TRAI’s Order on Interconnection Charges is Full of Holes

The regulator has abandoned an approach suited to India. Is it any wonder that its decision has sparked allegations of being skewed in favour of one company?

The Telecom Regulatory Authority of India's headquarters in New Delhi. Credit: PTI

The Telecom Regulatory Authority of India’s headquarters in New Delhi. Credit: PTI

The interconnection regime is really quite simple. If a call originates in network A and terminates in network B, then network A has to pay network B for the “work done” in terminating the call. This is called the mobile termination charge (MTC). The recent downward revision of this charge by the Telecom Regulatory Authority of India (Trai) is the subject of considerable controversy.

Trai’s decision is: (a) lower MTC from 14 paise to 6 paise; and (b) mandate that MTC shall be zero from January 1, 2020. It has been reported that the first decision bestows a benefit of  ~ Rs 5,000 crore on Jio and an equivalent loss on the other major operators. The second decision is also entirely in favour of Jio.

If traffic between networks A and B is balanced, the level of the MTC is immaterial. However, if traffic is imbalanced, then it makes a huge difference. Since the traffic from Jio to other networks is far higher than the incoming traffic on the Jio network, a lower MTC reduces Jio’s payout, hitting the revenues of its rivals. And, if MTC goes to zero (in 2020), Jio will once again be the major gainer.

The decision has not gone down well because it appears as if the regulator is being partisan. And, this comes in the wake of the regulator’s inaction since September last year on Jio’s tariff plans. Even when Telecom Disputes Settlement and Appellate Tribunal (TDSAT) told Trai to take a view, the regulator dawdled. The result: Predatory pricing continued destroying value and financials of the sector. And the regulator remained mum. So, it is no surprise that there is a more vehement articulation of bias.

The explanatory memorandum (EM) accompanying the regulation provides the justification. The reasons advanced: It will encourage competition, force networks to upgrade technologically, and benefit consumers.

Also read: Disruptors Get the Carrot and Incumbents the Stick as TRAI Terminates Interconnection Charges

First, Trai’s mandate is to balance the interests of consumers and producers. The government is seriously worried about the telecom sector’s health. Hence, one would have expected some consideration of this by Trai. There is not a word in the EM about the precarious finances of the sector. Nor, about where the resources are going to come for the huge investments required for upgrading networks. Thus, the decision is heavily skewed, not one that balances competing interests.

Second, how can the decision compel tech upgrade, if there are no internal resources with the debt-laden sector? And, is it the job of the regulator to decide technology of an operator? That’s what market competition is about.

Third, in the same breath the regulator claims it will promote competition. The EM is not clear how it will do it except for a few bald statements. However, consider the perverse incentives it creates. Jio can now afford to lower its consumer tariffs because the MTC has fallen. This will lead to another round of predatory pricing by Jio, now firm in the knowledge that its losses will be lower because of the smaller MTC payout. How can the regulator not see that this is destructive competition?

Let us now turn to how Trai reached the 6 paise decision. The MTC has always been cost-based (cost of work done). Trai decided to use a costing methodology (pure LRIC) that is employed in mature developed country markets. It is also known that this yields the lowest possible cost. In 2015, Trai used the LRIC+ methodology, arguing that the pure LRIC approach is a textbook theoretical model and unsuited to India. The difference: The 2015 method includes costs of spectrum and common costs; the pure LRIC omits them. In India, spectrum costs 10 to 20 times that in the rest of the world. It is the main cost: Just look at the debt of the telcos. How can we justify its omission? In the space of two years, Trai abandons an approach suited to India and plumbs for one used exclusively in developed countries. Is there any developing country that uses the pure LRIC method? Why abandon the earlier approach that Trai found suitable? The EM is silent on these matters, inviting the allegation that the method was chosen to yield the lowest possible number.

Also read: It’s Good That TRAI Is Slashing Interconnection Charges, But It Should Do It Faster

Now, the 2020 decision. This is an industry where technological change is a fact of life. And, few would risk predicting the course of change for just one year. Then, why not just wait and see how things evolve and then take a decision closer to the date. Why the unseemly hurry to announce that decision today? This provokes the allegation that it is merely to let Jio pocket this decision now. Moreover, the EM is completely silent on how Trai came to the date January 1, 2020. Why not January 1, 2019 or January 1, 2021?

In no country of the world – not one – has the regulator issued regulations mandating MTC equal to zero. This fact does not merit even a passing mention in the EM. Then why is Trai doing this? Any surprise that this decision too is inviting charges of partisan behaviour.

Another justification offered is: IP networks don’t need the MTC and these are around the corner. Reality check. Jio is not a full IP-based network. None of them will be for quite some time, given resource availability. Spur the move to VOLTE? Rural teledensity at 40 per cent; low penetration of smartphones; internet access in rural areas… forget it; and 50,000 villages with not even 2G connectivity. As for NFON/BharatNet the less said the better. For which India was Trai taking this decision? An imaginary one it seems.

The telecom sector is in dire straits. The finance minister (FM) says that the government cannot preside over its demise. Clearly, the FM and Trai are on different wavelengths. Urgent action is required. And, Trai’s decision is not a good augury. Government cannot afford to be a silent watcher-on. This is not the first time Trai has been accused of bias; and, in my memory, never have such charges of bias been leveled against any other regulatory body. The government must beware: It is but one short step to crony capitalism.

Rahul Khullar is former Chairman, TRAI. This piece has been republished through an arrangement with Business Standard.

  • Anjan Basu

    ” It is but one short step to crony capitalism”. Wrong, Mr Khullar! TRAI has taken that step already. We are already there, as several different things indicate. The Adanis get away with rampant over-invoicing of their imports, also probably with seeking bogus refund of duties not paid in the first place. The ED’s investigation into their nefarious activities are stymied deliberately. The entire TRAI architecture seems to have been modelled on what suits the Ambanis. The country’s largest bank — a public sector entity — finds fault with the Supreme Court’s decision to hold the Jaypee group responsible for the fraud they perpetrated on numerous buyers in their housing projects. This is the India that predatory capitalism worships.