In July 2014, the Telecom Regulatory Authority of India (TRAI) reduced the ceiling tariffs for point-to-point domestic leased circuits (P2P DLCs) of various capacities – E1 (2 Mbps), DS3 (45 Mbps) and STM-1 (155 Mbps). The regulator also brought P2P DLCs of STM-4 (622 Mbps) under the tariff regulation while the rates for DLCs of capacity less than E1 have been kept under forbearance. The new tariffs have come into effect from August 1, 2014.

P2P DLCs are dedicated connections between customer offices across the country, carrying voice and data traffic using a service provider’s network. DLC customers include enterprise subscribers such as financial institutions, PSUs, business process outsourcing organisations and IT/ ITeS companies. Also, telecom operators that do not have adequate infrastructure lease DLC capacities from service providers to offer services to their customers.

The telecom regulator has revised the ceiling tariffs downwards by up to 60 per cent. For E1 links, the ceiling tariff has been reduced from Rs 17,016 per annum to Rs 12,086 per annum for a network length of less than 5 km and from Rs 850,000 per annum to Rs 341,000 per annum for a length of more than 500 km. For DS-3 links, the tariff has been reduced from Rs 666,798 per annum to Rs 584,000 per annum for a network length of less than 50 km and from Rs 6.15 million per annum to Rs 2.65 million per annum for a length of more than 500 km. For STM-1 links, the ceiling tariff has been reduced from Rs 1.78 million per annum to Rs 1.61 million per annum for a network length of less than 50 km and from Rs 16.52 million per annum to Rs 6.96 million per annum for a length of over 500 km. In the case of STM-4 links, the ceiling tariff has been fixed at Rs 4.18 million per annum for a network length of less than 50 km and Rs 18.18 million per annum for a network length of more than 500 km.

TRAI stated that the need to review the then prevailing ceiling tariffs arose from the fact that there was a decline in the per unit cost of providing DLCs, which can be attributed to an increase in demand, expansion of transmission infrastructure and advances in transmission technologies. The regulator is of the view that the new ceiling tariffs will facilitate a reduction in bandwidth prices in small cities, and remote and hilly areas, where competition is constrained.

This is, however, contrary to the views submitted by industry stakeholders, who have asked for a deregulation of DLC tariffs. Their views are based on the fact that the DLC market is already highly competitive with about 10 access service providers and 31 national long distance operators. Consequently, service providers are already offering DLC services at a discount of 80-90 per cent of the ceiling tariff, as determined by market forces. They are of the view that any further reduction in the ceiling tariffs would affect market dynamics. Given the highly competitive nature of the industry, service providers will offer similar discounts on the new tariffs, which will erode their profitability.

The scope for further lowering DLC prices may, however, be limited. Regulatory challenges such as high right-of-way (RoW) charges and delays in obtaining approvals lead to higher cable deployment costs, making it commercially less viable for service providers to reduce prices fi. Service providers assert that RoW charges vary considerably across states, and even within states. Further, RoW charges for rolling out optic fibre cable networks have increased significantly in the past few years. For instance, the charges in Mumbai increased from Rs 6.7 million per km in 2009-10 to Rs 8.5 million per km in 2012-13 while in Delhi they have risen from Rs 850,000 per km to Rs 2.5 million per km. Even in a relatively low-ARPU area like Uttar Pradesh (West), RoW charges stood at about Rs 1.7 million per km in 2012-13. In this scenario, although service providers are expected to curb discounts on DLC tariffs to protect their profit margins, the market’s competitive nature may compel them to resort to price wars, as was witnessed in the wireless segment.

Nevertheless, from a customer perspective, lowering the ceiling on DLC tariffs will be beneficial, especially in areas with low broadband coverage. With lower tariffs, the adoption of high speed broadband services by small and medium enterprises (SMEs) is expected to rise. Access to faster broadband connectivity will help SMEs improve their operational efficiency, thereby reducing business costs and increasing profits.

In all, while the new ceiling tariffs may hurt the profitability of operators in the short term, the move will result in higher broadband penetration, thereby facilitating economic growth in the long term.