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
Date: 1996-11-27
Institutions: European Commission
Subjects: EU financing, competition law, costing, telecommunications, transmission network

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 

2. BACKGROUND 

2.1 The definition,  scope and financing  of Universal Service 

2.2 Policy aims underlying the financing  of 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 

2.4  Relevant  Community  law  applying  to  the  costing  and  financing  of 

universal service 

3. 

THE  ASSESSMENT  CRITERIA  TO  BE  USED  IN  REVIEWING 
NATIONAL SCHEMES 

4. ISSUES TO BE DETERMINED AT A NATIONAL LEVEL 

1 

2 

2 

3 

3 

4 

6 

9 

5.  GUIDELINES FOR THE OPERATION OF NATIONAL  SCHEMES 

10 

6. CONCLUSION 

, 

17 

ANNEX A :  RELEVANT PROVISIONS OF COMMUNITY  LAW RELATING 

TO UNIVERSAL  SERVICE 

ANNEX B: ACCESS DEFICIT CONTRIBUTION  SCHEMES 

ANNEX  C  :  COMMISSION  STATEMENT  TO  THE  MINUTES  OF  THE 
1910TH  MEETING  OF  COUNCIL  (TELECOMMUNICATIONS)  ON 
27TH  MARCH  1996  ON  WHO  CONTRIBUTES  TO  UNIVERSAL 
SERVICE 

ANNEX D: ASPECTS OF NATIONAL  SCHEMES ADDRESSED  MAINLY 

AT THE NATIONAL LEVEL... 

TECHNICAL GLOSSARY 

19 

23 

25 

26 

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 
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"). 

regarding 

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 
location  and,  in  the  light  of  specific 
users  independent  of  their  geographical 
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. 

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 

5 

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 : 

im  com  MATCA**  m  mwmm 

VIA A HAÏIONAI,  Bcmm 

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* 
The  issue  of  such 

attributable  to  unbalanced  national  tariff  structures9. 
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& 

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 
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. 

the  Minutes  of 

the  Council 

to 

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 
The  Member  States  concerned  must 
principle  of  proportionality. 
therefore 
such 
justifications 
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. 

sufficiently  detail 

the  possible 

for 

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." 

10 

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. 

II 

III 

r 

the calculation of the net cost of universal service 

the mechanisms for financing universal service obligations, and 

the determination of who contributes and how costs are shared between 
contributors. 

GUIDELINES FOR NATIONAL REGULATORY AUTHORITIES 

i<  wsmw^im^<>?yH€<m^Mmvmm.^mm^ 

V 
, -*'* "<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). 

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. 

12 

13 

!4 

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. 
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. 

Where 

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 
'access  deficit 
include  an 
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 
In  such  cases  the  date  for  the 
Article  1(2)  of  the  Full  Competition  Directive. 

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. 

6.1 

6.2 

6.3 

No  account  may  be  taken  in  calculating  the  net  cost  of  universal  service 
obligations which are outside 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 libraries; 

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. 

9. 

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. 

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 
level  or  a  system  of 

universal  service  fund  established  at  a  national 
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) 

b) 

The fund  shall  be  administered  by  a  body  independent  of  the  contributing 
and recipient  undertaking(s). 

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 
the  persons  and/or 
sums  due  and/or  administrate  out-payments 
organisations  entitled to receive payments from the Fund. 

to 

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 
their  usage  of  public 
in  proportion 
telephony  providers 
telecommunications  networks. 

to 

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 
identified  at  14  above  is  calculated  in  an  objective, 
In  order  to  ensure 

eligible  organisations 
transparent,  non-discriminatory  and  proportionate  manner. 
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 
In  such  a 
universal  service  as  a  provider  of  a  public  telecommunications network. 
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 

Article 4C of FuH Competition Directive 

2Q 

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 
In  this  case,  the  Commission  will  examine 
not  limit  access  to  the  relevant  markets. 
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 
in  telecommunications  markets  ("the  Full 

implementation  of  full  competition 

regarding  the 

•  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. 

Article £ of interconnect Directive 

?i 

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 
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. 

in  setting 

2. 

3. 

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. 

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 
to 
and  transparent  manner. 
independent verification.  The calculation  should  identify  the  allocation 
of  the  capital  employed  to  provide  access,  together  with  any  common 

The  calculation  should  be  subject 

23 

and joint costs which should  be allocated  according to the principles of 
proportionality and non-discrimination. 

4. 

5. 

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. 

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 
the 
service 
telecommunications  markets  subsidising  the  voice  telephony  operators. 
Consequently  contributions  should  be limited to  services within  the  scope  of 
the universal service  definition. 

the  same  Member  State  or 

to  all  undertakings 

in 

in 

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 
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 

for  certain  services 

(e.g.  Leased 

tariffs 

the 

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 

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.). 

Connection  Charge 

The  one-off  price  charged  to  connect  a  customer  to  an 
operator's network. 

Franchising 

High  Cost  Area 

incremental  Capital  Employed 

Incremental  Cost 

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). 

Incremental  Revenue 

refers  to  the  total  change  in  revenue  as  a  result  of  a 
particular activity (or increment in activity). 

Line  Rental  Charge 

A  periodic  fixed  charge  based  on  the  type  of  service  and 
facilities selected by the user. 

Long-run  Avoidable  Cost 

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). 

Long-run  incremental  Cost 

See long-run avoidable cost (above). 

Non-viable  Customer 

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 

The  incremental  costs  less  all  associated  incremental 
revenues. 

Rate of Return on 
Capital Employed 

Rebalancing of Tariffs 

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). 

Sunk Investments 

Investments which once made cannot be fully recovered. 

Unavoidable Net Losses 

Uneconomic Services 

User 

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. 

(e.g. 
Users  means  end-users, 
residential  end-users),  and  service  providers,  including 
telecommunications  organisations where the  latter  provide 
services which are or maybe provided by others. 

including  consumers 

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