TELECOM POLICY

A new tariff regime on hold

The Government keeps in abeyance a new tariff structure announced by the Telecom Regulatory Authority of India which sought to align the tariffs for various services to the costs of providing them.

R. RAMACHANDRAN
in New Delhi

THE Telecom Regulatory Authority of India (TRAI) proposes and the Government disposes. On March 9, the TRAI announced a new telecom tariff structure in the form of a Telecommunications Tariff Order 1999. The Order sought to "re-balance" the existing tariff structure essentially along the lines of its September 1998 Consultation Paper on telecom pricing. The latter had attracted a fair bit of criticism from telecom experts and consumer forums as well as the utility provider, the Department of Telecommunications (DoT) (Frontline, October 9, 1998).

The most contentious component of the TRAI's tariff regime, which was to take effect from April 1, related to a steep hike in telephone rentals and local call rates and a sharp reduction in long-distance (subscriber trunk dialling, or STD) and international (international subscriber dialling, or ISD) call charges. A major share of the DoT's revenue earnings comes from long-distance calls. In the Indian context, therefore, there is an element of "cross subsidisation" of the local network by the long-distance or trunk network. Therefore, the move, in the DoT's view, would eat into its revenues substantially and undermine its plans for expansion in terms of providing greater telephone access and connectivity, both urban and rural.

The Order led to a face-off between the DoT and the TRAI. On March 10, Union Minister for Communications Jagmohan told Parliament that the TRAI proposals had been put on hold. "The Government," Jagmohan said, "has decided to issue policy directives to the TRAI to keep its Order in abeyance till the entire issue is considered by the Government." The TRAI questioned this action of the Government which, it said, violated the powers bestowed on it by Section 11(2) of the TRAI Act of 1997. The TRAI maintained that no circumstance had arisen that allowed the Government to invoke the clauses of Section 25 of the Act and intervene in the exercise of the TRAI's authority under the Act.

M. LAKSHMANAN
The office of the Telecom Regulatory Authority of India in New Delhi. The new telecom tariff structure proposed by the TRAI would have the effect of removing the cross-subsidisation of the local network by the long-distance network.

The issue is basically one of whether or not the Order amounts to a statement of policy; Section 25(2) binds the TRAI to adhere to government directives only on questions of policy. Further, Section 25(3) states: "The decision of the Central Government on whether a question is one of policy or not shall be final." The TRAI has, in turn, asked the Government to share the "nature of the policy questions" in the matter because under Section 25(2) the TRAI can express its views "before any direction is given under this section". Of course, given that the new tariff structure seems to run counter to the concept of providing universal telephone access as envisaged in the National Telecom Policy (NTP) of 1994, through such means as cross-subsidisation, one could argue that the TRAI's tariff proposals impinge on policy.

However, the Government's stand in keeping the TRAI proposals in abeyance appears to have less to do with technical or socio-economic considerations than with political considerations. Even so, the rationale for the TRAI's new tariff structure is questionable and it needs to be contested.

THERE are two key elements to the TRAI proposals: one relates to telephone rentals and the second to pricing of local calls and STD and ISD calls. As mentioned earlier, in the Indian context, the higher STD call rates subsidise the local network and thus enable an increase in teledensity, which at present is at an abysmally low figure of 1.7 per 100. The TRAI's new tariff structure was evolved on the premise that the pricing should be pegged to the costs of the service and that for this purpose the local network and the trunk network must be viewed as distinct entities. It recommended that the prices of these services be aligned to costs in a staggered manner, over a period of three years. The underlying assumption, therefore, is that the costs of different elements of the network can be worked out and the price of these services aligned to these. In a bundled network, like the telephone network, both these assumptions are, however, not strictly valid.

Significantly, the DoT too has objected only to the loss of revenue from the downward revision of STD/ISD call charges and not to the increase in the local call charges, which affects the consumer at large. In that sense even the DoT has responded to the new tariff structure more as a monopoly operator which is keen to grow than as a state instrument which ought to be concerned about delivering a service for public good at an affordable cost to the largest numbers. The TRAI has paid lip service to the Universal Service Obligation (USO) mandated by the NTP, but the proposed cost-based tariff goes against this. For, it would result in a situation where access to the telephone in, say, the northeastern region of India would become extremely unaffordable and teledensity in such regions would remain close to zero forever. There may be valid arguments for lowering STD/ISD charges from the present levels, but increasing the local call charges in the name of pegging pricing to costs, and thereby denying access to a vast majority of low-volume users, would only serve to advance another agenda: the removal of the cross-subsidy that exists.

KAMAL NARANG
Justice S.S. Sodhi, TRAI chairman.

From Annexure II of the Consultation Paper of September 1998 it becomes clear that the TRAI has sought to recover the capital cost of the local network by increasing rentals and the operating costs by increasing call charges. But the impact of this would defeat the objectives of the NTP. To increase teledensity, the cost of access - rentals, installation and so on - has to be kept low and call charges should be used to recover capital and operating costs. As the Delhi Science Forum (DSF) pointed out in its submission to the TRAI opposing the changes proposed in the Consultation Paper, this is the practice the world over, including in the United States, where private monopolies operate. Indeed, in no other utility can the capital cost be recovered by merely providing a connection, as is being suggested by the TRAI.

Internationally, it is now recognised that it is not possible to separate the cost of each element of the network and that the rental tariffs and the cost of local and long-distance charges should be based on social and economic objectives. The regime that the TRAI has suggested is, however, biased in favour of the long-distance caller. The DSF document points out that under such a scheme local calls will become more expensive while long-distance and international call rates will be lowered. India has one of the lowest per capita incomes in the world. In general, even in countries with much higher income levels, the cost of access is generally taken as a small fraction of the capital costs of the local network, and the rest recovered through call charges, for both local and long-distance calls.

LOWERING access costs is the first step towards achieving universal connectivity. Access cost, or per-line cost, has to be brought down from the present level of around Rs.35,000 to less than Rs.10,000. This is essentially an issue of technology and can be achieved by adopting innovative approaches - for instance, by deploying a mix of access technologies, including cellular and wireless technology, as part of a single network. Unfortunately, neither the NTP nor the terms of reference of the TRAI (which is largely made up of officials with a non-technical background) address the issue of low-cost technological choices to achieve universal connectivity.

In the absence of a technological perspective to the problem, access costs will remain high and network expansion has to be achieved mainly through cross subsidies. In its attempt to do away with subsidies, the TRAI sought in its tariff structure to bring down STD call rates by 50 per cent over three years and ISD rates by 52 per cent. While a case could be made for lowering STD/ISD rates by a small factor, the move to reduce it by nearly half is preposterous. The argument that long-distance call charges in India would be higher than those prevailing internationally even after the charges are lowered is not valid because the teledensity in the country is nowhere near international levels. The TRAI appears to have sought to hike local charges in order to offset the huge revenue loss from the planned lowering of long-distance call rates; for a society waiting to be connected, there is the rub.

THE revenue implications of the proposed tariffs have become an issue of disagreement between the DoT and the TRAI. The DoT believes that the volume of STD/ISD traffic will remain unchanged even if the tariffs are lowered. That is, it believes that there is no elasticity of long-distance telecom traffic to price. According to the TRAI, however, even though there are no studies to estimate the elasticity of long-distance call demand, "there is enough anecdotal evidence to suggest that volume response to price decline will be substantial." Coming from a body that was instituted to guide the growth of telecom in the country, this statement, with its implication that no one has the correct picture about the possible response to tariff changes, is truly amazing. Essentially, therefore, in the matter of revenue implications, it is the DoT's word against the TRAI's word (see Table). According to the TRAI, even the DoT conceded before the Parliamentary Standing Committee that there may be a volume increase of 10-25 per cent in response to a price decline. In the TRAI's reckoning, the 10 per cent and 25 per cent increases it has projected are conservative estimates.

The reason for the DoT's concern is understandable. Its revenue requirements are primed to enable it to meet Plan targets for expanding the network. The original estimate of cost per direct exchange line (DEL) was Rs.43,362 for a 10-year perspective plan by the DoT. In the Ninth Plan this was pegged at Rs.45,000. The TRAI's argument is that over the years the per-DEL cost has come down to Rs.35,000-38,000. Given this cost, it argues, excess revenue would accrue to the DoT even if there was no increase in STD/ISD traffic in the first year; excess revenue would accrue in the second year if STD/ISD traffic rose by 10 per cent, and in the third year by 25 per cent. The authority considers the scenarios with lower revenue requirements very plausible and therefore believes that the DoT will have adequate resources to fund its expansion plans if the new tariffs are implemented.

The DoT says that it has no revenue surpluses because all its revenue earnings go into network expansion and that at the present stage of telecom growth, no amount would be enough. Data in respect of annual growth in connectivity bear this out. Over the last five years, the DoT and Mahanagar Telephone Nigam Ltd (MTNL) have together achieved an average annual growth of 22 per cent. Against a registered demand of 108 lakh lines, the two together added 110 lakh DELs, bringing down the average waiting period. This could well be a result of the fall in the cost per DEL; even so, teledensity is far from good.

Of course, these arguments hide two basic facts. One, the cost of access, even at Rs.35,000, is very high and has to come down below Rs.10,000. Unless that happens, it does not make sense to talk of removing cross-subsidisation. Two, there is absolutely no data on what the traffic volume will be after the tariff adjustments in respect of both local and long-distance call charges. One could certainly do better than to rely on "anecdotal evidence" or arbitrary scenarios.

For example, two years ago the number of slabs for STD call rates was increased from two to three. The DoT must surely have data on the effect that this had on traffic volume between any two points on the trunk network. Statistically, this data must be sizable enough to model the elasticity of demand to price. Similarly, to know the elasticity of demand in the local network, adequate data must be available about the change in traffic volume (in this case, perhaps reduced) after the pulse rate for a metred call was fixed at five minutes against unlimited time per call earlier. Only after a modelling exercise on the basis of these can one decide on the extent of downward revision in long-distance call rates that can be effected if the DoT's revenues are not to end up in large deficits and network expansion can occur as planned.

THE TRAI Order has another important implication for the average urban/rural subscriber, which has gone unnoticed. From the point of view of the ordinary "general subscriber", the increase in local call rates will result in hefty increases in the bimonthly bills. The TRAI claims that the increases will be inconsequential in view of income increases during the same period, but in fact they will be larger than the TRAI's estimates. This is because the TRAI has not only increased the local call rates but also fixed the pulse rate per metred call at three minutes (as against five minutes earlier), and its estimates do not account for this. This will translate into a larger number of metred calls for a given tele-conversation. The impact on the monthly bills of an average urban/rural low-use subscriber is substantial.

Critics of the Order, including the DSF and consumer forums, believe that the Order essentially bails out private basic service operators who were finding their operations unviable under the existing tariff structure. Since an increase in the local call rates was not really warranted even if long-distance call rates had to be brought down, it is variously believed that the tariff (and the pulse rate) worked out was essentially intended to ensure that basic service providers, who have so far failed to pay even a fraction of the licence fees, are able to survive.

Although it is true that the tariff package that the TRAI has recommended is only a cap and operators are free to offer any lower package, the argument that it will result in competition and the higher limit will not be reached is fallacious because competition results only when there is a surplus. Given the low telecom access, no operator is likely to offer below-the-ceiling rates. And in any case, in any given circle, besides the DoT, only two private basic service providers operate. In this bargain, the average consumer would be hit if the new regime were to be implemented. Indeed, during its consultation process, while the TRAI invited a whole lot of basic service operators, it did not seek the opinion of any consumer organisation. The Government may have had its reasons for deciding to keep the TRAI proposals in abeyance. One hopes that concern for the consumer figures as one of these reasons.