Universal Service Obligation

30 August 2001

Contents

Summary

Chapter 1 Introduction

Chapter 2 Review of current Universal Service provision

Chapter 3 Funding of Universal Service

Chapter 4 Level of Universal Service

Annex A Light User Scheme

Annex B List of respondents to the September 2000 consultative document

Summary

S.1 The Universal Service Obligation (USO) is a fundamental concept of regulation of telecoms in the UK. Basic telephone services should be available to everybody following a reasonable request and at an affordable price. BT and, in the Hull area, Kingston Communications, have to provide a telephone line on request and special tariff packages to help those people with special social needs and on low incomes. All telephone companies are obliged to provide itemised billing and access to the emergency services and directory enquiries.

S.2 The current requirements were set in 1997 for a four-year period. Oftel has looked at the USO and changes in the market to see what the level and scope of the USO should be from 2001. Oftel published consultative documents in June 1999 and September 2000. Oftel has also taken account of existing and proposed European legislation on the scope and funding of USO. This Statement gives Oftel’s conclusions.

Operation of existing regime

S.3 Seven per cent of homes in the UK do not have a fixed line phone. This varies from region to region. Most people without a phone have low incomes and for them cost and the ability to control expenditure are vital considerations. 85 per cent of those without a fixed-line phone own a mobile phone and are mainly satisfied with this alternative. People relying solely on payphones face practical difficulties and feel isolated.

S.4 Most of those consulted feel that the current level and scope of the USO are meeting its objective. Some feel that Oftel should take more account of mobile telephony in assessing the effectiveness of the USO. Consumer groups urged Oftel to take further action on the level of disconnections and BT to introduce a more flexible test on ‘reasonableness’ when customers request a line.

S.5 As a result, Oftel concludes that the obligation should remain on BT and Kingston to:

S.6 To measure future satisfaction of consumers, Oftel will monitor satisfaction with their primary means of telephony – including mobiles and call boxes. In addition, BT and Oftel will work together to draw up a set of guidelines on the criteria to be used for determining ‘reasonableness’ for residential and business customers.

S.7 BT is also being asked to review its current exclusion from its special schemes of those who have mobile phones to ensure low-cost schemes remain available for users on low incomes and with special needs. Oftel will review all Schemes in 2003.

S.8 The level of disconnections is not reducing significantly. Oftel believes that all operators should ensure that their disconnection procedures are appropriate, fully implemented and adequately publicised. Oftel will take the initiative to bring together operators and consumer representatives on disconnections and related issues in order to establish a ‘good practice’ guide.

S.9 On provisions for disabled users, Oftel will require fixed operators to report formally in October 2001 on their compliance with the Services for Disabled Persons Regulations 2000. Oftel will encourage mobile operators to adopt similar provision as fixed operators.

S.10 Oftel will consult on payphones later this year. This will include consideration of both the current criteria for installing of payphones on the grounds of social need; also the guidance on the removal and resiting of public call boxes.

Cost of USO

S.11 The costs of USO are met by BT and Kingston. Under European law, a fund where all operators share the costs of USO can be established only if there is a net cost that imposes an unfair burden on the USO provider. Oftel’s 1997 review of USO showed a significant net benefit to being a USO provider.

S.12 BT and Kingston argued that Oftel had underestimated the costs and overestimated the benefits of being the USO provider. Most other responses supported Oftel’s conclusions or suggested that Oftel had underestimated the benefits. BT and Kingston have not given more information on costs to support their case. BT and Oftel have not agreed on the assessment of benefits in particular those relating to brand image. Oftel’s recently concluded Price Control Review showed that BT’s overall level of profitability, after taking into accounts the costs of USO, exceeded what BT needed to cover its full costs and make a reasonable return.

S.13 Oftel’s conclusion is that the USO does not represent an unfair burden. However, Oftel will consider this issue as part of its review of retail markets scheduled for completion in 2002. Oftel will also carry out further research into benefits to the BT ‘brand’ from being the USO provider.

Scope of USO

S.14 Oftel has considered the effect on the USO of the development of new products and services. The fixed analogue network today enables virtually everyone to access the Internet. Innovative charging packages promote Internet use. The consultation revealed concern that the minimum data speed set at European level might be too low for Internet access. Oftel proposes to review what level should be set in the UK from 2003 if, as expected, those European requirements are made more flexible.

S.15 The USO is about basic telephony and data. Oftel supports the goal of higher bandwidth communications networks and is developing a regulatory environment to encourage this. Oftel will keep the relationship between higher bandwidth services and the USO under close review. An extension of the USO would need to be discussed in the context of the European framework, effects on investment, funding, cross-subsidies, consumer demand and means of supply. Oftel will carry out further research and will work with Government, industry and consumers.

Chapter 1

Introduction

1.1 Universal service aims to ensure that telecommunications services which are used by the majority and which are essential to social and economic inclusion are available to everybody on reasonable request, in an appropriate way and at an affordable price. This is intended to ensure that people on low incomes, those living in remote rural areas, disabled people and other vulnerable groups obtain the advantages of telephony.

1.2 To achieve this, BT and, for the Hull area, Kingston Communications are required to offer basic telephony services to everyone at affordable prices, where a reasonable request is made. These services are:

1.4 The provision of Universal Service should be at geographically averaged prices.

1.5 The current level of Universal Service was established in 1997 for a four-year period. Oftel has been reviewing the level and scope of the obligation, publishing two consultative documents: in July 1999 Universal Telecommunications Services and in September 2000 Review of Universal Telecommunications Services. A list of respondents to the September document is set out in Annex B.

1.6 In carrying out this review Oftel has taken account of growing levels of fixed and mobile phone ownership. Around 99 per cent of households now possess either a fixed-line or a mobile phone; about 78 per cent of households now own a mobile phone. This may indicate that the existence of the obligation has promoted phone ownership but may also suggest that customers’ needs are being met, at least partly, by mobile phones. In addition, customers’ use of the phone is increasingly going beyond basic telephony. Forty per cent of households have access to the Internet; and the extent of Internet use is expected to continue expanding rapidly given the UK’s position as one of the cheapest countries in the world for Internet access for residential customers.

1.7 These developments raise questions about the scope, level and funding of Universal Service. This document summarises responses to the review and sets out Oftel’s conclusions on the level of Universal Service. Chapter 2 considers the existing scope of the obligation; and Chapter 3 considers how it should be funded. The demand for workable and reliable Internet connection and the rollout of higher bandwidth services is examined in Chapter 4.

European framework

1.8 The framework for national rules on Universal Service is set at European level, including the minimum provision of services by Member States and a framework for funding Universal Service. In July 2000 the European Commission published a draft Directive on Universal Service and users’ rights, as part of its proposals for a new framework of legislation on electronic communications services. Under the draft Directive, European legislation will continue to define a minimum set of services of specified quality to which all users and consumers have access in the light of specific national conditions at an affordable price; and it will continue to set rules on funding. The Council of Ministers reached a common position on the draft Directive in June 2001. The draft Directive is now subject to approval by the European Parliament and final adoption by Council. The Directive is expected to be adopted by early 2002 and to come into force by mid-2003.

1.9 The aims of the draft Directive are consistent with Oftel’s strategy and the proposals set out in the earlier consultations. The Directive remains subject to change but this Statement takes into account the likely impact of the provisions, as currently drafted, on Oftel’s conclusions from the review.

BT’s restructuring

1.10 Oftel and the Department of Trade and Industry are discussing with BT a number of proposals for a possible restructuring of the company. Oftel’s view is that restructuring will not affect the definition of the component parts of the Universal Service Obligation. To the extent that BT’s final proposals on restructuring envisage full structural separation between different parts of the business, it may however be necessary to consider whether, and if so to what extent, individual parts of the obligation can be given to different companies and what the optimum mechanisms are for achieving this.

1.11 Oftel and the DTI have made clear that they will consult on the regulatory implications of BT’s final proposals when they are received and implications for the Universal Service Obligation will of necessity be part of their consultation. For the moment, however, in the absence of any change arising from that process, Oftel expects that the policy set out in this Statement, as it affects BT plc, would apply equally to a restructured BT.

Chapter 2

Review of current Universal Service provision

Basic requirements

2.1 In its September 2000 consultation, Oftel invited views on whether efforts to address the needs of people who remained without a fixed line should continue. Recent research has suggested that around seven per cent of households lacked a fixed line phone and that six out of seven of those had use of a mobile. Furthermore, in view of the increasing penetration of mobile phones, Oftel questioned whether it was appropriate to continue to assess the USO’s effectiveness solely on the basis of fixed line penetration.

2.2 Industry respondents suggested that universal fixed line phone ownership is not achievable and the role of mobiles should be reflected in the development of USO policy. They argued that, with high levels of fixed and mobile penetration, dealing with the remaining ‘unphoned’ should increasingly be seen as an issue to be tackled by social policy.

2.3 Consumer respondents suggested that the provision of basic telephony should be reflected in the Government’s general strategy on social and economic inclusion, with Oftel working with other Government departments as appropriate. Nevertheless it was felt that the USO still had a role to play, helping to connect those without a fixed line and making sure the service could be retained, for example by reducing the level of disconnections. The level of line rental was considered a significant obstacle for those who wanted a fixed line phone. Some consumer respondents suggested that a mobile phone was not an adequate alternative, eg due to cost, reliability; coverage; and suitability for some disabled users. Also, the individual nature of mobile phone ownership meant that access to the household may be limited.

Conclusions

2.4 Oftel recognises that some consumers will always prefer alternative forms of telephony, or simply not want a phone. Others will remain unphoned, despite the existence of special schemes, because of low income – which is essentially a social policy issue, not a regulatory matter. Oftel will continue to discuss these issues with Government departments to address these issues in their overall strategy on social and economic exclusion.

2.5 Nevertheless, Oftel believes that the USO continues to have a role in ensuring that those who wish to have a fixed line phone can do so at an affordable price and can retain service, as far as this is reasonably practical. Oftel concludes that the obligation to meet all reasonable requests for a fixed line phone and to enable users to make and receive local, national and international calls should remain a central element of the obligation.

2.6 BT’s prices for basic services are currently required to be averaged geographically. This means that such services are priced the same throughout the UK even when there are regional differences in the cost of provision. As stated in Oftel’s Price Control Review, Oftel is of the opinion that the USO should continue to be provided at geographically averaged prices. This is because geographic averaging has delivered the benefits of competitive price levels nationally, rather than just in geographic areas where competition is strongest. It has also helped to ensure that telephony is affordable in areas where the high costs of provision would otherwise disadvantage certain groups of customers.

2.7 As a means of assessing the operators’ overall compliance with the obligation, Oftel will continue to monitor and publish regularly the penetration rates for telephony, both fixed and mobile. Given that the level of substitution between the two remains uncertain, Oftel will undertake regular surveys on consumer satisfaction with alternative forms of telephony.

2.8 The rest of this chapter sets out Oftel’s position with regard to special schemes, disconnection of service, payphone provision and ensuring access to basic telephony.

Prepaid schemes

2.9 In its September 2000 consultation, Oftel proposed that BT’s prepaid scheme, In Contact Plus, should be rolled out nationally as swiftly as possible; and that Kingston should continue to promote its prepaid scheme, Basic Contact. The main aims of the schemes are to enable households that find it difficult to control expenditure to do so; thereby making a fixed line phone accessible to some households for the first time, and avoiding disconnection of service. Oftel proposed acting as a facilitator between BT (and any other provider of a special telephony scheme) and relevant public agencies to ensure the schemes were effectively targeted.

2.10 In March 2001, BT began the national rollout of In Contact Plus. The scheme is an enhancement of the In Contact product, which combines a low joining fee (£9.99) and reduced quarterly rental charge (£9.25) with a restricted service (calls can only be made to emergency services, 150, 151 and 12822 (Ring me Free)). With In Contact Plus, customers are able to make outgoing calls using a Phonecard Plus card, combined with an access code. Phonecard Plus is available at around 30,000 retail outlets and, for normal use, it can be used with any telephone. There is flat rate charge of 10p per minute for national and local calls and charges are broadly similar to payphone costs. To date, around 2,000 new cards have been used on In Contact lines (around 40,000 calls).

2.11 Whilst restating its commitment to In Contact Plus, BT argued in its response to the consultation that it should not be required to develop any further special schemes. Rather it believes that the way forward should be to improve understanding of the special and changing problems faced by people who do not have telephone service, together with more effective communication about the schemes available. BT accepts that In Contact Plus may be a useful alternative to outgoing calls barred within the disconnection process. It may be possible, subject to BT’s discretion, to allow the customer to combine debt repayment with the prepaid scheme.

2.12 In their responses, consumer organisations supported the national rollout of In Contact Plus but expressed concern that the level of charges was likely to be too high to attract significant takeup. They were also disappointed that access to freephone numbers would not be available at the launch of the national rollout and were concerned about the need to dial 17 digits before dialling the number required.

Conclusions

2.13 Oftel continues to believe that providing prepaid products and enabling control of expenditure by limiting outgoing calls are important steps towards increasing fixed line penetration rates. They also help consumers to stay on the phone. The desire to control expenditure does not necessarily equate to low income. Oftel’s research findings and the experience of utility providers strongly suggest that those on low incomes welcome the availability of a prepaid option. This would appear to be preferable to adopting a means-tested approach, which would be inappropriate for commercial companies to administer. Oftel therefore concludes that BT’s In Contact Plus and Kingston’s Basic Contact should remain as important parts of their portfolio of Schemes to meet licence requirements. Oftel will monitor the take-up and awareness of these schemes to ensure they remain appropriate for the target group.

2.14 Oftel recognises the potential shortcomings of the current In Contact Plus Scheme. Oftel therefore intends to review the product in mid-2002, looking in particular at the take-up by and reaction of target groups. BT will be required to demonstrate that the product fully meets the needs of consumers on low incomes, including those with special needs. BT will, for example, be expected to have examined the value of a scheme requiring a multi-digit access code, to elderly and disabled users, particularly those who are visually impaired. Limitations, such as the need to provide access to freephone numbers, also need to be addressed. The review will determine whether enhancements to the product are needed. BT will also need to demonstrate that their marketing strategy has been effective.

2.15 Oftel would welcome the introduction by other operators of low cost schemes that allow consumers to control expenditure and would be equally prepared to seek support of Government agencies to improve awareness of those schemes amongst the target groups.

Light User Scheme (LUS)

2.16 This BT scheme was launched in 1993 and currently has around two million customers. Normal rental charge and installation costs apply but users receive a rebate on the rental if call charges are less than £15.45 per quarter (excluding VAT). For every 1.0p that the call charge falls below this amount, the customer receives a rebate of 1.04p (excluding VAT). The maximum rebate is £16.08 (excluding VAT), and applies where no calls have been charged. Full details of the Scheme are set out in Annex A.

Future of LUS

2.17 The consultative document summarised research, which suggested that LUS continues to serve the needs of BT customers for whom affordability and accessibility are key issues. As an alternative to pre-pay services as a means of controlling expenditure, it is particularly suitable for those customers who make few calls. Pensioners make up nearly three-quarters of its customer base. The document explained that Oftel, in considering any changes to the scheme proposed by BT, would have to be satisfied that the needs of households with special social needs (including those on low incomes) would be met. For example, the scheme would need to ensure that those making regular calls would be in a position to control their costs.

2.18 In its response BT argued that it should be free to make changes to LUS in normal commercial time scales and suggested criteria against which alternatives and modifications to LUS should be assessed, including that the scheme:

2.19 Consumer groups, in their responses, accepted that the targeting of LUS could be improved but recognised that customers should not be required to provide proof of income in order to join social telephony schemes. They suggested that LUS users should only be moved to different schemes on a voluntary basis, and that LUS should not be withdrawn unless its ‘appropriate’ user base had declined to a negligible level.

Conclusions

2.20 Responses and research suggest that LUS is continuing to serve the needs of customers for whom affordability and accessibility are key issues. However, Oftel accepts that LUS is a complex and sometimes confusing scheme, which needs to be able to change and evolve relatively quickly. To ensure that the needs of vulnerable consumers are met, any proposed design changes, except those of very minor detail, will require the approval of the Director General.

2.21 BT’s criteria are helpful in suggesting how proposed amendments might be evaluated but more information would be needed to satisfy Oftel that the over-riding criterion, ie meeting the needs of the target group, was being met. BT would need to specify how changes would be monitored and evaluated and/or how users would be consulted before any changes were made.

2.22 At the present time, Oftel does not accept that In Contact Plus is a wholly adequate replacement for LUS. There are shortcomings that need to be addressed. In particular, many of the pensioners who benefit from LUS are likely to have difficulty using a prepaid card with multi-digit access codes. Notwithstanding these reservations, Oftel will look positively at proposals from BT which seek to make LUS and/or In Contact Plus more effective for the consumer group at which the schemes are targeted. Oftel intends to review all Schemes in 2003.

Special schemes and mobile phones

2.23 BT’s special schemes are subject to certain eligibility criteria with several exclusions. Currently, customers who have a telephone service provided by another telephone operator, including a mobile network operator, either directly or indirectly, would not be eligible for the scheme.

2.24 In its consultation, Oftel sought views specifically on whether access to LUS should be withdrawn for people who own mobiles, but the principle is equally applicable to In Contact Plus customers. In its research on households without a fixed line phone, Oftel found that a growing number, especially those on low incomes, used a mobile as an alternative. However, for many such households, the mobile was not permanently accessible, effectively excluding them from access to basic telephony for much of the time.

2.25 In its response, BT argued that LUS should remain unavailable for people with mobile phones and that if someone has access to telephony, albeit mobile, then the USO objective had been achieved. Responses from consumers emphasised the limitations of mobile ownership, as outlined above, notwithstanding the practical difficulties involved in actively policing the exclusion.

Conclusions

2.26 BT is obliged under condition 41 of its licence to make available schemes to assist users who have difficulty affording telephone services. Given that a mobile phone may provide no more than a lifeline for many households, rather than a substitute for a fixed line phone, Oftel concludes that BT should review the current restrictions on its special schemes to ensure they do not exclude those who have difficulty affording telephone service. Oftel recognises that customers should understand that such schemes are intended for those on low incomes and those with special social needs.

Disconnection of service

2.27 The Revised Voice Telephony Directive (RVTD) sets out measures to protect customers from immediate disconnection on the grounds of an unpaid bill. These requirements are applied in the UK to BT and Kingston through licence conditions. These require that disconnection procedures provide due notice of disconnection to customers. They also require operators to make details of their procedures available to customers on request and for inspection at their offices.

2.28 Disconnection levels have been monitored through the Telecommunications Industry Forum’s comparable performance indicators (CPIs). These indicators allow comparisons to be made between the Universal Service providers and other operators. As can be seen by the chart below, when customer base is taken into account, both USO providers have lower disconnection rates than their competitors.

2.29 In its September 2000 consultation, Oftel reported concern by operators at the rise in the number of customers who never pay any bills at all, taking advantage of competition to switch between operators (both fixed and mobile). Operators felt that in such circumstances they are fully justified in disconnecting the service, provided they have followed the standard procedures.

2.30 Oftel proposed that a co-regulatory group be established to revise and monitor the voluntary codes of practice drawn up in 1997. The intention would be to include in the codes procedures allowing customers to budget in advance for their telephone costs.

2.31 Support for such a group was not universal. Operators expressed concern that a co-regulatory group might be too inflexible, resulting in a lowest common denominator approach. BT indicated that the setting up of a group might delay BT’s plans to review and reissue its Code of Practice in 2001. Other respondents favoured the introduction of a mandatory licence amendment setting out the circumstances in which it would be permissible for operators to disconnect. Others believed Oftel should focus its attention on those operators and service providers with the highest disconnection rates, while recognising that in society in general there tended to be a more relaxed attitude to debt and bill payment.

Conclusions

2.32 Oftel recognises that it may be possible that wider social and market trends are responsible for the rising number of disconnections. Increasing mobility, household break-up, more telephony choice, and increased penetration bringing in more marginal customers, may be factors. However, the level of disconnections remains a key indicator of the extent to which "telephone services are available to everybody following a reasonable request and at an affordable price". It is therefore essential that appropriate measures are in place to ensure that customers who are genuinely in need and willing to pay are not disconnected.

2.33 Oftel accepts that using a co-regulatory group to revise and enforce disconnection codes of practice may be too rigid an approach at this stage. Nevertheless Oftel firmly believes that operators should be more directly accountable to consumers for their disconnection policies and trends. Oftel believes that in order to minimise situations whereby disconnection of service becomes inevitable, operators and service providers should:

2.34 To address these points, Oftel intends to:

2.35 Should these actions fail to produce published measures to deal with non-payment of bills that are proportionate and non-discriminatory, Oftel will propose further regulatory action in line with European Directives.

Specialist services for people with disabilities

2.36 Regulations implementing Article 8 of the Revised Voice Telephony Directive (98/10/EC) (the RVTD) became law in October 2000. The Regulations insert a new Condition into the licences of fixed line operators and require operators:

2.37 In the September 2000 consultation, Oftel asked for views on how to improve access to, and use of, existing specialist services, and to maximise take up. Oftel retains a particular interest in measures to encourage wider use of textphones and expects that the launch of the Virtual Text Network service, Text Direct, in July 2001, and the availability of rental textphones, will simplify and promote textphone use.

2.38 Industry respondents to the consultation referred to difficulties in improving take-up of textphones. One mobile operator is considering handset solutions for Text Direct, appropriate SMS tariffs and services, and 3G services. Oftel welcomes the progress of two mobile operators in helping hearing aid users. In order to stimulate and further enhance the availability of appropriate services for disabled customers, Oftel has invited mobile operators to a workshop, which will culminate in the adoption of a Code of Practice.

2.39 In February 2001, Ricability published a consumer guide, It’s your call – a guide to telephone services for older and disabled customers (see www.ricability.org.uk/). The guide reviews the services provided by fixed, mobile and indirect access operators.

Conclusions

2.40 Oftel will require fixed operators to report formally in October 2001 on their compliance with the Regulations. Oftel intends to report on its findings. It is expected that, following the adoption of the Code of Practice, mobile operators will offer a similar range of services. Oftel also wishes to ensure widespread awareness of the services available and will support follow-up work undertaken by Ricability.

Provision of telephony on reasonable request

2.41 As noted above, the obligation on BT and Kingston to meet all reasonable requests for a connection to the fixed public telephone network will continue. This is consistent with the RVTD, which requires Member States to ensure that the basic telephony services "are made available to all users in their territory, independent of geographical location, and, in light of specific national conditions, at an affordable price".

2.42 In the case of the installation of a line, BT has previously applied the test of reasonableness through the ‘100 man-hour rule’. The rule means that installation of a new fixed line, where less than 100 hours of work is involved, has a standard charge (currently £99 including VAT). For installations involving more than 100 man-hours, BT makes an extra charge to cover its costs above the 100 hours.

2.43 In its consultative document, Oftel indicated that a rigid rule was not appropriate. It proposed that, in future, BT should be more flexible and use a case-by-case basis to avoid excluding some users unreasonably from a basic telephony service. The consultation invited views on relevant factors BT should consider when applying a test of reasonableness.

2.44 Respondents made various suggestions for an alternative test of reasonableness, including length of residency, actual cost, and national and local levels of telephony penetration. BT argued that its 100 man-hour rule should stay, albeit expressed as a monetary value. BT believes that the rule is a sensible compromise between balancing the interests of the majority of customers by keeping costs down, and addressing the needs of customers in remote areas.

Conclusions

2.45 Oftel still believes that a rigid rule is not an appropriate way to test for reasonableness. BT and Oftel should work together to draw up a set of guidelines, taking into account comments received in response to the consultation, within six months of the publication of this Statement.

2.46 The Guidelines should ensure that the criteria for determining reasonableness for residential and business customers respectively are defined. An addition to the normal installation charge should be justified by specific national conditions, for example market prices. A sliding scale of charges might be feasible, particularly to ensure that the needs of low-income users are met.

2.47 The Director General’s approval of the Guidelines would be subject to reference to relevant data, eg customer information, number of installations and charges made, Oftel surveys, customer complaints received, etc. The Director General would take into account the effect of the Guidelines to ensure that they are not anti-competitive.

Provision of payphones

2.48 Oftel intends to publish a consultation paper on payphones later this year. It will include consideration of both the current criteria for installing payphones on the grounds of social need; and also the guidance on the removal and resiting of public call boxes. The paper will consider points raised in the responses to the Universal Service consultation.

The proposed new European framework

2.49 The draft directive on Universal Service and Users’ Rights does not make any significant changes to the basic level of Universal Service. It requires Member States to:

2.50 The draft Directive is consistent with both the conclusions that Oftel has reached above and the scope of Universal Service that Oftel is confirming in this Statement. However, Oftel will consider whether any changes to the UK regime are required when the Directive is adopted.

Chapter 3

The funding of Universal Service

3.1 The costs of Universal Service are currently met by BT and Kingston. The consultation considered the issue of funding and in particular whether being a Universal Service provider placed an unfair burden on BT and Kingston. This is relevant because European law requires that there must be a net cost – that is, the costs once the benefits have been taken into account – that imposes an unfair burden on the operator with the obligation before a Fund can be established. Directives also give detailed guidance for calculating costs and benefits.

Background

3.2 In 1997 Oftel concluded that there was a net benefit arising from the obligation for BT as a result of its USO and therefore the question of funding did not, therefore, arise. This conclusion was based on an estimate of the costs incurred and benefits gained by BT as a result of its USO.

3.3 The four benefits identified were:

3.4 As part of this review, Oftel updated the original calculation, taking account of changes in methodology and cost drivers. Oftel accepted that the methodology for calculating benefits to BT from ubiquity and life cycle effect led to an overestimation. The revised calculation of benefit to the Universal Service provider reduced to around £61m. Oftel estimated the cost of uneconomic customers to be £53 – 73m. In summary, Oftel’s revised estimate suggested the following net cost/benefit:

3.5 The calculations excluded factors placing downward pressure on the cost of the USO, including greater efficiency by BT.

3.6 On the basis of the recalculations Oftel concluded that this obligation did not currently represent an unfair burden on BT and Kingston. However, Oftel indicated that, given that the data of the initial costing exercise could be improved, discussions with BT and Kingston should continue in order to establish what further information on costs and benefits could be made available. Any reassessment of costs and benefits would be made on the basis of BT and Kingston as efficient operators, fully exploiting cost savings and benefits.

3.7 Oftel indicated that only if the first stage establishes a net cost, would Oftel assess whether the burden on BT and Kingston was unfair. In determining this, Oftel would take into account the extent to which BT is able reasonably to recover its costs of serving uneconomic customers from the profit it makes from economic customers.

3.8 Oftel’s view was that, on the basis of BT’s current return on capital and within the current price control, a net cost within the range of estimates to date is unlikely to be seen as an unfair burden. Nevertheless, if this process established an undue burden on BT and Kingston, Oftel would propose to set up a fund with the costs of Universal Service shared between operators.

Consultation

3.9 In its response, BT argued that Oftel had underestimated the costs of USO and overestimated the benefits and that, as its market share and returns diminished, its capability to fund loss-making services would be undermined. BT urged the setting-up of a cross-industry Fund, linked to the review of the current Retail Price Controls, which expire in July 2002. Other operators suggested that greater efficiency and better targeting of uneconomic customers by BT would lead to a reduction in costs and that Oftel was underestimating benefits. While not accepting that the obligation represented an undue burden on BT, some consumer groups also urged Oftel to consider the benefits that might arise from setting up a Fund. In their view, a Fund could act as a competitive mechanism to encourage BT and other companies to develop innovative ways of meeting the Universal Service Obligations.

European context

3.10 The common position adopted on the draft Directive on Universal Service by Council in June 2001 maintains broadly the current arrangements for the designation and funding of USO. It requires Member States to designate one or more undertakings to provide Universal Service and, if appropriate, different undertakings to provide different elements of Universal Service and/or to cover different parts of the national territory. Where national regulators find that an operator is subject to an unfair burden in providing USO, it requires Member States to introduce a mechanism:

Conclusions

3.11 Oftel remains of the view that, in the absence of further data from BT and Kingston on costs and conclusive evidence that the assumptions surrounding the benefits are unsound, the calculations made in 1999 provide the most reliable estimates available. Furthermore Oftel continues to believe that these calculations, taken into account with BT’s continuing high return on capital, do not suggest that the obligation represents an unfair burden at this time. The current funding arrangements should therefore continue.

3.12 Nevertheless, Oftel recognises that there are links with the current review of the retail market. The review will consider amongst other things the extent of competition and changes in BT’s returns and market share. Oftel will consider the implications of the outcome of this Market Review for its policy on assessing the net cost of the obligation. Oftel also accepts that further information on the benefits to the BT brand of being the USO provider would be helpful and will carry out market research on branding as part of the data gathering for the review. In this context Oftel notes BT’s recent ‘Better World’ advertising and website campaign in which it promotes itself as a socially responsible company (www.groupbt.com/society). A consultation document on the review is due to be published by December 2001 with a Statement following in spring 2002.

Chapter 4

The level of Universal Service

Introduction

4.1 In the consultative documents Oftel considered the effect of new services on the obligation. Specifically, Oftel sought views on whether the obligation should be extended in view of the growing use of mobile and Internet services and the rollout of higher bandwidth communication networks.

4.2 In considering these issues, Oftel explained that the rationale for the USO is to ensure that those telecommunications services, which are essential to social and economic inclusion, are made available to everybody on reasonable request in an appropriate fashion and at an affordable price. The USO is a safety net, to be used when the market has not been able to deliver. It ensures that services that are used by the majority are available to all.

4.3 ‘Universal service obligation’ involves imposing requirements on commercial companies to serve customers who might not otherwise have been served at prices that they may not have chosen commercially. Second, it involves special funding arrangements with the costs of meeting the obligation being paid by the telecom companies involved. The economic rationale for this subsidy is termed the ‘network externality’. The externality occurs because all customers benefit when others join the network. The benefit cannot be reflected directly in individual transactions or met on strict commercial terms. Hence there is a role for Government in ensuring that the network is as extensive as is feasible at appropriate prices.

4.4 European legislation sets the framework for both the scope of USO and its financing. Currently there is a minimum level of Universal Service set in European Directives together with rules for costing and establishing, if necessary, any fund paid for by telecom companies to meet the costs of providing this minimum level. Member States are free to set a higher level of service financed by government through public funds. Contributions from telecom consumers via a levy on operators to a fund cannot be mandated to meet the costs of USO when set above the European level.

Mobile telephony

4.5 Oftel set out its view that, although 75 per cent of households have access to a mobile phone, mobile telephony cannot be seen as ‘essential’ for social and economic inclusion, given the existence of fixed line alternatives. Mobile telephony already provides universality by allowing anyone to buy a mobile phone and, with the establishment of the pre-pay market, at reasonable costs.

4.6 Oftel supports operators’ efforts to increase geographic coverage and reported in its mobile market review consultation that all UK mobile networks typically cover 98 – 99 per cent of the UK population and that all networks also appear to be steadily increasing coverage in rural areas (see www.oftel.gov.uk/publications/mobile/ctom0201.htm). The Director General has a duty to encourage the sharing of facilities and property for the provision of public telecommunications networks, as well as for publicly available telecommunication services. This duty encompasses, but is not restricted to, the sharing of mobile masts and arises from Article 11 of the Interconnection Directive (Directive 97/33/EC). In May 2001 Oftel published an information note 3G Mobile Infrastructure Sharing in the UK, describing the types of infrastructure sharing which might take place and the general regulatory principles that apply.

Responses

4.7 Operators and most other respondents considered that there was no need to extend the obligation to mobile services. However, some consumer groups, mainly representing rural areas, argued for the inclusion of mobile in the obligation to ensure that the service was available in these areas.

4.8 The draft directive on Universal Service and Users’ Rights maintains the current scope of the obligation on the fixed network, setting a requirement for "all reasonable requests for connection at a fixed location to the public telephone network" to be met.

Conclusions

4.9 In view of the above – the alternatives offered by fixed services, the efforts of the industry to increase coverage and European law – Oftel concludes that it is not appropriate for the obligation to be extended to include mobile services.

Internet

Background

4.10 The Government’s objective is to ensure universal access to the Internet by 2005. The consultative documents described the current provision of Internet access and Oftel’s activities to date and considered whether any changes to the Universal Service Obligation would be required.

4.11 Oftel noted that almost everyone wishing to access the Internet now has the ability to obtain access over basic telephone lines, provided they have the necessary equipment and the appropriate training. Ten million UK households have Internet access and around 45 per cent of adults can access it through a home, work or college computer. Digital TV and some mobile phones also offer Internet access and e-mail. The cost of Internet access has reduced considerably with innovative charging packages, including charges below local rate and unmetered tariffs, making the UK one of cheapest countries in the world for Internet access for residential customers.

4.12 Some people may choose or need to access the Internet from a public access point or Internet cafés rather than the home or the workplace. Oftel explained its role in helping public institutions work together to reduce the price of Internet access as well as encouraging the telecommunications industry to provide special tariff packages for Internet access for schools, public libraries, further education colleges, Citizens Advice Bureaux and University for Industry learning centres. A number of telephone companies offer special tariffs for these public institutions, allowing them to connect to the Internet at lower prices.

4.13 Speed and reliability are important elements of Internet access. Oftel considered whether further action was required to ensure that users experience data speeds that allow workable access to the Internet. The minimum data speed currently set by European legislation, and the subject of an obligation on BT and Kingston, is 2.4 kilobits per second (kbits/s).

4.14 Oftel concluded that the market and the regulatory regime are already making considerable progress towards delivering the Government’s objective for universal Internet access by 2005 based on high levels of penetration, as well as affordable tariff packages for Internet access from the home and public institutions. Oftel considered that more work would be needed to ensure that reliable data speeds providing workable Internet access are available to all customers. Oftel invited views on this conclusion and on the minimum data speed that would be required under USO to ensure workable Internet access for all.

Responses

4.15 In its response, BT explained that the Internet speed experienced by customers was affected by factors other than line speed, such as data network bottlenecks, the performance of modems and of the far-end servers. BT argued that the vast majority of its customers experienced workable Internet speeds: in a test over seven days in July 2000, 96 per cent of the sample of users experienced speeds in excess of 24kbit/s; 90 per cent speeds in excess of 30 kbit/s. BT argued that to guarantee a speed of 34kbit/s or above for all its customers a significant network upgrade would be required, costing an estimated £2billion.

4.16 Responses from consumers argued strongly that the current minimum data speed (set at 2.4kbits/s) should be increased. New levels of 28.8kbit/s or above were suggested. There was particular concern about BT’s use of DACS equipment (Digital Access Carrier System – essentially a way of splitting lines). DACS reduces maximum line speed to around 28kbits/s.

Conclusions

4.17 The extent to which Oftel can change the requirements on the minimum data speed continues to be governed by European law. Article 4(2) of the draft directive on Universal Service and Users’ Rights removes the minimum data speed of 2.4kbit/s and introduces a more flexible requirement. It requires that the connection provided should be capable of allowing end users to make and receive data communications, at data rates that are sufficient to permit functional Internet access, taking into account technical feasibility and the technologies used by the majority of customers.

4.18 Until the Directive is implemented – expected by mid-2003 – the minimum data speed will remain at 2.4kbit/s. Oftel does not propose to take a view at this stage on the appropriate level that should apply from that time, given the rapid changes in customer demand and technical feasibility. Following adoption of the Directive, Oftel will review how its final provisions should be implemented and consult as appropriate.

4.19 Oftel has been examining BT’s practice on the installation of DACS. BT argues that in most cases DACS results in line speed of between 26-28kbits/s, which in BT’s view is acceptable for Internet use. BT has indicated that it is trialling a new product to succeed DACS which does not reduce line speed. In the meantime BT is reviewing customer complaints that may result from the installation of DACS and is proposing to establish a Centre of Excellence to help BT to advise its customers with Internet problems. Oftel welcomes these moves but will continue to monitor the use of DACS and customer complaints actively and will consider whether further action is needed to ensure that BT’s approach to the deployment of DACS and the handling of customer complaints is consistent with its qualified obligation to meet reasonable demands for data services under Condition 43 of its licence.

Higher bandwidth services

4.20 The Government has set the objective for the UK to have the most extensive and competitive higher bandwidth market in the Group of 7 industrialised countries by 2005, with significantly increased connections to schools, libraries, FE (further education) colleges and universities. In the consultative documents, Oftel considered progress to date and the possible implications for the USO.

Developments in the market for higher bandwidth services

4.21 The market for higher bandwidth services – offering data rates of 384 kbits/s and higher – is still at an early stage of development in the UK. Broadband services are being delivered to residential and business consumers in the UK in four main ways:

4.22 Estimates suggest that 70 – 80 per cent of households would potentially have access to higher bandwidth networks by the end of 2002 on the basis of these developments. BT has developed technology that increases the reach of ADSL services beyond 3.5km from an enabled exchange by reducing the upstream speed to less than 250 kbits/s. This would improve the proportion of the population able to get ADSL services from 70 per cent currently to over 90 per cent.

4.23 There is also some limited provision by fixed radio, which, together with mobile radio and satellite technologies, should in future also be able to deliver higher bandwidth services more widely.

4.24 Oftel has been, and continues to be, active in promoting competition in the supply of broadband services. Oftel believes that competition will best deliver choice and value for money to consumers. BT’s DSL service is currently available to around 55 per cent of the population. Takeup has generally been slower than expected though there are some signs that it is picking up. At present over 76 000 end users have been connected and over 100 service providers are taking wholesale services from BT. BT must offer services on non-discriminatory terms to itself and other service providers. Oftel is closely monitoring BT’s rollout and is investigating a number of complaints about the terms and conditions of BT’s rollout.

4.25 Local loop unbundling enables competing operators to install their own equipment at or near BT’s exchanges so to offer their own higher bandwidth service to end users. For the past year Oftel has been very active in working with the industry to set the technical and operational framework for LLU. Oftel has set the wholesale price of unbundled loops and has also acted firmly where necessary to resolve disputes over terms and conditions. While progress has been slower than anticipated, due in part to the adverse financial climate, clear ground rules are now set and the first co-location sites have been handed over to operators with the first upgraded unbundled loops operational.

4.26 Leased lines are used by larger businesses to access higher bandwidth services. Oftel has undertaken a formal review of the state of competition and has also acted to resolve disputes. As a result, BT offered new leased line products at wholesale prices on 1 August 2001. There are still some outstanding issues on the terms and conditions to resolve and Oftel is working to do this as quickly as possible.

4.27 Oftel has also been working with operators on issues of Learning Society access to encourage the rollout of high-speed links to the Internet in schools and other learning institutions including libraries (providing public access points), FE colleges, Citizens Advice Bureaux and ‘UK Online’ and ‘Learndirect’ learning centres. The initiative on schools is part of the National Grid for Learning with the Government objective that all schools are online and able to benefit from the Grid by 2002. Following discussions with Oftel, BT offers a special tariff for broadband access for schools and other eligible public institutions – Learning Stream, a 2Mbits/s service using HDSL technology. Oftel is also working with other Government stakeholders including the devolved administrations, regional development agencies and local broadband consortia to provide advice and assistance in relation to broadband rollout.

USO and higher bandwidth services

4.28 Oftel’s consultation raised the question of what part the Universal Service Obligation might play in the future, alongside other policy instruments, in ensuring the availability of affordable higher bandwidth services. Applying the traditional USO model, if higher bandwidth services were used by the majority and essential to full social and economic inclusion, all consumers would be given the right to a telecommunications connection above a stated (higher) data speed on reasonable request at affordable prices.

4.29 In the consultative documents Oftel emphasised its support for the goal of rolling out higher bandwidth communications networks with equitable and affordable access for all. Oftel set out its commitment to keep the role of the USO under close review, for example through further research into access to higher bandwidth services broken down by region and social class, and to look positively at the scope for other regulatory action in support of this goal. Oftel explained that while higher bandwidth services did not meet the primary test for consideration as part of the USO requirement at that time, because they are not yet services used by the majority, the issue needed to be kept under review alongside other factors relevant to the future of the USO. These included the emerging new EC framework, effects on investment, funding, cross-subsidies, consumer demand and means of supply.

4.30 Responses to the consultation broadly endorsed Oftel’s approach emphasising that Oftel and Government should consider in particular the need to foster competing routes for the provision of higher bandwidth services and the affordability of the services.

Recent developments

4.31 In February 2001, the Government published UK online: the broadband future. An action plan to facilitate the roll-out of higher bandwidth and broadband services. The report recommended a programme of action by Government and industry covering four main areas:

4.32 The report also considered issues surrounding the extension of the USO to include broadband services. It explained that an obligation funded, at least in part, by operators would require changes in European legislation, which were unlikely in the near future. Considering an option to extend the scope through the use of public money instead, probably in public/private partnerships, the report pointed to concerns about value for money and the risk of subsidising investments that the private sector would have made anyway. It explained that Government intervention now to support ADSL would depart from the policy of technological neutrality and would:

4.33 The report concluded the market is still too immature to assess whether there will be demand for universal broadband.

4.34 In addition, the draft Directive on Universal Service and Users’ Rights concludes that the scope of Universal Service should not be extended to include higher bandwidth services at this time. However, it requires the European Commission to carry out a review of its scope within two years of implementation by Member States, ie within two years of 2003. This review would take account of social, economic and technological developments, including mobility and data rates in the light of the prevailing technologies used by the majority of subscribers. The Commission would then submit a report to the European Parliament and the Council on the outcome of the review.

Conclusions

4.35 Oftel’s primary focus continues to be the promotion of competition in the provision of access to broadband services. A competitive market should give consumers greater choice, better value and higher quality and also encourage rollout. On BT’s ADSL rollout, Oftel’s role is to ensure that BT complies with its legal obligations under the Competition Act and the terms of its licence. On LLU Oftel has been involved in setting wholesale prices, resolving dispute and ensuring that a firm and clear ordering process is established. On leased lines Oftel is reviewing the level of competition in the market. Oftel is working with the Radiocommunications Agency and the Department of Trade and Industry on broadband fixed wireless access to promote efficient use of the radio spectrum and Universal Mobile Telecommunications Systems (‘3G’) to provide input on competition issues. Oftel is also represented on the competition sub-group of the UK Online Broadband Stakeholder Group. The Group is expected to report with its recommendations in September 2001.

4.36 On Universal Service issues, Oftel will monitor and publish market data on higher bandwidth services in order to increase transparency in the market and assist policymaking. Specifically Oftel will:

4.37 This data will be used to develop policy and in future reviews of the obligation. Once the market in higher bandwidth services has started to mature, it should be more apparent how and to what extent the effective competition is being delivered and whether there is any evidence of social exclusion developing. In the meantime, Oftel will continue to work with Government, industry and consumers and contribute positively to wider policy discussions on these issues, alongside Oftel’s broader efforts to promote equitable and affordable access.

Annex A

Light User Scheme (LUS)

A.1 Under this BT Scheme, normal rental charge and installation costs apply but users receive a rebate on the rental if call charges are less than £15.45 per quarter (excluding VAT). For every 1.0p that the call charge falls below this amount, the customer receives a rebate of 1.04p (excluding VAT). The maximum rebate is £16.08 (excluding VAT), where no calls have been charged. The scheme is available on residential lines that meet the following criteria:

(a) any existing customer whose call bill has not exceeded £15.457 per quarter in three of the four immediately preceding quarters. (Or, any customer with monthly billing whose monthly call bill has not exceeded £5.15 (excluding VAT) in nine of the twelve immediately preceding months);

(b) any existing customer who, owing to a change in circumstances which has, or is likely to have, a material effect upon the call bill, considers that the total call bill will not exceed £15.457 a quarter for each of the next three quarters; or

(c) any new customer who considers that the call bill will not exceed £15.457 for each of the next three quarters.

Annex B

List of respondents to the September 2000 consultative document

Advisory Committees on Telecommunications (ACTs)

CCE (Consumer Communications for England)
DIEL (ACT for Disabled and Elderly People)
NIACT (Northern Ireland Advisory Committee on Telecommunications)
SACOT (Scottish Advisory Committee on Telecommunications)
WACT (Welsh Advisory Committee on Telecommunications)
CfB (Communications for Business)

Telecommunications Advisory Committees (TACs)

Shropshire TAC
Aldershot and District TAC
North Lancashire & South Cumbria TAC

Consumer Groups and Disability Lobby Groups

CSTCEM Ltd
No Panic
Institute of Directors
Federation of Small Businesses
Hearing Concern
Trading Standards Northern Region
Hart Access Group
Age Concern
TAG (Telecommunications Action Group)
PUAF (Public Utilities Access Forum)
RNID (the Royal National Institute for Deaf People)
PhoneAbility
Telephone Helplines Association
Campaign for Unmetered Telecommunications
NACAB (National Association of Citizens Advice Bureaux)
RNIB (Royal National Institute for the Blind)
National Consumer Council
Consumers’ Association

Telecoms Companies

BT
Orange
Telewest
Energis
One 2 One
Vodafone
Centrica
Kingston Communications
Ntl

Others

Article on website http://www.webcomms.com/art32.htm BT Adopt "Criminalisation" Tactics
Cyngor Sir Ceredigion County Council
The Countryside Agency
Scottish Executive

Individuals

Simon Scott
Dave Wendon