This changing environment demands new methods of funding universal service and universal access - methods that are competitively neutral, transparent, non-discriminatory, and cost-efficient. A wide range of methods is possible for the collection and distribution of funds that support universal service. While most nations face a common set of goals, the challenges in promoting universal service vary from country to country.

UNIVERSAL SERVICE AND UNIVERSAL ACCESS DEFINED

Universal service and universal access are closely related concepts. In the United States, the notion of universal service is most commonly expressed as the belief that all households in the nation should have access to the telephone network. This is consistent with the International Telecommunications Union (ITU) suggestion that universal service should be defined as a telephone in every home, while universal access, often seen as a precursor to universal service, should be defined as a telephone within a reasonable distance for everyone.

 Universal Access

As described above, universal access is the term often used to describe the initial stages of telecommunications buildout. The emphasis of universal access policies is to increase access to telephones or telecommunications services on a community-wide level. Universal access programs often seek to foster installation of public payphones or public call centers in rural villages or low-income urban areas with the goal of providing a basic and initial connection to the network. Public payphones or call centers are used in some instances to ensure that even the most remote or sparsely populated area has some access to communication services.

 Universal Service

Universal service policies are typically aimed at either providing telephone or telecommunications services to all households within a country, including those in remote and hard-to-serve locations, or increasing the number of individuals with telecommunications services. Universal service programs tend to focus on making the cost of obtaining and maintaining telephone service more affordable to individual users or to targeted groups of users such as low-income consumers and residents of high-cost and rural areas.

The services supported by universal service mechanisms range from basic telephone service to advanced services. Some countries with well-developed telecommunications infrastructure have expanded their universal service support programs to include advanced services such as Internet access in schools and libraries and affordable access to rural health care providers.

UNIVERSAL SERVICE IN THE UNITED STATES The Telecommunications Act of 1996 defines universal service to include: Voice grade access to the public switched network, i.e., dial tone Touch-tone signaling Single-party service Access to emergency services, including access to 911 and E911, where available Access to operator services Access to long distance services Access to directory assistance Limits on basic long distance service fees for qualifying low-income consumers

The success of universal service programs may be measured in terms of changes in telephone penetration and subscription levels on an aggregate level or among specific groups of users. Practically speaking, the achieved level of universal service depends upon such factors as the level of a country's economic and technological development, the level of urbanization, and a country's land mass and topography.

Whether the goal is universal access or universal service, it is important to identify short- and long- term objectives and to establish sustainable policies and regulations that will make telecommunications services available and affordable to the maximum number of people. To this end, regulators should seek to incorporate certain core principles in their universal service or universal access policies.

PRINCIPLES OF UNIVERSAL SERVICE AND UNIVERSAL ACCESS

In 1997, the WTO Agreement on Basic Telecommunications Services identified a minimal set of principles that signatories should follow in developing universal service policies:

• Transparency
• Non-discrimination
• Competitive neutrality
• Non-burdensome application.

• Quality service at just, reasonable, and affordable rates
• Access to advanced services in all regions
• Access by consumers in rural, insular, and high-cost areas, and by low-income users, to services similar to those available to urban users, and at comparable rates
• Equitable and nondiscriminatory contributions should be made by all providers of telecommunications services
• Specific, i.e., explicit and predictable, financial support mechanisms
• Support should be provided in a competitively neutral fashion
• Access to advanced telecommunications services for schools, health care providers, and libraries

 Universal Service Core Principles

To implement an effective, pro-competitive plan for universal service or universal access, the following core principles are recommended:

• Transparency -- All proceedings, regulations, documents and information governing the collection and distribution of universal service support funds are made available to the public in a timely manner. Public participation in decision-making is allowed and encouraged.

• Non-Discrimination -- The collection and distribution of universal service support does not discriminate on the basis of facilities, services, country of origin, class of customers, technology used, class of service offered, or routing used to deliver service.

• Competitive Neutrality -- Universal service support mechanisms and rules do not unfairly advantage or disadvantage one service provider over another, and do not unfairly favor or disadvantage one technology over another.

• Non-burdensome Application -- Contributions made by telecommunications suppliers to universal service support mechanisms are borne by a large class of telecommunications service providers and do not impose an undue burden on a single service or class of service provider; and the administrative costs of universal service mechanisms are reasonable.

• Just and Reasonable Rates -- Rates are typically considered just and reasonable if they are based on cost.

• Affordable Rates -- Rates do not impose an undue burden on a customer's budget. Factors used to determine affordability include the number of subscribers in a particular location, the per capita income on a local or regional level (disparities at the national level may render national averages unusable), and the scope of the local calling area.

UNIVERSAL SERVICE FUNDING

One of the most difficult issues for regulators is how to raise and distribute funding for universal service. Historically, many countries have kept rates affordable and promoted universal service by cross-subsidizing local service with revenue from long distance and/or international services. This means that long distance and international rates were priced well above cost to include a subsidy used to keep local rates low. In a competitive environment, however, cross-subsidization is ineffective because the market puts downward pressure on rates that are priced significantly above cost.

 General Government Revenues

Some governments allocate a portion of their general revenues to a universal service fund. These revenues typically have been raised through taxes, tariffs, or other similar mechanisms. While this method of providing funding is transparent, explicit, and reduces economic distortions, it does not always raise sufficient funds or receive adequate political support.

 Revenues from Privatization, Licensing and Auctions

If the amount of revenue raised is large enough, regulators can allocate proceeds received from privatization, licensing and/or spectrum auctions into a universal service trust fund and use the interest to support universal service programs. This form of funding may make possible the implementation of a transparent, explicit, targeted and non-burdensome mechanism for universal service funding. A major hurdle with this method is obtaining the initial allocation of such proceeds for telecommunications support, rather than for other worthwhile but unrelated government objectives.

 Contributions from Telecommunications Companies

In some countries, regulators assess a contribution or tax on the revenues of telecommunications companies. Key regulatory issues involve defining which companies should make the contribution, what the contribution rate should be, and how to avoid duplicate contributions. In general, the contribution rate should be kept low in order to minimize economic distortions. A well-designed contribution mechanism can raise revenues in a manner that is non-discriminatory, non- burdensome, and technologically and competitively neutral. A poorly designed contribution mechanism can create significant market distortions, create entry barriers for new companies, and/or favor a specific company, technology or service.

 International Settlement Payments

Regulators and carriers in some countries use a portion of received international settlement payments to finance universal service and universal access. In many cases there are insufficient mechanisms to ensure that settlement payments are actually used to fund universal service. Furthermore, settlement payments are an unreliable source for universal service funding, since they will decline as the international accounting rate regime is replaced with a cost-based system determined by a competitive market. Funding universal service with settlement payments creates an incentive to maintain high accounting rates. In addition, funding universal service with settlement payments shifts the burden of support to other countries that may have their own alternative calling methods in order to bypass the above-cost accounting rate resulting from universal service mandates and commitments. Ultimately, this form of subsidy will encourage the hubbing of traffic through countries with which the destination country has low accounting rates. For these reasons, relying on settlement payments to support universal service will become increasingly risky.

 The U.S. Experience

All telecommunications carriers that provide interstate telecommunications services, including those that provide service on a non-common carrier basis, and payphone aggregators, must contribute to universal service. Internet and on-line service providers and cable companies do not contribute to universal support mechanisms unless they provide interstate telecommunications services.

Carriers that provide only international telecommunications services are not required to contribute to universal service. Only if an international carrier also provides domestic interstate service would it be required to contribute to universal service in the U.S. Contributions for high cost and low income support mechanisms are assessed against interstate end-user revenues -- i.e., the carrier's total revenues from telecommunications services including the revenues from subscriber line charges.

Contributions for universal service support for schools, libraries, and rural health care providers are based on carriers' interstate and intrastate end-user revenues. The contribution rate for schools/libraries is .0075 of total telecommunications gross revenues.

DISTRIBUTING UNIVERSAL SERVICE SUPPORT

 Competitive Bidding and Auctions

In some countries, the universal service administrator allocates funds via competitive bidding. The funding is awarded to the bid or proposal that meets a set of defined criteria, such as the bid that requires the lowest level of subsidy to execute the project. Under this method, the universal service fund administrator consults the government, other agencies, and private organizations to identify priority projects. Bids are solicited to meet the established criteria, and the entity that meets those criteria wins the bid and is allocated proceeds from the fund. This mechanism represents a transparent, affordable, and efficient method of meeting universal service needs.

 Grants and Loans

The universal service administrator may allocate funds for projects through grants or loans. Establishing clear and identifiable criteria to select the best project can be difficult, politically sensitive, and administratively burdensome. The use of grants or loans may therefor be most effective when the number of projects is limited.

 Allocating Funds to Carriers

The universal service administrator may allocate funds to any carrier or telecommunications service company that can demonstrate an ability to provide universal service. The administrator should establish clear, predictable, and competitively neutral criteria for allocating funds to carriers. There are many factors that can be considered in determining how much money is allocated to each carrier, including call volume, call routing, and the number of low-income or rural residents in the service area of a carrier. A growing number of countries are using forward-looking costs to determine how to compensate carriers that provide universal service.

 End-Users/Consumers

Another method of allocation is to give universal service funds directly to end-users. The universal service fund administrator must decide whether to give funds to all end-users or to a particular group. For example, some universal service programs provide funds only to users who live in high- cost areas or only to low-income users. After the recipient group has been selected, universal service fund administrators must decide how the universal service funds can be used. For example, recipients may be allowed to use funds only to pay for all or part of their initial connection costs, monthly phone bills, all calls, local calls and/or long distance calls. Administrators must also decide how funds will be allocated to the targeted recipients. For example, funds may be allocated to recipients indirectly through the carriers (e.g., through rebates, vouchers and/or pre-paid calling cards) or directly to recipients through vouchers, tax credits, government checks, or government- sponsored calling cards. Any method of funding, whether through the carrier or directly to end- users, requires establishing an effective and transparent allocation mechanism.

 The U.S. Experience

An independent, non-governmental entity, the Universal Service Administrative Corporation (USAC), manages high-cost and low-income support, administers the schools and health care programs, and provides billing and collection support.

In order to receive universal service support, a carrier designated as eligible by a state public utility commission must offer, throughout a designated service area, all of the services listed in the Act's definition of universal service. It must offer these services using its own facilities or by combining its facilities with another carrier's (resold) facilities. The carrier must widely advertise both that it provides services under the universal service program and its relevant fees. Any telecommunications carrier meeting these criteria for eligibility can receive universal service support, regardless of the technology it uses.

Carriers that provide service in rural or urban high-cost areas will receive support. A rural carrier is defined as one: whose study area does not include a city of 10,000 or more or any urbanized area; who provides service to fewer than 50,000 access lines; who provides service to any study area with fewer than 100,000 access lines; or less than 15 percent of whose access lines are in cities of more than 50,000.

Before this year, the amount of support a high-cost carrier was entitled to receive, whether it was deemed a rural or non-rural carrier, was based on its embedded costs. Beginning in January 1999, however, the FCC began using forward-looking economic costs to determine high-cost universal service support for non-rural carriers. Rural carriers continue to receive universal service based on their embedded costs. The FCC initiated a new proceeding, to be concluded in the near future, focusing on cost issues for rural carriers.

Lifeline: The Lifeline program helps low-income households pay monthly service bills. All eligible telecommunications carriers must offer this program to qualifying low-income consumers. Lifeline participants receive a total of $5.25 a month where a state provides no matching funds. If the state contributes to Lifeline support, the participant can receive up to $7.00 in federal support.

Lifeline participants are subject to toll limitation (long distance charge limits or blocking). A monthly limit can be set on the amount of money spent on long distance calls and if the bills are not paid, the long distance, but not the local service, can be cut off.

Link-up: The Link-up America program helps low-income subscribers pay the installation costs required to first receive service. Under this program, half of connection charges up to $60.00 will be paid ($30.00 maximum in federal support).

Eligible schools and libraries may purchase any commercially available telecommunications services, internal connections among classrooms, and access to the Internet, at a discount. Higher discounts are available for economically disadvantaged schools and libraries, and those entities located in rural areas. Internal connections include routers, hubs, network file servers and wireless LANs. Internet access means basic conduit access from the school or library to the Internet backbone; it includes the link from the school or library to the Internet service provider, as well as e-mail services.

All non-profit kindergarten through 12th grade schools with an endowment of $50 million or less are eligible for service discounts. Discounts range from 20 - 90%. The discount level depends on the level of poverty, student population and whether the school or library is located in a rural or urban area. Total expenditures for universal service support for schools and libraries are capped at $1.925 billion for 1998 through June 30, 1999, although any funds not disbursed in a given year may be carried forward and disbursed in subsequent years.

To receive a discount, schools and libraries must seek competitive bids for eligible services. Price should be the primary factor, but other factors may also be included. The subsidy for authorized services and equipment is based upon whether the school or library is located in a rural or high- cost area, as well as the percentage of students in the district who are eligible for the national school lunch program. The subsidy is to be paid directly to the service provider, who will then supply the services or equipment to the school or library at the discounted rate.

Approximately 9,600 health care providers in rural areas in the United States are eligible to receive telecommunications services supported by universal service funds. Eligible health care providers include teaching hospitals, medical schools, community health centers, migrant health centers, mental health centers, not-for-profit hospitals, local health departments, rural health clinics and consortia or associations of any of the listed providers. Support is provided for distance charges between the rural health care provider and the nearest large city, defined as having a population of 50,000 or more.

Carriers providing service to eligible health care providers receive the difference between the rural and urban rates; the rural health care provider thus pays no more than the highest tariffed or publicly available rate in the nearest large city. Support is provided to rural health care providers for telecommunications services having transmission speeds of up to the T-1 level (1.544 MBPS).

CONCLUSION

Universal access to telecommunications services is a challenge in virtually every country throughout the world - both developed and developing. In order to implement universal service or universal access, it is necessary to identify goals and establish sustainable policies and regulations that will make telecommunications services available and affordable to the largest number of people.

As domestic and international telecommunications markets become increasingly competitive, many countries will be challenged to replace traditional universal service programs with programs that minimize negative effects on competitive markets. For much of the world, the primary objective of universal service or universal access has been to ensure basic telecommunications services at affordable prices to all. A growing number of nations are realizing that universal service policies should be crafted in a pro-competitive and flexible fashion. Whatever polices are implemented to expand access to telecommunications networks, incentives for encouraging continued investment along with rapid growth and innovation remain key common objectives globally.

FURTHER INFORMATION

Universal Service Obligations in a Competitive Telecommunications Environment. Information Computer Communications Policy 38. OECD.

Kunigami, Jorge. "Options for Delivery of Rural Telephony." Presentation by Jorge Kunigami, Chairman, OSIPTEL-Peru. San Francisco, November 1996.

Hills, Jill. Universal service. Liberalization and privatization of telecommunications. Telecommunications Policy, June 1998.

Muller, Milton. Universal service in telephony history a reconstruction. Telecommunications Policy, July 1993.

Petrazzini, Ben. Competition in telecommunications --- Implications for universal service and employment. Private Sector, World Bank. October, 1996.

Ponce, Fatima. Acceso universal y telecomunicaciones rurales en el Peru: El rol de OSIPTEL. Documentos de Discussion 3. OSIPTEL, Peru.

Von Hesse, Milton. Telecommunications for rural and preferential social interest areas development: Strategy and Funding Policy. Documentos de Discussion 2. OSIPTEL, Peru.

Wellenius, Bjorn. "Extending telecommunications service to rural areas --- the Chilean experience." Viewpoint. Note 105. The World Bank. February, 1997.

Foro CITEL. Seminario sobre servicio universal. 14-15 April, 1998. Buenos Aires, Argentina. Co- published by Asociacion Hispanoamericana de Centros de Invetigacion y Empresas de Telecomunicaciones (AHCIET) and Camara de Informatic y Comunicaciones de la Republica Argentina.

Universal Service and Public Access in the Technologically Dynamic and coverging informationn society. OECD. April 1997.

La Transformacion de las Telecommunicaciones en el Peru. Organismo Supervisor de Inversion Privada en Telecommunicaciones. Memoria 1994-1997.

La experiencia de regulacion en telecommunicaciones. Documents del primer encuentro regional de organos reguladores de America Latina y el Caribe. Lima, 22-24 Mayo, 1996.