Memorandum by Royal Mail Group Plc
Royal Mail Group's Regulatory Affairs Team has
prepared the enclosed submission based on the questions raised
by the Committee. It emphasises the following three main issues
from the point of view of a relatively newly regulated Company:
1. The options available to incumbent organisations,
such as Royal Mail in the postal services sector, wishing to appeal
against Regulators' decisions are extreme even "nuclear options"either
through Judicial Review or by being referred (by the Regulator)
to the Competition Commission. Such a situation could be regarded
as an appeal made from "beyond the grave". We support
the OXERA/Norton Rose report recommendations for improving the
mechanisms for appeals against regulatory decisions.
2. Although the Postal Services Act 2000
sets out the duties of the Regulator, the method and weighting
applied to these duties falls within the remit of the Regulator
Postcomm. As also do the time horizons. Postcomm's primary duty
is to ensure the provision of a Universal Postal Service, thereafter
the promotion of effective competition between postal operators.
However, Postcomm's approachinvoking full liberalisation
before EU and failing to link market development and price controlis
in our view likely to have adverse consequences on Royal Mail's
ability to maintain the uniform tariff structure and universal
3. Royal Mail would question whether the
current arrangements of Select Committee hearings and National
Audit Office reports are sufficiently formal and regular to provide
for the effective scrutiny of Regulators by Parliament.
As a relatively newly regulated Company, although
not privatised, Royal Mail is in a unique position to comment
to the Committee on the accountability of Regulators. Royal Mail
has been subject to a regulatory regime since the enactment of
the postal Services Act 2000 and is pleased to respond to the
questions raised by the Committee.
1. What are the legal bases for regulators;
what are the nature of their powers and how do they exercise them;
how could their powers be revoked; from where do they obtain their
financial and administrative support?
(i) Regulators and their objectives and
powers are established, principally, through primary legislationEuropean
Directives and UK Acts of Parliament.
(ii) Main powers include regulating the
incumbent firm(s) through the setting of price controls and performance
standards, especially where the services provided are provided
by a monopoly or dominant provider of the services. Under the
postal Services Act 2000 (PSA 2000), Postcomm's primary duty is
the provision of a Universal Postal Service, thereafter the promotion
of effective competition between postal operators. The principal
regulatory provisions applying to the sector are set out in the
relevant legislation (in the case of postal services, the Postal
Services Act 2000), in regulations or orders made under it, and
in Conditions set out in the Licences issued to the postal operators.
Royal Mail as sole Universal Service Provider operates under a
Licence much more onerous than those of competitors entering the
market. The Secretary of State and Postcomm are the principal
regulators of the industry and each is given specific responsibilities
under the PSA 2000. The Regulator is responsible for the provision
of a Universal Postal Service and the issuing of Licences. While
Postcomm itself states that its number one priority and duty under
the PSA 2000 is to ensure the preservation of the Universal Postal
Service, it also subsumes this primary obligation in statements
such as "Postcomm's aim is: a range of reliable, innovative
and efficient postal services, including a universal postal service,
valued by customers and delivered through a competitive postal
market. " The Secretary of State may suspend the Licensing
regime but only for matters of the national interest. The issuing
of Licences is a key component of the Regulators powers and Regulators
have significant powers to change the regulatory regime by proposing
modifications to Licences.
(iii) To change powers of Regulators requires
a change in primary legislation (as evidenced by the changes to
the electricity and gas Acts through the Utilities Act 2000).
(iv) Regulators and Consumer Councils are
financed through charges imposed on the regulated companies through
licensing and registration fees. These fees are imposed on regulated
companies and are agreed between the relevant sponsoring department
and the regulatory body, although the Forward Work Programmes
provide an opportunity for regulated companies to comment on the
budget and work plan. Increases in budgets of Regulators have
been criticised by regulated companies due to the apparent disconnect
between the costs of the Regulatory office and the price controls
imposed on the regulated companies. Administrative support is
derived from associated non ministerial departments comprised
of directly appointed staff eg Ofwat, Oftel, Ofgem or through
secondments from main stream Departments, for example, Department
of Trade and Industry.
2. By whom and how is the continuing need
for regulators measured; how is their role changed or ended?
(i) The work of the Regulators is scrutinised
primarily by the National Audit Office (report by the Comptroller
and Auditor General), by Government through the various departments
and their subsidiary bodies, Select Committees, Better Regulation
Task Force, Regulatory Impact Unit. Also European Union and OECD.
(ii) The roles of Regulators are changed
or ended through Acts of Parliament.
3. Who are the members of regulatory bodies;
how are they appointed; are they adequately represententative;
do Nolan principles operate?
Members are public appointees, selected on experience
and merit. It has been said that by the nature of the positions
they are discharging that they are not meant to be representative.
For the most part Nolan principals do apply.
4. What are regulators set up to achieve;
to what extent do regulators achieve their purposes without adverse
consequences; how is their effectiveness assessed?
(i) Regulators are established under the
relevant Act of Parliament to undertake the duties set out in
the legislation. Although the Act of Parliament sets out the duties,
the approach, method and weighting applied to the duties falls
within the remit of the Regulator. As also do the time horizons.
The Regulator, therefore, can influence significantly how an industry
should evolve. In the postal services sector it is Postcomm that
has set the agenda for the introduction of competition, the time
horizons and the speed of entry. In setting the timetable, Postcomm
has allowed little by way of learning opportunities and the whole
of the UK postal market will be subject to full liberalisation
before the EU but also without an opportunity to learn from the
experience. In other sectors, although the Regulator has invoked
full liberalisation ahead of the rest of the EU (in energy, for
example) there have been time horizons that allowed for lessons
to be learnt and experience to be gathered. Moreover, liberalisation
has often been linked to and in line with price controls and other
regulatory developments. This provides linkage between market
development and price controla linkage that is lacking
within postal services, as evidenced by the "Access determination"
by Postcomm shortly after a price control was agreed. Adverse
consequences are therefore likely and, as Royal Mail has made
clear to Postcomm, the consequences are the risk to the uniform
tariff structure and universal service.
(ii) The effectiveness of regulatory decisions
is very difficult to assess, although some aspects of the regulatory
regime established under the previous administration show signs
of weaknesshave customers benefited? In the energy sector,
for example, there have been major concerns expressed on the financial
viability of companies and the long term security of supply issues.
(iii) Through reports by bodies such as
the National Audit Office and Select Committee hearings, Regulatory
Impact Unit through regulatory impact assessments.
5. To what extent are regulators both prosecutors
and juries on an issue; what rights of appeal are there against
decisions made by regulators?
(i) Although Regulators gather information
and consult on issues, as they are responsible for developments
and, as mentioned above, can influence greatly the structure of
a particular sector, they are both prosecutors and juries on an
issue. For example, they assess what cost reductions regulated
companies are required to make and put in place the price controls.
They undertake functions such as the speed of liberalisation and
can "blame" an incumbent operator should things go awry.
For example, within postal services Postcomm has expressed the
view that it will be Royal Mail's fault if the Universal Service
is put at risk citing Royal Mail's slowness or inability to make
even greater cost reductions than our planned £1.4 billion
gross savings including 30,000 less jobs, rather than a recognition
that this may be caused by regulatory actions such as the speed
of liberalisation. In a presentation to the UPU in October 2002,
Postcomm's Chairman, Graham Corbett stated that it was Royal Mail's
inefficiency that posed the greatest threat to the universal service
and not the impact of competition. Since then, Royal Mail has
seen significant reductions in its operating costs (through the
revised price control) and additionally an Access price proposed
at a ruinously low level. Postcomm is responsible for the provision
of the Universal Service under the PSA 2000, yet it is Royal Mail
that is being judged.
(ii) Appeals against Regulators' decisions
represent probably the biggest single issue, especially for incumbent
organisations, as the options available to challenge such decisions
are extremeeither legally through Judicial Review (evidence
shows that this is a very difficult avenue to pursue for a regulated
company) or by being referred (by the regulator) to the Competition
Commission. These approaches have been described as being "Nuclear
Options". Royal Mail seriously contemplated a referral to
the Competition Commission during the recent price control review.
A key determinant in deciding not to reject the price control
and be referred by Postcomm was the managerial time that would
have been necessary, at a time when Royal Mail is facing a massive
renewal plan requiring total managerial focus. Taking Directors
and Senior Managers away from 100 per cent focus on the Renewal
Plan would have been detrimental to Royal Mail's long term future.
However, had a different appeal mechanism been available, Royal
Mail may have used this mechanism to challenge the view of Postcomm.
Moreover, given the recent draft determination on Access and the
pitifully low price proffered by Postcomm an appeal may be mounted
by Royal Mail. However, this appeal can now only be via the Judicial
Review process and not by a reference to the Competition Commission.
Such a situation could be regarded as an appeal made from "beyond
the grave". The rights of a regulated company, therefore,
to challenge the Regulators' views are extremely limited and difficult.
This has been acknowledged by work undertaken
by OXERA/Norton Rose (see annex) who have investigated the prospects
for improving the mechanisms for appeals against regulatory decisions
(albeit that the report was restricted to the energy and water
sectors). Royal Mail is particularly interested in several of
the recommendations in this report. For example, an "Early
resolution procedure" in order to resolve disputes at an
early stage. The escalation process allowing for a hearing before
a proposed "Regulatory Disputes Panel" in the Competition
Commission is particularly to be welcomed. Similarly the proposal
for the Competition Commission to seek a concordat between the
Regulator, Company and other stakeholders, prior to a formal price
control inquiry would appear a sensible way forward and an opportunity
to move away from the "Nuclear Options" and the time
constraints that these options, described above, require. Perhaps
the most important recommendation from the report, however, relates
to a new right of appeal against decisions other than those restricted
to price control determinations and licence modifications. The
report recommends that, "A new right of appeal, on the merits,
should be provided against significant regulatory decisions other
than price determinations and licence modifications. The relevant
appeal body may be the Competition Appeal Tribunal . . ., or the
Competition Commission, depending on the issue". There are
also developments in respect of the Better Regulation Task Forces
Five principles of Transparency, Accountability, Proportionality,
Consistency and Targeting that may lead towards a reasonability
test in respect of decisions.
6. How are regulators held to account by
Parliament; what other accountability do regulators have to auditors,
Government departments or other public bodies?
In addition to the annual reports submitted
by Regulators to Parliament that are scrutinised, the other main
accountabilities are through the Select Committee hearings and
National Audit Office reports. We would question whether these
arrangements are sufficiently formal and regular to provide for
effective scrutiny by Parliament.
7. How are regulators accountable to those
whom they regulate; what is the impact of regulation on the economy;
how transparent are their methods of working?
(i) There is little accountability to those
whom they regulate and, as referenced above, little opportunity
for a regulated incumbent company to challenge the Regulator's
decision. This is a flaw in the current arrangements as little
or no account seems to be paid to the incumbents' views, and disproportionate
account taken of potential competitors. This is particularly difficult
for Royal Mail given the requirement to provide the Universal
Service at a uniform and affordable tariff, with competitors able
to cherry pick and cream skim Royal Mail's most profitable traffic.
This diminution in revenues, Royal Mail believes, will have an
adverse effect on the ability to provide the Universal Service.
(ii) The impact of regulation can have different
impacts on different parts of the economy. In postal services,
for example, the introduction of competition may provide large
users with alternative service providers who may offer lower prices
for some products and services. However, for most postal users
(social customers) it is probable that the revenues diminution
afforded by competition may lead to higher prices for such customers.
This has certainly been the experience of Swedish social postal
customers. In other sectors, for example, in the energy sector,
social customers have fared less favourably than large users.
The introduction of a regulatory regime, however, has tended to
improve performance standards.
(iii) Although Regulators produce consultative
documents and Decision documents and for big issues, such as price
controls, offer a public workshop, there is little transparency
in the decision making process as these decisions are made behind
closed doors and there are no minutes published. It is not possible
therefore to ascertain the level of debate within the decision
making process. As a minimum, the publishing of minutes of regulatory
commission meetings should be made available to interested parties
together with the reason for the decisions taken. Preferably,
Commission meetings should be subject to verbatim reporting. This
would provide for greater transparency and better understanding
of the regulatory decision making process.
8. How are regulators accountable to the
public other than through Parliament; what opportunities do the
public have to express particular concerns to regulators; how
do regulatory bodies relate to their associated consumer watch-dogs?
(i) There is little regulatory accountability
to the public other than through the formal consultation process
where views are requested. Many of the issue subjected to consultation
may be of a technical nature such as the Cost of Capital in a
price control review, so there is probably little opportunity
for wide scale public accountability. The major role for looking
after the consumer interest is through the various Consumers'
Councils, established under legislation. Through their involvement
with the wider public and especially the various trade associations
the views of the public are more widely obtained. However, there
can be conflict between the views of the social customer and the
various trade associations. For example, in the consultation on
the liberalisation of the postal market, the Postwatch forum for
trade association representatives had a major input, but there
appears to have been little by way of wider public involvement
and views expressed by the general public (the 1,341 petitions
that were made) would appear to be at variance with the views
of the Consumer Council.
(ii) The regulatory bodies generally have
Memoranda of Agreement or Understanding between themselves and
the relevant Consumer body. This is the case under the Utilities
Act 2000 and the Postal Services Act 2000. Additionally, in the
case of the Licence issued to Royal Mail, aspects of the services
provided by Royal Mail have been devolved by Postcomm to Postwatch.
This presents additional issues for the regulated company as there
is a risk of "Dual regulation" and duplication of roles.
9. How effective is public consultation by
regulators; what opportunities do the public have to contribute;
to what extent do the public make use of those opportunities?
As mentioned, above, consultation from members
of the public tends to be limited and it has been commented that
the consumer bodies act as surrogates for direct public participation.
10. To what extent do the needs of concerns
of the public guide the work of regulators; are regulators instruments
of Government or representatives of the public?
There is little indication that the needs of
the public guide the work of the Regulators, although through
the democratic voting process members of the public can have an
input, however this is not likely to be specifically on the regulatory
regimes. It is noteworthy, though, that the Labour Government
included a review of Utility Regulation at the start of the 1997
administration and this in part was due to concerns about the
balance between consumer and shareholder interests in the regulated
sectors. As Regulators operate under legislation, set by Government,
they are clearly instruments of Government, although they are
independent of Government.
11. How independent are regulators of Government;
what factors do or might compromise their independence?
Regulators are established as being independent
of Government working under the rules and legislation set by Parliament.
They are, therefore, bound by the restrictions placed upon them
through the Acts of Parliament imposed by Government. The establishment
of regulatory Commissions was intended to remove the risk that
a Regulator may be subject to regulatory capture, including by
Government, although it does appear that the role of the Chairman
and Chief Executive in determining policy is significant.
Director of Regulation
Royal Mail Group plc
5 June 2003