• It will collect and allocate funds to make up for ‘unfairness’ in the way universal broadband is provided
• Increased infrastructure competition and heightened appreciation of broadband has made the task more complicated 
• We outline Ofcom’s approach 

The UK’s regulator, Ofcom, has clarified its rules on the Universal Service Obligation (USO) for broadband in the UK. Two dominant network operators, BT and Kingston Communications (KCOM), have already been selected as USO providers. That means they must provide service across their infrastructures for anyone that asks for it in their coverage area (with reasonable notice of course). 

Because this means that competitive providers, who don’t share the obligation, will have a cost advantage, those competitive operators and possibly other interested parties, will pay into a fund to compensate the incumbents. Remember, however, that an incumbent being paid to sign up customers may improve its competitive position over time since it can slowly gain scale for its network and deprive scale to its competitors. So it’s important that the USO subsidy be carefully apportioned. 

Background to the foreground 

Universal service obligation (USO) rules might sound fairly straight-forward, but clearly the costs of delivering access network connections of any sort will usually vary between different sorts of end-point and their locations. And the profits to be had from the resulting connections will also differ wildly for different sets of users - that’s important because expected return is clearly a factor in working out whether extending service to particular users will actually be worth it overall. 

It’s true to say that in the past, for most urban and suburban coverage, the cost per dwelling connected could be considered relatively uniform since the marginal cost for connecting to a network built to ‘pass’ homes, will not ‘usually’ vary enough to suggest there should be differential pricing. And after all, the value of a telephone network (say) for each subscriber is not just dependent on the utility of his/her individual connection, but on the ability to connect to others. In other words, a connection is not much good if there’s nobody to talk to, so the concept that part of the cost of your connection be used to defray the costs of harder-to-engineer connections for others, is not difficult to grasp.

As a result a universal service obligation could often, in the past, be borne without the need for any sort of cross-carrier subsidy. There was usually a monopoly or even a dominant player, so connection and maintenance costs evened themselves out across each telco’s  customer base.

The same might have been reasonably true when it came to rolling out broadband, but infrastructure competition (well, any competition) and the value of being connected have both soared since the time of telephony roll-outs. 

Competitive infrastructure tends to have been carefully selected to try and avoid rolling out over difficult terrain or to ‘suboptimal’ communities, and slow roll-out tends to leave the most difficult to cost-justify customers to last. 

That means there can be significant cost differences between new and old infrastructure providers. 

Rights

We now talk of access to broadband as being a human right where access to telephony was previously thought of as a bit of a luxury - as recently as the 1980s in the UK it was usual for many not to have a telephone at home. Those that didn’t would ask if they could use a neighbour’s when required. No more.

Today it’s assumed that access to broadband in some way, shape or form, is crucial (especially now when employees may be required to work from home). So a universal service obligation can be seen as a key tool in the struggle to get broadband out to that final percentage of the population who, for whatever reason, are difficult or costly to hook up.

How much!?

The costs of providing physical connections can be wildly different - some connections will simply require vast sums. Obviously remote locations, like isolated farms, are one thing but in Australia the build-out of the National Broadband Network (NBN) was bedeviled with eye-watering corner cases where just digging up to a dwelling could cost the provider many thousands of dollars when it involved both difficult terrain and environmental sensitivity. (read - Complications and roadblocks: the nbn experience).

Workable rules for a USO, then, must address a complicated cost situation. Here is a summary of Ofcom’s approach.

Its rules set out that any citizen unable to get a decent broadband connection (download 10 Mbps/upload 1 Mbps at least) can request a connection from one of the two ‘Universal Service Providers’ (BT and KCOM). Ofcom decides who should contribute to the fund and how much they should pay. It then assesses funding requests from the USPs to compensate for any ‘unfair’ cost burden. 

This won’t be an easy task. As Ofcom points out, “a Universal Service Provider must submit appropriate information to support their request for funding, including specific financial information such as capital costs incurred and forecasts of future revenues and costs. It then has to assess whether the costs incurred in delivering the USO were ‘efficient’. An independent party will audit the figures and Ofcom will then calculate how much of the cost burden should be borne by the USP. 

There are many years of economic argument embedded in those short sentences. We can expect to hear much of it over the coming years. 

Apparently the necessity for a fund is still undecided, although this may simply be a legalism that prevents accusations of unfairness up the track. Ofcom states that “if we find Universal Service Providers have incurred unfair costs, we may establish an industry fund to compensate them. We will also determine who will contribute to the fund and how much they will contribute. This will include any threshold below which contributions will not be required. Once we have established an industry fund, we will collect monies from industry and compensate the Universal Service Provider."