Trai caught napping, again – It has no realistic model for calculating spectrum prices

By: | Published: December 18, 2018 12:20 AM

It has no realistic model for calculating spectrum prices, and TDSAT rips into it on predatory-pricing recommendation.

Rational Expectations: Trai caught napping, again

With the telecom sector in deep trouble, and likely to be the next big source of NPAs, the Department of Telecommunications (DoT) has now asked Trai to explain the methodology for fixing spectrum prices for the next auction. While, as FE reported on Monday, Trai has said it has given the methodology in its recommendations, this is not correct.

Its latest recommendations talk of spectrum-valuation options suggested by various stakeholders and then says it took “the simple mean of the valuations obtained from the various valuation approaches, on the assumption of equal probability of occurrence of each valuation approach”. Given the wide variation in the various models, using the median is better than the mean, but even that is inappropriate.

Trai uses a producer surplus model, a production function model, a revenue surplus model, a multiple regression model and even an indexed price of the 2016 auction—just sketchy details of each model are given. The valuation varies dramatically across models (see graphic) and there is no justification as to why the revenue surplus model, for instance, is not to be preferred to the production function or the producer surplus one. Averaging four different models is just lazy regulation and, even after this, Trai opts for an indexed value of the last auction—since past bids were also distorted, distortions of the past are being carried forward into the next auction.

As a result of this, and exceptionally high annual levies, the share of recurring licence/spectrum charges paid to government rose from 11% of telcos’ turnover in FY07 to 32.4% in FY17. High reserve prices were compounded by not auctioning enough spectrum and, at critical times, telling telcos that licence renewal was contingent on them buying fresh spectrum. The resulting high bids in these constrained-auctions were, mostly, used as the reserve prices in the next auction. So, in 2010, when 3G spectrum was auctioned, limited spectrum and industry exuberance ensured that in Delhi, for instance, while the reserve price for a 5 MHz slot in the 2100 MHz frequency band was `64 crore per MHz, the winning bid was for `663 crore. And when, in 2012, auctions were carried out for 1800MHz spectrum that telcos were planning to use for primarily voice traffic—3G spectrum was primarily for data services—the reserve price was at 3G-type levels of `554 crore per MHz.

As a result, India’s spectrum prices are much higher than those globally. In the US, the 600MHz band was auctioned last year for `3,480 crore per MHz. In India, by contrast, the 700 MHz band had an initial reserve price of `11,485 crore per MHz. This policy did not just hit telcos, it also hit the government. In 2012, 67% of the spectrum on auction couldn’t be sold as cash-strapped telcos found reserve prices too high, and this rose to 80% in 2013 and 100% in 2015; it was 59% in 2016 and averaged 38% since 2010. In FY17, while the government budgeted `98,995 crore in telecom revenues including auctions, it got just `70,241 crore; it slashed its expectations to `44,342 crore in FY18, but got just `30,736 crore.

This, however, is as much of an indictment of DoT since, while Trai kept recommending high reserve prices, it never asked for any justification till now. Also, when spectrum was given free, the high annual spectrum/license fees were like equated monthly installments (EMI) in lieu of an upfront payment; but when spectrum was sold at market prices, DoT never scrapped these high EMIs.

Nor is this the only example of Trai’s whimsical policymaking, as the TDSAT’s judgment, last week, of its recommendations on predatory-pricing show. Trai had ruled that a telco had to have a market share of at least 30% if it was to be even investigated for predatory-pricing. This made little sense since, at that point, the real fear of predatory-pricing came from newcomer RJio—see how it priced its services versus what the older telcos charged—but the telecom regulator ruled out RJio’s pricing even being examined by this new definition. The ruling never made sense (, so it is not surprising TDSAT came down heavily on Trai.

So, for instance, it said Trai’s definition of significant market power (SMP) showed “a degree of pre-determination to dilute the entire concept of SMP”, it was “arbitrary without any deliberation and effective consultation”, that it was “not backed by any intelligible and objective criterion nor any convincing reason” and so was “an extreme step and unnecessary abdication of its regulatory powers by TRAI”. TDSAT went on to add, that the Trai’s ruling provided “artificial protection to a TSP (telecom service provider) who may have the capability and intent to destabilise the sector through predatory-pricing”. And while Trai changed the definition of SMP to remove switching capacity—where RJio had a share of over 30%—TDSAT said even if this was accepted as OK, “there is no reasonable and acceptable criteria for similar treatment to the test of volume of traffic, more so when Jio Telecom had become an SMP on this criteria”.
While it is embarrassing that a supposedly neutral regulator should be shown up as whimsical, apart from incompetent, what is worse is that, in complete violation of norms that don’t allow a regulator to either get an extension or to get any government assignment—the government can then influence the regulator—the government reappointed the Trai chief after his three-year term got over in August.

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