CONSULTATION PAPER ON CONCEPTS,
PRINCIPLES AND METHODOLOGIES
I. OBJECTIVE OF THIS PAPER
1. 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. II. IMPORTANCE OF TELECOM
2. 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. 3. 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. III. TELECOM TARIFFS
1. Objectives of telecom pricing methodologies
4. 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. 5. 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. 2. Methodologies for determining telecom tariffs
6. 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. 7. 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. 8. 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...