Universal service: between socio- political mythology and economic reality An international cross comparison EU-USA of the regulatory-economic framework Prepared by Jean Paul Simon JPS public policy Consulting, For the ACORN-REDECOM conference Mexico, September 4-5, 2009
Summary A (quick) historical outlook: birth of a notion Coping with the market: the re-invention of universal service Conclusions 2 JPS Public Policy Consulting
A (quick) historical outlook: birth of a notion 3 JPS Public Policy Consulting
The American universal service concept: born under an unclear sign (1) The case of the electricity industry is particularly interesting, because it was the harbinger of regulation. It shows that regulation was not forced upon the industry, but rather was accepted when not openly demanded. Samuel Insull, Director of Commonwealth Edison in Chicago and President of the trade association for the electrical industry (National Electric Light Foundation) was intrumental to that end He introduced the notion of “natural monopoly” (partly borrowed from the realm of gas distribution) He found a justification in economic theory for the single industrial actor, capable of bringing new services to all users; both private and industrial. The telephone industry had the same problems as the electricity industry, with uncontrolled competition between companies. In 1902, in 1,002 cities, each with populations of more than 4,000 and where telephone services existed, 45% of customers were being serviced by a minimum of two companies. 4 JPS Public Policy Consulting
The American universal service concept: born under an unclear sign (2) The alter-ego of S. Insull in the telephone industry, Theodore N.Vail, came up in 1907, with a new doctrine: “ one system, one policy, universal service ” It was not then an attempt to bring a telephone to every US household at an affordable rate but a means of ensuring interconnection between telephone subscribers using competing companies. For T.Vail, universal service meant nothing other than a unified system (“unified service”), his strategy was twofold: to develop a so-called universal service to ensure interconnection and interdependence, and to buy out independent companies. As in the electricity industry, the choice was between regulation and direct operation by public entities. The regulated monopoly was seen as the best solution, regulation being seen by AT&T as the price to pay for slowly achieving a monopoly, and by the government as a way of protecting consumers. From the outset, the process was completely ambivalent. The rationale was as much to protect the firms against the supposedly harmful effects of competition, as to prevent consumer exploitation. 5 JPS Public Policy Consulting
The EU public service or universal service (1) The development of the telephone was initially left to private firms in Europe. However, this competitive period did not last and most major European countries decided to set up state monopolies. The main rationale of setting up a public monopoly was strategic and had to do with both security aspects and the protection of competition in other sectors: So as to guarantee fair access to information for all users and avoid obvious cases of asymmetry of information. The rationale shifted from the provision of service to consumers to a public service activity that was supposed to offer equal access for all under similar “fair” conditions. At least, this was the theory. In fact, one of the drawbacks of this public body was that it was plagued by the persistent inability of the states to provide the budget required, even for the deployment of the network. 6 JPS Public Policy Consulting
The EU public service or universal service (2) The outcome was almost inevitable and the penetration rate of telephone lines lagged behind the US rate. The EU situation was characterised by an enduring discrepancy between the goals and their achievement . We have here a concept (or an ideology) of “public service” in search of real implementation in the telecommunications sector. The discrepancy between the goals and the means remained blatant for several decades. In the United Kingdom, when the telegraph was nationalised (Telegraph Act of 1863), the real implementation was focused less on telephone penetration at reasonable rates than it was on the supply of an effective service to business users (low interurban rates). In any case, at the turn of the 19th century in Europe, the telephone was not considered to be a potential mass- market, but rather a device for the urban elite 7 JPS Public Policy Consulting
Coping with the market: the re- invention of universal service 8 JPS Public Policy Consulting
Passing the 1996 Telecommunications Act: the act as an oxymoron The system appeared to work well until some clear signals of a new area started to appear. The universal service concept resurfaced to deal with an entirely new competitive environment: “ The new, second generation universal service policy was part of a broader attempt to salvage the fortunes of the regulated monopoly system in the face of these challenges ” (Mueller, 1997). The adoption of the 1996 Telecommunications Act, and the public debates that took place before (and after), embodied these changes. The Telecommunications Act had four goals: to foster competition, to deregulate, to boost investment and to ensure universal service. The assessment of the first three goals triggered a lot of literature and may diverge about the current state of deregulation On the opposite the global assessment of the universal service rationale is rather negative 9 JPS Public Policy Consulting
A system under stress The current US funding system is not sustainable, as the funds needed to support the goals have skyrocketed, in less than a decade from: $955 million in 1997, up to $ 6.955 billions in 2007 (Total payments, NARUC, 2008) High cost areas: 4.287 billions Low income users: 823 millions School and libraries:1.808 billions Rural Health Care: 37 billions The Federal Universal Service Funds (FUSF) are collected through a tax on relevant customer charges: 11.4% i.e 12 billions « subscriber line charges » Growth of the high cost fund threatens sustainability and burdens telecom consumers: over 1 billion of growth due to increased payments to Competitive Eligible Telecommunications Carriers (CETCs) FCC projected 2.5 billions in 2009 10 JPS Public Policy Consulting
Source: McLean & Brown “Universal Service – Rural Infrastructure at Risk” 11 JPS Public Policy Consulting
And inefficient Net FUSF (payment to providers minus contributions from surcharge) vary widely by State: Positive (Missisipi, Alaska…) Negative (Florida, New York…) CETCs support distribution is skewed heavily toward a few states: top 10 states receive almost half And is unrelated to need Current mechanism: Encourages duplicative networks, Subsidizes competition. CETC support based on costs of incumbents: « equal support » rule. 12 JPS Public Policy Consulting
The need for reform The market has changed. Consumers are buying packages which bundle local, long distance, intra- and inter-state telecommunications and information services. A scissor effect making the implementation of the process almost impossible : The current USF collection mechanism, based on interstate and international revenues, is unsustainable, as revenues from these services are declining. New players like VoIP providers are not contributing to the fund, a situation likely to further deteriorate as IP-enabled services will become the regular telecommunications service. In June 2005, the FCC initiated a review procedure September 2007: Public Notice November 2007: Joint Board (FCC/ State Regulators) recommendation January 2007: Notice of Proposed Rule Making (NPRM) November 2008: Further Notice of Proposed Rule Making 3000 pages of comments 13 JPS Public Policy Consulting
The proposals from the Joint Board (source NARUC, 2008) Objectives Universal availibility of broadband and mobility services, Universal availibility of wireline voice services at affordable rates, Avoid increasing financial burden on consumers, Increase effectiveness of funding (sic), Eliminate equal support rules. Key elements Cap total high cost funding near current level, Transition to three new funds : Provider of the last resort : cap 3.2 billions (2007 ILEC level) Mobility : 1 billion cap Broadband (initial): 0.3 billion Separate distribition mechanism, funding allocations, and caps for each fund, Distribute support to only one provider per fund in a given area. 14 JPS Public Policy Consulting
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