Competition in the postal services sector and the Universal Service Obligation - Business, Innovation and Skills Contents

5  Ofcom and the regulatory framework

The postal services market has started to look much more like a private sector market. But in common with many other sectors that have followed the same path, regulatory intervention has been needed to ensure that wider social objectives continue to remain at the heart of the market. [The Social Market Foundation][114]

77. The Postal Services Act 2011 clearly sets out what Ofcom must have regard to:

    The need for the provision of a universal postal service to be financially sustainable, and the need for the provision of a universal postal service to be efficient before the end of a reasonable period and for its provision to continue to be efficient at all subsequent times.[115]

Ofcom's primary duty is to secure the Universal Postal Service, but this requirement sits alongside Ofcom's duty to ensure that the postal service is fully open to competition.[116] Ofcom is therefore striking a balance between protecting the USO (ensuring it is delivered as efficiently as possible) and protecting consumers and taxpayers. Ed Richards told the Committee about the work that Ofcom undertakes, to ensure that the Universal Service is not at risk:

    We monitor the whole market very carefully pretty much all the time. We look at it in different forms on a monthly, quarterly and annual basis. We looked specifically in relation to that judgment, which is important to emphasise is a judgment at a point in time, at a situation in the market today: what the facts are and what the empirical data tell us about the position today. Then we overlaid on that information that we received from Royal Mail and Whistl—and from other parties, but particularly those two parties—in terms of their expectations and projections about how the market would develop, particularly in light of different business plans and assumptions.[117]

78. In 2012, Ofcom published the new regulatory framework for postal services, and the methods by which they would protect the Universal Service, including the following:

·  Quality of Service-Royal Mail will be required to provide the universal service to the specified standard and we will regularly monitor service quality to ensure that this is the case;

·  Efficiency-we expect Royal Mail to improve efficiency levels and to sustain such improvement thereafter. While there are many ways to measure efficiency, our focus will be on the level of costs. It would not be in keeping with our regulatory objectives if Royal Mail were to return to a position of sustained profitability, but had done so solely as a result of price rises, and not cost reduction. Conversely, a situation where Royal Mail is able to demonstrate a healthy level of profitability that has been driven by cost savings or business improvements would be consistent with our regulatory objectives, and would not warrant our intervention.

·  Affordability-If prices rise to a point that they give rise to affordability issues, particularly for vulnerable consumers, then there would be a need to re-intervene.[118]

79. We asked Ofcom to provide supplementary evidence on the amount of work on postal services it had carried out in the past year. They responded with the following information:

    For 2014, Ofcom's work on regulating postal services took 16 FTE (full time equivalent/person years) or 28,365 hours. This includes the hours worked on these projects by policy, strategy, economics, finance, investigations and legal staff, but not communications, secretariat, operations and senior executives. The equivalent figure for 2013 was 12 FTE, and [that] year included the completion of two major projects, i.e. the review of users' needs and our guidance on end-to-end competition.

    Nearly three-quarters of the 16 FTEs related directly to either Royal Mail's proposals for access pricing (i.e. the Competition Act investigation and the review of access pricing) or work carried out in response to Royal Mail's submission on end-to-end competition (our monitoring programme and work on efficiency). If we look at the six month period from June 2014 (when Royal Mail made its submission on end-to-end competition) to November 2014 (when we completed the review, i.e. published on 2 December) we had 20 FTE/month on postal regulation. Both of these were significantly above what Ofcom had budgeted for the year.[119]

80. We also asked for supplementary evidence from Ofcom about details of the postal sector companies that are monitored (under Section 55 and Schedule 8 of the Postal Services Act 2011). Ofcom monitor Whistl, in relation to the Notification Condition and their future business plans. They also monitor 41 other postal operators: "We collect this information quarterly using our formal powers under section 55 of the Postal Services Act 2011".[120]

81. However, the remit of Ofcom did not satisfy a number of our witnesses. Moya Greene, from Royal Mail, argued that Ofcom needed to have a wider remit which not only incorporated all companies in the sector but which also could consider "how much latitude Royal Mail needs to be given".[121] The CWU went further and called for a judicial review of Ofcom, claiming that it failed to fulfil its primary statutory duty to protect the Universal Service Obligation. It went on to argue that Ofcom was 'part of the problem not the solution' for not undertaking a full review of the postal sector, but focusing only on Royal Mail's efficiency.[122]

82. The Rural Services Network were also critical of the Regulator:

    Ofcom have a legal duty to protect the Universal Service and the power to review the situation, but despite consistent warnings from interest groups and elected representatives, have refused to conduct a review until the last possible moment allowed under legislation, at the end of 2015.[123]

83. By contrast, Adam Scorer, from Citizens Advice, believed that Ofcom should approach its regulation of the USO in the following way:

    We would expect the regulator to respond to the issues that are alive at the moment and to have a proper, robust process that goes forward, but that does not start from answering an exam question from either an incumbent or a competitor, but takes a rounded, Copernican view, with the consumer slap bang in the middle rather than the USP deliverer or the value of competition in and of itself.[124]

84. We recognise that Ofcom has a difficult role in ensuring that the provision of a Universal Service is both financially sustainable and efficient. The sector is changing quickly, and Royal Mail has now moved from the public to the private sector. As competition increases, the statutory remit of Ofcom may need to change. Ofcom has to recognise its over-riding obligation to ensure the protection of the Universal Service Obligation and, if necessary, there should be changes in the regulatory framework to enable it to do so.

85. We recommend that Ofcom provides our successor Committee with quarterly updates on the state of the Universal Service, and highlights any potential middle-term effects on the Universal Service, and any action that it is proposing to take.

114   The Social Market Foundation (USO 19) para 20 Back

115   Postal Services Act 2011, Section 29, para 3 Back

116   In accordance with Directive 2008/6/EC of the European Parliament and of the Council, 20 February 2008 Back

117   Q144 Back

118   Ofcom, Securing the Universal Postal Service: Decision on the new regulatory framework, 27 March 2012 Back

119   Ofcom (USO 58) Back

120   Ofcom (USO 57), where the full list of postal sector companies that Ofcom monitors can be found Back

121   Q58 Back

122   CWU website, 2 December 2014 Back

123   The Rural Services Network (USO 05) executive summary Back

124   Q138 Back

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Prepared 12 March 2015