Public service obligations and competition

One objective of market liberalisation is to reduce average costs and prices, so that consumers as a whole, and the economy, will benefit. Markets are not, however, good at delivering benefits to vulnerable consumers, or protecting them from increasing prices. While universal service obligations are a useful way of managing the transition from a monopoly, as liberalisation increases they become increasingly difficult to sustain.

This report outlines the current provision made for public service obligations across telecoms, postal service, electricity, gas and railways at the European level and as implemented in four EU countries (Belgium, France, Germany and the UK). The focus is on how universal service obligations – which often involve an element of cross-subsidy – may distort competition.

The findings have been informed by examining the experience in different EU countries and by responses to the survey delivered across the CERRE membership. This process provided valuable examples of how these obligations work in practice for different players and regulators across a number of sectors.

Main conclusions

• Some distortion of competition and innovation may be inevitable, but the costs can be minimised by defining these obligations flexibly to reflect changing social needs and technological developments.
• Where public service obligations are maintained, transparency is crucial, especially regarding principles and mechanisms for compensation. It is also important to ensure that they do not reduce the incentives for innovation or new infrastructure investment.
• Given PSOs’ distortionary effect, their delivery should, where possible, be eventually transferred to those parts of the supply chain which are naturally monopolistic. This may however still prove problematic where there is vertical integration between monopoly and competitive elements of the supply chain.