Understanding Interconnection Usage Charge (IUC)

Recently, TRAI came out with its tariff order, directing the reduction of interconnection usage charges (IUC) from the current rate of 14 paise to 6 paise per minute (just over 57%) for all terminating voice calls. But what is IUC all about? This is to enable the "receiving operator" (to whom the incoming call terminates) to be compensated by the "originating operator" (from whom the call emanates) the cost of carrying this voice call. But why? As the TRAI has restricted all operators from charging the receiving subscriber (for incoming voices calls) when it introduced the CPP (Calling Party Pay) regime on 24th Jan 2003.

Estimating IUC Cost: The Principle

As per TRAI, this cost can be estimated by calculating the "avoidable cost" that an operator can save in case it didn't equip itself to carry the incoming calls terminating into its network (from other operator's networks). In other words, this is the actual cost that an operator must incur in order to carry the incoming calls.

Estimating IUC Cost: The Method

The method used to estimate this cost begins with the determination of total demand of voice minutes of an "equivalent operator" (a hypothetical operator with sufficient subscribers and running its network with optimal efficiency). In order to estimate this demand, we must evaluate the total number of subscriber of this "equivalent operator". TRAI estimated this number as 197 million. Also, it estimated the total incoming voice minutes seen by the "equivalent operator" based on the current traffic pattern as 250 billion minutes per annum. The table under summarises TRAI's calculations. One can refer to Appendix C, D, & B (page no. 45 to 50) of the explanatory memorandum for the IUC (Thirteenth Amendment Regulation, 2017).

Hence, the total MOU per month of the equivalent operator with 197 million subs has been estimated as only 340 (On-Net Outgoing has been multiplied by two for calculating total ON Net MOU). This is low from the industry average of 450 to 500 MOU.

Now the total cost for terminating these 197 million of incoming minutes in a year have been estimated by TRAI as Rs 1467 Cr (just 5% of the cost to carry full traffic - Appendix - P, page 60 for TRAI's order). This excludes all costs incurred by the equivalent operator in carrying ON Net and OFF Net Outgoing calls, plus resources needed to support data traffic (Note data consumes a disproportionate amount of network resources for which no IUC is applicable). Hence, the per minute IUC is a ratio between the OFF Net incoming call (250 Billion Minutes Per Year), and the cost of terminating these incoming minutes (Rs 1467 Cr) = Rs 0.0587 per minute. This was further adjusted to Rs 0.0592 per minute by taking into license and spectrum fee obligation - rounded to 6 paise per minute.

Estimating IUC Cost: The Sensitivity

The sensitivity of the IUC calculation is linked to both the quantum of OFF Net incoming minutes and the total cost incurred by the operators in carrying these minutes. Now, if the MOU is doubled, the cost of IUC will get halved. Also, if the cost of carrying OFF Net calls are estimated to increase, the IUC will proportionately increase. The direction in which these matrices will swing will depend upon the network mix of the equivalent operator. If the network is directionally migrating to 4G, then cost of carrying terminating OFF Net calls will decrease, then when the network is predominantly 2G. This is explained in my earlier note - How "Unlimited Voice" Impact Indian Operators. As per TRAI's estimate, the incoming OFF Net calls is 31% of the total MOU. Now even if one assumes 400 MOU of voice per sub per month, it translates into maximum 72 MB of data per month (if the voice is carried on 4G), and 31% of it is just 22 MB - a small fraction of the average data pack currently being offered to the subscribers per month.

Conclusion

It is clear that as the convergence of voice and data takes place, the voice will consume a small fraction of the network resources compared to when it is running purely on 2G, thereby requiring a lower IUC. But the issue is only relevant when the traffic is imbalanced. As soon as traffic balances out, i.e the OFF Net outgoing calls becomes equal to that of the OFF Net incoming calls, the IUC rates does not matter, as the outgoing and incoming payments will cancel out - resulting is it a negligible net outflow to the operator on account of the IUC payments.

(Views expressed are of my own and do not reflect that of my employer)