The terms under which Postcomm is minded to require the Royal Mail to open bulk mail deliveries to competition.

Response to consultation
By Jean Lambert, Green Party MEP for London

Delivered to:

Matthew Ward
Postal Services Commission
Hercules House, 6 Hercules Rd
London, SE1 7DB

http://www.postcomm.gov.uk/Index2.html

1.0 INTRODUCTION

1.1 The Royal Mail Group is a subsidiary of the government-owned public limited company Royal Mail Holdings plc, which has annual revenues of £8bn and around 220,000 employees. In 2000/01, Royal Mail carried over 20 billion items of mail. Royal Mail is required, by the conditions of its licence, to provide a universal postal service (UPS) in the United Kingdom.

1.2 The Royal Mail Group is subject to a licence monitored by the Government's communications regulator Postcomm. Condition 9 of the Licence establishes that Royal Mail must offer terms for access to its postal facilities to other companies. Should a negotiated agreement not be achievable, Postcomm has the power to intervene.

1.3 Following the implementation of the European Union Postal Services Directive (as amended in 2002), Postcomm has this year opened the bulk postal market to competition (4000 items and over). UK Mail Ltd has approached Royal Mail for access to this market. They intend to compete for large-scale mail collections from organisations. They have the facilities to collect, sort into area codes and then have it delivered to Royal Mail for final sorting and delivery (a service for which they will pay Royal Mail an agreed access price).

1.4 Negotiations between the two have collapsed primarily for two reasons:

1.4.1 They cannot agree the point at which mail collected by UK Mail should enter the Royal Mail delivery stream. UK Mail wants to deliver mail to the Royal Mail's local Delivery Offices (DOs) where mail would be sorted manually before final delivery. Royal Mail wants UK Mail's collections to enter the stream at the point earlier, at their Inward Mail Centres (IMCs), where mail would be machine sorted before being transported to local DOs.

1.4.2 They cannot agree the access price which UK Mail should pay to Royal Mail for the use of their services. Agreeing this is, of course, linked to their entry point into the delivery stream. Royal Mail argues that UK Mail should contribute to all Royal Mail's end-to-end costs excluding upstream variable costs. UK Mail does not want to contribute to any part of Royal Mail's overheads/joint costs. Postcomm does not believe that UK Mail should contribute to Royal Mail's upstream costs but does believe that UK Mail should contribute to that part of Royal Mail's joint costs which have been attributed to its downstream activities.

1.5 Postcomm will now intervene to determine the terms on which UK Mail may have access to Royal Mail's facilities. Postcomm has opened this decision to public consultation. The decision that is made now will be critical for the future of mail delivery in the UK.

1.6 This is the response of Jean Lambert, Green Member of the European Parliament for London.

2.0 GREEN APPROACH TO A UNIVERSAL POSTAL SERVICE (UPS)

2.1 It is the view of the Green Party of England and Wales that the preservation of a universally accessible and reasonably priced mail delivery service is essential and must be put first above all other considerations. Open market competition is against the interests of the public and, in particular those most vulnerable such as people living in rural and inner city communities. Instead, Royal Mail, Parcelforce, and Post Office Counters Limited should be given added commercial freedom to strengthen their protection of existing mail delivery arrangements (Green Party of England and Wales Manifesto for a Sustainable Society).

2.2 On this basis I contest Postcomm's claim that "competition plays an important role in the discharge of Postcomm's universal service duty". Postcomm is obliged to be the guardian of the UPS first and should prioritise this when considering access arrangements to Royal Mail's network - the only nationwide network delivering to all homes and premises. No clear case has been made that the market can bear more than one universal service provider.

3.0 POINT OF ACCESS

3.1 Postcomm is recommending that UK Mail be permitted to enter their mail into the Royal Mail sorting/delivery stream at the local DO level. UK Mail claims that this will enable better tracking and make their deliveries subject to less industrial disputes, most of which happen at IMC level.

3.2 Royal Mail currently manually sorts approximately 50% of its mail at DO level, and Postcomm argues (in support of UK Mail) that allocating UK Mail's bulk delivery to the DOs will not significantly add to Royal Mail's manual labour costs. However, I would suggest that it is too early to conclude this.

3.3 Royal Mail - as the UK's only UPS provider - is still undergoing the transition from being a public sector financed and orientated organisation to a largely profit orientated business, with the labour and service considerations this entails. It is still reviewing how best to achieve efficiency and economies of scale in its mail delivery stream. The early conclusions of this review are that better use of the IMCs, and less dependence on manual sorting in the DOs, allow for greater economies of scale. Postcomm's argument that Royal Mail should therefore entrench existing practice within its contracts with rival operators inhibits Royal Mail's flexibility when providing the best solutions for universal service.

4.0 PRICING OPTIONS

4.1 Postcomm have recommended that the access price to Royal Mail's delivery stream should be based on weight, starting at just over 11p for a letter under 60g. Royal Mail has suggested a cost of approximately 21p with discounts granted depending on weight of package (giving an average access price of between 15 and 17p).

4.2 A rival operator, requesting access to the bulk delivery market, is only doing so because it feels it can offer business a more competitively priced full end-to-end service than Royal Mail. The implications of this are lower stamp prices for business, less investment in the UPS infrastructure and potentially lower wage levels for those employed by non-unionised private operators.

4.3 Whatever costing is eventually agreed, Postcomm should approach the decision with universal service considerations as top priority. Postcomm's language throughout the pricing analysis is one of establishing a level playing field for competition with a view of keeping the costs low for customers. There is minimal analyse of the implications such an approach will have for the UPS, no identification of areas of the UPS which may be affected by the pricing changes, nor any value statement from the Government's regulator about the precedence of UPS over competition.

4.4 Royal Mail has stated that they can only guarantee universal service by using subsidies between products and routes. They have also said that their pricing recommendation is the only approach that will allow Royal Mail to continue to finance these subsidies, through the maintenance of a constant contribution to all fixed costs and joint costs regardless of volumes of upstream business lost as a result of granting access.

4.5 If Royal Mail argues that it will only be able to maintain a universal service if it is financially insulated from the impact of competition then it is the Regulator's responsibility to do an in-depth analysis of the potential impact on the UPS before considering the price at which mail delivery is opened to access. Postcomm have stated that "Royal Mail has been given the opportunity to provide data that would allow Postcomm to assess the issue of these cross-subsidies but, to date, Postcomm has not received clear evidence of their scale". If the information tendered to the Regulator is inadequate are we to assume that Postcomm has inadequate powers to demand such information or that insufficient analysis is available?

4.6 The terms under which Postcomm is proposing to open access to competition are the most generous in Europe. The UK's overseas competitors, such as the Dutch and German operators, will be able to access the UK network on terms that Royal Mail would not be offered in Holland or Germany at present. The argument, therefore, that this decision would establish a level playing field is mistaken.

4.7 It cannot be assumed that Internet provision will be a substitute for postal communication. Indeed Internet use is more likely to result in an increased level of postal use for delivery purposes.

4.8 Royal Mail is a labour intensive organisation. Each level of staffing, from customer services to the IMC and DO staff and mail deliverers, will need training in the tracking mechanisms, contact details, complaints procedure and end-to-end conventions of UK Mail, in addition to their own company. Has the burden of this training cost been figured into the unit cost of an individual mailed item?

5.0 THE POSTAL SERVICES DIRECTIVE

5.1 Postcomm's current position with regard to this consultation is based upon the European Union Directive Postal services: further opening to competition (amend. direct. 97/67/EC) COM(2000)0319. This aim of this Directive is to ensure the gradual opening of the postal services market. Under the new Directive, Member States will have to open the following market segments to competition:

- from 2003: delivery of letters weighting more than 100gr and all outgoing cross-border mail

- from 2006: delivery of letters weighing more than 50gr

5.2 The Directive does not require delivery of letters weighing less than 60g to be opened to competition until 2009. In 2006, the Commission is bound by the Directive to report on the impact of the liberalisation of the small package market on UPS, particularly concerning economic, social and employment aspects, as well as about quality of service. On the basis of that study, the Commission will then make a proposal to the European Parliament and Council on the full accomplishment of the internal market for postal services in2009 or determine any other step.

5.3 The Postal Services Directive was designed to introduce competition into the postal services sector, whilst ensuring the maintenance of universal service. This reflects the dualism (and some might argue contradiction) in Postcomm's own purpose: of "promoting effective competition between operators", and "ensuring the provision of a universal postal service". The language of this consultation supports the conclusion that Postcomm's primary objective is to promote the former at the expense of the latter.

5.4 Postcomm's 3-staged plan for opening mail collection to full market competition will mean that, by 2007, all restrictions on market entry will be removed. This suggests that, no matter what the conclusion of the European Commission's report on the impact of liberalisation on UPS, Postcomm will pursue the same course. The UK is moving ahead with introducing competition into the postal sector far quicker and with greater risk than the rest of the European Union.

5.5 In 2002, the Green/EFA Group in the European Parliament argued that the Postal Directive would be opposed to the general interest of European citizens. We considered it politically irresponsible. The postal service plays a central social role in poorer urban areas and in rural or outlying areas. Reducing the ability of UPS service operators to make internal financial adjustments will irreversibly undermine the modernisation needed to achieve high quality services for all.

5.6 Market forces do not automatically service the public's needs, far from it. It is necessary, therefore, for Postcomm to determine, in partnership with Royal Mail, exactly what it means by universal service. This is a question that has also been asked of the European Commission, and one which they will be required to answer in the writing of the 2006 report:

"Although liberalisation is now being questioned, the existence of integrated operators responsible for general interest missions does not, in itself, ensure that users have access to high-quality services or that their expectations are actually taken into account. The Commission will therefore have to clarify its universal service concept as one that is evolving on the basis of user needs, rather than one that is minimalist or temporary to cushion the impact of liberalisation"

(Opinion of the Committee on Employment and Social Affairs on the Commission communication on services of general interest in Europe (COM (2000) 580 - C5-0000/2000 - 2000/0000 (COS))

6.0 CONCLUSION

6.1 Royal Mail believe that, by opening the bulk postal market to competition, competitors will be able to "cherry-pick" the most profitable elements of the business leaving Royal Mail with high upstream collection and downstream distribution costs. In their view, they are likely to lose about two-thirds of the UK postal market value. Bulk mail constitutes a large number of addresses to which it is cheap to deliver. Competitors will deliver to these addresses themselves whilst leaving Royal Mail with the burden of delivering to all the more expensive addresses, such as those in rural areas.

6.2 Postcomm's own models have shown that, should all projected business lost to competitors be mail from users located near to delivery offices or inward mail centres, then this could lose Royal Mail £11 million each year. Royal Mail, however, estimates that access under the proposed prices will reduce their profits by up to £650 million during the three year price control period.

6.3 It is Postcomm's duty to first and foremost uphold the universal postal service which guarantees the delivery and collection at least once every working day of mail and the provision of a registered postal service, at affordable prices uniform throughout the UK. It is not the primary duty of Postcomm to uphold the needs of private enterprise in lowering costs through market competition.

6.4 Royal Mail have stated that, as the only national provider of a universal service, the conditions proposed by Postcomm will make it impossible for them to use bulk postal mail to underwrite the less profitable areas of its business - namely providing a service to the least economical and most vulnerable sectors of society - when delivering other companies' mail. Postcomm should therefore be minded to apply the precautionary principle in this instance, until such a time as a full analysis has been undertaken as to what the real impact on these sectors will be.

6.5 Royal Mail maintains a special relationship with Great Britain in being duty bound, under the conditions of its licence, to provide a universal postal service. It follows that, if the Regulator maintains that Royal Mail should open its most profitable business to competition, and not only this, but at a rate that Royal Mail believes will directly impact its ability to maintain universal service, how can the Royal Mail continue to provide such a service? The path trodden between open competition and guaranteed public service with equal access for all is precarious. Upon such a path, it is clear that it is not business that will be most impacted, but the most vulnerable, poverty-bound and voiceless.