When we in the Telecom Regulatory Authority of India (Trai) shifted to competition regulation in 2003, we were not sure of its results. After all, we still maintain cost-plus tariff regulation in the power sector; the fertiliser sector is no different and the government continues to subsidise inefficient units/technologies/locations.
Over the years, we have been told that cost-plus regulation is crucial for investment in key sectors since entrepreneurs cannot take risks in fast moving markets and so on.
We have also been told that cost-plus price regulation, at times, checks profiteering. Our experience in the telecom sector broke all the myths, and we realised that a level playing field and competition are the only answers for growth, investments and sustainability.
But let me first trace the events that led Trai to move to competition regulation.
The first compulsion was Bharat Sanchar Nigam Limited's request to permit predatory (below cost) tariffs after the January 2003 ADC regulation, which imposed very high access deficit charges on fixed-line operators.
Though BSNL was the incumbent and the predatory tariff theory was aimed at ensuring the incumbent didn't bring out below-cost tariffs to kill competition, we had to permit such tariffs as it was argued that this was essential to allow BSNL to survive in the competitive telecom market.
If we had not permitted the predatory rates, BSNL would have lost all its traffic to mobile operators and Trai or the government would have had to design separate schemes to enable BSNL to survive with much-reduced call traffic -- a vicious circle indeed.
One of the options was to stop looking at tariffs and allow operators to fix their own tariffs. After all, the principles of network regulation always said that once level playing field is established in a network, the regulator should allow market forces and competition to take over.
The second compulsion was more interesting. While the post-February 2003 tariffs were very high, Reliance launched a 'Chalis Paise mein Duniya Mutthi Mein' scheme. We scrutinised the scheme and found it was really a 95 paise per minute call, and the rest was intelligent packaging for the market.
Even this tariff was unthinkable in our cost-plus dispensation at that time, mostly determined by padding in costs by operators, as in many other sectors of the Indian economy.
We were mostly bureaucrats enjoying the power we wield. Our entire office supported us in our informal discussion that we must ban such predatory tariffs of the largest Indian company -- an exercise of perhaps showing our power.
Reliance made presentations before us for two days arguing that costs had come down severely and the tariff proposed was not predatory. We were not convinced. After all, we had allowed much higher tariffs in the network, as per our understanding of costs.
In the last and third-day presentation, we were surprised to find Mukesh Ambani alone representing Reliance Infocomm. He made one simple point, and brought regulatory literature to support his contention, that the exercise of banning predatory tariffs by the regulators was only meant to be used against the incumbent and operators with significant market power (SMP) and not against challengers.
He further stated that he may have been representing the largest industrial group in the country, but Reliance Infocomm was a very small player in the telecom market.
A few months later, Reliance launched another scheme 'Monsoon Hungama 501.' It gave away handsets at Rs 501, with the rest to be charged in instalments. The scheme excited the market and its subscribers grew. Again there were demands to ban this, and while we were examining the matter, there was a gentle reminder that we were tariff regulators and had no powers to control handset prices.
Between 2003-04 and 2004-05, the subscriber increase continued at 2 million per month, till the Tatas launched a two-year free-incoming call scheme. There were many demands to ban this scheme.
We decided to go in for a consultation and found many such instances in other countries. In the meantime, Hutch introduced a three-year scheme and later many launched lifetime schemes. These schemes excited the market and growth first rose to 3 million in 2005, and then 5 million a month in 2006.
On our part, while fixing termination rates, we left a small profit in these rates to sustain these schemes, while many colleagues argued in favour of reducing these charges.
We found the arguments of the incumbent in the first case, those of the challenger in the second and third case, and the arguments of Tata and Hutch, and later all operators, in the fourth case, convincing and did not intervene.
In any case, the regulator had started moving very slowly to competition regulation and we decided to make a bigger leap. We were told, in 2003, that the unbridled competition would ruin the sector, already in losses, and investments would stop. We are aware that this has not happened and most are making profits due to an unparalleled growth.
Had we intervened in favour of cost-plus tariff regulation, we would not have reached 2010 targets in 2006, and could not have hoped of achieving more than double of the target in 2010.
Yet cost-plus regulation continues in other networks such as power, and an effective structure of inducing competition regulation has not been put in place, though the 2003 amendment to the Act visualises this. In other sectors like fertiliser, inefficient technologies and fuels are allowed to flourish in the name of 'Retention Price Scheme' or some other scheme.
With low duty rates and free imports, it is time that we expose more sectors to 'competition regulation,' rather than continue cost-plus protections.
The author is a former chairman of the Telecom Regulatory Authority of India.