7 is probably unwilling to ignore (defense and national security issues, among others).<sup>7</sup> This last reason admits, at least theoretically, alternative solutions, since direct transfers may be generated to those who settle in the most unfavorable or far away urban centers, without affecting relative prices. It is possible for a company's activity to be subsidized in areas where it is not profitable, but this would only be efficient if the. exact amount of the subsidy could be calculated without affecting the company's incentive to recover losses. This scenario assumes a good level of regulator knowledge regarding production costs, which gives us an idea of how important the distribution of information between the regulator and the regulated company is. · Whatever their justification, cross-subsidies entail costs. The main ones refer to· efficiency since relative prices move away from relative costs (marginal costs). In order to minimize these costs, the regulator must decide how to define these subsidies, either among consumers or among services, However, this last pos~ibility is not open to all industries, or at least not to the same extent. For example, in telecommunications, the subsidy may be defined in both directions since this sector offers a range of products that may be affected by such a policy. If difficulty of access is the USO objective, for instance, the fixed charge may be brought down by adding a surcharge for use. Another example is basic telephony, which· could be cheaper if financed with contributions from other services that are not considered to be basic. Normally, the latter possibility does not appear in an industry lacking a many-sided supply. Therefore, in water, the cross-subsidy could be implemented among consumers, or at the most, between the connection and consumption charges. Since this service is indispensable, it would be difficult to finance the cross-subsidy through consumption in favo.r of access.

## _d) Extension of the concession and coverage._

Lastly, the regulatory experience shows that there are other possibilities. Although they are not strictly financing sources, they do provide the means for alternative funding. The. first is the extension of the concession through which the company enhances its monopoly on the basis of the exclusivity granted for its operation in the market. This mechanism allows the company use its own resources to continue financing the essential investments needed to . comply with the USO. This mechanism was proposed in Argentina in order to cover the collection deficit in infrastructure charges, which occurred when the extension works reached poorer neighborhoods farther and farther away from densely populated districts. Another· example is coverage extension. · Through this policy, the regulator grants additional financing sources in compensation for the universal service obligation. If the company is obliged to provide services to non-profitable community sectors, the regulator offers to extend coverage to include consumers to which cross-subsidies may be charged. However, this is a case of cross-subsidies between different generations. In other words, the extension of the area. is the mechanism through which the population base for the collection of subsidies that finance the universal service obligation is expanded. If the extension is not feasible because of geographic limitations, there is an alternative that entails the "reserving" of certain parts of the ·market for the operator in charge of providing USO. This policy, however, is difficult to implement because the consumers located in the reserved area would not benefit from competition.

# **1.3.** Universal service **in multi-product industries.**

In many industries, providing a spectrum of services is a serious practical problem which can only be addressed through a . very clear definition of the exact scope . of the universal service criterion. For example, oral transmission, emergency calls, telephone directories and telephones for the disabled could be considered a basket of products provided within the definition of universal service. But why stop there and leave aside other special services (fax, Internet, point-to-point

> 7 It must be recalled that this debate already took place when the issue of telephone tariffs was dis1,1ussed, regarding the possible differences between consumers living in the interior and those in the more densely populated Buenos Aires Metropolitan Area (See: Instituto de Economla UADE, 1996).