Examination of Witnesses (Questions 1-19)
MR RICHARD
HOOPER CBE AND
MR JONATHAN
BOOTH
20 JANUARY 2009
Q1 Chairman: May I begin by saying that
we welcome the fact that you have come before us? It is going
to be an interesting session. We have the union coming in behind
you in the light of what you said. May I, as I always do, begin
by asking you to introduce yourselves for the record?
Mr Hooper: Thank you very much
and good morning. My name is Richard Hooper; I am the chairman
of the independent review of the postal services sector. On my
right, your left, is Jon Booth, who is here this morning in his
capacity as head of the secretariat for the review. May I just
pop in two quick thanks? First of all to the many stakeholders,
people interested in the postal services sector, who helped us
with the report, including you, Chairman, and Mr Mike Weir, who
is not here this morning.
Q2 Chairman: I am afraid Mike Weir
is no longer with the Committee; he was discharged last night.
Mr Hooper: He and you were two
of something over 200 people we talked to last year. Secondly,
I should just like quickly to say thanks to my team, led by the
excellent Jon Booth. Civil servants often get a bad name. Well
this lot were hard working, intelligent and no matter if they
had to work through the night, they did it and also they were
fun to work with.
Q3 Chairman: We are expecting Digby
Jones in front of us in a few weeks' time.
Mr Hooper: I noted Lord Jones's
remarks last week and my comments are the opposite.
Chairman: I tend to that view myself
as well.
Q4 Lembit Öpik: I am the new
Mike Weir. To what extent do you feel clear costings can be differentiated
for the various services? It all comes from the same network.
Maybe it is difficult to do that.
Mr Hooper: This is a very difficult
question. We talk a lot in the report about costing and one of
our main recommendations, when we recommend that regulation should
pass from Postcomm to Ofcom, is that Ofcom have to get a grip
of what we call the cost transparency model. We do not have sufficient
costing information, which means that discussing, as we probably
will later on, access prices, the cost to the user is actually
quite complicated. We do not have the real figures. That is something
which is needed and it is particularly needed as you change the
regulatory regime in 2010, the beginning of the next price control
regime.
Q5 Lembit Öpik: Is that why
Postcomm has not actually differentiated it?
Mr Hooper: No, I just think it
is very, very difficult to do. There has been, as I pointed out
in the report, sometimes not the best relationship between the
regulator and the regulated parties and there has been quite a
lot of dispute about costs which really need to be got out of
the way. One of the reasons they need to be got out of the way
is that competitors, UK Mail, DHL, TNT, need to make sure that
the regulator is making proper decisions on the basis of real
costs in different parts of the network.
Q6 Lembit Öpik: The thing which
concerns me most is the access headroom question and you have
referred to that as well. Royal Mail actually say—and I
quote them—"Royal Mail cannot compete on price no matter
how efficient our upstream operations are". That can relate
to other things too. To what extent do you think that the access
headroom condition is distorting the market and do you think it
is fair or unfair?
Mr Hooper: We talk about it quite
a bit. It is actually quite a complicated technical area and it
relates to the fact that if you have a monopoly in a particular
market and you control both wholesale products and retail products
and you are selling wholesale products to competitors who are
then competing with you in the retail market it is possible for
you to reduce your retail prices or up your wholesale prices and
thus squeeze the profit margin of your competitors. That is the
issue. We felt that the current regime was not necessarily the
best way of handling the margin squeeze and that it was not necessarily
a good way of making upstream more efficient. We have suggested
in the regulatory part of the recommendations that Ofcom should
take a very long hard look. Ofcom have done this—and I was
on the board at the time—with BT, because the same issue
of margin squeeze happened with BT wholesale and retail. They
have a lot of experience of margin squeeze and I believe that
they will probably come up with a better way round it. One of
those better ways round it is your very point about cost transparency.
Q7 Lembit Öpik: It does seem
to me that in any other market something like access headroom
would be regarded as blatantly unfair on the core provider, in
this case Royal Mail. Is there a case for abandoning it?
Mr Hooper: There is not a case
for abandoning it; there is a case for making sure that it is
regulated correctly. I suspect that Ofcom will find ways of doing
it through costing different parts of the network and making sure
that those costs are transparent.
Q8 Lembit Öpik: Royal Mail do
take a different and very clear view about this. How can you do
what you have just described without transparency or would you
say one can only achieve parity here or fairness if there is transparency
for the service costs.
Mr Hooper: We say very clearly
in the report that without cost transparency you cannot solve
this problem. It is exactly the same with the whole question of
the access price which I know is of great concern to union members
and to other people about the way that the Royal Mail is regulated.
There is an argument and union members have put this to us and
we have had many meetings with Billy Hayes, Dave Ward and his
colleagues who are on after me. They would argue that the access
price effectively subsidises upstream competitors in the market.
The honest truth is that we do not have the cost models to show
that; it may be true and it may not be true. We have a section
in the report about that. Clearly cost transparency will help
us answer that question because clearly it is undesirable for
the Royal Mail, which delivers 99% of all letters—99% of
all letters are delivered by Royal Mail—to be in some senses
subsidising competitors who are fighting them in the upstream
market.
Q9 Lembit Öpik: To summarise
then, you are actually saying that without cost transparency the
access headroom price is guesswork and it may well be mitigating
against fairness in regard to Royal Mail's competitive advantage.
Mr Hooper: That is a fair position.
Q10 Mr Hoyle: To follow up on those
questions, it is quite interesting that you mention monopoly advantage.
If there is a monopoly advantage, there is a monopoly disadvantage,
because the USO only exists for Royal Mail; it does not exist
for its competitors. If you want to break a monopoly, why do you
not insist that every competitor with Royal Mail should have a
USO obligation? That would be fairness. However, we all know you
will not do that because they will not want to compete. What they
want to do is to be allowed to cherry pick. We touched on the
question that the access on bulk mail is being subsidised by the
taxpayer. Not only is it Billy Hayes who does not agree with it,
it is also Members of Parliament who do not agree with subsidising
private companies. It is absolutely absurd that here we are, we
have a company with a great reputation, a company which is well
loved in this country, which knows that Granny Smith in Chorley
will get her mail delivered next day, and all that is being put
at risk by allowing competitors to have an unfair advantage. What
are we going to do to allow the renegotiation of the access agreement?
I am interested that you did not come out and say you believe
it should be 25p. Why is it I have to pay full price yet competitors
do not have to pay full price to have their letters delivered?
I do not know whether you will agree with me but what we have
really done is to say to the market ahead of everybody else—and
it is not your fault and I hope you may agree with me—"Come
on in, have a share of the British market and what we'll do is
subsidise it through the taxpayer". Then, because Royal Mail
has been losing money because of this, we say "Oh, my word,
what a mistake we've made, why don't you have part of the ownership
of the company". Do you agree that this has been unfortunately
set up and there is an unfair disadvantage to Royal Mail and all
the advantages are to the competitors?
Mr Hooper: You are making two
separate points: one is about access price and one about cherry
picking and I will take them in that order. In answer to Mr Öpik
I have already said that it is difficult to know whether the access
price, which is 13p, subsidises or does not subsidise and I will
not repeat that. In the report we do not tell Ofcom how to do
their new job; that would be totally inappropriate and they are
an extremely professional regulator.
Q11 Mr Hoyle: But you do have a bit
of interest though.
Mr Hooper: At the moment the way
the access price was met was a negotiation between Royal Mail
and its competitors. I personally would think we would move to
a situation where the regulator would set the access price, knowing
the costs of delivery downstream properly, which are in the region
of 40% of Royal Mail's costs—somewhere between 40% and 60%,
depending on what you do with logistics costs. We are suggesting
in the report that Ofcom is likely to set that access price very
conscious of the points you have been making. However, there is
a sting in the tail and that is that it is very important for
the regulator to make sure that the delivery arm of the Royal
Mail is modernised and is efficient and is best in class in terms
of other postal operators. So in setting the access price, like
other utility regulators, water and electricity, the regulator
will almost certainly have a squeeze on in order to ensure efficiency
comes in to the delivery service, otherwise you would be subsidising
inefficiencies. Your second point about cherry picking. We agree
with you. We state it in the report. Cherry picking leads to what
we call a vicious spiral where basically you allow competitors
to pick away at the juicy profitable bits of the Royal Mail without
taking responsibility for the less profitable parts. We talk about
that quite specifically. At the moment Postcomm has rules to stop
cherry picking.
Q12 Mr Hoyle: What level can Royal
Mail come down to when it is competing for business? Is there
not a cap on how far it can drop?
Mr Hooper: At the moment its prices
are regulated by Postcomm.
Q13 Mr Hoyle: What sort of level
can it come down to?
Mr Hooper: They are complicated
RPI-X sums.
Q14 Mr Hoyle: What level can they
not go below? There is a level below which they cannot drop, is
there not?
Mr Hooper: Yes, there must be.
Q15 Mr Hoyle: What is it? You cannot
do a report without knowing what the consequence is.
Mr Hooper: Are you talking about
the current regime?
Q16 Mr Hoyle: Absolutely. We know
that they have to deliver bulk mail for 13p, they are competing
for the same work, what is the lowest level they can drop to?
You have done the report, very interesting; you have come up with
a lot of statistics. What is the answer to the cost level that
they can go down to?
Mr Hooper: I am not able to answer
that question.
Q17 Mr Hoyle: Oh, dear. This is a
worry. It is your report.
Mr Hooper: I will come back to
you afterwards with an answer to it.
Q18 Mr Hoyle: For clarification,
you have done a very good report, very interesting.
Mr Hooper: Thank you.
Q19 Mr Hoyle: Some things we will
agree on, some things we will disagree on. If you cannot tell
us at what level the competition is for Royal Mail, how can you
produce a report?
Mr Hooper: Sorry, "at what
level is the competition"?
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