Universal service

Universal service is an economic, legal and business term used mostly in regulated industries, referring to the practice of providing a baseline level of services to every resident of a country. An example of this concept 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
For the news agency, see Universal Service (news agency).

Universal service was widely adopted in legislation in Europe beginning in the 1980s and 1990s.[1] 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 concept and term

The concept of universal service appears to have originated with Rowland Hill and the Uniform Penny Post which he introduced in the United Kingdom in 1837. Though Hill never used the term "universal service", his postal system had the hallmarks of early universal service; postal rates were reduced to uniform rates throughout the nation which were affordable to most Britons, enabled by the postage stamp (first introduced here) and a General Post Office monopoly on mail. Hill's reforms were quickly adopted by postal authorities worldwide, including the United States Post Office Department (now the United States Postal Service) which already held a monopoly through the Private Express Statutes. The service obligations of USPS under current law are commonly referred to as the "universal service obligation" or "USO". Universal service is also a key objective of the Universal Postal Union.[2]

The term "universal service", on the other hand, appears to have originated with Theodore Newton Vail, president of American Telephone & Telegraph (the original AT&T) and head of the Bell System, in 1907 with the corporate slogan "One Policy, One System, Universal Service".[3][4][5] It was intended as a contrast to the "dual service" that had become common since the original Bell telephone patents expired in 1894, where independent telephone companies operated not only in non-Bell System markets, but also as a competitor in Bell markets.[6]

These independent phone companies did not interconnect to the Bell System; though modern commentators[3] suggest Bell refused to do so as an excuse for monopolization, it was argued then that phone systems of that day could not interconnect unless all phone companies used the same technology, as the Bell System did. This required many businesses to maintain phones with both companies, or else risk losing customers who subscribed to the other phone company.

Vail argued that an interconnected phone system (the Bell System), operated by one company (AT&T) and with rates regulated by the government, would be superior to the dual system and would produce great social benefits, much like Hill's postal reforms. Though largely ignored by modern commentators, Vail did work for the U.S. Post Office Department earlier in his career; thus, he may have been inspired by the U.S. postal system of that day.

Eventually, Vail prevailed in his views, first through state laws and ultimately through the Kingsbury Commitment of 1913, where AT&T agreed to several measures, including interconnection with non-competing independent phone companies, to avoid antitrust action, thus formalizing the Bell System monopoly. Meanwhile, the Mann-Elkins Act of 1910 made AT&T subject to regulation by the Interstate Commerce Commission.

Universal service in telecommunications was eventually established as U.S. national policy by the Communications Act of 1934, whose preamble declared its purpose as “to make available, so far as possible, to all the people of the United States, a rapid, efficient, Nationwide, and world-wide wire and radio communication service with adequate facilities at reasonable charges”.[7] The chief purpose of this law was to combine the Federal Radio Commission with the ICC's wire communications powers, including regulation of AT&T, into a new Federal Communications Commission with greater powers over both radio and wire communications.

Though the Bell System divestiture of 1984 dissolved the monopoly that inspired the term (though SBC Communications, one of the Baby Bells created then, ultimately bought AT&T and assumed its name[4]), universal service remained official U.S. telecommunications policy under the 1934 Act, even as the FCC began to abandon rate regulation. It was further codified by the Telecommunications Act of 1996,[8] even as it permitted expanded competition in the telecommunications field. The Federal Communications Commission is actively exploring universal service reform, and the place of universal service to the broadband communications environment.[9]

Funding

Most countries fund their USO by requiring the incumbent operator to be the designated USO provider or USP. USPs often previously held a legal monopoly protection. The USO is thus funded by rates/tariffs, and also by scale and scope economies. The risk of such an approach, while allowing competitive entry, is that a cross-subsidy exists and thus new entrants can potentially cream-skim (enter in only profitable routes or lines). One response is that some 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),
  • Pakistan has the Universal Service Fund Company (USF Co.),
  • Taiwan has the Universal Service Fund (USF),
  • Australia has the Telecommunications Industry Levy (TIL), etc.

Implementation
Fig.1
Fig.2

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[10] 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 seen from the above, 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.

Service providers also have to make sure the culture that they are supplying meets their specific needs and expectations and they change in almost every culture.

Besides services to deprived areas, there is also a "Lifeline" program that subsidizes telephone service to low-income people regardless of location.[11]

See also

References
  1. See the UK proposals in the Green Paper on Postal Services
  2. "At a glance". Universal Postal Union. Archived from the original on 2009-07-24. Retrieved 2009-06-14.
  3. "Unnatural Monopoly: Critical Moments". Cato Institute. Retrieved 2009-06-14.
  4. "AT&T Milestones in AT&T History". AT&T Inc. Retrieved 2009-06-14.
  5. "Cybertelecom :: Universal Service". Cybertelecom. Retrieved 2010-09-15.
  6. Cybertelecom :: AT&T History
  7. 47 USC § 151 Cornell University Law School
  8. 47 U.S.C. § 254 Cornell University Law Library
  9. FCC: Universal Service
  10. Courtesy, Professor James Alleman, University of Colorado at Boulder, Network Economics and Finance I, Lecture 24
  11. FCC Lifeline
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