Competitively neutral universal service obligations

Universal service obligations impose specific costs on the universal service provider and the latter may call for an appropriate compensation. Most often, a two-step procedure is put forward to finance the universal service in a competitive environment. Firstly, the cost of the universal service is assessed; secondly, the provider must be compensated for this cost. We argue that this procedure is problematic because the implementation of a compensation scheme affects the behavior of market participants and leads to an overcompensation of the universal service provider. We put forward an alternative approach to this problem that fully acknowledges the distortions that result from the compensation mechanism.