Appendix 2: Postcomm Response
Introduction
Postcomm welcomes the Committee's report on Royal
Mail after liberalisation. We are pleased that the Committee
recognises the real benefits that competition is already bringing
to postal services and supports the way we are formulating our
price control proposals, particularly in relation to the pension
fund deficit. We would like to confirm our determination to create
a competitive postal market that delivers real benefits to customers,
with a healthy Royal Mail at its heart.
A number of the conclusions and recommendations relate
to the DTI. We have dealt solely with those conclusions and recommendations
that are relevant to Postcomm, using the numbering as it appears
in the report.
Timing of liberalisation
The evidence that liberalisation delivers an improved
service for customers is compelling. However, we regard Postcomm's
choice of dates for the move to full liberalisation in the UK
postal services market to be an untimely one—not because
we believe that Royal Mail will be unfairly disadvantaged against
other operators, as we have faith in the competitive strength
of the Royal Mail, but because Royal Mail has also been asked
to prepare for competition at a time of great commercial uncertainty.
Postcomm is reviewing the price Royal Mail can charge for its
regulated services and the company also faces huge challenges
in addressing its pensions deficit and investment needs. Although
the review process is now nearing conclusion, we believe that
the difficulties for Royal Mail have already been caused. (Paragraph
21)
Postcomm welcomes the Committee's assessment that
liberalisation is already delivering an improved service for customers.
We believe that Royal Mail's proposed price control, which is
due to come into effect on 1 April 2006, will give the company
the commercial certainty it needs to move forward in a liberalised
market. Indeed the current price control proposals allow Royal
Mail over £1bn for capital investment.
Few of our witnesses disputed that the arrival
of liberalisation had served as a catalyst to drive through positive
changes in Royal Mail. These changes have benefited users, the
Royal Mail and shareholder (the Government) alike. We are aware
that data on Royal Mail's quality of service are already published
and that Postwatch and Postcomm have started discussions with
other licensees to ensure that similar data for them is published.
We recommend that comparable quality of service and complaints
data should be published to inform users of comparative merits
of all postal service operators in the UK. (Paragraph 40)
Postcomm agrees with the Committee's view that availability
of information to customers and potential customers will be essential
to the development of effective competition. However, postal operators
need the commercial freedom to be able to respond to customers'
demands for different types of products with different levels
of performance.
New postal operators are required by their licence
to establish systems adequate for measuring (using sampling methods
if appropriate) and recording their performance in achieving their
contract targets. They are also required to establish systems
for recording, analysing and responding to complaints in respect
of failure to achieve the contract targets and in respect of services
provided generally.
Postcomm will continue to work with licensees and
Postwatch on how best to provide information which is useful to
customers, does not damage the ability of licensees to compete
in the market, does not distort the market, and is not too costly
to provide. Postcomm understands that Postwatch intends to publish
information on performance standards and complaint handling once
an appropriate format has been satisfactorily agreed.
We believe that Postcomm has to remain vigilant
that the quality of such statistics is not compromised by the
licensee that provides them. One way this could be achieved would
be to require new operators to have their quality statistics independently
audited by an appropriate body, such as Postcomm, or the Office
of Fair Trading, to be decided by the Secretary of State. (Paragraph
41)
Postcomm is sensitive to the Committee's concerns,
however, in line with the Government's policy on Better Regulation,
we do not want to impose undue regulatory burdens on new operators.
Getting statistics audited independently is likely to impose
administrative and financial costs on new operators. At present,
we do not believe that a mandatory requirement to get quality
statistics audited is proportionate, given the lack of evidence
of customer harm in this area. However, we will monitor this
arrangement while working with licensees and customers to establish
a common approach to such statistics.
Royal Mail's VAT exemption
We do not want to see stamp prices increase owing
to the imposition of VAT on postal services, because of the impact
on those users who are not registered for VAT, especially, but
not exclusively, private individuals. We understand Royal Mail's
competitors' arguments of unfairness because of Royal Mail's VAT
exemption, but also note that it has the unique requirement, and
costs, of a universal service obligation. Moreover, we are sceptical
that the UK Government would be able to secure derogation in the
EU for a lower than normal rate. (Paragraph 52)
Postcomm does not support the full rate of VAT at
17.5% being applied to all postal services, as the resultant price
increases would not be in customers' interests. However, we consider
Royal Mail's unique VAT exempt status to be a significant distortion
of the market, and not necessary for the continued provision of
the universal service. This view is reflected in the results
of Postcomm's 2005 business customer survey.
The definition of the products which should be
included in a universal service is particularly vague in the EU
Postal Services Directive and Postal Services Act 2000. What is
encompassed in the UK's universal service is a matter for negotiation
between Postcomm and Royal Mail but we believe that the products
included in the universal service should not be unchanging, especially
as postal services will evolve over time. (Paragraph 76)
Postcomm supports the Committee's view that the universal
postal service should evolve over time. Our recent decision on
the definition of the universal service (on which we are still
awaiting Royal Mail's response) was the result of a two year consultation
process with a wide range of stakeholders about what they want.
As time goes by, customers' needs change and technology progresses,
meaning that the universal service definition will require periodic
review to ensure it continues to reflect customer needs.
We recommend that Postcomm should continue to
monitor and review the products included in the universal service,
taking account of users' changing needs and the new types of postal
service products offered to the market. The universal service
is rightly valued as a public service, especially in remote rural
areas. Therefore, Postcomm should also have regard to the views
of the Secretary of State, and, through him, of the Government,
on what the definition of a universal service in the UK should
be. In particular, we emphasise that a 'universal service' is
not worthy of the name if it allows for any geographical exemptions.
(Paragraph 77)
As mentioned above, Postcomm will periodically review
the definition of the universal service, listening to all stakeholders.
In addition to this, we plan to review the very limited exceptions
to the requirement on Royal Mail to provide a daily collection
and delivery nationwide to ensure that the arrangements meet the
needs of customers.
The majority of our witnesses told us that opening
up the UK postal services market to competition would pose no
immediate threat to the universal service and we agree with this.
However, the regulator must remain vigilant to ensure that greater
competition in the postal services market does not come at the
cost of the universal service. This is, after all, the regulator's
statutory duty. (Paragraph 78)
Postcomm welcomes the Committee's assessment that
opening the market does not pose an immediate threat to the universal
service. Acting in a manner best calculated to ensure the universal
service is our statutory duty and we carefully consider the potential
impact of every policy decision on the universal service. We
also monitor Royal Mail's financial viability on an ongoing basis,
and remain ready to respond to any threats to the universal service.
It is too soon to tell if falling mail volumes
are a temporary blip or a change in trend. Unfortunately, due
to its choice of timing, the regulator cannot wait to find out
before setting the price controls. However, we note with confidence
that in its amended price control proposals, Postcomm has allowed
for the possibility of an automatic price adjustment should mail
volumes fall short of its forecasts. (Paragraph 79)
We are pleased to report to the Committee that since
the hearings in autumn 2005, Royal Mail has notified us that mail
volumes rose again for the period. However, this is an area of
uncertainty that will always be present. To recognise this, Postcomm
has, as the Committee has noted, proposed an automatic mechanism
to adjust revenues if volumes deviate significantly from its forecasts.
This means that customers will benefit through lower unit prices
if volumes are higher, while Royal Mail will receive additional
revenue per unit if volumes are lower than forecast. Postcomm
understands that the broad rationale for its proposal is supported
by Postwatch and Royal Mail.
We are also happy that there is a further 'safety
net' possibility of a universal service compensation fund which
would require other operators to contribute to the costs of providing
a universal service, if it were in jeopardy. However, in our opinion
the fund would almost inevitably come too late. Therefore, we
recommend that a mechanism for an early price control review be
put in place by Postcomm as soon as is reasonably practicable
to avoid the universal service being jeopardised in the first
place. (Paragraph 80)
The current price control and Postcomm's proposed
new price control include mechanisms that allow Royal Mail to
ask for the price control to be re-opened if its financial position
is significantly adversely affected, and particularly if this
puts at risk the continued provision of the universal service.
Postcomm would assess any such request from Royal Mail as a matter
of priority.
Review of Price Controls
We welcome Postcomm's amended price control proposals,
which we understand are based on an agreement between Royal Mail
and Postcomm. We note that there has to be a further three month
consultation period but look forward to the adoption of proposals
broadly in line with the current agreement. (Paragraph 121)
We agree with Postcomm that RPI-X is the best
available methodology to use to set Royal Mail's future postage
service price caps as it has proved successful for price setting
with other incumbent monopolists in the past. In its amended proposals,
published on 7 December 2005, Postcomm agreed with Royal Mail
on a value for X of three percent, as it originally proposed.
(Paragraph 90)
Postcomm welcomes the Committee's support for the
RPI-X form of price control. Postcomm believes that this form
of control provides a strong incentive for Royal Mail to make
efficiency savings where these are available, as has been demonstrated
during the current price control, which Royal Mail has out performed,
and in other regulated industries.
Pension Fund deficit
We agree with Mr Leighton, Chairman of Royal Mail,
that the pension fund deficit is "such a big hole that it
has got to be dealt with in some way, shape or form" but
there has been insufficient time during this inquiry to investigate
the pension fund deficit in sufficient detail to come to firm
conclusions about the responsibility for the deficit. For example,
we were unable to ascertain with any degree of certainty the reliability
and robustness of Royal Mail's estimate of its future pension
fund deficit at some point in the future, once Postcomm's price
control proposals have been enacted. (Paragraph 107)
Postcomm has acknowledged the extent of Royal
Mail's pension fund deficit and has made an allowance in its revised
price proposals of an average £320 million per annum. We
understand Postcomm's acceptance that at least some of the pension
fund deficit should be funded by users through higher postage
prices. However, we consider that in principle the pension fund
deficit should also be funded by the other main stakeholders:
the shareholder, through a continued commitment to take nil-dividends;
and Royal Mail itself through greater management efficiencies;
and through improved management of the pension fund. (Paragraph
108)
Postcomm welcomes the Committee's views and recommendation
on this issue. The pension deficit is a crucial issue for the
ongoing financial position of Royal Mail. Postcomm has recognised
this, and the need for the issue to be addressed, by asking customers,
within the price control proposals, to contribute over £300m
a year to reducing the deficit. In addition to this very significant
contribution by customers, Postcomm believes that other stakeholders
need to contribute to addressing the issue, and in particular,
if Royal Mail generates free cashflow/ profit then it would be
prudent for at least some of this cash to be used to make additional
contributions to reduce the pension deficit, in a similar way
to other companies with large pension deficits.
Capital investment
Postcomm, in its initial proposals for the price
controls, had already taken account of Royal Mail's need to make
pension fund contributions and invest in new capital operations.
Postcomm believed that these should be paid for by the consumer,
and through some efficiency gains by Royal Mail, and in its original
price control proposals allowed Royal Mail an investment of £0.8
billion for new capital operations. In its revised proposals,
Postcomm has acknowledged that this figure was underestimated
and has agreed a new total of £1.2 billion. We approve of
this increase but do not believe that the customer should be the
only stakeholder made to pay. (Paragraph 119)
Postcomm welcomes the Committee's support for Postcomm's
proposal to allow additional capital expenditure for Royal Mail.
The principal reason for the additional allowance in the final
proposals is that Royal Mail provided much better quality information
to show that it had properly assessed its investment requirements
and developed financial cases to support the investments. Postcomm's
price control proposals do not assume a specific contribution
from other stakeholders to fund this investment over the period
of the price control.
The CWU does not believe that the existing mechanisms
for re-opening the price control in the event of price shocks
or other unforeseen events, which Postcomm is proposing should
be retained, are fit-for-purpose. In particular, it is concerned
that in Postcomm's price control proposals the scope for capital
investment will depend entirely on whether Royal Mail is able
to make a profit, and any fall in profit would stop much-needed
investment. We recommend that a robust mechanism, similar to that
in our earlier recommendation for protecting the universal service,
should be put in place to allow for the re-opening of the price
control sufficiently quickly to address any problems which could
develop in this area. (Paragraph 118)
The current price control and Postcomm's proposed
new price control include mechanisms that allow Royal Mail to
ask for the price control to be re-opened if its financial position
is significantly adversely affected, and particularly if this
puts at risk the continued provision of the universal service.
Postcomm's price control proposals allow Royal Mail
to make substantial capital investments, with an allowance for
£1.2bn over the period of the price control. If Royal Mail's
financial cases for each investment are robust then it will be
able to fund these investments. If the investments are not expected
to deliver a positive financial return then Postcomm would not
expect Royal Mail to implement the investments.
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