ex ante methods such as price caps, and also reflected on ex post legal remedies on abuse of monopoly power while simultaneously liberalising the sector to allow more competition in the market and also for the market. TTO 1999 was a landmark order in that, for the first time, it sought to make pricing cost-based and transparent, with a focus on voice. It sought to eliminate anti-competitive and unsustainable cross subsidies (many users will recall the impossibly high prices for international and domestic long distance calls with multiple slabs based on distance!), drastically reduced the price for essential facilities and provided a vision for the regulation of telecommunication services in the future. That vision saw price regulation as a temporary and second-best instrument for addressing market power, the best captured evocatively in the dictum often used in TTO 1999 that ‘competition is the best regulation’.
Mandatory and cost-based interconnection was perhaps the single-most important regulation that allowed the incipient competition to develop and flourish in the sector. Almost two decades later, while the TTO has undergone 62 amendments to adapt to far-reaching technological and structural changes in the market, the fundamental basis of regulation has not kept in step with changes in the sector. Given the new reality of the industry, a paradigm shift is necessary to reflect the fact that TTO 1999 may have outlived its usefulness.
In this new paradigm, where there is technological convergence, bundling of services and pre-eminence of data, a pure cost-based regime would be inadequate and, indeed, undesirable. Telecom analysts who swear by the benefits of cost-based interconnection in enabling competition and tempering retail prices will be well within their rights to ask how much more can the current interconnection regime deliver. A cost-based interconnection regime must be evaluated against the regulatory resource costs of determining the regime and the transaction cost of operating it. It is time to seriously ponder whether “bill and keep” is the preferred arrangement for sectoral benefit.
On the retail side, Trai already has already adopted forbearance as the preferred approach to tariff setting and rightly so. Competition is alive in the sector, and there is no need to be overly prescriptive on retail prices. Indeed, the evolution of the telecom sector in India best reflects the efficacy of withdrawing from ex ante tariff fixing in a market showing competitive character and competitive outcomes. The need to ex post monitor anti-competitive conduct will however continue to exist. Perhaps a strong case can be made for relocating regulatory resources to focus on quality standards, an area where Trai has had relatively little success. Quality has many dimensions, and regulating it is perhaps more complex than regulating price. For quality, defining and enforcing minimum requirements is crucial. Standards above the minimum are equivalent to changing the economic value of the service for which there will be different willingness to pay by customer groups and can be left to the market.
The ubiquitous shift in attention from voice to data also requires a changed approach. Data from Trai shows that revenue from data services increased from 15.62% of average revenue per user (blended ARPU) in March 2014 to 23.68% in December 2016. There is no doubt that this will increase further. From a regulatory perspective, the shift beckons assimilation of a new toolkit in the sector due to the emergence and growth of two-sided market markets.
Two-sided platforms create value by bringing two or more different types of economic agents together and facilitate interaction between them that make both agents better off. Telecom falls in the category of two-sided markets with service providers operating as a platform using which content providers and subscribers connect. Subscribers are better off with the content, and content providers are better off due to their expanded reach. But two-sided markets also raise a regulatory challenge because they don’t fit neatly into the existing standard approaches for assessing market definition and power. Their relative newness and almost complete absence of precedent makes the regulators task that much harder. It also makes ex ante prescriptions futile and requires more ex post competition analysis.
The resources of Trai would be better utilised for in-depth analyses of the market dynamics and of market dominance. Trai’s access to market data would enable continuous monitoring of the sector which would empower it to develop better-informed policies. This presents both a need and an opportunity for greater cooperation between the Competition Commission of India and Trai, each with a clearer understanding of its role and remit. Regulation that helped stimulate private investments replaced public ownership and direct planning as the primary means of influence on telecom in the late 1990s. Since then, the public and private sector roles have evolved, with the public role being overwhelmingly one of regulation in the presence of market failures, although it also has some presence in service provision (MTNL and BSNL). Joseph Stiglitz, a Nobel Prize winner, has argued that, contrary to the traditional view that market failures are the exception, such failures may be so pervasive as to be the norm.
However, it is not at all obvious that government will necessarily succeed where markets have failed. Consequently, not all cases of market failure will be amenable to correction through regulation. The key to effective regulatory intervention, therefore, lies not in demonstrating the existence of market failures (and establishing a rationale for government intervention) but with identifying the nature of the intervention that would make it worthwhile. This is the weighty question that confronts TRAI as it embarks upon what is perhaps TTO 2.0. TTO 1999 served telecom and its stakeholders well for nearly two decades, and it is now a ripe occasion to design TTO 2.0 that can be the proverbial slave to the sector for another two decades!
Kathuria is director and chief executive, and Kedia, Bagchi & Varma are consultants, ICRIER