VAN    •  DIJKMANAGEMENT CONSULTANTS                   EUROPEAN COMMISSION     Information Society and Media Directorate-G...
VAN    •   DIJKMANAGEMENT CONSULTANTS                                                      Contact for this assignment :  ...
VAN          •     DIJKMANAGEMENT CONSULTANTS                                                        Table of Contents1. I...
VAN          •    DIJKMANAGEMENT CONSULTANTS        2.2.5.a At the EU level..................................................
VAN         •     DIJKMANAGEMENT CONSULTANTS       5.2.3.a Identification of cost categories.................................
VAN     •   DIJKMANAGEMENT CONSULTANTS                                List of AbbreviationsARPU             Average Revenu...
VANMANAGEMENT CONSULTANTS                       •  DIJK1. INTRODUCTIONThe present report constitutes the final report for ...
VAN     •   DIJKMANAGEMENT CONSULTANTSThe present report will thus first of all identify and define the problem and define...
VAN     •   DIJKMANAGEMENT CONSULTANTS1.1. THE CONCEPT OF UNIVERSAL SERVICE IN THE EUROPEAN UNIONA profound insight in the...
VAN       •    DIJKMANAGEMENT CONSULTANTS                               Stage 1:           Stage 2: wide                  ...
VAN     •   DIJKMANAGEMENT CONSULTANTSAs the table above clearly shows, there is not one ‘universal set of characteristics...
VAN       •  DIJKMANAGEMENT CONSULTANTSIn theory, it could thus be argued that all public intervention measures or tools t...
VAN     •   DIJKMANAGEMENT CONSULTANTSneutral manner and are not more burdensome than necessary for the kind of universal ...
VAN     •   DIJKMANAGEMENT CONSULTANTSThe scope of the current universal service is described in Articles 4 to 7 of the 20...
VAN     •   DIJKMANAGEMENT CONSULTANTSphone boxes). For example, specific services such as textphone for the deaf or speec...
VAN     •   DIJKMANAGEMENT CONSULTANTSperformance targets taking into account the views of interested parties. 25 Provider...
VAN    •   DIJKMANAGEMENT CONSULTANTSpotential entrants, e.g. concerning the net costs and benefits of serving particularg...
VAN      •  DIJKMANAGEMENT CONSULTANTSmeans that the transfers result in the least distortion to competition and to user d...
VAN     •   DIJKMANAGEMENT CONSULTANTSnumber of customers receiving and making calls, etc. This rationale behind thesector...
VAN     •   DIJKMANAGEMENT CONSULTANTSof public funding is less distorting and more efficient than the use of a sector spe...
VAN      •  DIJKMANAGEMENT CONSULTANTS1.1.3 THE CURRENT STATE OF AFFAIRS AS A RESULT OF TRANSPOSING THE 2002DIRECTIVE IN T...
VAN     •   DIJKMANAGEMENT CONSULTANTS1.1.3.b THE DESIGNATION OF UNIVERSAL SERVICE PROVIDERSIt is left to the discretion o...
VAN     •   DIJKMANAGEMENT CONSULTANTS      Country                    Year                USO net cost           USO net ...
VAN     •   DIJKMANAGEMENT CONSULTANTS        where the specific services are not provided to the public under normal     ...
VAN        •  DIJKMANAGEMENT CONSULTANTSFor the purpose of this study, the first and third modification is of particularim...
VAN     •   DIJKMANAGEMENT CONSULTANTS(implementation of the) current EU concept of USO in the electronic communicationsec...
VAN           •      DIJKMANAGEMENT CONSULTANTSFurthermore, since the appearance of Next Generation Access 57 (NGA), a dis...
VAN     •   DIJKMANAGEMENT CONSULTANTSAlthough the definition or assessment of some policy options could indicate the need...
VAN     •   DIJKMANAGEMENT CONSULTANTS2. IDENTIFICATION AND ASSESSMENT (DEFINITION) OF THEPROBLEMThe purpose of this study...
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
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Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
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Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
Impact of EU Policy options for revision of the Universal Service provision
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Impact of EU Policy options for revision of the Universal Service provision

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SVP Advisors participated in a Consortium which was commissioned a Study by the EC on the “Impacts of EU Policy options for revision of the universal service provision”. This Study intended to assist the Directorate-General for Information Society and Media (DG INFSO) in the formulation of potential policy options and providing qualitative and quantitative assessment. In particular, this Study aimed at assessing whether universal service at the EU level is an appropriate tool to advance basic broadband development and if so, when and how it should be used, or whether this should be left to other EU policy instruments or national measures. Based on our study, as well as the results of an extensive public consultation process, the EC decided in the end not to include broadband access as part of the Universal Service.

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Impact of EU Policy options for revision of the Universal Service provision

  1. 1. VAN • DIJKMANAGEMENT CONSULTANTS EUROPEAN COMMISSION Information Society and Media Directorate-General *** * * * * * *** * Impact of EU Policy options for revision of the universal service provision Assignment under the Framework Contract for Impact Assessment and Evaluation-Related-Services N° 2007/035 – LOT 2 FINAL REPORT 25 October, 2010Report submitted by the consortium lead by Van Dijk Management Consultants and comprising SVP Advisors and time.lex VAN DIJK – MANAGEMENT CONSULTANTSAVENUE LOUISE 250 – BOX 14 – B-1050 BRUSSELS (BELGIUM) – WWW.BVDMC.COM
  2. 2. VAN • DIJKMANAGEMENT CONSULTANTS Contact for this assignment : Ms Tine DEBUSSCHERE Director eCommunication Services Administrator VAN DIJK MANAGEMENT CONSULTANTS Avenue Louise 250, b 14 B-1050 BRUSSELS Belgium Tel.: +32 (0)2 641 00 00 Fax: +32 (0)2 641 00 30 E-mail: tdb@bvdmc.com The opinions expressed in this report are those of the authors and do not necessarily reflect the views of the European CommissionDocument ControlDocument Final Report for the study on the Impact of EU Policy options for revision of the universal service provisionPrepared by Tine Debusschere, VDMC; Alexandre de Streel, on behalf of VDMC; Leen Moria, VDMC; Laurence Mourlon-Beernaert, on behalf of VDMC Julio Villalobos, SVP Advisors Date 25 October 2010
  3. 3. VAN • DIJKMANAGEMENT CONSULTANTS Table of Contents1. INTRODUCTION ..............................................................................................................7 1.1. The concept of Universal service in the European Union............................................................9  1.1.1 The origin of the USO concept....................................................................................................9   1.1.2 The concept of USO in the 2002 Directive................................................................................13  1.1.2.a General principles .............................................................................................................13   1.1.2.b The Scope of universal service ..........................................................................................13   1.1.2.c The designation of universal service providers .................................................................16  1.1.2.d USO financing....................................................................................................................17   1.1.3 The current state of affairs as a result of transposing the 2002 Directive in the EU Member  States .................................................................................................................................................21  1.1.3.a Scope of the universal service at MS level ........................................................................21  1.1.3.b The Designation of Universal service providers................................................................22  1.1.3.c Financing of USO ...............................................................................................................22   1.1.4 Further evolutions at the EU level since the 2002 Directive.....................................................23  1.1.4.a The reviews of 2005/2006 and of 2008 ............................................................................23  1.1.4.b The 2009 reform ...............................................................................................................24  1.2. The scope of this study ...........................................................................................................25  1.2.1 Current EU concept of USO.......................................................................................................26   1.2.2 Services considered ..................................................................................................................26   1.2.3 Relation to the periodic review of the scope of universal services ..........................................28 2. IDENTIFICATION AND ASSESSMENT (DEFINITION) OF THE PROBLEM ... 29 2.1. Identification of the problem (‘What is the problem’)..............................................................29  2.1.1 Development of the broadband market...................................................................................29  2.1.1.a Technological developments in the broadband sector.....................................................29  2.1.1.b Infrastructure versus service competition ........................................................................31  2.1.1.c Market development in the EU Member States ...............................................................31  2.1.2 The future broadband development ........................................................................................42  2.1.2.a Release of “Digital dividend” will increase availability of spectrum for wireless broadband  services in the coming years .........................................................................................................42  2.1.2.b Convergence of fixed and mobile networks (FMC)...........................................................43  2.1.2.c Evolution towards Next Generation Networks (NGN) ......................................................43  2.1.2.d Evolution towards Bundled offers ....................................................................................45  2.1.3 What elements of market evolution could impact the appropriateness of USO as a tool to  advance broadband development?...................................................................................................45  2.2. Assessment and description of the problem............................................................................47  2.2.1 What are the reasons behind the problem?.............................................................................47  2.2.1.a Problem of insufficient broadband coverage....................................................................47  2.2.1.b Problem of insufficient broadband take‐up......................................................................48  2.2.2 Who is affected by the problem (specific actors, sectors …)? ..................................................54  2.2.3 What is the scale of the problem?............................................................................................56  2.2.4 Why is public intervention necessary, why at the European level? .........................................58  2.2.4.a Need for public intervention.............................................................................................58   2.2.4.b Why intervention at the EU level? ....................................................................................61  2.2.4.c Can EU act, and if so, how: the principles of subsidiarity and proportionality .................64  2.2.5 How was the problem avoided or reduced via other institutional contexts, regulations or  policies? .............................................................................................................................................65 Assessment of appropriateness of universal service for advancing basic broadband development 3Final report
  4. 4. VAN • DIJKMANAGEMENT CONSULTANTS 2.2.5.a At the EU level...................................................................................................................65   2.2.5.b At the Member States level: The National Broadband plans............................................73 3. DEFINITION OF THE POLICY OBJECTIVES........................................................... 75 3.1. General objectives ..................................................................................................................75 3.2. Specific objectives ..................................................................................................................76 3.3. Operational objectives............................................................................................................77 4. IDENTIFICATION AND DESCRIPTION OF POLICY OPTIONS.......................... 79 4.1. Option 1: ‘No policy change’ (2009 Regime) ............................................................................79 4.2. Option 2: ‘No EU  regulation related to USO’ ...........................................................................80 4.3. Option 3: ‘Mandating broadband internet access for all citizens at a speed of 2Mbit/s’ ...........81 4.4. Option 4: ‘Refinement of the 2009 regime’..............................................................................81 4.5. Option 5: ‘A reformed and focused USO’ .................................................................................85 4.6. Summary of the main differing characteristics of the policy options regarding broadband and USO at the EU level .......................................................................................................................87 5. ASSESSMENT OF THE POLICY OPTIONS............................................................... 92 5.1. Qualitative assessment ...........................................................................................................92  5.1.1 Preliminary assessment of elements with major national flexibility ........................................93  5.1.1.a Mechanisms available for providing financial support to specific user groups ................93  5.1.1.b Sources for funding of USO net cost .................................................................................95  5.1.1.c Conclusion .........................................................................................................................98   5.1.2 Overall qualitative assessment of the economic, social and environmental impacts of each  policy option ......................................................................................................................................98  5.1.2.a Identification of the relevant impacts...............................................................................98  5.1.2.b Qualitative assessment of Option 1: No policy change (2009 regime)...........................102  5.1.2.c Qualitative assessment of Option 2: No EU regulation related to USO ..........................103  5.1.2.d Qualitative assessment of Option 3: Mandating 2 Mbps access for all EU citizens........104  5.1.2.e Qualitative assessment of Option 4: Refinement of the 2009 Regime...........................105  5.1.2.f Qualitative assessment of Option 5: A reformed and focused USO................................107  5.1.2.g Comparison of the options..............................................................................................109  5.2. Quantitative assessment....................................................................................................... 112  5.2.1 Assessment of the cost of ensuring full coverage (availability)..............................................113  5.2.1.a Cost of ensuring full coverage in the EU 27 ....................................................................113  5.2.1.b Assessment of the cost of ensuring full coverage with 2Mbps connectivity ..................123  5.2.1.c Estimation of the part of the cost of full coverage to be funded by the sector under each  option..........................................................................................................................................125  5.2.2 Assessment of the cost of ensuring affordability ...................................................................126  5.2.2.a Estimation of the cost of affordability of broadband services........................................126  5.2.2.b Assessment of the estimated cost of affordability .........................................................131  5.2.2.c Comparison of the cost of affordability between options ..............................................135  5.2.3 Assessment of the costs of managing the universal service system ......................................136 Assessment of appropriateness of universal service for advancing basic broadband development 4Final report
  5. 5. VAN • DIJKMANAGEMENT CONSULTANTS 5.2.3.a Identification of cost categories......................................................................................136   5.2.3.b Conclusion.......................................................................................................................140   5.2.4 Overall quantitative assessment.............................................................................................140  5.3. Overall cost‐benefit assessment of each policy option........................................................... 142 ANNEX 1 : OVERVIEW OF NATIONAL BROADBAND PLANS (SITUATION AS OF DECEMBER 2009) ..........................................................................................................144 ANNEX 2 : DETAILED QUALITATIVE ASSESSMENT OF EACH POLICY OPTION..............................................................................................................................................157 Policy option 1: ‘No policy Change’ (2009 Regime) ....................................................................... 157 Policy option 2: ‘No EU Regulation related to USO’ ...................................................................... 161 Policy option 3: ‘No policy Change’ (2009 Regime) ....................................................................... 164 Policy option 4: ‘Refinement of the 2009 Regime’ ........................................................................ 167 Policy option 5: ‘A reformed and focused USO’ ............................................................................ 171 ANNEX 3 : DESCRIPTION OF THE TECHNO­ECONOMIC MODEL FOR THE CALCULATION OF THE NET COST OF MANDATING BROADBAND INTERNET ACCESS FOR ALL EU CITIZENS AT A SPEED OF 2MBIT/S ..................................176 General architecture of the Techno‐Economic Model................................................................... 176 Description of the Techno‐Economic model main assumptions .................................................... 178 Inputs of the Techno-Economic model................................................................................... 181 ANNEX 4: BREAKDOWN OF NET COST OVER THE DIFFERENT TYPE OF AREAS (PER COUNTRY) ...............................................................................................186 Calculations based on the least expensive offers.......................................................................... 186 Calculations based on the median value offers ............................................................................ 187 Assessment of appropriateness of universal service for advancing basic broadband development 5Final report
  6. 6. VAN • DIJKMANAGEMENT CONSULTANTS List of AbbreviationsARPU Average Revenue per UserBIAC Broadband Internet Access CostCAPEX Capital ExpenditureDAE Digital Agenda for EuropeDG INFSO Directorate General Information Society and MediaDSLAM Digital Subscriber Line Access MultiplexerDOCSIS Data Over Cable Service Interface SpecificationeSGEI Services of General Economic Interest in electronic communicationsEAFRD European Agricultural Fund for Rural DevelopmentERDF European Regional Development FundFMC Fixed-Mobile ConvergenceFTE Full-Time EquivalentFTTx Fiber to the x, where x can be filled in by home (H), curb (C) , building (B)…HH HouseholdsIA Impact AssessmentICT Information and Communication TechnologiesISP Internet Service ProviderLTE Long Term EvolutionMS Member StatesNBS National Broadband SchemeNGA Next Generation AccessNGN Next Generation NetworksNRA National Regulatory AuthorityOPEX Operating ExpenditurePON Passive Optical NetworkP2P Point to PointSGEI Services of General Economic InterestSMEs Small and Medium EnterprisesTFEU Treaty on the Functioning of the European UnionUSD Universal Service DirectiveUSO Universal Service ObligationsUSP Universal Service ProviderVAT Value Added TaxWiMAX Worldwide Interoperability for Microwave AccessxDSL Different Digital Subscriber Line technologies, e.g. ADSL, ADSL2+, SDSLAssessment of appropriateness of universal service for advancing basic broadband development 6Final report
  7. 7. VANMANAGEMENT CONSULTANTS • DIJK1. INTRODUCTIONThe present report constitutes the final report for the study on the “Impacts of EUPolicy options for revision of the universal service provision”. This study supports theEuropean Commission Directorate-General for Information Society and Media (DGINFSO). It aims in particular to assist the formulation of potential policy options andproviding qualitative and quantitative assessment. The key issue of the study iswhether universal service at the EU level is an appropriate tool to advance basicbroadband development and if so, when and how it should be used, or whether thisshould be left to other EU policy instruments or national measures.The report presents the outcome of the three tasks – divided over two Stages – asidentified in the terms of reference for the study. Between Stage 1 and Stage 2, apublic consultation was organised by the Commission 1 .The link between the two Stages of the study, the study tasks and the impactassessment steps is illustrated in the following figure: STAGE 1 ,------------------------------------~ ,.. " " Main Impact Assessment steps:" I I I TASKl: Data gathering, a na Iys is of in puts I .Identification and assessment (definition) ofthe problem _--------------------- 1 §Ib9~_~ _----------~+---------------+~-----------,.. .. !oo ,/ • Defin ition ofthe policy objectives TASK 2: Supporting the : • Identification and description of a na lysis of contributons : the main policy options to public consultation I r.--- ---.. • Ana lysis ofthe impacts ofthe TASK 3: Assessment of policy options and comparison ofthe TASK 3: Assessment of policy options options policy options • Compa rison ofthe options and, where possible and appropriate, identification of a preferred option " ~----------T-+-------------.....~-----------~ , ... ... ... ---------------- ~~::::::::::::::::::_-­ ------------------, ... . • Specification of monitoringand eva luation ofthe preferred policy option Figure 1: Overview of the scope of the study1Seehttp://ec.europa.eu/information_society/policy/ecomm/library/public_consult/universal_service_2010/index_en.htmAssessment of appropriateness of universal service for advancing basic broadband development 7Final report
  8. 8. VAN • DIJKMANAGEMENT CONSULTANTSThe present report will thus first of all identify and define the problem and define theobjectives for the sought after solution for dealing with this problem (cf. Chapter 1).Referring to the tender specifications, the problem definition will strongly focus onuniversal service obligations for broadband services and particular attention will be givento the broad range of policy initiatives that have been taken in recent years forimproving the penetration and take-up of these services.Regarding the objectives (cf. Chapter 2), distinction will be made between general,specific and operational objectives. The relation with the objectives of other policyinitiatives will be made.After all, the analysis of the impacts of EU policy options for the revision of the universalservice provision should be based on the potential of the policy options to attain theobjectives that are defined in order to tackle a well-defined problem.In a next step (cf. Chapter 3), policy options are identified. The policy options that arepresented relate first of all to the minimal set of options as presented by theCommission in its tender specifications (Options 1, 2 and 3). This list has beencompleted with two additional options that are inspired by the detailed problemdefinition. For each policy option, a detailed description is provided, making explicitreference to the policy objectives in Chapter 4.The detailed qualitative and quantitative assessment of each policy option ispresented in Chapter 5. The qualitative assessment presents to what extent eachoption is more or less contributing to achieving the different policy objectives. Thequantitative assessment provides indications of the cost of overall availability andaffordability of basic 2Mbps broadband access services as well as indications on thecost of managing the Universal Service system.Finally, all of the above-mentioned steps have been further refined and / orcompleted based on the contributions to the public consultation on “Universalservice principles in e-communications” that was organised by the Commissionbetween 2 March 2010 and 7 May 2010 2 .The report was prepared for and funded by DG INFSO and will serve as an inputinto their own regulatory impact assessment exercise, if any. The analysis in thisstudy is based on information regarding policy and market developments availableat the end of September 2010. The calculations presented in Chapter 5 take intoaccount costing and pricing elements from end 2009 - beginning 2010.Before presenting the actual impact assessment of EU Policy options for revision of theuniversal service provision, the concept of universal service as well as the scope of thestudy is introduced in more detail.2Seehttp://ec.europa.eu/information_society/policy/ecomm/doc/library/public_consult/universal_service2010/presentations/questionnaire_en_100302.pdfAssessment of appropriateness of universal service for advancing basic broadband development 8Final report
  9. 9. VAN • DIJKMANAGEMENT CONSULTANTS1.1. THE CONCEPT OF UNIVERSAL SERVICE IN THE EUROPEAN UNIONA profound insight in the concept and reasoning behind imposing universal serviceobligations (USOs) is a basic requirement for a good understanding of the ideaspresented in the different parts of this impact assessment study. Therefore, animportant part of the introduction is devoted to resuming: The origin of the USO concept ; The concept of USO in the 2002 Universal Service Directive (USD) ; The current state of affairs as a result of transposing the 2002 Directive in the EU Member States; Further evolutions at the EU level since the 2002 Directive.1.1.1 THE ORIGIN OF THE USO CONCEPTUniversal Service Policy may have different meaning and objectives depending ofthe country and the development of the network. 3 It may vary from a social safetynet to an industrial policy tool. 4The wide range of possibilities in universal service policies, are clearly shown in atable composed by Claire Milne, as reproduced below:3 For example, the origin dates back to the beginning of the 20th century when it was decidedin the USA that all of the distinct local network would be integrated into one global network,offering “universal access” to all subscribers: see M. Muller (1997), Universal Service:Competition, Interconnection, and Monopoly in the Making of the American System, MIT Press.4 An “industrial policy” refers to a set of actions taken by government in order to affect theway in which factors of production are being distributed across industries.Assessment of appropriateness of universal service for advancing basic broadband development 9Final report
  10. 10. VAN • DIJKMANAGEMENT CONSULTANTS Stage 1: Stage 2: wide Stage 4: Stage 5: Stage 3: mass network geographic network services to market establishment reach completion individualsTeledensity* 0 to 5 per 100 1 to 20 per 100 15 to 40 per 100 35 to 60 per 100 Over 50 per 100GDP per capita rage Low income Lower middle Upper middle High income High income income incomeBusiness take-up 0-30% 20-80% 70-100% 100% 100%Household take-up 0-10% 5-30% 20-85% 75-100% 100% CommercialTypical telephone Administrative Operational Entrepreneurial (maybe Competitivecompany culture (govt. dept.) (huge workforce) privatised) Large scale Technical Growing callTypical management capital network Growing the revenues Profitabilitypreoccupations investment in (improvement, network (marketing) new technology public service) Limited demand Investment Affordability of due to due to Manpower for funds, service to poorerMain constraints to high prices (of plant installation appropriate households;network expansion low incomes) and to meet mass Market appeal technology and cultural use of alternative demand (waiting skills acceptability of communications lists) telephony Govt. control (for Installation andTypical public policy national security rental charges Network Investment Free, fairmeasures (telecom) and economy); kept low to competition, cost- incentives competition geographically stimulate line oriented tariffs uniform charges demandUniversal service goal Technological Geographic Economic Social (achieve Libertariantype (acquire new (maintain (stimulate political (individual right technology) regional parity) economy) cohesion) to communicate) Everyone can Telephone Long distance Widespread meet basic service available service linking all residential take Telephone communication in all populationExamples of universal major centres; up of telephony; affordable to all; needs; public centres;service goals public telephones meet all telephone service access to widespread where demand reasonable adaptable to advanced adoption of warrants demands for special needs services (esp. telephony in telecoms education, business health) Needs created byTypical market Main small Rural, disabled, Payphone rates Main household new services (e.g.research focus business low-income and locations requirements mobility, requirements needs internet) ProfitableTypical public policy Licence Control speed of Identify and meet licences subject to Targetedmeasures (universal conditions on prices non-market unprofitable subsidiesservice) network rollout rebalancing demand obligations Table 1: The five stages of universal policy development (Source: C. Milne (1998), “Stages of universal service policy”, Telecommunications Policy 22, p. 776)Assessment of appropriateness of universal service for advancing basic broadband development 10Final report
  11. 11. VAN • DIJKMANAGEMENT CONSULTANTSAs the table above clearly shows, there is not one ‘universal set of characteristics’ thatunambiguously defines the concept of USO and that is thus applicable in allcircumstances. This said, it is important for our study to understand how the conceptof USO has been defined in the regulatory framework for electronic communicationsservices in Europe.In the EU, the concept of universal service is linked to the liberalization process thattook place during the nineties and was conceived as a social safety net and not anindustrial policy tool. 5 It covers a number of particular or specific objectives,contributing to general public interest 6 , which were previously – i.e. in a monopolistcontext - ensured by a public service policy defining the monopolist organizations(i.e. by regulation). These objectives are availability, affordability 7 andaccessibility 8 . Moreover, in pursuit of these objectives, ensuring adequate qualitymust be monitored.With the opening of the market, new approaches, methods or tools have beendefined in order to pursue these same public interest objectives as mentioned abovein a competitive environment. In this way, the concept of universal service obligationsin Europe is thus directly linked to the change from a monopolist to a competitivecontext. More precisely, USO should remedy the shortcoming of the competitiveenvironment for attaining the objectives listed above. Furthermore, the concept ofUSO in se does not provide any indications on who should be responsible forfinancing the cost related to providing the universal services.Regarding the link between USO and the competitive environment, it should beemphasized that the introduction of competition itself was motivated by its expectedpositive contribution to the same objectives of quality, availability and affordability.More precisely, USO was defined as a measure accompanying the introduction ofcompetition, allowing public intervention in case the previously regulatedmonopolist situation of certain citizens would deteriorate after the market opening inthe sense that existing services would no longer be provided. Therefore, this context ofcompetition requires that any universal service obligation is implemented in a waythat results in minimal market distortion. After all, the starting point for theEuropean electronic communications sector policy is that stimulation competition isthe preferred approach to achieve the three objectives mentioned previously. At alltimes, market development based on competition should thus be given priority.5 On the origins of the concept of universal service in the EU, Communication from theCommission of 15 November 1993 Developing universal service for telecommunications in acompetitive environment, COM(93) 543, and Council Resolution of 7 February 1994, OJ16.2.1994 C 48/1.6 Please note that general public interest refers more generally to equality and continuity.7 ‘Affordability’ refers to the fact that maintaining and using a service does not place anunreasonable financial burden on consumers, particularly on vulnerable disadvantagedconsumers.8 ‘Accessibility’ refers to the fact that services must be useable by all social groups and inparticular by the disabled. Assessment of appropriateness of universal service for advancing basic broadband development 11Final report
  12. 12. VAN • DIJKMANAGEMENT CONSULTANTSIn theory, it could thus be argued that all public intervention measures or tools thatcontribute to the objectives of availability, affordability and accessibility in acompetitive environment can be referred to as universal service obligations.In practice however, the implementation of USO in Europe includes the possibility ofsector specific funding for the cost of universal service provision (cf. also section1.1.2.d). As a consequence, all other and subsequent policy choices for the practicalimplementation of USO (e.g. the listing of services, the designation of the universalservice provider(s) (USP), the development of a pricing policy in general and forspecific disadvantaged groups in particular) need to take into account this additionalaspect of USO in Europe. More precisely, the success of USO as a ‘safeguard’ that thecompetitive environment actually attains the three public service objectives for theservices in its scope, will depend on the extent to which USO can find the rightbalance between the positive impact of preventing exclusion of certaindisadvantaged citizens and the negative impacts of the financial burden placed onthe sector (e.g. in terms of increasing overall prices and thus reducing overallaffordability).Furthermore, the EU legislation balances carefully European harmonization andflexibility left to the Member States. For the services which are harmonized at theEuropean level (the scope of the USO), the modalities of their provision leave someflexibility to the Member States. Conversely, for the services that are not harmonizedat the EU level (other services than in the USO), the rules related to the modalitiesleave less flexibility to the Member States. Scope of USO Designation and Financing schemes 4 services in USOs State and/or sector fund EU level (harmonization) (some flexibility) Other services to be State funding only National level decided by Member States (flexibility) (some harmonization) Table 2: Overview of required balancing between the scope of the USO services and the financing mechanismsThe universal service at the WTO levelFinally, the concept of USO as defined at the EU level is consistent with 9 theprovisions in the WTO Reference Paper on basic Telecommunications of 24 April1996, Art 3, stating that: ‘Any Member has the right to define the kind of universal serviceobligation it wishes to maintain. Such obligations will not be regarded as anti-competitive perse, provided they are administered in a transparent, non-discriminatory and competitively9 See USD 2002/22/EC, Recital 3 USDAssessment of appropriateness of universal service for advancing basic broadband development 12Final report
  13. 13. VAN • DIJKMANAGEMENT CONSULTANTSneutral manner and are not more burdensome than necessary for the kind of universal servicedefined by the Member’.1.1.2 THE CONCEPT OF USO IN THE 2002 DIRECTIVEThe main elements of this Directive, further defining the concept of USO at EU level,are presented in the following paragraphs.1.1.2.a GENERAL PRINCIPLESThe Universal Service Directive provides that any measure taken to guaranteeuniversal service should meet the principles of objectivity, transparency, non-discrimination and proportionality. 10 It should also fulfill two important but subtlydifferent principles: competition should not be distorted and distortions withinmarkets should be minimised. 11The first principle, which stems directly from the Treaty, entails that universalservice measures may not distort competition between undertakings active on thesame market. This, in turn, implies that all undertakings active on a relevant marketcould be designated as a universal service provider, or that each provider that incursa net cost for doing so should be compensated on the same basis.At the same time, even if the state of competition may not be altered by universalservice measures, markets are often nonetheless distorted, because at least someuniversal services have to be provided at prices that depart from normal commercialconditions (i.e. at below market-prices or even below their costs of provision);therefore the provision of such services may require subsidising, which in turn mayrequire taxes or levies to be imposed. Therefore, in accordance with the secondprinciple, these markets distortions have to be minimised. This implies that the leastcostly way of ensuring the provision of universal service should be chosen by theMember State and, if compensation is to be provided from within the sector, the baseof contributors should be as wide as possible. 12 The principle of the minimisation ofmarket distortions should be seen as a gateway for the economic principle ofefficiency to enter the policy and regulatory arena. 131.1.2.b THE SCOPE OF UNIVERSAL SERVICEIn Article 3 of the USD, universal service obligations are in general described as:‘Member States shall ensure that the services set out in this Chapter are made available at thequality specified to all end-users in their territory, independently of geographical location,and, in the light of specific national conditions, at an affordable price’.10 See USD 2002/22/EC, Art.3(2).11 See USD 2002/22/EC., Arts.1(2) and 3(2) and Liberalisation Directive 2002/77/EC, Art.6(1).See R. Cawley, “Universal Service: specific services on generic networks – some logic beginsto emerge in the policy arena”, presented at the 2001 TPRC Conference and available athttp://tprc.si.umich.edu/tprc01/Program01.HTM.12 See USD 2002/22/EC, recitals 4 and 23.13 This principle was heavily relied upon by the Court of Justice in Case C-220/07 Commissionv France [2008] E.C.R. I-95, paras.29 and 31.Assessment of appropriateness of universal service for advancing basic broadband development 13Final report
  14. 14. VAN • DIJKMANAGEMENT CONSULTANTSThe scope of the current universal service is described in Articles 4 to 7 of the 2002Directive 14 .List of services to be made availableFirstly, it comprises access 15 for a connection to the public telephone network at fixedlocation, allowing end-users to make and receive calls, fax, and data communications.The data rate should be sufficient to permit functional Internet access, taking intoaccount prevailing technologies used by the majority of subscribers andtechnological feasibility. In 2002, this was limited by the Directive to a singlenarrowband network connection at 56 Kbps 16 . As the Directive is technologicallyneutral, the connection at the fixed location or address 17 could be fulfilled via wire orwireless technologies (including cellular) provided they allow call, fax and datacommunications to be carried out and that the tariffs for outgoing and incomingcommunications are structured in such a way as to meet the affordability criterion.Moreover, Member States should choose the least expensive technologies amongthose available because the provision of the universal service should minimisemarket distortions.Secondly, universal service comprises at least one comprehensive and regularlyupdated directory, in a printed and/or electronic form approved by the nationalregulatory authority (NRA). The directory should list fixed and mobile subscriberdata in a non-discriminatory way, and abide by the ePrivacy Directive, under whichall subscribers listed in a directory have to give their consent 18 . Moreover, acomprehensive directory enquiry service should be available.Thirdly, sufficient public pay telephones (that inter alia enable the placing of emergencycalls free of charge) should be available to meet the reasonable needs of end-users interm of geographical coverage 19 .Finally, with respect to accessibility, it is foreseen that disabled people can have anequivalent access to the above mentioned services as that enjoyed by other end-users(connection at a fixed location, directories and directory enquiry services, public14 I.e. scope in the narrow sense, meaning the list of services to be made available. The fullscope of US obligations, including provisions on the designation of undertakings, onaffordability of tariffs and on control of expenditure, can be found in Articles 3 to 10.15 This ‘Access’ obligation refers to the objective of ‘availability’.16 See Recital 8 of the USD 2002/22/EC that left some flexibility to Member States forallowing a data rate below the upper limit of 56 kbps to exploit the capabilities of wirelesstechnologies that may be of particular relevance in some future Member States.17 It should thus be underlined that connection at fixed location does not mean connection viafixed public network, but only connection at a specified address, which Member States mayrestrict to the end-users primary location/residence (see Recital 8 of the 2002 Directive).18 See ePrivacy Directive 2002/58/EC, Articles 12 and 16.19 Nevertheless, to ensure minimum regulation, an NRA may decide not to impose theseobligations if, after public consultation, it considers that these facilities or comparable servicesare widely available. More generally, when the market is satisfactorily providing for theelements of universal service, the Member State may not designate a universal serviceprovider.Assessment of appropriateness of universal service for advancing basic broadband development 14Final report
  15. 15. VAN • DIJKMANAGEMENT CONSULTANTSphone boxes). For example, specific services such as textphone for the deaf or speech-impaired people, or billing in specific formats such as Braille for the blind or partiallysighted, could be made available free of charge 20 .Affordability and qualityIn the European context, universal service implies not only availability, but alsoaffordability. Moreover, it implies a certain specified quality of service. On thedetermination of both of these characteristics, Member States enjoy some flexibilityto ensure, in accordance with the principle of subsidiarity, that universal service fitsnational circumstances.Tariffs for the universal service should be affordable, in the light of specific nationalconditions in particular in relation to national consumer prices and income. 21 Forinstance, affordable tariffs may be linked to the penetration rate or to the price of abasket of basic services related to the disposable income of specific categories ofcustomers. Particular attention should be paid to the needs and capacities ofvulnerable and marginalised groups. To achieve affordability, Member States mayrequire that the designated universal service providers offer tariffs which departfrom those offered under normal commercial conditions (i.e. which are at lowerprices or even below cost), that they comply with a price cap, or that they offersimilar tariffs across the whole territory. Among all these possibilities, MemberStates should choose the combination that minimises market distortions. 22Empirical evidence has shown that affordability is not only linked to the level ofexpenditure, but also to the way customers can control it. Therefore, the universalservice providers should also offer, at no additional cost, facilities and services thatenable subscribers to monitor and control expenditure and avoid unwarranteddisconnections. 23 In addition, to limit the expenses of the subscribers, universalservice providers may not require consumers to subscribe for additional facilities orservices which are not necessary or not required for the service requested. 24Quality of service is a factor that is as important as price. Therefore, information onservice quality should be made available and NRAs may impose credible20 See Recital 13 of the 2002 USD.21 See Art.9 of the 2002 USD.22 It has been shown that self-selected tariffs (where the universal service provider proposes asuite of tariff plans that consumers can choose, depending on their consumption pattern) maybe efficient, as it gives an incentive to consumers to reveal their preferences and limit thesubsidy to those subscribers that are really in need. Moreover, subsidies that are targeted to aspecific group of citizens or specific area are more efficient than a general geographicalaveraging of tariffs. It might also be appropriate to choose two different mechanisms, one foruneconomic areas and one for uneconomic customers in economic areas. In the first case,tariffs below costs could be imposed on the designated operator(s), whereas in the secondone, vouchers could be distributed to those specified customers, who could then themselveschoose between providers and benefit from competition between them: J.M. Cheffert (2000),“Universal service: Some observations relating to future European debates?”, Info 241.23 See USD, Art.10 (2) and Annex I, Part A.24 See USD, Art.10 (1).Assessment of appropriateness of universal service for advancing basic broadband development 15Final report
  16. 16. VAN • DIJKMANAGEMENT CONSULTANTSperformance targets taking into account the views of interested parties. 25 Providersof universal service should thus publish adequate and up-to-date quality of serviceinformation, based on both standardised parameters 26 and any other parametersdeveloped by the NRA, in particular those that take into account the specific needs ofdisabled users. Moreover, NRAs can set performance targets, and persistent failureto meet these would result in sanctions being taken against the universal serviceproviders.1.1.2.c THE DESIGNATION OF UNIVERSAL SERVICE PROVIDERSIf necessary, Member States may designate one or more undertakings to guaranteethe provision of universal service, in part or all of the national territory 27 . In order tofulfil the principle of avoiding distortions of competition, the method used todesignate providers should be transparent, objective and non-discriminatory. Hence,all undertakings that are able to provide the universal service 28 , irrespective oftechnology used, should be entitled to participate in the designation process and beaware of it. In order to fulfil the principle of minimising market distortions, themethod should ensure that universal service is provided in a cost-effective manner,i.e. in the least costly way. If it is efficient, different undertakings could be designatedto provide different elements of universal service and/or to cover different parts ofthe national territory. 29In practice, a whole range of designation mechanisms is allowed: tendering, publicconsultation or when those can not work, direct designation. Auctions 30 can beefficient and should be used when there is already sufficient competition on the localaccess market. Otherwise, they may be problematic, due to the difficulty of ensuringthat sufficient undertakings are in a position to bid against the incumbent (as newentrants would need to use alternative network infrastructure or use the incumbent’sassets) and because of the asymmetry of information between the incumbent and25 See USD, Art.11.26 See USD, Annex III,27 See USD, Art.8.28 Sufficient coverage is hereby not a pre-condition per se for being able to provide universalservices.29 To guarantee the principles of non-discrimination and the minimising of marketdistortions, national law may not require that the provider of the universal service should beable to cover the entire national territory: Case C-220/07 Commission v France [2008] ECR I-95,para.34. Also the pending Case C-154/09, Commission v Portugal which concerns the ability ofthe Portuguese legislator to designate the incumbent PT Comunicações as the universalservice provider until 2025 without relying on an efficient, objective, transparent and non-discriminatory procedure.30 For a typology of auctions and the criteria to be taken into account when designing anauction for universal service obligations: Sorana, “Auctions for universal service subsidies”,(1998) 18 Journal of Regulatory Economics, 33; Nett, “Auctions: an alternative approach toallocate universal service obligations”, (1998) 22 Telecommunications Policy, 661; CompetitionEconomists Group, 33-36. See also Weller, “Auctions for universal service obligations”, (1999)23 Telecommunications Policy, 645, who details the scheme proposed by GTE in the UnitedStates for an auction leading to in-market competition, which was criticised by Laffont andTirole, at 244-260.Assessment of appropriateness of universal service for advancing basic broadband development 16Final report
  17. 17. VAN • DIJKMANAGEMENT CONSULTANTSpotential entrants, e.g. concerning the net costs and benefits of serving particulargroups of subscribers.1.1.2.d USO FINANCINGThe USD specifies that : “Where, on the basis of the net cost calculation referred to inArticle 12, national regulatory authorities find that an undertaking is subject to an unfairburden, Member States shall, upon request from a designated undertaking, decide: a. to introduce a mechanism to compensate that undertaking for the determined net costs under transparent conditions from public funds; and/or b. to share the net cost of universal service obligations between providers of electronic communications networks and services.” 31Two funding or financing mechanisms can thus be applied by the Member States:public funding and sector specific funding. Moreover, it is allowed to use ‘differentelements of universal service through different funding mechanisms, and/or to finance the netcosts of some or all elements from either of the mechanisms or a combination of both’ 32 .These mechanisms can only be activated after determining the net cost of theuniversal service obligations. Furthermore, the activation is dependent on theobligatory assessment by the NRA of the unfair burden of this cost. This procedure ispresented in the following scheme:  Direct designation of Calculate net cost US provider(s) by the of USO ("ex-post"*) Member States If YES: Activate sectoral or public funding OR USO may OR If NO: No funding Unfair represent burden unfair confirmed? burden? Designation of US provider(s) by a Net costs are identified designation by designation mechanism mechanism (e.g. tendering) * Based on accounts and/or other information that is audited or verified by the national regulatory authority Graph 1: Consecutive steps preceding the financing of the USO net costReferring to the link between USO and the competitive environment (cf. supra), it isfurthermore specified that: “A sharing mechanism shall respect the principles oftransparency, least market distortion, non-discrimination and proportionality” 33 and “this31 See USD, Article 13, 1.32 See 2002 USD, Recital (21)33 See USD, Article 13, 3.Assessment of appropriateness of universal service for advancing basic broadband development 17Final report
  18. 18. VAN • DIJKMANAGEMENT CONSULTANTSmeans that the transfers result in the least distortion to competition and to user demand” 34 .“Least market distortion means that contributions should be recovered in a way that as far aspossible minimises the impact of the financial burden falling on end-users, for example byspreading contributions as widely as possible 35 ”.Remark on the appropriateness of financing procedure for substantial newinvestmentGraph 1 presented above clearly indicates that– even in the case of e.g. auctions forthe selection of the most cost-efficient universal service provider – no guarantee canbe given to the selected provider that the costs incurred for providing the universalservice are indeed going to be considered as an unfair burden 36 . As such, the USOfinancing mechanism brings about important uncertainties and could possiblediscourage undertakings from being a candidate provider.Also, the current compensation mechanism implies an important delay between themoment of the actual investment for providing universal services and therecuperation of the net cost. 37 In practice, several years can thus elapse beforefunding is received. This again could possible discourage certain undertakings forwhich pre-financing is very difficult or even not feasible 38 .The next paragraphs further comment on the two mechanisms that are currentlyforeseen for financing the net cost of USO. a.1. Sector specific fundingThe undertakings that are currently eligible for bearing a part of the net cost of USOare providers of electronic communications networks and services. These actors – e.g. anInternet Service Provider, offering access to the Internet – can also offer other servicesthat do not fall under the electronic communications services, such as the provisionof web-based content 39 . Undertakings that only provide other services thanelectronic communications services are however not eligible for contributing to thenet cost of USO.Intuitively, the contributions of providers of e-communications networks andservices to the net cost of USO could be regarded justified because of the benefitsthese operators derive e.g. from the wider roll-out of infrastructure, the larger34 See USD, Annex IV – Part B: Recovery of any net costs of universal service obligations35 See USD, Recital (23)36 The importance of respecting the consecutive steps for the activation of a USO fund andespecially of making the assessment of the unfair burden has been stressed by theCommission when it brought Belgium to the European Court of Justice. The Commissionconsiders that Belgium has not correctly transposed provisions of the USD as the Belgian Lawprovides for no assessment of the question whether the provision of social tariffs representsan unfair burden for the undertakings concerned.37 See 14th Implementation Report – Volume 1 – Part 2 (page 45): “In majority of those MemberStates where a decision to activate the compensation mechanism has already been taken, […] effectivecompensation faces long delays due to administrative procedures, appeals and court proceedings.”38 This difficulty has also been raised by Cheffert (2000).39 See also Framework Directive 2002/21, Recital (10).Assessment of appropriateness of universal service for advancing basic broadband development 18Final report
  19. 19. VAN • DIJKMANAGEMENT CONSULTANTSnumber of customers receiving and making calls, etc. This rationale behind thesector-specific funding for mainly voice telephony could be further transferred to thecontext of broadband in the information society. Very soon, it then becomes clearthat there might be a case to extend the scope of eligible actors for the sector specificfunding, in order to include e.g. providers of web content or web based services(both private and public, cf. e.g. eHealthcare, eGovernment). After all, these actorswould directly benefit when broadband services would be available to widercustomer bases.Finally, it is foreseen that not all undertakings providing electronic communicationsnetworks and services are obliged to contribute since “the net cost of universal serviceobligations may be shared between all or certain specified classes of undertakings.” 40 Forexample: “Member States may choose not to require contributions from undertakings whosenational turnover is less than a set limit.” 41Results of the public consultationIn the contributions to the public consultation on universal service principles in e-communications (March 2010) 42 , some operators argued – given the convergence ofthe internet, media and telecommunications industries – for extending thecontributory basis to e.g. web content providers. Also some national governmentsnoted there might be need to consider whether content providers should also beobliged to contribute in the future. Other market players however believed that suchan approach is not feasible provided e.g. the managerial difficulties and the endlessdisputes on the calculation of the contribution of each contributor. Furthermore,since current broadband offers are sold without subsidies from content providers,including them in the universal service financing system for broadband would easilydistort the market. a.2. Public funding (government budgets or ‘general taxation’)The possibility of financing the net cost for USO by means of public funding wasadded in 2002 compared to the 1998 framework 43 , where the possibility of financingwas limited to the sector.In general, economic literature has shown that, unless there are significantinefficiencies within current taxation, compensation of the net cost of USO by means40 See USD, Recital (23)41 See USD, Article 13 (3).42 Seehttp://ec.europa.eu/information_society/policy/ecomm/library/public_consult/universal_service_2010/index_en.htm43 See Directive 98/10 of the European Parliament and of the Council of 26 February 1998 onthe application of open network provision (ONP) to voice telephony and on universal servicefor telecommunications in a competitive environmentAssessment of appropriateness of universal service for advancing basic broadband development 19Final report
  20. 20. VAN • DIJKMANAGEMENT CONSULTANTSof public funding is less distorting and more efficient than the use of a sector specificfund 44 .This is because the taxable basis is broader, thus the distortive effect of the taxes isaccordingly smaller. Opponents to public funding for universal service argue thatallowing public funding could generate competitive distortions between MemberStates, and competitive disadvantage for the countries using sector specific fundscompared to those using the general budget. Such fears however are unfounded asdifferences in compensation mechanisms are similar to divergences between MemberStates in other economic factors, such as the cost of labour or capital or the taxationregime. Moreover, the universal service net cost burdens are small-scale whencompared with overall economic activity. Finally, undertakings in the electroniccommunications sector still generally compete within national markets, even ifcommunication is by definition an international activity.Regarding the list of services that are included in the scope of USO in relation to thefinancing source, national public budgeting procedures could require NRAs toprovide politicians with detailed estimates for the upcoming cost of USO. As suchand in comparison with financing based on sector specific funding, NRAs could bestimulated to focus more strongly on limiting USO to situations in which marketfailure is clearly demonstrated. a.3. Remark on other financing possibilitiesThe procedure to be followed for activating the USO fund somehow limits thepossibilities of financing. After all, any possible financing mechanism required thatthe burden on the undertaking providing the universal service is first assessed.Because of that, the following financing approaches are excluded in spite of theiradvantages: Direct subsidy to end-users (‘vouchers’): efficient to meeting universal service objectives in a very much directed way; Direct subsidy to operators: enables operators to have a pre-financing of the required investments; Pool operator together to invest in infrastructure: this approach would by definition guarantee open access to networks.44 See e.g. Report of the Competition Economists Group (CEG) on “Reforming Universal ServicePolicy” (2007, Report for GSM Europe) in which it was estimated that the welfare loss fromusing industry funds may be as much as three times higher than funding from generaltaxation.Assessment of appropriateness of universal service for advancing basic broadband development 20Final report
  21. 21. VAN • DIJKMANAGEMENT CONSULTANTS1.1.3 THE CURRENT STATE OF AFFAIRS AS A RESULT OF TRANSPOSING THE 2002DIRECTIVE IN THE EU MEMBER STATES1.1.3.a SCOPE OF THE UNIVERSAL SERVICE AT MS LEVELAs Member States enjoy a certain level of discretion with respect to universal service,some heterogeneity in scope of the services included in the national obligations, andin their evolution, can be perceived. More specifically, the following observations 45can be made: • In recent years, several Member States have limited the scope of the universal service obligations as some universal service elements are being delivered by the market under normal commercial conditions. Illustrative of this is the following non-exhaustive list of examples: - Directory and directory enquiry services have been taken out of the scope of USO in the Czech Republic, and are only intended to be designated for certain groups of disabled users in Denmark; - Provision of access at a fixed location is removed out of the scope of USO in the Czech Republic and Hungary, and Latvia has proposed a similar measure; - A reduction in the number of public payphones required can be observed in some Member States such as Hungary and Slovakia, and payphones are not included at all anymore in the USO scope in Denmark; • Measures for the disabled and users with special needs often consist of different forms of special tariff plans and prices, discounts for connection and call making, and obligations concerning the provision of public payphones with specific requirements for usage by disabled users. It has been observed that there is some heterogeneity in the measures employed by the Member States, and that the depth and scope of their impact also varies; • A small number of Member States have recently enlarged or are contemplating of enlarging the scope of the services included in USO. These elements, for which no sector-specific funding is/would be possible (see 1.1.2.d), include: - ISDN services, leased lines and maritime emergency services in Denmark; - Broadband services: next to Finland, also other Member States such as Spain 46 , France, Cyprus and Romania have initiated considerations in this regard. So far, Finland is the only country taken concrete measures to designate universal service providers for broadband 47 .45 Examples drawn from the 13th, 14th and 15th Report on the Implementation of theTelecommunications Regulatory Package.46 In Spain, a legislative proposal foreseeing universal access to the internet at a speed of1Mbps at “affordable rates” from the 1st of January 2011 is currently being considered.47 FICORA has designated 26 telecom operators as universal service providers in variousparts of Finland. The universal service obligations started at the 1st of July 2010. Theconnection speed must be 1 Mbps. No price cap for the broadband subscription fee was fixedAssessment of appropriateness of universal service for advancing basic broadband development 21Final report
  22. 22. VAN • DIJKMANAGEMENT CONSULTANTS1.1.3.b THE DESIGNATION OF UNIVERSAL SERVICE PROVIDERSIt is left to the discretion of Member States to determine the most efficient andappropriate mechanism for selecting the undertakings to supply universal service,provided that the requirements of the framework are respected. This implies thatMember States should ensure the provision of universal service in a cost efficientmanner, whilst respecting the principles of objectivity, non-discrimination andminimum market distortion. In this regard, the mechanism used to designateoperators for the provision of universal service must not a priori exclude anyundertakings, and the conditions of the designation procedure must allow forevaluation of all offers of interested parties to provide particular elements in thewhole or part of the national territory 48 .A number of Member States have not yet designated universal service providers in away that is based on the rules of the current US framework. These countries includeBelgium (other than social tariff component), Bulgaria, Greece, Italy, theNetherlands, Portugal, Spain. Three of them (Greece, Portugal and Spain) arecurrently in the process of preparing new designations. Eight Members Statesdesignate universal service providers based on a tendering procedure: these are theCzech Republic, Estonia, France, Hungary, Poland, Romania, Slovenia and Cyprus.1.1.3.c FINANCING OF USOCurrently, sector specific funding for USO is foreseen as the only or main financingmechanism for the net cost of USO in most of the EU Member States. Finland andSweden, and most recently the Czech Republic are the only three Members Statesproviding for a financing mechanism from public fund only. Malta and Portugalallow both public and sector-specific funding. In Latvia, the law requires setting upof a specific sector-sharing mechanism for the compensation of universal service netcosts but until such a mechanism is established compensation should be paid fromthe state budget.A compensation mechanism is currently only activated in a minority of MemberStates. These are Belgium (for social tariffs only), the Czech Republic, France, Italy,Latvia, Romania 49 and Spain.in advance, but FICORA indicated that a monthly fee of 30 to 40 EUR would be reasonable inmost cases. A reasonable delivery time and price will be determined case-specifically.See: http://www.ficora.fi/en/index/viestintavirasto/lehdistotiedotteet/2010/P_27.html48 See 14th Report on the Implementation of the Telecommunications Regulatory Package.49 The Romanian compensation mechanism is currently under scrutiny of the Commissionservices for compliance with the framework;Assessment of appropriateness of universal service for advancing basic broadband development 22Final report
  23. 23. VAN • DIJKMANAGEMENT CONSULTANTS Country Year USO net cost USO net cost per capitaBelgium 2003 48.4 million EUR 4.61 EUR 50Czech Republic 2006 13.8 million EUR 1.29 EURFrance 2007 22.86 million EUR 0.36 EURItaly 2003 41 million EUR 0.71 EURLatvia 2008 0.54 million EUR 0.24 EURRomania 2008 0.47 million EUR 0.02 EURSpain 2007 71.09 million EUR 1.55 EUR Table 3: Overview of USO net costs shared between operatorsThe fact that currently only a very limited number of Member States have actuallyactivated USO funds, could be considered as a confirmation that the current USOsystem is in balance. At the same time however, the number of MS activating a USfund is increasing. This can be explained by the fact that more and more incumbents(which are the universal service providers in most Member States) are losing marketshare on the retail markets, which leads to a reduced capacity of bearing the burdenof the net cost of USO and thus an incentive for asking the activation of a USO fund.1.1.4 FURTHER EVOLUTIONS AT THE EU LEVEL SINCE THE 2002 DIRECTIVESince 2002, the scope of the universal services was reviewed twice. Furthermore, in2009, the 2002 Universal Service Directive was amended by the Citizens’ RightsDirective. The impact of these on the elements of the 2002 USD presented in section1.1.2, are presented in the following paragraphs.1.1.4.a THE REVIEWS OF 2005/2006 AND OF 2008Article 15 and Annex V of the Universal Service Directive 51 request the Commissionto review periodically the scope of the universal service and to appreciate theopportunity to propose to modify this scope. This assessment has to be made takingaccount of social, market and technological developments (e.g. mobility, data ratesand prevailing technologies used by the majority of subscribers) and is based on twoquestions or ‘preliminary conditions/criteria’ which have to be completed if theCommission wishes to propose a change to the universal service’s scope: 1) are specific services available to and used by a majority of consumers and does the lack of availability or non-use by a minority of consumers result in social exclusion (“majority use test”)? 2) does the availability and use of specific services convey a general net benefit to all consumers such that public intervention is warranted in circumstances50 Approximately half of this amount relates to the component ‘social tariffs’ for which the ECbrought Belgium to the ECJ since it considers that there has been no assessment of thequestion whether the provision of social tariffs represents an unfair burden for theundertakings concerned.51 See USD 2002/22/ECAssessment of appropriateness of universal service for advancing basic broadband development 23Final report
  24. 24. VAN • DIJKMANAGEMENT CONSULTANTS where the specific services are not provided to the public under normal commercial circumstances (“market failure test” 52 )?The first periodical review of the scope of universal service was presented in 2005 53 ,based on which it was concluded that there was no necessity to modify the scope ofuniversal service. For mobile communications, evidence demonstrated that thecompetitive provision of mobile communications has resulted in consumers havingwidespread affordable access and that the conditions for including this service inuniversal service were therefore not fulfilled. For the broadband services, it wasconcluded that only a small, though growing minority of European consumers weremaking use of broadband services so that broadband in 2005 had not yet becomenecessary for normal participation in society, such that lack of access implies socialexclusion. Nevertheless, a number of questions to be further investigated were raisedsuch as the impact of the growth of IP-based services on the current USO modelwhich is based on access as well as services and the compatibility of the currentfinancing model of USO in the context of market liberalisation and the opening tocompetition.In 2008, a second periodical review was published by the Commission 54 . For themobile communications, the same conclusion of the first review was reaffirmed. Forthe broadband service, it was concluded that the first criterion for including a servicein the scope of universal service (service used by a majority of consumers) is beingapproached rather quickly compared to the first review and that consequently thesituation needs to be kept under review.1.1.4.b THE 2009 REFORMIn general, the most important changes for USO in the Citizens’ Rights Directive canbe summarized as follows: 1. the flexibility given to Member States to up-grade the provision of universal service to a connection to the public communications network allowing broadband data rates (Recital 5 of the Citizens Rights Directive 2009/136); 2. the possible imposition on all undertakings of requirements aiming at facilitating access and choice of e-communications by the disabled (Art. 7 of the Universal Service Directive); 3. the separation of the provision of a connection/access from the provision of services (Article 4 of the amended Universal Service Directive and Recital 15 of the Citizen Rights Directive); 4. the inclusion of public voice telephony access points in the scope of universal service (New Art. 6(1) of the Universal Service Directive).These changes do however not affect the provision on the financing of the cost or theprovisions on the selection and designation of the universal service provider.52 USD, Recital (25) refers to “a substantial majority of the population”.53 See COM(2005) 203, 24.5.200554 See COM(2008) 572, 25.9.2008Assessment of appropriateness of universal service for advancing basic broadband development 24Final report
  25. 25. VAN • DIJKMANAGEMENT CONSULTANTSFor the purpose of this study, the first and third modification is of particularimportance. Regarding the first modification, Recital (5) of the 2009 Directive statesthat ‘Data connections to the public communications network at a fixed location should becapable of supporting data communications at rates sufficient for access to online servicessuch as those provided via the public Internet. The speed of Internet access experienced by agiven user may depend on a number of factors, including the provider(s) of Internetconnectivity as well as the given application for which a connection is being used. The datarate that can be supported by a connection to the public communications network depends onthe capabilities of the subscriber’s terminal equipment as well as the connection. For thisreason, it is not appropriate to mandate a specific data or bit rate at Community level.Flexibility is required to allow Member States to take measures, where necessary, to ensurethat a data connection is capable of supporting satisfactory data rates which are sufficient topermit functional Internet access, as defined by the Member States, taking due account ofspecific circumstances in national markets, for instance the prevailing bandwidth used by themajority of subscribers in that Member State, and technological feasibility, provided thatthese measures seek to minimise market distortion.’Compared to the provisions in the 2002 USD 55 , reference is no longer made to anarrowband connection and the indication on an upper limit (56 kbps in the USD) hasbeen removed, so larger discretion is provided to the Member States. No preciseindications are provided as to how the specific national circumstances need to betaken into account. Recital (5) states the following: “Flexibility is required to allowMember States to take measures, where necessary, to ensure that a data connection is capableof supporting satisfactory data rates which are sufficient to permit functional Internet access,as defined by the Member States, taking due account of specific circumstances in nationalmarkets, for instance the prevailing bandwidth used by the majority of subscribers in thatMember State, and technological feasibility, provided that these measures seek to minimisemarket distortion”. Depending on the definition of functional internet access by eachindividual Member State and taking into account the specific circumstances innational markets, broadband services with different speeds could thus be added tothe scope of USO at national level.It should be noted that the introduction of the larger discretion for Member States toinclude broadband services of a specific speed, was not based on the assessment ofthe two criteria of Article 15 of the Universal Service Directive as defined for thereview of the scope of the universal service (cf. section 1.1.4.a). As such, it cannot beexcluded that the USD will be used by Member States as an industrial policy toolinstead of the social safety net that was previously conceived by the EU (cf. section1.1.1). Furthermore, this change upsets the balance between the flexibility regardingthe scope of the universal services and the harmonization of the fundingmechanisms, especially in view of the magnitude of funding required forimplementing such an industrial policy tool.1.2. THE SCOPE OF THIS STUDYThe scope of the policy options that will be considered in the context of this study onthe review of USO can be defined in terms of the extent to which the55 See Directive 2002/22, Recital (8)Assessment of appropriateness of universal service for advancing basic broadband development 25Final report
  26. 26. VAN • DIJKMANAGEMENT CONSULTANTS(implementation of the) current EU concept of USO in the electronic communicationsector can be modified, in terms of services considered; i.e. only basic broadbandservices are considered and in terms of its relationship with the periodic review ofthe scope of universal services.1.2.1 CURRENT EU CONCEPT OF USOMore precisely, since the purpose of the current study is to assess ‘whether universalservice at EU level is an appropriate tool to advance broadband development and if so, whenand how it should be used, or whether this should be left to other EU policy instruments ornational measures’, we have understood that a number of aspects related to theimplementation of USO as currently foreseen in the Amended USD can indeed bequestioned.Examples of such aspects are e.g. the requirement that the NRA first needs to assessif the net cost represents an unfair burden for the universal service provider beforecompensation can be agreed upon or the way in which the contributions to theuniversal service fund are collected. More precisely, it could be evaluated if some ofthese aspects require refinement or modification in order to make USO moreappropriate for broadband services, given the assumption that broadband shouldindeed be added to the services within the scope of USO.Other aspects, which are part of the fundamental characteristics of the current EUconcept of universal service, such as e.g. the possibility of sector funding forcompensating the net cost of providing universal service, have not been howeverconsidered as candidates for changes in this study.1.2.2 SERVICES CONSIDEREDIn terms of services considered, the scope of the policy options under considerationfor this study will clearly be limited to adding broadband services to the services whichfall currently within the scope of USO.Broadband capacity has previously been defined by the European Commission 56 ascapacity with a speed equal to or higher than 144 kbps. However, the 15thImplementation Report recognizes that today only a fraction of all retail broadbandlines provide speeds of 144 kbps, and that in future reports (and as of 1/1/2010) 1-2Mbps will be estimated as being the minimum download speed. This evolution isamongst others linked to the growth of e.g. content-oriented services that requirecontinuously higher speeds.56 See 15th Implementation Report, Annex 2, § 4.1 Broadband Access Definitions(http://ec.europa.eu/information_society/policy/ecomm/doc/implementation_enforcement/annualreports/15threport/15report_part2.pdf)Assessment of appropriateness of universal service for advancing basic broadband development 26Final report
  27. 27. VAN • DIJKMANAGEMENT CONSULTANTSFurthermore, since the appearance of Next Generation Access 57 (NGA), a distinctionis more and more often made between “basic broadband access” (or first-generationaccess) and “very high speed broadband services” (or second-generation access,based on NGA). This distinction can also explicitly be found in the “CommunityGuidelines for the application of State aid rules in relation to rapid deployment ofbroadband networks” 58 . Also, besides "basic broadband”, the Digital Agenda forEurope 59 sets targets concerning "fast" internet access at speeds of above 30 Mbpsand "ultra-fast" internet access at speeds above 100 Mbps (see further section 2.2.5.abelow).An overview of different possible services delivered through broadband and thelevel of broadband access they require is presented in the following graph: ~IeMooicne t.tJltiocatoo Collaboration Interactivrty level Vrtuli Sports Utioty ComlXltng Glds VrtuaJL...a1:lcfataies Next-Gmer<iion TV 64-256Khps 512 Khps-2 Mbps 3l Mbps-l Gbps Effectrve BandYtidth Access Typo _ . . . ,. • rFA;RST;mG:aNiEERAiiAiTn;ON;;--"llr~~ffi,;;;;:;;~:;-;;::::::::~::::::-------------- BROAllIWIO BROAOBIlND NEXTGE~RATlONGraph 2: Examples of services delivered through broadband and the required bandwidths(SOURCE: Digital highways – the role of government in 21st century infrastructure – Booz & Company)For the purpose of this study, only basic broadband access will be considered since thisis the broadband service that is currently most widely spread amongst consumers inEurope (cf. section 2.1.1.b).57 ‘Next generation access (NGA) networks’ (NGAs) mean wired access networks which consistwholly or in part of optical elements and which are capable of delivering broadband accessservices with enhanced characteristics (such as higher throughput) as compared to thoseprovided over already existing copper networks. In most cases NGAs are the result of anupgrade of an already existing copper or co-axial access network (See Draft CommissionRecommendation on regulated access to Next Generation Access Networks (NGA).http://ec.europa.eu/information_society/policy/ecomm/doc/library/public_consult/nga_2/090611_nga_recommendation_spc.pdf)58 See 2009/C 235/04, 30.09.2009.59 See COM(2010) 245 final/2: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0245:FIN:EN:PDFAssessment of appropriateness of universal service for advancing basic broadband development 27Final report
  28. 28. VAN • DIJKMANAGEMENT CONSULTANTSAlthough the definition or assessment of some policy options could indicate the needfor a broader review of the current USO model (e.g. because of the growingimportance of IP based services, the added value of including telephone services as aspecific USO on top of access to broadband internet services could eventually bequestioned), the assessment presented below will be limited to the broadbandservices. This means that, wherever appropriate, remarks will be made regarding thepotential impacts of a specific policy option for broadband on other universalservices; the policy options will however not include details on these impacts.In this respect, it is noteworthy that one stakeholder contribution to the publicconsultation 60 suggested that a reform of the universal service regime should foreseethat the obligation of the USP for providing access at a fixed location and telephonyservices is lifted once a publicly supported broadband network (under the“Community Guidelines for the application of State aid rules in relation to rapiddeployment of broadband networks”) or if some form of broadband universalservice were introduced.1.2.3 RELATION TO THE PERIODIC REVIEW OF THE SCOPE OF UNIVERSALSERVICESFinally, the objective of the present impact assessment study is clearly not to conducta third periodical review of the scope of USO. More specifically, the impactassessment will take a global approach when addressing the question on theappropriateness of adding broadband services to the Universal Service Obligations.By consequence, the study will thus not necessarily be limited to those elements thatcan directly be linked to the evaluation of one of the two criteria presented above.Therefore, in order to avoid any possible misunderstanding, we explicitly take theassumption that - for the policy options for which inclusion of broadband services inUSO is assumed - both criteria are met. This assumption is thus purely theoreticaland does not provide any indications of the opinion of the consortium on whetherthe two above-mentioned criteria are actually fulfilled for broadband services. On thecontrary, by making this assumption, the consortium solely wishes to indicate that –at least for the policy options that assume continuation of USO - it will directly focuson the larger debate on and assessment of the appropriateness of includingbroadband services in the Universal Service Obligations (USO) as they are definedtoday. Of course, in case the option of including broadband in USO would beimplemented, it would need to be verified if both criteria are indeed met or ifproposals for modifying these are necessary.60See contributions to the public consultation on universal service principles in e-communications.Assessment of appropriateness of universal service for advancing basic broadband development 28Final report
  29. 29. VAN • DIJKMANAGEMENT CONSULTANTS2. IDENTIFICATION AND ASSESSMENT (DEFINITION) OF THEPROBLEMThe purpose of this study is to assess the extent to which a number of policy optionsare effective and efficient for dealing with a problem. By consequence, it is of theutmost importance to first clearly identify and describe this problem, so that thepolicy options can be focused on the main bottlenecks identified.2.1. IDENTIFICATION OF THE PROBLEM (‘WHAT IS THE PROBLEM’)The key question addressed in this study is ‘whether universal service at EU level is anappropriate tool to advance broadband development and if so, when and how it should beused, or whether this should be left to other EU policy instruments or national measures’.Since answering this question requires a profound understanding of its broadercontext, the problem definition will include a large number of elements related tobroadband development in Europe and how this has been stimulated so far, so thatthese elements can also be taken into account when defining and delimitating at alater stage the objectives and future policy options related to USO.For the sake of clarity, the problem definition will therefore whenever possibledistinguish between elements related to: 1. the identification and assessment of the problem of insufficient broadband development (i.e. the underlying problem that needs to be dealt with by the policy options proposed in Chapter 4); and 2. the question if USO at the EU level could be an appropriate tool provided these elements (i.e. those aspects that will impact the extent to which USO could be an appropriate tool).2.1.1 DEVELOPMENT OF THE BROADBAND MARKETSince the appropriateness of USO for broadband services will depend on how theseservices have developed in recent years, the nature of the problem will first of all bedescribed in terms of broadband market developments.2.1.1.a TECHNOLOGICAL DEVELOPMENTS IN THE BROADBAND SECTORBroadband internet can be supplied by different technological solutions. Thefollowing paragraphs give a brief overview of the main technologies for internet datatransmission currently used.‘xDSL’ stands for Digital Subscriber Line and represents a family of technologies thatprovides digital data transmission over the wires of a local telephone network (e.g.ADSL, ADSL2+, SHDSL). xDSL technologies allow for a download speed of up to 24Mbps (ADSL2+) and an upload speed of up to 1 Mbps for asymmetrical DSL, andAssessment of appropriateness of universal service for advancing basic broadband development 29Final report

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