TRAI makes a bold move to terminate interconnection charges

By Shalini Pandey

The Telecom Regulatory Authority of India (TRAI) reduced the domestic termination charges or Interconnect Usage Charge (IUC), payable by service providers from 14 paise per minute to six paise, effective from next month. The regulator also announced that it will get rid of termination charges altogether, starting from January 1, 2020.

TRAI has vowed to review and slash down the charges aiming to not only level the playing field but also propel it forward, forcing migration towards next-generation networks based on internet protocol. With a view to incentivise innovation and customer friendly tariffs, TRAI has opted for a carrot and stick approach—disruptors get the carrot and the old hands get the stick.

 Old players worry about revenue losses

Airtel, Vodafone and Idea have a lot to lose as a result of TRAI’s recent decision. Termination charges are payable by the providers whose subscriber originates the call to the provider in whose network the call terminates. Anytime a Jio customer makes a call to an Airtel user, Jio would have to pay the charges for connecting to a different network. With the Indian market being asymmetric—older operators receiving more calls than new operators—old hands like Airtel and Vodafone made huge gains through termination charges. With the reduction of these charges, they stand to suffer losses to the tune of thousands of crores from next month.

Understandably, the prospect of termination charges being discontinued has been a sword hanging over these telecom companies’ heads since the charges were first established in 2003. The difference now is the presence of an entrant who is not only changing the status quo but also may even be shooting from TRAI’s shoulders.

Do new entrants stand to gain?

Jio has previously implored TRAI to adopt the ‘bill and keep’ regime where providers no longer charge each other for interconnection. Other jurisdictions have done so as well. The International Telecommunication Union (ITU)—a UN agency—recommended that regulators should phase out termination charges. It warned against the possibility of interconnection regulations being used by incumbents to actively hinder new players in the market. Jio runs its network on VoLTE where voice is transmitted over data. They argue that termination charges are close to negligible over these newer technologies and older companies with legacy technologies need to catch up.

In a sector that is laden with debt but not strapped for money, telcos are busy expanding their networks in rural areas in a bid to gain more customers. The incumbents, however, are incentivised to roll out 2G and 3G networks as long as they can stand to gain from high interconnection charges. While all operators will eventually move to IP-based networks for voice calls, it is critical that the transition happens now when large sections of the rural populace are being connected for the first time.

TRAI’s rationale

In a well-reasoned explanatory memorandum to the 2017 Amendment, TRAI considers its decision as one that benefits competition and consumers. Mindful of the traffic asymmetry in the market, the regulator notes that lower termination charges will offer telcos the flexibility to price their plans competitively, working to the advantage of both companies and consumers. Symmetry in tariff will bring about symmetry in traffic.

TRAI has temporarily terminated the debate on interconnection charges. The regulations will be challenged in court though it is unlikely that a legal claim based on lack of fairness or transparency in the setting of costs can succeed. The regulator has been forthcoming by listing out the arguments of the service providers and revealing the methodology for the calculation of the termination costs. The Supreme Court last year struck down TRAI’s call-drop regulations that penalised providers. However, the regulator will now avoid this pitfall. That is not to say that the telcos do not have other arguments at their disposal. As TRAI concedes, arriving at a number for termination charges can be complex and its components can be debated. The authority is willing to re-examine the reduction of the charges in a year’s time, if necessary, and also start a new consultation on international termination charges.

The good, the bad, the ugly

TRAI mentioned that “the overarching considerations for taking this decision are consumer interest, the overall industry’s interest, the competition and growth in technology and the benefits that accrue with it and is passed onto the consumer.”

Telecommunication Service Providers(TSPs) are not migrating to newer technologies such as VoLTE. TRAI is of the view that termination charges work as a disincentive to the deployment of new technologies such as VoLTE and migration to IP networks by operators. However, while justifying this argument, the regulator fails to refer to any clause of the licence agreement which mandates any particular technology to be adopted. Licences are technology-neutral and the choice of adopting the technology is left to the operator. 

Customers stand to benefit from any reduction in tariff. However, does this exercise help achieve that objective? Tariffs are already in the category of forbearance and TRAI has upheld tariffs can be as low as zero—as provided by some operators. Moreover, licensing regulations have ensured enough competition in the market for tariffs to be driven by market forces. Thus an operator who is not competitive is harming itself because the customer has the unrestricted option to port her services and avail the lowest tariffs. However, the only beneficiary of this exercise is saying that it would hardly gain from the IUC reduction as it had already passed on all benefits to customers with free unlimited voice calls. If so, how will the reduction benefit the customer any further?

What lies ahead?

Amidst the ripples that TRAI’s decision seems to have caused, it is important to note that this move perhaps could not have come at a better time. One of the long-held criticisms of abandoning termination charges has been that it would cause a trickle-down effect, increasing the cost to the consumer. That seems unlikely now, given the entry of Jio into the market and the consequent driving down of call and data charges. The TRAI’s order, therefore, is not only timely but may be the most significant regulatory intervention in the telecom sector since its privatisation in the 90s.

On Thursday, TRAI said that the IUC between operators cannot be considered as a source of revenue, but should be treated as a reimbursement for calls being terminated on a rival network.

“IUC can’t be a revenue generation model. It is a reimbursement of work done,” newly-appointed TRAI secretary Sunil K Gupta told The Economic Times. He added that it cannot be a profit or loss-making tool and the regulation should not be viewed as favouring one and not others.

“We have calculated as per data provided by telecom service providers,” the top official said.

Incumbents such as market leader Bharti Airtel, Vodafone India and Idea Cellular—who wanted the IUC to be more than doubled—cried foul, saying the move will hurt investments and alleged that the new regulation only favours Reliance Jio, a claim that the billionaire Mukesh Ambani-led new entrant has denied. Jio had previously backed lowering or scrapping of IUC.

According to Fitch Ratings, the operating profit of Bharti Airtel, Idea Cellular and Vodafone India will decline by 3%- 6% in the financial year ending March 2018, placing additional pressure on these companies that face unprecedented competition from Jio. IUC formed 9% to 15% of consolidated revenue for Bharti and Idea. Conversely, the move will result in a benefit of Rs 3,214-3,800 crore per year for Jio.

The regulator, for now, must be praised for making an unpopular move and sticking to its guns.

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