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

While arguments over methodologies and calculations will find its way to the courts, the telecom regulator believes that symmetry in tariffs will bring about symmetry in traffic.

The Telecom Regulatory Authority of India (TRAI) this week reduced the domestic termination charges payable by services 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.

The move is unsurprising. Termination charges have been viewed as a relic of the old order, ill-suited to modern networks when calls can be terminated over data. The regulator for this reason had vowed to review and slash down the charges aiming to not just level the playing field but propel it forward, forcing incumbents to migrate towards next generation networks based on internet protocol. The regulator, for now, must be praised for making an unpopular move and sticking to its guns. With a view to incentivise innovation and customer friendly tariffs, TRAI, through the 2017 amendment, has opted for a carrot and stick approach – disruptors get the carrot and the old hands get the stick.

Revenues at stake

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. Now, with the reduction of these charges by more than half, 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. What’s changed this time around is the presence of an entrant who is not only changing the status quo but also may even be shooting from TRAI’s shoulders.

Jio has previously implored TRAI to adopt the ‘bill and keep’ regime where providers no long 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, warning 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 – termination charges, they argue, 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 happen now when large sections of the rural populace are being connected for the first time.

TRAI’s rationale

The regulator in a well-reasoned explanatory memorandum to the 2017 Amendment considers its decision to reduce and eventually remove termination charges 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, TRAI opines, will bring about symmetry in traffic.

TRAI has terminated the debate on interconnection charges, but not for long. 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 for its weak consultative procedures in not taking into account some of the arguments made by the telcos – the regulator will now avoid this pitfall. That’s 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.

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 cost to the consumer. That, however, 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.

Madhulika Srikumar is with the Cyber Initiative, Observer Research Foundation, New Delhi. ORF receives financial support from Reliance Industries Ltd, which owns Jio Infocomm Ltd.