Why TRAI favors spectrum refarming that forces telecos to spend Rs 60,000 crore additional Capex

Telecom Lead India: Mobile operators — Vodafone, Idea Cellular and Bharti Airtel – will spend Rs 65,000 crore additional Capex – thanks to TRAI’s second round of clarification on spectrum on refarming.

READ FULL TEXT of TRAI’s response to DoT on refarming of spectrum HERE.

As per TRAI’s response to DoT’s letter No. L-14001/18/2012-NTG dated 25th October 2012 seeking clarifications on the prescribed limit for spectrum, retention of spectrum on renewal of licences and refarming of spectrum, telecom regulator TRAI said the following:

The Authority had recommended that, on renewal/extension of licence, the licensee will be entitled for consideration to get spectrum to the extent of the prescribed limit i.e. 8/5MHz (GSM/CDMA) in all the service areas except Delhi & Mumbai where it will be 10/6.25 MHz (GSM/CDMA). In the event spectrum held by it is beyond the prescribed limit, the licensee would be required to surrender the excess spectrum.

A question has been raised about the continuing relevance of the prescribed limits at the time of the renewal of licenses in view of the delinking of spectrum from the licence. The Government has decided that, in future, all spectrum will be allocated through a market driven mechanism. What then is the sanctity of the prescribed limit?

In its recommendations of May, 2010, the Authority discussed the issues in paras 2.168 to 2.172. One of the options discussed was:

“As all future licences will be delinked from the spectrum, the licensee applying for renewal will not have any right to the spectrum assigned earlier. The Government can assign the spectrum through a suitable mechanism and all operators including those applying for renewal can lay claim to the assigned spectrum”.

According to TRAI, it is important to recall the discussion contained in paras 2.4 to 2.9 of this Report. The crux of the matter is that an operator providing services over 20 years would have invested extensively on network planning and development including active infrastructure, planning of cell sites, MSCs, deploying equipment for backhaul connectivity, setting up points of interconnection, marketing and customer care centers, building up chains of dealers and distributors and other related infrastructure. Surely, such investments have been made on the reasonable expectation that, at the time of renewal, the operator would continue to have access to spectrum. If no such assurance was available, it would seriously and adversely impact investment incentives. What is even more important is the associated impracticality; without some assurance of spectrum availability, there could be a serious disruption to continuity of service to millions of subscribers and huge uncertainties for telecom operators. It was in this backdrop that the Authority recommended that spectrum up to the current holding or the prescribed limit, whichever is lower, is made available on license renewal. The Authority had, however, clearly recommended that the spectrum so assigned would be at a price determined by a market-based mechanism. The reasons cited then remain valid.

It is also important to note that the Cabinet has approved the National Telecom Policy, 2012 which incorporates the following provisions:

“3.5 To delink spectrum in respect of all future licences. Spectrum shall be made available at a price determined through market related processes”.

The wording leaves no doubt that the very purpose of delinking is to ensure that spectrum is made available at a price determined through a market related process. In short, the second sentence of 3.5 qualifies the first. The implication is clear. The delinking of spectrum and licenses is to ensure that a market-related process determines the price of spectrum. Surely, this wording of 3.5 does not justify creating discontinuity in service or creating all sorts of uncertainty. The prescribed limit only provides an assurance that if a licensee seeks renewal, there is reasonable assurance of the availability of spectrum so that operations can continue. No benefit can accrue to the licensee in terms of the price at which such spectrum would be made available: that would be market determined.

The Authority had recommended that spectrum be auctioned in block sizes of 1.25MHz. The Government accepted this recommendation and accordingly the spectrum block size has been fixed as 1.25MHz. This has implications on the prescribed limit recommended by TRAI. The prescribed limits of spectrum are 8 MHz/ 5 MHz in case of GSM/CDMA in all service areas except in the metro service areas of Delhi and Mumbai where it would be 10 MHz/ 6.25MHz. It is evident that the prescribed limit of 8 MHz for GSM technology is not a multiple of 1.25 MHz.

While discussing the issue of prescribed limit, the Authority, in para 3.21 of its recommendations of May 2010, noted that:

“It can be seen that with the contracted spectrum i.e. 6.2MHz for GSM and 5 MHz of CDMA, it is possible to serve most of the districts of the country. However, the average density of the district is not always truly representative of the demography of the area specially if the district has large urban areas. There are, today, 42 cities with a population of more than one million. The population density of all these cities is such that 8MHz of GSM spectrum and 5MHz of CDMA spectrum can effectively service the districts having such large cities, including their Central Business Districts, even assuming that the CBDs’ density will be 1.5 times the city density.”

Keeping in view the above observations of the Authority and the fact that spectrum shall be auctioned in block sizes of 1.25 MHz, the Authority is of the view that the prescribed limit for the spectrum that can be assigned by the Government to a licensee could be 7.5 MHz for GSM in all service areas except Delhi and Mumbai where it can continue to be 10MHz. This is the only minor change the Authority would suggest as far as prescribed limits of spectrum in the GSM/CDMA in all service areas is concerned, i.e. other prescribed limits for GSM/CDMA should remain as recommended by the Authority earlier.

Options for refarming

Before examining any of the options, it is important to set out the parameters within which the exercise has to be undertaken. First, it is 24 essential to take into account the spectrum proposed to be auctioned in the 1800 MHz band. In terms of the Notice Inviting Applications (NIA) dated 28th September 2012, issued by Department of Telecommunications:

“8 blocks each of 1.25 MHz (10 MHz) is being put to auction in all 22 Service Areas. In addition, a provision has been made for spectrum up to 3 blocks each of 1.25 MHz (3.75 MHz), wherever available, for topping up the 8 blocks of spectrum put to auction i.e. up to a total of 11 blocks each of 1.25 MHz to meet the requirement of new entrants, if such an exigency arises.”

The NIA clarifies that, in all Service Areas except Delhi and Mumbai, there is a provision to auction 11 blocks of 1.25 MHz (13.75 MHz) of spectrum in the 1800 MHz band; in Delhi and Mumbai, only 8 blocks of 1.25 MHz (10 MHz) will be put to auction.

The second parameter concerns the availability of spectrum in the 1800 MHz band. Based on the data given by WPC vide its letter dated 29th October 2012, the Authority has taken into consideration only that spectrum which is available in at least 75% of the districts of the service area including the capital. This implied reduced availability of spectrum in UP West, Rajasthan, Himachal Pradesh, Bihar and Jammu & Kashmir.

In the Note to the EGoM, the DoT posed three options, namely, (a) full refarming of the 900 MHz band where no operator was permitted to retain any spectrum in that frequency, (b) partial refarming where an incumbent operator was permitted to retain 2.5 MHz in the 900 MHz band; (c) partial refarming where an incumbent operator was permitted to retain 5 MHz of spectrum. (In all these options we are considering paired spectrum viz. 2×2.5 MHz etc. Henceforth, all references to spectrum size may be construed as references to paired spectrum.) It is pertinent that the options posed to the EGoM are different from the options considered by the Authority at the time it made its 25 recommendations. Specifically, the option for permitting retention of 2.5 MHz was not examined by the Authority at the time it made its recommendations.

Let us first examine the alternative of permitting operators to retain 5 MHz of spectrum in the 900 MHz band. In each of the LSAs there are three incumbent operators who were assigned spectrum in the 900 MHz band. Permitting them each to retain 5 MHz in each of the LSAs effectively means that 15 MHz of spectrum is pre-empted for incumbent operators. Now, spectrum available in the 900 MHz band ranges between 18.6 MHz in some LSAs to 22.2 MHz in other LSAs. If 15 MHz of spectrum is pre-empted for incumbent operators, the residual spectrum in 900 MHz band ranges between 3.6 MHz to 7.7 MHz. Thus, at best one new operator would be able to enter the 900 MHz band and in some LSAs we would not even have spectrum size of 5 MHz required to harness new technologies. In short, there will be too little spectrum on offer for fair and accurate price discovery and a successful auction. Moreover, it would not provide fair opportunity to all since the bulk of the 900MHz spectrum would, in effect, be reserved for incumbents. And, this would call into question the very purpose of undertaking the refarming. This option, therefore, even if feasible, clearly does not seem desirable.

At the other extreme is the option to undertake full refarming viz. all spectrum in 900 MHz band is vacated (this covers those whose licences are expiring up to 2016 as well as the PSUs).

Cellular Operators Association of India (COAI) may consider legal options to oppose the Government’s move for partial spectrum refarming that will force mobile operators to spend Rs 60,000 crore Capex.

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