Home India 1998 Proposed Restructuring of Indian Telecom Tariffs

Proposed Restructuring of Indian Telecom Tariffs

by david.nunes
B. K. ZutshiIssue:India 1998
Article no.:13
Topic:Proposed Restructuring of Indian Telecom Tariffs
Author:B. K. Zutshi
Organisation:Telecom Regulatory Authority of India
PDF size:40KB

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Article abstract

The importance of telecommunications tariffs for the provision, usage and market structure of telecommunications services is self-evident. They affect the efficiency of operation and use, growth and investment opportunities, innovation, and the achievement of various social objectives. This article provides a summary of the initiative taken by the Telecom Regulatory Authority of India (TRAI) to recast the country’s telecommunications tariff policy and restructure the tariffs.

Full Article

The importance of telecommunications tariffs for provision, usage and market structure of telecommunications services is self-evident. They affect, for example, the efficiency of operation and use, growth and investment opportunities, innovation, and the achievement of various social objectives. The Telecom Regulatory Authority of India (TRAI) has put forward a number of proposals that are now the subject of public consultations. These proposals cover both the elements of the policy framework for telecommunications tariffs and the proposed rate structure for various services. The main thrust of the proposals is to rationalise tariffs and to encourage or stimulate competition. National Telecom Policy of 1994 The National Telecom Policy of 1994 emphasises several objectives: Ÿ Promotion of investment in the telecommunications sector with a view to developing a world class telecommunications infrastructure; Ÿ Protection and promotion of the interests of the consumer; Ÿ Encouragement of transfer of new technologies; Ÿ Introduction of a range of new services with world quality standards; Ÿ Provision of access to telecommunication services to all at affordable and reasonable prices; and, Ÿ Ensuring that India emerges as a major manufacturing base and as a major exporter of telecommunications equipment and services. Telecommunications tariffs contribute significantly to all these objectives. They figure directly or indirectly in the calculations that determine the steps taken to achieve these objectives. Of course, to achieve certain objectives, such as Universal Service Obligation (USO) and quality of service, tariff policy has to be supplemented by other policy initiatives. The TRAI is conducting separate exercises to identify and measure the costs of USO, and to specify quality standards and determine their links with tariffs. Policy Initiative Regarding Tariffs Under the TRAI Act of 1997, the TRAI has the sole authority to regulate telecommunications tariffs. Recognising the need for a comprehensive treatment of tariff policy, the TRAI started late last year with a process of consultation and policy dialogue on telecommunications pricing. This has resulted in the recently released tariff proposals for further discussion. Consultation Process On the topic under consideration, the TRAI prepares a consultation paper summarising the main issues and questions that need to be addressed. This consultation paper is released to the public, and is now also put on the TRAI’s web-site (http://www.trai.gov.in). Written comments are invited within a specified time period, with main points being summarised in a short document, together with further questions that arise as a result of the comments. This document forms the basis of Open-House discussion meetings held by the TRAI. Depending on the scope of the issues considered, there could be one or more Open-House discussion meetings in various parts of the country. For these meetings, the concept of an Open-House is strongly. emphasised, and it is open to all who wish to participate. TRAI’s First Consultation Paper on Telecommunications Tariffs The first consultation paper on tariffs was released on 4 November 1997. This paper explained the various concepts, principles and methodologies regarding telecommunications tariffs, and raised a number of issues for discussion. These included, for example, Ÿ should telecommunications tariffs be regulated at all; Ÿ if tariffs are to be regulated, then for which services and under what conditions; Ÿ for services with regulated tariffs, should all service providers be regulated, and if so, should they be similarly regulated; Ÿ should price levels be specified or should there be only upper/lower limits to prices; Ÿ should prices be based on costs, and if so, which costs should be taken into account; Ÿ what should be the principle followed to determine interconnection charges (or access prices); Ÿ how should certain social objectives be reconciled with other objectives emphasised under tariff regulation; Ÿ what should be the nature and extent of subsidy required to achieve the social objectives, and who should provide the funds for these subsidies; Ÿ should lack of information delay tariff policy proposals by the TRAI. TRAI’s Second Consultation Paper on Tariffs On 9 September 1997, the TRAI released a second consultation paper on telecommunications tariffs, which addresses the framework for tariff policy and also provides specific tariff proposals for several services. The latter cover basic services, cellular mobile, (leased lines, Internet, Integrated Services Digital Network (ISDN), other value-added services, and interconnection charge. The TRAI’s initiative aims at linking tariff formulation to cost based prices through regulation and/or competition. Cost based tariffs are emphasised for a number of reasons: Ÿ These prices provide a basis for making subsidies more transparent and better targeted on specific social objectives, e.g. for achieving USO. Ÿ For consumers, cost based prices reflect economic costs and provide efficiency-oriented incentives for consumption, in contrast to the present where tariffs are not linked with either costs or incentives that enhance economic efficiency. Ÿ For service providers, cost based prices better prepare the ground for competition among different operators. Cost based prices restrict the possibility of cream skimming by operators, facilitate smooth interflow of traffic, and reduce the dependency of operators on narrow market segments for maintaining their financial viability. This also promotes a greater concern among operators for improving the quality of service and service options for a wider subscriber base. In the framework for tariff regulation proposed by the TRAI, a link is made between the establishment of cost-based tariffs through regulation, and the extent of competition in the market. Thus, low level of price regulation is proposed where the extent of competition is high (and thus prices reflect costs as a result of market competition), while cost based prices through regulation are proposed where competition is low. These prices act as a surrogate for competitive prices and prepare the market for competitive interaction. The TRAI feels that a combination of competition, increased information acquired locally and internationally, reliance on forward-looking costs, and a process of decision making that involves interaction with all interested parties, will help overcome the normal problems that arise in the case of cost based pricing. Other Objectives of Tariff Exercise In addition to the above-mentioned objectives, the proposals in the second consultation paper emphasise: Ÿ flexibility for operators, which helps improve operational/technological efficiency and financial viability; Ÿ providing a basis for enhanced competition in the near future; Ÿ preparing the ground for likely changes in market situation as a result of progressive liberalisation of different telecommunications services; Ÿ improving cost efficiency and global competitiveness of domestic business; Ÿ stimulating more widespread use of telecommunications for meeting economic and social objectives; Main Thrust of Proposals The general thrust is to have cost-based tariff for important inputs (such as leased lines and ports), for interconnection charges, for ISDN, pagers, cellular mobile, and the main tariffs applicable to basic telecommunications (rentals, and local, long distance and international calls). For basic telecommunication services, the proposed prices deviate from cost based prices in order to increase the access to the network. The objective is to ultimately have cost based prices, to be achieved in the period following the present implementation period. The present implementation period extends up to a maximum of three years. For certain interconnection charges (other than port charges and inter-exchange junction charges), a revenue sharing approach is proposed, based on the incremental costs of interconnection incurred by the operators. For other value added services, and certain prices for basic services (such as registration fees, reconnection fee, and the flat rate system of tariffs), the approach is to regulate prices only through a reporting requirement on the service. In certain cases, e.g. tariffs for certain leased lines (other than 64 kbps, N times 64 kbps and 2 mbps), it is proposed that tariffs be regulated through a basket approach. Under this approach, different services are treated as part of a composite basket, whose weighted average tariff has to be decreased by a specified extent. In the case of the basket of leased lines, the proposal is to decrease the basket average price by 50%. Maintaining Flexibility for Operators Even for services for which tariff regulation is specified, the proposed framework encompasses flexibility of action by the operators. This is because tariffs (and free calls) are proposed not in terms of levels, but in terms of ceilings (floors). Such price flexibility will contribute to: Ÿ competitive interaction amongst operators; Ÿ greater scope for prices to reflect the effects of improved technological alternatives; Ÿ freedom for the operators to distinguish between different types of customers through their pricing packages, rather than these packages being imposed upon them by the regulator; Ÿ better price and quality of service for the customer. ‘ Method for Determining Tariffs The method used by the TRAI for the proposed restructuring of telecommunications tariffs is summarised in Figure 1. The information base may, however, still not be satisfactory to fully implement the principles mentioned above, including basing prices on incremental cost concepts. Such an accounting framework is required for clarifying the costing details and revenue implications for the operators, and to more accurately assess the cost basis of prices for preventing cross subsidisation of certain services. Periodic Re-visitation A number of data components are not yet available, and require time to be collected. For some of the service sectors, the market is yet to mature or develop fully, and new information might be available in time. Likewise, ongoing technical change is expected to alter some of the underlying premises of the pricing exercise. In general, a time period of two years may be specified as the minimum period to re-examine the tariffs, unless there are major changes, which require an earlier re-consideration. This imparts greater certainty to the proposed tariffs. An important point to bear in mind is that even if the tariffs change over time, they will still be within the framework of principles that are developed as a result of the present exercise. This provides an abiding level of certainty to the process, nature, and extent of price regulation. Conclusion Written comments have been received from several individuals, organisations and service providers. The TRAI will consult the issues involved. It is expected that this exercise will be completed latest by early next year, and the TRAI will notify its tariff determination at that time.

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