Home Latin America II 1997 Universal Service Obligation in a Competitive Environment

Universal Service Obligation in a Competitive Environment

by david.nunes
Professor Howard WilliamsIssue:Latin America II 1997
Article no.:3
Topic:Universal Service Obligation in a Competitive Environment
Author:Professor Howard Williams
Title:Principal Consultant
Organisation:Analysys Ltd., UK
PDF size:36KB

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Article abstract

As countries open their markets to competition, the definition and quantification of USO costs become an increasingly important part of the regulatory regime. The key message is that a well-developed and understood policy is essential to achieving broader objectives in the sector, and to understand the dynamics of the competitive process and not merely the processes of market entry.

Full Article

Although universal service has been an important political and public concern for many decades, the entire cost of the universal service obligation (USO) has traditionally been borne by the monopoly telecommunications operator and so there has been no requirement either to carefully define USO or to quantify its costs. However, as countries open their telecommunications markets to competition, the definition and quantification ofUSO costs – and the process by which those costs are shared among competing telecommunications operators – become an increasingly important part of the regulatory regime. In a multi-operator market, universal service is at the heart of telecommunications policy development, providing the framework for arguing whether improvements in availability, quality and cost of telecommunications services can best be achieved through competition or government intervention. In an era of rapid technological change, competition is generally claimed as the most effective way of delivering universal service: it brings lower prices, introduces service diversity and supports network expansion. There is a view, however, that this will still leave a body of uneconomic areas and uneconomic customers who will not benefit. There will still therefore be a strong case for a universal service obligation, which requires telecommunications suppliers to provide more than the market might justify. Defining USO The social driver for universal service is the promotion of greater social and economic cohesion between both different groups in society and different regions. Additionally, as the information economy reshapes the nature of employment, economic activities and social interactions, telecommunications services become the foundation stone on which individuals develop and build their involvement in society and obtain a sense of belonging. Having a telephone becomes an economic as well as a social necessity, intertwined with issues of citizenship. Universal service is often used to link together three distinct issues: · affordability of basic telecommunications services; · public access to services, especially those associated with the Information Society; and, · obligation on service providers to undertake service provision which they would not undertake in a competitive market. Affordability Within the current debate, affordability is best interpreted as ‘controlling individual consumer expenditure’. This is critical to those consumers or potential consumers on low incomes who are uncertain about being able to pay for and maintain the service. Typically, on taking up a telephone service, a customer is given unlimited financial credit within a specified billing period but is unable either to know or to control the cost of a call. All the research shows that control of expenditure is the key tactic used by low income households to manage affordability. Issues of affordability in the debate surrounding universal service should be focused on allowing the customer to define: a contractual and financial liability which gives them better control of expenditure. Soft disconnection, prepayment cards, variable billing periods, and defined financial credit limits might form components of this new type of contract. Public Access In countries with developed telecommunications systems, public access tends to revolve around access to the Information Superhighway, and calls for ISDN/broadband to be available to schools, libraries and hospitals. The generic issue is the problem of defining the services which should be included in the universal service obligation in a period of rapid technological change. It is important, however, to distinguish between the terms public access and universal service, which actually refer to polar opposites in terms of service and market development. A public access policy, of which ISDN to schools is an example, is designed to encourage the early adoption of services and ‘kick start’ the diffusion of new services. Such policies allow suppliers to understand their cost structures better and to explore different pricing strategies, while at the same time allowing consumers to judge the value of the services being offered. As a result, economic entry is encouraged into markets where consumer demand has been stimulated and this leads to a rapid diffusion of the service. In stark contrast, universal service is about ensuring that the social and economic optimal roll-out of a service is achieved; it is about the tail-end of market development, rather than anticipating market outcomes and picking winners. Obligation to Provide Services From the perspective of network completion, it becomes possible to establish the criteria upon which services should be included in universal service. These criteria allow for both the better definition of what USO should include now, and when other services should be included. The two key criteria for a service to fall within the universal service obligation are: · that services currently enjoy a high market penetration of around 75%; · that there is a serious economic and social disadvantage from not having access to the service. Given these criteria, the author suggests that, for the present, universal service should be limited to the provision of basic telecommunications services to residential customers. This should include voice telephony at a defined level of quality (in terms of speed and connection, speech quality, frequency of failure and time to repair), payphones, operator services, directory enquiries, malicious call complaints services, itemised billing and selective call barring. This third issue therefore concerns the primary question of: ‘What activities is an operator (typically the incumbent) being asked to perform in a competitive market which it would otherwise not undertake?’ If these activities can be defined, then the cost of universal service can be calculated and appropriate compensation offered to the incumbent. Calculating the Cost of USO Calculating the cost of universal service is critically dependent on the availability of data from which uneconomic customers and areas can be identified. By using the avoidable cost methodology, it is possible to arrive at a net figure which reflects the differences of avoided costs and foregone revenues. This net figure represents the estimate of the cost of universal service obligation. The figure below shows estimates of this net cost for a number of countries (mostly within the European Union). These estimates were made in 1993/4 on the basis of Europe-wide data; subsequent, more detailed studies undertaken by Analysys have broadly confirmed these estimates. In viewing these figures, a number of points have to be kept in mind. Firstly, the degree to which tariff rebalancing has occurred so that tariffs actually reflect costs is important in defining the level of the USO, although it is important to note that tariff rebalancing will not remove the USO costs. Secondly, the definition of uneconomic customers and areas is based on the distribution of costs and revenues at a particular moment – a lifecycle approach to these costs and revenues may well produce different figures. Thirdly, regulatory constraints on the nature of the services offered by the incumbent could have an important but differential impact on costs and revenues, and therefore alter the net result. Funding Mechanisms However, in those countries where the USO cost is calculated to be substantial, mechanisms need to be designed which ensure that the cost is shared between competing operators. There are essentially two ways in which this can be organised: through interconnect charges or through an explicit universal service fund. Although increasing interconnect charges to cover the net cost of universal service is attractive because of its administrative simplicity, it does have its problems. The increased prices would encourage operators not to interconnect (at least directly) with the universal service provider. Increasing interconnect charges may also be unfair to those operators who cannot avoid interconnecting with the USP, whereas other operators might be able to avoid paying any contributions simply by bypassing the universal service provider. Additionally, the use of interconnect charges to fund USO requires accounting separation or self-purchase of wholesale capacity by the universal service provider if its contribution is to be made transparent. There are many advantages to a USO fund. It is fair and transparent in that all operators and service providers contribute and contributions can be audited. It is also flexible, in that the cost-sharing mechanisms can be tied to criteria relevant to all contributors and not just based on call minutes as in the interconnect mechanism. A fund is also non-distorting because it leaves interconnect charges unchanged. The biggest disadvantage to a fund is that it is administratively complex and requires the establishment of an institution to oversee the collection and redistribution of funds. A derivative of the universal service fund which has attracted much attention because of its apparent administrative simplicity is that of a ‘virtual fund’. Under such a scheme, operators transfer funds directly to one another to cover the costs of universal service. However, such a scheme is essentially reallocating the administrative and audit costs to the operators. There still remains the need for an independent arbiter to audit the cost-sharing process, including the determination of criteria for cost allocations and to resolve disputes. Beyond the Basic Cost of USO Universal service is seen by some commentators as a policy issue which is now solved – there exists a sound methodology for calculating USO costs; USO is an opportunity that carries substantial non-financial benefits; and there are relatively elegant solutions to any funding problem. This is not a view shared by others who maintain that, in an increasingly complex and competitive environment, universal service will remain a key policy issue. The debate has not ended but it has certainly moved on. Conclusion The key message is that a well-developed and understood policy on universal service is essential to achieving broader objectives in the telecommunications sector. These include the realisation that improved telecommunications availability, quality and cost can be derived from competition and choice. USO then becomes an issue of understanding market dynamics, the behaviours and intentions of all the operators and not just the static calculation of the avoidable costs and foregone revenues attached to specific network elements. Increasingly, the development of a universal service policy will require policy-makers to understand the dynamics of the competitive process and not merely the processes of market entry.

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