Postal Services Bill

My Lords, the essence of this large group of amendments concerns the balance between protecting the universal service on the one hand and allowing competition on the other. We agree that the new regulatory regime must strike the right balance between those two objectives. I thank all noble Lords who have contributed informed views from both ends of that spectrum. Satisfying all noble Lords will be something of a challenge. The Government’s policy for the mail market is clear: competition is beneficial but must not undermine the universal service. Securing the universal service is therefore the overarching objective of the Bill. Clause 28, which gives Ofcom its primary duties for postal services, and Clauses 37 and 38, which relate to the access regime, are fundamentally important to ensuring that that objective is met. Amendment 24GC seeks to remove subsection (3) of Clause 28, which ensures that, in performing its primary duty, Ofcom must have regard to the need for the provision of the universal postal service to be both financially sustainable and efficient. It is vital that the Bill ensures that Ofcom considers the impact of all that it does in regulating the market on the long-term financial sustainability of the universal service. None of us would want Ofcom to support the development of the market in a way that would undermine the long-term viability of the universal service. Furthermore, it is common ground that Royal Mail needs to modernise and to become ever more efficient. It is therefore also important that the financial sustainability requirement is balanced by a duty to have regard to the need for efficiency. Clause 28(3) is therefore a vital part of the new regulatory framework that we are creating. The noble Lord, Lord Young, suggested that there will be pressure to remove parts of the universal service that are not efficient. The requirements to have regard to both financial sustainability and efficiency apply to the universal service as a whole; it is both inevitable and in the nature of any universal service that some parts of it will be profitable and will need to cross-subsidise those parts that are not. There is nothing in the approach set out in the Bill that could or would lead to every individual component of the universal service needing to be profitable in itself—although, obviously, Royal Mail would hope that they could be. The Bill seeks to ensure that the universal service as a whole is financially sustainable and that it is delivered efficiently to the requirements and standards set. It is clear that there exists a strong view in your Lordships’ House—to a large degree, it is shared by many in the other place—that a greater emphasis needs to be placed on the security of the universal service. This is absolutely in line with the Government’s primary objective to secure a universal postal service for us all. We have always been clear that the financial sustainability of Royal Mail is a vital part of the overall picture. This was explicit in the Government’s policy statement that accompanied the publication of the Bill. It said: "““The Government is clear that Royal Mail needs to be in a sustainable financial position to ensure that it has the capacity to modernise, innovate and grow””." While I cannot support Amendment 24GC for the reasons that I have explained, I have listened carefully to these general concerns. I therefore give your Lordships a commitment that we will revisit this area with the aim of bringing back proposals on Report to strengthen protection for the universal service. With that assurance, I hope that the noble Lord, Lord Young, will, in due course, feel able to withdraw Amendment 24GC. I fully support the sentiments underpinning Amendment 24H in the name of my noble friend Lord Eccles. He has already made a number of thoughtful contributions to our discussions and I thank him for raising this important matter. His amendment addresses an issue that goes right to the heart of the Bill in terms of ensuring that the regulatory regime accurately reflects the costs associated with delivering the universal service. When he explained it, I understood him to say that consideration of cost was less important than price, but I shall address the specifics of costing. This is important for the following reasons: first, cost is important to assist in monitoring the universal service; secondly, it helps to set appropriate prices for users; and, thirdly, it ensures that any access price controls do not result in an unfair subsidy between operators, which is an issue that I shall address in more detail in a moment. Clause 38 allows Ofcom to impose USP accounting conditions, including costing systems, to ensure cost transparency and accounting separation. The impact of Amendment 24H—I acknowledge that my noble friend has clarified that it is a probing amendment—would be to create an additional duty on Ofcom to have regard to the need to establish costing systems to calculate the costs of providing the minimum requirements of the universal service obligation. However, as I have said, Ofcom already has the power to require costing systems under Clause 38, and one of the primary uses of these powers will be to determine the cost of providing the universal service. I agree with my noble friend that we all want to avoid a situation where unnecessary regulation is placed on the universal service provider. The Bill as drafted allows Ofcom to impose accounting conditions on the USP if it deems them necessary; it does not require it to do so in each and every circumstance. I may well not have adequately addressed my noble friend’s key points. I shall read carefully what he said and, if necessary, my already promised letter to him will no doubt expand. I am grateful to the noble Baroness, Lady Dean, and the noble Lord, Lord Brooke of Alverthorpe, for tabling Amendment 24PB, as it concerns an extremely important issue. It would give Ofcom the power to limit the indebtedness of the universal service provider in relation to the overall value of the company. The noble Lords speak from great experience on this issue. However, I reassure them that Ofcom is well equipped to tackle the risk of unsustainable levels of debt within the universal service provider. Clause 28, which we have just been discussing, ensures that Ofcom must carry out all its functions in relation to post that it considers will secure the provision of the universal service. As I have signalled, we will look again at the Bill to ensure that the universal service is sufficiently protected and that proper regard is paid to the financial sustainability of the universal service provider. On top of this, Ofcom already has the power to impose designated USP conditions through Clause 35, which could include conditions akin to the condition 16 requirement in Royal Mail’s existing licence. That does not allow Royal Mail to do anything that, "““creates any significant risk that the necessary resources will not be available””," to carry on its business. As I say, we will look again at this area. With that assurance, I hope that the noble Baroness, Lady Dean, and the noble Lord, Lord Brooke, will not feel that they need to press Amendment 24PB. The remaining amendments in this group all concern the access regime in the Bill. Before I turn to the specific amendments, it might be helpful to say a few words about the clauses in question—Clauses 37 and 48. We are clear that competition, by providing customers with greater choice, can help to support a vibrant postal service in the digital age by encouraging the postal sector to develop new products and become more efficient. The key is to deliver the benefits of competition to postal users but to ensure that it does not undermine the universal service on which we all depend. This is a primary focus of the Bill, delivered in large part by Clauses 37 and 48, which create a fair and transparent basis for access to the postal network. Clause 37 sets out the key principles of the new universal service provider access regime. It ensures that Ofcom can mandate access to the network of the USP only if to do so is consistent with its overarching duty, set out in Clause 28, to secure the provision of the universal service and if so doing meets the three tests of promoting efficiency, promoting effective competition and significantly benefitting users of postal services. This is a change from the 2009 Bill, which required that any one of these three tests be met. Coupled with the requirement that any regulation imposed must be objectively justifiable, non-discriminatory, proportionate and transparent, this will ensure that regulation is focused on economic bottlenecks, such as access to Royal Mail’s ““final mile”” delivery network. Clause 37 also allows Ofcom to cap access prices where they are too high or to prevent anti-competitive action by Royal Mail towards access operators. To ensure that USP access conditions are proportionate, Ofcom must take account of a number of factors when imposing obligations under an access condition. These include technical and economic viability, feasibility, investment made by the USP, the need to secure effective competition in the long term and intellectual property rights. Clause 48, which deals with general access conditions, mirrors Clause 37 closely. One key difference is that the clause applies to all postal operators, including the USP, whereas Clause 37 is concerned purely with access to the USP’s network. Amendments 24ACA and 24WA to 24WG, tabled by my noble friend Lord Eccles, relate to the access regime. Amendment 24ACA would enable Ofcom to request information from access competitors on which Ofcom could base its access terms and conditions. I hope to reassure my noble friend that the Bill already provides Ofcom with the powers to do just this through Clauses 53 and 38. Clause 53 and specifically Schedule 8 set out Ofcom’s powers to require information from postal operators. That is supplemented by Clause 38, which gives Ofcom the power to impose accounting conditions in order to achieve cost transparency and accounting separation. Amendments 24WA to 24WG to Schedule 3 would make some technical changes to exactly how the access conditions would operate. The key element of these amendments would be to apply access conditions to those operators not only giving access but also seeking it. I have listened carefully to my noble friend’s arguments and, again, hope to persuade him that these matters are already catered for in the Bill. The regulatory framework of the Bill works by imposing regulatory conditions on operators giving that access. Through Clause 37, Ofcom has the power, subject to certain tests being met, to impose access to the universal service provider’s network and to set prices for such access. Through Clause 48, Ofcom also has the power to impose access to other postal operators’ networks. Through Clause 40 conditions, Ofcom has powers to regulate those operators obtaining access, which it would use if it deemed it necessary. As such, I hope that my noble friend will accept that what he seeks to achieve is already adequately covered and that he will not feel it necessary to press his amendments. Amendments 24PD, 24PE, 24QA and 24RA, tabled by the noble Lord, Lord Young, also concern the access regime. The key feature of these amendments is that they would essentially provide for access to be granted only on the basis of a commercial negotiation. Their effect would be hugely to reduce—even, we fear, to eliminate—Ofcom’s ability to mandate access at all. I understand the reasoning behind the amendments—ensuring greater security for the universal service. However, I am surprised that the noble Lord seems to have somewhat departed from his party’s relatively recent position on the access regime. The Postal Services Bill that was bought to this House in 2009 by the last Government, and in which the noble Lord, Lord Young, played such a prominent role, contained an access regime that many argued favoured competitors to Royal Mail to too great an extent. These amendments could even lead to the end of any competition at all. As I have said, the access regime in this Bill has already been strengthened considerably in comparison to that in the 2009 Bill. I believe that the access regime here strikes the right balance. The noble Lord, Lord Young, stated that no other country requires an access regime. While it is the case that no other country has the same access regime as this country, it is not the case that no other country requires access to the postal network. Everyone accepts that the current regulatory regime is not working—I do not think that there is any argument there—but access regulation is not a bad thing. It has been beneficial to the UK’s postal market. Moreover, all member states are now required to enable access to their postal infrastructure where necessary to protect consumers or promote effective competition. Having said all that, I have committed to look again at Ofcom’s duties with a view to bringing back proposals to strengthen the protection for the universal service. Given that commitment, I hope that the noble Lord, Lord Young, will not feel it necessary to press his amendments. Amendments 24Q to 24W and 24AD to 24AH, tabled by my noble friends Lord Jenkin, Lord Skelmersdale and Lady Wheatcroft, would, as my noble friend Lord Jenkin said, pull the access clauses in the opposite direction from those amendments in the name of the noble Lord, Lord Young. They would effectively increase the opportunities for access competition and, correspondingly, arguably reduce protection for the universal service. The impact of these amendments would be threefold. First, the threshold for Ofcom to impose on Royal Mail mandated access in favour of third-party postal operators to the network of the USP would be considerably reduced, as the amendments would mean that only one of two tests—conferring significant benefits on users or promoting competition—would need to be met. The Government’s proposals are that both tests must be met, as well as a third test on promoting efficiency, which these amendments would remove. Secondly, the amendments would also oblige Ofcom to impose price controls in certain circumstances, rather than allowing it to do so. This runs counter to the general philosophy of the Bill, which allows Ofcom the discretion to utilise regulation in the way that it considers most appropriate to meet its statutory duties. This is also in line with the Government’s position that regulation should not be imposed on business unless necessary. Thirdly, in deleting paragraphs (a), (c) and (e) from Clause 37(8), and the equivalent paragraphs from Clause 48, the amendments would remove some important criteria that we believe Ofcom should take into account when deciding what obligations to impose in an access condition. Specifically, the amendments would mean that Ofcom did not have to take into account the following criteria: the viability of installing and using facilities that would make the proposed access unnecessary; relevant investment made by the operator from which access is mandated; and any intellectual property rights. The Government consider that it is only right that Ofcom has those criteria in mind when deciding what obligations to impose in an access condition. Whether it is viable to utilise facilities that would render the request for access unnecessary is important to an assessment of the proportionality of any obligation. How to price access to ensure that investment and intellectual property rights are taken into account is clearly an important consideration. It is only right that companies that have invested in equipment and processes for developing intellectual property should be able to earn a reasonable rate of return on those investments. My noble friend Lord Jenkin asked why only Royal Mail pays towards the costs of Postcomm. I assure him that the figure is only £8.9 million and not the £53 million that was suggested. I reassure him that under the current regime—