Economy

TRAI’s New Spectrum Usage Charge Formula is the Result of a Constrained Compromise

The government has essentially backed itself into a corner after the attorney general’s opinion last month on the legality of levying a uniform spectrum usage charge.

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The fight over how much spectrum usage charges should be levied is a curious game. Credit: PTI

New Delhi: The game of hot potato over how spectrum usage charges (SUC) should be levied, which has significant implications for new entrant Reliance Jio, became more curious on Tuesday after the Telecom Regulatory Authority of India (TRAI) added another layer of complexity to a decision that has been marked by controversy.

On Tuesday, a “constrained” TRAI  offered a few modifications to the Telecom Commission’s weighted average method of calculating SUC while protesting that it would be only a temporary solution. 

The decision, according to industry insiders and experts The Wire spoke to, will come as a partial relief to Reliance Jio, which was one of the few telecom companies that stood the most to lose if a uniform spectrum usage charge of 3.5%- 4.5% was levied.

The question of whether a flat and uniform SUC should be applied – in order to remove policy arbitrages arising from a flawed assumption that it would be possible to segregate the revenue contributions of different spectrum bands – has been passed between the Department of Telecommunications (DoT), the attorney-general’s office and TRAI over the last six months.

How and why did the concept of a uniform SUC, which was initially mooted, eventually end up as an overly complex weighted average formula that includes components such as final spectrum “bid values” and corresponding normalisation factors?

From simple to complicated

In January, in response to a request from the DoT, TRAI echoed its earlier 2013 recommendations on spectrum usage charges which said that “there should be a single uniform rate of SUC for all spectrum including the BWA (broadband wireless access) spectrum”. Reliance Jio currently owns and plans on using a good chunk of BWA spectrum (2300 and 2500 MHz) which is charged only a minimal SUC of 1% for a number of historical and administrative reasons.

Based on this and renewed support from higher levels of government, by the end of April, members of the DoT’s highest decision-making body, the Telecom Commission (TC), had decided on pushing for a uniform SUC of anywhere between 3% to 4.5% which would be applied to spectrum acquired on previous auctions such as the BWA spectrum sold in 2010.

“This is where things became unstuck however. We needed to cover our legal bases and so gave the uniform SUC proposal to the attorney general’s office. What came back was a weighted average formula that didn’t solve completely the problem of policy arbitrage. The argument that was given was that terms of the BWA auction back in 2010 couldn’t be changed. So the Telecom Commission came out with a formula taking that into account,” a senior DoT official who declined to be identified told The Wire.

According to people with knowledge of the matter, when the AG’s recommendations and the final TC proposal was sent to the cabinet, it was met with displeasure as it not only ran contrary to the Modi government’s stated principles of trying to make corporate regulation less complex but also gave the impression that the government was trying to favour a few telecom companies that had bid in the 2010 BWA auctions.

On June 24 therefore, on the cabinet’s urging, the DoT sent the AG’s opinion along with the TC’s formula to TRAI, asking once again to give its recommendations. The telecom regulator on Tuesday, strongly emphasised that the Dot should consider moving to a “simple, transparent and flat ad valorem SUC regime in accordance with laws”.

However, as TRAI noted in Tuesday’s order, because the regulator was “constrained” to “examining the weighted average solution as suggested by Ld. AG and proposed by DoT”, it has come out with a modified proposal that will slightly increase the overall SUC payout by most telecom companies including Reliance Jio, but also further complicates the weighted average formula.

“At this point, the government is essentially tying TRAI’s hands while hoping the regulator will support the uniform SUC proposal. What can TRAI say when it is being asked to work only within the framework of the AG’s opinion? Furthermore, it is clear that some parts of the TC itself is divided on the issue. Why else would the government not have strongly pushed for the issue? Is it being held up only by the AG?,” the senior executive of one of India’s senior telecom industry executive.

Cabinet’s next move?

The cabinet, according to industry insiders, could walk away and accept with the modified TRAI weighted average formula, which places less emphasis on the quantity of spectrum owned by a telecom operator.

“It’s true that the AG’s legal opinion, which is not completely wrong but still frustrating, has nixed the uniform SUC push. The TC’s weighted average formula may have seemed at supporting Reliance Jio. TRAI’s recommendations is a sort of middling compromise that may prove to be acceptable,” the senior DoT official, quoted above, said.

Complex to very complicated

The problem, however, is that TRAI’s new weighted average formula further complicates things and as the regulator itself notes, “is at best a temporary solution”.  The TRAI formula does away with the quantum of spectrum owned by a telecom operator in a specific band “as the sole weightage in the weighted average formula”. It instead replaces spectrum quantity with the final bid values placed by telecom companies during auctions.

TRAI gives examples of how its new formula would work, especially when it comes to operators (like Reliance Jio) who plan on utilising BWA spectrum. In the case of an ‘Operator A’ who owns 5 Mhz of spectrum in a non BWA band (with a SUC of 4%) and 20 Mhz of spectrum (unpaired) in a BWA band (with a SUC of 1%) – and the revenue contribution from the bands is 60% (non-BWA) and 40%(BWA) – then under the TC’s proposal the overall SUC would be only 1.6%. However, under TRAI’s proposal it would be 2.29%. If revenues from different spectrum bands were segregable, this operator would in the real world attract a SUC of 2.8%.

Therefore, while TRAI’s formula is better at solving the BWA policy arbitrage problem it would also deeply impact the way spectrum auctions are carried out in the future as the new formula takes into account the final bid values that telecom service providers place. As experts have already pointed out, this would make SUC extremely dynamic with every new auction.

TRAI however believes that “while the introduction of a normalisation factor will result in reduction of SUC [when compared to a flat uniform SUC] in case of some operators holding BWA spectrum, this gap will be less than that produced by DoT suggested formula”.

The question is: will that be good enough for the cabinet?