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Universal Service in Telecommunications

Follow-up to the Oftel Consultative Document of December 1995

Tony Shipley
April 1996


INTRODUCTION

Many interested parties submitted comments to Oftel on the content of the Consultative Document by the closing date of 29 February 1996. In the light of these comments, the COST 219 UK Liaison Group made a further submission within the time scale allowed by Oftel. This submission was chiefly concerned with the proposal to extend the application of the universal service fund to user groups (such as schools) whose requirements were at variance with those of the core group of UK users. It also expressed misgivings over the evident attempt to treat disabled users as separate customer groups, when the approach ought to be to find ways of enhancing their integration with the core group. Other submissions along the same lines were made by other bodies concerned with disability.

The COST 219 UK Liaison Group is planning a seminar on Universal Service in September 1996, and the present paper is intended to facilitate identification of the key issues to be raised at that seminar.


BACKGROUND

The concept of Universal Service is very simple. As telecommunication services are liberalised, to be achieved by 1 January 1998 in accordance with the policy adopted by European Union Member States, there is a potential risk that uneconomic services which are nevertheless socially essential will cease to be provided. In order to ensure that such services are maintained in an era of free competition, they will be designated "Universal Services" and telecommun-ications operators will be required - for example, through conditions attached to their operating licences - to guarantee their provision.

In theory, each operator in an EU Member State might have a set of Universal Service Obligations (USOs) written into the licence by the national regulatory body, which would have the ultimate sanction of revocation or non-renewal of that licence if the obligations were not discharged in an acceptable fashion. As it would not be necessary for every operator to provide a full range of universal services, such as public payphones or emergency call centres, it would be acceptable for those who did not provide to contribute to the costs of those who do - the "pay or play" principle. This leads to the notion of the Universal Service Fund (USF), to which all operators contribute in order to finance the provision of uneconomic services which have been designated as "Universal Service". Operators who do provide the designated universal services (the "players") would therefore be net recipients from the fund, while others would be net contributors.

The Fund would be managed by the national telecommunications regulators, or by agencies delegated to manage it on their behalf. Clearly, much of the work would consist of providing independent verification and audit of the claims made by the "players" in respect of the net unrecoverable costs of meeting USOs. The administrative costs would be top-sliced from the Fund's revenues and these revenues would be raised by imposing a tax - in the UK at a rate of about 0.5% - on operators' receipts (and therefore, in effect, upon telecommunications users).


EFFECTS OF FREE COMPETITION

Already the focus of the issue is shifting from a simple list of those tele-communications services which are to be deemed essential to the generality of users (including users with disabilities); the inter-relationships between telecommunications operators are becoming crucial. In a free competition regime, levels of payment by one operator to another - which is what the USF will represent - will be subject to question and scrutiny. Furthermore, national regulators will be prohibited by EU Directives from imposing licence conditions which would present barriers to trade, especially if such conditions are seen to protect existing monopolies. The basis of any conditions imposed by regulators will have to be transparently clear and fair to all contenders for licences. In order to achieve transparency, the elements of service cost will have to be carefully separated - "unbundled" - so that the extent to which any service is uneconomic can be revealed. Such cost separation is likely to be required by the operators themselves, as well as by the regulator, as competition intensifies for parts of their businesses. The ability and the willingness of a network operator to aggregate some loss-making services with more profitable ones to create a commercially viable macroscopic entity will be reduced by these pressures. The present UK model is of one major operator challenged by one much smaller rival (BT still has about 90% of the domestic market) and with relatively little competition so far from cable TV networks or mobiles; this model is likely to undergo extensive change.


THE UK PLAYERS

Telecommunications provision in the UK has already undergone massive changes since the days of Post Office telephones, when the Post Office (and Kingston-upon-Hull Corporation) had an absolute monopoly in the provision of network facilities and terminal apparatus. The significance of the changes is perhaps greatest with the latter, as it is now possible to purchase terminal equipment from a very wide variety of competitive sources and connect it to the public network through a simple plug and socket. The result of this liberalisation is two-fold; firstly, there is a free market in terminal equipment and therefore equipment design and supply is now market-driven and, secondly, the services of the network operator now stop at the line socket. The consequence is that a network operator may choose to sell, lease or lend terminal equipment but he is not obliged to; he may equally choose not to enter the equipment market or to divest the equipment supply part of his operation to another organisation. The first outcome is very clearly in accordance with the direction and policy of the European Single Market, while the second represents a step towards similar liberalisation of network services.

Further steps towards this goal include the replacement of remaining hard-wired terminals by plug and socket connections - being urged by Oftel - and the development of number portability, so that subscribers can change to another operator while retaining the same telephone number. Number portability is a stated objective for the European Commission and Oftel. Another key step is provided by the Interconnection Directive, which would open the network infrastructure to competing operators and require the owners of that infrastructure to carry telecommunications traffic on behalf of other operators.


FUTURE BUSINESS STRUCTURES

In comparison with the evolution of terminal equipment supply, the effects of the changes in the business structure of the major UK network operator might be seen as marginal, up to now. The transfer of Post Office telephones to BT, and the move of that organisation to the private sector, have not altered its position as the dominant institution providing telecommunications services. Regulation and competition notwithstanding, BT is still the key player in the UK; it owns the bat, the wicket and most of the playing field as of right. From this position, it is able to negotiate with Oftel over the pace of change. This is of particular importance in relation to issues such as the separation of service elements and the unbundling of hidden costs, which could have far-reaching consequences in relation to services for disabled people. In the not too distant future, however, the pace of change may be forced dramatically by commercial pressures. Scenarios which are now being canvassed, even if they do not come to pass, give an indication of the scale of re-structuring which can be expected in the telecommunications industry.

Liberalisation of European telecommun-ications networks will put existing PTT providers at risk unless they adapt to operate in an international market. BT has been considering a merger with Cable & Wireless, apparently with the intention of adding C&W's networks in the Far East to its already strong international business. The merged group would then be large enough to compete with AT&T, which is known to be keen to enter the UK market. If such a merger took place, C&W would have to dispose of Mercury to avoid creating a new monopoly. Among potential bidders for Mercury, Deutsche Telekom (about to be privatised), the Italian STET and AT&T have been mentioned. AT&T has also been rumoured to be interested in acquiring C&W, and the American cable television networks are believed to be poised to enter the UK and EU markets in domestic telecommunications. Whatever the outcome, it is evident that the structure of UK (and European) telecommunications operations is likely to undergo massive change and the position of any particular element of the present network operations must be open to conjecture. It would therefore be wise to view the approach to Universal Service in the context of a UK position that is very different from the present one.


THE ELEMENTS OF UNIVERSAL SERVICE OBLIGATIONS

The basic elements of USOs might be seen as:

  • ready access to basic voice Telephony services (or their equivalent*)
  • measures to assist users on low incomes or with special needs
  • availability of an emergency call service (999)
  • adequate provision of public payphones

* because some disabled users cannot use voice Telephony services, USOs arguably should allow for equivalent means of telecommunication by facsimile or text (such as keyboard send/receive).

An essential common feature of USOs is that the services should be affordable. The provision of certain types of service may be demanded by the regulator as a condition of licence ("universal availability"), but these will not constitute USOs unless they are also required to be affordable.

The EC Theme Paper on Universal Service (Ref: JEC/RC/PFS, Brussels, September 1995) is careful to distinguish three concepts: (a) universal service, (b) universal availability, and (c) the concept of public access, ie access by citizens to new telecommunications and information services through schools, hospitals, libraries and public offices. Unlike Oftel, the European Commission has recognised that public access is a complex issue worthy of separate debate and not to be confused with the "access to a defined minimum service of specified quality to all users at an affordable price", which is universal service.

A note on affordability

Network operators will wish to make their services affordable for their intended customers for obvious marketing reasons. Universal Service will therefore look to those users (or potential users) who might nevertheless be denied service on economic grounds. This might include low income group subscribers (for whom some means of controlling costs would be offered rather than direct assistance in meeting economic call charges) as well as any residential subscriber whose basic requirements were expensive to provide (eg on account of geography or service complexity due to disability). Where provision would be uneconomic for the operator, the USF can provide a subsidy which would effectively restore the price margins. However, accurate item of service costings are sometimes hard to obtain and there is a danger that the methods adopted by the regulator to quantify uneconomic services will mask some activities which ought to be included in USOs. This point is examined further in the section on "Application of the USF".


THE DISABILITY DISCRIMINATION ACT

The passing of this Act in 1995 establishes a legal framework for the prevention of discrimination against people with disabilities. The essential concept is that of integration; disabled people are an integral part of the general citizenry and must be treated as such. In the provision of goods and services to the general public, the manner, standards and terms on which those goods and services are provided must be the same for people with disabilities as for those without. If it is necessary, in order to achieve this legal duty, to offer an equivalent type of service for people with some forms of disability (because those people would be prevented by their disability from using the original service) then that equivalent must be of comparable quality.

It is too early, in the absence of legal precedents, to determine how the Act will operate. Unless telecommunications services are exempted by Regulations as yet unlaid - which would seem to be an unlikely political measure - network operators will have a legal obligation to ensure that disabled people have the same degree of access to their networks as any other member of the public. The key question is, what does this mean? If the boundary of the network is the line socket, terminal apparatus can be disregarded except where the operator provides public payphones. In domestic situations, the user may purchase and connect any suitable terminal equipment from the already liberalised range of approved devices. Systems such as the PSTN which are designed for voice Telephony will carry facsimile or 'keyboard send/receive' text traffic, so users with speech or hearing difficulties can use the network. In premises open to the public, it will be the duty of the manager to ensure that the terminal equipment which he provides is capable of providing the standard of service required by disabled people. The network operator's responsibility will then be to ensure that the service messages and user information are delivered in appropriate formats, and that human operator assistance is available regardless of transmission modality. On this model, users with severe speech or hearing problems would have ready access to the network but limited access to other subscribers, governed by the type of terminal equipment being used.

The above analysis, which is necessarily somewhat hypothetical, points to the existence of an as yet undefined boundary between legal requirements and desirable service features. Since "network externality" is quoted as one of the justifications for Universal Service, it would seem to be preferable for modality conversion facilities - text relays and other translation bureau services - to be regarded as USOs rather than legal necessities. The cost of meeting USOs can be defrayed from the Fund but it is unlikely that the USF will meet costs of complying with legal duties.

See appendix for a brief summary of the disability discrimination act


APPLICATION OF THE UNIVERSAL SERVICE FUND

The USF will aim to meet the unrecoverable cost of providing Universal Service through a subsidy. The extent of that subsidy would be linked to the difference in net costs for an operator working with a set of USOs and that same operator working without them. However, an operator might choose to provide an uneconomic service for a variety of reasons: it may be too difficult to "unbundle" item of service costs within an area of activity to separate the profitable customers from the unprofitable; there may be public image advantages in being seen to engage in altruism; some areas of service might be justifiably operated as loss leaders within the limits of fair competition rules, and all areas of service contribute to the bulk and visibility of the organisation. Oftel's present approach seems to be that, because it is difficult to make accurate cost comparisons, it is reasonable to look at the overall commercial behaviour of an operator. The danger in this approach is that it leads to the supposition that most existing services cannot really be uneconomic or they would not be provided. For example, the analysis carried out for Oftel (the Analysys Report) manages to demonstrate that there is almost no such thing as an uneconomic public payphone, with the result that public payphones receive only a passing reference in the Consultative Document and their provision costs have been excluded from the USF. Similarly, emergency (999) services are not mentioned, apparently because there is a satisfactory inter-operator agreement to fund these. Given that the commercial behaviour of present operators may be a poor guide to what may happen in future, there seems to be a strong case for setting out the USOs exhaustively, even where in existing circumstances there may be no need of USF support.

Further reason for a clear and comprehensive statement of USOs lies in the uncertainty about the application of the Fund in Europe. It has been suggested by DTI that the Fund may be pan-European, in which case the priorities governing its disbursements would not be solely set by Oftel and the needs of the poorer EU States would absorb much of the revenue. It is not yet clear whether USOs will be harmonised across the EU but it will be most important that the UK position is clear at the outset. Once European negotiations commence on the Universal Service Directive, it will be difficult to bring forward new USF candidates that were not on the opening agenda.


TERMINAL EQUIPMENT

A particular problem over services for disabled people is that it is the nature of the terminal equipment rather than the network which will determine, in many cases, whether they can access the telecommunications networks. The provision of terminal equipment has been liberalised; subject to minimal regulation, anyone can make and sell it: a corollary of this is that no-one is obliged to do so. Supply is market-driven and the market is not necessarily responsive to minority requirements.

On the basis that at least one of the present network operators is in the business of supplying domestic terminal equipment, Oftel could in theory require that service to continue, with due regard paid to the needs of disabled customers. To the extent that the minority market may not be profitable, it may even qualify for USF support. It is doubtful whether Oftel could insist on the continuation of such a service in the event of a major change of policy by that operator but, if similar requirements were common in the USOs set by other European Member States, it would then be possible for Oftel to tender for the franchise of meeting USO requirements. Indeed, it would probably have to do so if all the licensed UK operators were to opt to become payers rather than players. It seems desirable to urge Oftel to acknowledge this contingency.


PRIORITIES FOR ACTION

There are many uncertainties about the way forward on Universal Service. The priority would seem to be to establish a manifesto which contains all the aspects of USOs that are desirable now and in the short-term future. Any reluctance to state what may seem to be obvious should give way to an appreciation of the danger of failing to include any item of importance. With the approach of European legislation, it must be remembered that what may be commonplace in the UK might be regarded as extraordinary elsewhere in the EU, and vice versa.

If items are included in the manifesto which are subsequently thought to be matters for consideration under the Disability Discrimination Act, this can be an advantage. Regulations and Guidance in support of that Act have yet to be drafted and the consideration given to such questions now may be of assistance to legislators in that process.


This commentary has been prepared by Tony Shipley for the Scientific Research Unit of Royal National Institute of the Blind and for the UK Liaison Group of COST 219. The information and comments are presented in good faith but readers intending to act upon them are advised to obtain independent confirmation of critical points before doing so.

22 April 1996

 



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