Despite the exponential growth in the telecom sector, operators are becoming increasingly anxious. While the dust is yet to settle on the controversy surrounding the pricing and allocation of 2G spectrum, there is growing concern among operators holding spectrum in excess of 6.2 MHz over the huge financial implications of the Telecom Regulatory Authority of India’s (TRAI) recent recommendations on the pricing of 2G spectrum in the 1800 MHz band.

In a report to the Department of Telecommunications (DoT), TRAI has recommended that the fee for a pan-Indian licence with 6.2 MHz spectrum be revised to Rs 109.72 billion. This is a nearly six times increase over the 2G spectrum fee paid by telecom companies in 2001.

TRAI further states, “These revised prices should be made applicable with effect from April 1, 2010 on a pro rata basis, depending on the number of years left for the licences to expire. Moreover, for any licence coming up for renewal, the operator has to pay the new price for spectrum.”

In 2010, in the wake of the Comptroller and Auditor General’s (CAG) report on 2G spectrum allocation – which estimated a loss of up to Rs 1.76 trillion on account of the 2G spectrum allocation – TRAI had submitted its proposal, Spectrum Management and Licensing Framework. It had recommended that pending further deliberations, the 3G price would be adopted as the “current price” for spectrum. Moreover, TRAI had recommended that mobile carriers pay a one-time fee for holding 2G spectrum beyond 6.2 MHz based on 3G prices.

TRAI had also stated that it would conduct a study on 2G spectrum pricing options and would apprise the government of its findings. TRAI entrusted the study to four experts, who, on January 30, 2011 submitted their report, “The 2010 Value of Spectrum in the 1800 MHz band”.

The report is based on TRAI’s basic premise that all service providers who have spectrum beyond the contracted amount should pay excess charges at the current price, prorated for the duration of the validity of their licence, subject to a minimum of seven years.

According to TRAI, keeping in view the limited amount of spectrum available for meeting the requirements of different service providers, it is not feasible to auction spectrum in the 800 MHz, 900 MHz and 1800 MHz bands. Therefore, it makes more sense to determine the value of spectrum based on the current market price, especially since the price of spectrum was last fixed after the bidding for the fourth cellular licence in 2001. Thereafter, the fee for all subsequent licences was fixed at the same price. This, according to TRAI, must change as market conditions have changed significantly and the new prices must reflect the current value.

Accordingly, the report has classified the valuation of spectrum into two categories. There is a different price for spectrum up to the contracted limit of 6.2 MHz, and another for additional airwaves. Also, the spectrum price varies from circle to circle in both categories. In the case of the contracted limit, the price ranges from Rs 76 million per MHz in Jammu & Kashmir to Rs 1.87 billion in Tamil Nadu, while for additional spectrum, the price ranges from Rs 220 million per MHz in Jammu & Kashmir to Rs 4.31 billion per MHz in Andhra Pradesh.

TRAI has, however, cautioned that the figures quoted by experts are only estimated figures and may not exactly match market prices.

Nevertheless, what has the operators particularly worried is that according to TRAI’s recommendations, every MHz of additional spectrum (on an all-India basis) beyond 6.2 MHz will cost them a whopping Rs 45.71 billion.

Going by the report’s valuations, the six new pan-Indian licences awarded in 2008 will earn the government Rs 658.34 billion along with additional revenues from other firms that were awarded licences in fewer circles. This includes new licences, dual-technology licences and revenues from additional spectrum beyond the contracted limit of 6.2 MHz held by  operators such as Bharti airtel, Bharat Sanchar Nigam Limited (BSNL), Idea Cellular and Vodafone Essar.

Of the existing operators holding excess spectrum, BSNL is likely to be the worst impacted if the recommendations are implemented. The state-owned operator may have to shell out about Rs 160 billion, while leading operator Bharti airtel may have to pay close to Rs 87 billion for the additional spectrum it holds across various circles. Vodafone and Idea Cellular will also take a hit if the government clears this proposal.

The Cellular Operators Association of India, representing GSM service providers, has stated that the new recommendations will prove “disastrous” for most of the operators. It further says that revising prices now will be like “changing the goalposts in the middle of the game”.

In a media statement, Bharti airtel has noted, “The TRAI recommendations go against the stated principle of the government to offer affordability, fairness and a level playing field. For 2G spectrum pricing, TRAI, while moving away from its earlier arbitrarily linked 3G pricing levels, has now in many cases gone beyond 3G values. This goes against the telecommunications minister’s acknowledged position that 3G is significantly more efficient than 2G and the services must remain affordable for the masses. The company, therefore, fails to understand the reason for linking the auction price only to spectrum beyond 6.2 MHz. The price discovered through a fair and open auction must apply to all spectrum allocations.”

Bharti has made a strong appeal to the minister and DoT to provide a level playing field amongst all operators and ensure that all types of 2G spectrum pricing – 800 MHz CDMA, 900 MHz GSM and 1800 MHz GSM – be treated equally. Also, all spectrum provided under 2G bands – GSM as well as CDMA – must be clubbed together and considered as total allocated spectrum for the purpose of pricing and eligibility.

Martin Pieters, chief executive officer, Vodafone Essar, has made a similar claim against TRAI’s recommendations, saying that it is flawed, illogical and discriminatory against older operators. “The recommendations do not rectify the completely illogical difference in the treatment of spectrum provided to GSM operators and to dual-technology operators. Although the latter have between 10 per cent and 40 per cent more spectrum than Vodafone, the new TRAI recommendations suggest that they will pay insignificant amounts as one-time spectrum fees while the incumbent GSM operators will have to pay billions of rupees as one-time spectrum fee. The discriminatory nature of TRAI’s recommendations is shockingly clear: only the older GSM operators (who have already paid millions in the escalating spectrum charges over the past 10 years and continue to pay far more than dual- technology or new operators) are being punished for building the Indian communications industry, rolling out into rural areas and for choosing the right technology,” says Pieters.

Operators like TATA DOCOMO and Reliance Communications have also criticised the TRAI recommendations stating that they are crafted to benefit the old GSM players and that the extra spectrum hoarded by old operators will be legalised at a fraction of the actual cost. They also suggest that the operators should be asked to return the extra airwaves or else there should be a recurring cost and not a one-time entry fee, as proposed by TRAI.

Responding to the escalating criticism by operators, Dr J.S. Sarma, chairman, TRAI, has urged operators to look at all elements of its recommendations collectively and not selectively, only on the basis of spectrum prices. Sarma points out that the companies are looking at the issue from a very narrow perspective.

For instance, TRAI has recommended the fixing of uniform licence fees at 6 per cent of the adjusted gross revenue over a period of time as compared to the 6-10 per cent now, depending on the circles. According to Sarma, if all the elements of TRAI’s recommendations are taken in totality, the operators will actually save money over the licence period.

Besides lowering the licence fees and rationalising spectrum charges, TRAI is also in favour of reducing operators’ contribution to the Universal Service Obligation Fund, a levy that is used to subsidise operators for offering services in rural areas.

Whether TRAI’s recommendations are cleared by DoT will be known shortly. The operators, meanwhile, do not seem to be willing to give in and are set to continue opposing the recommendations.