Universal Service Obligations

Universal Service - What is it? Who Pays?

I. Introduction

Telephone services are an essential part of our modern living. They are not just important for business communication, but also for ordinary people in their everyday lives. They ensure a link to family, friends and the community, especially for the elderly or people with disabilities. The telephone enhances personal security by providing access to the emergency services and it plays an important role in community safety. It also has become the main way of accessing information and services from public, private and charity institutions. Telephony is vital for many inhabitants of rural areas and for the economic development of those areas.
It is therefore important to enable a broad range of customers to have affordable access to basic voice telephony. This is the task for Universal Service Obligations in a competitive market.

II. Regulatory framework in the European Union

1. The Council’s proposals

In its Resolution on the Review of the Situation in the Telecommunications Sector and the Need for Further Development in that Market -93 C 213/1 of 22nd July 1993 -, the Council made it clear that the basic principles of the single market have to be extended to telecommunications infrastructures throughout the Community, while safeguarding the public interest.
Responding to a subsequent proposal by the Commission for a Council Resolution on Universal Service Principles in the Telecommunications Sector -COM (93)543 of 15th November 1993-, the Council passed a number of Resolutions on Universal Service in the following years.
These were the Resolution of 7th February 1994 (94 C 48/1) on Universal Service Principles in the Telecommunications Sector and the Resolution of 22nd Dec. 1994 (94 C379/3) on the Principles and Timetable for the Liberalisation of Telecommunications Infrastructure. Each of them highlights the social need for a universal service in voice telephony and call upon the Member States and the Commission to establish an appropriate legal framework. The Council suggested that, in cases where telephony services can only be provided uneconomically, universal service may be financed by internal transfers, access fees or other transparent, non-discriminatory and proportional mechanisms. Particular account should be taken of rural areas with less developed or very small networks.
The Council recognised that universal service is one of the key factors in the future development of the telecommunications market in the European Union and that its underlying principles should be universality, equality and continuity. The Council therefore defined Universal Service as the provision of a minimum level of service for voice telephony of a specific quality to all users everywhere at an affordable price. Common principles should ensure a balanced and fair regulatory environment throughout the Community. The Council also recognised that universal service will have to be adjusted to meet future developments in technology, the market and user demand.
The Commission was required to submit a report to the Parliament and the Council on these matters which had to take full account of the need for universal service in preparing the future regulatory framework for the telecommunications sector, in particular by applying and adapting the open network provisions principles.

2. The Commission’s proposals

Complying with the Council’s prescription, the Commission released part I of its Green Paper -COM (94)440- in October 1994, dealing with the priciple of liberalisation in telecommunications and giving a timetable. In part II of its Green Paper -COM (94)682-, which was released in January 1995, the Commission inter alia underlined the importance of universal services and pointed to the major policy issues that will have to be discussed.
The Commission’s expectation is that liberalisation will, through lower costs and the introduction of new services, help the provision of universal service and strengthen economic and social development, especially in rural areas of Europe.

a) Definition of Universal Service

The term "Universal Service" has to be defined. At present the principal element is the provision of a basic voice telephony service of specified quality at an affordable price (in the light of specific national conditions) to all customers reasonably requesting it. It also includes voice telephony directories, pay-phones and emergency services. Since Universal Service isn't a fixed concept, it will perhaps include new services in the future - which may vary between countries - in accordance with expanding consumer needs and technological developments such as multimedia (although this will be a long term issue). It may also include the provision of broadband to fixed public access points such as libraries and schools.

b) Costs of Universal Service

Secondly, the costing of the universal service has to be determined in all Member States on the common basis of net costs. The Commission is of the opinion that this has to be calculated by deducting the actual costs of providing the service to customers from the revenue generated by the customer (comprising all rental and call charges paid by the customer, revenues from incoming calls and the marketing value for providing universal service to these customers). Market forces will often lead to such provisions being made on a commercial basis without further intervention being necessary. Intervention is only necessary in those cases where the operator would otherwise have insufficient economic incentive to serve those customers or areas.

c) Funding of Universal Service

Thirdly, it is the Commission’s view that the financing of universal service should remain at a national level, but in accordance with one of the European framework’s policy options. These are an independently managed universal service fund or the raising of additional access charges that are added to the interconnection charges and invoiced together with them by the telecommunications organisation responsible for the provision of universal service. The Council’s initial idea of financing through internal transfers has not been adopted by the Commission.
All operators and service providers should be under an obligation to the provide and/or finance universal services. The Commission has indicated a preference for the generation of funds as opposed to the use of access charges. Operators would make a contribution to those funds calculated as a percentage of their turnover. The aim is to have transparent, non-discriminatory and proportional financing, while complying with competition rules in order to make a fair contribution to the burden which the provision of universal service represents. Achieving the highest level of productivity in the provision of universal service is of prime importance.
Until now, the Commission has focused its activities on the question of what universal service should be, and not who should be obliged to provide such services. It is up to the Member States to determine from which operators such contributions are to be claimed. It was acknowledged, however, that imposing obligations on new market players, requiring them to either deliver or fund advanced levels of universal service provision to all customers at present ("pay or play"), could create barriers to effective competition. Therefore the Commission has proposed that companies with minimal market shares should may be exempted from paying into a universal service fund.

3. Reactions of the Member States

Although there is a general consensus for maintaining universal services in a competitive telecommunications environment, uncertainties remain about the concept of Universal Service and its financing. The Member States and operators are of the opinion that the nature of universal service obligations have to be analysed and fully understood in the Member States before there could be any discussion at an European level on its financing. In particular, concern has been expressed about the uncertainties surrounding the concept of access charges, interconnection and tariffs. Nevertheless, the introduction of a fund under the supervision of the national members has been welcomed, although the alternative of additional interconnection access charges should not yet be ruled out.

4. The Commission’s draft Directives

The Commission has taken these responses to its Green Paper have been taken into account in drafting its Directives. Rules on the scope, costing, funding and delivery of universal service are included in the draft Directive "Interconnection in Telecommunications with regard to Ensuring Universal Service and Interoperability through Application of the Principles of Open Network Provision (ONP)" -COM (95)379- and in the draft amendment to Directive 90/388/EEC regarding the Implementation of Full Competition in the Telecommunications Market.
Inter alia, the amendment states that the burden of universal service obligations has to be shared by all undertakings providing voice telephony or public telecommunications networks. Undertakings are entitled to choose whether they want to fulfil the universal service obligations themselves or pay for it instead. The Commission's idea of such a "pay or play" option has been described above and the question of how it can be arranged in practise will be answered later in the chapter on universal service in the United Kingdom. There will be incentives for providing universal service as efficiently as possible. The Commission will review by 2003, at the latest, the situation in those Member States that opted for an access charges financing scheme instead of the favoured funding scheme.
The draft Interconnection Directive includes the choice of financing scheme (funding or access charges, the latter having to be notified prior to their introduction to the national authority and the Commission), guidelines for calculating the net costs of universal service obligations and the Commission's right to draw up further guidelines on costing and financing of universal service.
The necessary regulatory framework (ensuring the provision and the financing of universal service as well as the establishment of interconnection rules) will be set up by 1st January 1998 as part of the 1998 liberalisation programme.

III. Universal Service in the United Kingdom

When British Telecom (BT) was privatised in 1984, only 78 % of households had telephones. By the end of 1995, penetration stood at 91 %. During this period prices fell on average by 35 %. However, for some two million households without a telephone, price is still a barrier and it remains a concern for many low income households with telephones. The aim of British Office of Telecommunications (OFTEL) is to develop policies that allow access for everyone who wants it, while at the same time enforcing and ensuring effective competition in the telecommunications market.

1. Universal Service Obligations in present PTO licences

Prior to the introduction of competition in the UK market, universal service was the responsibility of BT and, in Hull, Kingston Communications. Both monopoly operators had a number of licence conditions requiring them to deliver various elements of universal service.
BT has to provide voice telephony and other telecommunication services facilitating the conveyance of messages, except to the extent that the Director General of Telecommunications is satisfied that any reasonable demand is met or is to be met by other means and that it would therefore not be reasonable to require BT to provide the services requested. This means that BT is not merely obliged to provide services according to a reasonable demand but rather to provide services in all circumstances, unless the Director General is satisfied that any reasonable demand is to be met by other means.
"Voice telephony" is not defined, but "telecommunication services" are defined as including the conveyance of messages, directory information services and a service consisting of the installation, maintenance, adjustment, repair, alteration, moving, removal or replacement of apparatus for connection to a telecommunication system (section 4(3) Telecommunications Act 1984).
The licence contains further express universal service obligations such as delivery to rural areas, directory information for the blind, telecommunication apparatus for the disabled and emergency call services. BT's obligation to provide directory information services relating to its switched voice telephony services (and to the services of other providers who are connected to the BT system) by means of a telecommunication system does not include the supply of printed directories. Nevertheless BT's directory information is at present provided verbally by communication with an operator and in written form.
These obligations were intended to ensure that the universal provision of standard telecommunication services would continue to the same extent after BT's privatisation.
Today not just BT's and Kingston’s but all PTO licences contain universal service obligations, though BT's obligations are still the most extensive. Cable operators, within the area where their cable systems are installed, have to provide telecommunication services consisting of the conveyance of messages other than voice telephony to those reasonably requesting them. However, they are entitled (but not obliged) in their licences to provide voice telephony. If cable operators (and others authorised but not obliged to provide voice telephony) decide to provide voice telephony, it may also, by the order of the Director General, become subject to universal service obligations consisting in voice telephony if it is well established in the relevant market ("well established" representing a market share of at least 25%). No such order has ever been made.

2. Present financing of Universal Service

To finance the provision of universal services, BT's licence Condition 19 entitles BT to request so called access charges for connecting other connection service providers to its network, which can be charged in addition to other payments that have to be made for connection. In order to ensure that these access charges are on a non-discriminatory level and that revenues don't exceed the costs of universal service, BT's access charges have to be licensed by the Director General. Nevertheless BT has not yet asked other providers to pay any access charges.
The lack of funds resulting from BT not asking for such charges is presumably compensated by internal transfers of revenues from other services, which has the disadvantage that those services might be subject to competition (interfered by the transfers) and that it allows BT to hide the real costs of universal service obligations (which could be lower than originally thought). Although BT charges an access deficit contribution (ADC) from other providers who are connected to BT's system (which is allowed under Condition 13.5A of its licence but which in practice has been waived for all operators in the UK except to some extent Mercury) this is not intended to finance universal services but merely to cover the access deficit that arises from BT's loss on provision of exchange line access to customers. This is not to be confused with the access charge mentioned above.

3. OFTEL’s proposals for the future development of Universal Service Obligations

OFTEL is closely monitoring the European developments on universal service. The progress in Europe to a large extent mirrors OFTEL's proposals for the UK. OFTEL intends to ensure that the arrangements in the UK comply with the European regulative framework. It welcomes the Commission's statement that regulation of universal service on European level will be confined to principles and will not set out details.
It is recognised by OFTEL that a competitive market might not deliver a basic telecommunications service to all potential customers at a reasonably affordable price or adequately meet the needs of elderly and disabled customers.
Its long term goal is universal service delivery by competitive means in order to deliver choice and value to all customers and to encourage innovation in this market segment. The timetable for universal service in the UK anticipates its implementation by August 1997, when new licence amendments arising from the price control review will also come into effect.

a) Definition of Universal Service

OFTEL's original definition of universal service in the UK was:
"Affordable access to basic voice telephony (or its equivalent) for all those reasonably requesting it regardless of where they live".
This definition comprised the principles of geographic accessibility, affordability and equitable access. Since OFTEL itself is of the opinion that it is not possible to specify in detail the meaning of "affordable" and "reasonable", those being terms that are different for each individual customer, it proposes to monitor closely the level of penetration and churn in order to measure the success of its universal service policy. Addressing the issue of the price of voice telephony is not just about enabling those on low incomes to take up telephone services but also ensuring that those for whom telephones are "just affordable" stay connected to the network.
According to BT's and Kingston's technical abilities, OFTEL therefore defined "basic voice telephony" as:
"Individual access to the telecommunications network via switches capable of providing voice telephony, with free services of itemised billing and selective call barring, and some supplementary services available (such as call diversion and call waiting)".
This definition implied that all customers in the UK should be able to access the services with a 'digital line' that is a line (whether analogue or digital) connected to a digital exchange.
However, OFTEL recognised that the level of universal service is dynamic, due to rapidly developing technological capabilities and the development of competition. In addition to voice telephony fax and voiceband data may raise the level of universal service in the future.
Furthermore, having in mind the aim to inform, educate and train people to cope with the new information age, it seems reasonable to grant educational, training and certain other public service organisations a right to have access to an even higher level of universal service, such as ISDN or wideband services, in order to achieve wider economic and social objectives. As well as educational establishments such as schools and colleges this would include other public access points such as libraries, community or job centres and hospitals. The level of universal service defined as "basic" would depend on the customer class or group. It is therefore important to identify classes of customers who would benefit from affordable access to a higher level of service than the basic telecommunications service, such as new multimedia applications, virtual libraries and services available on broadband or wideband networks, as part of the "Education Superhighway".
Taking this into account, OFTEL modified its definition of universal service in its latest "Universal Telecommunications Services" consultative document, considering that the reference to universal service in PTO licences should be broad enough to cover new developments without the need for formal licence revisions. The new definition is:
"Affordable access to basic telecommunication services for all those reasonably requesting it regardless of where they live."
However, at the moment, the universal service level is still principally about voice telephony and "basic telecommunication service" is therefore, according to the definition of former "basic voice telephony", very narrowly defined by OFTEL as:
"Individual access to the telecommunications network via switches capable of providing voice telephony; free services of itemised billing and selective call barring; an outgoing calls barred service for residential customers as an alternative to disconnection for existing debt; and reasonable access to public call box services."

b) Costs of Universal Service

When calculating the costs of universal service obligations it is essential to identify customers or groups of customers who are "uneconomic". This will be the case when the total cost of providing a customer with service is greater than the revenue that results from him.
Besides the cash revenues there are other benefits of an operator being a "Universal Service Provider", such as corporate reputation, marketing, brand recognition, ubiquity and customer life cycles (a customer who is currently unprofitable might become profitable in the future). It is recognised that there are practical difficulties in determining an accurate value for those benefits. OFTEL therefore intends to estimate the value of benefits for those categories most open to quantification, such as life cycle and marketing, and to use these as a benchmark in placing a value on the totality of benefits.
OFTEL's study "The Costs, Benefits and Funding of Universal Service in the UK" indicates that about 10% of BT's and Kingston's customers or areas may be classified as "uneconomic", with costs of providing service to these customers around £ 58m - £89m p.a. After taking the mentioned benefits into account, the net costs will be within a range from £0m to £40m which is about 0-0.5% of the current network revenues.
Taking the higher levels of service for certain customer classes into account, OFTEL assumes the overall net costs may be in the range of £50m - £100m p.a. But it seems likely that the provision of these higher level services to many of the institutions could be economic and would therefore make interference by the authorities unnecessary. However the principle of geographic averaging of prices, which ensures availibility of services to all customers on the same terms, could prevent such services from becoming economic.

c) Funding of Universal Service

As mentioned before, the present funding of Universal Service in the UK is by internal transfers, which conceal the costs relating to universal service in BT's access deficit account. For OFTEL this funding method is neither transparent nor understandable.
OFTEL would therefore like to see a fund set up to finance universal service obligations, to be delivered initially by BT and Kingston Communications. The money raised (in relation to basic network revenues, including fixed and mobile voice telephony, telex and private leased circuits) will then be shared between the universal service providers according to the number of uneconomic customers they have each served.
Nevertheless a "pay or play" option for providers who think they could deliver universal services more efficiently than BT and Kingston is being considered by OFTEL and would be part of the PTO licence obligations. In detail, an operator could offer a special package of universal services on terms similar to those provided by BT. If customers choose to subscribe to the services from the alternative operator, this operator would receive payments from the fund according to the number of customers that were served with universal services. In order to avoid the need for individual cost estimates for those alternative operators, there would be a credit with the average long run avoidable costs (net of actual revenues and benefits) of a "special scheme" (designed to achieve affordable access) customer served by BT. BT and Kingston would remain as carrier of the last resort to offer universal service to uneconomic customers.
OFTEL proposes to set a value of £100000 for the minimum size of contribution to be paid to the fund (but instead also a minimum turnover could be a limit), thereby excluding small operators from the contribution obligation on the basis that the costs of securing their contributions may outweigh the value of their payments. OFTEL does not cite the Commission’s reason, enforcing competition from new operators, for the exemption.
It is OFTEL's opinion, however, that, before a universal service fund can be introduced, some questions have to be resolved, such as determination and review of universal service costs, contributions and contributors, administration of a fund and "pay or play" arrangements.

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OFTEL material:
- A Framework for Effective Competition, 12/94
- Effective Competition: Framework for Action, 07/95
- The Costs, Benefits and Funding of Universal Service in the UK, 07/95
- Universal Telecommunications Services, 12/95

EU material:
- Council Resolution 93 C 213/1 of 22.07.1993 on the Review of the Situation in the Telecommunications Sector and the Need for Further Development in that Market
- Commission Proposal of 15.11.1993 for a Council Resolution on Universal Service Principles in the Telecommunications Sector; COM (93)543
- Council Resolution 94 C 48/1 of 07.02.1994 on Universal Service Principles in the Telecommunications Sector
- Commission’s Green Paper on the Liberalisation of Telecommunications Infrastructure and Cable Television Networks Part I; COM (94)440
- Commission’s Green Paper Part II: A Common Approach to the Provision of Infrastructure for Telecommunications in the European Union; COM (94)682
- Council Resolution 94 C 379/3 of 22.12.1994 on the Principles and Timetable for the Liberalisation of Telecommunications Infrastructure
- Council Resolution 95 C 258/1 of 18.09.1995 on the Implementation of the Future Regulatory Framework for Telecommunications
- Draft Directive of 28.09.1995 on amending Directive 90/388/EEC regarding to the Implementation of Full Competition in the Telecommunications Market
- Commission Proposal of 19.07.1995 for a European Parliament and Council Directive on Interconnection in Telecommunications with regard to Ensuring Universal Service and Interoperability through Application of the Principles of Open Network Provision (ONP); COM (95)379

© 1996 by Jens Barkemeyer