Universal Service Obligation: a review

31 January 2005


1.1 Universal Service ensures that basic fixed line services are available at an affordable price to all citizen-customers across the UK.

1.2 The scope of the Universal Service Obligations (USO) is defined by the EC Universal Services Directive (“USD”). The Secretary of State for Trade and Industry specifies the services which must be provided throughout the UK in the Universal Service Order (the Order). The Order has been implemented by Ofcom through specific conditions on BT and Kingston Communications (in the Hull area) and general conditions on all providers. USO services include the following: special tariff schemes for low income customers; a connection to the fixed network, which includes functional internet access; reasonable geographic access to public call boxes; and a range of services for customers with disabilities including the text relay service.

USO Review and Ofcom’s Strategic Review of Telecommunications

1.3 Ofcom is reviewing BT and Kingston’s USO to ensure it continues to meet the needs of consumers. The review is focussed on delivering the current Universal Service arrangements and is being carried out alongside Ofcom’s Strategic Review of Telecommunications (“the Strategic Review”) which looks at longer term Universal Service issues. The Strategic Review’s conclusions on USO are set out in this document. The Strategic Review, published in November 2004, emphasised the importance of USO as the ‘safety net’ for vulnerable consumers but noted that the mechanisms for funding and provision of universal service may need to change if and when the provision of USO becomes an undue burden. At that point, it would be necessary to design new funding and provision mechanisms, for example a Universal Service fund. In future, it may also be appropriate to alter the overall scope of USO. Though we do not believe at this point that there is a case for extending universal services to include broadband, the Strategic Review considers how the scope of USO might evolve over time.


1.4 As Universal Service Providers (USPs), BT and Kingston have to ensure that customers can afford to obtain and retain telephone service. This is achieved through special tariff schemes that target customers on low incomes. BT’s existing schemes use a proxy of low use in order to attract low income customers. Ofcom’s research suggests that this works reasonably well: around 60 per cent of users are claiming a state benefit to assist with their income. BT has proposed an alternative scheme targeted at households with annual household income below £10,400. Ofcom is inviting views on both the existing and the proposed new schemes.

1.5 Ofcom considers that disconnections policy is another indicator of affordability. BT disconnects around 5 per cent of residential customers (1 million) a year for non-payment of bills. Ofcom research suggests that BT could promote its schemes more effectively and that this would assist customers who might otherwise be disconnected.

Public Call Boxes

1.6 Public Call Boxes (PCBs) provide a service that is valued and needed by many people without a phone or those away from home, who cannot, for whatever reason, use their mobile. Many disadvantaged and vulnerable consumers still rely on PCBs.

1.7 BT and Kingston are each required to ensure adequate coverage of PCBs. Ofcom considers that adequate coverage is best determined at a local level through consultation with local public bodies. The last PCB cannot be removed from a site if those bodies object - ‘the local veto’. As revenues from PCBs have fallen in recent years, BT argues that the local veto is unduly restrictive. Ofcom proposes that the local veto should remain but with new measures to make the process more transparent, accountable and consistent. Ofcom is proposing to issue guidance on requests for PCB removal, to improve the consultation process and to establish an appeal process.

1.8 Ofcom is also inviting views on the definition of a ‘site’; this determines which PCBs are subject to the local veto. Ofcom is also reviewing which public bodies represent the most appropriate level of local government to have the local veto.

Services for customers with disabilities

1.9 Universal Service measures provide access to, and affordability of, a range of essential services for customers with disabilities. A key service is the text relay, which is highly valued by customers. However, it needs to evolve as demand and technology changes. To improve transparency and accountability, views are sought on the establishment of a Stakeholder Advisory Panel for the relay service plus the publication of an annual plan and report on the operation of the service. A study into a video relay service is also proposed.

Provision of a connection capable of functional internet access

1.10 BT and Kingston are required to provide a connection upon reasonable request and at uniform prices, irrespective of geographical location. This requirement is particularly valuable to customers in remote rural areas whom the market might otherwise not serve. Where installation of a new line costs £3400 or less, BT sets a standard charge. Where installation will cost over £3400, BT requires the customer to pay the excess costs (plus its standard connection charge). Ofcom consider the use of a ‘threshold’ to be a sensible approach; Ofcom is seeking further data to help it decide the level of that threshold. In addition, Ofcom intends to publish guidance on the issues to be taken into account in considering whether a request is reasonable.

1.11 The obligation on BT and Kingston to provide a connection upon reasonable request encompasses the provision of a narrowband connection capable of ‘functional internet access’ (FIA). Guidelines on FIA were issued in 2003 which said that users should be able to expect connection speeds of at least 28.8 kbit/s. It also set out measures that universal service providers should take in response to complaints about data speeds. The Guidelines have been beneficial and no significant changes are proposed at this time. In particular, it is considered that the benchmark minimum speed should remain at 28.8 kbit/s for the time being.

Costs and benefits of providing USO

1.12 USO is currently funded by BT and Kingston as the obligations have not previously been considered to represent an unfair burden on them. Ofcom has considered how the costs and benefits to BT of providing USO might have changed in recent years. Ofcom’s indicative estimates suggest that since 2001 the costs of serving uneconomic customers have fallen significantly while the costs of providing uneconomic payphones have risen sharply by a similar amount. Benefits from providing universal services arise primarily from brand image and advertising on public call boxes. Ofcom’s indicative estimates of the benefits suggest they have remained broadly stable. Ofcom’s indicative estimate of the current costs of USO for BT suggests they are around £50-70m and the benefits are around £60m. Ofcom believes therefore that there is unlikely to be an undue financial burden on BT as a result of USO that would justify conducting a full cost benefit analysis and setting in place new USO funding arrangements. The Strategic Review is considering the medium to long term issues around universal service funding.