The building blocks for a sustainable postal service. UK Mail Response to Postcomm Consultation Documents. May 2011

Transcription

1 The building blocks for a sustainable postal service UK Mail Response to Postcomm Consultation Documents May 2011 The UK s Leading Independent Integrated Postal Operator

2 Note: Throughout this document: UKM RM RMW RMR = UK Mail = Royal Mail Group = RM Wholesale (i.e. the business unit within RM which sells access services to customers) = RM Retail (i.e. the business unit within RM which sells retail services to customers; UKM believes RM typically refers to this unit as RM Letters ) Consultation = Postcomm s 2011 consultations on The building blocks for a sustainable postal service A) Universal service, 28 th February B) Analysis of Markets, 1 st March C) Access review, 3 rd March D) Initial proposals on regulatory safeguards, 1 st April Numbering used in referring to a Consultation is as per the paragraph and table numbering in the relevant Consultation; A1 indicates Annex 1, etc. Quotes from a Consultation are shown in italics The contents of this response document only may be made public and attributed to UKM. All information or comment provided by UKM to Postcomm other than in this document is confidential and is not to be published, otherwise disclosed outside Postcomm or attributed to UKM UK Mail Response to Postcomm Consultation May 2011 Page 2

3 SUMMARY The following sections follow the structure of the Consultations and include UKM s response to the questions posed. The key points UKM makes with regard to Postcomm s questions in each Consultation are: 1) USO: Postcomm s approach is to seek to establish what services constitute the Universal Service by listing existing RMR services, when UKM argues that the requirements of the Universal Service are already set by EU and UK legislation and it should be for RMR to decide what services it wishes to offer to fulfil the USO. Any services provided by RMR which meet the Universal Service requirements should then be USO services. Postcomm s role is to confirm that RMG is fulfilling the USO by providing those services. With this perspective, UKM agrees that bulk mail services should not be considered USO services. However, removing bulk mail services from the USO would man they became VATed and such a change would undoubtedly be a further, major price shock to a market already severely impacted by the extreme RM retail and access price increases of May This highly detrimental impact on the overall mail market is likely to occur more quickly than the facilitation of competition can have a positive impact; UKM believes Postcomm/Ofcom must consider this impact very carefully before proceeding. UKM argues that neither meter-paid nor PPI-paid services can be USO services as neither meets the requirements of the USO (6 days a week collection and collection from all the access points provided by RM). Also similarly, Business Collections cannot be USO services. 2) Market Analysis: 3) Access UKM is assured that Postcomm has undertaken a generally through and well-founded analysis, reaching valid conclusions with which UKM very largely agrees. UKM strongly agrees with Postcomm s findings that Response Services and Redirections are distinct markets and that RMR has significant market power in each. For Redirections, UKM sees very clear similarities with the Postcode Address File (PAF), in terms of the nature of the data, RM s management of it and RM s commercial exploitation of it; hence UKM believes Redirections should be ring-fenced and subject to external advisory oversight in the same way as PAF. UKM believes Postcomm s analysis and basis for consideration clearly show that mandated and price controlled access must continue. While UKM fully agrees with Postcomm s conclusion that the tests set out in the Postal Services Bill in respect of access are met for access at Inward Mail Centres (IMCs), UKM firmly believes UK Mail Response to Postcomm Consultation May 2011 Page 3

4 that those tests are also met for access at Outward Mail Centres (OMCs) for both insertion and extraction of mail. UKM also argues that the regulator must actively consider whether the Postal Services Bill tests are met in respect of insertion access to the initial walk sequencing stage of RM s mail processing. Of the options outlined by Postcomm for regulatory involvement in terms and conditions for access, UKM favours the regulator establishing a clear framework of guidelines on which commercial access negotiations can be based (that is, an appropriate balance between hands off ex-post regulation and a prescriptive Access Code); this would recognise the need to provide for commercial opportunity through bi-lateral negotiations and RMW s monopoly market power in downstream activities. Given the many areas on non-equivalence between the requirements imposed on external accessors of RM s operational network and its internal procedures, UKM strongly supports Postcomm s conclusion that these non-equivalences must be addressed by mandating operational changes unless the necessary operational changes would clearly not be appropriate, when there must be fully compensating pricing or headroom allowance for accessors. Access must also be mandated to redirections and PO Boxes as RM has a monopoly in these market areas which form a barrier to competition. 4) Framework for 2012 UKM agrees with Postcomm s conclusion that the USO must be price controlled; the basic conditions that would allow otherwise are not present and freedom to price at profit maximising levels with inefficient costs could jeopardise the financial sustainability of the USO. Postcomm believes there are four key constraints which could act to make access price control unnecessary: cost transparency, accounting separation, mandated access and mandated equivalence; none of these is fully present or operating effectively. Hence, ex ante regulation of access services must be continue. USO services and access services serve very different markets and have other key differences (such as the legislative obligation for a universal service) which make separate price control of each clearly appropriate; separate price controls are also necessary to maintain the focus on financial sustainability of the USO while mitigating against cross-subsidy in either direction between USO and access services. In the continuing absence of true costs, correctly allocated with full transfer pricing and equivalence between access and retail, regulated access headroom must continue and be on the basis of narrow baskets (as for 2011); in particular, access baskets must be across products not across customers i.e. the same headroom must apply for all customers of the same product because a low number of large customers are critical to a competitive market in which RMW has extreme market power. Using LRIC rather than FAC as the basis for access headroom may be justified as a regulatory approach but only once robust LRIC data is established and being reported can headroom start to move to a LRIC only base; that will not be the case for April 2012 and so FAC must be the basis for the new price control. UK Mail Response to Postcomm Consultation May 2011 Page 4

5 A) UNIVERSAL SERVICE 1. General comment UKM has a general question about the approach Postcomm has taken to the Universal Service Obligation (USO) and RM s retail services. Postcomm first established which RM services were to be provided as part of the USO in 2001 when all services then provided by RM were considered USO services. This was then reviewed in , when the current list of USO services was defined in RM s 2006 licence. This seems to UKM to mean that the USO has always been defined by Postcomm by reference to RM s then existing services, when the USO is in fact explicitly defined by the European Postal Services Directive and the Postal Services Act Hence the USO in the UK is: One collection from each access point and one delivery to all addresses on five days per week for packets and six days per week for letters, covering postal items weighing up to 20kg within permitted dimensions. A registered and an insured post service. Equivalent cross-border services. At affordable prices at geographically uniform prices. (This will be the same when the current Postal Services Bill is enacted as expected this summer) The requirement on RM, as the designated USO provider, is to provide a service or services which meet those obligations. What service(s) RM offers should be the decision of RM. But any services offered by RM which had the features required by the USO would then be USO services. From the perspective UKM suggests, the USO is not defined by listing certain existing RM services which RM is therefore obligated to continue to provide. Rather, RM decides how it will meet its universal service obligation and any services it provides to meet that obligation are therefore USO services. UKM notes that neither in the Directive nor the Act is the USO defined as having to include any specific speed of service (never mind two different speeds of service), or any particular payment mechanism(s). The Act does not require Postcomm to specify any particular services be provided by the designated provider, it only requires that Postcomm will ensure the universal service is provided. Indeed, it seems to UKM that the Act does not give Postcomm the ability to tell RM what services it must provide to meet the USO. Postcomm says: Parliament has delegated to the regulator the task of identifying which specific services must be provided to meet the minimum requirements of the universal service. [2.9] But UKM cannot see where that delegation is stated in the Postal Services Act UK Mail Response to Postcomm Consultation May 2011 Page 5

6 Postcomm also says: The Postal Services Bill anticipates that Ofcom will also be required to set out a description of the services which should be provided as universal postal services [2.9] While UKM recognises that that the Bill says and OFCOM must by order (a universal postal service order ) set out a description of the services that they consider should be provided in the United Kingdom as a universal postal service [S29(1)(a)]; A universal postal service must, as a minimum, include each of the services set out in section 30 [S29(2)], section 30 only sets out features for the services which must be provided to meet the universal service (as summarised above). It remains the case that RM should decide how it will meet its universal service obligation and any services is provides to meet that obligation would then be USO services. In practice, this approach could operate by RM submitting to Ofcom a list of the services it considered to be USO services and for Of com to consider (including through public consultation) whether the USO had been met and whether all the services listed by RM were USO services. Hence, from the perspective set out here by UKM, this consultation has a false premise. Postcomm should not be consulting on whether certain services should be excluded from or included in the USO. Any services which RM provides that have the characteristics of the USO are USO services. Any services which RM provides that do not have the characteristics of the USO are not USO series. The questions asked by Postcomm in the Consultation have been answered below adopting this (perhaps controversial or unusual) perspective. 2. Bulk Mail Q1: Do you agree that references to bulk mail, and specifically Cleanmail and Mailsort 1400 (First and Second class), should be removed from Condition 2 of Royal Mail s licence and therefore from the universal service? Please explain your reasons to support or oppose the removal of bulk products from the universal service. These services do not meet the requirements of the USO, in that they cannot be posted from each of the access points provided by RM. Therefore they are not USO services. UKM generally agrees with the rationale put forward by Postcomm in the Consultation for bulk mail services to be removed from the USO and notes: Our research into the needs of bulk mail users from the universal service shows that they prioritise the importance of low-price bulk products, but that they place less value on the key features of the universal service, in particular accepting the concept of zonal pricing. [S.11] UK Mail Response to Postcomm Consultation May 2011 Page 6

7 We also consider that it is unlikely that Royal Mail would stop providing bulk products, or indeed the current universal services on a universal basis, as long as there is demand for these products. [S.12] The research implies that these universal service users do not require bulk products to be part of the universal service [3.14] We consider that bulk products would continue to be provided regardless of whether or not they are in the universal service because the revenues generated from the provision of bulk products are above the incremental costs avoided by not providing the products concerned, and the associated contributions are therefore critical to the financial viability of Royal Mail in its current configuration. [3.17] evidence from Frontier s report suggests strongly that Royal Mail would continue to provide bulk mail on a universal basis, as long as Royal Mail retains an obligation to deliver mail in all areas [3.24] However, please see concern raised below (in section 4) about the VAT consequences of removing baulk mail services from the USO. 3. Single Piece Products Q2: Do you agree that stamps, meter and PPI are payment channels in relation to single piece items and therefore ought to be treated in the same way in terms of their universal service status? UKM agrees that stamped, meter franking and PPI are all payment channels. They are not themselves services and can all be used as the means to show payment for a wide range of RM services, including bulk mail services as well as single item services. However, Postcomm seems to show inconsistency in this distinction as it sates: and the meter channel crosses the Y2X and B2X market boundary as defined by our analysis of the packet and parcel services markets. [4.7]; In our November document, we proposed that where a product crosses the boundary between the Y2X and B2X markets, it should attract the regulatory safeguards reflecting Royal Mail s market power in the Y2X market [4.7] It is unclear to UKM how a payment channel be considered to cross the boundary between product markets. Considering payment channels in terms of the features required by the USO, PPI paid items do not comply in that they cannot be posted from the access points provided by RM (they can only be posted where there is a RM collection from the premises of the contract holder). Therefore they do not have USO status. Also, although Postcomm states: The PPI is an indication on the envelope that the postage has been paid and can be used by customers with an account with Royal Mail [4.2], UK Mail Response to Postcomm Consultation May 2011 Page 7

8 UKM s understanding is that PPI can only be used by customers with an account with RM. A service paid for using PPI cannot then be a USO service as it is not available universally to all postal users. Postcomm does recognise that: access to PPI is dependent on a minimum annual spend [4.8, 2 nd bullet], which means there is a restriction on its use as a payment channel and so a service when paid for by PPI cannot be a USO service. And PPI paid items cannot be posted in a street posting box, so they do not comply with the collection from each access point requirement of the USO. Similarly, meter paid items do not comply with the requirements of the USO, in that they cannot be posted from each of the access points provided by RM on six days per week. Therefore they do not have USO status. Conversely, stamp paid single piece service items can be posted from each access point provided by RM on six days a week and so such items do have USO status. Note: UKM believes that while this Consultation was still underway, RMR has moved to change the terms for meter-paid services such that they may meet the USO requirements in respect of collection 6 days per week. However, this is reliant on an exemption granted by Postcomm in respect of Saturday collections from business posting boxes. If this obfuscation is allowed by Postcomm to permit meter-paid services to remain in the USO it establishes a highly questionable position where meter-paid services are in the USO only because of an exemption that they do not have to meet the USO collection requirement. Q3: Do you agree with our proposed definition of single piece mail? If not, can you suggest an alternative? This definition is only needed to allow Postcomm s view that single piece mail is within the USO regardless of what payment channel is used and the definition has been constructed with that purpose. Given that PPI and meter paid items cannot be within the USO as they do not comply with the requirements of the USO, the definition would seem unnecessary. The key test for a service to be a USO service is not whether the items being sent are single piece or not and what payment channel has been used but only what service features RM provides in relation to that mail. Q4: Do you agree that we should therefore modify Royal Mail s licence to include PPI First and Second class single piece mail in Condition 2? See above. Q5: Do you agree that First and Second class single piece PPI mail should be subject to the same quality of service targets as stamped and metered mail and that we should modify Condition 4 accordingly? The present position where different service targets apply to the same service just because of different payment channels is clearly inconsistent and should be addressed. UK Mail Response to Postcomm Consultation May 2011 Page 8

9 4. Regulatory controls and VAT In this part of the Consultation, Postcomm seems concerned that unless PPI-paid (and Meter-paid and stamp-paid items) are defined as being within the USO then (following enactment of the Postal Services Bill) Ofcom will not be able to apply controls such as price and quality of service. UKM is not sure that interpretation of the Bill must be so constraining as it provides for more general Ofcom powers, given the definition of Services within the scope of the universal postal service in clause 35 and other clauses such as clauses 49 and 50. While it may be only USO services (and access services) that can be price controlled by Ofcom, such deregulation is already being consulted on by Postcomm in its Initial proposals on regulatory safeguards document. The approach to USO services suggested here by UKM would also obviate the need for uncertain, perverse or complex VAT liability in relation to payment channels. As only stamp-paid items comply with the USO requirements and hence payment by stamp is necessary (but not sufficient) for a service to be a USO service, only stamp-paid services can be VAT exempt. However, while UKM believes that it would be right from regulatory principles and to establish equality in a competitive market for all RM bulk mail services to become VATed, such a change would undoubtedly be a further, major price shock to a market already severely impacted by the extreme RM retail and access price increases of May In a market where some 50% of all bulk mail is sent by mailers who are not VAT registered (largely financial services companies and charities), the imposition of 20% VAT would be a significant unrecoverable price increase. For charities, whose mail is generally marketing rather than transactional, the now higher savings for Advertising Mail have offered some mitigation of the sharp increase in headline prices but imposition of 20% VAT would be very likely to result in a straightforward 20% reduction in mailing volumes. For financial services companies with high proportions of transactional mail, and so no ability to achieve Advertising Mail savings, the May 2011 price increases have already greatly accelerated switching from mail to electronic communications. A further 20% increase in mail costs would be likely to ensure a yet quicker and precipitous fall in mail volumes. Hence UKM is very concerned that equalisation in VAT treatment between RMR bulk mail services and those of other operators will have a highly detrimental impact on the overall mail market more quickly than the facilitation of competition can have a positive impact. UKM strongly believes Postcomm/Ofcom must consider this impact very carefully before proceeding to remove all bulk mail services from the USO. 5. Support Services Q6: Do you agree that we should modify Royal Mail s licence to clarify that Recorded Signed For, Redirections (up to 12 months), Keepsafe, Poste Restante, Certificate of Posting, and/ or Business Collections should be provided as universal service products? UK Mail Response to Postcomm Consultation May 2011 Page 9

10 The same test should apply in considering whether these services are USO services - does RM offer them such that provision of the service complies with all the requirements of the USO? From that perspective, it seems to UKM (based on limited understanding) that Recorded Signed For, Keepsafe, Poste Restante and Certificate of Posting are each available for stamp-paid standard 1 st or 2 nd Class service items and so is each is a USO service when used in conjunction with such items. The Business Collections service however cannot be a USO service as it is not concerned with the USO requirement for daily collections from the access points provided by RM (and the specific terms required for having a Business Collection contract with RM mean that it is not available to all types of postal users, for example the requirement to pay by direct debit or by having an account with RM) contract. Q7: Do you agree that the quality of service for single piece items that are sent via Recorded Signed For, Redirections (up to 12 months), Keepsafe, and Poste Restante, and the quality of service for Business Collections is already driven by Royal Mail s existing quality of service targets for First and Second class mail and collection points? Do you agree that there should be no additional quality of services targets specific to these services? Do you agree that the target for Certificate of Posting should be that all customers requesting a Certificate of Posting receive one? Recorded Signed For, Redirections, Keepsafe and Poste Restante are all additional services to the standard collection & delivery service(s). Hence it is logical that they should be subject to the same service target as appropriate. The Business Collections service is not concerned with collections that are part of the USO and do not otherwise relate to the collection or delivery of mail and so should not be covered by the same service targets. Certificate of Posting is related to the standard service(s) and as RM s compensation scheme often requires proof of posting it must remain the case that a Certificate of Posting is provided whenever one is requested. UK Mail Response to Postcomm Consultation May 2011 Page 10

11 B) ANALYSIS OF MARKETS 1. Summary UKM believes that Postcomm has undertaken a thorough, comprehensive and well-founded analysis of the postal market sectors. In particular UKM notes and supports Postcomm s conclusions that: and mail fulfils two purposes that are hard to replicate: physical delivery and contacting named individuals. While mail is losing volume to non-postal alternatives, our analysis suggests that this is primarily due to non-price rather than price reasons these non-postal alternatives only exert a limited competitive constraint on the price of retail mail services. [S.8]; Our findings are consistent with Royal Mail s estimate that the overall price elasticity of mail is around We recognise that Royal Mail s average 15% price increase for business mail and access services may bring forward some switching away from post, increasing the price elasticity of mail in the medium term. However, the true long-run price elasticity would need to be around four times Royal Mail s estimates for us to conclude that the relevant market was wider than post [S.10] 2. Retail Market Study UKM broadly agrees with Postcomm s main findings, and so has not responded here to each of the consultation questions, but makes some challenges or observations as set out below. 2.1 Customer application price elasticities: For each of the five mail applications considered, Postcomm has assessed the price elasticity and considered whether RM s estimate of the elasticity is supported by Postcomm s findings. In each case, Postcomm s view is that the RM estimate is correct and the Consultation gives those elasticities for Transactional, Advertising and Social applications but not for Publication or for Fulfilment. What is the justification for redacting the price elasticities for those applications? 2.2 Level of sortation: Q7. Do you agree that the costs of pre-sorting mail are relatively low? Postcomm s conclusion here seems based on an assumption that pre-sorting of mail by the posting customer is typically done by sorting the mail file address data and that is typically done by an external mailing house, and so is too general. There are several large pre-sorted mailers who continue to use in-house production facilities which sort mail mechanically after production. For such mailers, the costs of pre-sorting can be significant, when considering the recovery of investment costs and on-going maintenance/development costs. The investment costs of switching from mechanical to data sorting are also significant and so serve as a barrier to change of sortation method. UK Mail Response to Postcomm Consultation May 2011 Page 11

12 2.3 Speed of mail: Q9. Do you agree that there is sufficient demand side substitution between D+ 2 and later than D+ 2 postal services for them to be included in the same market? Postcomm says: We accept that competitors to Royal Mail who use D+ 1 parcel networks for D+ 2 mail, would not be able to readily switch to proving a D+ 2 or later service. However, as UK Mail recognised, many of the more recent entrants into the mail market are not D+ 1 parcel operators and so could provide D+ 2 and later services in the way we suggested (i.e. in a similar way to how Royal Mail provides D+ 2 and later services). [2.236] However, this seems to consider the number of mail operators that have recently entered the market who are not D+ 1 parcel operators when most (if not all) of those entrants have comparatively very low mail volumes. When mail volume is considered, a very high proportion of mail is carried by operators who are also D+ 1 parcel operators. This would suggest that there is more of a market distinction between D+ 1 and D+ 2+ than Postcomm believes. Postcomm also says: our demand side analysis suggests that there has been considerable substitution between D+ 2 and later than D+ 2 mail services, and, that in practice, operators have been able to compete successfully for Mailsort 3 services from their existing D+ 2 services without needing to offer a later than D+ 2 service [2.236] This concludes that D+ 2 and later than D+ 2 services are in the same market because operators have been able to compete for Mailsort 3 (i.e. D+ 4 to D+ 6) without having to offer later than D+ 2 services. But it seems largely to ignore the market reality that operators have been able to compete for Mailsort 3 not on price or on speed of service but on other features (such as management information). UKM believes that there is more distinction between D+ 2 and later than D+ 2 than Postcomm concludes. 2.4 Response services: Q22. Do you agree with our initial assessment that Royal Mail has market power for response services? Yes, UKM strongly agrees with Postcomm s conclusion that: the relevant market is for postal response services and as the only provider, Royal Mail has market power [3.20]; and the rationale given in paragraphs This conclusion must have important implications for Postcomm s consultation on Access and how Postcomm (and Ofcom) apply the test set out in the Postal Services Bill for what forms of access should be mandatory for RM to offer. UK Mail Response to Postcomm Consultation May 2011 Page 12

13 In the Access Review consultation, Postcomm has not considered the application of the Postal Services Bill tests to extraction of mail at Outward Mail Centres. Yet the most practical point in the mail network for access to occur such that competing response services could be offered is at the Outward Mail Centre for extraction of response items. Given that Postcomm has (rightly) concluded that RM has market power in response services, UKM strongly believes that the Postal Services Bill tests are met in respect of extraction of mail at Outward Mail Centres and so such access must be mandatory. 2.5 Redirections data: Q32. Do you consider that there are alternative data sources that can be used to maintain up-to-date customer address databases? Q33. Do you have any evidence that indicates that there are competitive constraints acting on Royal Mail s redirections data service? UKM strongly supports Postcomm s assessment set out in paragraphs 3.43 & 3.44 and the conclusion that: there is a market for redirections data and that as the only provider, Royal Mail has market power [3.45] It is clear to UKM that RM derives significant commercial benefit from exploitation of this unique asset, which is holds as a result of its extreme market power in this area. Postcomm outlines in paragraphs 3.41 & 3.42 how RM sells this redirections data but no revenue or profit figures are provided. It is UKM s understanding that RM s commercial activities relating to redirections data are part of the Address Management Unit (AMU), whose other principle activity is the commercial management of the Postcode Address File (PAF). Postcomm has, through the RM Licence and other regulatory decisions, established a regulatory framework that ensures PAF data is made available to other users, including other businesses who add value to and re-sell the data. In particular, the RM Licence requires RM to: furnish a copy of the File to any person who may request it upon payment of a reasonable charge [C22.1.(b)] Given that RM: Has very similar market dominance in redirections data as it does in PAF data; Treats both assets as commercially exploitable; Earns significant revenue and profit from exploiting these two unique assets that result from market dominance; and Manages both sets of data and their commercial exploitation in the same business unit UKM strongly believes there is clear and reasonable justification for Postcomm/Ofcom to require RM to meet the same obligations on redirections data and PAF data. This approach is also fully consistent with (indeed, is required by) Article 11a of the EU 3rd Postal Directive, which states: UK Mail Response to Postcomm Consultation May 2011 Page 13

14 Whenever necessary to protect the interest of users and/or to promote effective competition, and in the light of national conditions, Member States shall ensure that transparent and nondiscriminatory access conditions are available to the following elements of postal infrastructure or services: postcode system, address database, post office boxes, collection and delivery boxes, information on change of address, redirection service, return to sender service. UK Mail Response to Postcomm Consultation May 2011 Page 14

15 C) ACCESS REVIEW 1. Background UKM agrees with the reasons Postcomm states in paragraph 2.3 as to why access competition provides both direct and indirect benefits for the market and the universal service [2.3]; and notes in particular that such competition is beneficial to the universal service, as stated further by Postcomm: There is clear evidence that access operators have been competing primarily on price but that bulk customers have benefited from an improved overall customer experience in addition to lower prices. These lower prices are, in our view, likely to have helped maintain bulk mail volumes in comparison with faster declines in other mail segments in recent years, and to have deterred customers from investing in technology enabling switching to alternative media. Our analysis indicates that Royal Mail also retains over 80% of the revenue from these services, helping to sustain the universal service. [ ] Postcomm also refers, in paragraph 2.5, to three reasons given by RM why the access regime is bad for the universal service; UKM strongly disagrees with all three reasons: 1) The price of access is too low, meaning RM loses money on access mail In making this assertion, RM seems conveniently to forget that it willingly agreed the initial access prices in 2004, through commercial negotiation, and Postcomm at that time stated it believed the price should have been lower. RM has since been able to increase access prices by at least as much as it has been able to increase its other bulk mail prices. RM has failed to achieve the efficiency improvements which it itself believed it could make. In evidence to the Public Committee on the Postal Services Bill, Tim Brown (Postcomm CEO) stated: access prices have gone up by 14%, yet now it loses 2½p per letter, Royal Mail claim. Our first issue would be one of the reasons for that: the inefficiency or the failure to modernise over the last five years is worth more than 2½p per letter. So if they had been efficient, access would not be unprofitable That is, if access has been unprofitable for RM, it is RM s fault On 9 th May 2011, access prices increased by an average of about 17%, an increase of typically about 3p on standard access services. If access had been unprofitable for RM it is now profitable. 2) Access regulation provides a competitive advantage to other operators No, access regulation prevents anti-competitive abuse by RM of its monopoly in downstream services by controlling access prices and safeguarding against margin-squeeze by RM. Access regulation seeks to safeguard against RM subsidising its bulk mail services (for which competition has been increasing) from its downstream services (where RM has a near 100% monopoly). If other operators have a competitive advantage, that is only in upstream services and only because of greater efficiency and better service. UK Mail Response to Postcomm Consultation May 2011 Page 15

16 3) Access introduces inefficiencies for RM s fully integrated network RM s network is not fully integrated ; RM operates separate networks for parcels, bulk presorted mail and other mail RM agreed the access requirements through commercial negotiation, as being necessary for it to accept access mail and so to mange any inefficiencies as it chose to Any such inefficiencies are allowed for in the access price (if not, RM would not have agreed the initial access price) The opposite is true; RM has imposed inefficiencies on its access customers by requiring of them procedures which it does not require of itself It seems to UKM that RM objects to providing access, seeks to make access more costly and more difficult where it can and uses access as an excuse for its own failings. This anti-access attitude has become increasingly clear from the persistent comments of its most senior executives, some of which seem to condone (if not perhaps even to encourage) the adoption of such an attitude systemically within RM. For example, in the February issue of RM s newsletter Courier, CEO Moya Greene said: I know some of you resent delivering items for our competitors. In the face of RM s continuing downstream monopoly, leverage of that dominance into the market for bulk mail series and unwillingness to treat access as other than a nuisance, Postcomm/Ofcom must continue to mandate and regulate downstream access. 2. Development of access competition In paragraphs 3.8 and 3.9, Postcomm comments on the difficulties of the current process of negotiating new access services with RMW. UKM agrees with these and would add that the process of formally requesting a new type of access service can also be difficult as the request proforma issued by RMW assumes that the new access will be of the same type as existing access (e.g. inward access at IMCs) and uses terms based on RM s existing service parameters (e.g. level of sortation). This can deter requests for more innovative types of access. In paragraph 3.21, Postcomm considers that the current, wide obligation on RM to provide access to postal facilities used in providing the universal service might in the future carry risks for Royal Mail. However, RMW has often interpreted this obligation to mean it is mandated to negotiate access only for services that would be equivalent to retail USO services, so that if the retail service is not a USO service then there is no obligation to negotiate even if the facilities concerned are still used in provision of the universal service. This focus on the service specification rather than the facilities used has led to past refusals to negotiate on access to RM s item tracking systems, for example. Postcomm refers in this paragraph to its view that regulation should be focussed where Royal Mail has market power but UKM is concerned that this might not sufficiently recognise parts of the market (e.g. upstream bulk activities) where RM is able to leverage dominance from a related area (e.g. downstream sortation and delivery). UK Mail Response to Postcomm Consultation May 2011 Page 16

17 Postcomm also refers to the absence of a clear basis upon which Royal Mail is entitled to refuse a request ; this concern must now be removed by the clearer and more stringent tests for mandatory access set out in the Postal Services Bill. In paragraph 3.22, Postcomm suggests that while there are standardised forms of access in can be difficult in practice for RMW to vary access contracts because it seeks the agreement of all access customers collectively. UKM believes this may, at least in part, be because RMW has chosen to use specific but common bi-lateral contracts (rather than an Access Code) but then seeks to apply across the board variations. In practice, RMW has in many cases not followed the actual variation requirements of each access contract (which would mean a formal variation signed by both parties in each case) and has instead sought to make a unilateral blanket variation by writing to all contract holders with an assumption of agreement. UKM notes that in paragraph 3.24, Postcomm opens up the possibility of individual negotiation of access contracts. If such practice was permitted, Postcomm/Ofcom would have to very carefully and effectively ensure that it was: provided on a non-discriminatory basis and to do so would not conflict with the fulfilment of the primary universal service duty, balanced against the benefits of transparency and simplicity of terms and conditions, including price, in enforcing other regulatory measures, for example, equivalence and price regulation [3.24] If there is to be any such scope for differentiation, it must only be with public or (at the very least) regulatory oversight. Postcomm draws together its view of the development of access competition by setting out, in paragraphs , its vision for the future of access. UKM agrees with the key elements of this vision, and sees as a crucial issue: the difficulties of maintaining incentives for Royal Mail Wholesale to negotiate commercially as other operators have no choice of operator [3.33] 3. Access in practice 3.1 Obligation on RM to offer access In this section, Postcomm considers the provisions in the Postal Services Bill which set the tests Ofcom will apply in considering where access should be mandated. These tests, often given the labels of The Triple Lock (S37(4)) and The Five-bar Gate (S37(8)), shift the balance of the legislative assumption firmly against access; as Postcomm states: Fundamentally, the application of these criteria has the effect of narrowing the scope of access to Royal Mail. [4.13] Postcomm comments that, for access seekers: the lack of a USP access condition would be no bar to them negotiating access to that point of the network with Royal Mail [4.15] UK Mail Response to Postcomm Consultation May 2011 Page 17

18 But it has already been UKM s experience that RMW has no interest in negotiating new access services unless it is mandated to. RMW has recently and unilaterally ceased to work with UKM on a new access service precisely on the grounds that such access may not be mandatory in the future even though under existing legislation and RM s current licence it is required to negotiate and doing so is likely to be commercially attractive to RMW. UKM believes such intransigent (and perhaps irrational) unwillingness to negotiate is a portent of a future in which RMW will never negotiate unless it has to. Q1 Can you provide us with examples of efficiencies that have been, or might in the future be, achieved either by Royal Mail or postal operators as a result of the access agreements already in place which allow participation in these relevant retail markets? Q2 Do you agree with Postcomm s provisional assessment that the access regime is an appropriate way to encourage the development of effective competition in these relevant markets? Q3 Can you identify examples of other benefits that users of postal services have, or that might in the future be achieved as a result of the access agreements already in place? Q4 Do you have any evidence suggesting that obliging Royal Mail to offer access in this market might not be appropriate for the purposes of promoting efficiency and effective competition and in order to secure significant benefits for users, including by reference to the regulators primary duty? UKM has provided much information to Postcomm on its experience as an access operator, though its response to the Postcomm consultations of 2010, though meetings with Postcomm and through confidential information submitted to Postcomm. As part of this, UKM has demonstrated how its improving operational efficiency has allowed it to reduce price to customers (excluding the RMW access charge) and improve service performance. UKM s view is that the access regime established by Postcomm has Been appropriate, generally encouraging effective competition and operator efficiency Brought considerable price and non-price benefits to postal users Encouraged innovation and new service development. Given RM s continuing all but absolute monopoly in final delivery of standard postal items, UKM can see no reason for or evidence to justify not obliging RM to offer access in the future. 3.2 Appropriate point of access Q5 Do you agree with the points made above in relation to access at the IMC? Q6 Do you have any additional evidence on the application of the factors listed above that would be relevant to consideration of access to Royal Mail s network at the IMC (or any other point)? Q7 In particular, with the passage of time, do you consider that access at the Delivery Office would be appropriate by reference to the five factors set out in the Bill? For example, what level of investment is Royal Mail likely to be required to make, and/or what impact could this have on investment already undertaken? UKM agrees with much of Postcomm s assessment of access at Inward mail Centre (IMC) outlined in paragraphs UK Mail Response to Postcomm Consultation May 2011 Page 18

19 However, in paragraph , Postcomm seems to reject the appropriateness of access to Delivery Offices (DOs) when UKM would argue that Postcomm takes too general view of such access. While DOs are typically smaller than IMCs, several DOs are co-located with IMCs and others are sufficiently large to be able to accommodate an accessor. Hence access to some, but not all DOs, may well be feasible and advantageous for both an accessor and RM. Such access should not be dismissed on the basis that it could not occur at all Dos. Indeed such access might encourage the development of local / regional competition. In paragraph 4.47, Postcomm suggests that RM s investment in walk sequencing machines at DOs and Mail Preparation Units (MPUs) also means that downstream access should in future only be at IMCs. This seems to ignore the opportunity for accessors (either other operators or originating mailers) to sort mail to the level of input to the walk sequencing machines and access RM s network at the location of those machines (at DOs, MPUs or IMCs). Where walk sequencing machines are not located at IMCs, the IMC must do some preparation of mail such that it is ready for input into the specific walk sequencing machine and such work could be done by an accessor. Where the walk sequencing is done at the IMC, UKM believes it is typically the case that more than one pass is required to take mail from IMC level to fully walk sequenced. Again such initial pass could be done by an accessor prior to handover of the mail to RM. It may be that part of the strategy behind RM s installation of walk sequencing machines is to create reason why access can in future only be at IMC and only for mail pre-sorted to that IMC (and no more). Postcomm s comments in these paragraphs seem to suggest it is accepting this RM positioning, without any fuller investigation or consultation with potential accessors. Also, in paragraph 4.50, Postcomm considers access at Outward Mail Centres (OMCs) only in terms of access into RM s network at that point, rather than access that might extract items at that point. Postcomm also seems to consider access at OMCs / RDCs only in light of existing access business models. A future form of postal competition might be based on collection of mail from posting or acceptance points in a local or regional area by an operator who did not have or wish to invest in the transport capability to then take that mail to IMCs and so wished to access the RM network at one or more of the OMCs / RDCs in the area from which it collected mail. If RM were required to give access only at IMCs, that would foreclose the development of such operational models. UKM strongly supports Postcomm s conclusions in paragraphs that: access to the IMC should not adversely impact on the financial sustainability and efficiency of the universal service [4.59] Q8 What are your views about the extent to which the preliminary assessment outlined in relation to access for the purposes of providing D+ 2 and later than D+ 2 services would apply to access for the purposes of providing packets and parcels services? UKM can see no reason consideration of access of this type for packet and parcels services (PPS) should be any different in that for Letters / Large Letters. Indeed, in 2010 UKM negotiated with RMW and no successfully operates an access agreement specifically for PPS items (up to 5kg). UK Mail Response to Postcomm Consultation May 2011 Page 19

20 Q9 Do you agree that it would be appropriate to require access to be given to Royal Mail s postal network in order to enable participation in the D+ 1 retail markets for letters and large letters on the same basis as set out above by reference to the three criteria in Clause 37(4) in relation to access for participation in the D+ 2 and later than D+ 2 retail markets? Q10 If not, what additional or different factors or considerations do you believe apply or should apply? Yes, UKM agrees that such access should be required to be given. Assessment of the tests required by the Postal Services Bill give the same conclusion for D+ 1 access as for D+ 2+ access. Q11 Do you consider that it would be feasible to require access to Royal Mail s upstream network at the point of the outward RDC or the OMC? Would this require significant investment by Royal Mail? UKM believes this would readily feasible and has commented on this potential use of such access point in responding to Q5-7 above. It should be quite straightforward for RM to adopt at its OMCs and RDCs similar procedures to those already developed and implemented at IMCs for access mail (indeed, OMCs and IMCs are physically the same facilities). Q12 What would be the impact of instead requiring Royal Mail to provide later slots for access at the IMC for the purposes of D+ 1 services? Q13 Would improved slot allocation at the IMC be likely to increase the scale of entry by access operators into the D+ 1 markets? Q14 Is there a risk that requiring Royal Mail to offer later slots at the IMC would have an adverse impact on its own ability to provide a D+ 1 service or otherwise on the efficient provision or the financial sustainability of the universal service? UKM agrees with Postcomm s assessment outlined in paragraphs and as UKM was the first operator to negotiate a contract with RMW for D+ 1 access, it can offer a comment on the timing of access slots for D+ 1 access. Postcomm says: access operators might have a greater incentive to invest in D+ 1 upstream activities if it were not for the fact that access users are given earlier access slots for injecting mail at the IMC for final sortation and delivery compared to Royal Mail s own retail business [4.72]; However, this is only the case because RMW would not offer later access slots as it would not consider allowing access mail to arrive at its IMC at the same time as its own D+ 1 service mail. UKM believes that RMW should revise this stance as it would be easily feasible to put into practice at IMCs procedures that allowed arrival of D+ 1 access mail later than now. UKM cannot see why such access should be detrimental to RM s own D+ 1 services or provision of the USO, when D+ 2+ access mail is accepted now at IMCs at times which overlap with the arrival of RM s own D+ 2+ services (as shown by Table 3 at paragraph 6.12) and this is managed by using, for example, allocated docks and revenue protection staff for access mail and for retail mail. RMW is currently working with accessors to implement Segregation By Format, which by adopting a new basis for segregating mail types on arrival at the IMC and by requiring automatic acceptance of revenue protection surcharges, eases the flow of mail from arrival to processing UK Mail Response to Postcomm Consultation May 2011 Page 20