3 Access mail and Direct Delivery
mail
End-to-end competition can present either a risk
to the viability of the USO if managed poorly or, conversely,
an opportunity if competition is managed by Ofcom in a fair and
reasonable fashion. [techUK][36]
Introduction
24. There are two types of competition in the postal
services sector, Access mail and Direct Delivery mail. Access
Mail, also known as Downstream Access or Access Competition, is
when mail is collected and distributed from customers by a postal
company other than Royal Mail, but is then handed over to Royal
Mail, for the final processing (known as Final Mile delivery).
Direct Delivery, or end-to-end delivery, is when postal operators
other than Royal Mail collect mail from customers and also deliver
them through their own network.
25. The following diagram sets out clearly the different
routes that letters and parcels can take, from sender to receiver,
by using either part or all or none of Royal Mail's infrastructure:
Ofcom: news release, 2 December 2014
Ofcom's Royal Mail Access Price Review illustrates
the same routes, but in more detail:
Ofcom: Royal
Mail Access Price Review, 2 December 2014[37]
Direct Delivery—a threat
to the USO as a result of cherry picking?
26. 'Cherry picking' is a phrase frequently used
to describe the effects of Direct Delivery. Richard Hooper wrote
that Royal Mail uses cross-subsidisation to support the financial
viability of the USO, and that cherry picking undermines that
cross-subsidy:
The USO's financial viability is built on cross-subsidies
from higher volume cheaper-to-deliver areas of the UK to lower
volume more expensive-to-deliver areas of the UK. Cherry picking
happens when an alternative carrier such as Whistl direct delivers
to the higher volume, cheaper-to-deliver areas and requires Royal
Mail to take the rest of their letters to the lower volume, more
expensive-to-deliver areas.[38]
Moya Greene told the Committee that conditions should
be placed on competitors who offer Direct Delivery:
In other countries we have seen Governments put
conditions on end-to-end players, saying things like, 'they must
cover at least 80% of the land mass in all of the regions within
a very finite period of time'. That helps, because it signals
that you shall not be allowed to just cherry-pick the high-volume,
high-density, low-cost-to-serve areas at the expense of the universal
service.[39]
Royal Mail's written evidence explained in more detail
the principle of cherry picking:
The UK's economic geography makes the Universal
Service challenging to sustain. It also creates an attractive
environment for cherry picking. In the EU, the UK has the highest
concentration of large, dense urban areas. These are very attractive
to a cherry-picking strategy: the densest 15% of the population
live in just 1% of UK landmass. Conversely, the UK has a significant
proportion of costly-to-serve rural areas: just 15% of the population
live in low density areas equating to 63% of the total UK landmass.
Direct Delivery is not, therefore, level playing field competition.
It is cherry picking arbitrage that both exploits the Universal
Service and puts its future at risk.[40]
27. However, others refuted the significance of action
described as 'cherry picking'. The Citizens Advice Service wrote
that the current level of Direct Delivery is of such insignificance
that the Universal Service could not be under threat:
The slower growth rate of end to end competition
means that these operators deliver less than 1% of total addressed
mail and Ofcom estimates that end to end competition is less than
0.4% (although acknowledging that the number of items carried
by alternative operators represents a six-fold increase on 2011
mail volumes). Royal Mail still remains the largest player in
the UK postal market and retains market power in the letters delivery
market and in the delivery of lower weight parcels, although it
is becoming less preponderant in relation to the market as a whole
and delivery of higher weight parcels is generally more competitive.[41]
ROYAL MAIL'S SUBMISSION TO OFCOM
28. Royal Mail wrote to Ofcom in June 2014, highlighting
its concerns over the future of the Universal Service. Its letter,
Direct Delivery: a threat to the Universal Postal Service,
stated that, as a result of unfair competition from companies
offering Direct Delivery, the Universal Service was in danger,
and that "Direct Delivery is in reality not level playing
field competition that brings benefits to consumers.[42]
Royal Mail's written evidence stated that "the Universal
Service is precious. But, it is also fragile and is becoming more
so".[43]
29. Royal Mail's submission highlighted what it believed
to be the impact of Whistl's[44]
plan to deliver letters to around 43% of UK addresses by 2017:
Direct delivery could undermine our ability to
finance the USO: Direct delivery entails cherry picking urban
areas, easier-to-handle mail and offering a less frequent service.
This removed from Royal Mail revenues that are currently deployed
to support the costs of the USO. It puts at risk the current system
of funding the USO.[45]
However, Nick Wells, the CEO of Whistl, refuted the
claim of cherry-picking:
We are also a by-product of the liberalisation
of the postal market and we signed an access agreement in 2004.
Where we started to do the collection, trunking and sorting, but
we handed over all our mail to Royal Mail. In 2012 we started
doing our own end-to-end deliveries. […] It is impossible
for us to cherry-pick because of an arrangement we made four years
ago with Royal Mail called zonal pricing.[46]
30. In its June 2014 letter, Royal Mail asked Ofcom
to carry out a full review of Direct Delivery and its impact on
the USO, and wrote that regulatory changes would be needed in
order to protect the Universal Service.[47]
In evidence to us, Moya Greene set out the reasons behind this
position:
We are not asking for subsidy; we are asking
for the underlying economics of the universal service to be recognised
and for the rules of the game to be fair.[48]
However, Citizens Advice Service did not believe
that Royal Mail had made a sufficient case for action to be taken:
Although Royal Mail's recent regulatory submission
to Ofcom suggested that the USO is under threat on the basis of
end-to-end competition in the market, this submission does not
provide compelling, robust evidence based reasons for immediate
intervention to protect the sustainability of the USO.[49]
Ofcom's response
31. On 2 December 2014, Ofcom published its Review
of end-to-end competition in the postal sector, setting out
the results of its review of whether the Universal Service was
in danger. It stated that "at the heart of Royal Mail's submissions
is its claim that that unless Ofcom takes regulatory action in
relation to end-to-end competition, Royal Mail's ability to finance
the Universal Service will be undermined".[50]
It described the Review in the following terms:
In this review, we have considered the evidence
available to us, including the most recent information from Royal
Mail's 2014 Business Plan, the latest results from our ongoing
monitoring programme and Whistl's rollout plans. We have also
considered the argument in Royal Mail's June 2014 Submission.
We have assessed whether, in light of the evidence, the impact
of end-to-end competition from Whistl is likely to pose a threat
to the provision by Royal Mail of a financially sustainable and
efficient universal postal service. To this end, we have assessed
the forecast financial position of the universal service, and
the arguments which Royal Mail and other stakeholders have put
to us about the likely impact of end-to-end competition on that
financial position.[51]
32. Through its ongoing monitoring of the postal
sector, Ofcom receives formal notifications from Whistl, under
the Notification Condition, which requires any operator to give
three months' notice of its intention to enter or expand its letter
delivery service. Such operators are also required to provide
Ofcom with their future volume forecasts, operational and business
plans, and any future geographical areas to be entered, with a
timetable for such entry or expansion, subject to minimum additional
volume requirement of 2.5 million items per quarter.[52]
Ofcom's review stated that it had "informed itself of the
developing position regarding end-to-end letter competition since
Whistl commenced its trial".[53]
33. While assessing the evidence, Ofcom wrote that
it considered "whether the legal tests in the Postal Services
Act 2011 for imposing regulatory conditions on end-to-end operators
are met, and/or whether we should be undertaking any other work
in light of our duty to secure the universal service".[54]
The review document is littered with redacted paragraphs, due
to commercial sensitivity. However, Ofcom stated that:
While the significant majority of information
provided to Ofcom by Whistl is commercially confidential, it has
publicly stated that its rollout plan is behind schedule. By the
end of 2014, it had expected to be delivering to around 15% of
the country but it is currently only delivering to around 7%.
(For example, it had planned to also be delivering in Edinburgh,
Glasgow, Birmingham and East London by now). As set out in our
annual monitoring update, Whistl only delivered around 0.5% of
the total addressed letter mail market in 2013-14.[55]
34. Having considered the relevant evidence cited
above, Ofcom decided that, for the time being, the Universal Service
Obligation was not under threat:
For the reasons set out in this document, we
do not consider it necessary at this time to exercise our regulatory
powers under the Postal Services Act 2011 to impose regulatory
conditions on Whistl in order to secure the ongoing provision
of a universal postal service. We do not consider that the provision
of the universal postal service is under threat, and as a result
we do not consider that the legal tests for imposing such regulatory
conditions are met.[56]
However, Ofcom included the following caveat:
Our decision not to intervene at this point does
not imply that we are ruling out such a course of action at some
point in the future, if circumstances change. As we set out in
our March 2013 end-to-end Guidance, we consider we could implement
GUSCs within six to nine months if it was necessary to secure
the provision of a universal postal service. To this end, we will
continue to monitor the situation closely.[57]
REGULATORY INTERVENTION
General Universal Service Obligation
35. Although Ofcom concluded that the viability of
the USO was not under immediate threat, it was not beyond the
remit of Ofcom to place conditions on other postal operators at
any point in the future. Ed Richards told us of the two main conditions
that could be imposed:
There are two most obvious ones. One is an obligation
to deliver over a specific geographic area and the other is to
deliver on a specific number of days. In other words, there are
service obligations, which would have an impact upon the underlying
cost structure of the new entrant. Those are the two most obvious
and clear ones.[58]
36. In supplementary evidence, Ofcom wrote that such
a General Universal Service Condition could be imposed on any
postal operator (under Section 42 of the Postal Services Act 2011)
within six to nine months:
In our March 2013 guidance on end-to-end competition
we said that the most likely requirements of such a GUSC would
be to require new entrants to deliver mail more days per week
and/or over a greater geographic than it had planned.
However, a GUSC cannot replicate the requirements
of the Universal Service i.e. they may not require a person to:
· Deliver
or collect letters six days per week (packets five days per week);
· Provide
a service throughout the UK; or
· Provide
a service at an affordable price which is uniform throughout the
UK.[59]
Universal Service Compensation Fund
37. The other regulatory intervention available to
Ofcom, in accordance with Section 44 of the Postal Services Act
2011, is the creation of a Universal Service Compensation Fund.
Ofcom's supplementary evidence described the longer process required
to create such a fund:
First, prior to October 2016, the Secretary of
State for Business would need to direct Ofcom to review the net
cost of the universal service (after this time, we could choose
to undertake a review at our discretion);
Second, Ofcom would need to review the net cost
of the universal service;
Third, if that review established that complying
with its universal service obligations imposes a financial burden
on Royal Mail, Ofcom would have to determine whether it considered
that financial burden to be unfair, and if so, to what extent
it was unfair;
Fourth, if Ofcom did determine that the universal
service imposed an unfair financial burden on Royal Mail, it would
have to report to the Secretary of State setting out recommendations
as to the action, if any, that Ofcom consider should be taken
to deal with the burden;
Fifth, the Secretary of State would have to direct
Ofcom to set up a fund; and
Finally, Ofcom would have to design, consult
and then establish the fund.[60]
38. However, Royal Mail was not convinced that Ofcom
could intervene as quickly as it had suggested:
Ofcom has said that it could intervene quickly
if needed. However, even to undertake a review of direct delivery
could take a year or more. Any subsequent interventions could
take many years to design, implement and take effect.[61]
In particular, Royal Mail argued that any compensation
fund "could take at least 3-4 years to put in place"
and would be of "doubtful value thereafter".[62]
This point was supported by techUK, which argued that a universal
service compensation fund would take too long to set up and "does
not effectively mitigate the threat to the USO".[63]
39. Cherry picking is a phrase often used in postal
services to describe the easy, most profitable sections of mail
services taken by Royal Mail's competitors. Cherry picking is
available to Royal Mail competitors but, at the moment, affects
only a very small percentage of Royal Mail's total business. This
could change quickly, given the ambitions of some of Royal Mail's
rivals in the market. Both Royal Mail and Ofcom need an evidence
base upon which to gauge the potential threats to the sustainability
of the USO in the event of a higher level of market penetration
by other providers. We note the decision by Ofcom that, currently,
the level of the threat does not justify intervention. We also
note that Ofcom is mandated to monitor the situation.
40. Ofcom has the power to impose a General Universal
Service Obligation on postal operators other than the Universal
Service Designated Provider (Royal Mail), in order to protect
the Universal Service. We have yet to be convinced that Ofcom
could impose the General Universal Service Obligation within the
predicted six to eight months. We recommend that Ofcom publish
a more detailed timeline for its implementation and an assessment
that the timescale is fast enough to avoid a failure in the Universal
Service, even in the short term.
41. The alternative regulatory condition—the
Universal Service Compensation Fund—involves a lengthy delay
in implementation. To avoid such a delay, we recommend that the
Secretary of State directs Ofcom to review the net cost of the
Universal Service, in accordance with the Postal Services Act
2011.
Views of the Universal Service-should
it change?
42. A number of our witnesses saw some scope in reviewing
or changing the requirements of the Universal Service Obligation.
Nick Wells, the CEO of Whistl, had an open-minded view:
Most countries in the modern world are currently
reviewing their universal service obligations. For example, Italy
and the Netherlands have reduced that to five days a week. I am
not advocating this. In Moya's own country, Canada, they will
stop delivering to letterboxes in the next five years and only
go to community post-boxes. That is certainly not something that
we would want to see, but the point here is that it will need
reviewing.[64]
43. Adam Scorer, Director of Consumer Futures at
Citizens Advice, also saw the possibility of reducing the current
six days a week service,[65]
while Alan Halfacre, Chairman of the Mail Users Association, argued
that the first-class postal service was not as important as some
would suggest:
If you need to get something to an individual
the following day, there are mechanisms. They are expensive for
physical items, but are they the only way the citizen can communicate?
We come down to, 'I want to send my birthday card'. Well, try
to remember to do it the day before rather than the last day.
You have been getting round to it for a long time, but, no, you
have to do it two days before instead of one day before. […]
It is not a social stigma to put a second class stamp on a letter.[66]
44. However, despite emphasising the cost of the
USO to Royal Mail, Moya Greene said that Royal Mail was "very
committed to the universal service in its current form" and
did not see the need to change it.[67]
45. There has already been an extensive debate
about the requirements of the Universal Service Obligation. The
Committee strongly believes that it would be inappropriate to
change the current requirements of the Universal Service Obligation.
Price to customers
46. In March 2012, Ofcom introduced a new regulatory
framework and provided Royal Mail with greater freedom on pricing
for the majority of its services. Ofcom's Royal Mail Access
Pricing Review described the intention and risks attached
to this decision:
Our objectives were to grant Royal Mail sufficient
pricing flexibility to ensure it could continue to provide the
universal service on a sustainable basis and sufficient commercial
freedoms to adapt to the changing market environment. We also
aimed to maintain the benefits of competition in supporting the
efficient provision of the universal service.
We recognised that removing price controls would
come with serious risks. We considered the most significant of
these to be the risk that Royal Mail would not take on the challenge
of improving efficiency and would rely solely on pricing to return
itself to profitability, potentially excluding vulnerable customers
and precipitating a more rapid decline in the mail market.[68]
47. Safeguards were therefore put in place by Ofcom,
including capping the price of second class letter stamps at 55p,
and capping large letters and small parcels (up to 2kg) at a 53%
increase, to ensure a basic universal service is available to
all.[69] In its latest
annual monitoring update, Ofcom wrote that customers were generally
satisfied with the cost of stamps and service, stating that "the
latest ONS data shows weekly household expenditure on postal services
to around 0.1% (60p) of total expenditure based on 2012 prices.
This is a little less than the current price of a single First
Class stamp".[70]
It also wrote that:
In terms of customers and consumers, our
research indicates the vast majority of consumers are satisfied
with their postal services and that prices remain affordable for
almost all consumers. Whilst First and Second Class stamp letter
and large letter prices did not increase in 2013, prices of these
increased above inflation in 2014. However the safeguard cap on
Second Class stamps will continue to protect vulnerable consumers
in the future. Royal Mail significantly improved its quality of
service, following a number of failed targets in the last year.
First and Second Class national targets were met, however the
Postcode Area (PCA)
target was missed,
albeit narrowly. We will nonetheless continue to monitor Royal
Mail's progress on quality of service performance.[71]
48. Ofcom's Annual Report also highlighted its monitoring
of affordability in the future:
We will continue to use our quantitative consumer
survey for residential consumers and businesses […] to enable
us to monitor use of postal services, and to assess the affordability
of services in the universal service, value for money and satisfaction
with post and postal prices.[72]
49. We note that Royal Mail has again increased
its prices this year. Royal Mail should not increase prices in
an attempt either to increase its own profit levels or to protect
the Universal Service Obligation, without continuing to increase
the efficiency of its operations, thereby reducing its costs and
enabling it to improve its standards of service.
36 techUK (USO 30) para 4.6 Back
37
Ofcom, Royal Mail access pricing review, 2 December 2014,
page 20 Back
38
Richard Hooper (USO 06) para 3 Back
39
Q41 Back
40
Royal Mail (USO 37) paras 1.15 and 1.16 Back
41
The Citizens Advice Service (USO 20) para 3.4 and 3.5 Back
42
Royal Mail plc, Direct Delivery: a Threat to the Universal
Postal Service Regulatory Submission to Ofcom, June 2014,
extracts from executive summary Back
43
Royal Mail (USO 37) 1.9 Back
44
Royal Mail's letter used the name of TNT Post, which was the former
name of Whistl and the correct name at the time of Royal Mail
writing to Ofcom. Back
45
Royal Mail plc, Direct Delivery: a Threat to the Universal
Postal Service Regulatory Submission to Ofcom,, June 2014,
executive summary Back
46
Q4 Back
47
Royal Mail plc, Direct Delivery: a Threat to the Universal
Postal Service Regulatory Submission to Ofcom,, June 2014,
executive summary Back
48
Q26 Back
49
The Citizens Advice Service (USO 20) para 6.4 Back
50
Ofcom, Review of end-to-end competition in the postal sector,,
2 December 2014, executive summary Back
51
Ofcom, Review of end-to-end competition in the postal sector,,
2 December 2014, para 1.7 Back
52
Ibid, para 2.17 and footnote 11 Back
53
Ibid, para 2.17 Back
54
Ofcom, Review of end-to-end competition in the postal sector,,
2 December 2014, para 1.8 Back
55
Ibid, para 2.18 Back
56
Ibid, para 1.9 Back
57
Ibid, para 1.12 Back
58
Q153 Back
59
Ofcom (USO 54) Back
60
Ofcom (USO 54) Back
61
Royal Mail (USO 37) para 1.4 Back
62
Ibid Back
63
techUK (USO 30) para 4.15 Back
64
Q37 Back
65
Q115 and 116 Back
66
Q119 Back
67
Q37 Back
68
Ofcom, Royal Mail access pricing review, 2 December 2014,
paras 3.24 and 3.25 Back
69
Ofcom, Royal Mail access pricing review,, para 3.25
and Annual monitoring update on the postal market, 2013-14,
para 5.9 Back
70
Ofcom, Annual monitoring update on the postal market, 2013-14,
para 5.30 Back
71
Ofcom, Annual monitoring update on the postal market, 2013-14,
para 1.6 Back
72
Ibid, para 5.31 Back
|
