Postal Services Bill

My Lords, this important amendment seeks to reassert that the universal service should be maintained as a benefit to the whole country even though this may involve some cost. The amendment aims to remove the new criteria that Clause 28(3) seeks to introduce. These criteria direct Ofcom to have regard to the universal service being financially sustainable and efficient. The criteria are new; they did not apply to Postcomm. These seem to be perfectly reasonable provisions. Who would not want financial sustainability or efficiency? However, the universal postal service is the object of our discussion, and the stark facts are that some elements of it cost more than the revenue they yield, and some parts are underutilised on a regular basis. That is why it is vital to draw attention to the new provision in the Bill. It is generally accepted that the universal service is a good and necessary thing and that its delivery by Royal Mail has been well handled. That is significant. There is no body of evidence to suggest that Royal Mail's provision of the universal service lacks something. However, the Government have implied that it lacks something by suggesting new criteria. Let us look at these. In future, the universal service must be financially sustainable. Let us then suggest that the six-day delivery model may involve a degree of loss on at least one day a week—or, if not loss, then a lower rate of return on one or more days. Anyone who has some familiarity with the pattern of deliveries across the working week will endorse such a view. Therefore, would this not mean, on a strict interpretation, that the six-day service is not financially sustainable? Let us consider the term ““efficient””. Is it efficient to maintain delivery vehicles and stock that may not be fully utilised but which guarantee a universal service to remote areas? From a commercial point of view, if these vehicles are utilised less than the other vehicles in the network on average, that is definitely inefficient. If that is the case, would it not be an argument for extending the number of exceptions to the USO on the basis that remote areas require an inefficient use of scarce resources? Ofcom will be forced to move in this direction once the new owners of a privatised Royal Mail demonstrate that part of the USO can never be financially sustainable or efficient. In the debate in the other place, when questioned on this issue the Minister for postal services was forced into hypothetical speculation about how Ofcom would use these new criteria to do something that Postcomm does not—I repeat: does not—do at present. In Committee, Nia Griffith MP asked the Minister: "““Will the Minister give us an example of how a decision, requirement or interest might be different as a result of not having the clause in the Bill?””." Mr Davey said: "““It will, of course, be for Ofcom to make that final decision. If I give a concrete example, what I do not want to do is to imply by my words in Hansard that that is what Ofcom should or ought to do. I want to make it absolutely clear, by those preliminary remarks, that in giving an example, I am not in any way saying that that is the intention of the clause””." We can see by this initial contortion by the Minister how abstract the debate has become because of the difficulty of justifying these new criteria. That said, the Minister continued: "““Hypothetically—again, this is not necessarily the intention behind the measures, but it may be the way that it chooses to use the powers—Ofcom might decide, in a decision on prices, that if it held the price down too much, it could create financial problems for the universal service, and hence it might not be financially sustainable. In making these fine balances, Ofcom might decide that it has a duty under subsection (3)(a) to ensure that the universal postal service is financially sustainable. It might—this is not a suggestion of what it should do—decide that the price that the universal service provider, Royal Mail, can charge to competitors accessing its downstream service could be a little bit higher to ensure that the universal service was financially sustainable. I hope that that is quite a central example””.—[Official Report, Commons, Postal Services Bill Committee, 30/11/10; col. 514.]" This is the only example that has been heard so far of the Government’s intentions behind the new criteria. What is remarkable is that the Minister seems to assume that the existing arrangements allow the regulator to hold postal prices down without any regard to the needs of the universal service provider—hypothetically speaking, at least. In life, that is not the case. The price control arrangements are very long-winded and, before arriving at its decision, Postcomm has had to hold extensive public consultation exercises, which can last for years. Royal Mail is fully involved in these consultations and strongly argues the case for the price controls to reflect the need for it to maintain all its services and to secure the universal service. Although the first price control was certainly severe for Royal Mail, the second one has given it more scope, the point being that, under the present criteria for maintaining the universal service, Royal Mail is legitimately able to direct the attention of the regulator to its financial needs. It is unrealistic to suggest that Postcomm, for all its many failings—and there were many of them—has ignored the maintenance of the universal service. Therefore, in reality, we come back to the view that the Government are introducing new considerations that could weigh against the provision of the universal service. Who will benefit from this? Certainly not the public, as such criteria will inevitably limit and reduce the scope of the universal service. If noble Lords will forgive me, I intend to take this opportunity to comment on the other amendments in this large group while I am on my feet. Amendments 24QA and 24RA both bear on the relationship between access and the universal service network. There is no doubt that regulation of access has been one of the most controversial elements of the legislation introduced by the Postal Services Act 2000. As long ago as Richard Hooper’s first report, it was noted: "““Whilst access competition has so far been predominantly based on price, and there has been less innovation than might have been hoped, the situation is still fundamentally better than one of a monopoly. We recommend, therefore, that downstream access should be continued.""The UK access regime differs from the approach used by other countries in two ways: … Royal Mail is required to allow other postal companies to access its national network on a non-discriminatory basis. Very few other countries operate a mandatory regime in this way ... the price which Royal Mail charges other postal companies to deliver their mail over the final mile is regulated through a system of access headroom ... We are aware of no other country which has a comparable system””." Therefore, even someone as pro-competition and pro-access as Richard Hooper recognised that there might be problems. His report went on to indicate: "““The access headroom margin is not directly related to Royal Mail’s upstream costs. As Royal Mail’s costs change over time, the level of headroom does not. As a result, the margin available for competitors to enter the upstream market could be too large for some projects (encouraging inefficient entry) and too small for other products (discouraging efficient entry).""Headroom may dilute some of Royal Mail’s incentives to become more efficient. Royal Mail cannot pass upstream cost savings through to lower retail prices without also having to cut its access price. If Royal Mail does not wish to cut its access price, it has less incentive to reduce retail prices and upstream costs.""There is uncertainty whether access services are currently being provided by Royal Mail at a loss or a profit””." Therefore, even with his enthusiasm for the access arrangement, Hooper noted a number of problems which are of huge significance for the industry. Moya Greene, the chief executive of Royal Mail, indicated in her evidence during discussions on the Bill in the other place that Royal Mail was subsidising the competition to the tune of approximately £160 million a year. She said that it was unfair and crippling Royal Mail, and, whether Royal Mail was privatised or not, this problem would have to be addressed. Hooper also noted, as I said earlier, that the form of access in this country decided by the regulator is unique. Indeed, we have to register that since his report no other EU country has followed the lead of the British regulator, even though they are all now subject to liberalisation of the postal market. First, it is clear that across the EU access tends to be provided on the basis of negotiation. In Germany, access requests apply only to dominant firms in relevant geographies and only where it is reasonable from an economic standpoint. In Belgium, access is provided on a negotiated basis. In the Netherlands, unbundled access it not mandated. Therefore, compared with other countries, the UK is unique in requiring the Royal Mail Group to provide third-party wholesale access on an access headroom basis. The other countries may have mandatory access but they are on terms acceptable to the universal service provider, which gives the USP the ability to take a commercial decision on the terms of granting access. The question that the Government surely have to address is why they should continue to support a form of access which encourages unfair competition and is not commercially sustainable and to which no other comparable national provider is subject. Amendment 24QA allows for this anomaly to be rectified. In future, this issue should be subject to normal commercial negotiations. If there is any complaint of market abuse or unfair competition by Royal Mail, a simple normal commercial remedy is at hand—complain to the Competition Commission and let it make a judgment. Equally, Amendment 24RA introduces an important correction to current regulatory practice. The assumption is that access costs involve Royal Mail performing the service of final sorting and delivery for the company buying the access service. Therefore, Royal Mail charges for that service under the glare of the regulator’s view of those costs. However, the competitor does not contribute to the maintenance or depreciation costs of the universal service provider in providing access. Bringing this into the estimation of access costs is entirely legitimate. The universal service obligation cannot be delivered without the deployment and replacement of the capital and workforce that Royal Mail maintains. Without such a physical embodiment, there is no universal service provision. It is worn out, depreciated and replaced in the provision of the universal service. Every use of the network in some manner or another involves this process, so the access contracts from competitors demand not just that part of the network that secures access but the whole of the pipeline to secure delivery. In this sense, competitors also need to be charged for sustaining the network from which they so generously profit. If the Committee can see the benefit of these amendments, we will go a long way towards remedying the problems with regulations which Hooper highlighted and which continue to cripple Royal Mail. I want to comment briefly on a number of other amendments in this very large group. They include Amendment 24H in the name of the noble Viscount, Lord Eccles. We are not absolutely clear about the intention of this amendment. On the one hand, if the intention is to ensure that Ofcom has an obligation—