The value of the telecom network for users increases as more customers join the network. Interconnection with other networks increases this value further by increasing the number of people the subscribers of a network can call and the range of services they can access. With increasing competition comes plurality of operators and services, which again highlights the importance of interconnection.
Of course, there is a charge associated with network interconnection. Interconnect usage charges (IUC) are wholesale charges payable by one operator to another for the use of the latter?s network for originating, terminating or transiting/carrying a call. These charges are usually based on cost and indicate a fair compensation for the use of one service provider?s network resources by another.
So far, the concept of IUC, as evolved by the Telecom Regulatory Authority of India (TRAI), has proven to be a suitable approach to interconnect pricing in a competitive, multi-operator environment. It has given service providers sufficient flexibility in fixing tariffs.
However, the regulator?s decision to review IUC has become the latest area of conflict between incumbent mobile phone companies and the new players. Interconnection charges often account for a very significant part of the costs of new telecommunications operators. This is particularly the case with new entrants that do not own end-to-end networks. The level and structure of interconnection charges are, therefore, major determinants of the viability of operators in a competitive telecommunications market. Over the years, a variety of approaches have been used to calculate interconnection charges and to determine the financial terms of interconnection. The IUC regime consists of origination, transit, carriage and termination charges.
The authority notified the first IUC regulation on January 24, 2003, which contained, inter alia, charges for origination, transit and termination of calls in a multi-operator environment. Though this regulation has been amended three times since then, in 2003, 2006 and 2009, the basic framework has remained the same.
After the 2009 amendment, the termination charge for local and national long distance voice calls was fixed at Re 0.20 per minute while the termination charge for incoming international long distance voice calls was fixed at Re 0.40 per minute. The carriage charge was retained at a ceiling of Re 0.65. On the basis of the cost data submitted by service providers, TRAI also prescribed a Re 0.15 per minute transit-carriage charge from Level II trunk automatic exchange (TAX) to short distance charging area (SDCA). It also prescribed that intra-SDCA and TAX transit charges be lower than Re 0.15 per minute. The IUC for SMSs continues to be under forbearance.
Approaches for determining IUC
There are four approaches to regulating IUC: cost oriented, bill and keep (BAK), retail based and revenue share. During the pre-consultation process of the present exercise, two schools of thought emerged with regard to the approach that should be used for the IUC regime. Some service providers were of the view that a cost-based regime should be used, as they felt they should be fairly compensated for their investment and operational expenses. Others were in favour of the BAK method. In this model, carriers avoid the administrative burden of billing one another for exchanged traffic. The method also has low regulatory costs. Further, BAK proponents claim that zero mobile termination charges under the BAK regime are pro-consumer and pro-competition. The current regime distorts competition in favour of large operators by enabling them to sustain on-net/off-net price differentials that harm the small operators and lead to traffic imbalances. They have also stated that consumer concern is likely to increase with the implementation of mobile number portability as the consumer will not be aware whether a call to a ported subscriber is on-net or off-net.
Costing methodologies
At the consultation stage, service providers were divided on adopting the present costing methodology. Some of the service providers and one of the associations favoured the fully allocated cost (FAC) method used by TRAI in earlier regulations. However, another association held the view that interconnect pricing should be based on a robust cost-based model, which includes all costs and justifies the investment for expanding services. The cost model approach adopted should be in line with international best practices. The two most commonly followed international practices or methodologies for determining cost-based IUC are FAC and long-run incremental cost (LRIC). FAC involves the allocation of all historical costs incurred till date between individual services, based on a set of criteria such as relative capacity utilisation, minutes of use or proportionate revenues generated. On the other hand, the LRIC approach involves determining the incremental costs of providing an additional unit of service over current levels and over a defined future period of time. Thus, it considers costs that are both forward-looking and incremental, which would generate credible charges that reflect real economic costs for providing interconnection. TRAI?s existing costing methodology is based on the FAC model.
Domestic termination charge
Inclusion of capital expenditure
The accounting separation reports submitted by service providers during the consultation process indicate that service providers generate revenue on account of fixed charges, administrative charges or rental. There is a point of view that if capex and opex are both taken into account for calculating termination charges, the revenue on account of fixed charges, administrative charges or rental would be a windfall gain to the service provider. Moreover, tariffs are currently under forbearance and service providers are offering different tariff plans with fixed and variable charges bundled together for post-paid and prepaid subscribers. The bundled tariff plans are difficult for consumers to compare and are a constant source of concern for them. If rental/administrative or any other fixed charge component is removed from the tariff by regulatory intervention, retail tariffs will be considerably simplified. TRAI has, therefore, sought the view of stakeholders on the following:
?Should capex be included in calculating/estimating termination charges? If so, which network elements from the accounting separation report (ASR) data should be included in the cost base?
? Should the inclusion of capex in the calculation of termination charges, rental/ administrative or any other fixed charge component be removed from the retail tariff through regulatory intervention?
Weighted average cost of capital
The weighted average cost of capital (WACC) is used to measure a firm?s capital costs. Firms are generally financed through a combination of debt and equity investments. Since the costs of debt and equity capital are different, the overall measure of a firm?s cost of capital is WACC.
In the ASR, service providers are using different rates of WACC for determination of their return on capital. The WACC may vary from company to company, depending on the debt-equity ratio, risk factors, brand name and other parameters. TRAI has thus sought answers to the following:
? Should TRAI continue with the existing rate of return of around 15 per cent in the form of pre-tax WACC as adopted in other regulations? If not, what should be the rate of pre-tax WACC, and why?
Other elements covered by TRAI for the determination of the domestic termination charge are depreciation, relevant operational costs, treatment of revenue and costs related to value-added services, asymmetric termination charge, as well as traffic minutes.
