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Excess Deficit Charge - Should ADC continue?

April 15, 2005
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In the UK, where the concept of access deficit charge (ADC) originated, the objective was to compensate the incumbent, namely, British Telecom (BT), for the cost of providing local call services which it had previously subsidised from profits derived from its monopoly of long distance and international call traffic. This regulatory intervention was brought about by the regulator (OFTEL) imposing a price cap, to control BT's price, which restricted the extent to which BT could rebalance its local call tariffs and increase its rental charges to reflect the cost of their provision

The basic concept of access deficit contribution is that the provider of long distance services should be required to make a contribution to the provider of the local access line, so as to compensate for below cost rental and local call charges. In other words, it is a means of cross-subsidy of basic services by long distance services to make the former affordable to the poorer sections of society. The underlying assumption is that people making long distance calls have deeper pockets and will not mind paying cost plus ADC for their STD and ISD calls to subsidise local services. It is globally realised as part of interconnection usage charge (IUC) on a per minute basis for actual usage of the local access network.

IUC regime and ADC
The classical IUC regime is when the tariff paid for a call by the subscriber originating a call to his service provider is split between the "origination", "carriage" and "termination" service providers. While there is only one service provider for origination and only one for termination, the carriage itself could be through multiple operators.

Though the original IUC regulation did not have the ADC, it was notified in late 2003. Close on the heels of the implementation of the latest framework, TRAI has issued another consultation paper for a fresh round of review. Before we examine the key issues raised therein, it is of utmost importance to consider the very rationale and quantum of ADC, and its impact on the market structure and activities of players.

Is there a real case for ADC?
Though originally TRAI had indicated a figure of Rs 130 billion per annum towards ADC, it quickly revised this to around one-third of this figure when private operators and consumer groups pointed out the faulty assumptions on which it was based. It must be noted that the incumbent as the key beneficiary of the ADC was, by and large, satisfied by the notification in late 2003 based on the downward revision.

In any regime, the beneficiary of a subsidy should stand up to transparent scrutiny and justify the quantum being claimed. More so if the beneficiary happens to be the largest telecom service provider in the country and that too, a state-owned enterprise. So, rather than proceeding with the assumption that BSNL continues to need ADC support, the onus should be on BSNL to prove beyond a shadow of doubt the quantum that it really needs as ADC towards providing below-cost services to rural subscribers. This will only be possible by way of accounting separation and other appropriate mechanisms.

Since TRAI has already forborne tariffs for telephones, except for the fixed lines in rural areas, continuation of ADC for fixed lines to non-rural subscribers will only reward the incumbent for indulging in predatory pricing as well as provide a regressive incentive for lower efficiency in operations than it would otherwise achieve.

ADC recovery from ISPs
When the IUC regime was notified in January 2003, and ISPs claimed termination charges by the access providers for termination of dial-up calls on the their network, TRAI held that ISPs are not interconnecting parties and hence, beyond the ambit of the IUC regime. Against this backdrop, it is really surprising to note that in the current consultation paper, there is a specific question (3.7) which reads:

"In case ADC is to be recovered as a percentage of revenue, should it cover all types of services including ISPs, or should it exempt certain operators like niche operators or ISPs with annual revenue collections up to a defined threshold value?"

The language of this question indicates an inherent bias towards rent-seeking from value-added service providers like ISPs for growing beyond a certain point. Though there is no corresponding question that revisits TRAI's decision on keeping the ISPs beyond the IUC regime.

If the ADC is fixed as a percentage of revenue, it is essentially a form of USO contribution, irrespective of the semantics. It is pertinent to quote from TRAI's own recommendations on USO:

"No levy should be charged from pure value-added services such as ISPs, E-mail, voice mail service providers, etc. who do not own facilities and thus are not in the category of network operators and carriers."

In every country, ISPs have been kept outside the purview of both USF as well as the ADC, which are similar in concept and have identical objectives. ADC, which is part of the IUC, is to be paid only by facility-based telephony service providers and the value-added service providers are kept outside such a regime.

First and foremost, however, the moot question remains: "Is there a need for continuation of ADC at all and if so, exactly how much?"

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