A1

A2

Universal Service Obligations

in the Digital Age
Outlook of Italian Scenario

Fulvio Ananasso – AGCom

Executive Director of Studies, Research and Education

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it
Diapositiva 1

A1 Autore; 18/06/2008

A2 Autore; 18/06/2008
 In Italy, the Regulatory Authority (AGCom):

reviews effective costs of Universal Service

Obligation (USO) provider -- ex monopolist
assesses fringe benefits for the Provider in terms
of reputation and Company image and Brand
promotion / goodwill
decides whether USO expenses should be
completely charged to the Provider or shared with
the other Operators

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 1/15
 Services falling under the scope of Universal
Service Obligations in Italy:

 Fixed voice telephony (uneconomic areas)

 Public telephony (uneconomic Public PayPhones)

 Fixed voice telephony for low income and disabled

customers

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 2/15
Net cost accounting methodology

AGCom has approved the methodology to calculate

the net cost for each service in 1998

The accounting methodology was based on Current

Cost (CCA) and Long Run Incremental Cost (LRIC)

AGCom has recently approved a new methodology

based on Historical Cost Accounting (HCA) and
avoidable costs
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 3/15
Main reasons for that:
ƒ CCA (current cost accounting) and LRIC (long run
incremental costs) provide the information whether it is
reasonable for Operators to “make” or “buy” Æ “pay or
play” mechanism -- pay other’s USs or provide USs
ƒ services falling under USO regard access networks –
their assets are an essential facility, there is no
substantial reason to evaluate them through CCA
ƒ net cost could be better calculated on the basis of
different accounting methodologies -- e.g. HCA,
Historical Cost Accounting
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 4/15
Avoidable costs under USO:

All kinds of cost that Telecom Italia would avoid if no

obligations were imposed :
ƒ fixed voice telephony (uneconomic areas)
ƒ public telephony (uneconomic Public PayPhones)
ƒ fixed voice telephony for low income and disabled
customers

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 5/15
Potential uneconomic areas
 Telecom Italia assesses where uneconomic / unprofitable
concentrator areas are located on the national territory.
 Telecom Italia makes an ex-ante analysis to establish the
potential unprofitability of each area in Italy (about 10,000
concentrator areas) according to statistical data on the population
density, altitude, population income, percentage of business
customers, …..
 Results:
 1.400 potential uneconomic areas -- 14% of total areas
 700,000 uneconomic customers -- about 2% of the total
 80% of the uneconomic areas are located on mountainous
territory
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 6/15
Public PayPhone (PPP) net cost
 National regulation establishes specific qualitative and
quantitative obligations concerning the installation of PPPs --
minimum number of PPPs for small and medium towns, PPPs
on the roads, stations, airports, ….
 The application of such a criteria forces Telecom Italia to install
& maintain about 120,000 PPPs on the national territory.

Net cost of low income and disabled customers

 Low income and disabled customers enjoy discount on line
monthly fee -- 50% and free of charge, respectively
 AGCom has approved 7.5 M€ net cost
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 7/15
 Funding mechanism

 In Italy, Mobile and Fixed Operators are identified as

USO fund financers by the national legislation
 2/3 of USO net costs are carried by the ex
monopolist (Telecom Italia)
 Sharing mechanism: apart from Telecom Italia,
Mobile Operators are the main net cost financers
 Exemption mechanism: 1% of the net revenues --
gross revenues minus wholesale service costs

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 8/15
 Experience shows that:
 total net cost is gradually decreasing and Italy is getting closer
to countries where USO are not financed by “sharing
mechanism”;
 “traditional” USO are loosing relevance in such matters as
specific users cathegories protection – e.g. “disabled
customers” and “low income customers”;
 in EU there is a common trend to focus USO on such specific
users cathegories protection that is supported by a change
proposal to the existing EU Directive -- currently being debated
in the EU Parliament;
 USO delivery in the EU will either increasingly involve
Competitors in a free market or write-off the ex-monopolist
costs.
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 9/15
 Net cost trend in the four years following
introduction of accounting methodology (1998)

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 10/15
What might universal service mean in a digital world?
The digital world has little to do with the present definition of USO,
although this subject generates both interest and confusion.
Digital divide and broadband networks development - especially
NGN (Next Generation Networks) - are often debated as to whether
or not USO should include broadband access.

Is it appropriate to include broadband in the USO?

USO have to prevent social exclusion in a public utility service,
guaranteeing that such services are available to everyone.
Broadband (ADSL) is a technology, not an essential service, as well
as high speed data transmission doesn’t seem an essential service.
The broadband market is not fully developed yet. Just about 40% of
customers request broadband services, even though 96% of the
population could potentially buy the service.
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 11/15
What should be the USO objectives?
To prevent social exclusion in a public utility service.
To include services distributed to almost every customer / end user.
As a consequence, if the large majority (>98% in Italy) of population
uses a service that needs protection - like public utility services (e.g.
telephones) -, it might be worth introducing a mechanism to
guarantee a universal delivery of the service to all customers
(including the remaining <2%), although unprofitable.

How to avoid potential market distortions?

Excluding services not needing protection and not distributed to
close enough to 100%.
For USO services, ensuring proper mechanisms for all Providers
to share the possible associated service delivery losses.
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 12/15
How feasible is universal broadband?
Broadband access services might in principle be considered for
protection by the Regulator, but their distribution has not reached
the majority of population yet.
It is an emergent market, characterised by strong competition
among Operators.
Including broadband services in USO might cause limited – or no -
competition on their distribution in remote Country areas.
Despite 96% of population is potentially reachable by broadband
access services, at present more than 50% of end users are not
interested in the broadband access service.
Is it best left to the market?
Probably. Eventually market will deliver, in due time, the associated
services to everyone via the most appropriate technologies.
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 13/15
If required, how could an USO in broadband be
organised and funded?
Providers of USO broadband services should not hit the market
before the service has reached some 95+% of the population
Promotion of broadband, whenever considered eligible for
protection, should be pursued through support of Government
industrial plans – e.g. incentives to Operators for service activations
What are the implications for public service
broadcasting and for public sector information and
content? What about must carry obligations?
Public service broadcasting should follow the same logic as
market failure, and assimilated in every way to USO
Public broadcasting service should include only those services
that a free market would not provide since not remunerative –
e.g.educational programming, not soccer matches
www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 14/15
 Thank you for your attention
Fulvio Ananasso

f.ananasso@agcom.it

www.agcom.it
Fulvio Ananasso - IIC Forum Madrid, 24-25 June 2008 – f.ananasso@agcom.it 15/15