Mechanisms of funding for Universal Service Obligations: the electricity case

The transition towards a more competitive regime in network industries (and specially in electricity sector) raises the relevant question of funding for the Universal Service Obligations (USOs). Our paper focuses on two ways of funding for universal service and equal treatment obligations ("Ubiquity and Nondiscrimination constraints, UND"): the funding through access charge (CS regime) or taxation (T regime). Using a network model including competition between a historical monopoly (in charge for the USOs) and an entrant, we obtain some results concerning gains and losses of social welfare due to those mechanisms. We show that most of the time it is socially better to let the historical monopoly be active whatever the type of funding for USOs applying, and whatever profitability of the firms is. However, when the entrant is active, we can highlight that the introduction of the T regime (compared to the CS one) implies either welfare deterioration or an entry prevention strategy by the historical firm. Therefore, the T regime could not be an argument for the regulator to promote vertical separation of the historical firm (according to the European community line). (C) 2004 Published by Elsevier B.V.