Universal Service Costs


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Definition of USO and reasons why services are unprofitable.

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Universal Service Costs

  1. 1. Universal Service Costs Peter KLUNE Prague, 23 rd May 2007
  2. 2. Agenda <ul><li>Definition and scope of USO </li></ul><ul><ul><li>Services covered </li></ul></ul><ul><ul><li>Rational behind USO </li></ul></ul><ul><ul><li>Some critical issues </li></ul></ul><ul><ul><li>Situation in Austria </li></ul></ul><ul><li>Calculation of USO Costs </li></ul><ul><ul><li>Cost calculation scheme </li></ul></ul><ul><ul><li>Reasons for deficit </li></ul></ul><ul><li>How to finance USO? </li></ul><ul><ul><li>European Benchmarks </li></ul></ul>
  3. 3. Definition and scope of USO <ul><li>According to the USD, universal service covers the following services: </li></ul><ul><ul><li>Provision of access at a fixed location </li></ul></ul><ul><ul><li>Comprehensive directory </li></ul></ul><ul><ul><li>Directory enquiry services </li></ul></ul><ul><ul><li>Public pay telephones </li></ul></ul>
  4. 4. Rational behind USO obligation and designation <ul><li>Provision of a minimum set of services to all end-users </li></ul><ul><li>Affordable price </li></ul><ul><li>Ensure quality of service level </li></ul><ul><li>->compensation is needed if obligation can only be provided at a loss </li></ul>
  5. 5. Some critical issues <ul><li>USO provision denotes an obligation but no right of exclusiveness </li></ul><ul><li>Why designate a provider in the case of competition? </li></ul><ul><li>How to ensure that a compensation is competitively neutral? </li></ul><ul><li>Problems may accrue if the ordering party (or caller for bids) differs from the paying party </li></ul>
  6. 6. Situation in Austria <ul><li>Telekom Austria is currently designated to provide the following three services: </li></ul>Directory enquiry services Comprehensive directory <ul><li>Effective Competition </li></ul><ul><li>Yellow & white pages printed format update once a year financed by advertising </li></ul>Access at a fixed location Public pay telephones <ul><li>PSTN-access at a fixed location </li></ul><ul><li>Dial in internet access </li></ul><ul><li>affordable price </li></ul><ul><li>Area wide provision of sites </li></ul><ul><li>affordable price </li></ul>
  7. 7. Agenda <ul><li>Definition and scope of USO </li></ul><ul><ul><li>Services covered </li></ul></ul><ul><ul><li>Rational behind USO </li></ul></ul><ul><ul><li>Some critical issues </li></ul></ul><ul><ul><li>Situation in Austria </li></ul></ul><ul><li>Calculation of USO Costs </li></ul><ul><ul><li>Cost calculation scheme </li></ul></ul><ul><ul><li>Reasons for deficit </li></ul></ul><ul><li>How to finance USO? </li></ul><ul><ul><li>European Benchmarks </li></ul></ul>
  8. 8. Cost calculation scheme (1/2) Avoidable costs - foregone revenues = direct net costs + indirect benefits = overall net costs Those costs which would not arise if there would be no universal service obligation Revenues which would not accrue if there would be no universal service obligation Benefits, including intangible benefits, which relates to the provision of universal service elements Costs of universal service Benefits of universal service Net costs of universal service
  9. 9. Cost calculation scheme (2/2)
  10. 10. Avoidable Costs <ul><li>Costs which relates to uneconomic elements: </li></ul><ul><ul><li>Uneconomic areas </li></ul></ul><ul><ul><li>Uneconomic customers </li></ul></ul><ul><ul><li>Uneconomic sites (e.g. public payphones) </li></ul></ul>
  11. 11. Forgone Revenues Local area 1 local area 2 calls to mobile national calls intern. incoming traffic international calls active calls passive calls Fixed fees RT+WS margin xDSL 1 2 2 2 3 4 - loss of installation national calls calls from mobile 3 3
  12. 12. Indirect benefits Life cycle effects Non USO services Ubiquity Volume discounts Advertising Customers may not be profitable now, but may become so in the future The benefit that accrues of having a USO presence and infrastructure and thereby being able to offer non-USO services at marginal cost Cost savings e.g. in equipment made as a result of providing the USO The advantages of having a nationwide presence as a result of being the USP The benefit of being able to advertise e.g. on payphones and bills Brand/corporate reputation The enhancement of the brand and image through leveraging the USO role
  13. 13. Reasons for unprofitable areas <ul><li>Austria does have a large number of small villages with only a small number of subscribers. About 19 % of the sites does have less than 500 lines. About 45% of the sites does have less than 1.000 connections. </li></ul><ul><li>Only 25 local area networks, or about 2%, have more than 10.000 lines </li></ul>subscriber density
  14. 14. Reasons for unprofitable areas poly centric e.g.: Mettmach dispersed with centre e.g.: Sillian in Tyrol subscriber density/type of area
  15. 15. Reasons for unprofitable areas high costs and low revenue
  16. 16. Agenda <ul><li>Definition and scope of USO </li></ul><ul><ul><li>Services covered </li></ul></ul><ul><ul><li>Rational behind USO </li></ul></ul><ul><ul><li>Some critical issues </li></ul></ul><ul><ul><li>Situation in Austria </li></ul></ul><ul><li>Calculation of USO Costs </li></ul><ul><ul><li>Cost calculation scheme </li></ul></ul><ul><ul><li>Reasons for deficit </li></ul></ul><ul><li>How to finance USO? </li></ul><ul><ul><li>European Benchmarks </li></ul></ul>
  17. 17. Financing of universal service obligations <ul><li>Two possible ways of financing </li></ul><ul><ul><li>Public funds </li></ul></ul><ul><ul><li>Provider </li></ul></ul><ul><li>Who has to contribute? </li></ul><ul><ul><li>Fixed + mobile operator + ISP </li></ul></ul><ul><li>Principles to respect </li></ul><ul><ul><li>Transparency </li></ul></ul><ul><ul><li>least market distortion </li></ul></ul><ul><ul><li>non-discrimination and proportionality </li></ul></ul><ul><li>Member States may choose not to require contributions from undertakings whose national turnover is less than a set limit! </li></ul>(Sweden) (Belgium, Czech Republic, Denmark, Estonia, Spain, France, Ireland, Italy, Hungary, Netherlands, Austria, Poland, Slovenia, Slovakia, United Kingdom)
  18. 18. European benchmarks “ Unlikely to be an undue financial burden on BT as a result of USO” „ No significant competitive disadvantage for Telefónica“ 2002 about 1,1% of wire line revenues (only ES) 2003 about 0,7% of wire line revenues 2002 about 0,1% of revenue (group) Source: Cullen International and own calculations Only preliminary values
  19. 19. Summary <ul><li>USO cost calculation means: </li></ul><ul><ul><li>Huge data gathering effort </li></ul></ul><ul><ul><li>Detailed cost and revenue assignment </li></ul></ul><ul><ul><li>Dealing with legal uncertainties </li></ul></ul><ul><li>Results are: </li></ul><ul><ul><li>Highly vague (indirect benefits, unfair burden) </li></ul></ul><ul><li>Outcome depends on: </li></ul><ul><ul><li>Willingness of the NRA to refund costs </li></ul></ul><ul><li>Conclusion -> try it, but manage expectations </li></ul>
  20. 20. Thank you for your time Questions? Peter KLUNE Regulatory Affairs TELEKOM AUSTRIA AG Lassallestraße 9 A-1020 Austria › E-Mail [email_address]  Phone +43 (0)59059 1 16012   Fax +43 (0)59059 91 16012   Mobile +43 (0)664 629 61 76
  21. 21. Appendix: helpful legal documents <ul><li>DIRECTIVE 2002/22/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) </li></ul><ul><li>Review of universal service obligation undertaken by OFCOM ( http://www.ofcom.org.uk/consult/condocs/uso/statement/ ) </li></ul><ul><li>COCOM07-08 FINAL Universal service implementation issues ( http://circa.europa.eu/Public/irc/infso/cocom1/home ) </li></ul><ul><li>COCOM07-08_ANNEX1 FINAL Universal service financing table ( http://circa.europa.eu/Public/irc/infso/cocom1/home ) </li></ul>