Eco Telecom

8/8/2019 Eco Telecom

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Pricing in Telecom Sector

KishoreKumar.C (09MIB026)

Thiruchitrambalam.G (09MBA115)


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INSTITUTIONAL HISTORY OF THE TELECOM SECTOR IN INDIA

The telegraph act of 1885 governed the telecommunications sector. Under this act, thegovernment was in-charge of policymaking and provision of services . Major changes intelecommunications in India began in the 1980s. Under the Seventh Plan (1985-90), 3.6

percent of total outlay was set aside for communications and since 1991, more than 5.5percent is spent on it (Figure 1). The initial phase of telecom reforms began in 1984 withthe creation of Center for Department of Telematics (C-DOT) for developing indigenoustechnologies and private manufacturing of customer premise equipment. Soon after, theMahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited(VSNL) were set up in 1986. The Telecom Commission was established in 1989.

When telecom reforms were initiated in 1994, there were three incumbents in the fixedservice sector, namely DoT (Department of Telecom), MTNL and VSNL. Of these, DoToperated in all parts of the country except Delhi and Mumbai. MTNL operated in Delhi andMumbai and VSNL provided international telephony.

Given its all-India presence and policy-making powers, the DoT enjoyed a monopoly in thetelecom sector prior to the major telecom reforms. However, subsequent to the second phaseof reforms in 1999, which included restructuring the DoT to ensure a level playing fieldamong private operators and the incumbent, the service-providing sector of DoT was splitup and called Department of Telecom Services (DTS). DTS was later corporatized andrenamed Bharat Sanchar Nigam Limited (BSNL). This meant separation of the incumbentservice provider from the policy-maker. Broadly, DoT is now responsible for policy-making, licensing and promotion of private investments in both telecom equipment andmanufacture and provision of telecom services. BSNL, a corporate body, is responsible for

the provision of services.


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A crucial aspect of the institutional reform of the Indian telecom sector was setting up of an independentregulatory body in 1997 the Telecom Regulatory Authority of India (TRAI), to assure investors that the sectorwould be regulated in a balanced and fair manner. TRAI has been vested with powers to ensure its independence fromthe government. The government has retained the licensing function with itself. The main issue with respect tolicensing has not been whether it should be with the regulator but that the terms and conditions of licensing should

involve consultations with TRAI to ensure transparency in the bidding process Some of the main functions of TRAIinclude fixing tariffs for telecom services, dispute-settlement between service providers, protecting consumersthrough monitoring of service quality and ensuring compliance to license conditions, setting service targets and

pricing policy for all operators and service providers.

Further changes in the regulatory system took place with the TRAI Act of 2000 that aimed at restoring functionalclarity and improving regulatory quality. TRAI can frame regulations and can levy fees and charges for telecomservices as deemed necessary. The regulatory body also has a separate fund (called the TRAI General Fund) to

facilitate its functioning. To fairly adjudicate any dispute between licensor and licensee, between service provider,between service provider and a group of consumers, a separate disputes settlement body was set up called TelecomDisputes Settlement and Appellate Tribunal (TDSAT).


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Telecommunications is the transmission of data and information between computers using acommunications link such as a standard telephone line. Typically, a basic telecommunications system wouldconsist of a computer or terminal on each end, communication equipment for sending and receiving data, and acommunication channel connecting the two users. Appropriate communications software is also necessary to

manage the transmission of data between computers. Some applications that rely on this communicationstechnology include the following:

Electronic mail (e-mail) is a message transmitted from one person to another through computerizedchannels. Both the sender and receiver must have access to on-line services if they are not connected to the samenetwork. E-mail is now one of the most frequently used types of telecommunication.

Facsimile (fax) equipment transmits a digitized exact image of a document over telephone lines. At thereceiving end, the fax machine converts the digitized data back into its original form.

Voice mail is similar to an answering machine in that it permits a caller to leave a voice message in a voicemailbox. Messages are digitized so the caller's message can be stored on a disk.


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Videoconferencing involves the use of computers, television cameras, and communications software andequipment. This equipment makes it possible to conduct electronic meetings while the participants are at differentlocations.

The Internet is a continuously evolving global network of computer networks that facilitates access toinformation on thousands of topics. The Internet is utilized by millions of people daily.

Actually, telecommunications is not a new concept. It began in the mid-1800s with the telegraph, wherebysounds were translated manually into words; then the telephone, developed in 1876, transmitted voices; and then theteletypewriter, developed in the early 1900s, was able to transmit the written word.

Since the 1960s, telecommunications development has been rapid and wide reaching. The development of dialmodem technology accelerated the rate during the 1980s. Facsimile transmission also enjoyed rapid growth during thistime. The 1990s have seen the greatest advancement in telecommunications. It is predicted that computingperformance will double every eighteen months. In addition, it has been estimated that the power of the computer hasdoubled thirty-two times since World War II (With row, 1997). The rate of advancement in computer technology

shows no signs of slowing. To illustrate the computer's rapid growth, Ronald Brown, former U.S. secretary ofcommerce, reported that only fifty thousand computers existed in the world in 1975, whereas, by 1995, it wasestimated that more than fifty thousand computers were sold every ten hours (U.S. Department of Commerce, 1995).


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Deregulation and new technology have created increased competition and widened the range of network services availablethroughout the world. This increase in telecommunication capabilities allows businesses to benefit from the information revolution innumerous ways, such as streamlining their inventories, increasing productivity, and identifying new markets. In the following sections,the technology of modern telecommunications will be discussed.

Progress of reforms

a. Private Participation in Telecom - For the provision of basic services, the entire country was divided into 21 telecom circles,

excluding Delhi and Mumbai (Singh et. al. 1999). With telecom markets opened to competition, DoT and MTNL were joined byprivate operators but not in all parts of the country. By mid-2001, all six of the private operators in the basic segment had startedoperating (Table 1). Table 2 shows the number of village public telephones issued by private licensees by 2002.

After a recent licensing exercise in 2002, there exists competition in most service areas. However, the market is still dominated bythe incumbent. In December 2002, the private sector provided approximately 10 million telephones in fixed, WLL (Wireless LocalLoop) and cellular lines compared to 0.88 million cellular lines in March 1998 (DoT Annual Report, 2002). 72 per cent of the total

private investment in telecom has been in cellular mobile services followed by 22 per cent in basic services. After the recent changes,the stage is now set for greater competition in most service areas for cellular mobile Over time, the rise in coverage of cellular mobile

will imply increased competition even for the basic service market because of competition among basic and cellular mobile services.


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b. Teledensity and Village Public Phones (VPTs) - India's rapid population increase coupled with its progress intelecom provision has landed India's telephone network in the sixth position in the world and second in Asia (ITU). Themuch publicized statistic about telecom development in India is that in the last five years, the lines added for basicservices is 1.5 times those added in the last five decades! The annual growth rate for basic services has been 22 percentand over 100 percent for internet and cellular services. As Dossani (2002) argues, the comparison of teledensity of Indiawith other regions of the world should be made keeping in mind the affordability issues. Assuming households have a

per capita income of $350 and are willing to spend 7 percent of that total income on communications, then only about1.6 percent of households will be able to afford $30 (for a $1000 investment per line).

Teledensity has risen to 4.9 phones per 100 persons in India compared to the average 7.3 mainlines per 100 peoplearound the world. Figure 2 shows the growth rate of fixed and cellular mobile subscription between 1998 and 2002.Although, the coverage is still much higher in urban areas - 13.7 in urban areas compared to1.4 in rural areas, thegovernment has made efforts to connect villages through village public telephones (VPT) and Direct Exchange Lines(DEL). This coverage increased from 4.6 lakhs in March 2002 to 5.10 lakhs in December 2002 for VPT and from 90.1lakhs in March to 106.6 lakhs in December 2002 for DELs. BSNL has been mainly responsible for providing VPTs;

more than 84 percent of the villages were connected by 503610 VPTs with private sector also providing 7123 VPTs .


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The overall telecom growth rate is likely to be high for some years, given the increase in demand as income levelsrise and as the share of services in overall GDP increases. The growth rate will be even higher due to the price decreaseresulting from a reduction in cost of providing telecom services. A noteworthy feature of the growth rate is the rapid rateat which the subscriber base for cellular mobile has increased in the last few years of the 1990s, which is not surprising inview of the relatively lower subscriber base for cellular mobile.

c. Foreign Participation India has opened its telecom sector to foreign investors up to 100 percent holding inmanufacturing of telecom equipment, internet services, and infrastructure providers (e-mail and voice mail), 74 percent inradio-paging services, internet (international gateways) and 49 percent in national long distance, basic telephone, cellularmobile, and other value added services (FICCI, 2003). Since 1991, foreign direct investment (FDI) in the telecom sectoris second only to power and oil - 858 FDI proposals were received during 1991-2002 totaling Rs. 56,279 crores (Figure4) (DoT Annual Report, 2002). Foreign investors have been active participants in telecom reforms even though there wassome frustration due to initial dithering by the government. Until now, most of the FDI has come in the cellular mobilesector partly due to the fact that there have been more cellular mobile operators than fixed service operators. For instance,during the period 1991-2001, about 44 percent of the FDI was in cellular mobile and about 8 percent in basic service

segment. This total FDI includes the categories of manufacturing and consultancy and holding companies


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d. Tariff-setting - An essential ingredient of the transition from a protected market to competition isthe alignment of tariffs to cost-recovery prices. In basic telecom for example, pricing of the kind thatprevailed in India prior to the reforms, led to a high degree of cross-subsidization and introduced inefficientdecision-making by both consumers and service-providers. Traditionally, DoT tariffs cross-subsidized the

costs of access (as reflected by rentals) with domestic and international long distance usage charges (Singhet. al. 1999). Therefore, re-balancing of tariffs - reducing tariffs that are above costs and increasing thosebelow costs - was an essential pre-condition to promoting competition among different service providersand efficiency in general.

TRAI issued its first directive regarding tariff-setting following NTP 99 aimed at re-balancing tariffsand to usher in an era of competitive service provision. Subsequently, it conducted periodic reviews andmade changes in the tariff levels, if necessary. Table 4 shows the current level of telephone charges in India

effective from January, 2003. Re-balancing led to a reduction in cross-subsidization in the fixed servicesector. Cost based pricing, a major departure from the pre-reform scenario, also provides a basis for makingsubsidies more transparent and better targeted to specific social objectives, e.g. achieving the USO.


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e. Service Quality - One of the main reasons for encouraging private participation in the provision of infrastructure rests on its ability to provide superior quality of service. In India, as inmany developing countries, low teledensity resulted in great emphasis being laid on rapid expansionoften at the cost of quality of service. One of the benefits expected from the private sector's entry intotelecom is an improvement in the quality of service to international standards. Armed with financial

and technical resources, and greater incentive to make profits, private operators are expected toprovide consumers value for their money. Telephone faults per 100 main lines came down to 10.32and 19.14 in Mumbai and Delhi respectively in 2002-03 compared to 11.72 and 26.6 in 1997-98(Figures 6 and 7). Quality of service was identified as an important reform agenda and TRAI hasdevised QOS (Quality of Service) norms that are applicable across the board to all operators (Singh et.al. 1999).

OBJECTIVE OF THIS PAPER

This paper introduces various concepts, principles and methodologies for determining telecomtariffs and interconnection charges (i.e. charges paid by one operator to another for use of the lattersnetwork in delivering the telecom service). The purpose is to provide a basis for comments andsuggestions from interested parties and the public to take forward the process of developing pricingmechanisms for telecom tariffs and to provide guidelines for interconnection charges. Besides

explaining the main features of different methodologies, a number of options have been listed andquestions posed to focus attention on clarifying various aspects for discussion on a comprehensivepricing methodology for the telecom sector.


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IMPORTANCE OF TELECOM

The progressive transformation of telecom technologies and products has resulted in a largedecline in world-wide telecom costs and emergence of a variety of new markets andopportunities. Due to these developments, the telecom sector has become connected with a

growing number of activities, and has emerged as a major modernizing and dynamic influencein several parts of the world. An efficient and widespread telecom network is increasinglybecoming a necessary infrastructure to utilize and develop various technologies, and to achieveboth economic and social goals.

For India, the gap between the actual situation and the likely opportunities is highlightedstarkly by its low teledensity, both at present and as expected at the turn of this century. This

suggests an urgent need to invigorate the telecom sector in India. Pricing methodology is anessential component of any attempt to infuse dynamism in this sector.

TELECOM TARIFFS

Objectives of telecom pricing methodologies

Prices are an important means to achieve policy objectives. The telecom sectors objectives

cover a wide canvas which includes enhancing efficiency and flexibility of operation, financialviability of the sector, promoting investment and innovation, stimulating demand andcompetition, addressing unfair competition, and meeting social objectives such as universal

provision of telecom services at fair and reasonable rates.


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For achieving these objectives, there is an increasing focus on efficient cost-based pricing,with a forward-looking perspective. At the same time, flexibility of prices and competitivepressure on prices are also emphasized. Price floors and ceiling, together with unbundling ofthe various services, have been considered for addressing the issue of unfair competition.

Higher peak-time prices are used to better manage demand, and subsidized prices might berequired to achieve social objectives such as providing universal access to telecom.

Methodologies for determining telecom tariffs

Earlier, regulators focused on providing telecom operators with a specified rate of returnwhich ensured financial viability while keeping the price low for consumers. Experience

showed that this methodology requires considerable information and gives rise to perverseincentives, leading to inefficient operation and investment.

More recently, due mainly to increasing competition in the sector, the focus has been onprices which encourage dynamic elements such as efficiency, innovation and flexibility.


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Prices can be based on costs or demand, and could be specified in terms of a particular level or withsome flexibility for the operator to decide the price level. An increasing trend in certain countrieshas been to exclude services from price regulation if there is adequate competition in their markets.Enhanced competition has also led to tariff restructuring in several countries to alter the previously

prevailing pattern of cross-subsidizing local calls and rentals through relatively high prices for longdistance and international calls. This restructuring has basically meant that prices are getting morecost-oriented. Such cost-orientation of prices can arise either through the determination of a pricelevel based on costs, or through a flexible process such as under a price cap methodology (see

below).

Prices based on costs

Short run marginal (or variable) costs, long-run incremental costs (which include investment costs),and fully-allocated costs have been considered for specifying prices based on costs. All cost-based

pricing requires considerable information and monitoring, and a number of conceptual and practicalproblems arise in properly measuring and assigning costs to the various telecom services.


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Prices based on short-run marginal costs and long-run incremental costs promoteefficient production. However, the revenue derived on the basis of these two cost-

concepts does not cover total costs because they do not account for all the coststhat are incurred by a telecom operator. In contrast, fully-allocated costs cover allcosts. Despite this, there is increasing emphasis on using long-run incrementalcosts for cost-based pricing because they promote efficiency, while fully-allocatedcosts foster inefficiency. Long-run incremental costs cover a greater portion oftotal costs than marginal costs, and incorporate dynamic elements such astechnical change and economies of scale.

Different variants of long-run incremental costs can be calculated depending onthe level of output, time period and technologies used. A wide coverage isprovided by total service long-run incremental costs (TSLRIC), which basicallyshows the cost the firm would avoid in the long run if it stopped providing aparticular service.

M k


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Mark-up

A mark-up is required to cover the deficit that would arise if an efficient cost-based price were determined. Different methods for ascertaining the mark-up include: mark-upvarying inversely with elasticity of demand of different users or services (Ramsey rule);applying a rule-of-thumb, such as a risk-adjusted reasonable commercial return; and

applying different price slabs to different units of usage, or obtaining the requisite revenuethrough rentals. The rule-of-thumb is the most straight-forward of the mark-upmethodologies. Since demand is not easy to estimate, Ramsey rule provides at best a roughguide on the nature of the mark-up.

Subsidized pricing

Subsidies to price are given normally for achieving social objectives such as promotingthe provision of universal service in telecom or providing preferential telecom access tospecific users such as hospitals or those living in remote areas. The subsidy could be given,for example, in terms of access charges, rentals or price of the calls made.

With greater competition and pressure for changing the prevailing pattern of cross-subsidization, there is a great need to improve the transparency of the extent and nature of

the subsidies being provided. This requires greater transparency of costs and revenues, andan unbundling of the services being provided. With such information, the policy-makerwould have a better basis to consider alternative policies to fund the subsidies.

D d b d i i


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Demand-based pricing

Under this methodology, prices reflect willingness to pay for the use of a product, or the value given to aparticular product. These prices are shown by the demand curve. In assessing the social value from a demand-price, itwould be necessary to specify the social value of consumption of the service by different customer groups. Demand-

based prices are not easy to determine on account of the difficulty of determining the demand curve.

Flexibility

With increasing complexity of emerging telecom products, difficulty of monitoring and ascertaining costs of production, and the market providing price discipline as the level of competition increases, telecom regulators areincreasingly relying on flexible pricing methodologies. This is done either by providing a range within which pricescan be fixed by the operators, or by not extending price regulation to certain products (normally products withcompetitive markets or those that are not considered essential).

A flexible price range is usually provided under a price cap methodology, which imposes an upper limit on theaverage price increase for a basket of telecom services. This increase is specified under a formula which usually

incorporates a need to decrease prices due to a rise in productivity. For certain specific services, sub-baskets aredevised with conditions different from the overall basket. The price cap methodology provides considerable flexibilityto take account of various policy objectives, including equity and efficiency of operation.


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Price floors and ceilings have also been used for providing flexibility, and tolimit an operator from abusing its dominant market position.

Price flexibility is also achieved through different price options provided foralternative combinations (or volume) of services that are purchased by customers.These include, for example, options providing combinations of a high rental and lowusage charge or a low rental and a high usage charge, or volume discounts.

Conclusions from the discussion on pricing methodologies

To begin with, a regulator needs to determine which services should be subject toprice control and which should be left outside the purview of such control. The nextstep is to consider what type of regulation should apply to the various telecomservices subject to price regulation. For instance, should different types of control beused, with certain services (such as essential services) being subject to closer pricescrutiny and control (including a specific price level being determined for them), and prices of other services being controlled only broadly through price floors and

ceilings. Alternatively, should only a price cap mechanism be used for regulating prices, or should such a mechanism supplement the other forms of price control inorder to infuse some simulated competitive pressure on prices.


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Even for those services which are not subject to any price regulation,mechanisms are available to deal with situations of unfair competition. An effectivefunctioning of these mechanisms requires unbundling of the various services.Furthermore, unbundling, together with better account-keeping, enhances thetransparency of revenue and costs linked to different services. Detailed account-

keeping is also an important requirement if prices based on costs were to be used.

Another benefit of more detailed account-keeping is to improve thetransparency of subsidies given for social reasons, thus providing a better basis for

policy-formulation in this regard.

There are a number of methods to fund the deficit that arises due to

expenditures for meeting social objectives. These include increasing the telecomtariffs or rentals, creating a fund financed by the license fee obtained from thetelecom sector, or by revenue obtained through a levy or a tax. If a levy wereimpose on the telecom operators for financing this fund, then the price of certaintelecom services might need to be increased to accommodate this "additional cost".

The discussion suggests a number of questions and options to be considered

with regard to tariff policy. A list containing these options and questions is providedin the Annex to the Executive Summary.


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TELECOM TARIFFS IN INDIA

Some salient features of the telecom tariffs in India are considered next, inparticular the escalation in tariffs as the number of calls increase, tariffs for STDcalls (including international calls), operator-assisted trunk call rates, different

rentals charged on the basis of the capacity of a subscribers telephone exchange,preferences given to rural subscribers, and off-peak rates to ease the pressure onthe network during peak-hours. The paper raises questions on whether or not thesetariffs and rentals should be re-balanced, and provides certain options in thisregard (see Annex to the Executive Summary).

In making any assessment of the prevailing tariff system in India, it is useful

to bear in mind certain features which have a bearing on the Indian telecom scene.These include: excess demand for telecom on account of congestion in thenetwork and unsatisfied demand for linkage to the network; likely substantialgrowth in demand for telephones; inadequate information on telecom demand inIndia (including on demand elasticity); inadequate information on costs; andprivate investors being limited to specific segments of the telecom market.


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INTERCONNECTION CHARGES

Interconnection involves a linking up of one telecom operator to the infrastructure facilities of another.Interconnection charges include charges for collecting and delivering calls, for installing, maintaining andoperating the points of interconnect, payment for supplementary services, and for ancillary and other facilities(such as space in the equipment room). In many instances, a charge is levied for funding the expenditure due touniversal service obligations.

Basically interconnection charges are paid either through sharing of revenues among the interconnectedoperators, or on the basis of the cost of the interconnection service provided (plus a reasonable profit). The latterapproach is more widely used.

Procedures Used for Setting Interconnection Charges

The procedures used to establish interconnection charges include,

The regulator determines the charges, together with other essential elements of interconnection, in advance;

The regulator sets the standard or guidelines which should be used for establishing the rates through(bilateral or multilateral) negotiations among the operators themselves;

The operators set the rates through commercial agreement, without the involvement of the regulators;

In the negotiations between the operators, the regulators stand-by as mediators/arbiters, settling the

interconnection charges in case the parties involved fail to agree or if a dispute is brought to the regulator.


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In most countries, regulators encourage the operators to settle interconnection ratesthrough negotiations. To assist this process, the regulators normally establish guidelines or aframework which they consider desirable for determining interconnection charges.

Objectives of Interconnection Pricing

The objectives of interconnection pricing policy are similar to those mentioned in thecontext of telecom tariffs. This is particularly so because of the link between interconnectionand the provision of telecom services to end-users. However, the objective of efficiency ininterconnection not only requires a cost-based price, but also flexibility of interconnection. Thelatter aspect involves two features. One is to facilitate interconnection among different operatorsat any specific point (unless technically infeasible). Second is that the interconnection should be

made available for the specific elements of the network for which interconnection is requiredrather than a whole bundle of interconnection services being purchased. This suggests a needfor unbundling of the interconnection services provided.

A very important objective under interconnection is prevention of unfair competition. Thisrequires identifying those interconnection services which are essential for facilitatingcompetition, or are required for essential services. Such services are subject to particular

scrutiny and control, including monitoring and specification of interconnection charges andother access conditions. Furthermore, in certain cases, cost-concepts (such as incremental costsor "stand-alone costs") are used to define the limits on prices through floors and ceilings. Thishelps to guide the negotiations on interconnection among operators.


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Emphasis on promoting competition also implies that interconnectioncharges do not discriminate between different operators, particularly withreference to the operator which belongs to the same business group as theinterconnection provider.

An important feature about interconnection charges has been that in anumber of cases, preferential treatment has been provided to a new entrant. Onereason for this is the view that the newcomer starts with a competitivedisadvantage, in particular due to the various types of interconnection problemsthat can arise, and the difficulty of initially generating an adequate market to

cover the relatively high start-up costs. Preferential treatment helps the newentrant to stabilize in the market, with market stability judged in terms of certaincriteria such as market share.

Different methodologies for fixing interconnecting charges

It is easier to determine the cost of physically linking-up an operator with

another operators network than to determine the cost of providing interconnectionservices. Therefore, most of the focus under interconnection charges has been ondetermination of these charges for the latter aspect.


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Interconnection charges have generally been based on the time period (duration as wellas peak or off-peak period) and the distance covered by the call. The different methodologiesfor fixing interconnection charges and mark-up for provision of interconnection servicesinclude several which were mentioned with regard to telecom tariffs, e.g. cost-based pricing,two part tariff, price caps, floors and ceilings, Ramsey mark-up, and uniform or cost-

axiomatic mark-up. Similar issues, as discussed earlier, arise for these methodologies.Other methodologies include,

(i) Charges based on the structure or the level of actual tariffs in place for telecomservices. Not being linked to costs, this method leads to inefficient operation and investment.

(ii) Charges based on the time used by the calls made and the distance covered by the

calls;

(iii) Charges based on the capacity to which access is provided. This method has beenfound difficult to implement, mainly because interconnecting carriers have underestimatedtheir peak demand, which in turn reduces the competitive pressure in the market.

(iv) Charges based on the network elements that are used through interconnection. This

gives a better estimate of the costs involved, but requires more detailed information forimplementation.


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(v) The "efficient component pricing rule" (ECPR) methodology, which provides for a floor and a ceiling for interconnection charges, and thatinterconnection charges comprise both the costs of giving interconnection as wellas the earnings lost by the interconnect provider because of the telecom traffic thatis diverted from that operator to the new entrant who obtains interconnection.

This methodology is supposed to evoke less political and strategic oppositionfrom the incumbent regarding entry into the market. The new entrants have to bemuch more efficient than the incumbent in order to enter the market. However,this approach has been criticized on a number of grounds. It would sanctify themarket revenue earned by the incumbent in a protected market, and would make itmore difficult to infuse competition, efficiency and even the introduction ofrelated (but novel) products through new entry. Moreover, the incumbent operatormay not have much incentive to improve the services for users because it makes areturn whether or not the whole call is made on its network. These issues arecompounded by a difficulties in ascertaining the extent of diverted traffic.Furthermore, if there is excess demand, then the diversion of market away fromthe incumbent is unlikely, or is likely to be small. Without market diversion, the

ECPR is like a cost- based rule with floor and ceiling prices.


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Due to the various problems with the ECPR methodology, this approach has beenrejected in general. Most countries in the world use cost-based interconnection charges, orhave decided to use costs as a basis for interconnection charges.

(vi) The issues regarding cost-based charges are similar to those arising in the context

of telecom tariffs. Once again, a combination of efficiency and revenue considerations haveresulted in the focus being on long-run incremental costs. Parallel to the total service long-run incremental costs (TSLRIC) which was mentioned with regard to telecom tariffs, aconcept of total element long-run incremental costs (TELRIC) has been suggested forinterconnection charges. While TSLRIC focuses on the cost of providing services to end-users, TELRIC addresses the use of specific elements of the network by the interconnectingoperator.

Suggested Guidelines

Operators should be encouraged to settle interconnection charges through negotiations.Intervention by the regulators should be in the event of a difficulty or a dispute in thenegotiations.

Interconnection charges for establishing a connection with anothers infrastructurefacilities should be separated from charges for using the network facilities. The set-up costsassociated with establishing and maintaining interconnection facilities should be sharedbetween the interconnecting operators.


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It would not be possible (nor desirable) to specify interconnection prices for each one of theinterconnection services. The interconnection services should be divided into essential services(essential for competition or for consumption), and others. While the regulator would address the issueof interconnection charges for both these services when there is a dispute or lack of agreement amongoperators, greater control and scrutiny has to be exercised for interconnection charges for essentialservices. This includes changes in these charges for essential services being subject to specific approval.

Further, in order to increase the predictability of the process and to assist negotiations among theoperators, cost-concepts should be identified on the basis of which a range (floor and ceiling) normallyexpected for these charges could be specified.

Efficiency would require cost-based interconnection prices. The relevant concept of cost isincremental (i.e. forward-looking) costs, calculated for an efficient (i.e. the most productive) operator.

The costs should be those which reflect cause and effect relationship to the maximum extent possible,i.e. should incorporate all directly attributable costs. Further, the interconnection charge should include anormal commercial return.

Being based on costs, a change in the interconnection charge should itself be linked to a change incosts (or in efficiency). The relevant components for such a consideration will depend on the specificprevailing situation.

A price cap mechanism could be combined with prices for essential services and for the pricesgiven in terms of floor and ceiling. Such a pricing mechanism will address the issues of efficiency andunfair competition, provide flexibility of operation, and exert pressure to improve efficiency over time.


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To promote competition and to guard against unfair competition, interconnection charges shouldbe non-discriminatory. If a relatively higher charge has to be imposed on any operator, it should bebased on a demonstrated difference in the cost of providing the particular interconnection service tothat operator. Similarly, the interconnection price charged to competitors must not be greater than theinterconnection providers best price to its own vertically integrated operations (unless there is a cost

justification). To limit the possibility of unfair competition, interconnection charges for any serviceproviding the same functionality should not have a different price.

As much as possible, the charging structure should be unbundled so that a telecom operatorpays for what it uses and is not forced to pay for what it does not use. In view of the principle of non-discrimination mentioned above, the interconnection charges for unbundled elements of a servicemust be priced the same across all bundled services. Furthermore, for consistency of pricing of

unbundled services, any part of a service should be priced at less than the price of the whole service(unless cost justification is provided). Similarly, an interconnection charge for a service should not begreater than the sum of the interconnection charges for the various parts of this service (unless cost

justification is provided).

Since the operator seeking interconnection has to operate with a reasonable profit in the market,the interconnection charge should be below the end-user price of the service. There might be a need

to provide a preferential treatment to a new entrant. For that purpose, the interconnection chargecould be based on a cost-concept which provides an interconnection charge lower than a conceptwhich has a wide coverage of costs. This preference could be granted for a transition period, basedon certain criteria such as market share. The preference could be removed once the entrants market

position is stabilized.


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Policy in the near future

Full implementation of the above-mentioned principles would require developing appropriate cost-accountingmethodology, and collection of detailed data. This would require time, and the question is whether the decisions onmethodology and determination of interconnection charges should be suspended while detailed data is beingcollected. The answer to this question has to be in the negative. There is a need to determine both the methodologyand to take other decisions soon, and this will be done on the basis of the available information, albeit imperfect.Thus, while detailed cost information is being collected, a decision on methodologies for interconnection chargeswould be taken, and these charges could be based on a quick (but rough) estimate of the relevant costs, or onrevenue sharing arrangement, or on international benchmarks.

11th Plan (2007-2012).

FDI in Telecom sector has increased in recent years with value of 81.62 billion with share of 10% in totalinflow during January 2000 to June 2005. This is mainly in telecom services and not in telecom manufacturingsector. Therefore, it is essential to enhance the prospect for inflow of increased funds. The NTP 1999 sought to

promote exports of telecom equipments and services. But till date export of telecom equipment remains minimal.Most of the state-of-the-art telecom equipments including mobile phones are imported from abroad. There is thusimmense potential for indigenous manufacturing in India. Certain measures like financial packages, formation of atelecom export promotion council, creation of integrated facilities for telecom equipment through SEZ andencouraging overseas vendors to set up facilities in India, are required for making India a hub for telecomequipment manufacturing and attract FDI. The telecom sector has shown robust growth during the past few years.It has also undergone a substantial change in terms of mobile versus fixed phones and public versus private

participation. The following table and discussions from the report of the working report on the telecom sector forthe 11th plan (2007-2012)will show the growth of telecom sector since 2003.


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Conclusion

Telecommunications is one of the fastest-growing areas oftechnology in the world. Because of its rapid growth,

businesses and individuals can access information at

electronic speed from almost anywhere in the world. Byincluding telecommunications in their operations, businessescan provide better services and products to their customers.For individuals, telecommunications provides access toworldwide information and services.


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Sources:

TRAI (March 20, 2006), Recommendations on Issues relating to Broadcasting and Distribution of TVchannels.

Economic Survey, Annual Reports of the Department of Telecommunications, Ministry of Communications

and Technology and the Telecom Regulatory Authority of India (TRAI)various issues.

Business Standard: August 22, 2007

Panagariya, Arvind (2004). "India in the 1980s and 1990s: A Triumph of Reforms".

"That old Gandhi magic", The Economist, November 27, 1997.

Ahluwalia, MS. 2001, "State level performance under economic reforms in India" Working Paper No. 96,Center for Research on Economic Development and Policy Reform, Stanford University

Department of Telecommunications, Annual Report 2002-2003, Ministry of Communication andInformation Technology, New Delhi

Department of Telecommunications "Indian Telecommunication Statistics: Policy Framework, Status andTrends", Economic Research Unit (Statistics Wing), Ministry of Communications, New Delhi.

Dossani, R. (Ed.) 2002, Telecommunications reform in India. Quorom Books

www.dot.gov.in

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