Universal service: between socio- political mythology and economic reality An international cross comparison EU-USA of the regulatory-economic framework.

Universal service: between socio-political mythology and economic

realityAn international cross comparison EU-USA

of the regulatory-economic framework

Prepared by Jean Paul Simon

JPS public policy Consulting, For the ACORN-REDECOM conference

Mexico, September 4-5, 2009

JPS Public Policy Consulting 2

Summary

A (quick) historical outlook: birth of a notion Coping with the market: the re-invention of

universal service Conclusions


A (quick) historical outlook: birth of a notion


The American universal service concept: born under an unclear sign (1)

The case of the electricity industry is particularly interesting, because it was the harbinger of regulation. It shows that regulation was not forced upon the industry, but rather was accepted when not openly demanded.

Samuel Insull, Director of Commonwealth Edison in Chicago and President of the trade association for the electrical industry (National Electric Light Foundation) was intrumental to that end He introduced the notion of “natural monopoly” (partly borrowed from the

realm of gas distribution) He found a justification in economic theory for the single industrial actor,

capable of bringing new services to all users; both private and industrial. The telephone industry had the same problems as the electricity industry,

with uncontrolled competition between companies. In 1902, in 1,002 cities, each with populations of more than 4,000 and where

telephone services existed, 45% of customers were being serviced by a minimum of two companies.


The American universal service concept: born under an unclear sign (2)

The alter-ego of S. Insull in the telephone industry, Theodore N.Vail, came up in 1907, with a new doctrine: “one system, one policy, universal service”

It was not then an attempt to bring a telephone to every US household at an affordable rate but a means of ensuring interconnection between telephone subscribers using

competing companies. For T.Vail, universal service meant nothing other than a unified system (“unified

service”), his strategy was twofold: to develop a so-called universal service to ensure interconnection and

interdependence, and to buy out independent companies.

As in the electricity industry, the choice was between regulation and direct operation by public entities. The regulated monopoly was seen as the best solution,

regulation being seen by AT&T as the price to pay for slowly achieving a monopoly, and by the government as a way of protecting consumers.

From the outset, the process was completely ambivalent. The rationale was as much to protect the firms against the supposedly harmful effects

of competition, as to prevent consumer exploitation.


The EU public service or universal service (1)

The development of the telephone was initially left to private firms in Europe. However, this competitive period did not last and most major

European countries decided to set up state monopolies. The main rationale of setting up a public monopoly was

strategic and had to do with both security aspects and the protection of competition in other sectors: So as to guarantee fair access to information for all users and avoid

obvious cases of asymmetry of information. The rationale shifted from the provision of service to

consumers to a public service activity that was supposed to offer equal access for all under similar “fair” conditions. At least, this was the theory. In fact, one of the drawbacks of this public body was that it was

plagued by the persistent inability of the states to provide the budget required, even for the deployment of the network.


The EU public service or universal service (2) The outcome was almost inevitable and the penetration

rate of telephone lines lagged behind the US rate. The EU situation was characterised by an enduring

discrepancy between the goals and their achievement . We have here a concept (or an ideology) of “public

service” in search of real implementation in the telecommunications sector.

The discrepancy between the goals and the means remained blatant for several decades. In the United Kingdom, when the telegraph was nationalised

(Telegraph Act of 1863), the real implementation was focused less on telephone penetration at reasonable rates than it was on the supply of an effective service to business users (low interurban rates).

In any case, at the turn of the 19th century in Europe, the telephone was not considered to be a potential mass-market, but rather a device for the urban elite


Coping with the market: the re-invention of universal service


Passing the 1996 Telecommunications Act: the act as an oxymoron

The system appeared to work well until some clear signals of a new area started to appear.

The universal service concept resurfaced to deal with an entirely new competitive environment: “The new, second generation universal service policy was part of a broader

attempt to salvage the fortunes of the regulated monopoly system in the face of these challenges” (Mueller, 1997).

The adoption of the 1996 Telecommunications Act, and the public debates that took place before (and after), embodied these changes.

The Telecommunications Act had four goals: to foster competition, to deregulate, to boost investment and to ensure universal service. The assessment of the first three goals triggered a lot of literature and may

diverge about the current state of deregulation On the opposite the global assessment of the universal service

rationale is rather negative


A system under stress The current US funding system is not sustainable, as the

funds needed to support the goals have skyrocketed, in less than a decade from: $955 million in 1997, up to $ 6.955 billions in 2007 (Total payments, NARUC, 2008)

High cost areas: 4.287 billions Low income users: 823 millions School and libraries:1.808 billions Rural Health Care: 37 billions

The Federal Universal Service Funds (FUSF) are collected through a tax on relevant customer charges: 11.4% i.e 12 billions « subscriber line charges »

Growth of the high cost fund threatens sustainability and burdens telecom consumers: over 1 billion of growth due to increased payments to

Competitive Eligible Telecommunications Carriers (CETCs) FCC projected 2.5 billions in 2009


Source: McLean & Brown “Universal Service – Rural Infrastructure at Risk”


And inefficient

Net FUSF (payment to providers minus contributions from surcharge) vary widely by State: Positive (Missisipi, Alaska…) Negative (Florida, New York…)

CETCs support distribution is skewed heavily toward a few states: top 10 states receive almost half

And is unrelated to need Current mechanism:

Encourages duplicative networks, Subsidizes competition.

CETC support based on costs of incumbents: « equal support » rule.


The need for reform

The market has changed. Consumers are buying packages which bundle local, long distance,

intra- and inter-state telecommunications and information services. A scissor effect making the implementation of the process

almost impossible : The current USF collection mechanism, based on interstate and

international revenues, is unsustainable, as revenues from these services are declining.

New players like VoIP providers are not contributing to the fund, a situation likely to further deteriorate as IP-enabled services will become the regular telecommunications service.

In June 2005, the FCC initiated a review procedure September 2007: Public Notice November 2007: Joint Board (FCC/ State Regulators)

recommendation January 2007: Notice of Proposed Rule Making (NPRM) November 2008: Further Notice of Proposed Rule Making

3000 pages of comments


The proposals from the Joint Board(source NARUC, 2008)

Objectives Universal availibility of broadband and mobility services, Universal availibility of wireline voice services at affordable rates, Avoid increasing financial burden on consumers, Increase effectiveness of funding (sic), Eliminate equal support rules.

Key elements Cap total high cost funding near current level, Transition to three new funds:

Provider of the last resort: cap 3.2 billions (2007 ILEC level) Mobility: 1 billion cap Broadband (initial): 0.3 billion

Separate distribition mechanism, funding allocations, and caps for each fund,

Distribute support to only one provider per fund in a given area.


From the Green Paper on telecommunications to the 1st Review of 1993: the EU

The irony of the European situation is that: when the ideal of a truly universal service became a reality, the PTTs were faced with the challenges of deregulation.

When the first review of the telecommunications framework was launched in 1992, Member States, decided to agree on full liberalisation.

A new trade-off emerged: To give time to the incumbents to adapt, by a preset date, to the

opening up of all the markets, and included, at the request of some Member States (France

among others), a wider recognition of the goals of universal service at European level.


The EU legislation on universal service Following this first review, the Commission adopted several pieces of legislation, In 1995 the Voice Telephony Directive specified for the first time

that the service should offer opportunities for voice, fax and/or data communications, and also the obligation to designate at least one operator to supply the described

universal service, and to specify the rules concerning its finance.

The Universal Service Directive of 2002 added that: ‘connections to the public telephone network at a fixed location should be capable of

supporting speech and data communications at rates sufficient for access to online services such as those provided via the public Internet’

The designated universal service provider is required to supply a connection that provides “functional” Internet access.

To be noted: the Directive avoided setting a minimum data rate for functional Internet access and left it to individual Member States to decide

Altogether, the scope of the universal service is defined rather narrowly connection to the public telephone network at a fixed location (capable of supplying

"functional Internet access” currently limited to a single narrowband network connection);

access to publicly available telephone services (including geographical averaging of retail prices and social tariffs); and

directories and directory enquiry services, public pay telephones, and special measures for disabled users.


Implementing universal service

The scene was set and Member States implemented the principles all the easier, as the penetration rate was already

satisfactory in most Member States. In most Member States, a fund is foreseen or

already provided for by law. However, only a few Member States have

established a USO cost (Czech Republic, France, Hungary, Italy and Spain) and implemented the fund. They specified methodologies to establish the net

costs, as well as the procedures to designate the US provider.


Reviewing the universal service (1)

The concept was reviewed three times, first in the context of the 1999 Regulatory Review, then in 2005, and again in 2008.

It was asked whether the scope of the Directive should be extended so as to include mobile and/or broadband

The directive provides for a three-criteria test for inclusion of a new service in universal service scope: Criteria 1: are specific candidate services available to (coverage),

and used by (take up), a majority of consumers? Criteria 2: Does the lack of availability or non-use by a minority of

consumers result in social exclusion? Criteria 3: Does the availability and use of specific services convey

a general net benefit to all consumers such that public intervention is warranted?


Reviewing the universal service (2) The conclusion was identical each time: it was proposed to leave the

scope unchanged. No inclusion of mobile, neither of broadband.

For mobile: the market took care of the provision, consumers already have widespread affordable access to mobile communications and criteria 2 is therefore not fulfilled.

mobile penetration reached 112% of the EU-27 population in October 2007 (119 % in 2008).

mobile pre-paid packages (used by nearly 60% of mobile subscribers) allow low income consumers a basic connection to the network at low entry prices

For broadband: as broadband is not yet used by majority of population, therefore criteria 1 is not fulfilled.

At end of 2007, fixed DSL broadband networks were, on average, available to 93% of the EU-26 population

As of January 2008, broadband penetration (both DSL and cable) was on average 20% of population

The population coverage and penetration rate translate into a broadband penetration of 36% of EU households in 2007.


Reviewing the universal service (3) There is (was?) a broad stakeholder consensus that

bringing mobile and high-speed Internet services to users is best left to the market, except where structural problems such as geographical

remoteness justify specific public investment to help bridge the broadband gap.

The view from the Commission is that for an expanded scope of universal service to an e-Society (the broadband/ digital divide issue); the costs are too high almost certainly too much for some (most ?) Member States

Preliminary estimates show that broadband provision would multiply the current universal service costs by a factor of 7 to 10 in advanced EU member states (like France)

and in less advanced countries (Bulgaria, Romania) it will be even more expensive and indeed pre-mature.

while requiring much centralised organisation and management for compliance.


Universal service: propositions included in the review of the EU framework

A shift of focus: from Universal service to users’ rights as the US directive is renamed: “Citizen directive”. Consumer protection is a major policy goal in the EU

Introduction of separate USO on providers of access infrastructure and on providers of services, According to the Commission, as networks move increasingly to IP,

voice will become just one application on the IP network. This will create an Internet-like model, where anyone with an IP connection can choose between a range of competing voice service providers.

The Commission says that this change would not affect the scope or provision of universal service, but would facilitate a future review of the USO.

Removal of the provision of directories and directory enquiry services from the scope of universal service Because of an increasingly competitive market and the development

of Internet-based directories.


Universal broadband: the return? As a consequence of the crisis the issue of broadband may

bounce The views of the role for market forces in delivering broadband may

evolve The Commission acknowledged a growing pressure

(F.Colasanti, Director Information Society Directorate) However, the Commission maintains a cautious view:

The European Commission will produce a report (timing not specified) to demonstrate how costly it can be to have broadband as part of the universal service obligation.

Member States are not really pushing as they have other concerns

It was the second priority of the French presidency ( 2d semester of 2008) But rather unexpectedly France did not try to impose an existing solution

recognizing it may be costly and unfeasible: rather flexibility and subsidiarity. Was rather aiming at fostering an « a minima » political debate on the issue

of access to broadband


Conclusions


“As time goes by” (Re) Assessing the goals


Conclusions (1) From an historical perspective, the conditions appear to be highly

differentiated on either side of the Atlantic. As the backgrounds were different, the approaches and the solutions

diverged. Ironically, the main point in common is the discrepancy between the

alleged goal and the socio-economic reality which has existed for some decades. When the historical model was achieved, nevertheless it supplied a very

limited number of basic services. In the EU, a look back clearly shows that, for the Commission,

universal service was first and foremost a safety net but never a mechanism to deploy networks.

It remained a minimalist approach that Members States could “improve” according to their own standards, under the important restriction that they could not overtax the telecom sector to that end. This minimalist approach avoided any financial drift. Even in countries where a fund was created, it appears to have been

sufficiently monitored and it did not increase but decreased.


Conclusions (2)

The lessons from the US are conspicuous: there is a need for clearly defined funding goals (and also clear public interest

objectives), transparent collection mechanisms, and the avoidance of any undue extension of scope to an array of recipients.

Fostering the deployment of networks is a different issue from enabling fair access to existing services. Economic goals should not be confused with social goals.

There is a risk to entering such a vague and ill-defined debate on the issue of broadband.

Besides, the situation is now much more heterogeneous in the EU-27 than it was in the EU-15, and may not lead to a single definition of universal service within the EU.

The lessons of history clearly show: that the deployment of a network requires considerable time, and that during this period there is an enduring discrepancy between social but

theoretical goals and the reality of what the market can provide under normal economic conditions,

Different approaches are possible: market solutions (as illustrated with the mobile case), US fund, regional funds, tax shelters, PPPs, services of general interests….


Conclusion

Play it again Sam


« Uniuversale est semper et ubique, singulare est hic et nunc »,

Roger Bacon (1292)

Thank You

Jean Paul SimonJPS Public Policy Consulting23 rue des Sablons 77300 FontainebleauFrance Tel/ fax + 33 (0)1 64 24 08 49Mob : + 33 (0)[email protected]

Universal service: between socio- political mythology and economic reality An international cross comparison EU-USA of the regulatory-economic framework.

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