Pricing in Telecom Sector

KishoreKumar.C (09MIB026)
Thiruchitrambalam.G (09MBA115)
INSTITUTIONAL HISTORY OF THE TELECOM SECTOR IN INDIA
The telegraph act of 1885 governed the telecommunications sector. Under this act, the
government was in-charge of policymaking and provision of services . Major changes in
telecommunications 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 5.5
percent is spent on it (Figure 1). The initial phase of telecom reforms began in 1984 with
the creation of Center for Department of Telematics (C-DOT) for developing indigenous
technologies and private manufacturing of customer premise equipment. Soon after, the
Mahanagar 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 fixed
service sector, namely DoT (Department of Telecom), MTNL and VSNL. Of these, DoT
operated in all parts of the country except Delhi and Mumbai. MTNL operated in Delhi and
Mumbai and VSNL provided international telephony.
Given its all-India presence and policy-making powers, the DoT enjoyed a monopoly in the
telecom sector prior to the major telecom reforms. However, subsequent to the second phase
of reforms in 1999, which included restructuring the DoT to ensure a level playing field
among private operators and the incumbent, the service-providing sector of DoT was split
up and called Department of Telecom Services (DTS). DTS was later corporatized and
renamed Bharat Sanchar Nigam Limited (BSNL). This meant separation of the incumbent
service provider from the policy-maker. Broadly, DoT is now responsible for policy-
making, licensing and promotion of private investments in both telecom equipment and
manufacture and provision of telecom services. BSNL, a corporate body, is responsible for
the provision of services.
 A crucial aspect of the institutional reform of the Indian telecom sector was setting up of an independent
regulatory body in 1997 – the Telecom Regulatory Authority of India (TRAI), to assure investors that the sector
would be regulated in a balanced and fair manner. TRAI has been vested with powers to ensure its independence from
the government. The government has retained the licensing function with itself. The main issue with respect to
licensing 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 TRAI
include fixing tariffs for telecom services, dispute-settlement between service providers, protecting consumers
through 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 functional
clarity and improving regulatory quality. TRAI can frame regulations and can levy fees and charges for telecom
services 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 Telecom
Disputes Settlement and Appellate Tribunal (TDSAT).
 Telecommunications is the transmission of data and information between computers using a
communications link such as a standard telephone line. Typically, a basic telecommunications system would
consist of a computer or terminal on each end, communication equipment for sending and receiving data, and a
communication 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 communications
technology include the following:
Electronic mail (e-mail) is a message transmitted from one person to another through computerized
channels. Both the sender and receiver must have access to on-line services if they are not connected to the same
network. 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 the
receiving 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 voice
mailbox. Messages are digitized so the caller's message can be stored on a disk.
 Videoconferencing involves the use of computers, television cameras, and communications software and
equipment. This equipment makes it possible to conduct electronic meetings while the participants are at different
locations.
The Internet is a continuously evolving global network of computer networks that facilitates access to
information 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, whereby
sounds were translated manually into words; then the telephone, developed in 1876, transmitted voices; and then the
teletypewriter, 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 dial
modem technology accelerated the rate during the 1980s. Facsimile transmission also enjoyed rapid growth during this
time. The 1990s have seen the greatest advancement in telecommunications. It is predicted that computing
performance will double every eighteen months. In addition, it has been estimated that the power of the computer has
doubled 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 of
commerce, reported that only fifty thousand computers existed in the world in 1975, whereas, by 1995, it was
estimated that more than fifty thousand computers were sold every ten hours (U.S. Department of Commerce, 1995).
 Deregulation and new technology have created increased competition and widened the range of network services available
throughout the world. This increase in telecommunication capabilities allows businesses to benefit from the information revolution in
numerous 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 by
private operators but not in all parts of the country. By mid-2001, all six of the private operators in the basic segment had started
operating (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 by
the incumbent. In December 2002, the private sector provided approximately 10 million telephones in fixed, WLL (Wireless Local
Loop) 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.
b. Teledensity and Village Public Phones (VPTs) - India's rapid population increase coupled with its progress in
telecom provision has landed India's telephone network in the sixth position in the world and second in Asia (ITU). The
much publicized statistic about telecom development in India is that in the last five years, the lines added for basic
services is 1.5 times those added in the last five decades! The annual growth rate for basic services has been 22 percent
and over 100 percent for internet and cellular services. As Dossani (2002) argues, the comparison of teledensity of India
with 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 about
1.6 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 people
around 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, the
government 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 90.1
lakhs 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 .
 The overall telecom growth rate is likely to be high for some years, given the increase in demand as income levels
rise and as the share of services in overall GDP increases. The growth rate will be even higher due to the price decrease
resulting from a reduction in cost of providing telecom services. A noteworthy feature of the growth rate is the rapid rate
at which the subscriber base for cellular mobile has increased in the last few years of the 1990s, which is not surprising in
view 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 in
manufacturing of telecom equipment, internet services, and infrastructure providers (e-mail and voice mail), 74 percent in
radio-paging services, internet (international gateways) and 49 percent in national long distance, basic telephone, cellular
mobile, and other value added services (FICCI, 2003). Since 1991, foreign direct investment (FDI) in the telecom sector
is second only to power and oil - 858 FDI proposals were received during 1991-2002 totaling Rs. 56,279 crores (Figure
4) (DoT Annual Report, 2002). Foreign investors have been active participants in telecom reforms even though there was
some frustration due to initial dithering by the government. Until now, most of the FDI has come in the cellular mobile
sector 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
 d. Tariff-setting - An essential ingredient of the transition from a protected market to competition is
the alignment of tariffs to cost-recovery prices. In basic telecom for example, pricing of the kind that
prevailed in India prior to the reforms, led to a high degree of cross-subsidization and introduced inefficient
decision-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 (Singh
et. al. 1999). Therefore, re-balancing of tariffs - reducing tariffs that are above costs and increasing those
below costs - was an essential pre-condition to promoting competition among different service providers
and efficiency in general.
TRAI issued its first directive regarding tariff-setting following NTP 99 aimed at re-balancing tariffs
and to usher in an era of competitive service provision. Subsequently, it conducted periodic reviews and
made 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 service
sector. Cost based pricing, a major departure from the pre-reform scenario, also provides a basis for making
subsidies more transparent and better targeted to specific social objectives, e.g. achieving the USO.
 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 in
many developing countries, low teledensity resulted in great emphasis being laid on rapid expansion
often at the cost of quality of service. One of the benefits expected from the private sector's entry into
telecom 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 to
provide consumers value for their money. Telephone faults per 100 main lines came down to 10.32
and 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 has
devised 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 telecom
tariffs and interconnection charges (i.e. charges paid by one operator to another for use of the latter’s
network in delivering the telecom service). The purpose is to provide a basis for comments and
suggestions from interested parties and the public to take forward the process of developing pricing
mechanisms 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 and
questions posed to focus attention on clarifying various aspects for discussion on a comprehensive
pricing methodology for the telecom sector.
IMPORTANCE OF TELECOM
The progressive transformation of telecom technologies and products has resulted in a large
decline in world-wide telecom costs and emergence of a variety of new markets and
opportunities. 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 influence
in several parts of the world. An efficient and widespread telecom network is increasingly
becoming a necessary infrastructure to utilize and develop various technologies, and to achieve
both economic and social goals.
For India, the gap between the actual situation and the likely opportunities is highlighted
starkly 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 an
essential 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 sector’s objectives
cover a wide canvas which includes enhancing efficiency and flexibility of operation, financial
viability of the sector, promoting investment and innovation, stimulating demand and
competition, addressing unfair competition, and meeting social objectives such as universal
provision of telecom services at fair and reasonable rates.
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 competitive
pressure on prices are also emphasized. Price floors and ceiling, together with unbundling of
the 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 be
required 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 return
which ensured financial viability while keeping the price low for consumers. Experience
showed that this methodology requires considerable information and gives rise to perverse
incentives, leading to inefficient operation and investment.
More recently, due mainly to increasing competition in the sector, the focus has been on
prices which encourage dynamic elements such as efficiency, innovation and flexibility.
Prices can be based on costs or demand, and could be specified in terms of a particular level or with
some flexibility for the operator to decide the price level. An increasing trend in certain countries
has 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 long
distance and international calls. This restructuring has basically meant that prices are getting more
cost-oriented. Such cost-orientation of prices can arise either through the determination of a price
level 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 practical
problems arise in properly measuring and assigning costs to the various telecom services.
Prices based on short-run marginal costs and long-run incremental costs promote
efficient 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 costs
that are incurred by a telecom operator. In contrast, fully-allocated costs cover all
costs. Despite this, there is increasing emphasis on using long-run incremental
costs for cost-based pricing because they promote efficiency, while fully-allocated
costs foster inefficiency. Long-run incremental costs cover a greater portion of
total costs than marginal costs, and incorporate dynamic elements such as
technical change and economies of scale.
Different variants of long-run incremental costs can be calculated depending on
the level of output, time period and technologies used. A wide coverage is
provided by total service long-run incremental costs (TSLRIC), which basically
shows the cost the firm would avoid in the long run if it stopped providing a
particular service.
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-up
varying 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 revenue
through rentals. The rule-of-thumb is the most straight-forward of the mark-up
methodologies. Since demand is not easy to estimate, Ramsey rule provides at best a rough
guide on the nature of the mark-up.
Subsidized pricing
Subsidies to price are given normally for achieving social objectives such as promoting
the provision of universal service in telecom or providing preferential telecom access to
specific 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, and
an unbundling of the services being provided. With such information, the policy-maker
would have a better basis to consider alternative policies to fund the subsidies.
Demand-based pricing
Under this methodology, prices reflect willingness to pay for the use of a product, or the value given to a
particular product. These prices are shown by the demand curve. In assessing the social value from a demand-price, it
would 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 are
increasingly relying on flexible pricing methodologies. This is done either by providing a range within which prices
can be fixed by the operators, or by not extending price regulation to certain products (normally products with
competitive 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 the
average 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 are
devised with conditions different from the overall basket. The price cap methodology provides considerable flexibility
to take account of various policy objectives, including equity and efficiency of operation.
 Price floors and ceilings have also been used for providing flexibility, and to
limit an operator from abusing its dominant market position.
Price flexibility is also achieved through different price options provided for
alternative combinations (or volume) of services that are purchased by customers.
These include, for example, options providing combinations of a high rental and low
usage 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 to
price control and which should be left outside the purview of such control. The next
step is to consider what type of regulation should apply to the various telecom
services subject to price regulation. For instance, should different types of control be
used, with certain services (such as essential services) being subject to closer price
scrutiny 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 in
order to infuse some simulated competitive pressure on prices.
 Even for those services which are not subject to any price regulation,
mechanisms are available to deal with situations of unfair competition. An effective
functioning of these mechanisms requires unbundling of the various services.
Furthermore, unbundling, together with better account-keeping, enhances the
transparency 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 the
transparency 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 telecom
tariffs or rentals, creating a fund financed by the license fee obtained from the
telecom sector, or by revenue obtained through a levy or a tax. If a levy were
impose on the telecom operators for financing this fund, then the price of certain
telecom 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 provided
in the Annex to the Executive Summary.
TELECOM TARIFFS IN INDIA
Some salient features of the telecom tariffs in India are considered next, in
particular the escalation in tariffs as the number of calls increase, tariffs for STD
calls (including international calls), operator-assisted trunk call rates, different
rentals charged on the basis of the capacity of a subscriber’s telephone exchange,
preferences given to rural subscribers, and off-peak rates to ease the pressure on
the network during peak-hours. The paper raises questions on whether or not these
tariffs and rentals should be re-balanced, and provides certain options in this
regard (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 the
network and unsatisfied demand for linkage to the network; likely substantial
growth in demand for telephones; inadequate information on telecom demand in
India (including on demand elasticity); inadequate information on costs; and
private investors being limited to specific segments of the telecom market.
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 and
operating 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 to
universal service obligations.
Basically interconnection charges are paid either through sharing of revenues among the interconnected
operators, or on the basis of the cost of the interconnection service provided (plus a reasonable profit). The latter
approach 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.
 In most countries, regulators encourage the operators to settle interconnection rates
through negotiations. To assist this process, the regulators normally establish guidelines or a
framework which they consider desirable for determining interconnection charges.
Objectives of Interconnection Pricing
The objectives of interconnection pricing policy are similar to those mentioned in the
context of telecom tariffs. This is particularly so because of the link between interconnection
and the provision of telecom services to end-users. However, the objective of efficiency in
interconnection not only requires a cost-based price, but also flexibility of interconnection. The
latter aspect involves two features. One is to facilitate interconnection among different operators
at 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 required
rather than a whole bundle of interconnection services being purchased. This suggests a need
for unbundling of the interconnection services provided.
A very important objective under interconnection is prevention of unfair competition. This
requires identifying those interconnection services which are essential for facilitating
competition, or are required for essential services. Such services are subject to particular
scrutiny and control, including monitoring and specification of interconnection charges and
other access conditions. Furthermore, in certain cases, cost-concepts (such as incremental costs
or "stand-alone costs") are used to define the limits on prices through floors and ceilings. This
helps to guide the negotiations on interconnection among operators.
 Emphasis on promoting competition also implies that interconnection
charges do not discriminate between different operators, particularly with
reference to the operator which belongs to the same business group as the
interconnection provider.
An important feature about interconnection charges has been that in a
number of cases, preferential treatment has been provided to a new entrant. One
reason for this is the view that the newcomer starts with a competitive
disadvantage, in particular due to the various types of interconnection problems
that can arise, and the difficulty of initially generating an adequate market to
cover the relatively high start-up costs. Preferential treatment helps the new
entrant to stabilize in the market, with market stability judged in terms of certain
criteria 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 operator’s network than to determine the cost of providing interconnection
services. Therefore, most of the focus under interconnection charges has been on
determination of these charges for the latter aspect.
 Interconnection charges have generally been based on the time period (duration as well
as peak or off-peak period) and the distance covered by the call. The different methodologies
for fixing interconnection charges and mark-up for provision of interconnection services
include 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 telecom
services. 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 been
found difficult to implement, mainly because interconnecting carriers have underestimated
their 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 for
implementation.
 (v) The "efficient component pricing rule" (ECPR) methodology, which
provides for a floor and a ceiling for interconnection charges, and that
interconnection charges comprise both the costs of giving interconnection as well
as the earnings lost by the interconnect provider because of the telecom traffic that
is diverted from that operator to the new entrant who obtains interconnection.
This methodology is supposed to evoke less political and strategic opposition
from the incumbent regarding entry into the market. The new entrants have to be
much 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 the
market revenue earned by the incumbent in a protected market, and would make it
more difficult to infuse competition, efficiency and even the introduction of
related (but novel) products through new entry. Moreover, the incumbent operator
may not have much incentive to improve the services for users because it makes a
return whether or not the whole call is made on its network. These issues are
compounded by a difficulties in ascertaining the extent of diverted traffic.
Furthermore, if there is excess demand, then the diversion of market away from
the 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.
 Due to the various problems with the ECPR methodology, this approach has been
rejected in general. Most countries in the world use cost-based interconnection charges, or
have 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 have
resulted 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, a
concept of total element long-run incremental costs (TELRIC) has been suggested for
interconnection 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 interconnecting
operator.
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 the
negotiations.
Interconnection charges for establishing a connection with another’s infrastructure
facilities should be separated from charges for using the network facilities. The set-up costs
associated with establishing and maintaining interconnection facilities should be shared
between the interconnecting operators.
 It would not be possible (nor desirable) to specify interconnection prices for each one of the
interconnection services. The interconnection services should be divided into essential services
(essential for competition or for consumption), and others. While the regulator would address the issue
of interconnection charges for both these services when there is a dispute or lack of agreement among
operators, greater control and scrutiny has to be exercised for interconnection charges for essential
services. 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 the
operators, cost-concepts should be identified on the basis of which a range (floor and ceiling) normally
expected for these charges could be specified.
Efficiency would require cost-based interconnection prices. The relevant concept of cost is
incremental (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 a
normal commercial return.

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

A price cap mechanism could be combined with prices for essential services and for the prices
given in terms of floor and ceiling. Such a pricing mechanism will address the issues of efficiency and
unfair competition, provide flexibility of operation, and exert pressure to improve efficiency over time.
 To promote competition and to guard against unfair competition, interconnection charges should
be non-discriminatory. If a relatively higher charge has to be imposed on any operator, it should be
based on a demonstrated difference in the cost of providing the particular interconnection service to
that operator. Similarly, the interconnection price charged to competitors must not be greater than the
interconnection provider’s 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 service
providing the same functionality should not have a different price.
As much as possible, the charging structure should be unbundled so that a telecom operator
pays 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 service
must 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 be
greater 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 charge
could be based on a cost-concept which provides an interconnection charge lower than a concept
which has a wide coverage of costs. This preference could be granted for a transition period, based
on certain criteria such as market share. The preference could be removed once the entrant’s market
position is stabilized.
Policy in the near future
Full implementation of the above-mentioned principles would require developing appropriate cost-accounting
methodology, and collection of detailed data. This would require time, and the question is whether the decisions on
methodology and determination of interconnection charges should be suspended while detailed data is being
collected. The answer to this question has to be in the negative. There is a need to determine both the methodology
and 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 charges
would be taken, and these charges could be based on a quick (but rough) estimate of the relevant costs, or on
revenue 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 total
inflow during January 2000 to June 2005. This is mainly in telecom services and not in telecom manufacturing
sector. 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 thus
immense potential for indigenous manufacturing in India. Certain measures like financial packages, formation of a
telecom export promotion council, creation of integrated facilities for telecom equipment through SEZ and
encouraging overseas vendors to set up facilities in India, are required for making India a hub for telecom
equipment 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 for
the 11th plan (2007-2012)will show the growth of telecom sector since 2003.
Conclusion
Telecommunications is one of the fastest-growing areas of
technology in the world. Because of its rapid growth,
businesses and individuals can access information at
electronic speed from almost anywhere in the world. By
including telecommunications in their operations, businesses
can provide better services and products to their customers.
For individuals, telecommunications provides access to
worldwide information and services.
Sources:
TRAI (March 20, 2006), Recommendations on Issues relating to Broadcasting and Distribution of TV
channels.
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 and
Information Technology, New Delhi
Department of Telecommunications "Indian Telecommunication Statistics: Policy Framework, Status and
Trends", Economic Research Unit (Statistics Wing), Ministry of Communications, New Delhi.
Dossani, R. (Ed.) 2002, Telecommunications reform in India. Quorom Books
www.dot.gov.in