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In the context ofEuropean Union law, apublic service obligation orPSO is an obligation imposed on an organisation bylegislation orcontract to provide aservice of general interest within EU territories. PSOs may operate in any field of public service, butpostal services,social services,energy,transport andbanking are specific sectors where the concept is relevant.[1]
In EU transport law, a PSO is an arrangement by which a governing body or other authority offerssubsidies in anauction, whereby the winning company will be obliged to operate a specified service ofpublic transport for a specified period of time in return for the subsidy. This usually leads to the winning bidder having amonopoly on the route, as competing services would not be viable without subsidies. PSOs are aimed at routes which are unprofitable in afree market, but where there is a socially desirable advantage to transport being available.
The use of PSO can be applied to manymodes of transport, includingair,sea,road orrail. In many cases, the introduction of PSO has been a way toprivatize government-owned transport. Infrastructure is often separated from operations, and may be owned by a governing body or a third party. The authority may also maintain the ownership of the vehicles, such as ferries orrolling stock.[citation needed]
Traditionally, public transport has been operated by a company wholly-owned by the state with a monopoly, like a national railway company. Alternatively, private companies were grantedprivileges (with or without subsidies) granting them a monopoly. In recent years, many markets have been deregulated, especially in Europe, by paying the lowest bidding operator to carry out services.[citation needed]
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The authority issuing the auction may be aministry of transport,county,province,state,municipality or other regional or local authority, or it can be atransit authority or other ad-hoc organization responsible for some form of transport in an area. To put sérvices out to tender, an authority must have an interest in subsidizing the transport. It must also have the authority to prevent other interests from operating competing services on parts of or all of the system.
The auctioneer will specify a number of terms of the service, such asfrequency, size of vehicle, timing of services, the maximum permittedfare, and/or other specifications related to service and quality. The auctioneer can specify either a net or gross contract. In the latter the operator bids for the full operating costs, and all revenue goes to the authority; with net contracts the operator will be granted all revenue, and will bid only for the difference between fare revenue and that needed to make the desired profit. The use of gross contracts reduces the risk of the operator since they do not need to estimate the ridership and will normally result in lower bids since there is a lowerrisk premium in each bid. This option also makes it easier to create free transfer between operators and modes.
Net contracts give the operators an incentive to increase ridership and reduce risk to the auctioneer. Gross contracts tend to have higher administrative costs for the authority administrating the fares. Urban public transport with transit authorities is most commonly operated with gross contracts, while airlines and ferry routes are typically operated on net contracts.
Typical uses of PSO includeregional airline services inNorthern Norway orIreland, where the airlines serve low-population areas not profitable for the carriers without subsidies. Rail services can be unprofitable even on major routes, and government subsidies are sometimes offered through PSO. This has been very popular inGermany. Most cities subsidize theirpublic transport, and in places where the transport is provided by private companies, that may be awarded through PSO. Other common PSO services are ferries, such as the routes toGotland in Sweden, or car ferries along Norway's road network. Ferry routes servingoutlying islands inHong Kong are also subsidised, as a result of risingoil price and therefore the cost of operation.
In theEuropean Union, route PSOs are governed by Regulation (EC) No 1008/2008 and Council Regulation (EEC) 3577/92. They must be offered fortender in theOfficial Journal of the European Union and be open to any transport operator registered in an EU member state. There are limitations in the number of passengers which can be carried where the route can remain eligible for PSO. The winning tenderer usually receives a monopoly on the route, but may have to conform to one or more conditions of service, such as the type and size of vehicle, the timing of services, the maximum fare paid for a portion or all of the seats offered, membership of a common reservation system, quality of service measured by a maximum percentage of cancelled services, etc.
Examples of air transport PSOs currently in operation in Europe are routes fromDublin toKerry andDonegal, routes between theGreek Mainland and theGreek Islands, routes fromItalian mainland toSardinia andElba, routes between theFrench mainland andCorsica, certain domestic routes withinSweden andFinland, and routes to theScottishHighlands and Islands.
International routes are usually not supported by PSO. This is because of a political principle that people should pay for international travel themselves, not through tax money. This is especially evident inScandinavia where there is very little international air traffic between cities other than through the capitals, where connections are commercially profitable. There are exceptions, like theStockholm-Narvik night trains.
The term is also used in relation to electricity generation, such as wind power and biomass powerplants.[2]
TheEssential Air Service (EAS) is aU.S. government public service obligation style program enacted to guarantee that small communities in theUnited States, which, prior to deregulation, were served by certificatedairlines, maintained commercial service. Its aim is to maintain a minimal level of scheduled air service to these communities that otherwise would not be profitable. This came in response to theAirline Deregulation Act, passed in 1978, which gave U.S. airlines almost total freedom to determine which markets to serve domestically and what fares to charge for that service.[3] The program is codified at49 U.S.C. §§ 41731–41748.
TheUnited States Department of Transportation (DOT) subsidizes airlines to serverural communities across the country that otherwise would not receive any scheduled air service.[3] As of November 1, 2013[update], the Essential Air Service subsidized 160 communities, of which 43 were in Alaska, whose guidelines for service are distinct from the rest of the country. The decision as to what degree of subsidized service a community requires is made based on identifying a specifichub for the community and from there determining the number of trips, seats, and type of aircraft that are necessary to reach that hub.[3]