Select Committee on Constitution Minutes of Evidence

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 approach—invoking full liberalisation before EU and failing to link market development and price control—is in our view likely to have adverse consequences on Royal Mail's ability to maintain the uniform tariff structure and universal service.

  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 legislation—European 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 control—a 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 weakness—have 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 extreme—either 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.

Stephen Agar

Director of Regulation

Royal Mail Group plc

5 June 2003

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