Funding Universal Services: Cross-subsidization and Net cost balancing

Incumbent operators providing universal services are increasingly active in competitive markets. Prices of universal services (US) products are often regulated. The traditional solution is to regulate the US products by separating accounts between US and non-US products and imposing a product-specific rate-of-return regulation on US products with fully allocated cost based on activities (ABC) as a point of reference. In this paper we analyze the competitive and welfare effects of the Swiss net cost balancing mechanism (NCB). NCB is applied since 2013 and allows the regulated USP to reallocate its net cost of the universal service obligation through internal transfer payments. The analysis in Section 2 leads to the conclusion that NCB is as least as strict as anti-cross-subsidization rules based on Faulhaber. If general competition law applies to non-universal services, NCB can be considered stricter. NCB can therefore be seen as an implementation of the Faulhaber rule. We further find that NCB increases welfare as compared to ABC costing clearly. The welfare increases are induced by a more market oriented, but cross-subsidy free USP pricing.