2. The fact that there is a reservation enables the postal company to lower its costs in the non-reserved sector. This can distort the market for provision of services in the non-reserved sector.

We believe that the appropriate weight limit for the reserved sector should be a maximum of 100g progressively reduced over time and this should be reduced over time. The reserved sector should also take into account other factors besides just weight.

### d. Universal Service Issues in Postal

As noted above, a Universal Service Obligation (USO) often is retained as part of the postal privatization process based upon the assumption that postal service – at least at some level – constitutes a public good to which all citizens must be granted access. Therefore, within a limited reserve sector, the incumbent SOE typically retains a legal obligation to provide the defined service to every customer that requests it. In return for assuming this service commitment, the universal service provider typically enjoys protection from competition within the reserved sector (as discussed above) as well as USO funding intended to ensure that (i) the cost of the service remains affordable to all customers, and (ii) that the universal service provider does not lose money in providing the service.

The Japanese Cabinet Decision on Basic Policy on Postal Privatization (Sept 10, 2004) (the "Cabinet Decision") stated that "Preferential measures shall be established if necessary to maintain universal service". This statement presents a number of problems as our studies of the universal service concept in a number of different areas demonstrate. Our studies show that the universal service commitment may actually lead to cost advantages for the incumbent that is subject to universal service obligations. This is because the universal service obligation means that the Post has a built-in infrastructure that can be used to lower costs for the provision of certain services outside the reserved sector. For example, the Post can use its infrastructure to lower the costs associated with sending packages through express mail, if it has an express mail arm. Instead of having to pay costs of C for utilization of infrastructure which the private competitor must build out, the Post must pay only C-X (the cost of elements that are needed but have already been built out under the USO).

This reduction of costs means that the Postal Company is at a cost advantage over the private competitor. The USO therefore becomes more like a State Aid to use the language of European competition law. Applying the concepts that are applicable under European State Aid law, the USO becomes a governmental benefit that alters the cost base of the Post. Under European terms, the aid is an “economic advantage which it would not have obtained under normal market conditions.” European law also provides an exemption for services of general economic interest, although this benefit is not without limits.

In the Altmark case, the court ruled that in order for a benefit to be classifiable as a state aid, it must be capable of being regarded as an “advantage” conferred on the recipient undertaking which that undertaking would not have obtained under normal market conditions. $ ^{69} $ As we discussed, there are four conditions which must be applied for a state financial measure to escape