Competitively Neutral Universal Service

Universal service obligations impose specific costs on the universal service provider. The measure of these costs and their financing have been studied along two complementary lines of reasoning: is the universal service obligation sustainable? Who should bear its costs? Most often, a two-step procedure is put forward. In a first step the cost of USO must be assessed; in a second step the USP must be compensated for this cost. In this paper we argue that this procedure is most often problematic because the implementation of the compensation scheme directly affects the effective cost of USO. We therefore put forward an alternative approach to this problem which does not rely on this two-step procedure and fully acknowledges the distortions that result from the compensation mechanism.