Examination of Witnesses (Questions 200-219)
POSTCOMM
24 FEBRUARY 2009
Q200 Mr Hoyle: How much do you pay?
Mr Brown: I pay 27p for second-class
mail.
Q201 Mr Hoyle: Therefore, we are
subsidising bulk mail?
Mr Brown: For example, a large
direct customer like Royal Bank of Scotland would not be paying
Royal Mail 27p and 36p; it would pay at a mailsort price. Therefore,
those large customers already receive a discount against the price.
The principle is fairly well used in other postal industries.
Where a customer accounts for more of Royal Mail's work Royal
Mail offers a discount.
Q202 Mr Hoyle: I understand all that,
but is it not fair to say that the competitors do not have the
universal service obligation imposed on them because of the cost
of doing so?
Mr Brown: Royal Mail is at the
heart of the USO and they pay for that delivery.
Q203 Mr Hoyle: If you want competition
what you should say is that anybody who wants to compete with
Royal Mail should also deliver everyone's mail. The reason you
have not done it is because it would be too costly to do and,
therefore, you have imposed on Royal Mail the obligation to delivery
everybody else's mail and that is why it delivers 99% of mail,
surely.
Mr Brown: And it delivers that
at a price that Royal Mail negotiates and charges its customers.
Q204 Mr Hoyle: But it does not pick
its own price; you do it?
Mr Brown: No, we do not.
Q205 Mr Hoyle: Who picked the 13p?
Mr Brown: The access price was
the price negotiated between Royal Mail and its access customers.
Q206 Mr Hoyle: Can Royal Mail increase
it?
Mr Brown: It can increase its
price of access, yes.
Mr Hoyle: How? The minister said that
it could not and he would have to look at the access agreement.
Q207 Chairman: You said it was negotiated,
but am I right in saying that if those negotiations did not result
in an agreement you would impose the price of 11p? Was that not
the position of Postcomm?
Mr Stapleton: No. Back in April
2003 Postcomm opened up the bulk mail market—over 4,000
items—to competition. Based on that a couple of operators,
UK Mail and TNT, wanted to get into the access market. Royal Mail
at that stage talked about charging them very high prices and,
therefore, UK Mail came to us and asked us to do a determination
of the price. We worked on that and at five minutes to midnight
before the determination was finalised Royal Mail reached a freely
negotiated agreement with UK Mail. It was not in any way identical
to what our own determination would have been.
Q208 Mr Hoyle: You asked Royal Mail
to play Russian roulette with a bullet in every chamber?
Mr Stapleton: Not at all.
Q209 Mr Hoyle: Of course you did.
What you said was that if it did not negotiate you would tell
it what the price would be, so it would have been less?
Mr Stapleton: In terms of a competitive
marketplace that is not unreasonable.
Q210 Mr Hoyle: Do you agree that
in a competitive market everything should be equal?
Mr Stapleton: I think the point
you have missed is that it is the massive volumes of bulk mail
that provide Royal Mail with the economies of scale and mean we
can have a universal service with a 27p second-class stamp. If
it were not for those economies of scale that bulk mail brought
to the market we would not see the universal service being as
close to self-financing as it is. The real challenge is that as
those bulk mailers move to the internet Royal Mail is losing those
economies of scale.
Mr Hoyle: I think you have answered the
question. You said "close to self-financing", whereas
before you told us that it was self-financed. CWU and the RMG
claim that effectively they have been required to subsidise their
competitors.
Chairman: I think you asked that question
earlier.
Q211 Mr Hoyle: But CWU and RMG have
also stated it. You still say that both of them are wrong?
Mr Stapleton: I made the point
that Royal Mail is losing money on bulk mail that it delivers
end to end. It would be hardly surprising, therefore, that on
a fully allocated cost basis it would also be losing money on
access because that is a piece of the end-to-end business.
Mr Hoyle: I rest my case.
Q212 Chairman: I really do not understand
your evidence. Perhaps I am being very stupid. It may be there
are different accounting definitions for what constitute profit
and what does not, but my understanding of what you have told
the Committee is that Royal Mail makes money and does not make
money on it.
Mr Stapleton: It is very clear.
The evidence is in Royal Mail's regulatory accounts. There are
two definitions of cost. There is a definition based on fully
allocated costs with all the overheads thrown in and there is
a definition based on marginal or variable costs. All the mail
that Royal Mail handles obviously covers the variable costs. Both
bulk mail and access on Royal Mail's figures lose money on a fully
allocated cost basis. That is the clear position.
Q213 Chairman: If it is truly profitable
for a company it should make money on both measures, should it
not?
Mr Stapleton: Yes, but at this
point the choice that bulk mailers have to use electronic communication
puts some constraint on that ability.
Q214 Chairman: What you are saying
is that it makes no contribution to the bigger overheads of the
company?
Mr Stapleton: I did not say that
it made no contribution; I said that it did not totally cover
those costs.
Q215 Chairman: It does not meet the
full costs to the company of providing the service?
Mr Stapleton: No, and that is
hardly surprising given the inefficiencies.
Q216 Chairman: You referred to what
powers you did not have that you would like to have. You mentioned
powers to do with access. What powers do you think you should
have had to deal with access?
Mr Stapleton: The powers we would
be talking about are not just what I said in terms of concurrency
under the Competition Act but also powers in terms of cost transparency
and accounting separation.
Q217 Mr Wright: Continuing the line
of questioning about costs, what is your current assessment of
the costs of the universal service obligation?
Mr Brown: Royal Mail has quoted
that those products that come within the universal service we
talked about earlier in answer to Mr Clapham made a loss of £100
million in 2007-08, but those products that are classified as
being outside the USO but still use the network, for example things
like special delivery on account, make a profit. It is our view
that we look at the whole entity of Royal Mail Letters and at
profitability. At the moment on Royal Mail's numbers it approximately
breaks even on that basis.
Q218 Mr Wright: There is a huge disparity
between what you are telling us and what Royal Mail Group suggest.
RMG says quite clearly that the cost is £3.4 billion. Quite
a number of zeroes are added to that figure.
Mr Brown: I think it takes us
back to some of the discussions we had about costing and such
like. The cost without the associated revenue is £3.4 billion.
The net cost if you add back the revenue Royal Mail earns for
the universal service products is the number we have given, so
it is the difference between pure cost and the earned revenue
for those products.
Q219 Mr Wright: But this figure must
be consolidated. The Hooper review came to the view that there
was a distinct lack of agreement between Royal Mail and Postcomm
on even the most basic statistics. Surely, it is something that
should have been sorted out a long time ago?
Mr Brown: Over the years we have
worked with Royal Mail on its costings. Royal Mail's costing systems
have improved. When we do the price control every three or four
years we look at the financial strength of Royal Mail as a licensed
entity in terms of letters, not at the individual product level.
The result of the lack of cost transparency and information means
that when we have conducted specific investigations and reviews
we have done quite extensive and time-consuming analyses of that
data. Therefore, the need for cost transparency is about speeding
up the decision-making process.
| 
