Chapter 1 Introduction
Background The Economic Basis Consultation to Date Timetable for Action
Chapter 2 The European Dimension
Background European Commission Theme Paper EC Directives Effect on the UK
Chapter 3 Objectives
Policy Objectives Other Aims Service Availability
Chapter 4 Definitions of Universal Service
General Definition Other Customer Groups
Chapter 5 A 'Safety Net' for All
Access to a 'Digital Line' Selective Call Barring Disconnections Public Call Boxes
Chapter 6 Achieving Affordability
The Light User Scheme Options for the Future
Chapter 7 People with Disabilities
Current Position Disability Discrimination Act Proposals
Chapter 8 Education "Superhighway" Services
Who should Benefit? Defining the Level of Service Tariffing Principles Next Steps
Chapter 9 Costing Universal Service
Current Cost Estimates Valuation of Universal Service Benefits
Chapter 10 The Universal Service Fund
Contributions to the Universal Service Fund Payments from the Universal Service Fund
Chapter 11 Universal Service Delivery
'Uneconomic' Customers and 'Pay or Play' Universal Service in Uneconomic Areas Services for Textphone Users Services for Schools
Chapter 12 Monitoring and reviewing
Review Mechanism A Review Body?
Chapter 13 Conclusions and Questions
Conclusions Summary of Questions
Annex 1 Facilities by BT exchange type
Annex 2 BT's Disconnection Statistics
Annex 3 Extracts from European Commission's Draft Directives on Interconnection and Competition in Telecommunications
Annex 4 Glossary
Universal service for telecommunications - what does this mean? The principle of everyone having access to the communications networks of the day has been a fundamental goal of successful economies throughout history. In today's world universal access to basic telecommunications services is seen as a desirable objective in all developed countries. It is valuable economically and is important to us all in our daily lives. Today, basic service means access to digital networks.
The universal service proposals in this document follow two rounds of consultation over the last year. It defines universal service based on the principles of geographic accessibility, affordability and equal opportunities. It proposes different levels of service for different consumer groups such as schools. It puts forward arrangements for funding and delivering universal service across the industry which are fair and transparent, and which encourage competitive delivery by the market wherever possible. It also explains how universal service might develop as technology and customer needs change.
Universal service is a legitimate area for economic regulation. The more people have access to the communications network, the greater the economic benefit. And where the telecoms industry can play a part in delivering economic advantage to the UK, through the education and training of tomorrow's workforce for example, then the telecommunications regulator may rightly be expected to help bring this about.
We need your views to help ensure that the arrangements for universal service from 1997 are good for the UK and good for customers.
DON CRUICKSHANK
The initial consultation period will run until 29 February 1996. There will then be a further period up to 14 March 1996 during which comments are invited on any submissions made to Oftel in the initial period. Comments are invited in particular on the questions highlighted in the text of the document and summarised in Chapter 13.
Comments should be sent to:
Peter Westley
Consultation on Universal Service
Oftel
50 Ludgate Hill
London EC4M 7JJ
Alternatively you can telephone: 0171 634 8743.
Written comments will be made publicly available in Oftel's Library except where respondents indicate that their response or parts of it are confidential. Respondents are requested to separate out any confidential material into a clearly marked confidential annex. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.
Short electronic mail messages in response to this document can be sent to Oftel using the Feedback Form in these pages or by using the following e-mail address:
press.office.Oftel@gtnet.gov.uk
Oftel intends to set up a link between this document and responses to the document placed on respondents' own Web pages. Please contact Mary-Ann Auckland on 0171 634 8751 to organise a link.
Confidential responses should not be sent via the Internet.
Oftel is arranging a consultation meeting on Universal Service to take place on 27 February. The morning will be designed for consumers and their representatives and the afternoon session will be aimed at representatives of the telecommunications industry. You are welcome to attend both sessions if you wish.
There will also be an education workshop on 23 February to discuss this document's proposals for schools and educational bodies. Invitations and further details for both meetings will be sent out by early February.
If you would like to attend either meeting but do not receive an invitation, please contact Peter Westley at Oftel on 0171-634 8890.
1.1 This Consultative Document represents Oftel's third stage of public consultation on universal service. The concept of universal service is a long-standing principle in the UK, dating back long before 1984 when BT was privatised. It implies a safety net - provision of reasonable access to the network for people throughout the UK. Access to modern communications is of increasing importance if all individuals are to be allowed the opportunity of full social and economic participation in modern life.
1.2 Prior to the introduction of competition in the UK market, universal service was the sole responsibility of BT and, in Hull, Kingston Communications. Both monopoly operators had a number of licence conditions requiring them to deliver various elements deemed to contribute to universal service. Yet the definition of the universal service level was unclear, and arrangements for funding universal service were hidden in BT's and KC's accounts.
1.3 In order to develop a more effective policy for securing universal service in the UK as we move towards the 21st century, it is necessary to define a basic minimum level of service that should be available to all customers, or to defined classes of customers everywhere, at the same price - Universal Service. It is also necessary to set out a methodology for quantifying any legitimate additional costs incurred by commercial operators in delivering universal service and establish mechanisms for sharing these costs fairly across the industry. And all this must fit into a competitive market.
1.4 A number of economic benefits underpin the concept of Universal Service. These benefits are difficult to capture in the prices charged for telecoms services yet they are real and significant. In these circumstances it is appropriate for some telecom services to be provided at a price below the directly identifiable resource cost. One such benefit is that derived from increasing the size of the network. As more customers join a network the value to all customers of being on the network increases, because they can access a larger number of users. This is known as the network externality: the greater the size of the network the greater the benefit to other users of the network. Therefore, the true economic value of service to customers is greater than the willingness to pay of the individual customer. As a consequence, there are circumstances in which it is appropriate to provide support to some customers whose costs of service provision exceed the revenues that they generate.
1.5 The nature of a telecommunications network which gives rise to this externality is two-way communication between network users. This characteristic is not present in the networks of other utilities, such as gas, electricity and water. In those industries delivery is one-way: the transmission and distribution network is used to deliver services to customers, but services are not carried in both directions between different customers on the network.
1.6 In addition to this benefit, telecoms offers a means of communication, which can provide an alternative to other services, such as travel and transport. To the extent that telecoms is a substitute for the use of transport, costs associated with pollution and congestion are avoided. This represents an economic benefit that is not reflected in telecoms prices. More generally, there may also be benefits that arise from access to a telephone in case of emergency, such as avoiding protracted illness and possible loss of life, and in helping reduce and prevent crime.
1.7 Increasingly in future, digital communications over telecoms networks will become the means of delivering a number of essential public services. Delivery by electronic means is likely to substantially increase efficiency and is likely to contribute to a lower cost base for some services. In order to be fully effective, the maximum possible number of people will need to be connected to the network. Within some services such as education, electronic communications and digital technology can substantially enhance the quality and scope of the service delivered.
1.8 There is, therefore, a strong economic case for regulation to ensure effective universal service delivery in the UK.
1.9 In December 1994 Oftel published "A Framework for Effective Competition", a wide-ranging Consultative Document which examined the development and future direction of the UK's regulatory structure. Oftel's proposals were driven by the objective of achieving a competitive market place, offering all customers in the UK a choice of high quality, value for money services, and no longer requiring detailed regulation. However, it was recognised that a competitive market might not deliver a basic telecommunications service to all potential customers at a reasonably affordable price or adequately meet the needs of elderly and disabled customers. The document therefore explored the regulatory interventions that might be required to secure universal service for the future.
1.10 The first consultation period, which lasted until March 1995, was a major exercise. Public meetings were held across the country and a telephone hotline was set up for comments. Over 150 written responses were received from the industry, consumer bodies, local authorities, and from domestic and business consumers.
1.11 In July 1995 Oftel published "Effective Competition: Framework for Action" (Oftel's 'Summer Statement'). This developed the issues addressed in the previous months, absorbing proposals from the earlier consultation period. It took forward Oftel's thinking on universal service and raised the possibility of specific customer groups, such as schools, colleges and libraries, having a higher level of universal service in order to achieve wider economic and social objectives. This document was complemented by simultaneous publication of our consultancy study on "The Costs, Benefits and Funding of Universal Service in the UK".
1.12 The Analysys report concluded that the net cost of providing universal service, after taking benefits into account, was currently very low - smaller than previously claimed and minimal in the context of total telecom revenues. The Summer Statement also examined in more detail how Oftel expected greater tariffing freedom for BT (arising largely from ending the constraint of RPI+2% on line rental charges) to result in a wider choice of tariffs and services for residential customers.
1.13 Comments on both the December Consultative Document and Oftel's Summer Statement were generally very supportive of Oftel's proposals for universal service. Responses can be viewed in Oftel's Library. While there was some questioning of the quantification of the benefits to universal service providers, there was widespread agreement on the methodology for establishing the costs of universal service, on funding any net costs through contributions to an independent Universal Service Fund, and on introducing a degree of competition into the delivery of universal service wherever possible. This degree of consensus gives Oftel a firm basis on which to develop detailed proposals. In moving forward, Oftel has taken into account the views expressed by consumer and industry representatives at two specially arranged consumer and industry workshops on universal service held at Oftel in November 1995.
1.14 This Consultative Document contains a number of detailed proposals for universal service in the UK from 1997. It also raises a number of issues for further thought and consultation, such as the higher level of universal service for schools. Subject to the responses to this Consultative Document, and subject to regulatory developments at the European level, Oftel will issue a further detailed document after Easter 1996, containing firm proposals to establish the new regime for funding and delivering universal service. Oftel intends to consult further on detailed licence amendments later in 1996. This timescale should ensure that the new universal service regime is implemented by August 1997 when new licence amendments arising from the price control review will also come into effect.
2.1 European Council resolutions in 1993 (93/C213/01 on the review of the situation in the telecommunications sector and the need for further development in that market - OJC 213/1, 6.8.93) and 1994 (Council Resolution 94/C379/03 on the principles and timetable for the liberalisation of telecommunications infrastructure - OJC 379/4, 31.12.94) committed Members States to the liberalisation of telecommunications within most of the Community by 1 January 1998. Developing European policy sees universal service as a range of basic telecommunication services - which may vary between countries - which Member States will want to have widely available and delivered at affordable levels in an increasingly competitive marketplace. National Regulators will have a degree of flexibility beyond these underlying universal service requirements (essentially, affordable access to basic voice telephony).
2.2 Member States' responses to the 1994 Infrastructure Green Paper shared a degree of agreement on universal service issues (summarised in Commissioners Bangemann and Van Miert's 1995 report) and have been taken into account by the Commission in drawing up the draft Directives described below. There is broad consensus that where a cost arises from universal service provision, this could be met most readily through the introduction of a Fund under the supervision of the National Regulatory Authority. The alternative of funding by means of additional interconnection payments is not ruled out at this stage, but would be subject to future review by the Commission.
2.3 Universal service issues were addressed in a September 1995 Theme Paper by the European Commission and discussed in Brussels at a Public Hearing on Universal Service on 18 October 1995. This Paper stated that greater affordability might result from combining price levels which are reasonable to the majority with specifically targeted schemes to assist low income users or those with particular needs. It also recognised the benefit of a higher level of service at public access points such as libraries and schools, and argued that changes in the scope of universal service over time should reflect changes in the market and user demand. Such developments should enable a broad range of consumers to have affordable access to the opportunities offered by the rapidly developing 'Information Society'. It was acknowledged that imposing onerous obligations on new market players, requiring them to either deliver or fund advanced levels of universal service provision to all customers at present, could create barriers to effective competition.
2.4 Rules on the scope, costing, funding and delivery of universal service are included in the draft Directive on 'Interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of Open Network Provision' and in the draft Directive amending Directive 90/388/EEC regarding the implementation of full competition in telecommunications markets (relevant extracts from current drafts at Annex 3). The Interconnection Directive proposes a harmonised regulatory framework for regulation by National Regulatory Authorities, in accordance with the principles set out in the Open Network Provision Framework Directive (90/387/EEC). The Competition Directive would remove restrictions on the provision of public voice telephony services and network infrastructure.
2.5 The Directives stress the need for transparency in the calculation of the net cost associated with universal service in cases where market players are required to make contributions and envisage that companies would be able to discharge their obligations to a Universal Service Fund either by assuming directly a share of those obligations or by making appropriate financial contributions (ie pay or play). Companies with minimal market shares may be exempted from contributing to a Universal Service Fund.
2.6 The draft Interconnection Directive would not oblige National Regulatory Authorities to arrange universal service funding. They may only make such arrangements where they consider universal service obligations represent an unfair burden for an organisation. Regulatory Authorities would be required to make public details of their universal service funding mechanisms and of the level of contributions to this funding; to have this data independently audited; and to have an appeals procedure to settle disputes about the amount of operators' funding contributions.
2.7 A European Commission report focusing on scope and affordability is expected early in 1996, with a study of universal service costing to be launched at around the same time.
2.8 Oftel is closely monitoring European developments and is reassured that progress in Europe largely mirrors Oftel's proposals for the UK. It appears that European legislation will be consistent with the proposals in this Document for UK regulation on universal service.
2.9 Oftel will continue to monitor and keep under review developing EC Universal Service policy, in order to ensure that the arrangements in the UK are in accord with the broader framework of European regulation. It is encouraging, given the detailed contents of this document, that a recent Commission statement said that EU legislation would be confined to principles rather than mandating detail.
3.1 Over the last year, as a result of broad consultation, a number of objectives for universal service for telecommunications in the UK have been developed and refined. The most important is to ensure that customers throughout the country have universal access to a reasonably affordable basic telecommunications service at an appropriate level of capability. To achieve this Oftel intends to apply three policy principles to future definitions of universal service:
3.2 In addition certain categories of customer, such as people with disabilities, schools or public libraries may need to access a different level of service at appropriate rates throughout the UK. Oftel therefore believes it is appropriate to seek to define different universal service levels for specific customer groups, in order to achieve wider economic and social policy goals.
3.3 Universal service objectives should be achieved without any material distortion of competition among operators. Where telecommunications companies, operating on a commercial basis, are able to deliver universal service without regulatory intervention, then this should be encouraged by the policy framework. Where activities are required which go beyond those which might be expected from commercial companies operating in a competitive environment, then contributions towards ensuring that universal service is provided should be fair and proportional, and arrangements should be as transparent as possible.
3.4 The system for ensuring that universal service is provided should not be disproportionately expensive or complex. Evidence from research suggests that the real commercial cost of providing universal service at current levels is in the range of 0-0.5% of current network revenues. This relatively small overall figure makes it essential to devise a method for calculating and sharing any net costs of universal service which does not consume a disproportionate amount of resources.
3.5 Arrangements for universal service in the UK need to be compatible with the developing European regulatory framework.
3.6 Oftel does not intend to include consideration of universal availability of other services within the scope of universal service policy. The principle of geographic accessibility to the defined "basic telecommunications service" level of universal service is already incorporated as described above. The geographic availability of other service levels to classes of customers across the UK is more appropriately dealt with under Oftel's powers to prevent undue discrimination.
4.1 Oftel's definition of universal service for all UK customers, proposed in its Summer Statement, "Effective Competition : Framework for Action" published last July, was "affordable access to basic voice telephony or its equivalent for all those reasonably requesting it, regardless of where they live". The phrase "or its equivalent" referred to the need to provide access to equivalent services for people unable to use standard voice telephony services because of a disability. Oftel does not believe it is possible to specify in detail what is meant by 'affordable' and 'reasonable'. This will vary over time and between customers. Rather, the Director General will need to exercise his judgement in determining what is or is not reasonable or affordable following vigorous monitoring of penetration and churn rates amongst different consumer groups. Thus, for example, under current arrangements the Director General deems it reasonable for BT to levy an additional connection charge for connecting very remote customers to the network, where more than 100 person hours of labour are needed to install a new line.
4.2 Oftel's definition commanded support from all respondents. However, in the same document Oftel suggested that a higher level of basic service might be appropriate to meet economic and social objectives for certain public institutions such as schools, colleges, or other public access points. Since that time further discussions have taken place with the education community and with government. There is growing support for using the universal service mechanism to ensure affordable delivery of a higher level of universal service to all primary and secondary schools throughout the UK, and possibly to other public access points.
4.3 Oftel therefore proposes that the definition of universal service in the United Kingdom should be broadened to take account of the principle that a different level of universal service may apply to different groups of customers. Oftel considers that the reference to universal service in public telecommunications operators' (PTO) licences in future should be broad enough to cover new developments without the need for formal licence revisions at every stage. An approach along the following lines is therefore proposed:
"affordable access to basic telecommunication services for all those reasonably requesting it regardless of where they live".
4.4 "Telecommunication services" would be those services which fall within the 1984 Telecommunications Act definition of telecommunication services. The level of service defined as "basic" telecommunications service would depend on the customer class or group under consideration. Geographic averaging of tariffs would apply to all levels of telecommunication service as defined for universal service purposes. Licensees would be required to offer, or contribute to the cost of, the same service on the same terms to the same 'class' of customers throughout the UK for any defined universal service level.
4.5 Oftel sees the need to develop firm definitions of the basic telecommunications service level for universal service purposes for several different customer groups. These are:
and, subject to further consultation
4.6 Proposed definitions of the appropriate universal service level for these different customer groups are described in the following chapters. If, in response to the consultation, other customer groups are suggested then these will need to be carefully considered.
5.1 In its Summer Statement Oftel proposed that the basic level of telecommunications service for all UK customers should be "individual access to the telecommunications network via switches capable of providing voice telephony, with free services of itemised billing and selective call barring and some supplementary services available (such as call diversion and call waiting)."
5.2 This implies that all customers in the UK should be able to access the services associated with a 'digital line'. The table in Annex 1 shows the extent to which BT now has a digital network. The TXE4 electronic analogue exchanges which currently serve 15% of the UK population should be completely replaced with modern digital switches by the end of September 1997. The UXD5 exchanges which serve around 0.5% of the UK population (in remote rural areas) represent earlier digital technology and are able to provide most but not all of the services now associated with a 'digital line'. Arrangements are sometimes able to be made to give customers access to the other services on request.
4.3 Free itemised billing on request is now available to all customers in the UK. While some operators expressed concern about the requirement for free outward selective call barring, arguing that in a competitive marketplace there should be discretion for operators to charge for such services, there was overwhelming consumer support for the notion that free selective call barring should be universally available. Research has shown that control over telephony costs is one of the key issues in terms of getting 'unphoned' households on to the network and keeping customers with limited incomes on the network. If universal service is to be realised, it is important to ensure that more effective means are available to enable customers to control their telephony spend and manage costs better. Oftel therefore believes that free selective call barring services, which allow customers on request and at no cost to them to have outgoing calls barred from their line to different types of premium rate service, or to international numbers, should be included within the basic telecommunication services definition for residential customers. However, it is not Oftel's intention to amend PTO licences other than BT's to effect this. Rather, the expectation is that such facilities would be provided by new operators as an integral part of the competitive process.
5.4 Consumer representatives, Oftel's Consumer Panel and Oftel's statutory Advisory Committees, have further pressed for regulatory action to reduce the continuing high level of disconnections of residential customers who do not comply with BT's current terms for business. On average between 60,000 and 70,000 residential customers are disconnected by BT each month. Trends over the last year or so are shown in Annex 2. Around 60% of disconnected customers are subsequently reconnected on payment of their bill. With technological advances and the widespread availability of digital switching, it will be possible by the end of 1997 to universally offer a service which bars outgoing calls (other than emergency or operator calls) from the customer's line, rather than fully disconnecting service. We would expect this service to be provided at a very cheap rate. The effect of this service is that the customer still has a lifeline; operators avoid the cost of disconnection and reconnection, and continue to get revenue from incoming calls to that customer; and operators do not lose customers who later could become profitable. Negotiations between the operator and customer should ensure that outstanding debt is paid back over an agreed period after which full service could be restored.
5.5 Oftel therefore proposes to include within the basic telecommunications services definition for residential customers access to an outgoing calls barred (OCB) service as an alternative to disconnection for existing debt. Oftel would expect operators to cooperate in drawing up workable proposals to implement this requirement where a customer had been offered, and agreed, a payment plan that protected the operator from increases in the level of debt. This should not prevent disconnection from taking place where fraud had been identified. Special steps may be needed to deal with reversed charge calls to the OCB number. A cross-industry Code of Practice on disconnection may be the best way forward.
5.6 The consultation process has also suggested that reasonable access to public call box services should be a universal service requirement. In particular, there was concern that widespread access to public payphones should be maintained, not least on less commercially attractive sites such as poor inner city areas and remote rural villages. Oftel therefore proposes to add this to the definition of basic telecommunications services for residential customers. Oftel is currently in discussion with BT on the licence condition relating to public payphone resiting and removal and will ensure that reasonable access to public payphones throughout the UK continues to be provided.
5.7 Oftel therefore proposes a definition of the level of "basic telecommunication service" for all UK customers along the following lines:
"individual access to the telecommunications network via switches capable of providing voice telephony; free services of itemised billing and selective call barring; an outgoing calls barred service for residential customers as an alternative to disconnection for existing debt; and reasonable access to public call box services"
Q1: Do respondents support this revised definition of the level of universal service for all UK customers from 1997?
6.1 The telephone is the main means of communication in business, and increasingly important to domestic users. Without access to telephone service people cannot easily contact health and welfare sources, educational and employment bodies, as well as social and leisure outlets. Telephone penetration currently stands at just over 91% of UK households, up from 78% in 1984. This leaves some 2 million households without service, the majority of whom would like to be connected to the telephone network but are deterred, in most cases, by the costs. Ensuring that these people gain access to the network will reduce the prospect of them being marginalised from the increasing social and economic opportunities that telecommunications provides.
6.2 Research indicates that two-thirds of unphoned households would like to have domestic phone service but find the main barrier is cost (affordability of fixed up-front charges such as deposits, connection charges and quarterly rental in advance; and managing ongoing costs). Phone service is invisible, unlike gas or electricity service where at least prepayment is available and a meter can be checked.
6.3 Penetration rates tend to be lowest amongst economically and socially disadvantaged groups such as unemployed people, people in low paid unskilled work and lone parents. Penetration rates also tend to be significantly lower for those in rented accommodation. The percentage of households without a phone in some of these customer segments can be 20% or more. Table 1 illustrates the relationship between income and telephone penetration.
Table 1 Telephone Penetration and Income
GB HOUSEHOLDS
Poorest 20%* Other 80% All
Total No. 4.6m 18.3m 22.9m
% with a Phone 75% 95% 91%
* by gross household income
Source: 1994/5 Family Expenditure Survey
6.4 In addition to the proposals to include free itemised billing and selective call barring, and outgoing calls barred to replace disconnection in the universal service definition, Oftel is working with operators on a range of measures to ensure affordable basic service is reasonably available to all households on request. Oftel believes that the workings of the marketplace, in which operators strive for competitive advantage through tariff and service offerings, will increasingly make a range of different service packages commercially available to customers. A number of these packages may well be attractive to households with limited incomes. Ensuring choice and diversity of supply is one of the key ways in which universal service will be achieved.
6.5 BT is currently considering a range of new packages to attract "unphoned" customers onto the network and other offerings aimed at helping customers with limited incomes. Oftel welcomes these initiatives. Many cable companies are already offering monthly billing, free call barring and free connections. BT will soon introduce a voluntary "call levels" system which will replace the need for up-front deposits from new customers (unless they have a bad debt history) when they first take up service. Oftel would like to see call levels more widely available, so any customer could choose to agree with their operator a cap on their telephone spend, thereby helping them manage costs better.
6.6 Consultations with consumer representatives indicate that what is really required is a spectrum of packages which offer varying degrees of credit exposure to give customers a full range of alternatives to choose from. Some of these offerings may limit the ability of customers to make unrestricted phone calls; but for many this would still provide them with basic security and safety, and would be a welcome alternative to no service at all. A number of possibilities are considered further below in the context of the options for replacing the Light User Scheme.
6.7 BT is currently required under its licence to provide a low user scheme. The current "Light User Scheme" (or LUS) is intended to give the bottom 20% or so of customers by call usage (currently people who make less than £10.80 worth of calls a quarter) a rebate on their line rental. This scheme offers BT's residential customers who make a modest amount of calls the only alternative at present to the standard tariff. Around 2.4m customers are currently in receipt of the Light User Tariff.
6.8 Some initial research undertaken by BT shows that 43% of LUS customers have household incomes below £10,000 p.a. and around 40% of LUS customers are pensioners. However, a more meaningful test of the effectiveness of LUS in targeting low income households is to look at the proportion of "poor households" whose call bills make them eligible for LUS. Oftel's analysis of Family Expenditure Survey data (which provides accurate data on household income and telephone bill expenditure) shows that only 34% of households in the lowest two deciles (the poorest 20%) are eligible for this scheme because of the usage criteria, as shown in the following table.
Table 2: LIGHT USER SCHEME ELIGIBILITY (GB)
Poorest 20% Other 80% All
Households with a 3.45m 17.39m 20.84m
phone
Eligible for LUS 1m (34%) 3m (18%) 4m (20%)
Not eligible for 2m (66%) 14m (82%) 16m (80%)
LUS
Source: FES
6.9 Oftel's current intent is to encourage the development of an alternative scheme or schemes which would be more effective than the Light User Scheme in achieving reasonably affordable access to basic telecommunication services for residential customers throughout the UK. The current Light User Scheme would therefore cease to be a specific requirement in BT's licence after August 1997. In its place could be one of the following packages, subject to the responses to this Consultation. In order to be effective, such a scheme could potentially raise competition issues. It would therefore need to be provided within the universal service framework. While other operators could offer a similar basic service entitlement that met minimum criteria defined by Oftel, the provision of the scheme would only be a licence requirement for BT and KC, from 1997.
6.10 A number of alternative service packages are suggested below as schemes which could be made available in order to help achieve affordable access.
6.11 A "Basic Service" Fixed Sum Package. Under this option customers would be provided with a line, programmed to allow access to 999, operator and freephone numbers; a limited number/value of calls (which could be to a fixed set of local or local/national numbers); standard incoming calls service; and standard fault repair service. The outgoing call allowance would be capped at a set value. If that value was reached, then outgoing calls barred service would be provided. Automatic voice messages warning customers that the 'cap' was approaching would clearly be a desirable feature. In return customers would pay a low fixed monthly amount in advance, which would cover an appropriate element of fixed costs (discounted to reflect the limited service offering) and call costs. The advantages of this option are that a small, fixed up-front monthly sum would allow phone costs to be better managed; incoming calls would still generate revenue for the PTO; and the customer would still have access to the network and be able to make some calls. The disadvantage would be that the service available to the customer would be limited, although this may well be preferable to no service. In addition PTOs might need to take steps to ensure that reverse charge calls to the number did not result in fraud.
6.12 "Lifeline" Service. A variant of the above option could be to provide at a very low tariff just an outgoing calls barred service - literally a lifeline to allow access to 999 calls (and operator services), plus the ability to receive incoming calls.
6.13 Pay as you Go. Customers could enter this scheme on payment of a very small sum to cover 'outgoing calls barred' service. They would then have outgoing calls barred (apart from 999 etc) applied to their line up until the point when they paid a sum of money (say £5 minimum) into a credit account which they opened with their operator. Outgoing calls of any type would then be allowed if the customer's account remained in credit. When the credit ran out, the line would revert to outgoing calls barred. Outgoing calls would be restored when further payment was made. Payments could be made in a BT shop, local Post Office, or other outlets as appropriate. In time, prepayment technology may be available to make this a cheaper scheme to administer (using swipe cards, for example). Calls would be charged at an appropriate rate between the other residential tariffs available and the call tariff for chargecard and public call box services. The relatively higher call charge would compensate for there being no fixed rental charge. This option does not artificially limit the ability to make outgoing calls: provided that the customer's account was in credit, any calls could be made. The customer could then manage what they could afford. There would be some inconvenience for customers in terms of arranging the prepayment. However, PTOs would not be exposed to bad debt: they would run a credit account rather than the traditional debit account.
6.14 A Chargecard Scheme. This scheme is similar to the above option in that it would require no connection or rental charges - just a small up-front sum for outgoing calls barred service. It would provide a customer with a line programmed for outgoing calls barred (apart from 999 etc), and also programmed with a chargecard number and possibly also a PIN for extra security. This option is different in that it develops the chargecard approach to providing service, and allows customers, by means of a debit account and a chargecard, to have access to service at any phone. The cardholder would pay any desired amount, say for example £5.00, into their debit account at a retail outlet such as the Post Office. Once payment was registered the customer could make calls from any phone using their chargecard number (and PIN number if necessary). The call tariff could be similar to a public call box tariff. This would work out cheaper for most customers than the current LUS tariff if calls totalled less than about £20.00 a quarter, but it would have the major advantage of being controllable and affordable to the customer. For higher volumes of calls such a scheme could be more expensive than current tariffs, yet it may still be attractive to some because of the control it offered. The service could be enhanced by voice messages stating the amount of credit remaining at the start of each call.
6.15 A number of operators have argued that affordable services will be provided to all residential customers by commercial means; there is no need for prescriptive regulation as the market will deliver. Oftel invites operators with this view to come forward with detailed proposals to demonstrate how this would be achieved, and wishes to encourage the delivery of "affordable service" to residential customers on a commercial basis wherever possible. Oftel is mindful that developments in the pipeline may go some way towards achieving affordable service. However more is still likely to be needed, at least in the short term.
6.16 If further regulatory action is needed to achieve affordable basic telephony for residential customers, then if the net cost of providing that minimum service entitlement fell below net long run avoidable cost, operators providing that level of service could make a call on the Universal Service Fund. This is explained in more detail in Chapters 10 and 11.
Comments on whether regulatory action still needs to be taken to achieve affordable access to basic service, and if so views on the options outlined in this chapter are invited. The views of consumer representatives, and of operators who may have concerns about technical feasibility or fraud implications, are particularly sought. It would be helpful if respondents could indicate their preference for a scheme to achieve affordable basic telephony - either a combination of the options listed above, or an alternative which would better achieve stated universal service objectives.
7.1 Around 7 million people in the UK have a physical or mental disability. As the population ages, the size of this customer group is likely to increase. Oftel is committed to working towards ensuring that people with disabilities have equality of opportunity to share the benefits available from modern telecommunications.
7.2 A number of special services to meet the needs of people with disabilities are already available. These include a free directory enquiry service; large print, braille and talking bills; the availability of apparatus with amplifiers or inductive couplers for the use of people with hearing aids; a protected services scheme to safeguard against disconnection; and a priority fault repair scheme. Modern payphones have been designed to meet the needs of customers with impaired sight and hearing. BT has a policy of developing its payphones to make them accessible to all disabled people and is, for instance, currently installing some text payphones for the benefit of deaf and speech impaired people in public locations. BT's modern public payphones, which exclude the traditional 'red box' payphones in conservation areas, are designed with their floor level with the ground to offer easier access to wheelchair users. This means that about 90% of BT public payphones are accessible to people who use wheelchairs. In addition, all payphones to which the public have access are required to have inductive couplers fitted to enable them to be used by people with hearing aids which are designed for use with telephones.
7.3 BT is required under its licence to provide a relay service for textphone users (Typetalk) wishing to communicate with other phone users, or vice versa. This service is currently delivered through an arrangement with the Royal National Institute for Deaf People (RNID). People who cannot hear (even with hearing aids) or speak require special textphone equipment. Such equipment currently retails from around £200, and Local Authority Social Services Departments have discretionary powers to meet the cost of such equipment (and currently fund about 90% of provision). BT offers its own customers a Textphone Users Rebate Scheme. This offers a rebate to compensate users for the fact that calls made by textphones take considerably longer to complete than comparable voice calls. Currently this amounts to 60% of call charges up to a maximum of £160 p.a. (for deaf/blind customers the figure is £600).
7.4 Research for Oftel indicates that many of the 7m or so customers who have difficulty in using a standard phone could have their needs met by services already available on a commercial basis. (Ref: Oftel/DIEL "Using the Phone: People with Additional Needs", 1995). Awareness of these services, however, tends to be low. Oftel and DIEL, its Advisory Committee on Telecommunications for Disabled and Elderly People, are therefore taking action to encourage BT and other operators to market their services better in order to meet the needs of this customer group.
7.5 Around three-quarters of a million mainly elderly customers including people in sheltered accommodation, still have hard wired phones with rotary dialling. This means they cannot connect additional apparatus like fax machines, modems or answering machines to the line and cannot access Internet type services. More significantly for many of these customers, they cannot connect to community alarm systems or use textphones. In addition, they do not have the benefit of modern push button 'tone' dialling, preventing them from accessing a range of supplementary services. All those still with hard wired phones are long-standing BT customers. Since 1992, BT has offered them a reduction of just over £1 per quarter on the rental of their old dial telephone. While BT's standard charge for upgrading these installations is around £30, BT has changed out some individual lines free of charge. Oftel would strongly urge BT as a priority to offer to upgrade the remainder of these installations at no extra cost to the customer. An Oftel investigation is currently in hand to establish the economic cost basis for BT's charges in this area.
7.6 Consultation with bodies representing the interests of elderly and disabled people has identified a number of potential requirements which might be desirable in the long term. These include:
7.7 The Disability Discrimination Act received Royal Assent on 8 November. Part III of the Act consists of new rights of access to goods and services for disabled people, which will be phased-in over a period of maybe ten years. The first of the rights to be implemented, around the end of 1996, will make it unlawful for a service provider to refuse a disabled person access to a service which they are prepared to offer to other members of the public (or to offer it at a lower standard or on less favourable terms). It should be emphasised that, at this stage, the service in question will not have to be adapted or adjusted to suit a disabled person: s/he only has a right of access to the same service as everybody else. In terms of the telecommunications industry, this means that operators will only have to provide a standard access to the network: specialist services, such as the "Typetalk" relay service, would not have to be considered at this point.
7.8 However, the further rights under Part III will be brought into force within the next few years. These will ensure that those providing services to disabled people will have to, as far as it is reasonable:
if otherwise the service in question would be impossible or unreasonably difficult for a disabled person to use.
7.9 Oftel would expect operators to respond positively to their new obligations under the Disability Discrimination Act when these come into force, particularly in respect of the requirement to provide reasonable auxiliary aids and services. Oftel intends to liaise closely with the Government Departments concerned to ensure that appropriate regulations are developed under the new Act.
7.10 In the light of these developments, Oftel proposes that universal service arrangements for people with disabilities under the new universal service arrangements should focus on people with profound hearing loss or serious speech impairment as a current priority. This is a significant customer group presently suffering serious disadvantage in terms of the availability of accessible and affordable basic telecommunication services.
7.11 People with profound hearing loss or serious speech impairment require access to a text relay service in order to be able to communicate with hearing people over the telecommunications network. Because text relay calls take proportionately longer to complete than ordinary voice calls, a rebate scheme is needed if text relay users are not to be unfairly discriminated against.
7.12 The current uptake of the Typetalk text relay service stands at 15,000 customers. There are over 400,000 severely deaf people in the UK who are unable to use a telephone. RNID estimates indicate that the market for a text relay service could potentially be extended to around 100,000 users (one reason why the market for text relay services is limited to around 100,000 is that many deaf people are elderly, and resistant to using textphone technology). Typetalk currently costs around £5.8m p.a. to run, with an additional £1m p.a. paid out for the text users rebate scheme. These costs are largely met by BT, with a small contribution by Mercury. Extending the current text users service to cover 100,000 users could increase the costs to around £20-£25m p.a. In addition, offering a Text Users Rebate Scheme to 100,000 customers could cost around £5m p.a.
7.13 Oftel is mindful that technological advances are starting to make an impact on this market. Text messages over the Internet may become a more efficient and economical means of communication for deaf people than text relay; voice synthesis or higher quality video telephony could be available on a commercial basis within a few years. These developments will need to be kept under review.
7.14 For the present, however, Oftel proposes that the definition of basic telecommunication services for people with profound hearing loss or serious speech impairment could be as follows:
Any net costs of providing this service (in accordance with the Oftel costing methodology) could be met from the Universal Service Fund as described in Chapter 10.
7.15 Oftel recognises that there are other, smaller groups of people whose difficulties are not met by this proposal - for example deaf/blind people who are currently unable to use textphones without additional, expensive electronic aids. We intend to keep their needs and how they might be more satisfactorily addressed under review.
Oftel invites comments on this proposed definition of basic telecommunication services for people with profound hearing loss or serious speech impairment.
8.1 Oftel suggested in its Summer Statement that the universal service framework could be used to provide a higher level of services to certain groups of customers in order to meet specific economic or social goals. Guaranteeing a basic level of service for all consumers is not the only way of meeting the telecommunications needs of the UK. It may be that the overall public interest, in economic and social terms, is best served by ensuring a higher level of service is available and affordable to educational establishments such as schools, and maybe also other "public service" customers.
8.2 Consumer bodies and others with an interest have highlighted the need for the UK to be able to derive maximum social and economic benefit from the development of new 'information superhighway' technology, and the need to prevent the development of information 'haves' and 'have nots'. In Chapter 12, Oftel's proposals for keeping the basic telecoms service definition for all UK customers under review as services develop in future are outlined. However, there may need to be early action. Preliminary discussions with relevant government departments and with others indicate that there is strong support for identifying a discrete class (or classes) of customer who could benefit now from affordable access to a higher level of service than the basic telecommunications service described in Chapter 5 for UK customers as a whole, funded if necessary through the universal service regime. This Chapter puts forward some proposals for consultation purposes.
8.3 Subject to responses, detailed proposals will be developed over the Spring and Summer of 1996. Oftel's view is that if, after consultation with the educational community and other relevant sectors, telecommunications operators and government, and after full public debate, there is a broad consensus that a higher level of service should be made available to certain classes of customer across the United Kingdom at an affordable price, and if the overall cost calculated according to Oftel's universal service costing methodology is not too great, then it would be appropriate to include a higher level of service for such customers within the universal service framework for telecommunications.
8.4 There are a number of potential contenders for consideration as an appropriate class of customer. These include public access points such as public libraries, community centres or job centres; hospitals, clinics and GPs' surgeries; and educational establishments such as schools and colleges.
8.5 Oftel believes that any development of universal service arrangements should focus on priorities, at least for the period from 1997, and be contained by reasonable bounds in terms of any additional cost to the industry. A number of commentators have suggested that education should be the top priority for action, in order to skill and equip young people for the "information age" and to use the power of IT to enhance their education generally.
8.6 The educational sector in the UK is made up of the following types of institution, or 'customer class':
There are in addition around 2,500 independent, non-maintained schools. Several thousand maintained adult education centres and nursery schools complete the picture.
8.7 Arguably the first priority for the UK, because of the number of institutions involved and the way in which schools are funded, should be to support the delivery of effective education services for school age children. Oftel therefore proposes that the class of customer for higher level universal service purposes should be the 30,000 or so maintained primary, secondary and special schools in the UK providing educational services for children aged from 5-16 years. This definition would include secondary schools with sixth forms in respect of their pupils up to age 16. This is not to deny the needs of the further and higher education sectors, nor indeed the potential for wider public access to wideband or broadband services. It is considered, however, that schools for children from 5 years up to the end of statutory education - 16 years - are the most important group to focus resources on in the first instance. Arrangements could be kept under close review and, if this initiative proves successful, then other sectors could be considered.
Q2 Comments are invited on Oftel's proposal to define maintained primary, secondary and special schools serving children from the ages of 5 to 16 as a class of customer eligible for a higher level of universal service, and whether Oftel is right to focus on schools in the first instance.
8.8 The universal service level (ie the definition of "basic telecommunication services") that might be appropriate for schools requires further consideration and debate. However, it is clear that the delivery of effective education for children could benefit from the new multimedia applications and services becoming available over broadband or wideband networks. Such services are capable of combining images and sounds in forms of expression which can give greater reality and understanding than text alone. They allow pupils and teachers to select from a range of options and interact meaningfully with the system. Technologically there should soon be the capability to recognise language and respond to a few keywords, with user prompting for decisions or responses. The new systems will make access to service less dependent on time and place, with implications for individual interactive learning programmes, for remote schools and for distance learning. They can be configured to allow shared interactive learning and communication between groups. And they can provide remote access to 'virtual libraries' of text, image and sound information, and to other education databases of value for curriculum development and teacher training. The UK Education Departments have consulted widely on these issues as part of its "Education Superhighways" initiative and responses have been positive.
8.9 In order to take advantage of these new opportunities, schools may wish to have available, at an affordable rate, a number of different service elements. Some of these are PTO provided 'telecommunication services' within the meaning of the 1984 Telecommunications Act. Others are not, as shown below.
TABLE 3: DESIRABLE SERVICE ELEMENTS FOR SCHOOLS
"Telecommunications services" Non "Telecommunications Services" Connection to a wideband or Internal networking broadband network Affordable and predictable network End user equipment access and usage tariffs Dedicated external network links User training Dedicated external network links Applications and services
8.10 Oftel considers that as the Telecommunications Regulator it could legitimately require PTOs to provide, within the universal service regime, a package of services that included service elements from the left hand side of the table. This would exclude, for example, any internal networking beyond the network termination point, unless a broader definition of telecommunication service could be agreed for this purpose. Oftel recognises that this approach raises questions as to how the rest of any overall package for schools might best be made available. While this question lies outside Oftel's remit, Oftel would support a coordinated approach with other relevant public sector, voluntary and commercial bodies.
8.11 The "basic telecommunication service" definition may vary by type of school. Oftel would expect it to include, as a minimum basic entitlement:
8.12 The amount or nature of this basic service entitlement could be varied by, for example, the size of the school, the education sector (primary 5-11, secondary 11-16 or special), or some other factor. Respondents' views on this issue would be welcome. Oftel would expect there to be reasonable flexibility in the arrangements.
8.13 Once the universal service level or levels had been determined, then any operator who wanted access to the funding available under the universal service arrangements would need to offer the package universally on the same terms to all maintained schools within its area of operation. For BT, this would be the whole of the UK (apart from Hull). This would mean that remote rural schools would be able to benefit from the same level of service as schools in urban areas. For other operators, the same arrangement would apply in respect to their licensed areas.
Q3 Responses are invited on what the definition of basic telecommunications services should be for maintained schools from 1997. Should the level of basic service be different for different types of schools? Which types of schools should have a different service level, and what should it be? How could any other non-telecoms superhighway service requirements for schools best be met in a coordinated way?
8.14 Oftel's intention is to help maintained schools to get a specified minimum level of service at a reasonably affordable tariff. Where competing infrastructure exists, this would best be achieved by allowing operators to compete for the services to be provided to a school. The growth in network competition means that most schools should be able to benefit from a choice of at least two, and in many cases three competing operators within the next few years. Operators could design their own tariff packages to meet the needs of schools, within an agreed framework which set out the tariffing principles to be followed. Each school could then choose the package that best suited its needs.
8.15 Tariffs for telecommunication services generally involve a balance between fixed and variable payments. Fixed payments may either be one-off, such as connection charges, or ongoing such as subscriptions or line rentals. Variable payments are related to usage of the network. Oftel is looking to the education community to inform it and the industry about the type of tariffs that would best suit schools. It may be that schools would prefer to have connection charges spread over a number of months or years, rather than face a large upfront charge.
8.16 A key requirement is also likely to be predictability in payments, because schools work to fixed budgets. This would suggest that the sort of tariff attractive to schools might involve more fixed than variable charges - with perhaps most of the payment as a monthly or quarterly charge, and a smaller part of the bill related to usage. However, it is not for Oftel to dictate the nature of the tariff; it is for schools for indicate the type of tariff that would best meet their needs and for operators to deliver. It may be that different types of tariff would be appropriate for different types of school. It would be Oftel's intention to try to design universal service for schools in such a way that maximum flexibility was given to operators and schools to design the tariff structures that best met their needs.
Oftel would welcome comments from schools and their representatives on the appropriate balance between fixed and variable charges, and between one-off and ongoing charges in any universal service schools tariffs. Comments from operators with experience of providing services to schools are also invited.
8.17 There are a number of different ways that universal service could be delivered to maintained schools in a competitive market. Oftel has identified two broad approaches that could be adopted. The first would be to define a special "Schools Tariff" that would be available to schools at a discounted rate. The second would be to give the benefit to schools more directly by means of "Virtual Vouchers". These two alternatives are described in more detail below.
8.18 The Schools Tariff approach would work by first defining the eligible telecommunications service level or 'service package' to which it would apply. Then the special schools tariff to be applied would need to be determined by Oftel or any new Universal Service Funding Body, with the intention of providing a tariff that was reasonably affordable for schools. In designing the balance between fixed and variable charges, the opinions expressed by schools and operators would need to be taken into account. The tariff could be below long run incremental costs, with BT's national average long run incremental cost used as the benchmark for determining the tariff. Operators who provided the defined special Schools Tariff to schools could then make a claim on the Universal Service Fund (see Chapters 10 and 11).
8.19 This approach would have a number of disadvantages. It would be very interventionist, since Oftel or the Universal Service Funding Body would be involved in the detailed specification of a single service/tariff packages, or a number of such packages if it was considered appropriate to segment schools into different categories. As a result, it would also provide little flexibility for schools to select their desired tariff. If the schools tariff involved mostly fixed payments, there would also be a need to set an upper ceiling on the extent to which schools could make use of the special service, in order to limit the claims on the Universal Service Fund. This would act as a disincentive to usage.
8.20 The Virtual Voucher approach might be a preferable way forward. The first step would again be to define the services which should be made available to all schools within the universal service framework. But under this scheme each school would be eligible for a Virtual Voucher which provided them with a financial benefit of set value, financed from the Universal Service Fund. Any operator providing such services to schools could claim back from the Universal Service Fund the value of the 'voucher' for each school served, if it offered an eligible tariff. To be eligible to claim the value of the voucher from the Fund, the operator would need to justify to Oftel or the Universal Service Funding Body that its tariff was below its incremental costs, geographically average across its licensed area.
8.21 The value of the voucher could be varied by size or by type of school. If, for example, the amount of money available for schools from the Fund was £50m per annum, then a school of average size could benefit from say an extra £1,500-£2,000 p.a. off its charges for specified telecommunications services. This would represent a further financial discount below incremental costs. Any school taking up the specified services could get this benefit: it need not necessarily depend on the amount of usage.
8.22 Oftel would envisage working up reasonable proposals for one of these approaches, or another alternative if appropriate, provided that further work in this area is supported by this consultation exercise. Oftel's current preference is for the 'Virtual Voucher' scheme, but it would be interested in other practical approaches.
Oftel would welcome comments on these two alternative schemes or other options for delivering an affordable service/tariff packages to schools. Views on whether and if so, how the schools market should be segmented are also invited.
8.23 Oftel recognises the high level of public interest concerning the issue of access to "superhighway" services by schools. For this reason Oftel would not wish to proceed further without a full and open debate amongst all those with an interest - the education community, central and local government, the telecommunications and communications industries, and others.
8.24 Oftel will be circulating this document and publicising its contents very widely. A special workshop will be arranged to discuss the proposals in this Chapter, to take place in London on 23 February 1996. Anyone wishing to attend this workshop should contact Peter Westley on 0171 634 8890. Responses to the consultation exercise will then be analysed and reviewed, and a further document with detailed proposals for universal service will be published after Easter.
9.1 Oftel set out its general approach to costing universal service in the Summer Statement, and at the same time published the study it had commissioned from Analysys, "The Costs, Benefits and Funding of Universal Service in the United Kingdom".
9.2 Responses to the basic ideas set out in the Summer Statement were almost entirely positive. Respondents endorsed the following proposals:
This general endorsement of Oftel's approach is welcome, and Oftel's further proposals are set out in this and the next two Chapters.
9.3 Oftel's approach to calculating the costs of universal service in the United Kingdom is generally to identify and establish the cost to BT and KC of customers whose revenues, including revenues from incoming calls, falls short of the long run avoidable costs of providing them with service. The estimated value of the benefits of being the universal service provided is then subtracted. For new services a long run incremental cost basis net of benefits is considered more appropriate.
9.4 Work carried out over the last year identified both uneconomic areas in certain parts of the UK which were expensive to serve, and also individual 'uneconomic customers' whose revenues did not cover their costs. Up to 375,000 out of a total of 27m telephone lines were estimated to fall in areas of the UK which were uneconomic. Such areas accounted for around 20% of the estimated costs of universal service. Around 2 million "uneconomic" residential customers in otherwise economic areas were also identified, making up the bulk of current universal service costs. A significant proportion (80%) of these customers spend less than £10 per quarter on calls (but note that only 30% of all residential customers spending less than £10/quarter on calls were found to be uneconomic). The net cost of other potential universal service elements - public call boxes and services for people with disabilities was also investigated. The total gross cost of universal service provision at present was estimated to range from around £60m-£90m p.a. as shown below.
TABLE 4: ESTIMATES OF THE COSTS OF UNIVERSAL SERVICE (BEFORE BENEFITS)
Components of Financial cost to Financial cost to
universal service BT of universal KC of universal
service provision service provision
Interpretation: (a) (b) (a)
£m £m £m
Uneconomic customers 49 68 0.39
Uneconomic areas 9 21 0.0
Sub-total 58 89 0.39
£m
public call boxes 14 0.19
Typetalk 5 n.a.
Note: BT was unable to supply detailed data on incoming calls or call data on an area-by-area basis. For uneconomic customers and areas, the different interpretations [(a) and (b) above] adopt different assumptions about these two elements of missing information. For simplicity, only one interpretation is shown for Kingston Communications (KC).
9.5 Net costs, after account had been taken of benefits, were within the range £0-£40m. The estimated value of benefits to BT is shown below. The study also indicated that further improvements in BT's efficiency, or the introduction of radio based technology, could significantly reduce the total cost of providing universal service in the UK.
TABLE 5: ESTIMATES OF VALUE OF BENEFITS TO BT
Components of Benefits to BT of Net cost to BT of
universal service provision provision
Interpretation: (a) (b) (a) (b)
£m £m £m £m
Uneconomic customers 28-49 37-68 0-21 0-31
Uneconomic areas 5 12 4 9
Sub-total 33-54 49-80 4-25 9-40
£m £m
public call boxes 14 0
Typetalk not estimated ?
9.6 These results are estimates only. They rest on important assumptions which require further investigation. Probably the most important of these is the ratio of incoming to outgoing call traffic for uneconomic areas or customers. This ratio is important in determining the call revenues which can be attributed to any line or group of lines. A second issue requiring further analysis concerns the geographical disaggregation of costs: the data used requires further elaboration, over a larger sample of areas. Thirdly, insufficient data was available to determine whether in fact BT's public call box services were a net universal service cost.
9.7 In order to provide a basis for operators' contributions to a possible Universal Service Fund, more detailed information is required. Unfortunately, BT and KC have recently indicated that the collection of some of this data will be a lengthy and expensive process. Oftel therefore intends to adopt an approach to costing and funding universal service which in the short term imposes relatively few new information requirements.
9.8 There are a number of ways in which BT, KC, or any other universal service provider might receive commercial advantage or financial benefit from providing universal service. These include:
Further details of these issues can be found in the full report on "The Costs, Benefits and Funding of Universal Service in the UK", available from Oftel.
9.9 In its response, BT has argued that some of these costs are not advantages but potential disadvantages, because they increase the costs to the company of exit-ing the relevant business.
9.10 Oftel's view on this issue is that, if it were starting from scratch in assigning universal service obligations among a number of firms qualified to compete for the task, it might be appropriate to exclude some such "benefits". However, this is not the starting point. Given its inherited position as the ubiquitous former monopoly operator delivering universal service, BT would find it in its commercial interest to protect its reputation in this respect. It would be unreasonable to expect other operators to contribute to the costs of sustaining that reputation.
9.11 Possibly the best approach to establishing the value of universal service benefits is behavioural. This would involve observing the conduct of firms in the market place. If they chose to undertake an activity (for example, providing call boxes or service in a remote area), for which the incremental revenues appeared to fall short of the avoidable cost, it would be natural to conclude that some other benefit accrued to the firm, at least as great in monetary terms as the observed "loss". However, there is an obvious difficulty in applying this approach as circumstances change. BT might find it in its interests to do things in some market and regulatory situations which it might not do in others. This means that the "revealed preference" approach is only likely to work after a lag, or in static market conditions which the telecoms industry is unlikely to experience over the coming years. Thus an analytical approach to the problem of valuation is preferable, requiring investigators to specify assumptions necessary to compute the benefits rather than observe behaviour.
9.12 Oftel strongly endorses the principle that the value of benefits to the universal service provider should be taken into account in calculating the net cost of universal service. Oftel believes that most if not all of the categories listed above are likely to yield significant benefits to BT and KC, and these should be taken into account. There are practical difficulties in seeking to place an accurate value on all benefits, and some subjective judgement is needed. Oftel therefore intends to estimate the value of benefits for those categories most amenable to quantification, and to use these as a benchmark in placing a value on the totality of benefits. The categories of benefit which offer the most tractable valuation opportunities are life cycle effects and ubiquity. It may also be possible to quantify marketing benefits in some circumstances (eg the benefits to the operator of having its logo visible on public call boxes).
9.13 Life cycle effects relate to the possibility that a customer whom it is currently unprofitable for an operator to serve might become profitable in the future. For commercial reasons an operator might choose to retain a proportion of currently unprofitable customers. In order to calculate life cycle effects for uneconomic customers, it would be necessary to estimate:-
9.14 A similar approach could be adopted to estimate the life cycle effects for uneconomic areas, or for classes of customer such as schools.
9.15 A first attempt has already been made, in the Universal Service Costing Study, to quantify life cycle effects although the approach was restricted in a number of respects. The time horizon examined was only five years, the analysis was related to average trends in customers groups rather than significant changes in the behaviour of individual customers, and the possibility of new sources of revenue (such as multimedia services) was not examined. For these reasons, the estimates may understate the true life cycle effects. The study estimated that life cycle effects would reduce the net cost of uneconomic customers by £10 million, and the net cost of uneconomic areas by £1 million.
9.16 For the purpose of estimating the benefits of ubiquity, it would be possible to adopt an approach based upon that set out by BT in an Annex to its response to the Summer Statement. This involves establishing the difference between the proportion of newcomers to an area which subscribe to BT and the (possibly longrun) proportion of BT subscribers among longterm residents. The differential is then evaluated on a net present value basis, and counted as a benefit. The information required for this approach is:
9.17 Oftel proposes to focus its work over the coming months on the valuation and quantification of benefits in at least these two areas. Oftel believes, however, that after appropriate consultation has been made it will fall to the Director General to make a final determination of the scale of the net benefits.
9.18 Oftel's preliminary view in the light of the information currently available, is that the overall net costs of universal service in the UK taking account of service for uneconomic customers, provision of service to uneconomic areas, services for people with profound hearing loss or serious speech impairment, and the proposed services to schools, based on the defined service levels described earlier in this document, may be in the order of £50m-£100m p.a.
Oftel would welcome proposals from operators and others on how the calculation of benefits should be made in practice and on appropriate values of the parameters. Suggestions for valuing other forms of benefit are also welcome.
10.1 The proposal to establish a Universal Service Fund was widely supported, provided the overall costs of providing universal service to the agreed level are large enough to justify the setting up of a Fund. Oftel considers that while the net universal service costs, taking on board the proposals for schools outlined earlier in this Document, may be of the order of £50m-£100m p.a. - a relatively small sum compared to the industry's turnover of around £16bn - this level of costs still justifies the establishment of an effective funding mechanism from August 1997. Oftel therefore proposes to set up a Universal Service Fund.
10.2 It is clearly important that the Universal Service Fund should be administered and managed independently of any operator. On the face of it the options appear to be either for Oftel to manage the Fund, or for a neutral industry-funded body to be set up for this purpose. Administrative costs could be top sliced from Fund contributions, but should be kept to a minimum through the operation of streamlined procedures wherever possible.
10.3 Oftel believes that the most appropriate way forward would be for a neutral third party body to be set up for the purpose of administering the Universal Service Fund (the "Funding Body"). Oftel would set the service definitions, costing methodology and audit rules which the Funding Body would follow. The Funding Body would then apply these rules to operators and calculate the payments required into the Fund and the payments to be made out of the Fund. Oftel would act as the appeal mechanism if any operator disputed the basis for payments in or out. This approach would be in line with the emerging proposals in the EU's Draft Interconnection Directive, to come into force by the end of 1997.
10.4 Universal service funding arrangements should be as transparent as possible, while respecting any legitimate needs to respect the confidentiality of any commercially sensitive information. The Funding Body would publish an Annual Report giving full details of payments made by contributing operators, and the basis for them. It would also publish details of payments made from the Fund, to whom, and what they were for. Estimates and evidence submitted to the Funding Body would be open to inspection by other contributors subject to exclusions for commercial confidentiality. The Funding Body's running costs, and operating procedures, would be independently audited and published.
Comments are invited on the proposals to set up an independent Universal Service Funding Body to administer the Universal Service Fund from August 1997.
10.5 The Universal Service Costing Study suggested that contributions should be in proportion to basic network service revenues, including fixed and mobile voice telephony, telex and private leased circuits. This implies that all public fixed link operators, cable operators, local delivery operators, cellular operators, PCN operators and ISR operators, - ie operators of this type with individual Telecoms Act licences - would contribute to the Fund. It further suggested that this objective could be achieved by making contributions proportionate to PTO systems business revenues less certain exclusions.
10.6 Oftel endorses this approach as a basis for sharing universal service costs simply and fairly across the industry, including both companies who provide networks and companies who buy network services, and hence among all customers who benefit from expansion of the network. In particular, Oftel endorses the exclusion of revenues from broadcast entertainment services, on the grounds that to burden such services with contributions would place them at a disadvantage compared with equivalent services delivered by other means such as satellite.
10.7 The second significant exclusion proposed was for interconnection and leased line payments to other contributing operators. This means, for example, that the contribution of BT (which is a net supplier of interconnection services) would be based upon the sum of its retail sales of access and calls and of its net sales of interconnection (the difference between what it sells to other operators and what it buys from them). In its response, BT has argued that interconnect services are simply another input and that there is no more justification for netting out interconnection costs than for netting out other inputs such as labour, fuel and power.
10.8 Oftel, however, does not support this argument and believes that where telecomsrelated intermediate or final services are involved, the contribution should be paid by the firm receiving the associated revenues. Thus BT and all other operators should make contributions on their net revenues, interconnection and leased lines. The inclusion of mobile network revenues is justified because mobile customers too benefit from the extension of the network generated by universal service provision.
10.9 To gain an impression of the contribution rate implied by this approach, an estimate of the net cost of universal service can be calculated as a proportion of total telecom revenues. If it is assumed that the current net cost, taking account of the value of benefits and services to schools, falls in the £50m-£100m p.a. range, and the total relevant revenues are about
£13 billion p.a., then the implied contribution rate is about 0.5% 0.8%. The distorting effects of such a low rate are likely to be minimal. Changes in the net cost of universal service to incorporate the proposals in this document are unlikely to alter the scale of contributions significantly.
10.10 There may be arguments for excluding certain small operators on the grounds that the costs of securing their contributions may outweigh the value of their payments. Establishing any de minimis level will inevitably have an element of arbitrariness. The alternatives are to either set a de minimis level on the size of the company's turnover, or a de minimis level on the size of payment that is worth collecting. Oftel's preference is to set a de minimis level of, say, £100,000 for the minimum size of contribution to be paid to the Fund. Assuming an 0.5% tax rate, the lowest value of net network revenues eligible for payment would be £20m.
Oftel would welcome views on this proposal to set a de minimis level of £100,000 for the minimum size of contribution to the Universal Service Fund.
10.11 The Funding Body would make payments from the Fund to operators who incurred a net loss as a result of delivering universal service to customers, in accordance with Oftel's methodology. The net loss would be the difference between the price paid by customers for the service and the long run avoidable cost (or long run incremental cost, for new services), of providing that service net of revenues and less any benefits to the operator as a result of providing that service.
10.12 Service elements eligible for payment from the Fund could include:
Providing basic voice telephony service to all customers in uneconomic areas.
Providing a special scheme or schemes for "uneconomic customers" (ie the level of service that it is agreed should replace the LUS for customers on limited incomes).
Providing an extended text relay scheme and text users rebates for people with profound hearing loss or serious speech impairment.
Subject to consultation, providing a higher level of universal service to maintained schools or another class of customer if agreed.
10.13 Public call boxes (PCBs) are not included in these proposals. Oftel's current view, based on information so far available, is that neither BT nor KC incur a universal service cost as a result of delivering these services. If this is disputed, then further information is required to demonstrate the extent to which BT/KC's PCB business does not cover the long run avoidable cost net of revenues of providing that service. Oftel would need to consider this further information, and review the value of the benefits to BT/KC of operating PCB services throughout their area, before reaching conclusions on this issue.
11.1 Estimating the net costs associated with providing basic telecommunications service to uneconomic residential customers, following the approach used to date, is a complex task requiring highly detailed and disaggregated information on customer costs and revenues, including incoming call revenues. For this reason, Oftel proposes use of a simplified procedure which relies upon the fact that most of any net costs incurred by serving such customers would be associated with a special scheme or schemes designed to achieve affordable telephony.
11.2 The proposed arrangement would operate as follows. BT and KC would report the number of and revenues associated with customers whom they served on the new special scheme or schemes which replaced the LUS. In order to simplify the calculations, an average cost of service for such customers would be estimated on a national basis, based on BT's costs, taking account of the average value of the cost drivers (such as line length and subscriber density) and the call revenues relating to them. This would generate an estimate of the average net costs of serving uneconomic customers on the scheme.
11.3 "Pay or Play" could be achieved, in areas of the UK where competing carriers were available, through an arrangement whereby other operators could offer a special package or packages on terms similar to those provided by BT and agreed by Oftel. If subscribers choose to take service from the alternative operator, that operator would be credited with the net cost of providing universal service, payable from the Fund. For the purpose of the calculation, the alternative operator would be credited with the average long run avoidable cost (net of actual revenues and benefits) of a "special scheme" customer served by BT. This would remove the need for individual cost estimates for other operators. It would, however, be necessary to estimate revenues (especially for incoming calls) very carefully, because of the special nature of the new tariff. Operators offering such a service would receive payments from the Fund pro-rata to the number of customers they had on the scheme. BT would remain as carrier of the last resort to offer the scheme or schemes to uneconomic customers.
11.4 A minority of Special Scheme customers are likely to be unprofitable (if LUS is any guide, since only about 30% of LUS eligible lines are uneconomic). Therefore, an alternative to a single "price" for each special scheme customer would be to relate the payment from the Fund to one (or more) drivers of universal service cost, eg bill size. This would be less crude than a single "price" per customer, i.e. the payment from the Fund might be closer to the true universal service cost of the customer. However, it might be more difficult and complicated to administer.
11.5 The merit of the approach outlined above is that 'special scheme' customers could be readily identified from operators' billing data. It would therefore not be necessary to carry out major new data gathering exercises to identify individual uneconomic customers. Oftel believes that this approach represents a practical way forward, and also encourages choice and competition in the marketplace for the opportunity to deliver universal service to "uneconomic" residential customers.
Q5 Comments are invited on the proposal to offer "Pay or Play" opportunities to operators who deliver a special package or packages to 'uneconomic customers', agreed by Oftel, with BT/KC remaining as carriers of the last resort.
11.6 As already outlined, a few remote rural areas in the UK are alleged to be unprofitable to serve on a commercial basis. While the precise nature and extent of these areas cannot be specified until further detailed data is provided by BT, once this data is forthcoming then in principle any net long run avoidable cost (net of benefits) of serving these areas could be met from the Universal Service Fund.
11.7 The idea of encouraging competition for the provision of universal service in such areas is attractive. It could help to enhance efficiency in the delivery of services to so-called uneconomic areas, and could also generate useful information about the benefits associated with being a universal service provider.
11.8 For these reasons, Oftel proposes to investigate the prospects for introducing trial franchising arrangements. In essence, these would take the following form.
Oftel would welcome comments on and refinements of this proposal for franchising universal service in uneconomic areas.
11.9 This element of universal service is currently provided largely by BT. If it is agreed desirable to extend the scale of services available for deaf people, then there are two choices. Either the current arrangements could continue, subject to the rebate scheme being available to any operator's customers but be extended so that the 15,000 current customer base was expanded nearer to the 100,000 potential market identified for these services. BT would continue to fund Typetalk and the Text Users Relay Scheme as per the current arrangements.
11.10 Alternatively, contributions to meet the long run incremental costs of providing a text relay or equivalent service, net of benefits, could be shared across the industry. If this were the preferred option then there may be a case for exposing the provision of the service to competitive tendering, in order to improve efficiency and effectiveness.
Comments on the preferred approach to securing the delivery of text relay and text users rebate services to people with profound hearing loss or serious speech impairment are invited.
11.11 Once the level of service appropriate for maintained schools had been specified and agreed, Oftel envisages a Pay or Play arrangement similar to that described above for uneconomic residential customers. This would allow any operator offering the defined level of service to schools, on the agreed tariffing basis (see Chapter 8) to be eligible for funding from the Universal Service Fund.
11.12 In order to keep the administrative arrangements as simple as possible, Oftel has suggested a "virtual voucher" approach to tariffing and delivery, whereby specified services would be offered by operators to schools at their long run incremental costs, geographically averaged across their licensed area. Schools taking up these services would then be eligible for a discount (paid to the operator from the Fund) based on a preset value or "voucher". The Universal Service Funding Body would establish and monitor the detailed arrangements. Oftel, however, would need to establish the framework to be followed.
11.13 In order to do this a number of issues would need to be resolved. Firstly, there would need to be a mechanism to ensure that operators were offering the specified services to schools at their geographically averaged long run incremental costs. Secondly, the value of the voucher for different sizes or types of school would need to be determined and would need to be kept within reasonable bounds. To keep things simple it may be best to classify schools on the basis of number of pupils in the 5-16 age group, with perhaps two or three different size classes and consequently two or three different "voucher" values.
11.14 The above approach requires further work. It does, however, offer the advantages of simplicity, flexibility for schools, and opportunities for choice and competitive delivery of services to this market.
Q Oftel invites comments and further suggestions on how this or an alternative approach might be implemented.
12.1 Universal service is not a static concept. In a fast moving marketplace like telecommunications it will be important to ensure that the level of universal service is kept under review and that the implications of any relevant European Union policies are assessed.
12.2 As new levels of service become commercially available and penetrate different market sectors, if they reach a point where unacceptable social and economic disadvantage is placed on customers lacking access to those services, then the universal service level could be upgraded accordingly. The review mechanism could include consideration of criteria such as:
(1) Is the service necessary to allow individuals a full and fair opportunity for economic and social participation in the UK?
(2) Do most customers in that customer class already use the service?
(3) Do the overall benefits of adding the service to the universal service definition justify the costs involved?
(4) Are any changes necessary to reflect the development of regulation under new legislation such as EU Directives or the 1995 Disability Discrimination Act?
12.3 The review mechanism could apply to residential customers, customers with disabilities, schools, public access points, or in principle to any further class of customer that may, following full public consultation and debate with government, be identified as requiring a different level of universal service in future.
12.4 Once the new universal service arrangements are in place and appropriate funding and delivery is secured, then it will be most important to monitor the achievement of universal service against Oftel's stated objectives. Oftel will collect data to verify whether affordable access to basic telecommunications service for all residential customers reasonably requesting it, regardless of where they live, is being achieved. Oftel intends to do this by monitoring penetration and churn rates across the country. Operators would be required to provide Oftel with appropriate data for this purpose. This data would need to be disaggregated by geographic area and by socio-economic group. Oftel will also wish to monitor uptake of any services included within the scope of universal service by disabled customers, and also take up by schools of any designated higher level of service.
12.5 Oftel understands that a broad consensus is needed, including government, consumers and the industry, before any decisions are taken on future upgrading of the universal service definition or definitions, as may apply to different classes of customer. It is most important that full public consultation and debate takes place on the most appropriate future level or levels of universal service in order to give legitimacy to any further action by Oftel.
12.6 So far reaction has been positive, and Oftel's outline proposals have been welcomed by many interest groups. However, it may be appropriate in future for an independent group to be established representing relevant consumer interests, to monitor and review developments and advise the Director General on future universal service definitions and delivery mechanisms. The Director General has asked the Consumer Panel, set up for the purposes of the Price Control Review, to take on this task in the short term. If the Consumer Panel is to assume more substantial responsibility for universal service review then it may be appropriate to broaden its membership to include, for example, the interests of people with disabilities and possibly the education community.
Comments are invited on how best to keep universal service under review, and whether the Consumer Panel, with suitably broadened membership, should be requested to provide independent advice to the Director General on universal service definitions and delivery mechanisms.
13.1 The proposals outlined in this Consultation Document demonstrate that a flexible framework for universal service for telecommunications across the UK can be secured and delivered, both now and in the future, in a competitive marketplace. Oftel believes that the overall package of proposals represents an appropriate balance between the costs and the benefits of implementing a system for delivering a fair deal for customers while compensating universal service operators for the services which they provide. Oftel further believes that the proposals achieve an appropriate balance between the interests of BT and other operators. Oftel's proposed approach requires some simplification of the existing costing methodology, and an estimate of the value of benefits, which will require further work. It also introduces elements of competition through its proposals for "pay or play" and for franchising experiments. It should yield a system of contributions, to meet the relatively modest universal service costs identified, which is light on administrative costs and also avoids distortions in operators' behaviour.
13.2 Subject to the outcome of this consultation, Oftel intends to consult in detail after Easter 1996 on detailed proposals for the new universal service arrangements from 1997. Proposals will be in harmony with emerging European regulation in this area.
13.3 This document seeks views on the issues which Oftel is considering in its review of universal service arrangements from 1997. Listed below are the questions raised in the document on which Oftel would particularly like responses. Comments on other issues relating to universal service are also welcome.
13.4 Do respondents support this revised definition of the level of universal service for all UK customers from 1997? Page
13.5 Comments on whether regulatory action still needs to be taken to achieve affordable access to basic service, and if so views on the options outlined in this chapter are invited. The views of consumer representatives, and of operators who may have concerns about technical feasibility or fraud implications, are particularly sought. It would be helpful if respondents could indicate their preference for a scheme to achieve affordable basic telephony - either a combination of the suggested options or an alternative which would better achieve stated universal service objectives. Page
13.6 Oftel invites comments on this proposed definition of basic telecommunications services for people with profound hearing loss or serious speech impairment. Page
13.7 Comments are invited on Oftel's proposal to define maintained primary, secondary and special schools serving children from the ages of 5 to 16 as a class of customer eligible for a higher level of universal service, and whether Oftel is right to focus on schools in the first instance. Page
13.8 Responses are invited on what the definition of basic telecommunications services for maintained schools should be from 1997. Should the level of basic service be different for different types of schools? Which types of schools should have a different service level, and what should it be? How could any other non-telecoms superhighway service requirements for schools best be met in a coordinated way? Page
13.9 Oftel would welcome comments from schools and their representatives on the appropriate balance between fixed and variable charges, and between one-off and ongoing charges in any universal service schools tariffs. Comments from operators with experience of providing services to schools are also invited. Page
13.10 Oftel would welcome comments on these two alternative schemes or other options for delivering an affordable service/tariff package to schools. Views on whether and if so, how, the schools market should be segmented are also invited. Page
13.11 Oftel would welcome proposals from operators and others on how the calculation of benefits should be made in practice and on appropriate value of the parameters. Suggestions for valuing other forms of benefit are also welcome. Page
13.12 Comments are invited on the proposals to set up an independent Universal Service Funding Body to administer the Universal Service Fund from August 1997. Page
13.13 Oftel would welcome views on this proposal to set a de minimis level of £100,000 for the minimum size of contribution to the Universal Service Fund. Page
13.14 Comments are invited on the proposal to offer "Pay or Play" opportunities to operators who deliver a special package or packages to 'uneconomic customers', agreed by Oftel, with BT/KC remaining as carriers of the last resort. Page
13.15 Oftel would welcome comments on and refinements of this proposal for franchising universal service in uneconomic areas. Page
13.16 Comments on the preferred approach to securing the delivery of text relay and text users rebate services to people with profound hearing loss or serious speech impairment are invited.
13.17 Oftel invites comments and further suggestions on how this or an alternative, approach might be implemented.
13.18 Comments on how best to keep universal service under review, and whether the Consumer Panel, with suitably broadened membership, should be requested to provide independent advice to the Director General on universal service definitions and delivery mechanisms.
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