An assessment of
universal service funding
in Canada
Lisa Leidig
Ovum Ltd.
April 2000
1
Table of Contents
1. About Ovum ........................................................................................................................3
2. Summary..............................................................................................................................4
3. Introduction.........................................................................................................................5
3.1 The impact of competition on universal service policies...........................................................................................................5
3.2 Best practices............................................................................................................................................................................5
3.3 Is reform needed in Canada?....................................................................................................................................................7
4. Costing universal service..............................................................................................10
4.1 When is support for universal service justified?........................................................................................................................10
4.2 What costs are included in an assessment?.............................................................................................................................14
4.3 What costs are not included?..................................................................................................................................................15
4.4 Essential steps for calculating the net cost of universal service................................................................................................17
5. Financing universal service costs ..............................................................................19
5.1 How should universal service costs be financed?.....................................................................................................................19
5.2 Reviewing subsidy requirements and reimbursing operators....................................................................................................20
6. Recommendations for Canada....................................................................................21
1. The European Union ......................................................................................................25
1.1.Definition and scope...............................................................................................................................................................25
1.2 Funding strategy.....................................................................................................................................................................25
1.3 Cost calculation......................................................................................................................................................................26
1.4 Fund administration................................................................................................................................................................26
2. France.................................................................................................................................27
2.1 Definition and scope...............................................................................................................................................................27
2.2 Funding strategy.....................................................................................................................................................................27
2.3 Cost calculation......................................................................................................................................................................29
2.4 Fund administration................................................................................................................................................................30
3. United Kingdom...............................................................................................................31
3.1 Definition and scope...............................................................................................................................................................31
3.2 Funding Strategy....................................................................................................................................................................31
3.3 Cost calculation......................................................................................................................................................................32
3.4 Fund administration................................................................................................................................................................33
An assessment of universal service funding in Canada
Ovum
2
4. Australia .............................................................................................................................34
4.1 Definition and scope...............................................................................................................................................................34
4.2 Funding strategy.....................................................................................................................................................................34
4.3 Cost calculation......................................................................................................................................................................36
4.4 Fund administration................................................................................................................................................................36
An assessment of universal service funding in Canada
Ovum
3
1. About Ovum
Ovum is an independent research and consulting company, offering expert advice on
IT, telecommunications and new media.
We specialise in the analysis of key market, technical and regulatory developments
and our work is highly respected worldwide for its authority, quality and clarity.
Owned by its staff and with clients worldwide, Ovum prides itself on its independent
and international viewpoint.
Established in 1985, Ovum has offices in London, Boston and Melbourne. We employ
over 80 consultants who provide reports, advisory services and strategic consultancy
to 10,000 clients worldwide.
Lisa Leidig is a Principal Consultant at Ovum and a recognised world expert on
universal service issues. She is the author of Ovum’s 1999 report, Universal Service
Funding: World Best Practice. While Lisa has been at Ovum, she has advised 12
countries on how to develop a universal service policy appropriate for competitive
telecommunications markets. She received the US Government Bronze Medal Award
in 1995 for efforts to establish a new universal service policy in the United States,
while working for the National Telecommunications and Information Administration
(NTIA), the executive branch agency responsible for advising the US Administration
on telecommunications and information issues. Lisa has also worked for Price
Waterhouse and for the US Trade Representative, Office of the White House.
An assessment of universal service funding in Canada
Ovum
4
2. Summary
The current universal service funding mechanism that is operational in Canada is
unlikely to meet the government’s goals of keeping universal services affordable and
achieving effective competition. This is because it:
•
compensates ILECs for their access deficits and thus, removes any incentive for
them to maximise efficiencies. This has the added-on effect of raising the overall
costs of universal service
•
deters competition from developing in the local market, as new entrants cannot
compete with subsidised ILEC tariffs
•
deters operators, especially smaller new entrants, from competing in the long
distance market because of high contribution charges, which grow according to
traffic volume and not revenues earned
•
encourages operators to bypass ILEC networks in order to avoid high contribution
charges. This practice could result in the disappearance of universal service
support in the long term.
Reform is necessary. Ovum suggests the following recommendations:
•
the current funding strategy is replaced by one that is appropriate for a fully
competitive environment
•
funds are collected to support a universal service fund on the basis of the net cost
of providing universal service
•
the net cost should be calculated according to a forward looking cost methodology
that takes into account efficient operations and current technologies
•
the process for determining the net costs should be transparent and allow for the
participation of the whole telecommunications industry
•
a review of the net costs should occur annually. If the amount collected in any one
year exceeds the subsidy required, contributing operators should be reimbursed or
credited against future contributions.
An assessment of universal service funding in Canada
Ovum
5
3. Introduction
3.1 The impact of competition on universal service policies
The worldwide trend to liberalise telecommunications is driving the development of
new universal service funding mechanisms. There are three main reasons:
•
incumbent local exchange carriers (ILECs) are being left with the financial burden
of providing essential services below costs in order to keep users connected in
newly competitive environments
•
long distance and mobile operators are paying an unfair burden in environments
where competition has progressed from partial liberalisation (local access still a
monopoly) to full liberalisation
•
local competition is not developing in the residential market where rates have not
been rebalanced to the extent required to provide economic incentives for new
entrants.
Policy-makers are either reforming existing universal service policies, or
implementing them for the first time to:
•
ensure a level playing field among operators – where no one operator pays an
unfair burden
•
promote competition in the residential market and thus increase quality, choice
and price of services for residential customers
•
meet national objectives of promoting an Information Society for all citizens –
“Connectedness.”
3.2 Best practices
Ovum has identified five key success factors for meeting the universal service
challenge in competitive environments. These factors are described in Figure 3.
Figure 3 : Key success factors
Select a funding mechanism to match the environment
Funding mechanisms need to be adjusted over time to reflect changes brought about
by market liberalisation, government policy and economic indicators
Promote a level playing field
No one operator or group of operators should bear an unfair cost burden. Incumbents
should not bear all of the burden in providing universal services if costs are high. On
the other hand, incumbents should not be overly compensated for meeting goals, while
still dominant.
Base subsidies on the net cost of providing universal service: do not overcharge operators
Operators required to make financial contributions should do so based on the net cost
of providing universal services. The net cost should be reviewed annually and
contributors should be reimbursed if contributions exceed costs
Maximise efficiencies: create incentives not burdens
Require operators to calculate net cost based upon an efficient operator using current
technologies. Funding mechanisms that encourage operators to compete for support
are the most desirable as they will likely lead to innovation in both the provision of
universal service delivery as well as lowering overall costs
An assessment of universal service funding in Canada
Ovum
6
Implementation: ensure a transparent process
Criteria and procedures should be practical and allow the determination of costs in a
transparent environment. Subsidies should also be explicit.
Selecting a funding mechanism to match the environment
There is no one perfect funding mechanism. Funding mechanisms need to be adjusted
over time to reflect changes brought about by market liberalisation, government
policy and GDP per capita, among other factors. Adjustments are needed to ensure
that government goals continue to be met through different stages of
telecommunications liberalisation. Figure 3.1 illustrates the five primary scenarios
that lead to the use of specific funding mechanisms.
Figure 3.1: Funding scenarios
Funding mechanism
Environment
Country examples
1. Incumbent covers cost
Competition does not exist or is in early Majority of countries prior to market
stages. Policy makers require operators liberalisation
to meet specific goals per licence
obligations
2. Long distance and mobile operators
pay asubsidy charge
Local loop still monopoly. Local
operators still have high access deficits
Canada
(US and Australia prior to full
competition)
3. Incumbent and other local operators
cover costs
Full liberalisation but incumbent is still
dominant. Cost of universal service is
low. Population density and GDP per
capita are high.
UK, Italy
4. All operators share cost
Full liberalisation – medium to high
level of competition. Universal service
costs are high due to network
development goals and/or roll- out of
new advanced services.
US, France, Australia, Colombia
GDP per capita can be low or high
Large rural areas
5. Government funds costs
Full liberalisation – high level of
competition. High GDP per capita.
Costs of universal service are low.
Finland
Promoting a level playing field
Funding strategies should promote a level playing field among operators:
•
no one operator or group of operators should bear an unfair cost burden
•
incumbents should not bear all of the burden of providing universal service where
costs are high
•
incumbents should not be overly compensated for meeting goals while still
dominant.
If these conditions are not met, consumers are unlikely to benefit from a fully
competitive environment.
An assessment of universal service funding in Canada
Ovum
7
Calculating operator contributions: do not overcharge operators
If a decision is taken that it is necessary to support the universal service provider’s
net cost, policy makers must ensure that contributions required of other operators :
•
do not jeopardise their financial viability
•
do not create disincentives for competing in telecommunications markets.
The amount that operators pay should be linked to cost studies that project annual
net costs of meeting policy goals. Amounts paid should not be arbitrary. Operators
should be reimbursed if contributions collected exceed calculated cost in any given
year.
Maximising efficiencies: create incentives not burdens
Policy makers should strive to create a universal service regime that maximises
efficiencies. Regulators should require cost assessments that are based on an efficient
operator using current technologies. This will help ensure that operators pay for the
net cost of providing universal service rather than supporting operators with
universal service obligations (USOs).
Funding mechanisms that provide incentives rather than burdens can lead to
innovation as well as lowering the cost of universal service. For example, competitive
bidding processes are being used in Colombia, the US, Peru, and Chile to bring down
the costs of universal service by rewarding the most efficient operator.
The decision to award subsidies through a competitive bidding process must be
predicated on whether or not operators, in addition to the incumbent, can meet
universal service goals on a regional or national basis. In most developed countries
this case has not been made. However, in countries where network roll-out is still
needed, awarding capital grants to the most efficient operator is desirable. This may
be the case in the remote areas of Canada where a significant number of people still do
not have access to basic telecommunications services, let alone advanced services such
as the Internet.
Implementation: ensure transparency
The process for implementing funding mechanisms and how to qualify for funds
should be transparent. Once rates have been rebalanced to encourage local
competition in the residential market, mechanisms should replace any implicit
subsidies with explicit subsidies in order to reflect the real costs of providing service
and send the right signals to the market
3.3 Is reform needed in Canada?
Previous universal service polices and corresponding funding mechanisms helped
Canada achieve one of the world’s highest telephone household penetration rates at
98%. This is remarkable considering its large rural areas and disperse population.
However, if policymakers want to ensure that they keep universal services affordable,
as well as promote competition, reform is essential. Reform is necessary because the
current funding mechanism no longer corresponds to the Canadian
telecommunications market. The effect is:
•
policies are not promoting a level playing field among operators and thus effective
competition is not developing
An assessment of universal service funding in Canada
Ovum
8
•
operators are not contributing on the basis of the net costs of providing universal
service
•
there is no mechanism in place to reimburse operators for making contributions
that exceed the subsidy required
•
efficiencies are not being maximised
•
the processes are not transparent.
Figure 3.2 shows the change drivers that drive universal service funding in monopoly
environments through initial competition, and then finally to full competition.
Figure 3.2 Change drivers
Monopoly provider pays all-achieved
through cross-subsidies from:
• urban to rural
• business to residential
• international to long distance
• long distance to local
Monopoly environment
Change drivers:
increase investment
(Privatisation/licence
new operators)
limited competition
•Long distance and mobile operators pay
access charge to connect to local loop
Liberalising environment
(monopoly still in local loop)
Change driver:
Open licensing
environment
Full competition
(local loop opens up)
•All operators share costs of USO
•Access charges are lowered or phasedout over time
•Operators compete to receive USO
funding
The current funding mechanism that is operational in Canada coincides with the
market conditions typical of a partially liberalised environment; whereas Canadian
legislation promotes a fully competitive environment. Thus, the current mechanism is
unlikely to achieve the government’s goals because it:
•
compensates ILECs for their access deficits and thus, removes any incentive for
them to maximise efficiencies. This has the added-on effect of raising the overall
costs of universal service, which are ultimately passed on to consumers
•
deters competition from developing in the local market, as new entrants cannot
compete with subsidised ILEC tariffs
•
deters operators from competing in the long distance market because of high
contribution charges, which grow according to traffic volume and not revenues
earned
An assessment of universal service funding in Canada
Ovum
9
•
encourages operators to bypass ILEC networks in order to avoid high contribution
charges. This practice could result in the disappearance of universal service
support in the long term.
An assessment of universal service funding in Canada
Ovum
10
4. Costing universal service
4.1 When is support for universal service justified?
In developed economies where there is a high teledensity(lines per 100 people) and
GDP per capita, the burden is on universal service providers to prove that they suffer
an undue cost burden before they can be compensated. This is the case for all EU
countries. From 1997 to 2000, regulatory authorities in Germany, the UK and Italy
decided that current universal service providers do not suffer an undue burden and so
no compensation is authorised. France is the only EU Member State where a
universal service fund has been established to support the incumbent.
To make the case for support, USO providers must fulfil a two step process:
1.
prove that there is a net cost
2.
prove that this net cost represents an unfair burden.
Figure 4. illustrates the formula prescribed in Europe and in Australia for proving net
costs.
Figure 4.
Costs of service delivery avoidable if universal services were not provided to
uneconomic areas, customers and pay phones
-
Revenues forgone from not serving these areas, customers or pay phones
=
Direct net cost
The next step in the process is to assess whether the net cost represents an unfair
burden. This step helps regulators guarantee that incumbents are not overly
compensated in an environment where they are still dominant. It also acts as a
safeguard to ensure that universal service providers do not inflate their costs or
deflate their revenues to get a higher subsidy.
Oftel, the regulator in the UK, makes this assessment by requiring British Telecom
(BT) to assess the benefits derived from:
•
Life cycle effects. BT may lose money on a particular customer at a certain stage
but retain their loyalty when they become profitable
•
Enhancement of corporate reputation. BT can benefit from the marketing value
associated with being a universal service provider
•
Ubiquity. BT receives certain advantages from being recognised as serving all
regions of the country
Ovum’s philosophy is that covering an incumbent’s entire net cost is undesirable.
However methodologies used to calculate intangibles like brand recognition and
ubiquity are not precise. Thus, we advocate that the regulator make an additional
subtraction to the formula illustrated in figure 4 according to the degree of market
dominance enjoyed by the incumbent and the extent to which the market can bear the
cost. For example, in Australia the government reserves the right to reduce the net
An assessment of universal service funding in Canada
Ovum
11
cost claim if it is in excess of widely accepted benchmarks, common industry practice
or world best practice. In 1999, the government agreed to pay only 32% of Telstra’s1
claim for universal service costs. Telstra’s claim of $1.83 billion would have been a
substantial cost burden on new entrants (Australian $200 million). The Ministry of
Communications also set a three year cap on the net cost level that can be claimed by
Telstra.
Figure 4.1 clearly indicates that the majority of ILECs in Europe do not receive
support for USOs as they have yet to prove their case.
Telstra is the incumbent provider in Australia responsible for providing universal
services
1
An assessment of universal service funding in Canada
Ovum
12
Figure 4.1: Universal service funding in Europe
Country
United Kingdom
Denmark
USO Requirement
for Incumbent
Time Limit
BT
First consultation issued in 1997
Kingston
Communications
(Hull)
Second consultation issued in 1999. Results are
forthcoming
ü
Until 2007
Next review scheduled for 2001
Contribution Mechanism
None
In 1997, Oftel decided a funding mechanism was not necessary because BT d
undue financial burden. Thus, BT, the primary USO provider, does not receive
meeting USOs.
None
National legislation allows for a funding mechanism if the case can be made.
Spain
ü
Under review
None.
(Telefonica is required to meet universal service goals National legislation allows for a funding mechanism if Telefonica can demonstr
until 31/12/05)
represents a net cost and unfair burden.
Italy
ü
Reviewed every two years
Review occurred in 1999
Ireland
ü
Under review
None
In 1999, the regulator rejected a request from Telecom Italia for L1.45 trillion (U
compensation for costs linked with providing universal services. Telecom Italia
carry the burden without compensation from other operators.
None
Telecom Eirean is evaluating the net costs associated with meeting its obligatio
eligible for compensation.
The regulator is considering a compensation mechanism in the form of a fund
interconnect surcharge in the event TE can make a case for support consisten
regulations.
Portugal
ü
Under review
None
The regulator is considering various mechanisms of compensation if Portugal T
a case.
Netherlands
ü
X
None
Belgium
ü
X
None
Finland
X
X
None
All operators are required to meet all requests for service. Tariffs are not geog
averaged, which means that operators are allowed to set prices according to th
providing service. Low income individuals receive direct support for basic tele
Ministry of Social Affairs.
France
ü
Telecoms law
allows for other
operators to be
USO providers if
they can provide
the range of
services nationally
Reviewed every four years (first review in 1997)
Next review scheduled for 2000
A universal service fund became operational in 1997. All operators offering p
telephony are required to contribute. Operators make two types of payments:
paid in addition to interconnection charges; 2) a payment to the fund that is a p
of France Telecom’s net universal service costs, calculated on a pro-rata syst
traffic volume
Operators pay into the fund three times a year
.
The surcharge to interconnection component of the contribution mechanism wa
1999
Germany
Greece
ü
If DT decides not to be the universal service provider None
or changes the content of its provision, it must
USOs are not
inform the regulator one year in advance. The
In 1998, the regulator decided that DT generates enough revenues to support
under the
obligation would then be open to bids from other
However, if DT can demonstrate that it bears a net cost using a forward lookin
obligation of any
operators.
methodology, RegTP will consider establishing a fund.
one provider;
however, DT
If a fund were established, all public operators that have achieved a 4% mark
currently meets
particular market would be required to contribute.
national goals
ü
Under review
None
Assessment of Canada’s universal service policy
Ovum
13
The Ministry of Communications has begun a process to develop a definition
service and determine whether there is a net cost
Switzerland
Austria
Open to bids from
all operators
ü
5 Year period
Government offers financial support to operators providing USO services
Review in 2002 (The regulator will decide whether or None
not to tender USO)
PTA covers the cost of universal service per EC regulations. The Ministry of F
cost of social tariffs for the disabled and low income individuals.
Assessment of Canada’s universal service policy
Ovum
14
In developing countries where resources are limited, the trend is not to offer
compensation to incumbent providers to recover their historical costs for building a
national network. Instead, government policy is to provide incentives to any operator
that wishes to develop new networks as well as provide new services. For example,
universal service funds in Colombia, Chile and Peru award capital grants to the most
efficient operator that offers to build out networks in rural areas.
ILECs in Canada have not been asked to prove that they incur an unfair net cost
burden. The current policy, which allows universal service providers to make claims
for funding on the basis of shortfalls they incur on residential lines may be viewed in
other markets as anti-competitive. This is because it is difficult to know whether
these shortfalls are due to the operator’s inefficiencies in providing the service or
because the operator suffers a net cost in supplying the service.
4.2 What costs are included in an assessment?
The following costs are generally associated with providing universal service in
developed economies similar to Canada:
•
uneconomic areas (where the cost of providing services exceeds revenues) – these
areas tend be high-cost rural areas, but also include some urban and suburban
areas
•
uneconomic customers – these customers are unprofitable because
they do not generate enough revenues to cover the cost of providing service, or
they have to be subsidised based on disability, low income or other criteria
•
non-profitable payphones – in many countries, USO providers have to meet public
payphone obligations in order to ensure that everyone has access to
telecommunications services. Operators are obliged to install payphones in areas
where insignificant traffic is generated and, therefore, they cannot recover the
costs of providing service
•
providing access to the Internet is a growing requirement. In developed economies
like the US, providers are being subsidised to offer Internet to schools, libraries
and rural health care centres. In developing economies, where the policy is
universal access rather than universal service, operators are being asked to
support the costs of bringing advanced information services to designated public
access sites.
Universal service costs vary between countries and are influenced by the following
factors:
p/OVUMFINA.DOC
•
definition of universal service – definitions can consist of a single concept or a
combination of concepts to achieve specific national goals. The number of services
or concepts that forms the definition will influence the total cost of providing
universal services
•
income distribution (affordability levels) – this will affect the net costs, since prices
are set at levels that are affordable to most of the population. Universal service
costs are directly related to people below affordability levels
•
rural and urban population ratio – rural areas are normally high-cost areas; hence
large populations in rural areas will increase the size of subsidies and the cost of
universal service/access
•
population density – costs increase in areas where population is scattered; for
example, northern Canada
Ovum
15
•
geography of the country – this influences the choice of telecommunications
solutions and, therefore, the cost of providing telecommunications. The costs are
distance-dependent and terrain-dependant
•
Operator efficiency – inefficient operations will increase the costs – particularly in
high-cost areas; whereas efficient operators and selection of appropriate
technologies will bring down the costs.
Ovum expects the number of rural areas, low population density and geography in
Canada to increase the costs of universal service. Meanwhile, we also expect that
these costs will be brought down by Canada’s:
•
high GDP per capita/income distribution - this factor increases the affordability of
telecommunications services
•
operator efficiency. Universal service providers in Canada should be evaluated
according to efficient operators typical of other developed economies where
advanced management techniques and state-of-the art technologies are
commonplace. Figure 4.2 shows our view of how universal service costs are
impacted in Canada.
Figure 4.2: Impact on universal service costs in Canada
Increasing
costs
Number of
rural areas
Low population
density
Geography
Definition
Lowering
costs
Operator
efficiency
Income distribution
4.3 What costs are not included?
The goal of modern universal service policies is to subsidise customers who would not
be served if there were no universal service policy. These customers would not be
served because they cannot afford cost based prices. Some of these customers will be
in rural areas and some will be in urban areas.
The goal is not to support an operator’s access deficit as this practice inhibits effective
competition. In fact EU legislation prohibits the use of access deficit schemes after
January 1, 2000.
An access deficit occurs when the net cost of building and maintaining the local
network is greater than the revenue collected through recurring monthly charges and
installation charges. As local operators have historically been obliged to keep local
prices affordable for everyone as part of a universal service obligation, access deficits
p/OVUMFINA.DOC
Ovum
16
have been commonplace. In fact, the majority of universal service funding
mechanisms financed through explicit, usage-based subsidy charges, cross subsidies
or a central fund have helped local operators recover this deficit in monopoly or quasi
monopoly environments. This characterises the funding strategies in the US and
Australia before the local loop was open to competition. This system is still in place in
Canada.
Explicit usage-based subsidy charges and cross-subsidies enabled operators to meet
government requirements for a geographically averaged tariff, which was believed to
be necessary in order to increase telephone penetrations as well as to keep users
connected in high cost areas (e.g. the cost of service in an urban area may only be
$US8 but in remote areas it may be as high as $US80).
However, in fully competitive environments, an ILEC’s access deficit is a diminishing
concern because:
•
in many cases the incumbent has already recovered a significant portion, if not all,
of the historic costs of building its network
•
other revenues generated from services other than reoccurring monthly charges
and installation charges enable the provider to make an overall profit for a
particular subscriber line
•
regulators are requiring local operators to rebalance tariffs so that prices are more
closely aligned with costs. This has two advantages: 1) it decreases or eliminates
an operator’s access deficit; 2) it promotes competition in the local loop as there is a
more viable business case for entry in this market. Special tariff packages can be
introduced to ensure that individuals and groups do not fall of the network due to
the inability to afford cost-based prices. The net cost of these packages would then
be included in the overall net cost of universal service.
Furthermore, usage-based subsidies are an unsustainable support system for
universal service goals. This is because new entrants can bypass incumbent LECs
and offer lucrative high-volume customers equivalent services at lower charges, even
if they are less efficient than the incumbent is. In addition to being non-competitive,
this situation could lead to the disappearance of universal service support.
Finally, support for universal service that is collected through usage-based subsidy
charges can potentially reduce competition for low-volume customers (i.e. residential),
as few operators will choose to serve them. This is because would be competitors
would not be able to beat the incumbent LEC’s local tariffs, supported by subsidies.
Thus, the focus of modern universal service is how to finance uneconomic customers
and areas. Examples of two countries where subsidy charges have been reformed are
explained in figure 4.3.
Figure 4.3: Examples of reform
France
US
In 1997 a universal service fund became
operational for the first time. Operators were
required to pay two interconnection surcharges.
One to support uneconomic areas resulting from
geographical price averaging. The other to
support France Telecom’s (FT) access deficit
resulting from unbalanced tariff structures.
Operators no longer have to pay for the latter
surcharge as FT has rebalanced tariffs to the
In 1988, the FCC implemented a new access
charge system based upon forward looking
costs, which significantly lowers access
charges. The new system replaces traffic
sensitive charges with flat rate charges. It also
implemented a new system, which requires all
operators to contribute to universal service
fund according to a percentage of net revenues.
The flat rate access charge will eventually be
p/OVUMFINA.DOC
Ovum
17
benchmark of affordability set by the regulator.
phased out completely.
4.4 Essential steps for calculating the net cost of universal service
If regulators are going to require other operators to support an incumbent in its
provision of universal service, they must agree to the costing approach and
methodology used. To ensure that the level of contributions required from other
operators is fair, regulators should oversee a cost calculation process that is:
•
non-discriminatory – this means that companies required to make contributions
should not pay more for these services than would be payable if the services were
offered under competitive conditions. The goal is to ensure that cost data
corresponds to efficient service provision. The cost data should cover the costs of
uneconomic customers and areas and payphones, depending on legislation (not all
countries require operators to meet public payphone obligations)
•
transparent –this ensures the legitimacy of the process. Obviously there is some
information that should remain confidential but the majority of it should be in the
public domain so that contributing operators have the opportunity to comment and
suggest better approaches
•
objective. The ultimate decision regarding the amount of costs to be supported by
contributing operators should rest with the regulator. To make this decision, the
regulator must balance the goals of promoting competition with meeting universal
service policy objectives.
Costing methodologies
Long run incremental costs (LRIC) are increasingly required by regulators as the
methodology of choice for determining the net cost of universal service. For example,
the EC Interconnection Directive requires the application of forward-looking costs,
which the LRIC methodology incorporates. Operators in the EU, the US and
Australia are already using LRIC to assess the cost of universal service.
The benefits of LRIC are:
•
it is consistent with the idea that universal service costs should be measured on
the basis of avoidable costs. Costs may be avoidable as a result of better network
design, the use of modern assets or improved efficiency
•
it requires that a cost assessment is based upon an efficient operator using current
technologies. This is important because if costs are calculated with a methodology
that does not fulfil efficiency requirements, contributing operators are liable to end
up subsidising the USO provider rather than supporting its true net universal
service costs
To make the transition from the traditional approach of historic cost accounting and
fully allocated costs to LRIC, countries are following one of the three paths:
p/OVUMFINA.DOC
1.
Implementing LRIC direct from traditional approach. This transition path will
suit areas where new infrastructure is being installed (e.g. developing countries
and rural areas)
2.
Transition path 1 which uses an interim stage of current cost accounting (CCA)
while still using fully allocated costs. This transition path will be appropriate
where the provider of universal service/access operates a substantially digital
Ovum
18
network. In this case the move to CCA will be an evolution from the traditional
costing methodology
3.
p/OVUMFINA.DOC
Transition path 2 which uses an interim stage of incremental costs (ICC) while
still using historic cost accounting. This approach should be used where the
incumbent’s network is largely analogue, and the move to current cost accounting
would undermine the incumbent’s ability to make investment in digital
technology.
Ovum
19
5. Financing universal service costs
5.1 How should universal service costs be financed?
Once a net cost has been determined, a decision must be made about how to finance
it. Ovum has developed a series of models to help regulators with this decision.
Figure 5 shows financing options appropriate for Canada - a developed country where
there is full telecommunications liberalisation.
Figure 5.1: Funding for a developed country with full liberalisation
Developed country characteristics
1. GDP per capita > US$15,000
2. Teledensity > 50%
3. Low urban poverty
4. Full liberalisation
Universal
service/access
goals
Funding
strategy
Emphasis on people below
poverty line, minorities and
the disabled
Number of uneconomic
areas becomes critical
cost factor
Definition moves beyond
basic telephony to
include access to advanced
services
Universal
service
fund
Key drivers
Implementation
options
Telecom
industry
is a major
engine of the
economy
Universal service
costs are low.
The majority of
subscribers
can afford
services
Option 1
Tax on all
operators
Option 2
General income
tax on all tax
payers
Option 3
Explicit tax on
subscribers
Best practices
All operators pay a tax
based on percentage of net
eligible revenues to a fund
Government supports
universal service costs
through
the national budget
Operators add a line
item to subscriber
bills to support costs
Users buy into
government
goals
Figure 5.1 above identifies three funding options used to support a universal service
fund:
•
a revenue tax on all operators
•
a general income tax on all tax payers
•
an explicit tax on subscribers.
Tax on all operators
This option requires all operators to pay a tax based on a percentage of net eligible
revenues to a central funding mechanism. Mobile operators and Internet service
providers are also obliged to contribute. This option is best used in countries where
the cost of universal service is high and where telecommunications is a major engine
of the economy. This form of financing is used in the US, Peru, Colombia, Zambia and
p/OVUMFINA.DOC
Ovum
20
Australia. The advantage of this approach is that it ensures a constant flow of
revenues. This compares with subsidy charges that could vanish over time as
operators bypass incumbent LECs through local loop unbundling or by building their
own networks to reach the most profitable customers. This approach also ensures that
operators contribute on the basis of actual earnings.
Potential disadvantages arise from the increasing difficulty of assessing revenues in
the telecommunications industry as services are increasingly bundled.
General tax
For this option, government supports universal service objectives through the
national budget. This form of financing is used in Finland, South Africa and Chile.
For this option to be effective one of two conditions must exist:
•
the cost of universal service is low. This helps ensure that the amount of money
needed to support goals is small and thus not likely to suffer from competing
demands for funds in the society at large (case of Finland)
•
the government views the development of telecommunications as essential to
economic growth and social development and so commits substantial resources to
grow the industry (case of South Africa and Chile).
Explicit tax on subscribers
For this funding option, operators add a line item to subscriber bills for an amount set
by the regulator. This amount is submitted to the fund and goes to support all
operators meeting universal service objectives. These objectives could include serving
high cost areas and customers as well as providing discounted Internet access to
schools, libraries and hospitals.
5.2
Reviewing subsidy requirements and reimbursing operators
Mechanisms should be in place to review subsidy requirements periodically. The exact
time period should be determined by the regulator but should not exceed one year. In
the US, operator contributions are revised on a quarterly basis. In the first quarter of
2000, operators in the US will be reimbursed for contributions required for the schools
and libraries fund in 1999 as funds collected exceeded demand. France is another
example of where operators are reimbursed if the provisional cost that they have paid
in is more than the actual cost incurred by France Telecom.
Besides Canada, Ovum is not aware of another country where regulators do not
review the subsidy required to support universal service goals on an annual basis. A
review is even more important in Canada as there is already some evidence that the
contributions collected are exceeding the subsidy requirement.
p/OVUMFINA.DOC
Ovum
21
6. Recommendations for Canada
As explained above, universal service policy reform is needed if policy makers want to
achieve universal service goals as well as promote full competition in Canada. Ovum
suggests the following:
1.
The current funding strategy is replaced with a strategy appropriate for a market
in full competition. Figure 6 outlines the choices. Ovum recommends that Canada
pursue option 2.
Figure 6: Funding strategies used in fully competitive markets
Strategy
Implementation
Outcome
1. Cross-subsidies
The incumbent bears the cost if it is
the dominant market player and if
costs are low (e.g. UK & Italy)
No incentive for new entrants to serve
uneconomic areas and customers
2. All operators share
cost
Universal service fund. Funds are
collected from all operators or
subscribers on the basis of net costs
where costs are high and would
constitute an unfair burden
No one operator bears the burden.
This can encourage competition in the
local loop if all operators are eligible
for support through a competitive
bidding process
3. Targeted assistance
Funds from the national budget are
used to issue capital grants or
vouchers to support specific operators
or individuals when costs are low
No geographic averaging of prices.
Operators set tariffs at cost. Funding is
targeted to those in need. This
encourages competition in the local
loop
Option 2 satisfies the government’s goal of continuing to ensure that universal service
is kept affordable in a market where costs may be an inhibiting factor. It also
promotes a level playing field among operators as subsidies cannot be higher than the
net cost of universal service.
p/OVUMFINA.DOC
2.
CRTC should oversee cost studies that calculate the net cost of providing
universal services. Ovum recommends that the costing methodology employ LRIC
because it is consistent with the idea that universal service costs should be
measured on the basis of avoidable costs. Costs may be avoidable as a result of
better network design, using modern assets or improving efficiency. LRIC also
requires that a cost assessment is based upon an efficient operator using current
technologies. This is important because if costs are calculated with a methodology
that does not fulfil efficiency requirements, contributing operators are liable to
end up subsidising the USO provider rather than supporting its net universal
service costs
3.
The process for determining the net costs should be transparent and objective. It
should allow for the participation of the whole telecommunications industry – this
ensures the legitimacy of the process. Obviously there is some information that
should remain confidential but the majority of it should be in the public domain so
that contributing operators have the opportunity to comment and suggest better
approaches. The ultimate decision regarding the amount of costs to be supported
should rest with CRTC. If covering the total net costs would jeopardise the
financial viability of contributing operators or cause dissent among subscribers,
Ovum
22
the CRTC may have to make a decision to cap the amount of the subsidy, which
can be recovered in order to ensure effective competition
4.
p/OVUMFINA.DOC
A review of the net costs should occur annually. And, if the amount collected in
any one year exceeds the subsidy required, contributing operators should be
reimbursed or credited. If the CRTC chooses a strategy whereby subsidies are
collected through a subscriber line charge, these charges can be reduced in
subsequent years if the subsidy required decreases.
Ovum
23
Appendix: Country profile
p/OVUMFINA.DOC
Ovum
25
1. The European Union
1.1.Definition and scope
The European Commission’s concept of universal service is laid out in two directives –
the Voice Telephony Directive (COM96) and the Interconnection Directive 1997. The
Interconnection Directive defines universal service as a:
‘Minimum set of services of specific quality, which are available to all users
independent of geographic location at an affordable price’.
It also includes the provision of:
•
free directories
•
directory enquiry services
•
public payphones.
The Directive does not define precisely what the scope of the services will be, leaving it
to each country to legislate according to its specific situation. The Directive does,
however, limit the services that a member state can finance through a universal
service funding mechanism (the Interconnection Directive, ref.19, art.5(1), European
Parliament and Council of the EU). The Interconnection Directive states that:
‘it would be disproportionate for national funding schemes to be used to recover
costs associated with the provision of communications services outside the scope
of universal service to schools, hospitals or similar institutions’ (COM 96/608).
1.2 Funding strategy
The Interconnection Directive, art.5(1), proposes that member states may establish
mechanisms for sharing the net cost of universal services with other organisations
‘operating public telecoms network and/or publicly available voice telephony
services’. However, EC Directives do not require member states to set up national
compensation schemes to fund universal service goals. National Regulatory
Authorities (NRAs) are permitted to establish a funding system only if operators with
universal service obligations can prove that they face a net cost constituting an unfair
financial burden (art.5(1)).
In cases where the NRA does conclude that there is a net cost, it must develop a
funding scheme that is transparent and in which the total funds collected do not
exceed the net cost of the universal service obligation. In keeping with EC Directives,
the NRA must spread the net cost of universal service proportionately amongst all
companies providing public telecommunications networks and services. Payments
should be made according to an operator’s traffic volume, gross revenues or number of
customers. Operators that would be exempt from making payments towards a
universal service fund include: public network operators offering network or closed
user-groups services; service providers providing data communications or value-added
data services; and service providers offering enhanced voice telephony services such as
video conferencing and voicemail services. (The Commission does not consider the
Internet to be a voice telephony service. Therefore, operators that provide this service
are exempt from making contributions towards a universal service fund).
Member States were allowed to implement a surcharge to interconnection to recover
access deficits until January 1, 2000. After this time period, the EU requires that any
access deficit recovering schemes be separate from national schemes to finance the net
costs of universal service.
p/OVUMFINA.DOC
Ovum
26
1.3 Cost calculation
The Interconnection Directive requires the application of a forward-looking cost
methodology to determine whether or not there is a net cost associated with meeting
universal service obligations. NRAs are responsible for verifying the net cost of
universal service obligations and determining whether they represent an undue
burden.
1.4 Fund administration
The European Commission Directive, EC COM 96/608, requires NRAs to meet the
following criteria where national schemes incorporate a universal service fund:
p/OVUMFINA.DOC
•
the fund must be administered by an independent body
•
the body shall be responsible for collecting contributions from liable operators and
service providers, and will oversee the transfer of sums due and/or administrate
out-payments to universal service providers.
Ovum
27
2. France
2.1 Definition and scope
According to the 1996 Telecoms Act, universal service obligations include:
•
the provision of basic telephony services at an affordable price2
•
the free forwarding of emergency calls
•
the provision of information services
•
the provision of a telephone directory, printed and electronic forms
•
the establishment of public payphones over the French territory.
This definition is consistent with EU directives3. It is also subject to review every
four years. The next review will take place this year - 2000.
2.2 Funding strategy
France is the first and only country in the EU to implement an operational universal
service fund. The French government believes that a universal service funding
mechanism is necessary to help ensure social and economic equality. Furthermore,
the fact that approximately 50% of the population live in areas with less than 100
inhabitants per square km creates substantial costs for operators with universal
service obligations.
In 1997, the Ministry of Communications issued a Universal Service Decree
implementing the provision of the Telecommunications Act 1996 (Ch. 3). This decree
instated a funding mechanism to finance universal services. It designates France
Telecom (FT) as the public provider of universal services. However, the law allows
other operators to be designated as universal service providers if they are able to
provide the range of universal services nationally.
The Act stipulates that geographically averaged tariffs and reduced-rate social tariffs
(for specific categories of the population such as the disabled or less privileged) are
required to ensure all consumers have access to universal services. All operators are
entitled to participate in programmes to provide discounted services to qualifying lowincome users. Operators providing social tariffs will have the cost of the service
deducted from the contribution they are obliged to make to the fund.
Who contributes?
All operators offering voice telephony to the public are required to contribute to the
fund. 4. This excludes carriers that just carry long distance services but do not
interconnect with end users.
Operators are required to pay two types of payments:
1.
an explicit surcharge paid in addition to interconnection charges;
2
French Telecommunications Act 1996, Article L35-1
3
The Interconnection Directive (1996 Commission of European Communities)
ISPs and long distance operators who do not terminate calls on public networks do
not contribute to the Fund.
4
p/OVUMFINA.DOC
Ovum
28
2.
a payment to the fund that is a proportionate share of FT’s net universal service
costs calculated on a pro rata system linked to a carrier’s traffic volume.
Initially, there were two interconnection surcharges. One supporting geographical
price averaging and the other supporting unbalanced tariff structures. The combined
amount for both of these surcharges was forecasted to be 1.80 centimes (0.29 cents) for
1998. For 1999, this charge was decreased to 0.49 centimes (0.08 cents), because FT
rebalanced tariffs close to the amount required by the l’Autorite de regulation des
telecommunications (ART). The surcharge supported unbalanced tariffs (effectively an
access deficit charge) was phased out for 2000. The current surcharge exclusively
covers geographical price averaging.
Figure 2 shows the costs of providing specific universal services and the type of
operators required to contribute in 1998 and 1999.
p/OVUMFINA.DOC
Ovum
29
Figure 2: Universal service costs and the operators liable for contribution
(provisional cost for the years 1998 and 1999)
Components of
universal service
Financing method
Cost FFr
millions
(1998)
Cost FFr
millions
(1999)
Mobile
operators/
service
providers
Fixed
operators/
service
providers
Service providers
not providing voice
telephony
Tariff
disequilibrium
Interconnection
surcharge,
centimes per
minute
2,242
2,027
û
ü
û
2,717
1,550
ü
ü
û
Geographic
coverage
1998
0.80
1999
0.00
Interconnection
surcharge,
centimes per
minute
1998
1.00
1999
0.49
Telephone
booths
Fund
163
189
ü
ü
ü
Social tariffs
Fund
921
1,105
ü
ü
ü
Directories
Fund
0
0
ü
ü
ü
Key:
ü Contribution is required on a pro rata basis linked to the company’s volume of traffic
û No contribution is required
Source: Ministry of Economy, Finance and Industry, 1999
2.3 Cost calculation
The provisional amount of net contributions to be paid by operators is calculated by
ART and then fixed by the Ministry of Telecommunications.
In 1999, ART evaluated the cost of universal service provision at FFr 4871 million
and the Ministry fixed the cost at that amount. France Télécom received FFr 95
million from the fund and interconnect surcharges, which represent 1.6% of the cost
of France Télécom's universal service provision. For 2000, the evaluated cost of
universal service provision is FFr 5644.
p/OVUMFINA.DOC
Ovum
30
Method used to calculate cost
The French Universal Service Decree requires mechanisms used for calculating the
cost of national coverage to be based on two factors:
•
the net costs of unprofitable zones
•
the net costs of unprofitable subscribers situated in profitable zones.
ART specifies the accounting rules, use of costing model and determines the number
of non-profitable zones or uneconomic areas. It also calculates the net costs of these
obligations based on relevant provisional avoidable costs obtained from information
supplied by France Telecom, which are lower than historical costs. ART also uses
models of the Association of French Telecommunications Operators, which take into
account the best available technologies. France Telecom's model incorporates a costing
methodology similar to long run incremental cost (LRIC) methodologies. For 1999 cost
projections, LRIC was used.
The primary costs associated with meeting universal service objectives in France
relate to geographical constraints. France is the largest land mass in the EU with the
lowest population density. This reality increases the number of potential uneconomic
areas to be served.
2.4 Fund administration
The universal service fund is managed and administered by Caisse des Dépôts et
Consignations. This is an independent financial institution overlooked by the Ministry
of Economy. The institution receives an estimated fee of FFr20,000 – 80,000 ($3,238 –
12,948) for administration costs. Each operator pays a part of this fee calculated on a
pro rata system linked to its traffic volume.
Operators pay into the fund three times a year. The definitive cost to be paid by the
operators is evaluated by ART and fixed by the ministry on the basis of the audited
costs of the year in question (for example, in 1999 for the cost of 1998). Operators are
reimbursed if the provisional cost that they have paid is more than the actual cost
incurred.
p/OVUMFINA.DOC
Ovum
31
3. United Kingdom
3.1 Definition and scope
According to Oftel:
`universal service means the level and quality of telecommunications service, which
everyone in the UK should be able to receive on reasonable request at an affordable
price'.
For the period 1997-2001, Oftel has defined universal service in the UK as the
following:
•
a connection to the fixed network, able to support voice telephony and low-speed
data and fax transmission
•
the option of a more restricted service package at low costs
•
reasonable geographic access to public pay phones across the UK at affordable
prices
•
access to emergency services, itemised billing, call blocking, operator assistance
and directory information.
Internet
Oftel does not believe that the scope of universal service should be upgraded beyond
low-speed data and fax transmission. It states that universal service should not be
used as a means of rolling out new technologies, but as a means of ensuring that
services that the market has provided to most people, and which have become
essential, become generally available to everyone.
3.2 Funding Strategy
BT is the only provider of universal services in the UK. Precise obligations are
detailed in its licence agreement. BT does not receive compensation for providing
designated services, as the regulator for the sector (Oftel) has determined that it does
not suffer an undue burden. Although doubts exist about the size of the current and
future universal service costs, Oftel believes that BT derives some benefit from being
the national universal service provider in a competitive environment.
Kingston Communications is the only other incumbent access network operator with
universal service obligations. It serves the local area of Hull, England.
In 1997, Oftel decided that a fund was not necessary in the UK because BT does not
bear an undue burden as the national provider of universal service.
Oftel began a second review in 1999 to consider the development of a competitive
tendering scheme to encourage the most efficient provision of universal services. BT
believes that this scheme could convincingly demonstrate the existence of universal
service costs. Furthermore, the regulator will also consider the introduction of a `playor-pay' scheme if funding arrangements were in place. Under such a scheme,
operators could choose to provide packages for customers with affordability problems,
thereby eligible for universal service funding, which would be netted off against the
operator's contribution towards universal service net costs. Results will be published
in April 2000.
p/OVUMFINA.DOC
Ovum
32
3.3 Cost calculation
In 1997, Oftel estimated future costs at £40-80 million (US$65-130 million), of which
£40-60 million (US$65-98 million) was attributed to uneconomic customers. BT's
estimates were higher at £65-85 million (US$106-139 million). However, Oftel found
BT's costing procedures inadequate, due to a lack of detailed information on incoming
calls and area-by-area call data. BT, on the other hand, believed that Oftel had
overestimated the size of any benefits it receives as a universal service provider. Oftel
issued a consultation document in July 1999 to review costs. This produced forecasts,
which were slightly higher than the previous calculations for 1995/1996. Figure 3
compares 1995/1996 and 1998/1999 estimates.
Figure 3: Oftel's estimation of BT's costs in 1995/1996 and 1998/1999*
Components of universal
service
Universal service cost after efficiency
adjustment (£m)
Universal service cost after efficiency
adjustment (£m)
(Original estimate 1995/1996)
(Forecasts 1998/1999)
Uneconomic areas
5-10
5-10
Uneconomic customers
30-40
38-48
Uneconomic pay phones
10-15
10-15
Total
45-65
53-73
*Cost estimations after efficiency adjustments and before benefits
Source: Universal Telecommunications Services, Oftel 1997 and 1999
Oftel has attempted to value the benefits arising from serving uneconomic areas and
customers as the universal service provider. Oftel acknowledges that precise
quantification of the benefits to the universal service provider is not easy, but views
the benefits to BT as being large. Oftel's approximate valuation of the benefits for each
factor defined above is shown in Figure 3.4.
Figure 3.4: Revised estimates of cost of universal service obligation
Components of universal
service
Universal service cost after efficiency
adjustment (£m)
Universal service cost after efficiency
adjustment (£m)
(Original estimate 1995/1996)
(Forecasts 1998/1999)
Uneconomic areas
5-10
5-10
Uneconomic customers
30-40
38-48
Uneconomic pay phones
10-15
10-15
Total cost
45-65
53-73
Benefits
102-151
61
Source: Universal Telecommunications Services, Oftel 1999
Based on the evaluation of costs and benefits to BT, Oftel felt that BT did not bear an
undue financial burden as the universal service provider, and so there was no
justification for a funding mechanism.
p/OVUMFINA.DOC
Ovum
33
Method used to calculate cost
Oftel assesses costs for the following universal services:
•
uneconomic areas
•
uneconomic customers
•
uneconomic public call boxes.
Oftel also assesses benefits to BT as the provider of the universal services. This
assessment is based on:
•
terms of lifecycle effects - BT may lose money on a particular customer at a certain
stage but retain the loyalty of that customer when they become more profitable
•
ubiquity - BT receives certain advantages from being recognised as serving all
regions of the country
•
brand enhancement and corporate reputation - BT could use this as a marketing
tool.
Oftel uses a costing methodology that incorporates the following key concepts:
•
costs exist if revenues generated by a customer, or a group of customers, are
insufficient to cover the long-run avoidable cost of providing service to that
customer or group of customers
•
efficiency adjustments are made to ensure that the costs do not hide inefficiencies
a forward-looking valuation of assets.
3.4 Fund administration
The UK does not have a universal service fund. However, Oftel is working in
conjunction with a working group (consisting of telecoms experts and consultants) to
design a blueprint for a funding mechanism in line with EU directives, if deemed
necessary at a later date.
p/OVUMFINA.DOC
Ovum
34
4. Australia
4.1 Definition and scope
Part 7 of the Telecommunications Act 1997 defines the services subject to the
universal service obligation as:
•
standard telephone services
•
payphone services
•
prescribed carriage services (none have been prescribed at this stage).
At present the standard telephone service is a telephony service capable of delivering
fax service. Following election commitments given by the Government during the
course of the 1998 Federal Election campaign, the Government has asked Telstra to
provide all residential and business customers who request it with a digital data
services at 64 kbit/sec. at commercial prices.
4.2 Funding strategy
Telstra is currently the national universal service provider in Australia, although the
legislation provides for a system in which different carriers may take on the USO in
different areas or different carriers may take on different parts of the USO in a given
service area (e.g. one might supply pay phones and another standard telephony). Each
carrier which is a universal service provider must submit a plan saying how it will
fulfil its USO in respect of the service area concerned. These arrangements have yet
to be implemented.
Who contributes?
With very few exceptions, carriers (but not service providers) contribute to meeting
the costs of the USO. They contribute to a universal service fund in proportion to
eligible revenue. Eligible revenue includes revenues from connections, line rentals,
carriage of calls, leased lines and interconnection services.
The Government issued a discussion paper in the first half of 1999 on the subject of
whether to put USOs out to tender. The discussion paper sought views within the
industry. Some operators with alternative customer access technologies, such as
Vodafone, argued strongly in favour of introducing a competitive tender mechanism
open to mobile operators as well as fixed operators.
Pre-1997 arrangements
The arrangements for the administration and funding of the universal service
obligation were established in 1991 with the introduction of an additional licensed
general carrier and two additional licensed mobile carriers. The arrangement was
based on the creation of a universal service fund framework within which carriers
were credited with the costs of their contributions to the provision of service in defined
universal service areas, and debited with the benefit they derived from these
expenditures, in proportion to the level of defined minutes of timed traffic for which
they were responsible.
The basis of costing for the purpose of this scheme is the principle of net avoidable
costs – that is, the costs that the carrier would have avoided by not supplying the
service or services in question, less the revenue received as a result of having done so.
p/OVUMFINA.DOC
Ovum
35
The ACA assessments for the 1997/98 financial year are set out in Figure 4 below.
Figure 4: Assessments of universal service costs and credits for 1997/1998
Telstra
Corporation
Optus
Communication
s
Vodafone
Others
Total
Net universal
service cost
$ 253.32 mil
$ Nil
$ Nil
$ Nil
$253.32 mil
Levy Debit *
$215.4 mil
$30.9 mil
$4.3 mil
$2.7 mil
$253.32 mil
Levy credit?/debit
$38.6 mil credit
$30.9 mil debit
$4.3 mil debit
$2.7 mil debit
Receivable /
Payable to Fund
$38.6 mil
receivable
$30.9 mil
$4.3 mil
$2.7 mil
Note: * based on minutes of timed traffic All numbers rounded.
Source: ACA Assessment of 22 December, 1998
1997 arrangements
Part 7 of the 1997 Telecommunications Act specifies the new arrangements for
funding universal service. These are largely based on the pre-existing arrangements.
In summary the legislation provides as follows:
1.
Under the Universal Service requirements, all people in Australia, wherever they
are, should have reasonable access on an equitable basis to standard telephone
service, payphones, and prescribed carriage services.
2.
There is currently one national universal service provider in Australia, although
the legislation provides that Australia may be divided into service areas for
universal service funding purposes, with, potentially, competition for service
delivery in each area. This has yet to be implemented.
3.
With very few exceptions, carriers (but not service providers) will contribute to
meeting the costs of the USO. They will contribute to a universal service fund in
proportion to eligible revenue. Eligible revenue will include revenues from
connections, line rentals, carriage of calls, leased lines and interconnect services.
4. The universal service provider in a service area must not charge more than the
universal service charges for the services it provides under its USO. There is
provision for universal service charges to be controlled through Ministerial pricing
determinations. These can take a number of forms including:
- maximum charges
- parity with charges in other areas
- the speed with which universal service charges might change.
5.
There is a net cost to the universal service provider in meeting its USO in certain
areas. Such areas are known as net cost areas. They are declared at the
beginning of the year for which the fund operates by the Australian
Communications Authority (after it has studied proposals from the universal
service providers). Operators can claim USO funding only for declared net cost
areas.
6. The size of the universal service fund is the sum of the net costs in net cost areas.
The net cost for a service area is normally estimated as:
p/OVUMFINA.DOC
Ovum
36
- the cost avoided in not serving the service area less
- the revenue forgone in not serving the service area.
There is, however, provision for other options to be adopted. For example, carriers
may be invited to bid competitively to become the universal service provider to
serve an area for the lowest subsidy. Simpler methods of estimating net costs
(instead of the method set out above) may also be used if all parties affected agree.
7. In calculating the net cost in an area, safeguards are required to ensure that the
universal service provider does not inflate its costs (or deflate its revenues) to gain
a bigger subsidy. The universal service provider is allowed to claim actual avoided
costs (rather than the costs of an efficient operator) but the Government reserves
the right to reduce these costs if they are in excess of “widely accepted
benchmarks, for example, common industry practice or world best practice”
8. The aggregate net cost of each universal service provider is then met from the
universal service fund. Carriers contribute to the fund in proportion to eligible
revenues and draw from it according to the sum of the net costs for the service
areas where they act as the universal service provider.
4.3 Cost calculation
In accordance with the procedures nominated in the Act, Telstra submitted a levy
credit claim in respect of financial year 1997/98 to the ACA in September, 1998. The
claim was for a total net cost of $1.83 billion. This amount was substantially in excess
of the previous year’s assessed figure of $252 million.
The reaction of industry was hostile. A pay out of around $200 million was considered
a substantial cost burden during the start up phase of new entrant operations.
The Minister responded to industry concerns by asking Telstra to voluntarily cap its
net cost level for claim purposes at $253 million, as an interim measure, and, failing
that, indicated that the Government would legislate for such a cap.
On 30 July, 1999 the ACA published its preliminary assessment of the claim at
$580.2 million (around 32% of the Telstra claim).
Method used to calculate costs
The net cost for a universal area is normally estimated as the cost avoided in not
serving the area minus the revenue forgone in not serving the service area.
There is a provision for other options to be adopted. For example, carriers may be
invited to bid competitively to become universal service providers and serve an area at
the lowest subsidy. Simple methods of estimating net costs may also be used if all
affected parties agree. The universal service provider is allowed to claim actual
avoided costs (rather than the costs of an efficient operator), but the government
reserves the right to reduce these costs if they are greater than ‘widely accepted
benchmarks; for example, common industry practice or world best practise’.
The Universal Service Avoidable Cost Determination of September 1998, which
adopts the Bellcore universal service obligation net cost model, adopts the principle of
basing assessment costs on the use of forward-looking technologies.
4.4 Fund administration
The Australian arrangements amount to a ‘virtual’ fund and are administered by the
ACA, the regulatory agency. The ACA assesses the net cost claim of Telstra, and the
p/OVUMFINA.DOC
Ovum
37
liability of carriers to contribute based upon their share of eligible revenue for the year
in question. The ACA will then arrange for invoices to be issued on carriers in debit,
and once these amounts have been collected, arrange payment to carriers entitled to
receive a contribution – Telstra alone at this stage in the development of the scheme.
The costs of administration have been variously estimated at $ 1.5 – 3 million per
annum, based on the resources deployed on universal service costing by Telstra, the
carriage industry, and the regulator. This estimate represents an administrative
overhead cost of 0.6-1.2% of the $253 million involved in 1997/98 – a fairly modest
impost that will likely decrease as the new detailed arrangements become fully
implemented.
p/OVUMFINA.DOC
Ovum