COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 27.11.1996 
COM(96) 608 final 
COMMUNICATION FROM THE COMMISSION 
on 
Assessment Criteria for National Schemes for the Costing 
and Financing of Universal Service in telecommunications 
and Guidelines for the Member States on Operation of such 
Schemes 

TABLE OF CONTENTS 
1. INTRODUCTION : THE PURPOSE OF THIS COMMUNICATION 1 
2. BACKGROUND 2 
2.1 The definition, scope and financing of Universal Service 2 
2.2 Policy aims underlying the financing of universal service 3 
2.3 The decision whether or not to create a National Scheme to fund the net 
cost of universal service in a Member State 3 
2.4 Relevant Community law applying to the costing and financing of 
universal service 4 
3. THE ASSESSMENT CRITERIA TO BE USED IN REVIEWING 
NATIONAL SCHEMES 6 
4. ISSUES TO BE DETERMINED AT A NATIONAL LEVEL 9 
5. GUIDELINES FOR THE OPERATION OF NATIONAL SCHEMES 10 
6. CONCLUSION , 17 
ANNEX A : RELEVANT PROVISIONS OF COMMUNITY LAW RELATING 
TO UNIVERSAL SERVICE 19 
ANNEX B: ACCESS DEFICIT CONTRIBUTION SCHEMES 23 
ANNEX C : COMMISSION STATEMENT TO THE MINUTES OF THE 
1910TH MEETING OF COUNCIL (TELECOMMUNICATIONS) ON 
27TH MARCH 1996 ON WHO CONTRIBUTES TO UNIVERSAL 
SERVICE 25 
ANNEX D: ASPECTS OF NATIONAL SCHEMES ADDRESSED MAINLY 
AT THE NATIONAL LEVEL... 26 
TECHNICAL GLOSSARY 29 
1<K 
1. INTRODUCTION : THE PURPOSE OF THIS COMMUNICATION 
This Communication is intended to inform the Member States on the criteria which 
the Commission will use in assessing under Community law provisions relating to 
the costing and financing of universal service within national schemes for universal 
service ("National Schemes"). 
No requirement is imposed on Member States to set up National Schemes to share 
any financial burden resulting from the cost of universal service provision amongst 
market players. 
However, where such schemes are implemented they must be compatible with 
Community law, and in particular, with Commission Directive 96/19/EC of 13 
March 1996 amending Commission Directive 90/388/EEC regarding the 
implementation of full competition in telecommunications markets ("the Full 
Competition Directive") and with the provisions endorsed by the Council and 
European Parliament in the proposed Council and European Parliament Directive on 
Interconnection ("the Interconnection Directive"). 
National Schemes must necessarily be adapted in the light of the specific conditions 
in the Member States, particularly the conditions in less developed regions within the 
Community. At the same time, the underlying principles for costing and financing 
universal service within those schemes should be the same throughout the 
Community, even though the costs eventually calculated may be closely related to 
the prevailing economic, social and geographical conditions. This Communication 
also provides guidance on principles for the operation of National Schemes. 
According to the Full Competition Directive National Schemes must be notified to the 
Commission. This Communication therefore identifies in Sections 2 and 3 the legal 
principles and approaches which the Commission expects to find in National Schemes 
notified to it, if such schemes are to be judged to be compatible with the Community 
legal framework. It also in Section 4 examines those aspects of universal service which 
are primarily addressed at a national level. In Section 5 provides additional detail in the 
form of Guidelines for National Regulatory Authorities as to the operation of national 
schemes for universal service in the area of telecommunications. 
This Communication does not create enforceable rights. Moreover, it does not 
prejudice the final assessment of National Schemes notified to the Commission. 
That assessment will necessarily take into account the situation prevailing at the time 
of notification of National Schemes. 
COMMON POSITION (EC) No 34/96 adopted by the Council on 18 June 1996 with a view to 
adopting Directive 96/.../EC of the European Parliament and of the Council of... on interconnection in 
telecommunications with regard to ensuring universal service and interoperability through application 
of the principles of open network provision (ONP). 
1 b 
2. BACKGROUND 
2.1 The definition, scope and financing of Universal Service 
The concept of universal service will play an important part in meeting the 
challenges of the Information Society2. It is based on the principles of universality, 
equality, continuity and affordability. 
Universal Service is defined in the Interconnection Directive as: 
"a defined minimum set of services of specified quality which is available to all 
users independent of their geographical location and, in the light of specific 
national conditions, at an affordable price ". 
In March of this year, the Commission indicated that that defined service equates to 
""the provision of voice telephony service via a fixed connection which will also allow a 
fax and a modem to operate, as well as the provision of operator assistance, emergency 
and directory enquiry services (including the provision of subscriber directories) and the 
provision of public payphones ." 
It also indicated that according to Directive 95/62/EC (the "Voice Telephony Directive"), 
"Users should also have access to published information about the cost and prices of 
services, about their quality and whether targets for quality are being met". 
Finally, the Commission stressed in that Communication that universal service was a 
dynamic and evolving concept and that it would be kept under regular review, 
particularly, with regard to its scope, level, quality and affordability within the 
European Union. The Commission is due to report for the first time by 1 st January 
1998. In this context, the question of possible financing of preferential tariffs for 
access to Internet type networks by schools as mentioned in the Action Plan 
"Learning in the Information Society", adopted by the Commission last October, 
could also be considered. One initial important evolution is found in the recent 
proposal for a European Parliament and Council Directive which adapts the Voice 
Telephony Directive to a competitive environment . This proposal, for example, no 
longer equates universal service with access solely via a fixed line, but rather with 
provision of a defined service to a fixed location, allowing delivery via a fixed line 
or a wireless connection. This recognises the role of wireless delivery to fulfil 
universal service obligations where this is the least costly technology. 
5 See Commission Communication of 13 March 1996 on universal service in the perspective of a fully 
liberalised environment, COM(96) 73 and Commission Communication on general interest services in 
Europe, COM(96) 443. 
See Communication of 13 March 1996 on Universal Service for telecommunications in the 
perspective of a fully liberalised environment, COM(96) 73. 
Directive 95/62/EC of the European Parliament and of the Council of 13 December 1995 on the 
application of open network provision (ONP) to voice telephony, OJ L321, 30.12.96 
Proposal for a European Parliament and Council Directive on the application of open network 
provision (ONP) to voice telephony and on universal service for telecommunications in a competitive 
environment, COM(96) 419, 11.996. 
The net cost of such universal service obligations may, where it represents an unfair 
burden on the organisation providing universal service, be shared amongst other 
market players. Section 2.3 below provides an overview of Community law 
applying to the costing and financing of universal service. 
2.2 Policy aims underlying the financing of universal service 
National schemes for financing universal service should be consistent with certain 
basic policy aims at a European level. Such schemes must, as far as possible: 
- minimise market entry barriers, whilst providing adequate guarantees for the 
financing of universal service. 
respect the need for neutrality (e.g. between particular market players / 
particular technologies or between integrated or unbundled provision of 
services) in order to avoid distorting the pattern of market entry or subsequent 
investment decisions and/or market activity. 
keep any administrative burden and related costs to a minimum 
be based on objective, transparent, proportional and non-discriminatory 
procedures, and 
create an environment which stimulates greater efficiency and innovation in 
order to ensure the delivery of universal service at a lower cost over time. 
Whilst Member States remain free, in line with the principle of subsidiarity to set 
additional obligations relating to particular technologies and facilities and/or to set 
service and coverage targets (e.g. for Mobile Services or for ISDN), any financial 
burden associated with their provision may not be funded out of the mechanism 
established for financing universal service. 
2.3 The decision whether or not to create a National Scheme to fund the 
net cost of universal service in a Member State 
In line with subsidiarity, the National Regulatory Authority is free to determine on 
the basis of the audited costs of universal service, that : 
Universal service financing is not required, either because universal service 
obligations do not result in a net cost, or that either (i) the net cost established 
does not represent an unfair burden for the operator(s) concerned or (ii) it does 
not justify the administrative costs of a specific financing scheme. 
Universal service obligations do represent a burden, but the State chooses to 
finance it directly or indirectly. 
Universal service obligations are considered a burden and that a specific 
universal service financing scheme is required. In such a case the National 
Schemes must be in accordance with Community law. 
2.4 Relevant Community law applying to the costing and financing of 
universal service 
The general principles and policy aims set out above are derived from the current 
framework for costing and financing universal service (See Annex A for legislative 
references). That framework imposes specific obligations on the Member States. 
2.4.1 The Full Competition Directive 
According to the Full Competition Directive, Member States are required to notify to 
Commission no later than 1 January 1997 any licensing or declaration schemes 
aimed at compliance with 'financial obligations with regard to universal service"**. 
These schemes must be published by the Member States no later than 1 July 1997 
and before they are implemented the Commission must "verify the compatibility of 
these drafts with the Treaty" (Article 3). This process of verification by the 
Commission will therefore take place during the early part of 1997. 
The criteria which such schemes must follow are set out in Article 4C of the 
Directive. These permit Member States to make use of either a universal service 
fund or a system of supplementary charges. The approach chosen can apply only to 
undertakings providing public telecommunications networks and must "allocate the 
respective burden according to objective and non-discriminatory criteria and in 
accordance with the principle of proportionality". 
Finally, the Commission is also required to review such universal service schemes 
no later than 1 January 2003 to assess whether the schemes in place "limit access to 
relevant markets". 
2.4.2 The Interconnection Directive 
The proposed Interconnection Directive will set out a framework which goes beyond 
the principles found in the Full Competition Directive. Whilst the latter directive 
identifies obligations flowing from the Treaty with regard to universal service, the 
Interconnection Directive builds on those principles to propose a common, 
harmonised framework for the costing and financing of universal service within the 
Member States. 
According to Article 5(1) of the Interconnection Directive, Member States may 
establish mechanisms for sharing the net cost of universal service with other 
organisations "operating public telecommunications networks and/or publicly 
Where universal service schemes are put in place other than via a licensing or declaration procedure, 
Article 4C of the Directive requires Member States to notify any national scheme to share the net cost 
of the provision of universal service obligations for verification with the Treaty. In this case, such 
schemes must be notified by 11 January 1997 rather than the slightly sooner date set for licensing and 
declaration procedures. 
Later dates for notification may apply to those Member States to which the Commission grants additional 
transitional periods in respect to opening up of their markets to competition. Notification dates in those 
cases will be set out in the decision granting the additional transitional periods. Where Member States 
do not immediately create National Schemes for universal service, but do so at a future date, the 
Commission would expect such schemes to be notified to the Commission in order to allow an 
assessment of their compatibility with Community law in good time before their entry into force. 
available voice telephony services". In common with the Full Competition Directive 
contributions must be determined in an objective, transparent, non-discriminatory 
and proportional manner. 
Article 5(2), in common with the Full Competition Directive, envisages either an 
independent universal service fund at a national level or a system of supplementary 
charges in addition to interconnection payments. 
Only the fixed public telephone network and fixed public telephony services as 
identified in Section 2.1 above (i.e. Annex I Part 1 of the Interconnection Directive) 
can be financed via a universal service financing mechanism . 
The Interconnection Directive provides (Article 5(3) and Annex III) principles for 
calculating the net cost of universal service. That net cost represents "the difference 
between the net cost for an organisation of operating with universal service 
obligations and operating without the universal service obligations". It requires 
these calculations to be made available to National Regulatory Authorities on request 
and for those calculations to be audited by the National Regulatory Authority or 
other competent body, with the results being made public. 
National Regulatory Authorities are required to assess whether a specific financing 
mechanism is justified, taking account of the market benefit which accrues to the 
organisation providing universal service (Article 5(4)). 
Finally, procedures for cost sharing and the mechanisms used should be open to the 
public. National Regulatory Authorities should also publish on an annual basis a 
report giving the cost of universal service and the contributions made by all the 
parties involved (Article 5(5)). 
2.4.3 The role of state aids 
Where Member States decide to fund, directly or indirectly through the State budget, 
part or all of the net cost of universal service in the telecommunications sector, such 
interventions must be made in a manner which is consistent with the EC Treaty's 
rules on State Aids which are set out in Articles 92 to 94 together with Article 90. 
Such funding should be transparent and should not exceed the net costs of the 
obligations calculated in line with guidelines provided in this Communication. In 
cases where it will be soundly established that there is no overcompensation (eg. 
when there is no compensation of costs which should normally be borne by the 
relevant activity) of the cost of public service, there will normally be no state aid in 
the meaning of Article 92(1) EC. Conversely, when the public intervention will lead 
to an overcompensation, the Commission will have to determine whether the aid 
involved can be approved under one of the derogations of Article 92(2)and(3). 
7 As mentioned at 2.1 above, the Commission has proposed a modification to the current Voice 
Telephony Directive. When adopted, this will develop further the precise scope of the universal 
service concept within the European Community, in particular, with regard to the obligation of 
affordability. 
Examples of such direct support could include providing support from the social 
security budget to particular operators, or directly to certain customers, to cover the 
cost of special equipment or tariff packages for users with disabilities. 
3. THE ASSESSMENT CRITERIA TO BE USED IN REVIEWING 
NATIONAL SCHEMES 
The list below identifies the assessment the Commission will use when examining 
national legislation implementing national schemes for universal service. 
In Section 5 below more detailed guidelines are provided for National Regulatory 
Authorities in the Member States in relation to the operation of National Schemes. 
These guidelines aim to develop best practice within the sector and draw on the 
principles set out below. 
Member States must ensure that National Schemes comply with Community law. 
In assessing the conformity with Community law of National Schemes notified to it, 
the Commission will examine the following points : 
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The Commission will examine the national approach to calculating the cost of 
universal service and, in particular, will consider the following points : 
1. National Schemes may only cover the "net cost" of universal service obligations 
as defined in Community law (i.e. the costs associated with the provision of the 
public fixed telephone networks and publicly available fixed telephone service8). 
The calculation should take account of both costs and revenues. The costing 
approach should be forward looking, rather than based on historical cost 
accounting principles. 
For an explanation of what is meant by "net cost" and the methodology which is 
suitable in calculating the net cost of universal service obligations see the 
guidelines in Section 5 below. 
2. National Schemes must ensure that the net cost of universal service is calculated 
according to objective, transparent, non-discriminatory and proportional criteria 
and procedures. 
3. In order to meet the requirement for transparency and proportionality in the Full 
Competition Directive, National Schemes must ensure that an operator claiming 
universal service financing clearly identify (for example by way of a formal 
declaration), which customers or groups of customers it formally refuses to serve 
or it intends to disconnect, unless the burden associated with offering service to 
them is shared via a National Scheme. This does not require an operator to identify 
those customers individually. Nevertheless, it should be able to indicate the number 
of customers involved in relation to particular groups or particular areas. 
See Annex I Part I of the Interconnection Directive. 
COSTS THAT MAY NOT BE RECOVERED VIA A NATIONAI JSCBBME 
The Commission will examine National Schemes to ensure that they do not seek 
to recover net costs which are not attributable to universal service obligations, 
and, in particular, it will seek to ensure that the following are not included in any 
cost calculation for universal service. 
4. National Schemes may not be used to recover an 'access deficit contribution* 
attributable to unbalanced national tariff structures9. The issue of such 
contributions is addressed in Annex B. 
In order to assess the compatibility of National Schemes with Community law, 
schemes notified to the Commission must include a timetable for the future 
phasing out of remaining tariff imbalances. Such rebalancing should be 
completed, at the latest, by 1 January 2000, except in the case of those Member 
States who have been granted an additional implementation period pursuant to 
Article 1(2) of the Full Competition Directive. In such cases the date for the 
completion of such rebalancing shall be the date upon which that additional 
implementation period ends. 
i. Furthermore, on the basis of the Full Competition Directive it would be 
disproportionate for National Schemes to be used to recover costs associated with 
activities which are not within the scope of universal service, for example: 
- the cost of implementing specific measures required for purposes of public 
security; 
- the provision of communication services outside the scope of universal service 
to schools, hospitals or similar institutions; 
- compensation and/or refund payments (or administrative and other costs 
associated with such payments) made to users as a result of failure to meet 
specified service quality levels; 
- the cost of replacement and/or upgrading of telecommunications equipment in 
the course of normal network modernisation; 
6. No account may be taken in calculating the net cost of universal service obligations 
of the cost of itemised billing, and other facilities (e.g. selective call barring and 
calling-line identification) where such facilities are imposed as obligations to all 
voice telephony operators. 
Where it is not possible to complete the rebalancing of tariffs by 1 January 1998, Member States may, 
in line with the Full Competition Directive (see Recital 20), establish mechanisms separate from 
National Schemes for universal service to prevent inefficient bypass and "cream skimming" of the 
incumbent operators, which would be incurred as a result of regulatory controls preventing them from 
rebalancing their pricing structure (i.e. competing operators (new entrants), are able to undercut the 
incumbent's tariffs in the international and long-distance market sectors without the incumbent 
operator being able to respond. These sectors are attractive to competitor's because the incumbent, 
acting on the basis of commercial principles, must maintain artificially higher prices in those sectors in 
order to cross-subsidise its regulated below cost charges for access and local calls). 
m$ pmmAMm<€UOÊm,$% uapaa «s «r COST or iftwuuuir $mvia& 
10 The Commission will examine whether any specific mechanism created to fund 
universal service operates in an objective, non-discriminatory, transparent and 
proportionate manner, and, in particular: 
7. Where a specific mechanism is considered necessary to share the net cost of 
universal service obligations amongst market players, National Schemes may 
collect and distribute contributions either via (i) a universal service fund, 
established at a national level or (ii) via a system of supplementary charges paid by 
undertakings interconnecting with the universal service provider. 
THE OftOAm^TIONS/THAT ARE REQWORED TO CONTRIBUTE TO THE COST OF 
The Commission will examine the scope of organisations which are required to 
contribute to the costs associated with universal service obligations, and, in 
particular: 
8. National Schemes must identify those organisations who are required to 
contribute to the net cost of universal service. Contributions may be 
required from providers of public telecommunications networks and/or 
publicly available voice telephony services, but only in accordance with the 
principles of non-discrimination and proportionality and in line with the 
Commission's Statement to the Minutes of the Council of 
Telecommunications Ministers on 27 March 199610. This means that 
contributions may be imposed only on voice telephony providers in 
proportion to their usage of public telecommunications networks. 
In the framework of its assessment of the licensing or declaration 
procedure as regards voice telephony and the provision of public 
telecommunications networks which the Member States must no later than 
1 January 1997 notify under Directive 96/19/EC, the Commission will, in 
the case of an application/extension of obligations to new entrants and/or 
mobile operators, assess in particular if the burden is allocated according 
to objective and non-discriminatory criteria and in accordance with the 
principle of proportionality. The Member States concerned must 
therefore sufficiently detail the possible justifications for such 
application/extension in order to allow the Commission to make its 
assessment, inter alia as regards the degree of substitutability between 
mobile telephony and fixed voice telephony service. 
The Commission will take a position on these financing schemes in the 
framework of the formal decisions it will adopt regarding the compatibility 
of the national declaration or licensing schemes notified by the Member 
States." 
Commission Statement to the Minutes of the 1910th meeting of Council (Télécommunications), 27 
March 1996. A Copy of this Minute Statement is set out in Annex C below. 
8 
THE BASIS FOR CALCULATING coNTRrBimoras TO THE COST OF UNIVERSAL 
SERVICE 
The Commission will examine the method chosen to identify and apportion the 
contributions to the net cost of universal service amongst market players, and, in 
particular: 
9. National Schemes should apportion contributions amongst eligible market players 
according to their activity in the relevant market. In order to achieve this National 
Schemes must provide procedures for identifying clearly the market upon which 
such activity is measured and determine in a transparent manner the basis for 
contribution for each eligible organisation to contribute. 
The Commission will examine the mechanisms for payments out of National 
Schemes, and, in particular: 
10.Payments via National Schemes must be made in a proportionate, non­
discriminatory and transparent manner to organisations subject to universal 
service obligations. 
4. ISSUES TO BE DETERMINED AT A NATIONAL LEVEL 
The assessment of National Schemes will also necessarily take into account the 
overall approach in a Member State to universal service. Member States must 
therefore assess a range of issues which, in line with the principle of subsidiarity, are 
mainly a matter of determination at a national level. 
These issues include : 
- Whether or not obligations relating to universal service are specifically imposed 
on market players, or whether market forces are relied upon to guarantee the 
universal availability of an affordable service. 
- Whether or not specific pricing constraints (such as requirements for affordability; 
cost-orientation; uniform national pricing) are imposed as part of any obligation. 
In this context the Communication on Universal Service of 13 March 1996 it was 
recognised that "affordability is at the heart of the framework for universal service 
in the Community". That Communication also indicated that "Member States 
should ensure that appropriate measures are taken, (e.g. price caps, targeted tariff 
schemes) necessary to maintain the affordability of services for all users, 
particularly in the run up to full competition ". 
- Whether obligations are imposed on one or more market player and how such 
obligations are imposed (e.g. licensing / primarily legislation / time period). 
- Whether Member States seek to franchise universal service obligations or to 
operate a pay or play system. 
Indications of the Commission's approach to these national level issues is provided 
in Annex D. 
5. GUIDELINES FOR THE OPERATION OF NATIONAL SCHEMES 
On the basis of the principals set out in the legal framework identified above, this Section 
now provides detailed Guidelines for the operation of such National Schemes with a view 
to developing best practice amongst National Regulatory Authorities. 
Nationals Schemes should therefore operate in a way which meets the criteria and 
conditions set out below. These criteria assess three principal aspects for National 
Schemes: 
I. the calculation of the net cost of universal service 
II the mechanisms for financing universal service obligations, and 
r III the determination of who contributes and how costs are shared between 
contributors. 
GUIDELINES FOR NATIONAL REGULATORY AUTHORITIES 
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, -*'* "<i: 
1. National Schemes may only relate to costs attributable to the provision of 
universal service (i.e. costs attributable to the provision of public fixed telephone 
networks and publicly available fixed telephone services, as set out in Annex I Part 1 
of the Interconnection Directive). 
The cost of universal service covers the unavoidable net losses incurred by an efficient 
operator in providing universal service to customers or groups of customers. 
These are customers or groups of customers for whom the benefits to the operator of 
providing them with service are outweighed by the costs incurred. 
Therefore, these are the customers that an operator, acting solely on commercial 
principles, would choose to disconnect if there was no universal service obligation 
requiring him to provide service at an affordable price. In areas where the network has 
not yet been completed, these would be customers to whom the operator would not 
offer service. These "net cost" customers may be termed "non-viable". 
The cost of universal service also covers the provision of public pay phones, of 
emergency call centres supporting emergency telephone numbers and the provision of 
certain special equipment of services, for example, to users with disabilities. 
2. Any calculation of the cost of universal service obligations must establish the 
net cost of such obligations. 
In line with the Full Competition Directive only the net cost of universal service 
obligations may be recovered via National Schemes. 
In line with Annex III of the Interconnection Directive National Schemes must 
comply with the following principles : 
2.1 The net cost calculation must be based on objective, transparent, non­
discriminatory and proportionate procedures and criteria. 
10 
2.2 The net cost calculation should : 
(i) identify the cost, less revenues and associated benefits of providing 
universal service obligations to a customer or group of customers; 
' /0_£ft§_cjse^oi^^(iaaj£«S&2me/S, the cost of providing service should only include 
the incremental costs less associated revenues, i.e. the net cost that the operator 
can avoid^ by withdrawing service (i.e. disconnecting) from "non-viable" 
customers11. 
!nJtR^âS&otnsw^UÂÎOMex§, (whether in an area where the network has already 
been built or in an area where service has yet to be extended), the same approach 
in principle should be adopted12 
In alt cases a reasonable13 return on the incremental capital employed in providing 
service to non-viable customers should be allowed. 
Tj^assgissme.^ benefits should include: 
- connection (i.e. a one off revenue for instalment), rental and call revenues paid 
by customers or groups of customers (i.e. direct, revenues). 
- the call revenues paid by all commercially viable customers, when calling "non­
viable"' customers (i.e. indirect revenues, including revenues from freephone 
ser/ices and shared cost sen/ices ). 
- the replacement call revenue, which should be estimated and set against the 
incremental direct revenues that would be lost if service were withdrawn from 
non-viable customers. 14 
{11} When calculating net cost a quantification of the intangible benefits of being 
a universal service provider should be added on the benefit side. 
A valuation should be placed on the intangible benefits of being the provider of 
universal service obligations for the operator concerned. Although all the benefits of 
being a universal service provider may not be precisely quantifiable, it should be 
possible to establish benchmark estimates for the categories identified below, given 
that such estimates are not uncommon in business valuations. Any such valuation 
must, however, clearly identify the basis for calculation and any assumptions made. 
These benefits include the following: 
- Enhanced brand recognition (vis-à-vis competitors). 
12 
13 
!4 A long run approach to identifying avoidable costs is the approach most consistent with the principle 
of non-discrimination. 
Calculations of the expected revenue of new customers must be based typical revenue information 
from existing customers in similar areas. 
A "reasonable rate of return on capital employed (ROCE)" is the minimum rate required to continue 
attracting necessary funds from investors. As an approximation, ROCE for incumbent operators, 
based on historic costs, tend to fall in the range of 13 to 19 percent, and when based on current costs, 
between 6 and 9 percent. 
In calculating the revenue lost an estimate should be made of the revenue that a disconnected customer 
would still generate for the operator through "replacement" calls, i.e. through the use of the telephone 
of a relative, a friend, at work or public payphones. 
11 
- Universal coverage in the area of ubiquitous operation (i.e. comparatively lower 
costs than competitors in extending network to new customers). 
- Life cycle value of particular customers or groups of customers (Life cycle 
value refers to the fact that a customer who is uneconomic today may become 
profitable in the future e.g. a "non-viable" young family may become profitable 
to serve over time as family income begins to rise and the children start using 
the phone). This means that there is a certain value for an operator in 
providing service to that customer in the short-term given the revenues 
generated over the customer's lifetime. 
- Marketing benefit of accessing full range of telephone usage data. 
(iii) identify separately the net cost of public payphones, emergency services 
and the provision of special equipment or services (e.g. to disabled users). 
The services identified here are different to the provision of the basic telephone 
service and therefore should be identified separately in any cost calculation by 
Member States. They are specific services that the operator is required to provide 
at tariffs that do not provide, in total, sufficient direct or associated benefits to cover 
the total incremental cost of provision. These services are sometimes termed 
"uneconomic services". They are the services that would not be provided 
according to normal commercial principles if they were not mandated by regulation. 
In the case of emergency services, a distinction must be made between the 
obligation to provide free emergency calls, which is generally placed on all 
operators (so that each bears its own costs) and the obligation on one operator to 
provide an emergency call centre, with trained staff, to handle emergency calls at a 
national or regional level. The net cost of such a call centre would be recoverable 
via a National Scheme for universal service. 
Public payphones may also impose a loss on the operator, and where this is the 
result of a regulated averaged call price, the total net incremental cost to the 
operators of providing payphones (i.e. incremental costs less all associated 
revenues) may be added to the cost of universal service. 
Where such services are provided at prices, which result in the total incremental 
revenues (if any) not covering the total long-run incremental cost of service 
provision, the net cost incurred should be added to the cost of universal service. 
2.3 National Schemes should calculate costs under 2.1 and 2.2 on the basis of 
investments and operating costs that could be avoided if the operator stopped 
providing service to 'non viable' customers or groups of customers. "Non viable" 
refers to customers where the total direct and indirect revenue for the operator 
(calculated as set out at 2.2 above) is less than the cost of providing service to 
that customer. 
The "avoidable cost" principle followed in these cost calculations applies both to 
operating costs and fixed costs associated with capital equipment. Where there 
are sunk investments (i.e. investments which once made cannot be fully recovered) that 
could have been avoided but for the universal service obligation, an appropriate rate of 
return on capital employed should be included as an element in the incremental cost 
calculations. 
12 
The value taken for any fixed investments should not be the one appearing in the 
operator's accounts, but the current cost of a capital investment required to provide a 
similar service today15. 
2.4 The actual process of quantifying universal service costs in any Member State is 
likely to require an assessment of likely net cost areas, which may be explained 
by a number of factors, such as, the social/economic make up of subscribers, the 
density of subscribers and the topography of the landscape. 
The methodology proposed under 2.2 and 2.3 above, will also account for the net cost 
of serving "non-viable' customers in so called high cost areas. No additional calculation 
for high cost areas is permitted, where this results in double counting of the cost of 
serving "non-viable" customers. 
2.5 National Schemes should only relate to the financing of the net cost of universal 
service obligations in respect of which the operator, subject to that universal 
service obligation, has explicitly declared that he is only able to provide the 
service at a net cost to himself. 
Such a declaration should be made to the National Regulatory Authority and should 
identify those customers or groups of customer or those services which the operator 
concerned would not serve, but for universal service obligations, or in the case of 
provision to new customers or in new areas, will not be prepared to serve on request. 
3. In line with the Full Competition Directive, National Schemes for calculating the 
cost of universal service obligations may not include an 'access deficit 
contribution' attributable to unbalanced national tariff structures. 
Traditionally, operators have often ensured cheap connection, rentals (and sometimes 
local calls) by cross-subsidies from long distance and international call revenues. This 
has often meant that the connection charge and the access line rental does not result in 
a reasonable rate of return on the capital employed by those operators in providing that 
access.. 
Where an operator, which does not face competition, has an "access deficit", the 
operator is typically compensated by very high profits generated by other services such 
as international and long distance calls. Where this situation exists, the operator's tariffs 
are "out of balance" with the costs it incurs16. In a competitive marketplace an operator 
should not be forced to maintain such tariff imbalances. 
4. National Schemes notified to the Commission must include a timetable for the 
future phasing out of remaining tariff imbalances. Such rebalancing should be 
completed, at the latest, by 1 January 2000, except in the case of those Member 
States who have been granted an additional implementation period pursuant to 
Article 1(2) of the Full Competition Directive. In such cases the date for the 
The governing principle is that competitors should only be required to pay for universal service 
provision according to the minimum cost of an efficient operator providing that service to-day. At the 
same time, account should be taken in identifying those costs of any regulatory restrictions which 
would prevent the universal service provider from using the most efficient technology (for example, 
restrictions placed on incumbent network operators from using wireless solutions in rural or remote 
areas). 
Unbalanced tariffs, or its corollary, an access deficit, do not equate to a genuine 'net loss' for the 
operator as the operator is usually compensated by the large profits from other activities, such as long 
distance and international calls. Indeed, it is likely that most customers receiving subsidised access 
will still be profitable for the operator to serve, based on the incremental revenues that are attributable 
to them. Those customers who impose a net cost on the operator will be captured in the net cost 
exercise described in section 2.2 above. 
13 
completion of such rebalancing shall be the date upon which that additional 
implementation period ends. 
5. Where it has not be possible to complete the rebalancing of tariffs by 1 January 
1998, Member States may, in line with the Full Competition Directive'7, establish 
mechanisms separate from National Schemes for universal service to prevent 
new entrants from unfairly taking advantage of the structure of prices (i.e. high 
charges for international and long-distance services which are not oriented 
towards cost) created by the regulation of the incumbent operator's prices. 
Such mechanisms must be based on objective, transparent, non-discriminatory 
and proportionate procedures and criteria. 
The principles for such access deficit schemes are discussed further in Annex B. 
6. No account may be taken in calculating the net cost of universal service 
obligations which are outside the scope of universal service, for example: 
6.1 the cost of implementing specific measures required for purposes of public 
security; 
6.2 the provision of communication services outside the scope of universal service 
to schools, hospitals or libraries; 
6.3 compensation and/or refund payments (or administrative and other costs 
associated with such payments) made to users as a result of failure to meet 
specified service quality levels; 
6.4 the cost of replacement and/or upgrading of telecommunications equipment in 
the course of normal network modernisation; 
7. No account may be taken in calculating the net cost of universal service 
obligations of the cost of itemised billing, and other facilities (e.g. selective call 
barring and calling-line identification) where such facilities are imposed as 
obligations to all voice telephony operators. 
Il TKÊ MECHANtôM **Oft FINANCING UNIVERSAL SERVICE OBLIGATION 
8. Mechanisms for financing universal service obligations within National Schemes 
must be based on objective, transparent, non-discriminatory and proportionate 
criteria and procedures. This includes situations where a specific financing 
mechanism is not set up or where the State funds directly or indirectly the cost of 
some or all elements of universal service. 
9. In line with the Full Competition and Interconnection Directives, National 
Schemes may provide a mechanism for sharing any unfair burden resulting from 
the net costs associated with the provision of universal service obligations 
amongst other market players. 
10. Such mechanisms within National Schemes may take the form of either a 
universal service fund established at a national level or a system of 
supplementary charges. 
See in particular Recital 20 of the Full Competition Directive. 
14 
The rules for calculation of the net cost of universal service, set out above, are the same 
for both financing mechanisms. Only the collection of universal service contributions 
from the relevant market players is different under the two schemes. 
11. National Schemes may combine elements of both mechanisms in order to ensure 
that any unfair burden associated with the net costs of universal service 
obligations are shared fairly amongst market players, providing that there is no 
undue discrimination, and that no organisation is required directly or indirectly to 
contribute more than once in respect of the net cost of a particular universal 
seivice obligation. 
12. Universal Service Funds 
12.1 Where National Schemes incorporate a Universal Service Fund, the body 
administering that fund should meet the following criteria: 
a) The fund shall be administered by a body independent of the contributing 
and recipient undertaking(s). 
b) That body shaSS be responsible for collecting contributions from operators 
and s twice providers who are liable to contribute to the cost of universal 
service obligations in that Member State and will oversee the transfer of 
sums due and/or administrate out-payments to the persons and/or 
organisations entitled to receive payments from the Fund. 
In administering the financial arrangements for universal service, National 
Schemes should seek to minimise the administrative burden imposed and the 
resulting costs. For that reason, the body administering a Fund may act as an 
"auditor" and "clearing house" for payments or may simply oversee payments 
directly between the organisations concerned. 
c) The responsibility for verifying the net cost of universal service obligations 
should remain with the relevant National Regulatory Authority. 
12.2 Out payments from the fund to the organisations incurring a net cost attributable 
to universal service obligations must be made according to proportionate, non­
discriminatory and transparent criteria. 
13. A system of supplementary charges 
13.1 National Schemes providing for a system of supplementary charges must ensure 
that the operator(s) concerned determine(s) the net cost of universal service 
obligation, as well as the specific contributions to be collected via the system of 
supplementary charges in an transparent, non-discriminatory and proportionate 
manner and subject to review by the National Regulatory Authority. 
National Schemes should ensure, in particular, that there is no conflict of interest 
between an operator's commercial activities and its role in collecting in-payments 
from its competitors. 
Any contribution to be paid via a system of supplementary charges should be calculated 
annually and based on an annual calculation of the cost of universal service 
obligations.18 
13.2 The sum due should be collected within a reasonable time period from the 
organisations concerned. The payment may be collected as a one off payment 
See Article 5(5) of Interconnection Directive. 
15 
on an annual basis or at any other frequency determined by the relevant National 
Regulatory Authority. 
13.3 National Schemes must ensure the transparency of any system of supplementary 
charges. 
This requires the unbundling of traffic charges for interconnection from any identified 
contribution to the cost of universal service. In addition, the universal service provider 
should itself indicate separately the extent of its own contributions toward the cost of 
universal service. 
IB DETERMINATION OF WHO CONTRIBUTES ANO THE CALCULATION OF THE LEVEL OF 
CONTRIBUONS wrrmN nmomt smmm 
14 In line with the Full Competition Directive and the Interconnection Directive, only 
organisations providing public telecommunications networks and/or public voice 
telephony services may be required under National Schemes to contribute to a 
Universal Service Fund or to any system of supplementary charges. Any 
requirement for contribution must however be in accordance with the principles 
of non-discrimination and proportionality and in line with the Commission's 
Statement on this issue at the Council of Telecommunications Ministers in March 
1996 (See Annex D). This means that contributions may only be imposed on 
voice telephony providers in proportion to their usage of public 
telecommunications networks. 
In the framework of its assessment of the licensing or declaration procedure as regards 
voice telephony and the provision of public telecommunications networks which the 
Member States must no later than 1 January 1997 notify under Directive 96/19/EC, the 
Commission will, in the case of an application (extension) of obligations to new entrants 
and/or mobile operators, assess in particular if the burden is allocated according to 
objective and non-discriminatory criteria and in accordance with the principle of 
proportionality. The Member States concerned must therefore sufficiently detail the 
possible justifications for such application/extension in order to allow the Commission to 
make its assessment, inter alia as regards the degree of substitutability between mobile 
telephony and fixed voice telephony service. 
The Commission will take a position on these financing schemes in the framework of the 
formal decisions it will adopt regarding the compatibility of the national declaration or 
licensing schemes notified by the Member States. " 
15. Examples of organisations which are npi liable to contribute to financing 
universal service include (i) private network operators offering corporate 
networking or closed user group services), (ii) service providers offering data 
communications or value-added data services, (such as e-mail), and (iii) service 
providers offering enhanced voice telephony services19 such as video­
conferencing, voice mail services, and voice enquiry/reply services such as 
home-banking or tele-shopping,. 
The scope of the contribution base for universal service may evolve over time in 
line with changes in technology and market structure. 
With regard to the provision of voice telephony service via the Internet, this is not currently viewed as 
a publicly available voice telephony service, (see Commission Notice [..] regarding the status of voice 
on the Voice on the Internet under Directive 90/388/EEC). Contributions cannot therefore be required 
today from Internet Access Providers, though organisations providing Internet access via their own 
network would normally have contributed on the basis of their operation of a public network. 
16 
16. National Schemes should apportion contributions amongst eligible market 
players according to their activity in the relevant market. In order to achieve this 
National Schemes should provide procedures for identifying clearly the market 
upon which such activity is measured and determine in a transparent manner the 
basis for contribution for each eligible organisation to contribute. 
17. National Schemes must ensure that the level of contribution required from the 
eligible organisations identified at 14 above is calculated in an objective, 
transparent, non-discriminatory and proportionate manner. In order to ensure 
this, National Schemes should comply with the following principles: 
17.1. In line with the principle of subsidiarity, Member States may determine the 
specific criteria within National Schemes for apportioning contributions amongst 
eligible market players, providing such criteria meet the requirements of 
paragraph 16 above. 
17.2 National Schemes should ensure that the apportionment of contributions does 
not unduly distort investment incentives and economic efficiency. 
17.3 National Schemes should ensure that the criteria chosen to determine market 
share of eligible organisations does not have a disproportionate or discriminatory 
effect on particular players. 
A number of indicators, such as revenues before tax; call minutes, number of 
subscribers and overall profit, might be used to measure the activity of eligible 
organisations. Nevertheless, whatever method is chosen should operate in a 
proportionate, non-discriminatory and transparent manner, and should encourage 
competition whilst avoiding unjustified administrative or accounting burdens of the 
players concerned. For example, Member States should avoid criteria which unduly 
distort patterns of market entry, activity or investment by market players. 
17.4 National Schemes should ensure that the collection mechanism prevents "double 
contributions". 
One example of a double contribution would be where a service provider, providing 
service via leased lines is required to contribute directly to a universal service fund 
according to his activity level (e.g. gross revenues), even though the tariff for the leased 
lines has been set by the network operator to recover that operators contribution to 
universal service as a provider of a public telecommunications network. In such a 
situation the direct and indirect contribution would incur duplicate payment of that 
Service Provider towards the cost of universal service obligations. 
6. CONCLUSION 
This Communication has identified the criteria which the Commission will use in 
assessing the costing and financing aspects of National Schemes for universal 
service which must notified to the Commission in line with the deadlines 
established in the Full Competition Directive. 
The Commission intends to review such notified schemes in the first half of 1997 
in order to allow Member States to take any necessary steps to adapt such schemes 
to the requirements of Community law in good time to permit the full liberalisation 
of the telecommunications market by 1 January 1998. 
17 
In the light of its experience in assessing the schemes notified to it, and of the 
results of an important study of the practical aspects of costing and funding 
universal service in a competitive environment, the Commission intends to draw 
conclusions in the form of practical guidelines for the telecommunications industry, 
for regulators and for users, to develop best practice with the Community. 
This Communication is now submitted to the Member States to assist them as they 
finalise their National Schemes. 
18 
ANNEX A : RELEVANT PROVISIONS OF COMMUNITY LAW RELATING 
TO UNIVERSAL SERVICE 
2Q Article 4C of FuH Competition Directive 
Without prejudice to the harmonization by the European Parliament and the Council in 
the framework of ONP, any national scheme which is necessary to share the net cost of 
the provision of universal service obligations entrusted to the telecommunications 
organizations, with other organizations whether it consists of a system of supplementary 
charges or a universal service fund, shall, 
(a) apply only to undertakings providing public telecommunications networks; 
(b) allocate the respective burden to each undertaking according to objective and 
non-discriminatory criteria and in accordance with the principle of proportionality. 
Member States shall communicate any such scheme to the Commission so that it can 
verify the scheme's compatibility with the Treaty. 
Member States shall allow their telecommunications organizations to re-balance tariffs 
taking account of specific market conditions and of the need to ensure the affordability 
of a universal service, and, in particular, Member States shall allow them to adapt 
current rates which are not in line with costs and which increase the burden of universal 
service provision, in order to achieve tariffs based on real costs. Where such 
rebalancing cannot be completed before 1 January 1998 the Member States concerned 
shall report to the Commission on the future phasing out of the remaining tariff 
imbalances. This shall include a detailed time-table for implementation. 
In any case, within three months after the European Parliament and the Council adopt a 
directive harmonizing interconnection conditions, the Commission will assess whether 
further initiatives are necessary to ensure the consistency of both directives and take 
the appropriate measures. 
In addition, the Commission shall, no later than 1 January 2003, review the situation in 
the Member States and assess in particular whether the financing schemes in place do 
not limit access to the relevant markets. In this case, the Commission will examine 
whether there are other methods and make any appropriate proposals. 
20 Commission Directive 96/19/EC of 13 March 1996 amending Commission Directive 90/388/EEC 
regarding the implementation of full competition in telecommunications markets ("the Full 
• Competition Directive"). 
19 
Article 1 (g) of interconnection Directive^ 
(g) "universal service" means a defined minimum set of services of specified quality which 
is available to all users independent of their geographical location and, in the light of 
specific national conditions, at an affordable price. 
?i Article £ of interconnect Directive 
Interconnection and universal service contributions 
1. Where a Member State determines, in accordance with the provisions of this Article, 
that universal service obligations represent a unfair burden on an organization, it may 
establish mechanisms for sharing the net cost of the universal service obligations with 
other organizations operating public telecommunications networks and/or publicly 
available voice telephony services. Member States shall take due account of the 
principles of transparency, non-discrimination and proportionality in setting the 
contributions to be made. Only public telecommunications networks and publicly 
available telecommunications services as set out in Part 1 of Annex I may be financed 
in this way. 
2. Contributions to the cost of universal service obligations if any may be based on a 
mechanism specifically established for the purpose and administered by a body 
independent of the beneficiaries, and/or may take the form of a supplementary charge 
added to the interconnection charge. 
3. In order to determine the burden if any which the provision of universal service represents, 
organizations with universal service obligations shall, at the request of their national 
regulatory authority, calculate the net cost of such obligations in accordance with 
Annex III. The calculation of the net cost of universal service obligations shall be 
audited by the national regulatory authority or another competent body, independent of 
the telecommunications organization, and approved by the national regulatory authority. 
The results of the cost calculation and the conclusions of the audit shall be open to the 
public in accordance with Article 14(2). 
4. Where justified on the basis of the net cost calculation referred to in paragraph 3, and 
taking into account the market benefit if any which accrues to an organization that offers 
universal service, national regulatory authorities shall determine whether a mechanism 
for sharing the net cost of universal service obligations is justified. 
5. Where the mechanisms referred to in paragraph 4 are established, national regulatory 
authorities shall ensure that the principles for cost sharing, and details of the 
mechanism used, are open to the public in accordance with Article 14(2). 
COMMON POSITION (EC) No 34/96 adopted by the Council on 18 June 1996 with a view to 
adopting Directive 96/.../EC of the European Parliament and of the Council of... on interconnection in 
telecommunications with regard to ensuring universal service and interoperability through application 
of the principles of open network provision (ONP). 
20 
National regulatory authorities shall ensure that an annual report is published giving the 
calculated cost of universal service obligations, and identifying the contributions made 
by all the parties involved. 
Until such time as the procedure described in paragraphs 3, 4 and 5 is implemented 
any charges payable by an interconnected party which include or serve as a 
contribution to the cost of universal service obligations shall be notified, prior to their 
introduction, to the national regulatory authority. Where the national regulatory authority 
finds on its own initiative, or after a substantiated request by an interested party, that 
such charges are excessive, the organization concerned shall be required to reduce the 
relevant charges. Such reductions shall be applied retrospectively, from the date of 
introduction of the charges, but not before 1 January 1998. 
Annex f, part 1 of Interconnect Directive21 
The fixed public telephone network 
The fixed public telephone network means the public switched telecommunications 
network which supports the transfer between network termination points at fixed 
locations of speech and 3,1 kHz bandwidth audio information, to support inter alia: 
voice telephony; 
facsimile Group III communications, in accordance with ITU-T Recommendations 
in the "T-series"; 
voice band data transmission via modems at a rate of at least 2 400 bit/s, in 
accordance with ITU-T Recommendations in the "V-series". 
Access to the end-user's network termination point is via a number or numbers in the 
national numbering plan. 
The fixed public telephone service according to Directive 95/62/EC of the 
European Parliament and of the Council of 13 December 1995 on the application 
of open network provision (ONP) to voice telephony (22) 
The fixed public telephone service means the provision to end-users at fixed locations of 
a service for the originating and receiving of national and international calls, and may 
include access to emergency (112) services, the provision of operator assistance, 
directory services, provision of public pay phones, provision of service under special 
terms and/or provision of special facilities for customers with disabilities or with special 
social needs. 
Access to the end-user is via a number or numbers in the national numbering plan. 
22 OJ No L. 321,30.12.1995, p.6. 
21 
Anna* m of Jnteroonnoct Directive21 
CALCULATING THE COST OF UNIVERSAL SERVICE OBLIGATIONS FOR 
VOICE TELEPHONY 
Referred to in Article 5(3) 
Universal service obligations refer to those obligations placed upon an organization by a 
Member State which concern the provision of a network and service throughout a specified 
geographical area, including - where required - averaged prices in that geographical area for 
the provision of that service. 
The cost of universal service obligations shall be calculated as the difference between the net 
cost for an organization of operating with the universal service obligations and operating 
without the universal service obligations. 
This applies whether the network in a particular Member State is fully developed or is still 
undergoing development and expansion. 
The calculation shall be based upon the costs attributable to: 
(i) elements of the identified services which can only be provided at a loss or provided 
under cost conditions falling outside normal commercial standards. 
This category may include service elements such as access to emergency telephone 
services, provision of certain public pay telephones, provision of certain services or 
equipment for disabled people, etc. 
(ii) specific end-users or groups of end-users who, taking into account the cost of providing 
the specified network and service, the revenue generated and any geographical 
averaging of prices imposed by the Member State, can only be served at a loss or under 
cost conditions falling outside normal commercial standards. 
This category includes those end-users or groups of end-users which would not be 
served by a commercial operator which did not have an obligation to provide universal 
service. 
In peripheral regions with expanding networks, the cost calculation should be based on the 
additional cost of serving those end-users or groups of end-users which an operator applying 
the normal commercial principles of a competitive environment would choose not to serve. 
Revenues shall be taken into account in calculating the net costs. Costs and revenues should 
be forward-looking. 
22 
ANNEX B: ACCESS DEFICIT CONTRIBUTION SCHEMES. 
Assessment Criteria to Access Deficit Schemes 
As indicated in the Assessment Criteria for National Schemes above, Member 
States may establish separate mechanisms which address the effects resulting 
for an incumbent operator of regulatory constraints on its tariff structure, i.e. 
controls on the speed with which it can rebalance its tariffs in order to meet 
the requirement for rebalancing in the Full Competition Directive. 
Such schemes should be separate from the National Scheme for costing and 
financing the net cost of universal service obligations in a Member State. 
Such schemes should be based on objective, transparent, non-discriminatory 
and proportionate procedures and criteria and should only be created on a 
temporary basis. 
In order to meet these conditions such schemes should comply with the 
principles set out below: 
1. After 1 January 1998, the operators concerned retain significant cross-
subsidies for residential access going beyond what would be expected 
according to normal commercial practices, (i.e. such operators are 
subject to regulatory constraints which have prevented them from 
completing the process of tariff rebalancing and this has resulted in 
tariff structures which are substantially out of line with the capital 
invested in providing local access). 
2. Access Deficit Schemes should be implemented only on a temporary 
basis and only until 1 January 2000. 
In principle, access deficit schemes take the retail price structure (or the 
profitability of the various business areas) of the incumbent as the 
starting point for calculating the interconnection price, and allow a 
discount on these prices to give the price for interconnect for a 
particular type of call or service. The calculation is therefore top down, 
rather than a bottom up approach based on the actual costs incurred. 
As a result any access deficit scheme will prevent effective competition 
from becoming established as competitors (entrants) will be forced to 
charge higher prices for those services, which contribute to the 
incumbent's access deficit. This type of interconnection pricing regime 
undermines the incentives for the incumbent to orient its prices towards 
cost. These effects distort investments within the industry and can only 
be considered as a temporary exception to the Treaty competition rules. 
3. Any Access Deficit Scheme should require the clear identification of 
any "deficit" claimed, calculated in a proportionate, non-discriminatory 
and transparent manner. The calculation should be subject to 
independent verification. The calculation should identify the allocation 
of the capital employed to provide access, together with any common 
23 
and joint costs which should be allocated according to the principles of 
proportionality and non-discrimination. 
4. Safeguards to ensure the transparency of any Access Deficit Scheme are 
of particular importance, given the considerable discretion available to 
an incumbent operator with regard to the allocation of common / joint 
costs within its business. Access Deficit Schemes should not be used in 
a way which simply finances inefficiencies within an incumbent 
operator's activities. 
5. Information concerning the implementation of such schemes, as well as 
the timetable for their phasing out should be notified to the Commission 
alongside the notification of National Schemes for universal service (i.e. 
by 11 January 1997 1996. 
In the absence of such information it will not be possible for the 
Commission to assess the compatibility of National Schemes with the 
EC Treaty. 
6. Any Access Deficit Scheme should be structurally separate from any 
National Scheme for Universal Service. 
The purpose of an access deficit scheme is to address the effects, of 
inefficient bypass and cream skimming, created by regulatory 
constraints on the incumbent's tariff structure. The "deficit" does not 
represent a genuine loss for the operator concerned. It is not therefore 
part of the net cost of providing elements of universal service. 
7. National Regulatory Authorities should ensure that other market players 
only contribute to any access deficit where the competitor uses some 
part of the network (i.e. interconnects) of the incumbent to transmit a 
call. 
If the competitor is able to offer to customers an end to end service 
which does not use or interconnect to the incumbent's network, no 
access deficit contribution should be payable. 
8. Access deficit contributions should be calculated on the basis of the 
contribution to the access deficit that the incumbent loses when the 
revenue (tariff) that would have gone to the incumbent, is instead paid 
to a competitor, even though the call was transported partly via the 
incumbent's network . The access deficit contribution will be less than 
the full contribution to the access deficit that the incumbent would have 
earned had it transported the entire call, because of the effects of 
competition in expanding the market. A portion of the interconnected 
traffic should be considered new traffic for which there can be no 
contribution foregone by the incumbent. 
Where no interconnection takes place, no contribution to the access deficit should be made. 
24 
ANNEX C: COMMISSION STATEMENT TO THE MINUTES OF THE 
Î910TH MEETING OF COUNCIL (TELECOMMUNICATIONS) 
ON 27TH MARCH 1996 ON WHO CONTRIBUTES TO 
UNIVERSAL SERVICE 
"In relation to Article 5(1) of the common position on the proposal for a 
Directive on interconnection in telecommunications, the Commission recalls 
that Article 4c of Commission Directive 96/19/EC of 13 March 1996 
amending Directive 90/388/EEC regarding the implementation of full 
competition in telecommunications markets states that, where Member States 
set up mechanisms for sharing the net cost of universal service obligations, 
they should apply these mechanisms to undertakings providing public 
telecommunications networks. The Directive further states that the respective 
burden must be allocated according to objective and non discriminatory 
criteria and in accordance with the principle of proportionality. According to 
the latter principle contributions should, as emphasised in recital 19 of the 
Commission Directive, seek only to ensure that market participants contribute 
to the financing of universal service. The Commission notes that Parliament 
and Council Directive 95/62/EC on the application of ONP to voice telephony 
defines the scope of universal service obligations, which burden may be 
financed through universal service mechanisms. Furthermore, the principle of 
non discrimination opposes financing mechanisms for the universal service 
obligations which lead either to double contributions to the cost of universal 
service in the same Member State or to all undertakings in the 
telecommunications markets subsidising the voice telephony operators. 
Consequently contributions should be limited to services within the scope of 
the universal service definition. 
The Commission will therefore interpret both Article 4c of the Commission 
Directive and 5(1) of this common position as allowing contributions only to 
be imposed on voice telephony providers in proportion to their usage of public 
telecommunications networks." 
25 
ANNEX D: ASPECTS OF NATIONAL SCHEMES ADDRESSED 
MAINLY AT THE NATIONAL LEVEL 
Even though the needs of the internal market and aim of ensuring a high standard of 
consumer protection mean that a common concept of universal service is required at 
a Community level, many of its aspects are closely linked to the specific situation in 
each Member State. As a result considerable day to day responsibility is placed on 
National Regulatory Authorities, for example, to determine what is "affordable" 
service in a particular Member State. 
In line with the principle of subsidiarity, a range of issues will be addressed mainly 
at a national level concerning the management of the universal service obligations. 
These approaches create the overall framework within which National Schemes will 
operate. National approaches in these areas must remain consistent with Community 
law, and in particular, must be proportional, non-discriminatory, transparent and 
based on objective criteria and procedures. Whilst such issues are not the primary 
focus of this Communication, the Commission will necessarily examine the 
approach chosen in order to assess properly the National Schemes submitted to it. 
The need for specific obligations to be imposed to guarantee universal service 
- The first issue is whether there is a need for specific obligations placed on 
certain operators to provide universal service, or whether voluntary use by 
operators of special and/or customer targeted tariff schemes is achieving the 
overall aim of ensuring affordable service. 
The principle of proportionality means that obligations should be imposed in 
relation to universal service only where there is a risk that the goal of ensuring 
affordable access to a defined level of universal service throughout a given area 
cannot be achieved in a competitive environment without the creation of specific 
mechanisms to share fairly amongst market players any identified costs 
attributable to those obligations which the universal service provider(s) has 
(have) incurred. 
Pricing decisions as part of universal service obligations 
- A second issue is the decision on pricing policies (e.g. national choices to apply 
a uniform national tariff or to allow some degree of tariff deaveraging / 
determination of affordability / use of mechanisms to control the speed of 
rebalancing). 
Community policy with regard to pricing is confined to specific obligations for 
cost-orientation of the tariffs for certain services (e.g. Leased lines, 
Interconnection charges) and an obligation of affordability with regard to the 
delivery of universal service24. Community policy does not require nor 
prevent decisions at a national level, for example, to maintain uniform 
See COM(96) 419 of 11 September 1996, Proposal for a European Parliament and Council Directive 
on the application of open network provision (ONP) to voice telephony and on universal service for 
telecommunications in a competitive environment (replacing European parliament and Council 
Directive 95/62/EC). 
26 
national prices or to allow deaveraging, providing the overall affordability of 
the service is not called into question. 
At the same time, in the Communication on Universal Service the Commission 
made clear that "greater [tariff] flexibility must be conditional upon the 
regulatory framework (i) including adequate measures to ensure affordability ; 
ensuring that price increases for users in remote and rural areas, other than 
adjustments to achieve cost-orientation, are not used to compensate operators 
for losses in revenue resulting from price decreases elsewhere and (Hi) ensuring 
that any differences in pricing between high cost areas and low cost areas do not 
endanger the affordability of universal service ". 
The organisation of the universal service obligation at a national level 
Once that decision is taken to entrust universal service provision to one or more 
organisations, National Regulatory Authorities are likely to decide a range of 
additional issues which impact the operation of National Schemes: 
- Whether there will be one or multiple providers with universal service 
obligations in a Member State or particular areas within a Member State; 
- Whether universal obligations will be imposed by geographical areas (e.g. the 
whole territory or by region) or by service category (e.g. provision of public 
voice telephony; provision of payphones); 
- Procedures for imposing universal service obligations (e.g. imposition through 
regulatory instruments / use of tendering procedures / time scale for review of 
obligations); 
- Administrative aspects (e.g. structure and management of universal service fund 
/ payment mechanisms for universal service (e.g. out of a fund / direct State 
funding / user of vouchers to pay subsidies directly to needy customers / 
valuation of contributions in kind). 
Universal Service contributions through 'Pay or Play' schemes 
A key issue to be addressed is the basic choice as to who will provide universal 
service and how that or those provider(s) will be selected. Once again, provided the 
general principles of objectivity, proportionality, non-discrimination and 
transparency are observed, this decision is principally an issue of subsidiarity. 
At the same time, there should not be an automatic assumption that the current 
universal service provider must continue to provide universal service or be the only 
provider, or equally that universal service should be maintained as a single bundled 
offering. It will remain important within any scheme to ensure that adequate 
incentives are provided to encourage cost-efficient delivery of universal service. This 
will limit the possible distortive effects on market entry and investments which 
higher than necessary universal service costs may have. 
One means of achieving this may be to place elements of universal service out to 
tender on either a geographical basis or for specific service elements, such as the 
provision of public payphones. This would allow competitors to bid to provide 
elements of universal service of equal or improved quality, with the tender being 
27 
awarded to the organisation offering to provide service of specified quality at the 
lowest level of subsidy. In the event that no bid to provide service, the NRA would 
retain a residual power to impose universal service obligations. 
Another means would be to invite for tenders among competitors, as above, but on 
franchising terms (i.e. specified service, quality and end-user prices) awarding the 
universal service provision obligation to the service provider asking for least subsidy 
to provide the universal service element in an uneconomic area. This approach may 
be particularly important in those Member States where the process of network build 
out has not yet been fully completed to all areas. 
Closely linked to this issue of franchising is the relationship between those providing 
universal service and those contributing to its cost. In general, those providing 
elements of universal service should be able to offset the net cost of such provision 
against contributions which they would otherwise be required to make through a 
financing mechanism. A valuation of that cost should take into account the 
marketing and commercial benefits which may be seen to accrue from being a 
universal service provider. This is often termed a "pay or play" approach, though in 
reality, it is more likely to be "pay and play". 
28 
TECHNICAL GLOSSARY 
Access Capital 
Access Deficit 
Avoidable (décrémentai) Cost 
Capital Employed 
Connection Charge 
Franchising 
High Cost Area 
incremental Capital Employed 
Incremental Cost 
Incremental Revenue 
Line Rental Charge 
Long-run Avoidable Cost 
Long-run incremental Cost 
Non-viable Customer This is the capital employed to provide customer local 
access to the public telephone network. 
"Access deficit" refers to the case where the revenues an 
operator earns from connection and rental charges do not 
provide it with a reasonable rate of return on capital 
employed in providing access. 
Similar concept to incremental cost, except that instead of 
the cost relating to an "outward" increment in output the 
focus is on the cost that can be 'avoided' by a decrement in 
output. 
The assets attributed to the provision of a particular service 
or sector(e.g. local access, international calls, pay-phone 
service, etc.). 
The one-off price charged to connect a customer to an 
operator's network. 
A transfer for a specific period of a right or obligation which 
have a 'public' purpose. It involves an activity which is 
performed on a commercial basis. 
refers to an area with less developed voice telephony 
infrastructure, where the cost of providing customer access 
to the voice telephony network is significantly higher than 
in well developed areas. 
This is the additional capital required by an operator to 
conduct a particular activity. The activity (or increment in 
activity) may, for example, relate to a customer or group of 
customers, or to a specific type of service. 
is a cost standard which measures the change in total cost 
arising from a discrete or substantial increase/decrease in 
output (i.e. serving service). 
refers to the total change in revenue as a result of a 
particular activity (or increment in activity). 
A periodic fixed charge based on the type of service and 
facilities selected by the user. 
refers to the cost that an operator could avoid over the long 
run if it was to discontinue a particular activity (or 
increment in activity). 
See long-run avoidable cost (above). 
A customer is said to be non-viable when the total 
increment in revenue associated with a customer is less 
than the incremental cost incurred by the operator in 
serving that customer. 
29 
Net Incremental Cost 
Rate of Return on 
Capital Employed 
Rebalancing of Tariffs 
Sunk Investments 
Unavoidable Net Losses 
Uneconomic Services 
User The incremental costs less all associated incremental 
revenues. 
or "accounting rate of return", is the ratio of accounting 
profit to accounting capital employed. 
Process whereby prices for universal service elements are 
adjusted relative to each other (e.g. when implementing 
cost related prices). 
Investments which once made cannot be fully recovered. 
The net loss an operator cannot avoid as a result of being 
obliged to provide uneconomic universal service or provide 
service to uneconomic customers. 
Services for which the incremental cost of provision is 
greater than all the associated incremental revenues(if 
any) the operator gets from the service. 
Users means end-users, including consumers (e.g. 
residential end-users), and service providers, including 
telecommunications organisations where the latter provide 
services which are or maybe provided by others. 
30 
ISSN 0254-1475 
COM(96) 608 final 
DOCUMENTS 
EN 15 08 
Catalogue number : CB-CO-96-639-EN-C 
ISBN 92-78-12987-9 
Office for Official Publications of the European Communities 
1,-2985 Luxembourg 
91