Examination of Witnesses (Questions 240
- 259)
MONDAY 25 MARCH 2002
MR JOHN
ROBERTS CBE, MARISA
CASSONI AND
MR STUART
SWEETMAN
240. £500 million?
(Mr Roberts) Yes.
241. At the moment it is £81 million?
(Mr Roberts) Yes.
242. Ultimately it will go up to £500 million?
(Mr Roberts) They are two different types of modelling.
I will bring Mr Sweetman in, if I may, in a second. The net avoided
cost model, which is the one that Postcomm have talked about and
the Report has talked about, is a model which looks at the cost
of the USO in a steady state before liberalisation, by looking
at routes which are costing us money to provide. The entry pricing
model looks at what happens after liberalisation and then looks
at the cost of arriving at it. Correct?
(Mr Sweetman) That is right. There are a whole series
of judgments that go into these models. You can pick any number
between about £80 million and £500 million and it will
not be until the changes happen in reality and we can look then
at the accounts of that year in two, three, four years' time,
will any of us know. We can have teams of economists arguing finer
points but it is within that range.
243. I do not understand why it can go up.
(Mr Sweetman) It is not going to go up.
244. The cost from a Lincolnshire sub post office
sorting office to deliver to someone's door, why might it go up
after liberalisation?
(Mr Sweetman) It is not a question of it going up,
it is a different set of assumptions. You put one set of assumptions
into one model, a new set of assumptions into a different model
and they come out with different answers so the range will be
between 81 and 500. There is not an arithmetic transition between
one and the other.
245. What I am asking is which figure we should
be using to assess the value of the Universal Service Obligation,
the cost of it, in terms of getting these letters to that village
house in the Outer Hebrides?
(Sir John Bourn) I think you should start with what
is happening actually and that is the £81 million. The other
figure is, of course, it is fair to say, based on other assumptions
but the cost of what is involved in doing it now is the fact of
the matter.
(Mr Roberts) Before any liberalisation.
246. The NAO Report and the Postcomm Report
also point out that being the person who owns the Universal Service
Obligation is actually an asset as well as a liability.
(Mr Roberts) Indeed.
247. Why is it a problem to you? You seem to
be screaming blue murder at the opening of competition, you seem
to be very worried about it, as if this thing is going to jeopardise
the Universal Service Obligation and yet the Universal Service
Obligation is only going to cost you £100 million to maintain,
so what is the problem?
(Mr Roberts) I think, as Sir John has just said, if
it is 81 now, the issue is what might it become if you then make
the changes that liberalisation could bring. If, for example,
we find that the profitable routes are affected by the changes
then the amount of money that we make on those routes will no
longer be available to fund the USO. The change to the USO will
come from—Will you pursue it?
(Mr Sweetman) Yes. There is a little more background
and then we will come back to that. Later this year Postcomm are
planning to review the nature, size, scope of the USO. One of
our concerns is that in putting forward their competition proposals
they are doing so in advance of deciding what the USO is. We might
well have a problem, we have just been discussing whether it is
£81 million or £500 million, but they are planning to
review during the summer what the USO is. All this is speculation
because we do not know what the future of the USO is and, therefore,
we have concerns about whether anybody, including Postcomm, can
actually say what they are protecting or not because they have
not decided its definition yet.
248. How bad could it get? What is the worst
that could happen?
(Mr Sweetman) I think, what is the worst that could
happen? One of the issues is that we try and link the cost of
the USO with efficiency. Even if we were perfectly efficient,
if such a being existed in the world, we would still be exposed
to cream skimming competition where people would come in to us,
as a provider of a USO, at a uniform price and find imbalances
between the cost of the service and a uniform price. Even if we
were perfectly efficient, there would still be opportunities for
competitors to come in and undercharge and, therefore, take away
our source of balancing the higher cost routes.
249. Let us just side track on that one about
skimming off the most profitable bits. How come a competitor can
get bulk post from, say, a Lincolnshire sub post office cheaper
than you can? Why can you not undercut them?
(Mr Sweetman) Because at the moment we have a uniform
price as part of our USO methodology and, again, it will not be
until later this year when Postcomm will decide what the future
price control regime will be. At the moment we have no ability
in a competitive world to chase down prices down to more cost
reflective pricing and rebalance other prices in the less competitive
areas where they would have to go up to be more cost reflective.
250. If the German post were to undercut bulk
4,000 plus letter deliveries, the next element to be liberalised,
you are saying you have a minimum price below which you cannot
go?
(Mr Sweetman) Correct. We have a uniform price to
everybody who is accessing that service. One of the things we
are hoping to negotiate with Postcomm during the price control
discussions will be the ability to rebalance prices.
251. How come the German post can offer British
Gas a price cheaper than you are offering to all your other customers?
Surely you should bring the price of all your big customers down
to the same price of the German post? Why can they do it cheaper
when they have only got one client?
(Mr Sweetman) Indeed. Under our licence conditions,
if we offered a lower price to British Gas we would have to offer
the identical price to all comparable posters.
252. Why is that a problem?
(Mr Sweetman) That is not a problem. I am speculating,
these are not real numbers so excuse me. If we chase down our
price by two, three, four pence an item, which may well be a more
cost reflective price to British Gas and large posters, that would
remove that amount of money from our ability to cross-subsidise
the higher cost routes.
253. That is the £81 million?
(Mr Sweetman) No, no.
254. Might it be £500 million?
(Mr Sweetman) No, that is a different issue. One is
a cost of the USO and the other is the contribution we get from
our streams of commercial traffic.
255. Which all should be profitable.
(Mr Sweetman) It is the loss of margin which is the
issue.
256. Why do you think it is loss of margin,
what is it funding? The only thing it is funding is the USO.
(Mr Sweetman) No, no. It is funding the more expensive
routes.
257. They are all meant to be profitable. The
only thing that is not profitable is the USO. Everything else
is commercially viable.
(Mr Sweetman) No.
258. Not to external competitors but to you.
(Mr Sweetman) I think you are getting mixed up between
the two issues. One is the mix of costs that we have within our
total cost base where some routes will cost 35 pence for a first
class item, some £2 and some probably down at 10 pence. The
great advantage in the USO as we define it is that you have this
uniform pricing. If you take one slug of revenue out, unless there
is an equal and opposite increase in revenue somewhere else in
that uniform price regime we lose money and margin moves from
ourselves to our competitors. That undermines the financing of
the whole of Consignia.
259. What proportion of your income is the 4,000
plus delivery?
(Mr Sweetman) We have estimated, and have provided
recently to Postcomm, that in volume terms it is 52 per cent of
our volume from posting to 4,000 which represents about 40 per
cent of our revenue.
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