Universal Telecommunication Services

1. This document is about what special schemes and services telecoms operators should be required to put in place to ensure that everyone who wants a telephone is able to get one at reasonably affordable prices.

2. The ability to get access to a telephone is important for full social and economic inclusion in society – it would be unfortunate to be excluded because you live in a remote rural area, because you are poor, or because you are old or have a disability. And it is to the benefit of all telephone users to have as many other people as possible on the network. That is why Oftel, in common with other telecoms regulators around the world, pursues a policy of "universal service".

3. In the UK, what this means is that a basic level of service is provided to everybody at the same price no matter where they live. The obligation to provide this service is placed on BT (and, in Hull, Kingston Communications). BT and Kingston are also obliged to provide a network of public call boxes and, where necessary, to provide special schemes designed to make telephony more affordable for those who are on low incomes or who use the telephone only from time to time.

4. Other operators will offer competitive services and BT will offer more sophisticated services, but as a last resort, anybody in the UK (outside Hull) can get telephony services at a reasonable price from BT. In Hull, the same role is performed by Kingston Communications.

5. This policy is not entirely cost free. If it were not for the licence obligations placed upon BT as the "universal service provider", they might decide not to provide services that are loss-making. The extra cost to BT of providing service to everybody under the terms of their universal service obligation is a cost which is passed on to the rest of their customers. Although universal service provides an important safety net, it is important to remember that it comes at a price.

6. Two years ago, Oftel concluded an exercise that established the level of universal service in the following terms.

• Oftel establishes the level of universal telecommunication service for the 4 year period from 30 September 1997 to 29 September 2001 (subject to a review in 1999 which will take into account the views of the Secretary of State for Trade and Industry, who shares statutory responsibilities with the Director General in this area) as consisting of the following services:

• A connection to the fixed network able to support voice telephony and low speed data and fax transmission;

7. This document launches the 1999 review of universal service. It has three broad elements.

8. Firstly, the document considers the existing regime and the new measures that were introduced two years ago. It seeks views on whether or not these have been successful.

9. A new scheme called the Residential Limited Service Scheme was introduced to provide a cheap very basic level of service (incoming calls only) for those who could not afford full service or who had difficulty controlling the size of their telephone bills. Nearly 30,000 households have taken up this scheme, which is lower than had been hoped but still represents a considerable benefit to the individuals concerned.

10. The Light User Scheme continues to offer reductions in line rentals for people who use the phone rarely. The scheme is not well focussed on those with greatest need and makes up a large part of the costs of universal service. Oftel questions whether this is an appropriate way to target support and whether it should be removed once BT introduce one or more service packages which allow call-expenditure to be controlled by payment in advance.

11. The voluntary measures from industry to reduce the number of people being disconnected for debt have been quite successful, though a large number of disconnections do still take place.

12. Oftel seeks views on how these schemes and policies have developed and asks whether, in the short term, the basic level of universal service needs to be adjusted in any way. Oftel’s initial view is that BT needs to put further effort into the provision of these services, but that the obligation to provide the Light User Scheme could be dropped once a wider range of service packages are made available.

13. Secondly, the document re-examines the cost of the existing universal service regime and the funding mechanism.

14. The document looks at the costs and benefits to BT from being the universal service provider. It considers whether there have been significant changes to the assumptions that supported the estimates completed two years ago. It also acknowledges that some of the calculations need revisiting in the light of developing thinking.

15. Taking various changes into account, Oftel accepts that the balance between the costs and the benefits is closer than previously estimated. However, Oftel does not believe that the case for the establishment of a universal service fund to share the burden with other operators is proven. The document seeks views on these calculations.

16. Finally, the document asks whether a more dramatic change in the level of universal service is needed. In the past, universal service has always been seen as a safety net that ensures that those services used by the majority are available to everybody. Should this change to anticipate the likely impact that major technological developments, particularly in the availability of higher bandwidth services, will bring to everyday life? Should the level of universal service be significantly increased to cover higher bandwidth access in order to speed the introduction of high tech products and services?

17. The document looks at what this would mean in practice if it were introduced now. Following the current universal service model, it might mean requiring BT to roll out higher bandwidth access technologies such as ADSL to all parts of the country, whether or not a commercial case can be made for it. Further, if the cost of such a service were too expensive for some consumers, it could mean developing low cost service packages at a loss. This would involve a cross subsidy from other telecoms customers. There are significant difficulties with this approach since the amount of cross-subsidy required would be very high and this cost might have to be borne by a minority of users. Alternatively, a cross-subsidy from ordinary telephony users would mean that general telephony prices would be forced higher than otherwise.

18. However, the document suggests that it might become appropriate to consider extending the scope of universal service at some stage in the future when higher broadband services are being used by the majority and if they come to be seen as essential for full economic and social inclusion.

19. Oftel seeks views on all these issues and on anything else that readers think relevant. A specific list of questions is included at Chapter 7 of the full document. Details of the consultation process are at the end of the document. Responses should be with Oftel by 29 October 1999.

20. Oftel will publish conclusions based on its further work and on the responses to this document towards the end of the year.

1.1 Most of us take the telephone for granted. "universal service" is about making sure that what most of us take for granted is available to everyone.

1.2 The policy objective behind universal service is to ensure that those telecommunications services which are used by the majority and which are essential to full social and economic inclusion are made available to everybody upon reasonable request in an appropriate fashion and at an affordable price. This principle is designed to ensure that people on low incomes, those in remote rural areas, those with disabilities and various other groups who might be described as more vulnerable do not miss out on the advantages telephony can bring.

1.3 In order to achieve that, obligations are placed in the licences of BT and, for the Hull area, Kingston Communications, to ensure that they offer basic telephony services to everyone, upon request, at reasonable prices. This is, in effect, a small cross subsidy from the majority of telephone users to the minority who might be left out if the market was left to itself.

1.4 In 1997, Oftel completed a consultation exercise which established the level of universal service until the year 2001, subject to a review in 1999. This document launches that review.

1.5 The review is timely. The European Commission is about to launch a thorough review of the whole of EU communications legislation, including universal service, which will set the ground rules in this area for the beginning of the next century. Simultaneously, technological and market developments are illustrating the great potential of the ‘Information Age’ and turning people’s minds to the problems of social exclusion.

1.6 But two notes of caution are called for right at the beginning of this consultation exercise on universal service, though they will be discussed in greater detail later in this document.

1.7 Firstly, the legal framework for universal service is established at the EU level. Any conclusions Oftel might reach that would require significant policy changes will have to be negotiated in Europe and are unlikely to be implemented for several years. However, the policy debate on these issues needs to happen now.

1.8 Secondly, it has been suggested that universal service might be an appropriate tool to prevent social exclusion from the Information Age. It has worked very well in the past to ensure that most homes have access to basic telephony, and it is natural to ask whether it could be used to roll out new and innovative services. But, historically, universal service has been founded on the basic principle that the majority of consumers who use a telecoms service can afford to cross-subsidise the limited, basic needs of a small minority that might otherwise miss out. That principle does not translate easily to the provision of expensive new technology at affordable prices, at least in the early stages of market development.

1.9 This document launches Oftel’s review of universal service provision. It sets out the principles behind universal service, the main questions Oftel believes need to be addressed in this review, and the timetable Oftel will be following.

1.10 Where appropriate, the document will set out Oftel’s initial views. Hopefully, by setting out our initial position in this way rather than asking totally open questions, it will encourage a more meaningful exchange of views and opinions. However, Oftel is open to argument and persuasion on everything set out in the following pages and would welcome the widest possible range of responses.

1.11 Following this introductory chapter, the document will address the following issues:

• What is universal service? The background to the policy, the policy objectives, how it works and who pays for it, and what the current universal service obligations are.

• Can the existing regime be improved? What minor changes can usefully be made to the existing regime?

• How should universal service be paid for? How much does it cost and who should pay?

• Should the level of universal service be raised? Should more significant changes to universal service be considered?

• Timetable. What Oftel will be doing and when.

• Questions. A list of specific questions for readers.

• Consultation Details. How to contact Oftel, and the timetable for submissions.

  

2.1 The overwhelming majority of people in the UK have a telephone at home. Estimates from surveys conducted by the Office of National Statistics suggest that about 94% of households have a fixed line telephone. Most people would probably consider having a telephone to be essential. It provides a means of staying in touch with friends, relatives and work. It enables calls to businesses and services, local government, social security, the doctor and a range of other vital contacts. And, of course, it gives access to the emergency services.

2.2 For some people, such as those in rural communities, single parents, the elderly and people who have long-term sickness or disability, the telephone can be a lifeline.

2.3 The market in telephony, which has been liberalised since 1984, meets most people’s needs and provides basic affordable telephony at increasingly attractive rates and of a growing quality and variety. However, there are sections of the community whose needs, for one reason or another, might not be met without some sort of intervention in the market on the part of the Regulator.

2.4 These people include:

• Those on low incomes;
• Those who use the telephone infrequently;
• Those in short term rented accommodation;
• Those in remote rural areas;
• Those in areas of urban deprivation;
• Those with disabilities;
• Those of pensionable age (though they are of concern principally where they fall into one of the above categories).

2.5 What is it that prevents some of the above groups from getting access to telephony services, or what is it that might exclude them if all regulatory controls were removed?

For many, it is still a question of affordability. Although the cost of an off-peak weekend local call from, for example, BT is now only 1 penny per minute, it is still £99.99 to get a new line installed and costs £26.77 per quarter just for the line rent. Oftel believes that these rates are based fairly on the true costs of providing the service and are acceptable for most people. But, for somebody on social security living in short term rented accommodation, the up

2.6 For many, it is still a question of affordability. Although the cost of an off-peak weekend local call from, for example, BT is now only 1 penny per minute, it is still £99.99 to get a new line installed and costs £26.77 per quarter just for the line rent. Oftel believes that these rates are based fairly on the true costs of providing the service and are acceptable for most people. But, for somebody on social security living in short term rented accommodation, the up-front costs of arranging for a telephone to be installed at normal rates are prohibitive.

2.7 For some, although they could afford the cost of a basic telephony package, the telephone represents a financial risk because of the unpredictability of the bills. Consumers do not know the size of the bill until it arrives and, if it is unexpectedly large, it can upset their careful family budgeting. Such people might find themselves in constant battles to stay connected or paying out extra sums for reconnection when they have been unable to pay a large bill.

2.8 The cost of providing telephony varies in different parts of the country. Rural areas, on the whole, cost more to serve because the population is more spread out. Rural areas also tend to produce less revenue from businesses (though residential usage might be higher). Traditionally, the costs of serving rural and urban markets have been averaged out and all consumers have been charged the same rates. If the market were left entirely to itself, operators might decide that certain areas of the country were not worth serving. Telephones in rural areas or inner cities might become rare commodities. Or, areas that are expensive to serve might find that the cost of telephony goes up, putting it beyond some people’s budgets.

2.9 Finally, the elderly and those with disabilities can find themselves facing problems simply because the design of the service does not take into account their reduced mobility, reduced strength, their loss of sight or hearing or a range of other disabilities. Simple things like reading the telephone bill, making a call or getting in and out of a telephone box can be next to impossible for them if no provisions are made for this section of the community.

2.10 In the light of the above, the objective for Government and the Regulator has been:

2.11 Universal service is about finding ways of meeting the needs of those remaining few whom the unregulated market might choose not to serve. It is not about predicting what will be required in the future and requiring it advance. Neither is it about prescribing what is required for future economic growth and prosperity. That would not be "universal service" as currently understood and funded. However, Chapter 5 of this document considers whether such changes might be desirable or possible in the context of the delivery of higher bandwidth services.

2.12 What policy tools are available to ensure that the above objective can be met? The most obvious is that the market can be left to pursue voluntary initiatives. Just because an unfettered market might neglect certain social groups does not mean that it will. There is a range of reasons why a socially responsible industry will want to meet its obligations in this area. There are also sound commercial reasons for being seen to help such groups and practical benefits in terms of brand loyalty. These ‘benefits’ are discussed further in Chapter 4. Furthermore, in some circumstances the operators might not be able to distinguish, before they are connected, between strictly uneconomic customers and those who bring a reasonable return, so they would be unable in practice to refuse service exclusively to the former.

2.13 Other regulatory measures, such as price controls on BT and the promotion of competition, are not specifically designed with universal service in mind, but make a significant contribution to reducing the level of concern because they ensure that prices are fairly based on costs. The impact of these measures should not be underestimated. Although this exercise does not specifically address such measures, it is arguable that they make a greater contribution to the long-term well being of vulnerable consumers than universal service does.

2.14 The main instrument of universal service policy is to place a licence obligation on one or more operators requiring them to provide a basic level of service to anybody who reasonably requests it. This ensures that, throughout the country, at least one operator will offer a basic telephony service. This policy, particularly if combined with an obligation that such services be offered at the same price throughout the country, does much to address the basic problems of accessibility and affordability in uneconomic areas.

2.15 A second element to universal service is the licence obligation placed on one or more operators to provide a network of public call boxes (PCBs). Despite the growing prevalence of mobile phones, PCBs are still needed in their own right in order to provide access to telephony away from home. Moreover, they also serve a useful function as substitutes for residential telephony for people who, for whatever reason, are unable or unwilling to have a telephone installed at home. Most PCBs are economically viable, but a universal service obligation in this area can ensure that a comprehensive network is available throughout the country and that uneconomic call boxes are provided in areas where they are needed.

2.16 The third main element is to require the universal service provider to offer special tariff packages for people on low incomes or with low usage patterns. BT currently has licence obligations requiring it to provide a Light User Scheme, which gives rebates on line rental if the telephone is used infrequently, and a Limited Service Scheme, which has low joining and rental costs but which offers no outgoing calls service. They are also working on a Limited Outgoing Calls service that would help users control their call expenditure by limiting outgoing calls to those paid for in advance using a pre-paid card.

2.17 Finally, certain types of obligations can be placed on all operators if the service concerned is considered to be sufficiently important. For example, all operators are required to offer free emergency calls and to provide a directory enquiry service. Oftel has recently suggested to the DTI that the provision of specific services for meeting the needs of people with disabilities should also fall into this category.

2.18 As indicated above, the obligations associated with universal service could be placed upon all operators or just upon one or two. In some cases, such as emergency calls, it is important that all operators should provide the service. In others, the important thing is to ensure that somebody provides the service and there is no need to impose the burden on everybody so long as, for that particular element of universal service in that particular area, there is a designated "universal service provider" who has the obligation.

2.19 Oftel made a detailed assessment of universal service costs in 1996 and they were published in February 1997. Estimates were made of the cost of serving:

• Uneconomic customers (ie the cost of providing special tariff schemes);
• Uneconomic areas (ie the cost of providing service in, mainly, remote rural areas); and
• Uneconomic public call boxes.

2.20 These costs, totalling £44-65 million per year, were 0.2-0.3% of industry turnover in 1996/97 (estimated at £22.2 billion). More significantly, however, there are also benefits associated with the provision of universal service and these should be set against the costs to get a better understanding of the net burden of universal service. Oftel looked at the following main kinds of benefits:

• Ubiquity (ie the increased likelihood of winning the custom of people who move out of uneconomic areas to economic ones);
• Life cycle benefits (ie the increased likelihood of retaining profitable customers if you have served them when they were unprofitable);
• Brand image (ie the enhancement of your brand because you are seen to serve the community).

See table 4.1 for details.

2.21 Although the calculations behind some of the benefits were less rigorous than those related to the costs, it was clear that there was no demonstrable net burden. However, that does not mean that there never will be. The question of who pays needs to be addressed.

2.22 One option would be for the Government to meet this cost out of general taxation, subject to EU rules on state aid. Payment could be made directly to the universal service provider or could be made in the form of direct subsidy to the consumer.

2.23 An alternative is to place the burden, if any, upon the industry. This could be done by expecting the universal service provider to meet the cost or by spreading the burden of universal service obligations upon the industry more generally through payments into and out of a universal service fund. Whatever the mechanism, what this means in practice, of course, is that the costs are passed on to telecoms customers.

2.24 The question of how much universal service obligations cost is therefore of relevance not only to the operators, but to everyone; either as tax payers or as telecoms users. The point becomes more pertinent if Oftel were to give serious consideration to raising the level of universal service.

2.25 Deciding which operator or operators should be charged with the delivery of universal service is not a decision that is made in isolation. A number of very practical considerations come into play.

2.26 Most obviously, BT already has the universal service obligation, which it inherited from the time when it was a nationalised monopoly service. Kingston Communications is in a similar position in respect of services in Hull. BT and Kingston therefore already have networks capable of delivering a universal service in their respective areas.

2.27 Another practical consideration is that it is in the long term interests of competition (and, therefore, of consumers) to keep the regulatory obligations on new operators as low as possible so as to encourage market entry. Placing universal service burdens on new-entrants might have the effect of discouraging competition.

2.28 Finally, much of the statutory framework for universal service is now based upon EU legislation. Changes to the UK regime might require changes to EU legislation, which would need to be proposed and negotiated in the usual way.

2.29 In the light of all the above, how have Oftel and the DTI secured the policy objective described in paragraph 2.11?

2.30 At the end of the last consultation exercise on universal service, Oftel confirmed that the universal service providers were BT and Kingston Communications. In July 1997, Oftel established the current level of universal service in the following terms:

• Oftel establishes the level of universal telecommunication service for the 4 year period from 30 September 1997 to 29 September 2001 (subject to a review in 1999 which will take into account the views of the Secretary of State for Trade and Industry, who shares statutory responsibilities with the Director General in this area) as consisting of the following services:

• A connection to the fixed network able to support voice telephony and low speed data and fax transmission;

2.31 In addition, an Oftel Statement published in September 1998 made a recommendation to the Secretary of State with regard to the appropriate level of universal service that should be provided to meet the needs of people with disabilities. The Secretary of State will be consulting shortly on the precise terms of a Statutory Instrument based on that recommendation.

2.32 Although BT and Kingston Communications are the universal service providers, the services listed above as being available to ‘all consumers’ are provided by all telecoms operators offering direct residential services.

2.33 On the basis of the calculations of the costs and benefits of universal service, Oftel decided it was not appropriate to establish a universal service fund. No calculations were done for the costs or benefits of Kingston Communications’ universal service obligations.

2.34 The July 1997 Statement also introduced a number of specific measures:

• The introduction by BT under its licence of the Residential Limited Service Scheme (marketed as ‘In Contact’);
• BT’s voluntary commitment to introduce a Limited Outgoing Calls service by the end of 1999;
• New voluntary disconnection policies and targets;
• The simplification of the licence rules for the location of Public Call Boxes; and
• New guidelines on the introduction by BT of ‘uneconomic’ Public Call Boxes.

3.1 Oftel seeks views on the success or failure of the current regime at meeting the policy objective set out in paragraph 2.10. In particular, Oftel wishes to assess the modifications to the regime introduced in 1997 and listed at paragraph 2.34. As these latter modifications were not introduced until the second half of 1997, Oftel will be looking at them in greater detail later this year in the light of comments received and so as to give a better opportunity to assess their performance over a reasonable period of time.

3.2 This Chapter gives an overview of the developments so far and identifies key issues that need to be addressed. Oftel will be glad to receive comments on all aspects of it.

3.3 Overall household penetration rate for fixed telephony in the UK is at approximately 94%. Though this may hide a certain amount of variation between regions and between income groups, it is nevertheless a very high level of penetration. Of those that are excluded, a number will be those who do not want a telephone, who have a mobile telephone or who are moving between houses and in the process of having a telephone installed.

3.4 One of the interesting developments since the last time Oftel looked at universal service is the dramatic uptake of pre-paid mobile telephony. Although the up front costs and the per minute charges are relatively high, pre-paid mobile does have a number of characteristics that make it very attractive to people who are concerned by the risk of running up large bills. It can also be used by those with poor credit ratings and is attractive to those who are wary of formal contractual commitments. Finally, of course, it has the added advantage of being mobile and is suitable for people who move regularly between short term rented accommodation. Therefore, although these mobile telephones are still relatively expensive, they do suit the lifestyles of many people who still remain unconnected to the fixed network. This is reflected in the high take-up of the product, and Oftel would be very interested in any information regarding the extent of substitutability between fixed and pre-paid mobile at this end of the market.

3.5 As the percentage of the population without a telephone falls, it becomes increasingly difficult to identify those that remain and the reasons behind that situation. The question of who remains ‘unphoned’ is of great interest to Oftel. Equally, as the percentage drops, it becomes more difficult to find ways of getting the last few onto the network. There must come a point at which the marginal cost of finding a way of getting the next percentile connected becomes excessive. Oftel welcomes views on these issues.

3.6 During the course of the last examination of universal service, Oftel negotiated with BT the introduction of a new tariff scheme to help those without a telephone become connected. The Residential Limited Service Scheme, marketed by BT as ‘In Contact’, has no connection charge, a one-off joining fee of £9.99 and a quarterly rental of £9.25. No outgoing calls are allowed other than free calls to emergency services and certain freephone numbers. The scheme was designed to offer basic incoming telephony to enable people to keep in touch and be contactable. BT’s licence condition required them to use their best endeavours to market the Scheme in such a way as to enrol 300,000 subscribers within 18 months. This figure was based on what was felt to be a reasonable proportion of the ‘unphoned’ and was not based on close market research of the potential customer base for the product. While Oftel expect BT to continue to market In Contact aggressively and to improve their take-up, it is more important to ensure that those people who would benefit from the service are able to obtain it than it is to meet a particular target.

3.7 That said, although the scheme was very successful during trials and has worked well, take-up has been disappointing. By the end of March 1999, only 27,000 subscribers had been on the scheme. This has been very good for those 27,000 households, but it is a lot less than Oftel had hoped for. A similar scheme introduced by Kingston Communications has barely registered.

3.8 BT have done quite a lot to meet their obligation in terms of marketing activity, but there is still scope to make the scheme more accessible. Oftel expects BT’s efforts in this area to continue and to improve.

3.9 Oftel believes that there are three main contributory factors for the low take-up. Firstly, the scheme still involves a fair amount of bureaucracy and ‘fuss’; contracts have to be signed and lines installed. Secondly, the scheme is still too limited. It was meant to be part of a ‘suite’ of schemes with pre-paid options that would have allowed greater flexibility and made outgoing calls easier. These pre-paid options have not yet been introduced. Finally, though it is debatable how much of an influence this has been, the introduction of pre-paid mobile may have taken up some of the market that Oftel was aiming for (though it will have had little impact in more remote rural areas). Indeed, the development of pre-paid mobile has demonstrated that markets are, in the long run, a better instrument for meeting the needs of customers than schemes invented by regulators or Government.

3.10 It is worth asking the question, should BT persevere with this scheme? Oftel believes that it will be more successful when linked to the pre-paid option being introduced later this year. That and the clear benefits which almost 30,000 households do get from the Residential Limited Service Scheme suggest that it is worth persevering.

3.11 The Light User Scheme is an older scheme required under BT’s licence. It provides a reduction in the cost of line rental compared to the standard rental for those who do not use the telephone a great deal. It is available to the bottom fifth of customers ranked according to call usage.

3.12 Oftel was concerned at the time of the last review of universal service that this scheme was poorly targeted. It is available on the basis of low usage rather than low income. This can mean that wealthy individuals who make few calls can gain more from it than poor families who need to use the telephone to keep in touch. It is also rather expensive, accounting for some two thirds of the estimated cost of universal service for BT. This expense is, effectively, a permitted cross subsidy from the remainder of BT’s business and a burden on all other telephone users.

3.13 Oftel felt that schemes which genuinely helped people control their telephone bills through barring and through pre-paid options would represent better value for money. In 1997 Oftel suggested that, if BT introduced one or more pre-paid options, they might be relieved of their obligation to provide the Light User Scheme.

3.14 BT are about to launch a pre-paid scheme (see para 3.15) and Oftel would welcome views on whether or not to relieve them of this obligation. If the Light User Scheme were to be abolished, of course, telephone bills would rise for those currently on the scheme and Oftel would welcome views on how the scheme might be phased out and whether a transition period of some sort would be needed for these customers.

3.15 As mentioned above, BT has continued to work on the development of a pre-paid scheme. This would allow customers to have an outgoing calls barred package similar to In Contact, with the additional advantage of being able to make outgoing calls when they have been paid for in advance by the purchase of a card with a Personal Identification Number. Such cards would be available from newsagents and other retail outlets.

3.16 Given the unenthusiastic take-up of In Contact, it is worth asking whether this new Limited Outgoing Calls Scheme is still appropriate, and Oftel would welcome views on this matter. However, the success of pre-paid mobile suggests that this kind of flexibility could be very popular and could meet a genuine need. Together with In Contact, it could represent a suite of service packages that enable people to control their expenditure and successively migrate onto a full service package. Oftel will therefore hold BT to its promise to introduce the Scheme later this year.

3.17 Working with BT, Oftel has developed three service packages designed to help people who would otherwise have difficulty being able to afford a telephone; the Light User Scheme, the Residential Limited Service Scheme and the future limited outgoing calls scheme. They have had variable levels of success.

3.18 In principle further schemes could be developed for these customer groups. But there is not necessarily a role for Oftel in developing such products. If they are genuinely useful products that would appeal to different segments of the market then the operators are likely to develop and promote them without the need for regulatory interference.

3.19 At the time of the last review, Oftel was concerned by the high level of disconnections for debt. Universal service is not truly universal if many people are left without access to a telephone because of inflexible debt management and disconnection. All the main operators have agreed to introduce new measures to bring the number of disconnections down. These new measures consisted of Codes of Practice involving contacting all customers in debt and giving them the option of a repayment plan together with a temporary bar on outgoing calls to prevent further debt accumulation.

3.20 Since the last review, gross disconnection rates have come down (see table 3.1), but not as much as Oftel had hoped. BT’s gross residential disconnections have fallen by 15% over the last two years. This indicates an improvement in the number of times that customers have been disconnected and then reconnected again. It suggests that the new policy has assisted those who find themselves in payment difficulties from time to time. Such people constantly found themselves being disconnected, paying a reconnection fee and then being disconnected again in a seemingly endless cycle. However, net disconnection rates (ie those that have not been reconnected) have risen over this period. Given the extensive procedures now in place to give customers the opportunity to find a means of paying, this is a disappointing figure. However, it also suggests that a large number of these people have no intention of paying. There is increasing competition on telephony and it may be that growing numbers of customers are leaving BT for a different operator without paying their final bill

3.21 Oftel would be glad to receive views on whether BT’s procedures now give everybody a fair and reasonable opportunity to settle their bill. The decline in gross disconnections suggests this might be so. The rise in net disconnections might suggest that BT is doing insufficient or it might reveal a rising incidence of fraud as competition gives greater opportunities in this area.

3.22 At the time of the last review of universal service BT agreed to make a change to its policy on the installation of new public call boxes (PCBs). BT are continuously assessing new locations for PCBs on a commercial basis. However, they get regular requests for new PCBs in locations that they do not believe offer viable commercial prospects. In the past, they have not installed PCBs in these circumstances. However, they agreed to undertake an assessment on social need in each such case that they have rejected on commercial grounds. Subject to an overall ceiling of 500 such PCBs, BT agreed to install new ‘uneconomic’ PCBs where the location met criteria agreed between BT and Oftel. Since that agreement, some 500 requests have been made and over 100 new uneconomic PCBs have been installed. The remaining 400 requests were for the installation of uneconomic call boxes in areas where there was little social need or where there was adequate existing provision in the vicinity.

3.23 The provision of specific services to enable equal access to basic telecoms services for people with disabilities is a part of universal service. As these measures can be introduced by the Secretary of State for Trade and Industry in a Statutory Instrument in the context of Article 8 of the Revised Voice Telephony Directive, Oftel has made recommendations in this area to the Secretary of State for a new licence condition that would place obligations upon all telecoms operators offering fixed line retail services. These recommendations are being considered and a proposal for a Statutory Instrument in expected shortly.

3.24 Progress on this element of universal service has been slower than the remainder of the package and it is not really possible to undertake any kind of review at this stage. However, once the new Conditions are in place it will be important to ensure that they are reviewed on a regular basis.

3.25 DTI are also reviewing the affordable provision of textphones in the UK. Textphones are connected to the network like any other telephone, but they send and receive typed messages displayed on a small screen. They are invaluable for people with impaired hearing or speech who can not use a conventional telephone. The current high price of basic models has been a significant barrier to greater textphone use and to the greater use of telephony by people with impaired speech or hearing.

3.26 Separately, BT has been developing a ‘Virtual Text Node’ which will increase the functionality of the network for textphone users. This would upgrade the BT network by the addition of a platform that identifies textphone calls, automatically connects to a text relay service where necessary allowing textphone users to converse with people who do not have a textphone. It also avoids the need for lengthy registration processes with the text relay service every time a call is made. Progress has not been as fast as Oftel would have hoped, but BT are confident that it should be introduced during the course of 2000.

3.27 As part of the last Price Control Review Oftel set out the principle that those basic elements of telecoms service which form universal service would be provided at geographically averaged prices so that they are available to all consumers at the same price throughout the country. This principle was restated as part of the last review of universal service. It has the benefit of ensuring that the benefits of competition in areas of the country where BT face strong competition are extended throughout the country. However, it is not without negative effects on the market and, at the margin, it might force BT to price higher in areas of low cost than they might otherwise do. Oftel suggest that the benefits in terms of the impact on non-competitive areas more than outweigh the relatively minor impact on prices in low cost areas, but will be looking at it again in the context of the Price Control review.

3.28 There is, at present, an exception to the rules on geographic averaging which allows BT and Kingston Communications to charge the full cost of any line installation that involves the use of more than 100 man-hours. This has always been seen by Oftel as an acceptable exception that ensures that the universal service providers and the majority of their customers are not exposed to excessive costs installing lines in very remote locations. Arguably, however, such lines are every bit as essential to those living in remote locations as they are to everybody else. Oftel is required by EU obligations to ensure the affordability of universal services and to consult on issues relating to affordability. Oftel would welcome views on whether the charges arising from this measure are significant barriers to those who might wish to be connected to the network.

3.29 One possible option is for BT to make greater use of its ability to provide fixed radio access in rural areas. BT has been awarded spectrum for this purpose, but has been slow to introduce the service. If BT were to use fixed radio access to bring down the cost of providing access to remote properties, there might be less need for a ‘100 man-hour rule’. Alternatively, it might be thought that removing the 100 man-hour rule would give BT greater incentive to make use of its fixed radio spectrum.

4.1 The final part of this Review is to look again at the costing and funding of universal service. Oftel’s position in 1997 was that there was no demonstrable net burden on BT as a result of its universal service obligation and that the question of funding did not, therefore, arise.

4.2 This position was based on an estimate of the costs incurred and benefits gained by BT as a result of its universal service obligation. As this is an interim review, rather than repeat the complex modelling undertaken previously Oftel has carried out a study to update the original calculation in the light of changes in methodology and cost drivers. It is Oftel’s view that a full-scale exercise is required only if this initial study indicates that there is likely to be a significant net burden from universal service provision.

4.3 Of course, one factor that can have a significant impact on the net cost of universal service provision is the scope of the universal service obligation. For example, widening the scope to include mobile telephony or ISDN could lead to a significant net cost arising. However, this initial analysis does not explore the net cost implications of changing the current universal service obligation.

4.4 Methodological issues can impact on the estimate of both costs and benefits of universal service provision. The general approach that Oftel took to the costing methodology has received broad acceptance by the industry. This methodology, and that for estimating benefits, can be found in Chapter 6 and Note 1 of the February 1997 consultative document.

4.5 However, the methodological issues associated with the valuation of benefits proved more controversial. The three benefits identified by Oftel in the consultation document were, as defined in paragraph 2.20, ubiquity, life-cycle effects and brand enhancement and corporate reputation. Table 4.1 shows Oftel’s original estimate of the value of these benefits.

Source: Universal Telecommunications Services, Statement, Oftel, 1997.

4.6 Oftel remains of the view that BT gains a benefit from brand enhancement and corporate reputation. There is a benefit to being seen to provide service to uneconomic areas and customers. Oftel also remains of the view that BT gains a benefit from serving uneconomic call boxes. This benefit to BT arises partly because uneconomic call boxes may become economic over time, and partly because advertising the company’s logo on uneconomic call boxes enhances corporate reputation.

4.7 Oftel originally argued that there was a benefit to BT from ubiquity because a household moving from one area to another will know that BT is a potential supplier but may not know of BT’s competitors. This leads to BT gaining customers who would have opted for the competitor if they had been aware of the competitor’s existence.

4.8 However, Oftel is now of the view that this estimate was too large. The estimate included the benefit from BT being a large national network as well as the benefit from BT having the universal service obligation. The benefit to BT from the universal service obligation exists only where customers move from uneconomic areas to economic areas. A customer moving from an economic area would be aware of BT even if there was no universal service obligation because BT would voluntarily serve in the area. Since around 1% of the UK population live in uneconomic areas, the ubiquity benefit arising simply because of the universal service obligation on BT is likely to be insignificant.

4.9 Oftel is of the view that its original estimate of the benefit from the life-cycle effect may also have been too high. Oftel had originally argued that by serving the customer when unprofitable, BT increases the probability of retaining the customer when they become profitable. However, it has been argued that not all customers will become profitable in future years. Once the calculation is adjusted to take account of this fact the benefits are likely to be reduced to the lower end of the range quoted in the Statement.

4.10 So it appears that changes in methodology will lead to a reduction in the estimated benefit arising from holding the universal service obligation. The revised benefit is likely to be around £61m. The next stage is to examine whether there have been developments in the market that have changed the estimated cost of universal service provision.

4.11 The Oftel statement costed three components of universal service: uneconomic areas, customers and payphones. The estimated cost of each of these components is shown in table 4.2. The main cost from the universal service obligation was found to arise because of the ‘Low User Scheme’ tariff. The cost of this scheme was estimated at £30-£40m. The Statement also put forward the idea of an ‘outgoing calls barred service’ (the Residential Limited Service Scheme, marketed by BT as ‘In Contact’). By modelling the likely take up of this scheme Oftel concluded that its introduction could lead to an increase in costs of £10-£30m in the year 1998/99.

Source: Universal Telecommunication Services, Statement, 1997.

4.12 Thus the most significant factor in analysing whether costs are likely to be different to those in the Statement is whether the take-up of LUS has changed and whether, as predicted, there has been significant take-up of In-contact.

4.13 Information provided by BT shows that the take-up of the In-Contact scheme has been far lower than expected and the line rental tariff charged is higher than originally envisaged. These two factors together mean that the cost of this scheme is likely to be less than £3m.

4.14 During the same time period the take-up of the LUS scheme has grown. At the time of the statement there were around 2.2m customers on the scheme. This has risen to around 2.6m, so increasing the cost of the scheme by around £5m. The overall impact of updating the calculation to take account of the current take up of In contact and LUS is to raise the cost of uneconomic customers by £8m from the initial estimate of £30-£40m.

4.15 The conclusion of this initial exercise is shown in Table 4.3. It can be seen from the table that the original costing exercise carried out by Oftel, which used data from 1995/96, estimated that the benefits of the universal service obligation outweighed the costs.

4.16 This initial study leads to a revised estimate of the net current cost of the universal service obligation in 1998/99. Methodological changes in the valuation of benefits reduce the estimated benefits by anywhere between £41m and £90m. At the same time, changes to the take-up of low user schemes lead to an increase in the estimated cost of around £8m.

4.17 It can be seen from Table 4.3 that these revisions bring the estimated benefits much closer to the estimated costs and could result in either a small net cost or a small net benefit.

4.18 However, it should be recognised that the cost estimate has not been revised to take account of factors placing downward pressure on the cost of the universal service obligation. For example, greater efficiency by BT will lead to a reduction in the cost of uneconomic customers and uneconomic areas.

4.19 At this stage of the review exercise Oftel has not put a figure on the increase in efficiency or on the impact this has on universal service costs. However, for each percentage increase in efficiency the resulting percentage reduction in the universal service cost can be substantially larger. This is because the universal service cost is calculated as the difference between the revenue foregone and the avoidable cost. The efficiency adjustment reduces the avoidable cost, but does not affect the revenue foregone.

4.20 There is also the potential for cost reduction by using fixed radio access in the local loop. Oftel’s original costing exercise calculated that the cost of universal service would fall significantly if BT were to use fixed radio access in areas where it is the least cost technology. The Radiocommunications Agency has allocated spectrum to BT for this purpose, but BT has made little use of this spectrum allocation at present. At this stage it is therefore impossible to judge the impact of fixed radio access on costs incurred by BT.

4.21 However, it could be argued that where radio fixed access is the lowest cost technology it is the modern equivalent asset to the copper pairs. It could also be argued that Oftel should be examining the cost of universal service to an efficient operator, rather than the cost BT incurs in delivering universal service. If these two arguments are accepted it implies that the calculation should assume that radio fixed access is used where it is the least cost technology. This would lead to a significant reduction in the cost of both uneconomic areas and uneconomic customers.

4.22 A further cost saving could arise from the greater freedom BT now has in the resiting and removing of call boxes. For example, BT is able to resite call boxes away from locations in which they are being vandalised. The 1997 consultation document estimated that this change could reduce the cost of providing uneconomic call boxes by up to £10m.

4.23 While this initial study has not estimated the impact on cost of these downward pressures, it is clear that they could have a significant impact on the cost of universal service. For example, in the 1997 Consultation Document Oftel concluded that treating radio fixed access as the modern equivalent asset might reduce the cost of uneconomic areas by about one-half.

4.24 The above does not represent a thorough and detailed re-evaluation of the costs of universal service, but it gives an indication as to whether or not a more thorough exercise is worth undertaking. The initial view of Oftel is that it is not. The above exercise seems to demonstrate that a more thorough re-evaluation would simply confirm that there is still no case for a funding mechanism to be put in place.

4.25 Oftel does not completely exclude the possibility that a more thorough costing exercise might be needed. If respondents present a convincing case that the initial assessment above is fundamentally flawed, then a reassessment might be appropriate.

4,26 However, there are additional tests that would have to be met before a new costing exercise is undertaken.

4.27 First, BT and/or Kingston Communications would have to insist that, in the absence of a universal service obligation, they would choose not to serve certain customers. If they can not make this statement, then they are clearly indicating that the provision of service to these customers is not an undue burden on them.

4.28 Second, BT and/or Kingston Communications would have to believe that there is a net burden and that a Fund is a proportional response. If they do not believe this, there is little value in undertaking the exercise.

4.29 Finally, BT and/or Kingston Communications would have to be prepared to calculate the costs and benefits of universal service according to an Oftel methodology and would have to provide an appropriately detailed level of information in order for this to done. The Oftel Consultative Document from February 1997 set out a number of areas in which BT’s data were insufficient. One of the main reasons that Oftel made no similar calculation of the universal service costs for Kingston Communications was that, at the time, they were unable to provide the relevant data.

4.30 Oftel believes that it is unlikely that there will be a need to re-evaluate the costs and benefits of universal service at this time. However, in the unlikely event that a re-evaluation is undertaken and that it demonstrates an undue net burden on BT or Kingston Communications, Oftel would give real consideration to the setting up of a universal service fund.

5.1 This chapter considers whether or not there is a case for raising the level of universal service. Chapter 2 has considered whether relatively minor alterations to the universal service obligations are needed in order to meet the policy objective. This chapter looks ahead at future needs and considers whether more significant changes are required to bring more advanced services within the scope of universal service. The focus of the chapter will be on access to higher bandwidth services, but other possible additions to the universal service obligation (mobile and narrowband ISDN) will also be looked at briefly at the end of the chapter.

5.2 There has been much discussion about the role that Governments and Regulators can play in making access to higher bandwidth ‘Information Age’ services available to as many people as possible. "Universal Service" has been a notable success in ensuring that most people have access to basic telephony. Could it achieve the same for new products and services?

5.3 This would be a considerable change in approach. Rather than a policy designed to ensure that nobody lacks access to a basic and essential technology, policy would be based on the idea that new services, such as fast Internet access, should be made available on a comprehensive basis as soon as possible. The idea would be to reduce the risk of the development of an information ‘have not’ group in society.

5.4 A further reason for addressing this issue now is that the European Commission is in the process of conducting its 1999 review of EU communications legislation. This will include reviewing the existing EU legislative framework for universal service. Extending the scope of universal service in response to new technologies, such as access to higher bandwidth, will be an area of discussion and debate. If the UK is to engage in that debate in needs to have thought the issues through.

5.5 This chapter examines whether to extend the scope of universal service to cover the provision of access to higher bandwidth services. For the domestic user, this could create access to services which will:

• speed up access to the Internet significantly, revolutionising access to information for leisure and educational purposes;
• make the emerging range of interactive services and ‘e-commerce’ (home shopping, home banking, interactive games) even more attractive; and
• enable the delivery of new services such as video on demand.

5.6 There are several competing technologies that might be able to deliver higher bandwidth services to the home in the future. Already, existing infrastructure can provide customers with leased lines or with a cable connection for use with a cable modem. Third generation mobile telephony should provide equivalent services over mobile networks by 2003, and fixed broadband radio should be available in the same timescale. Digital television and satellite services will also be offering means of delivering some of these services. But the greatest interest, in the short term, is likely to be on ADSL (Asymmetric Digital Subscriber Loop) technology, which allows the operator to deliver a wide range of new digital services to the home via the existing copper wires. Both BT and Kingston Communications are about to roll-out ADSL over their networks in the near future.

5.7 Oftel has been looking at ways of encouraging the provision of ADSL in its consultative document Access to Bandwidth: Proposals for Action. The approach taken there is to enable service providers to use BT’s network to deliver higher bandwidth services as BT upgrades the network and also to promote competition in that technological upgrade through ‘local loop unbundling’ which would give other operators access to BT’s local loop. Oftel believes this approach will facilitate the development of a wide range of services including high speed Internet access and also encourage operators to upgrade wherever they see demand. As some areas of the country gain access to these higher bandwidth services, Oftel expects there will be a knock-on effect with demand increasing and operators competing to deliver access and services.

5.8 The Government is also addressing the future provision of broadband service with the forthcoming auctions for Third Generation mobile services and its current consultation on opening up the 28 and 40 GHz bands for broadband wireless fixed access services.

5.9 The market for higher bandwidth services is, as yet, unproven. The measures by Oftel and the Government outlined above are designed to ensure that any current or future demand for access to higher bandwidth services is recognised and met. However, if such products do become a significant feature of the telecoms market, there may still be large numbers of people who can not access them for one reason or another at an affordable price. There may come a point at which the issue of social exclusion becomes relevant, particularly if the services being accessed by the majority come to be seen as essential for full social and economic inclusion.

5.10 At what point might it become appropriate to include access to higher bandwidth services in the universal service obligation?

5.11 It has been argued that there is a case for doing so almost immediately. One argument is that the development of the market might be accelerated if the services were made available to all. In other words there is likely to be a ‘critical mass effect’. The number of customers will depend upon the number and range of services available, which will in turn depend upon the number of customers. In order for the market to take off, it is necessary for the service to be rolled out to a sufficient number of customers for service providers to regard it as worthwhile to enter the market to serve the customer base.

5.12 However, the existence of ‘critical mass effects’ is not, on its own, sufficient to justify regulatory intervention or the funding of uneconomic customers. Many markets exhibit these characteristics, but regulatory intervention is not usually called for simply because of this. It is in the interests of suppliers to provide the upfront investment to ‘kick start’ the market if it is necessary to achieve a critical mass in order to make the services in question viable. Accordingly, Oftel does not consider that the existence of the ‘critical mass effect’ is sufficient reason, by itself, for regulatory intervention.

5.13 A further argument for introducing a new universal service obligation immediately is that action is necessary to guard against the development of information ‘have nots’. As explained above, using universal service in this way would be a significant departure from the way universal service has been applied before. If such an approach were adopted now, what would it mean in practice?

5.14 Following the traditional universal service model in this context would mean giving everyone a right to a telecommunications connection offering higher bandwidth services. Despite the range of technologies that might deliver such services in the medium to long term, in the near future the most realistic technology to deliver a near ubiquitous product would be ADSL delivered on the fixed networks of BT and Kingston. A new universal service obligation would, in this context, probably translate into an obligation on BT and Kingston to roll out their ADSL product more rapidly and more extensively than they might under purely commercial considerations. This would include roll out to ‘uneconomic’ areas. Following the example of the current universal service model might also mean geographically averaged tariffs and the establishment of special schemes to ensure the affordability of the service for those who could not afford the full price.

5.15 This approach might have several advantages. It would help ensure that people were not excluded from the developing opportunities that high speed Internet access might offer. These opportunities could include greater access to commercial services, the ability to work from home, greater ability to interact with social services, health and local government and opportunities to use a wide range of entertainment services. They also offer individuals enormous possibilities in terms of access to information and to learning opportunities.

5.16 More widely, a universal service obligation of this sort introduced in the near future might help to bring benefits to society and to the economy as a whole. The benefits to individuals listed above could feed through and provide a better informed, better-educated and more skilled workforce. They could also contribute to the development of a market for e-commerce and an environment in which e-commerce can thrive.

5.17 But there are also arguments against using universal service in this way at this stage. Technically, there are limits to the roll-out of ADSL technology, which mean that homes and businesses far from the exchange can not always be provided the service without incurring large infrastructure costs. It might also be damaging to the development of efficient means of providing such services. The imposition at this early stage of a universal service obligation delivered by a particular technology might reinforce the adoption of that technology even though it may not be the most efficient for providing services in the longer term. Further, the imposition of the universal service at charges below economic cost might stifle the development of cheaper alternatives for serving those customers.

5.18 But a key argument against introducing universal service for access to higher bandwidth services now is one of cost.

5.19 Universal service is based on a cross-subsidy from one group of customers to another. The majority of telephone users cross-subsidise the few who can not otherwise afford the service. This helps ensure an affordable service in otherwise uneconomic areas and allows for the provision of special services at low prices for those uneconomic customers who could not otherwise afford telephony. For basic telephony, this is not an undue burden because:

• the infrastructure already exists;
• most people already have a telephone, and
• the numbers that need to be cross-subsidised are quite small.

5.20 But the provision of access to higher bandwidth services is an unproven market and the circumstances, at present, are very different from those applying to basic telephony:

• there are high costs associated with roll-out of the product, probably running to billions of pounds if based on ADSL;
• given the immature state of the market, there are no revenues to cover the cross-subsidy (and it is far from clear what future revenue streams will be), and
• as a basic access package is likely to cost more than basic telephony, the numbers of people who find they can not afford it, and therefore need to be subsidised, is likely to be much higher.

5.21 It therefore appears that cross-subsidy within higher bandwidth services (ie economic users of such services subsidising uneconomic users) is unlikely to be supportable at least until the economic users are in a significant majority. A further possibility is cross-subsidy between services (ie from ordinary voice telephony users to higher bandwidth users). This would involve profits from ordinary telephone services being used to subsidise access to higher bandwidth, probably through the mechanism of a universal service fund. The result would be telephony charges higher than without such a cross-subsidy and, in view of the sums involved, this effect could be very significant. The requirement to contribute to a universal service fund might also create a barrier to entry for new telecoms operators, which would be to the long-term disadvantage of all consumers.

5.22 Even if a new universal service obligation of this sort were introduced now, it would only address one part of the overall issue. If the broader policy objective is to ensure that people can use e-mail and access the Internet, then, in terms of access to the network, there are few barriers at present since 94% of households already have a telephone line to which a PC and a modem can be attached. A product like ADSL allows faster and more ambitious services, but is not needed for basic e-mail and Internet access. The real barriers to greater take-up of Internet services are those of access, trust and understanding. Universal service might make a contribution towards improving access, but consumers still need a computer to attach to the network. And universal service can do nothing to address the issues of trust and understanding: many people still have a fear and misunderstanding of information technology and a lack of understanding of the services available and the benefits of using the Internet.

5.23 The above analysis suggests it may be too early to justify adding access to higher bandwidth services to the universal service obligation. However, when might it become appropriate? If, at a future date, there is widespread use of higher bandwidth services and the barriers listed in paragraph 5.20 are, to varying degrees, eliminated, then it might well become appropriate to include access to higher bandwidth services as part of universal service. However, some variation of the current universal service model might well be appropriate. It is not yet clear how the market for such services will develop. It is quite possible that ADSL will not be the most popular delivery technology in the longer term or even that it might fail to take a significant share of that market. Even if it does, there is no certainty that BT and Kingston will be the dominant providers of ADSL in the future. If this situation arises, then any future universal service policy will have to be adapted to include a wider variety of service providers and a range of technologies. This might suggest a ‘pay or play’ model in which a range of operators contribute to the provision of universal service through direct provision as well as, or instead of, contributing to the universal service fund.

5.24 The above analysis suggests that a universal service obligation could be a useful tool for addressing issues relating to network access once higher bandwidth services are already widely used. The costs associated with such an obligation could be recovered from a universal service Fund or via other mechanisms, whichever was most effective. In the former case, changes to the rules in European legislation would be required. Oftel believes that it would be appropriate for EU legislation to provide for Member State discretion to bring additional services within the scope of a universal service fund. This could be on the basis of objective criteria set out in European legislation, for example that the service was considered to be essential, the market penetration had already passed a specified threshold and that intervention was necessary to bring take-up to the maximum achievable level very quickly. This would allow national regulators to adapt the universal service mechanism dynamically to the developments in their respective markets.

5.25 In the meantime there is a range of measures which Government and the Regulator can take to address some of the real barriers to greater take-up of higher bandwidth services. In order to help drive the development of the UK Information Society, Oftel has taken a leading role in encouraging the telecommunications industry to provide affordable tariffs for Internet access for schools. The telecommunications industry has responded positively to this initiative. Many telecommunications companies offer special tariffs for schools, allowing them to connect to the Internet at low prices. Since the introduction of reduced charges for schools, there has been a rapid rise in the number that have become connected. Progress is also being made on a special tariff for primary schools.

5.26 Following the success of the schools initiative, Ministers asked the Director General to encourage telecommunication operators to offer special tariff packages for public libraries, FE colleges and Citizens’ Advice Bureaux. Oftel established a project – Learning Society Access Issues – to take forward this work. A steering group of officials was set up to involve all government departments with an interest. In addition, Oftel is holding discussions with a variety of public institutions with the aim of setting up a working group to inform these institutions how they might become more informed purchasers of the telecommunications services required for Internet access. Earlier this month Oftel announced that a number of telecommunications operators have agreed, in principle, to offer special tariffs for the defined institutions. These tariffs will hopefully be available from early next year.

5.27 Through its IT for All programme and its Information Society Initiative the Government is encouraging more firms and individuals to use new digital services. It has also promoted competition in digital television between different platforms in ways that should promote the spread of interactive digital services to consumers who do not own personal computers. Oftel supports all these initiatives.

5.28 At the same time, the market is finding ways to bring down the costs of computers and of using other devices, such as televisions or games consoles, to allow access to the Internet without the need for a computer. Internet cafes offer public access points and exposure to the technology for those who are still unsure of it. BT has just announced that it will be introducing telephone kiosks with 24-hour Internet access and an e-mail facility. And there is strong competition between Internet Service Providers, which is bringing down the cost of access.

5.29 The bulk of this chapter has looked at the possibility of extending universal service to cover ADSL. But there are two other candidates that are often mentioned in the context of extending the definition of universal service: mobile telephony and narrowband ISDN. Some of the arguments for and against their inclusion are the same as those described above for ADSL, but there are a few specific points worth mentioning.

5.30 Arguably, mobile telephony is on the way towards meeting the test of ensuring that what is used by most people should be available to all. But it still has some way to go before it gets there and it is not clear that mobile telephony is ‘essential’ for social and economic inclusion, given the existence of fixed line alternatives. However, even if mobile telephony were in use by a clear majority of the population and were deemed to be essential, it is debatable whether it would be appropriate to consider adding it to the universal service bundle. Mobile telephony is available to all; without any kind of universal service obligation, the market is providing mobile telephony to anybody who asks for it. The issue, if there is one, is not one of market penetration, but of geographical coverage and of prices.

5.31 Concern has been raised by consumer groups that coverage in some rural areas is poor (eg in rural Wales). Oftel will be investigating this further separately.

5.32 On the price side, Oftel and the MMC have taken action to bring down the price of calls to mobile phones. Oftel is expecting the price of calls from mobiles to fall significantly in the near future as competition develops further. It does not consider that regulatory action to control prices is necessary as competition is delivering lower prices. But it will be monitoring prices and will be reviewing the state of competition in the market next year.

5.33 The second candidate is narrowband ISDN. This is clearly not a service which is currently used by the majority or which is essential. Although it is available to the majority, on demand, it is actually used by very few. This may well be a function of the price of the service, but, as indicated above, that is not something that universal service policy can address. The possibility of adding ISDN to the universal service obligation also raises the fear that picking the wrong technology is more dangerous than picking nothing at all; few people would now back narrowband ISDN as the future of telecommunications.

6.1 This Consultative Document seeks views on the initial positions suggested by Oftel.

6.2 Oftel will consider the responses to this document and will publish a second document towards the end of the year. This second document will include more detailed observations on developments on the existing package of universal service obligations and informal consultation, if necessary, on any licence modifications arising out of that part of the Review. It will also reach firm conclusions on the need for undertaking a re-evaluation of the cost of universal service and on the issue of raising the level of universal service.

6.3 If Oftel concludes that there is no value in recalculating the costs and no need to raise universal service, then the second document is likely to be the last part of the Review, although it might be followed up by formal consultation on any necessary licence modifications. If Oftel concludes that further work is needed, then the Review is likely to continue into the following year.

Comments are invited on all aspects of this document and on any issues that Oftel has not addressed, but which readers feel should be considered. However, readers are encouraged to give particular consideration to the following questions.

Questions arising from Chapter 3: Review of the existing universal service regime

1. Who are the ‘unphoned’? What groups still lack access to basic telephony and what can be done to address their needs?
2. Has pre-paid mobile telephony had an impact on the provision of telephony for the ‘unphoned’?
3. At what point should Oftel accept that no further measures are needed to increase the penetration rate of basic telephony?
4. What more should be done to encourage and develop the Residential Limited Service Scheme?
5. Should the Light User Scheme be retained?
6. If the Light User Scheme were to be abolished, would a transition period of some sort be appropriate for existing LUS customers?
7. Should BT go ahead with the introduction of the Limited Outgoing Calls scheme?
8. What is the future of special service schemes such as the RLSS, LUS and LOC?
9. Is the reduction in BT’s gross disconnections adequate?
10. Is the increase in BT’s net disconnections acceptable?
11. Is BT’s disconnections policy appropriate?
12. Are the procedures for the provision of new uneconomic payphones working well?
13. Should the ‘100 man-hour rule’ be removed?

 

Questions arising from Chapter 4: Should the burden of being a universal service provider be re-evaluated?

   14.Are the revised estimates of benefits sensible?
    15.Are the revised estimates of costs sensible?
    16.Are there any grounds for the establishment of a universal service fund?
    17.Should Oftel do a more detailed analysis of the costs and benefits?

Questions arising from Chapter 5: Should the level of universal service be raised?

    18.Is it appropriate to use universal service obligations now in the context of the roll out of new, advanced services such as ADSL?
    19.If not, at what point might it become appropriate to raise the level of universal service in the future?
    20.Is it appropriate to include mobile or narrowband ISDN in the universal service obligation?

Oftel seeks the views of operators, service providers and consumers on the proposals contained in this consultation document by 29 October 1999. There will then be a further 2 week period during which comments on the representations made during the first period of this consultation are invited. This will end on 12 November 1999.

As part of the consultation process, Oftel will be holding a workshop during the course of September. Anybody interested in attending the workshop should contact David Parsons at the address below.

Views and comments should be made in writing and sent to:

David Parsons
Regulatory Policy Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ

Tel: 0171 634 8746
Fax: 0171 634 8893

Email: dparsons@oftel.gov.uk

Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex, which is clearly identified as containing confidential material. In the interests of transparency, respondents are asked to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing 0171 634 8761.

Oftel would like to set up a link between this Consultative Document on Oftel’s website and any responses on respondents’ own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 or by e-mail to arrange this.

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Asymmetric digital subscriber loop (ADSL) – a technology that allows the use of a copper line to send a large quantity of data (eg. a television picture) in one direction and a small quantity (eg. a control channel and a telephone call) in the other.

Bandwidth – the physical characteristic of a telecommunications system that indicates the speed at which information can be transferred. In analogue systems, it is measured in cycles per second (Hertz) and in digital systems in binary bits per second. (bit/s).

Broadband – a service or connection allowing a considerable amount of information to be conveyed, such as television pictures. Generally defined as a bandwidth > 2Mbit/s.

Copper line – the main transmission medium used in telephony networks to connect a telephone or other apparatus to the local exchange. Copper lines have relatively narrow bandwidth and so have limited ability to carry broadband services such as video unless combined with an enabling technology such as ADSL.

Digital subscriber loop (DSL) – A family of technologies generically referred to as DSL, or xDSL, capable of transforming ordinary phone lines (also known as ‘twisted copper pairs’) into high-speed digital lines, capable of supporting advanced services such as fast Internet access and video-on-demand. ADSL (Asymmetric Digital Subscriber Line), HDSL (High data rate Digital Subscriber Line) and VDSL (Very high data rate Digital Subscriber Line) are all variants of xDSL.

E-commerce – The action of buying online or establishing an online store-front. Also, using technology to speed up and make more efficient the transaction of commerce at all stages of the process from production to delivery.

Geographically averaged prices – prices established by averaging the costs of network elements across the country so that customers in different areas of the country do not pay different rates.

In Contact – The name that BT uses to market its Residential Limited Service Scheme.

Integrated services digital network (ISDN) – a network based on the existing network that provides digital links to customers and end to end digital connectivity between them. ISDN2 provides a maximum bandwidth of 128kbit/s.

Internet – a global network of networks, mainly narrowband, accessed by users with a computer and a modem via a service provider.

Local loop – the access network connection between the customer’s premises and the local exchange, usually a loop comprised by two copper wires.

Local loop unbundling (LLU) – If local loop unbundling is mandated other operators will be able to ‘own’ BT’s access network connection between the customers’ premises and the local exchange (generally, the digital local exchange), which is usually a loop comprising of two copper wires. The customer would then be able to choose another supplier to provide service, and would cease to have a contract with BT.

Narrowband – a service or connection allowing only a limited amount of information to be conveyed, such as for telephony. This compares with broadband, which allows a considerable amount of information to be conveyed.

Public Call Box (PCB) – A payphone to which the public has unrestricted 24-hour access and which is operated under an individual company licence.

Public Telecommunications Operator (PTO) – A network operator with powers granted by the Secretary of State for Trade and Industry under the Telecommunications Act 1984 to enable them to install their systems on public and private land, property etc.

Radio fixed access – Technology that enables operators to provide customers with direct connection to the public telecommunications’ network via a fixed radio link from the home or premises to the local exchange, instead of providing a ‘wired’ connection using copper cables or optical fibre.

RVTD – EC Revised Voice Telephony Directive.

Textphone – A device used by hearing and speech impaired people to communicate over networks in typed text rather than speech (the device is needed at both ends of the call, or a text relay service is needed).

Text relay service – A service enabling textphone users to communicate via the network with other customers by means of an on-line translation service.

Universal service – The basic level of telecommunications services that should be available to all customers.

Universal service provider – BT and, in Hull, Kingston Communications, who have certain licence obligations designed to ensure that a basic level of telephony service is available to everyone in the country, upon request.

Virtual Text Node (VTN) – A proposed network service being prepared by BT which would enable textphone calls to be handled more efficiently and would increase the speed and efficiency of text relay services.