88.In November 2015, the former Prime Minister pledged that by 2020 everyone in the UK should have a legal right to access a broadband connection that downloads at 10Mbps, which he likened to other basic utilities such as light, heat and water. Therefore the Government are proposing to introduce a universal service obligation (USO) to cover broadband. In principle, this could give everyone a right to request a reliable broadband connection at a minimum of 10Mbps, and would be likely to make a huge difference to many homes and businesses. The Government will introduce an enabling power for a broadband USO in the Digital Economy Bill, which had its first reading on 5 July 2016.
89.The Government has said that ensuring rural communities and businesses can enjoy the benefits of faster broadband in the same way as their urban counterparts is critical to balancing the economy, although, as we have highlighted, there are many premises in cities which will benefit under a USO. When we visited the Chilterns in February, many of those we met experienced internet speeds of around 0.5–1.0Mbps and had generally unreliable connections, where others had no connection at all. Many locals there struggled with those aspects of modern life that require online social and economic connectivity, such as shopping online, e-education and reliable email. In addition, the Government is vigorously encouraging people to use online public services. The DCMS has estimated that the number of households that will be unable to access a 10Mbps service by 2017 is likely to be as high as one million, with 100,000 of these in remote rural areas.
90.A core justification for establishing a USO lies in the social and economic benefits it could deliver, such as cheaper and more efficient Government and public services, and the likely consequent productivity and growth to follow. For example, by 2020 digital services such as ‘tele-medicine’ are likely to be more prevalent—where patients monitor their own conditions through home-based or wearable devices connected to the internet, which could reduce the need for referrals to acute centres. Clearly, broadband offers an opportunity to overcome geographical constraints by providing more services remotely. On the other hand, inadequate provision is a significant drag on the economy, inhibiting employment creation, limiting educational opportunities and reducing the quality of life for households in affected areas.
91.The consequences of being digitally excluded are almost certain to become more severe over time as more services expand online. Professor Helm, Professor of Energy Policy, University of Oxford, argued that in a modern functioning economy and democracy every citizen should be entitled to a certain bundle of social primary goods, of which broadband should now be considered one. As he explained, that was broadly the argument used for connecting people to the electricity system at a social cost and one used to justify universal postal services. An economic argument is that, in the era of ‘digital-by-default’ for public services and with commercial and social interactions increasingly taking place online, there are collective benefits to all users when everyone is connected to the network.
92.The aim of a broadband USO would be for it in theory to capture 100% of premises. However, where the cost of provision is particularly high, for example in very remote areas, it seems the householder will be expected to contribute to the connection cost. The specification of a USO for broadband would depend on a number of factors, including the required speed, cost, technical feasibility, affordability and possibly other service standard-type requirements. Its implementation would be demand-led, meaning whoever requested a connection should receive it. This right would apply to all end-users at a fixed location, whether that be a residential or business address.
93.A USO will plainly impose a cost on the provider or providers who carry the obligation to deliver connections in unserved or underserved areas. The current EU Universal Service Directive allows for two funding mechanisms where the delivery of a USO would be regarded to be an unfair burden on the designated providers: through compensation via public funds, and through sharing of costs between providers of electronic communications, i.e. through a levy. The Minister told us that a mixture of both was possible but the Government’s preference is for the latter.
94.In setting a minimum download speed, we heard a range of conflicting views ranging from the suggestion that just 2Mbps download is sufficient for access to government services, through to views that the European target of 30Mbps minimum download by 2020 may itself be inadequate. Looking ahead to 2023, the Broadband Stakeholder Group (BSG) forecast a median household could require 19Mbps, with some users requiring 20–30Mbps.
95.BDUK’s market-testing pilots found that there is a general lack of knowledge among people about internet speeds and their practical capabilities. Evidence from the pilots suggests that when they are given a choice, people mostly prefer cheaper, slower packages; particularly if the package offered is 10Mbps. According to Ofcom, 10Mbps is required to meet the needs of a typical household—below this level, it found a household’s use of data is constrained by its broadband connection, especially for households where several family members are often online at the same time. Also more advanced applications, demanding higher speeds, were becoming more commonplace. In addition to this, Ofcom’s consumer research has found that consumers were more likely to rate their broadband experience as less than good at speeds below 10Mbps.
96.In its written evidence BT disagreed with Ofcom, saying it was not convinced by its argument that a USO of 10Mbps was needed. BT believes it is important to understand what constitutes a good broadband service for modern digital services, and what features other than speed may be important. In its “real-world” experience, various facts pointed towards 5Mbps being a better judged minimum, for example, hundreds of thousands of customers on lines of 5Mbps were content to continue using those lines, even when a superfast broadband line was available in their area.
97.Putting this in context, BT explained that delivering a 10Mbps service would have a significant cost burden and would be substantially higher than any other definition of fixed line access in other EU member states. BT opposed a USO that would impose a unilateral cost on BT shareholders to fulfil a legal obligation, but said it stood ready to deliver a minimum standard broadband speed of between 5 and 10Mbps though this would be subject to Government and Ofcom taking action to make this commercially viable. Towards the end of our inquiry, Gavin Patterson accepted that 10Mbps was probably around the right level for a USO.
98.Similarly, a DCMS consultation found that there were concerns about the level at which the USO would be set if it led to higher broadband prices. Virgin Media was highly sceptical of the justification, believing a commercial market solution alone will be enough. It argued that having a gap between what is the average speed across the country and what is needed for basic broadband was “entirely appropriate”, since it should not be the purpose of a USO to enable all internet uses. Instead, a USO should allow access to those uses that are likely to prevent digital exclusion. According to Virgin, the applications most relevant to enable societal and economic participation were workable at 3Mbps, or even lower. As such, Virgin argued that if a USO were to be mandated, then it should be funded by a universal service operator and be set at a level which delivered optimum network externalities at a minimum risk of crowding out commercial investment.
99.As well as households having an entitlement to better connectivity, a USO would also need to support small businesses. Earlier this year, the Business Secretary, Rt Hon. Sajid Javid, announced a review of business broadband which among other things is looking at speeds that businesses need both now and in the future. We considered therefore whether there was a case for the USO to set different speeds for domestic and business users.
100.Research conducted for the BSG has also found that while median downstream demand for small business premises would rise from 5Mbps in 2015 to 8.1Mbps in 2025, demand for the top five per cent would rise from 12.9Mbps to 41.1Mbps. These download speeds are lower than BSG’s projections for a typical household. The Federation of Small Businesses agrees with setting a USO at 10Mbps but says it should explicitly include businesses. Upload speeds are also essential for some businesses and are more difficult to deliver using standard connections. BSG found that over 50% of small business premises currently exceed the 1 Mbps upload capacity of ‘standard broadband’. It does not appear that anyone has looked at what households will need for upload speeds as more public services move online, but it may be that domestic uses will need an upload speed of at least 1 Mbps too.
101.Rather than introducing two USOs, a single USO should be sufficient to accommodate the typical needs of both residential and small business users, which would facilitate home working. For those businesses that require above average speed connections, it is reasonable that they pay extra for these services, as they do for others such as business banking or other ancillary services. As a USO would be running principally on residential-grade infrastructure it could be complex to operate two fully specified USOs, one for home use and another for SMEs. Although some adjustments could be managed at an exchange level, which could make some differentiation possible, we expect in practice this would likely cause significant technical, operational and commercial challenges.
102.Under a USO, it will be important that Ofcom identifies logical, coherent areas for provision, assuming that it is not done on a national basis as it is for current fixed-line USO. The advantage of disaggregating provision is that different providers and technologies (or mix of technologies) are then able to serve particular areas. It is probable that not all areas will need a subsidised provider to any great degree, but rather those containing the harder-to-reach premises. There is also the question of how the size of each USO area should be determined. There is likely to be a trade-off between facilitating the emergence of the technology suitable for a particular environment versus economies of scope in providing for contiguous or close-by areas. Both would be considerations in the design of a competitive tender system. Dido Harding warned that the danger of a USO would be if it became subsumed into one company it would crowd out the technology competition that is needed to solve the problem of serving difficult-to-reach areas.
103.Gigaclear’s starting position was that in order to make efficient use of existing networks, any USO scheme ought to define service areas as being the smallest area to be served by any existing network operator. If no operator was willing to assume the USO undertaking (presumably under a competitive tender), then the scope of the area could be gradually expanded until an operator did apply. A USO could be introduced in a phased way, introducing it first into areas where no further commercial deployment was expected and leaving areas where deployment was expected to the last, i.e. 2020 or later, i.e. the reverse of the way the BDUK programme has operated.
104.Gigaclear also explained that the Government or Ofcom would have to require BT to undertake a full audit and mapping exercise to establish current broadband performance in order to determine the part of the market which needed to be addressed by a USO scheme, and then make this information available at an individual premises level to all potential bidders. It is not yet clear, however, how this would work in practice. The holes in the current superfast provision would help determine these areas but BT and others will need to share information on coverage at a premises level and not hide data citing commercial confidentiality.
105.There are a number of aspects to a USO which are less straightforward than in a ‘traditional’ utility industry with a monopoly provider. With a single provider the allocation of a USO is relatively uncomplicated: the monopoly provider is the universal service provider. Moreover, a uniform national price can be set to cover all parts of the country and the price level can be regulated so that it covers the average cost of provision; above the actual cost in some areas and below in others. However, the arrangement for a USO in today’s UK broadband market is complex, as there is competition in provision in many areas and a choice of technologies to fulfil the obligation.
106.To be fully effective, the mechanism for allocating a universal service provider would have to be technology-neutral, and allow competitive tendering to determine the technology to be used in an area. This would be expected to include mobile (i.e. 4G and potentially 5G in the 2020s) as well as fixed-line and fixed-wireless providers. Sound, credible providers with the most cost-effective solutions, in some cases offering a mixture of technologies, would be expected to be designated the USP. For a tender to work properly, there would also need to be enough competitors willing to bid, otherwise it would be a case of negotiating with the incumbent in the area and in most cases that would be BT. In such cases, where there was a lack of competition, Ofcom or the DCMS would potentially have to step in to appoint a provider and compensate them accordingly through the levy.
107.This leads to the question of whether there is a need to designate a backstop USO provider or providers by placing the ultimate obligation on a single entity or entities. Given that Openreach is the custodian of the majority of the UK’s access and backhaul networks it would be the obvious candidate in many regions to take this role on but others could be suitable too—for example, Virgin Media, given its coverage in urban areas. We would also see a vital role for the regulator in ensuring that larger operators did not pursue any unfair predatory pricing of tenders to force others out of the running in more attractive areas.
108.If Openreach became the backstop provider in some areas or nationally it might then subcontract provision to others, effectively allowing those providers to build out their own networks instead of BT always building its own. Nevertheless, we recognise it would be very difficult to incentivise such behaviour through regulation. Potentially, if Openreach were the backstop provider, in a properly functioning market, it would choose to have some of its existing areas of poor infrastructure replaced by a lower-cost provider under contract.
109.Ofcom, or a body appointed by Ofcom, would need to oversee tendering and offer an effective alternative dispute resolution process where disagreements arose between Openreach, other providers, individual consumers or local representative bodies. Ofcom would also need to designate a national or regional single point of responsibility to coordinate, manage and arbitrate between different networks over issues such as network connectivity, and rectification of faults and repairs. Openreach would seem the obvious candidate to take this on, given the extent of, and reliance by other providers on, its core and access networks.
110.One way of covering the costs of a USO would be to allow the provider to operate geographical pricing where the cost of provision varied between areas, so prices would be set in line with costs. A justification for geographic pricing is that it costs more to provide services in some areas and the people who live in these areas should be prepared to pay the higher costs. However, as Professor Helm suggested, there are strong arguments for ‘socialising’ the network costs of utilities.
111.Under a USO only the net costs of providing the obligation, i.e. any costs over and above the consumer revenues received by the provider, should be recovered from a universal fund. An industry levy would spread the additional cost of providing a USO among all providers which would be passed on through subscribers’ bills. DCMS and Ofcom would need to estimate the amount that a levy would need to raise and then set the individual charge in line with the total number of subscribers. The levy could then be adjusted over time in line with the actual costs of provision.
112.Gigaclear was concerned that a USO scheme should avoid transfers from smaller providers to BT Group which could subsidise BT’s network development further. This could involve some funding from the Exchequer, rather than a levy on operators, or involve a threshold which ensured firms did not contribute to a levy unless and until they achieved a certain turnover. However, it would be inequitable to exempt customers of small providers from contributing towards the costs of the USO as this would be a clear market distortion, favouring small firms over larger ones and it would not be fair to all other customers.
113.Putting the cost of subsidising high-cost connections on to all broadband users via an industry levy could conflict with the aim of promoting uptake. The industry levy will increase the price of broadband to all subscribers, which may be a disincentive to taking broadband, inhibiting the growth of the network. Using public funds would avoid this problem, but this would require the cost to be passed to all taxpayers through general taxation.
114.European and UK legislation requires Ofcom to ensure the universal service is provided at an affordable price. Ofcom suggests in a consultation document that options for achieving this could require uniform pricing of the USO product or price caps on these charges. The Secretary of State has asked Ofcom to consider the case for setting a social tariff. Ofcom will need to determine the parameters for such a tariff, for example data allowances which might apply. A universal service fund could cover the costs for basic broadband for those who met eligibility criteria, such as those in receipt of certain welfare benefits or on low incomes, as happens now for basic fixed telephone lines.
115.The presence of subsidised networks and affordable tariffs, even at broadband speeds of 10Mbps, could have an impact on some providers who offer speeds starting at say 50Mbps, but charged at higher prices. The lower the price of the “basic” USO service, the greater the impact on the revenues that providers (both the USP and others) could earn from higher speed products, as more users decide to take the basic service rather than a faster one. Keeping the subsidised USO product at a fairly basic level would therefore be advisable and not unusual.
116.We believe that there is a compelling case for expanding the current USO for telephony and dial-up internet to cover broadband, given the vital role it plays in people’s lives through facilitating interactions with friends and family, and commercial and public services. A USO should allow all to have access to decent and reliable broadband services wherever they live. The design of a new USO should be in line with the Government’s and Ofcom’s aspiration for competition in broadband delivery, both at the service and infrastructure level. Ideally, the USO must be designed so as not to impose too great a burden on industry: to incentivise investment, without creating consumer detriment or overly inhibiting take-up.
117.We support the Government’s preference for an industry-funded scheme at this stage. Given that the rollout of superfast broadband has been supported by £1.7bn of public funding and will bring coverage up to nearly 95 or 96 per cent of premises, we believe a demand-led approach is now appropriately funded through a levy on communications providers. Like the history of other utilities, this will involve all users covering—up to an agreed limit—the higher costs of connecting the remaining few who wish to connect. An industry levy in our view could legitimately apply to all communication providers including mobile network operators given that mobile broadband will be part of the solution to delivering a national USO.
118.We believe Openreach would be the obvious backstop provider of the broadband USO in many regions as the owner of the national access infrastructure. Where no provider was willing to bid for the USO undertaking in a particular area, then Government or Ofcom would need to decide whether it would be Openreach or another provider who would meet the obligation and compensate them for doing so through the levy.
119.There will be no advantage in setting the USO’s speed and other specifications too high at its introduction, since worthwhile interim solutions to improve connectivity such as wireless solutions may not achieve ambitious data downloads and uploads in certain locations. In addition, a higher specification would force industry to pass on the extra cost to consumers as well as in higher charges, and would also reduce the attractiveness of the providers’ retail offers and packages. We believe that the Government is right to follow Ofcom’s advice to set it at 10Mbps as a minimum at the start. However, the need for an increase in the USO minimum download speed to 30Mbps by 2022 is entirely foreseeable, and the Government should be making active plans for this eventuality.
120.We recommend setting a single USO for broadband which accommodates the reasonable requirements of both domestic and average small business use, given that delivery is over a residential-grade infrastructure. This would be workable and limit distortions to the commercial broadband markets. The USO’s specifications will need to define a range of important factors that affect the experience of household or small business connectivity. As well as download speeds, these factors include minimum upload speeds, maximum delay and maximum error rates.
121.Wherever it is realistic, the Government and Ofcom should ensure that the design of the broadband universal service should use and extend existing commercial and community networks, rather than displacing them. We heard in evidence that it should be possible to set incentives for Openreach to meet a USO through buying in services from existing infrastructure providers rather than seeking to overbuild them itself. A diverse structure of physical infrastructure competition is clearly beneficial, not least in allowing benchmarking of infrastructure construction costs and exploiting different techniques and technologies. Ofcom and the DCMS should work together as necessary to establish a regulatory framework that promotes diversity within the provision of a USO.
122.In allocation of a USO, an open procurement process should take place where there is transparency and suitably-sized procurement lots to encourage competition among all providers, small and large. Smaller lots appear to suit smaller alternative network providers offering hybrid solutions but we recognise economies of scale and scope can be gained from larger deployments. We envisage Ofcom, or another similar body, taking on an alternative dispute resolution role to arbitrate where disagreements over designation occur. In addition, Ofcom or another body would need to choose the areas to be awarded and run the tendering process.
123.There will need to be a regime in place to conduct periodic reviews of the minimum requirements of the USO and any other conditions attached to it. Those companies bidding would need to be fully aware of the timescales for reviewing the USO and be incentivised to invest in solutions which had a credible upgrade path. Ofcom would need to provide clarity over the likely evolution of the USO standard in line with its ongoing communication market analysis and reviews.
124.Whilst we realise that a USO will take time to implement, given the costs and technical feasibility work that is required as well as the mapping and designation of areas for tenders, we would nevertheless urge Government to introduce the USO at the earliest point, possibly as early as 2018, once the BDUK rollout is due to complete.
123 “Government plans to make sure no-one is left behind on broadband access”, 10 Downing Street, Press Release, 7 November 2015.
124 The current USO for telephony effectively allows every household to request a dial-up Internet access at 28.8Kbps. This is delivered through BT in nearly all of the UK and KCOM in Hull and the surrounding area. In 2009, the Government specified that every household should have broadband access of at least 2 Mbps. This is a state-funded commitment being delivered by BDUK.
125 A New Broadband Universal Service Obligation Consultation, DCMS, 23 March 2016.
126 Designing the broadband universal service obligation, Call for inputs, Ofcom, 7 April 2016, para 1.15.
127 Age UK ()
129 i.e. network externalities.
130 The current telephony USO sets a cost threshold of £3,400. For costs below this, the households pay a standard connection charge to BT, the Universal Service Provider for nearly all the UK, of £130. For the most expensive to connect premises, consumers have the option of covering any construction charges over this threshold.
131 A USO would mean that at least one provider must fulfil all reasonable requests to provide an affordable connection.
132 For instance, see KCOM Group plc ()
134 See for example: Nottinghamshire County Council (); Q581 [Broadband for Rural Devon and Somerset].
136 Ofcom, Infrastructure Report 2013, p31.
137 Ofcom, Making Communication work for everyone, Initial conclusions from the Strategic Review of Digital Communications, p27.
138 BT ()
139 In March 2015, the Government announced an intention of setting a USO at 5Mbps. See: The digital communications infrastructure strategy, DCMS, 18 March 2015.
140 BT ()
142 New Broadband Universal Service Obligation consultation: Summary of responses and Government Response, DCMS, 17 May 2016.
143 Virgin Media ()
144 Sajid Javid launches a review of business broadband at the EEF annual conference, BIS Press Release, 24 February 2016.
145 BSG Publishes New Model on Small Businesses’ Connectivity Requirements.
146 See para 94.
147 Federation of Small Businesses ()
148 Upload speed determines how quickly a person can send files, information and data to the internet. For example, when someone send pictures to another via a social networking site.
149 Q347 [Dido Harding]
150 Gigaclear ()
151 Gigaclear ()
152 BT offers a social telephone tariff which runs at a loss in order to meet its Universal Service Obligation.
18 July 2016