Universal service


Universal service

Universal service is an economic, legal and business term used mostly in regulated industries. Originating in the telecommunications sector of the United States, universal service refers to the practice of providing a baseline level of services to every resident of a country. An example is found in the US Telecommunications Act of 1996, whose goals are:

*to promote the availability of quality services at just, reasonable, and affordable rates
*to increase access to advanced telecommunications services throughout the Nation
*to advance the availability of such services to all consumers, including those in low income, rural, insular, and high cost areas at rates that are reasonably comparable to those charged in urban areas

It was widely adopted in legislation in Europe beginning in the 1980s and 1990s. [See the UK proposals in the Green Paper on Postal Services] For instance, under the EU Postal Services Directive (97/67/EC), the Electricity Market Directive (2003/54/EC) and the Telecommunications Directive (2002/22/EC). The language of "universal service" has also been used in proposals by the US Democratic Party for the reform of health care.

Origins of the term "Universal Service"

It is tempting to believe that the concept of “universal service,” a guaranteed baseline level of telephone service, has been a longstanding precept of US telecommunications policy. The preamble of the Communications Act of 1934, declares that the purpose of the Act is “to make available, so far as possible, to all the people of the United States, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.” The term “Universal Service” itself predates the 1934 Act, and was first coined by AT&T President Theodore Vail in a 1907 speech: “one system, one policy, universal service.” Milton Mueller's scholarship has almost singlehandedly shown that Vail’s “universal service” meant something much different than the current understanding.

For Vail, Universal Service was the opposite of Dual Service. In 1907, AT&T’s Bell companies competed for subscribers against hundreds of independent telephone companies, though rarely more than one in a single market. The independent companies entered the market for telephone services when the original Bell telephone patents expired in January, 1894. The Bell companies’ policy of focusing on business use, and thus connecting only major metropolitan centers left plenty of opportunities for independent telephone companies, particularly in smaller cities and for residential subscribers. For the most part, the telephone network of the Bell companies did not interconnect with the local independent companies’ network: a subscriber on the AT&T network could not call a neighbor whose telephone service was provided by the local independent company, and vice versa. For customers such as businesses who needed to be available to customers on both networks, this meant paying for service from both telephone companies: dual service.

The idea of non-interconnecting telephone service seems unwieldy and redundant today, but at the time it had many advocates. Dual service meant that telephone companies competed on characteristics other than price alone, first and foremost, the scope of their network. This created incentives to reduce the cost of access, to interconnect with non-competing networks (usually in distant cities), and most importantly, to connect and provide service to underserved markets. A telephone company that offered connections to distant customers might be more attractive, particularly in a time of rapid rural-urban migration when many customers had family members in small rural towns. The market structure created incentives to wire the countryside. The result was that by 1920, while 30% of American households had telephone service, 38.7% of American farms had telephones. Telephone service was more common in the country than the city.

In this context, universal service was not about providing every home with telephone service at affordable rate: dual service was proving remarkably effective at this, as contemporary regulators were well aware. Instead, universal service was Vail’s vision of ending the intense competition between Bell companies and independents, and submitting the resultant telephone monopoly to government regulation. Vail was certain that a government-regulated monopoly would be more profitable than competing with the independent phone companies. Universal service also convenient undercut the independent telephone companies’ efforts to construct a long distance network that would compete against the lucrative Bell long distance network. By lobbying state governments to require interconnection, or by allowing independents to connect to the Bell network with liberal licensing terms, AT&T could undercut the profitability of the long distance intercity connections being built by the Independents. In some markets where independents had a commanding lead in the number of subscribers, establishing universal service meant conceding the market and selling out to the local independent. By 1920, a combination of Bell company buyouts, regulatory change (under intense lobbying from the Bell companies) and competition had eliminated dual service, clearing the way for the Federal regulatory framework for telephony codified in the Communications Act of 1934.

How Universal Service is Funded

Most countries have a Universal Service Fund and have all their Telecommunications industries pay a part of their net earnings into it. This Fund has different names in different countries:
*Chile has the Telecommunications Development Fund (FDT) ,
*India has the Universal Service Obligation Fund (USOF) ,
*The United Kingdom has the Universal Service Obligation (USO) , etc.

How Universal Service is Implemented

Though the nomenclature is different the importance of the goal of universal service has been noted by most of the countries and similar methods are being implemented to work towards this end. Each country gives certain service providers Universal Service Provider or Eligible Telecommunications Carrier status. This allows the provider in question to get subsidies from the universal service fund to economically provide the necessary service. The basic concept of Universal service is the below cost pricing of service to increase the quantity of service [ Courtesy, Professor James Alleman, University of Colorado at Boulder, Network Economics and Finance I, Lecture 24] as shown in Fig. 1.

The figure shows a Demand Curve where the region in red shows the extent of the original service and the increase shown by the green area represents the increase in the service area once the subsidy helps reduce the prices. The conclusion is simple, as the prices reduce from P1 to P2 the quantity of customers increases form Q1 to Q2. Thus satisfying allowing universal service.The size of the subsidy paid out to the telecommunication service provider in this case is shown in Fig.2.

Since each call in fact costs price P1 and price P2 in the cash flow from the customer the rest (P1-P2) comes from the Universal Service Fund. This is a simplistic case and most countries have very complex legislation to guarantee the service and have several subsidy mechanisms to implement universal service. The case shows the idea behind universal service not the universal service mechanism actually used in any country.

Efficiency

As we can see from the above, universal service is not truly “Universal”; the number of potential customers increases as the number of people who can now afford it increases. However service providers need to be able to actually provide that service through their network. This build-out of network is also subsidized by funds like the High Cost Fund in the United States which is also provided for in the Telecommunications Act of 1996.

Besides services to deprived areas, there is also a "Lifeline" program that subsidizes telephone service to low-income people regardless of location [ [http://www.fcc.gov/cgb/consumerfacts/lllu.html FCC Lifeline] ] .

ee also

*E-rate
*Universal Service Administrative Company
*Foundation for Rural Service [http://www.frs.org]

References


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