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Regulatory Governance and the Implementation of Universal Service: A Comparative Study of the US and Japan
Unformatted Document Text:  Tracking Number: ICA-1-11804 Regulatory Governance and Universal Service 9 Methods of Universal Service For decades, in most countries, internal cross-subsidization by the incumbent operator has been the main mechanism used to promote universal service in the telecommunications sector. Such cross-subsidization involves “the use of surplus revenues earned from profitable services to cover losses from providing non-profitable services” (Intven, 2000, p.19). AT&T promoted universal service through cross-subsidization and this was a means of expanding the reach of the telephone, and thus the value of AT&T’s service to public. Today, however, cross-subsidies between services are increasingly viewed as impractical and anticompetitive because rates have fallen with the onset of competition in international and long-distance services (OECD, 1995; Blackman, 1995). Another method for universal service is access deficit charges (ADCs). ADCs are a variation on traditional cross-subsidy mechanisms. As examined above, traditional cross- subsidies are internal to the incumbent. But the difference is that in an ADC regime, all providers of subsidizing services must contribute payments to subsidize access services. In other words, the subsidy ‘tax’ is beyond the incumbent and spread across all competitors in the long distance market. Like cross-subsidies that are internal to the incumbent, ADCs also have been criticized as being inefficient and anti-competitive (Intven, p.21) and some critics and the long-distance carriers have argued that these methods need to add rate rebalancing with accurate calculation of interconnection charges. Finally, universal service funds are generally seen as the best option for promoting universal service objectives. They collect revenues from various sources and disburse them in a fairly targeted manner to achieve specific objectives. That is, in contrast to ADCs, universal service funds are generally used to finance specific and targeted high cost areas and/or low income subscribers. The most efficient funds provide relatively small subsidies to encourage private sector telecommunications operators to serve targeted service areas. These are typically areas where service would otherwise be uneconomical (Intven, p.22). Now I will look at how these methods have been used in the US and Japan. Universal Service in the US The administration of universal service policies is relatively complex in the US although the concept and the implementation was first introduced and conducted in the US. This complexity is partly due to the two-tier state and federal regulatory system in the country (Intven, p.49).

Authors: Park, Namkee.
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Tracking Number: ICA-1-11804 Regulatory Governance and Universal Service 9
Methods of Universal Service
For decades, in most countries, internal cross-subsidization by the incumbent operator has been
the main mechanism used to promote universal service in the telecommunications sector. Such
cross-subsidization involves “the use of surplus revenues earned from profitable services to cover
losses from providing non-profitable services” (Intven, 2000, p.19). AT&T promoted universal
service through cross-subsidization and this was a means of expanding the reach of the telephone,
and thus the value of AT&T’s service to public. Today, however, cross-subsidies between
services are increasingly viewed as impractical and anticompetitive because rates have fallen with
the onset of competition in international and long-distance services (OECD, 1995; Blackman,
1995).
Another method for universal service is access deficit charges (ADCs). ADCs are a
variation on traditional cross-subsidy mechanisms. As examined above, traditional cross-
subsidies are internal to the incumbent. But the difference is that in an ADC regime, all providers
of subsidizing services must contribute payments to subsidize access services. In other words, the
subsidy ‘tax’ is beyond the incumbent and spread across all competitors in the long distance
market. Like cross-subsidies that are internal to the incumbent, ADCs also have been criticized
as being inefficient and anti-competitive (Intven, p.21) and some critics and the long-distance
carriers have argued that these methods need to add rate rebalancing with accurate calculation of
interconnection charges.
Finally, universal service funds are generally seen as the best option for promoting
universal service objectives. They collect revenues from various sources and disburse them in a
fairly targeted manner to achieve specific objectives. That is, in contrast to ADCs, universal
service funds are generally used to finance specific and targeted high cost areas and/or low
income subscribers. The most efficient funds provide relatively small subsidies to encourage
private sector telecommunications operators to serve targeted service areas. These are typically
areas where service would otherwise be uneconomical (Intven, p.22). Now I will look at how
these methods have been used in the US and Japan.
Universal Service in the US
The administration of universal service policies is relatively complex in the US although the
concept and the implementation was first introduced and conducted in the US. This complexity is
partly due to the two-tier state and federal regulatory system in the country (Intven, p.49).


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