Ofcom Consult on Funding for the 10Mbps UK Broadband USO

Ofcom has today opened a new consultation on the funding (compensation) arrangements for BT and KCOM’s forthcoming Universal Service Obligation (USO), which is due to begin on the 20th March 2020 and aims to ensure that everybody can request a minimum broadband speed of “at least” 10Mbps (1Mbps upload).

The USO (see our detailed summary) – supplied by ISPs BT (UK Wide) and KCOM (Hull only) – is focused on helping those in digitally disadvantaged parts of the UK (mostly rural), where speeds of 10Mbps are not currently available or not planned to be available within the next 12 months (i.e. reflecting future plans from the point of request by a consumer). At present around 578,000 premises (2% of UK) fall into this category and the number is falling.

Under this plan the USO could be delivered by either a fixed line (FTTC/FTTP) or fixed wireless broadband service. The latter of which opened the door for BT’s mobile sibling (EE) to harness their 4G network, which could significantly shrink the scale and cost of the USO (as opposed to only using fixed line solutions).

Sadly the original USO announcement failed to set out any detailed rules for funding of the new obligation, although it is known that the USO is to be cost neutral (i.e. Universal Service Providers will gain neither a cost advantage nor disadvantage from delivering the USO) and the net cost of meeting these obligations will be determined by several uncertain factors (e.g. the number of premises that are eligible, the technologies used to supply premises and the cost of building the infrastructure necessary to deliver it).

Today’s new consultation thus covers the issue of funding, not least by setting out the procedures for any compensation that the USPs (BT and KCOM) may claim for delivering the USO (particularly any “unfair costs involved“) and information on how such a fund would operate (i.e. those who will contribute and in what proportions, and how funds would be collected and distributed).

The Proposals in Brief

• A Universal Service Provider can request that Ofcom reviews their claim for compensation for the cost of delivering the USO, minus any benefits associated with being the Universal Service Provider (net cost). We expect to review no more than one net cost claim per year, and it is for Ofcom to decide on the scope of a review and when the review will begin.

• A Universal Service Provider must submit sufficient information to support their claim for compensation. For the purposes of the broadband USO, we also propose to separately require the provider to submit specific financial information.

• When carrying out a review, Ofcom will need to determine the existence and level of any net cost. We will review the information submitted by the provider and assess whether the costs incurred in delivering the USO were efficient. Our calculation will also be audited.

• Once we determine a net cost, we will decide whether it would be unfair for the provider to bear some or all of that cost. We propose our approach which includes considering: the cost to Ofcom and industry of establishing and administering an industry fund; the impact on the provider of bearing these costs alone; the method of designating the Universal Service Providers; and the outcome of any previous determinations.

• If we decide that delivering the USO is an unfair burden, Ofcom may establish an industry fund to compensate the Universal Service Providers. We will also determine who will contribute to the fund and how much they will contribute. This will include any threshold below which contributions will not be required.

• Once we have established an industry fund, we will collect monies from industry and compensate the Universal Service Provider. We will gather and check relevant information to calculate individual contributions. We will then invoice each provider required to contribute to pay by a specified deadline. When we start receiving the contributions, we will pay the Universal Service Provider on a monthly basis.

At this point it’s worth reminding readers that the regulator expects both BT and KCOM to “contribute towards funding the net cost of the USO … we would expect this to strengthen the incentives to accurately estimate connection coverage.”

Earlier this year BT and KCOM both provided evidence that they had considered the capital expenditure needed to effectively deliver the USO. Furthermore, both BT and KCOM demonstrated that they had “access to sufficient sources of funding” in order to meet these funding requirements.

Ofcom also considered whether BT and KCOM could maintain adequate operation of the USO service between deployment and any due compensation that may be received for that deployment. “We determined that both BT and KCOM were able to do so,” said the regulator earlier this year.

We note in today’s consultation that Ofcom will only establish an industry fund for the USO if they “find that there is an unfair net cost burden” being imposed on BT and KCOM due to its delivery. In reality there may well be some deployments that attract a high cost and so will need to dip into such a fund (NOTE: A cost threshold of £3,400 applies to USO connections but this must be balanced against forecast take-up – see our summary).

The regulations allow for quite a wide section of the industry – both fixed and mobile providers – to contribute toward such a fund (cost recovery), albeit with some limits. “If we consider this to be appropriate, we have the power to require only particular providers or a particular description of providers to contribute, including requiring contributions only from undertakings whose national turnover is more than a set limit,” said Ofcom.

Overall the consultation covers a lot of information about the processes and mechanisms involved, although it doesn’t specifically spell out details of how big the fund will be or which providers should contribute (other than the designated USPs) and via what products. By the sounds of it we may have to wait until the USO is up and running before all that becomes clear.

The new consultation closes on 7th January 2020 and Ofcom will then aim to publish a statement on funding regulations during spring 2020.