Regulation and the burden of the net cost resulting from the Universal Service Obligation

The financing of the Universal Service Obligation (USO) in network industries has traditionally relied on granting the provider exclusive rights. Full liberalization has created the need for alternative funding mechanisms. This has increased the interest of regulators and the public in estimating the (net) cost of the USO as the universal service provider (USP) should be correctly compensated for its burden. While there is quite a comprehensive literature on the cost of the USO in light of a different business strategy in the hypothetical scenario without USO, there has been little discussion so far on the assumptions to be made about the regulatory environment in this hypothetical scenario. That is the focus of this chapter. In addition, the chapter argues that a careful assessment of the regulatory environment may be useful in assessing the burden resulting from the USO. In Europe, the costing and financing of the postal USO is laid out in the Third Postal Directive 2008/6/EG. Article 7 states that only the net cost of the USO that constitutes an unfair financial burden should be subject to compensation. It does not further define what is regarded as unfair, but imposes criteria on compensation such as objectivity, transparency, non-discrimination, proportionality, least distortion, or neutrality.