Conclusions and recommendations
Cost of the Universal Service to Royal Mail, region
by region
1. Given
the fundamental importance of the USO, we were concerned to note
that Royal Mail were unable to provide a regional breakdown of
the cost of the Universal Service Obligation (USO). In addition,
given the responsibility of Ofcom to protect the USO, we were
surprised to learn that there is no consensus between Royal Mail
and Ofcom over what constitutes the cost, revenues and profits
of the USO. We recommend that both Royal Mail and Ofcom should,
as a matter of urgency, agree a set of financial metrics against
which the costs should be measured. If necessary, this should
be carried out by the National Audit Office (NAO) or a mutually-agreed
body of experts. (Paragraph 22)
2. We recommend that
Royal Mail—the Designated Universal Service Provider—using
these figures, provides a geographical analysis of where the Universal
Service is profitable and where it is not. Such detailed analysis
and financial monitoring of the Universal Service would provide
the evidence to assess the long-term sustainability of the Universal
Service. This breakdown of costs should be included in Royal Mail's
Audited Regulatory Accounts. If Royal Mail declines to provide
these figures, we recommend that the Government should consider
extending the remit of Ofcom, to enable Ofcom to enforce this
requirement. (Paragraph 23)
Universal Service Compensation Fund
3. 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. (Paragraph 39)
4. 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. (Paragraph 40)
5. 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. (Paragraph 41)
Views of the Universal Service-should it change?
6. 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. (Paragraph 45)
Price to customers
7. 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. (Paragraph 49)
UK Bulk Mail
8. The
evidence that we received suggest that Royal Mail still has to
match the technical innovations introduced by many of its competitors.
These innovations more clearly match the expectations of consumers,
as well as contributing to the efficiency of competing postal
operators. (Paragraph 63)
Royal Mail's price structure for national average
prices and zonal prices
9. We
support Ofcom's consultation on the level of zonal pricing set
by Royal Mail. Any recommendations arising from that consultation
must balance the need for Royal Mail to retain the freedom to
set its prices, dependent on the cost of delivering in that area,
with the benefits of retaining an open market and increasing competition.
Royal Mail are free to set zonal pricing, but it should be based
on actual costs of delivering to those zones, and not as a device
to deter, or even stifle, competition. There is a fine balancing
act to be set. Ofcom must set out the timetable for this consultation,
and when a decision will be made. (Paragraph 68)
Labour costs
10. We
are opposed to a 'race to the bottom' of postal sector employees'
wages, terms and conditions, and such a race should not be an
inevitable result of greater competition in the sector. Indeed,
Royal Mail's negotiations with the CWU have resulted in pay increases
and job security. Our evidence suggests that, while Royal Mail's
criticism of its rivals' treatment of their staff is not wholly
proven, there are certainly examples of where the wages, terms
and conditions offered by other companies in the sector fall short
of the standards offered by Royal Mail, including what appears
to have been a disproportionate use of zero-hours contracts by
Whistl. (Paragraph 75)
11. If standards of
pay in the postal sector, as in other sectors, fall short, then
the taxpayer is left to pick up the difference, because in-work
state benefits will cost more. Furthermore, it is unacceptable
that delivery of the Universal Service Obligation should require
downward pressure on the terms and conditions of staff delivering
that service. We recommend that Ofcom investigates the impact
on customers and the service provided to customers of any downward
pressure on terms and conditions of postal sector staff. We further
recommend that the Government considers extending Ofcom's remit
to include consideration of labour costs, conditions and standards
in the postal sector. (Paragraph 76)
Ofcom and the regulatory framework
12. 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.
(Paragraph 84)
13. 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. (Paragraph 85)
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