Advances in Regulatory Economics series
Edited by Michael A. Crew and Timothy J. J. Brennan
Chapter 17: Calculating the net cost of home delivery obligations
A number of universal service providers (USPs) have seen their yearly mail volumes declining; some have even been experiencing sharp declines in consumer demand. Against this background, it appears likely that USPs may require compensation for the Universal Service Obligation (USO) that would have to be provided by government funds or through a cost-sharing mechanism. Under the current EC regulatory framework, USO compensation requires calculating the ënet costí of the USO. There is a consensus among economists that the net cost is to be calculated based on the profitability cost approach presented by Cremer et al. (2000) and Panzar (2000), that is, as the difference in USP profits with and without the USO. One essential element of the USO and hence of USO net cost calculation consists in the obligation of home delivery, which entails two major USO requirements: (1) frequency: daily delivery and (2) coverage: nationwide home delivery. In regulatory practice, claims made by USPs that frequency of delivery constitutes a net cost seem to be accepted to a certain extent, in particular if national requirements include six delivery days. USP net cost claims of not serving entire remote areas have often been rejected, for example, in Denmark, based on the belief that forgone revenue would be larger than avoided cost. With no USO on delivery in place, the USP may be able to increase profits by optimizing delivery.
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