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9.30 pm

Lord Hoyle: My noble friend, as always, has put his finger on the pulse. He has described in some detail the difficulties that Postcomm created for Royal Mail. Indeed, I must join him in saying that I welcome the demise of Royal Mail, even if my noble friend who

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speaks from the Front Bench has not. He mentioned that it is difficult to estimate the costs. In fact, when the Business and Enterprise Select Committee interviewed Mr Crozier, he said that the loss per item was about 2p. The chairman of the committee went on to ask, “You said you lost 2p per item. For the record, how many items are we talking about?”. Mr Crozier replied, “About 5 billion”. At 2p per item, they are losing roughly £100 million.

It seems absolutely ridiculous that people whom I would term predators are cherry-picking the items they want and taking business away from the Post Office. The Post Office will then have to subsidise that to the tune of £100 million. That does not make any commercial sense whatever. It is no wonder that one can get into problems. That is why this amendment is very important. We hope that Ofcom will adopt a different policy. It is important that the phrase “on commercial terms”, which my noble friend suggests, is included in the Bill. A public service should not subsidise the people to whom I have referred.

Repeated interviews with Postcomm and its appearances before the Select Committee in the other place have always indicated that it seemed to be more interested in competition than in the provision of a universal service; in other words, it had its priorities the wrong way round. Therefore, we should not allow Ofcom to make the same mistake that Postcomm did.

I am not suggesting for one moment that Ofcom is the same animal as Postcomm. A lesson has been learnt in that regard. As we have discussed on many occasions, we opened up this market far earlier than others did. Indeed, my noble friend has asked on many occasions when the French intend to open up their market. Some of the competitors that are mooted to take a 30 per cent stake, such as TNT, had their markets liberalised only in March this year. Another competitor reported to have shown an interest in taking up a shareholding, Deutsche Post, is now losing money. That just proves that we were too far ahead of the game. However, it was not just a matter of being ahead of the game but of putting conditions on Royal Mail that should not have been imposed on it. It was absurd to impose on it losses running into billions of pounds.

We shall listen to the Minister’s reply, but we should press the amendment at some stage. I hope that his mind is not completely on Chelsea at the moment. I am sorry that I cannot give him any good news in that regard.

Lord Hunt of Wirral: The score is nil-nil.

Lord Hoyle: Is it still nil-nil? Thank you. Sometimes the Opposition are invaluable. At least my noble friend knows that Chelsea is not losing at the moment, but anything can happen. But, coming back to losing, we no longer want—

Lord Razzall: How long is there to go?

Lord Hoyle: Until about 9.45 or 9.50 pm; I estimate another 15 minutes. By the time the Minister has replied to the amendment, we shall have the result. I return to the serious matter of Royal Mail and what

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happened to it under Postcomm. We are trying to ensure that if Royal Mail is obliged to deliver certain items, it should do so on a commercial basis. It should make a profit rather than subsidise predatory competitors. I am pleased to support my noble friend’s amendment.

Lord De Mauley: I will try to be brief. We agree with the principle of Amendment 88 in the name of the noble Lord, Lord Clarke. Certainly, since any access condition will impact on contracts between Royal Mail and other postal operators, the noble Lord is right that care should be taken to maintain conditions that take account of commercial realities.

Amendment 96 goes a little wider and I am afraid that we have reservations about it. It seems to impose a potentially substantial burden on postal operators who might have nothing to do with the universal postal service at all. We fully appreciate the benefits of transparency. However, it is one thing to expect the universal service provider, which will just have been bailed out by the taxpayer to the tune of several billion pounds, to be transparent about how it is maintaining the UPS, it is quite another to demand that private companies open themselves up to criticism about how they operate their businesses when they are providing services that have no impact on the UPS.

Lord Carter of Barnes: In the dying moments at Stamford Bridge, I, too, will try to be brief. However, I shall try to address the amendments and the points that have been made in the debate because, to my mind, they are central to a fundamental ambition of the Bill. I have come to be aware of and appreciate the interest and expertise of my noble friend Lord Clarke in this area. I hope that by the end of the debate he may be persuadable that it is possible to create a regime that is both fair and transparent, underpins the universal service and allows for productive competition. It is not the view of the Government that those things are in conflict.

I begin with Amendment 88. I am grateful to my noble friend Lord Clarke for allowing me the opportunity to provide further clarity on USP access conditions and the Government’s position and to explain why the proposed new regulatory regime is adequate to the task at hand. The amendment seeks to introduce an additional threshold of “on commercial terms” on any USP access condition. The amendment risks creating additional regulatory burdens and may constrain the nominated company’s management—in this case Royal Mail—in its ability to run the business. While I fully appreciate and understand his concerns around cross-subsidisation, particularly unfair cross-subsidisation, it is difficult to see what meaning “commercial terms” could have in relation to Clause 34(1)(b), which deals with accounting separation relating to access. Furthermore, the amendment would create uncertainty, as “commercial terms”, which is not defined, could be interpreted widely and increase the possibility of either legal challenge or judicial review.

Clause 34 improves on current postal regulation by clearly setting out, and for the first time bringing on to a statutory basis, the grounds that Ofcom must have regard to when imposing a USP access condition.

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Clause 34 and concurrent competition law powers provide the tools through which Ofcom can ensure that access prices are not set too high or indeed too low. I am conscious that it is late, but I will digress to make a specific point. This exemplifies one of the central findings of the Hooper review, which was not that there is not a case for a transparent, accurately costed wholesale pricing regime, but that it did not currently exist, and it needs to exist on terms that are fair and transparent. The noble Lord is right to point out that Hooper did not do that transparent cost analysis. However, he was not asked to do it and nor was the review team equipped to conduct it. Its commissioning by Ofcom was central to his report.

Although I welcome my noble friend’s sentiments, the amendment risks creating uncertainty without adding materially to the safeguards provided by the Bill. He can rest assured that the Bill gives Ofcom the necessary powers to establish the cost of access at Royal Mail on fair terms and to ensure that access prices are set appropriately and are subject to Ofcom’s explicit primary statutory duty to secure the provision of the universal postal service. The noble Lord, Lord Hoyle, raised by way of example the question of the precise and accurate nature of the costs, the losses and the subsidisation. One of the ambitions of this new regime must be a fair, accurate and transparent wholesale access regime that preserves and funds the universal service and stimulates not parasitic but purposeful competition.

My noble friend also tabled Amendment 96, which he is proposing should be inserted after Clause 44. The amendment would give Ofcom the discretionary power to require any postal operator to publish information about its performance. In doing so, it mirrors Clause 33, which requires the nominated universal service provider, if Ofcom imposes any designated USP condition, to publish details of performance.

As the noble Lord opposite observed, the amendment has the potential to significantly increase the regulatory burden on what may be very small businesses, while achieving little more than is already allowed for in the regulatory powers of Ofcom in Schedule 8 to the Bill. One has to bear in mind that these operators are already in active competition with one another and, indeed, with the Royal Mail. If customers of these alternative operators are dissatisfied with the level of service, they are able to change providers with relative ease.

I should direct my noble friend Lord Clarke’s attention to Schedule 8, paragraph 3. There we have set out the powers for Ofcom to require postal operators to provide all the information that Ofcom considers necessary to carry out comparative overviews of the quality and prices of postal services. That overview must be carried out with a view to publication and in the interest of users of postal services, whom he referred to.

We are satisfied that this Bill as it stands provides the necessary powers for Ofcom either to ask for any information they might require on performance conditions, or to require other operators to publish such information if it can show that to do so is objectively justifiable and proportionate. Given these explanations, I hope that my noble friend Lord Clarke will not only see fit to

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withdraw his amendment but think again about the balance between preservation of the universal service and fairly priced access to wholesale competition.

9.45 pm

Lord Clarke of Hampstead: I thank my noble friend for that quite conciliatory and helpful reply to this short debate. My noble friend Lord Hoyle drew attention not only to the situation at Stamford Bridge, but to the number of times that the unfairness of the current Postcomm regime has been raised in this House. On his first point about Chelsea, he should have been watching the famous Arsenal last night, who scored four goals. Unfortunately the other team scored four as well.

Seriously, I shall not go into my earlier comments, but in my innocence I actually believed that when you put a case showing that something was wrong, people would take action. I turned up at meetings, not only of Postwatch, but Postcomm, and I argued the case. Now, after all this time we are told that the Hooper review cannot answer the questions that my noble friend Lord Hoyle and I have been asking for a number of years.

I am pleased that the noble Lord, Lord De Mauley, agrees with the principle of my amendment. He suggested, and the Minister picked it up, that Amendment 96 could be unfair to smaller organisations. The problem with all this unfairness is that if you put an obligation on Royal Mail, it should be fair to put the same obligation on its competitors, because that has caused a lot of the upset for at least the past eight years, probable longer. It has to be seen to be fair. I quickly looked up Schedule 8, paragraph 3, which does give food for thought, and there could be some merit in my noble friend Lord Carter’s comment that he might consider it possible to create a fair system. However, if the outcome does not make it clear that the role of the regulator is not the role of the promoter of competition, but is the watchdog to see that the competition meets the requirements of the Bill, that would be worth looking at.

I am glad that he understands my concern, because it is getting to the point where, because of Postcomm’s interference and biased approach, money has been drained; it is like shovelling £1 coins down the drain. I am prepared to look at the possibility of finding a better way of expressing what I have tried to do in Amendment 96. It is essential that we try to get this as clear as we can. I have said many times during the passage of the Bill that clarity, transparency and accountability must be the watchwords if we are producing legislation that we hope will resolve some of these problems. Ultimately, someone should do the work on the costs on the final mile. Hooper’s team could not do it and they said that they were not asked to do it. There was a bit of a slip-up there if that is the reasoning on which the charging regime is being based.

You cannot compare going from Chadford and Moretonhampstead in a nice little van to deliver a letter to the next village—I think it is called Gidleigh; I went there once on a visit—with the final mile of someone going to South End Close in Hampstead, where there are 14 blocks of flats with 140 steps in each block. Someone needs to work out whether there

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is some measurement that will take into account the various weighting factors required for a fair pricing policy for the final mile. It will not be easy but it is possible. These days, there are ways of weighing up all the differences between a rural area, an urban area and a densely populated area, such as the Abbey Estate in Abbey Road, where I used to live. In North End in Hampstead, you walk down a lovely leafy lane to Northstead or North End Avenue. It can be done and someone needs to do it properly.

I am sure that the Government are prepared to look at the possibility of getting a proper pricing policy with proper guidance regarding Ofcom’s responsibilities. With proper consultation, that should be possible. However, for tonight, I beg leave to withdraw the amendment.

Amendment 88 withdrawn.

Amendment 88A not moved.

Amendment 88B

Moved by Lord Hunt of Wirral

88B: Clause 34, page 19, line 18, leave out “might” and insert “is likely to”

Lord Hunt of Wirral: In working my way through the various conditions that the Bill allows Ofcom to impose, one of the most important concerns has been whether it requires Ofcom to show that the condition is necessary. Unlike in Clause 44, which imposes general access conditions, Ofcom does not have to show that a USP access condition is necessary—merely that it is appropriate for the promotion of efficiency, effective competition or the conferring of significant benefits on the users of postal services. I should be interested to hear from the Minister what sort of burden of proof there is on a requirement to be “appropriate”.

The vagueness continues in subsection (4), when Ofcom must consider whether to impose a price control. The drafting seems to make it appropriate as long as there is the possibility of the universal service provider having the ability to fix prices at an excessively high level or impose a price squeeze.

We frequently have debates in this House over the words “may” and “must”, and even “must” and “shall”. I am afraid that I am now including “might” in the list of potentially ambiguous modal verbs, but I look forward to hearing the Minister explain, in particular, whether subsection (4) will have any reference to the intent of the USP. I beg to move.

Lord Carter of Barnes: My most recent example of negotiating on “must”, “may”, “shall” or “would” was with the German telecommunications Minister in a European Council meeting, where, rather to my chagrin, he outnegotiated me in English on the wording of the telecoms framework. Let us hope that we can do better on this one.

I shall try to give some clarification. As we understand it, Amendments 88B and 88C seek to increase the threshold—or at least question whether the threshold is correct—that needs to be reached before Ofcom may impose access price controls on Royal Mail.

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These amendments challenge whether the Bill contains the appropriate checks and balances in the various subsections and schedules on Ofcom’s ability to impose access prices. We contend that the balance is right. Furthermore, by raising this threshold by the introduction of “might”, the amendments would risk tilting the regulatory balance too far away from the benefit of consumers to the benefit of the company. In the long run, that would serve neither the consumers nor the company well.

Clause 34 already provides that Ofcom may not impose a USP access condition, which includes access to price controls, unless the regulator considers it appropriate either to promote efficiency and effective competition or to confer significant benefits on the users of postal services. A USP access provision that imposes a price control is also subject to a standard general test for imposing or modifying regulatory conditions as set out in Schedule 6. Ofcom must ensure that access price controls are objectively justifiable, do not duly discriminate and are proportionate and transparent.

As we have stated previously, Royal Mail currently delivers 99 per cent of all items posted in the United Kingdom and no other company is likely to have an equivalent national network in the foreseeable future. A balance has to be struck between regulation that protects the consumer and allowing the company to flourish. The Bill, as drafted, attempts to provide such a balance and we believe that it does. I hope that these explanations give some certainty to the noble Lord as to our preference for the language as drafted and we ask him to consider withdrawing his amendment.

Lord Hunt of Wirral: I shall carefully consider what the Minister has said and in the mean time I beg leave to withdraw the amendment.

Amendment 88B withdrawn.

Amendment 88C not moved.

Amendment 88D

Moved by Lord Hunt of Wirral

88D: Clause 34, page 19, line 22, leave out “may” and insert “must”

Lord Hunt of Wirral: Our amendments in this group contrast the differences between the drafting of Clause 32(4) and that of Clause 34(3)—the first listing the factors that Ofcom mustconsider when setting price tariffs and the second listing the criteria that Ofcom mayhave regard to when setting access prices.

To return to the old debate between “may” and “must”, our first amendment would make it necessary, not optional, for the criteria in subsection (5) to be taken into account. Our second amendment relates to the requirement that the price control must be based on clear and transparent accounts. I understand from Ofcom that the difference in drafting is a hangover from what has been described as previous legislation. Ensuring that drafting is consistent with precedent legislation is generally a good principle, but consistency

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within a single piece of legislation should prevail. Although there are differences in the interests of public and retail customers that might justify differences between the criteria to be taken into account, I do not think that the differences are so great as to suggest that cost transparency would be inappropriate. I beg to move.

Lord Carter of Barnes: My answer may give the noble Lord some comfort but I am advised that I must do this quickly, so I shall do it at a canter. By replacing “may” with “must”, Amendment 88D would require Ofcom, when imposing access price controls, to have regard to prices at which services are available in comparable competitive markets and to determine what it considers represents efficiency by using cost accounting methods. Our view is that, by constraining the manner in which Ofcom can regulate the sector, the amendment oversimplifies the complexity of the task of regulation and the need to allow the regulator the appropriate flexibility.

All network businesses with large common costs are complicated, as my noble friend Lord Clarke said earlier. Royal Mail is a network business with high levels of complexity. The current drafting of the clause guides Ofcom to consider areas to which it might have regard when imposing access price controls, but it seeks not to constrain Ofcom’s discretion in these areas. Ofcom has a track record of doing similar tasks, perhaps with an even more complex, multilayered network business. Given the complexity of these markets and businesses, our sense is that Ofcom should retain the flexibility to consider what methodologies to use when setting access prices.

Amendment 88E would add an additional requirement on Ofcom to ensure that if it sets any access prices, it must seek to ensure that the prices take account of the costs of providing the service. Against the backdrop of a rapidly changing market and, we hope, an accelerated modernisation programme for Royal Mail, as we have stated before, Ofcom will need to ensure that access prices are set neither too high or too low nor, indeed, indulge in artificial cross-subsidisation. If access prices are too low and below cost, that damages the Royal Mail's ability to provide a universal service. Conversely, if access prices are too high, that will in the long term encourage users to move to alternative forms of distribution, such as digital media, far more quickly.

Clause 34 is explicit in stating that Ofcom cannot impose an access price control unless it appears that the universal service provider might set its prices excessively high or begin imposing a price for a margin squeeze adversely affecting users. Evidence suggests that Royal Mail has not modernised as quickly as other leading European operators and is therefore not as efficient as it could be—and, we all hope, will be. Ofcom will need

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to take into account that it will take time and expense to reach an efficient cost base. Again, that is an area where Ofcom has considerable experience in establishing coherent and what are generally regarded as sensible glide paths for that adjustment.

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