The Swedish Postal Services Market 2015

Report number PTS-ER-2015:3 Date 15/04/2015 The Swedish Postal Services Market 2015

The Swedish Postal Services Market 2015 The postal services market in Sweden Report number PTS-ER-2015:3 Reference number 15-635 ISSN 1650-9862 Authors Olof Bjurö, Lars Forslund, Anders Hildingsson, Joakim Levin, Pär Lindberg, Emma Maraschin and Gabriel Rhawi The Swedish Post and Telecom Authority Box 5398 102 49 Stockholm +46 (0)8-678 55 00 pts@pts.se www.pts.se 2

Foreword In its Terms of Reference for 2015, the Swedish Post and Telecom Authority was assigned to follow-up and analyse the postal market and postal services with the following information: - developments in the postal services market, - the competition situation in various sub-markets within the postal services sector, - barriers to market entry and effective competition, - price trends in the postal services market and how the regulation of prices contained in Section 9 of the Postal Services Ordinance (2010:1049) has been complied with, - how the stipulations of Chapter 3, Section 2 of the Postal Services Act (2010:1045) for pricing and other special terms to be transparent, nondiscriminatory and cost-oriented have been complied with by the designated provider of the universal postal service, as well as - whether the density of the service points covered by the universal postal service takes account of the needs of users in all parts of the country. The Swedish Post and Telecom Authority shall also report: - the nature and extent of complaints that the general public has presented to postal operators and to the authority, as well as - any changes in the service level of services included in the universal postal service. The assignment is presented in this report The Swedish Postal Services Market 2015 1. Göran Marby Director-General 1 It corresponds to previous years' reports, Service and Competition 3

Contents Foreword 3 Summary 7 1 Current trends and events in the postal sector 9 1.1 Background 9 1.2 Current trends and events - internationally 9 1.2.1 The universal postal service is being re-evaluated 9 1.2.2 A lack of regulatory adaptation 10 1.2.3 Focus on the work of the regulators organisation, the ERGP 14 1.3 Current trends and events national 15 1.3.1 E-commerce focus on the last mile 15 1.3.2 Increased need to coordinate distribution networks 17 1.3.3 The growing importance of the market for post-related services 17 1.3.4 Digital mailboxes and My messages 19 2 Developments in the Swedish postal services market 20 2.1 Development of volumes and market shares in the letter market 20 2.2 The competition situation in various parts of the letter market 24 2.2.1 Bulk mail 25 2.2.2 Single letters 27 2.3 Barriers to market entry 28 2.3.1 Bulk mail sent overnight 29 2.3.2 Bulk mail not sent overnight 30 2.3.3 Market for the nationwide distribution of single letters 30 2.3.4 Market for the local conveyance of single letters 31 2.4 The parcel market and e-commerce 31 2.4.1 E-commerce in Sweden 31 2.4.2 The Swedish parcel market 32 3 Pricing in the postal services market 34 3.1 Price developments in the postal services market 34 3.1.1 Price development of postage for single letter consignments 34 3.1.2 Price development of postage for bulk mail 35 3.2 Regulation of prices in Section 9 of the Postal Services Ordinance 37 3.3 Compliance with Chapter 3, Section 2 of the Postal Services Act 37 3.3.1 PostNord's new pricing model 2014/2015 38 3.3.2 Legislation work - Chapter 3, Section 2 of the Postal Services Act 38 3.4 Conclusions from PTS's review of PostNord's post-costing estimate for 2013 40 3.4.1 Mail & Communication - letter services 40 3.4.2 Logistics - parcel services 41 3.5 Value for money letters and packages 41 4 Complaints from the general public 44 4.1 Complaints received by PTS 44 4.2 PostNord's reporting of complaints 44 4.2.1 PostNord's trend in complaints 2011-2014 45 4

4.3 Complaints - Bring Citymail 47 5 Service and accessibility 49 5.1 The population's use of postal services 49 5.2 PostNord's service network 49 5.2.1 Postal outlets and stamp agents 50 5.2.2 Business centres 50 5.3 Collaboration with regional actors on postal services in sparsely populated areas 50 5.3.1 Lidsjöberg, Strömsund Municipality 52 5.3.2 System support for the monitoring of accessibility and changes 52 5.4 Supervision and monitoring of the quality of mail delivery 53 5.4.1 Modified delivery procedures within PostNord 54 5.4.2 Distribution issues that concern other postal operators 55 5.4.3 Residential customers without five day deliveries 55 5.4.4 Delivery times 56 5.4.5 Introduction of communal letterboxes 57 5.4.6 Undeliverable letters 57 5.5 Risk and vulnerability analysis of the postal services sector 58 Concluding remarks 61 Appendix 1: PostNord's report of the number of complaints 62 regarding letters and parcels, 2014 62 5

Tables Table 1: Trend in the total letter market... 21 Table 2: Distributed volumes as well as market shares of distributed and collected volume respectively.... 23 Table 3: Market shares (turnover)... 24 Table 4: Parcel services... 32 Diagrams Figure 1: Trend in the total letter market... 22 Figure 2: Diagram of the letter market... 25 Figure 3: Postage development, first class stamp... 34 Figure 4: Price development bulk mail 20 grammes... 36 Figure 5: Consumer prices in SEK (incl. VAT), domestic first class letters... 42 Figure 6: Consumer prices in SEK (incl. VAT), domestic first class postal packages... 43 Figure 7: Complaints, Domestic letters... 45 Figure 8: Complaints, International letters... 46 Figure 9: Complaints, Domestic postal parcels... 46 Figure 10: Complaints, International postal parcels... 47 Figure 11: Undeliverable letters and the total amount of letters... 58 6

Summary The first chapter of this report describes Current trends and events in the postal sector. The international section presents the changes in market conditions that may result from current rulings of the European Court of Justice, both in regard to the opportunities to consolidate letters and the risk that some parts of the universal postal service may become exempted from VAT and the lack of legal adaptation that this entails. The lack of legal adaptation at the EU level is also addressed in view of developments regarding the preparation of a new Postal Directive and the European Commission's ambitions in the field of e-commerce. The national section focuses on different aspects of the increasing shift from physical to electronic communications in combination with the rapid growth of e-commerce. This chapter also deals with the involvement of PTS in international organisations in the postal field. Chapter 2 deals with Developments in the Swedish postal services market. To begin with, the developments concerning letter volumes and market shares are explained in more detail. Certain concepts important to providing a correct description of the competitive situation in different parts of the postal services market are then specified. The competitive situation in different sub-markets for letters is analysed, as are the different conditions for establishing oneself in these markets. A special section is devoted to the parcel market and e- commerce. Chapter 3 focuses on Pricing in the postal services market. The chapter begins with a description of the pricing developments on the postal services market and the importance of competition to keep prices down, especially with regard to large volumes of letters and parcels. Here the pricing regulations that still exist on the letter market are also covered along with the measures enacted by PTS in order for the regulation to have its intended effect. This includes a description of the conditions for the legislation work concerning PostNord's pricing that began during 2014. In a final section, the opinions of the public concerning the value for money of certain letter and parcel services are presented. Complaints from the general public are addressed in Chapter 4, both those received by PTS and those submitted to the PostNord and the other postal operators. It is partly a question of making clear what the essential nature of these complaints are in addition to a presentation, presented in a separate appendix, of the official complaint statistics that Sweden is obligated to present to the EU in accordance with a certain standard. 7

The report's fifth and final chapter deals with Service and accessibility of PostNord's services. Herein is described PostNord's service network and how this may be developed with regard to the changes that may result from PostNord's ongoing agent procurement. Here it is also expounded on that public opinion of the service in PostNord's service network is positive overall. A separate section covers changes in PostNord's service to sparsely populated areas and the development of coordination with other types of service, which is viewed as an opportunity to maintain this service at an acceptable level. Finally, the results of the risk and vulnerability analysis of the postal services sector carried out in 2014 are described. 8

1 Current trends and events in the postal sector 1.1 Background The entire postal industry is currently undergoing a seismic structural change. Never before have developments been so fast and so pervasive. Nor are there any indications that this trend is about to slow down. On the contrary, it is likely to represent a default state which will persist a long time to come. The trends and events that have been highlighted make no claim to be comprehensive, but mainly serve to highlight certain issues that in some way have been topical during the year or have been assessed as particularly important to discuss. However, it is clear that there are some key areas that, in different forms, are likely to be relevant in the coming years: Digitalisation and its implications for the postal services market the physical communication's role in a digital future; E-commerce development and its link to letter and parcel services; The difference between, on the one hand, regions where service and range increase and, on the other hand, regions where there are major challenges in meeting the needs of the general public and companies in respect of postal service; Regulation and regulatory needs in a changing postal services market. 1.2 Current trends and events - internationally 1.2.1 The universal postal service is being re-evaluated The issue of maintaining the universal postal service in times of, in many quarters, sharply declining letter volumes has increasingly come to be the focal point of discussion in the postal sector, not only in Europe but also in other parts of the industrialised world. Thus, changes have been implemented or considered in countries such as New Zealand, Australia, Canada and the USA. This development does not only raise the question of how the universal service can be maintained in the long term, but equally important is that the declining volumes is also a sign that the users' needs have changed. These partly new needs may have to be addressed within the framework of the universal service. There are several alternatives to traditional mail as a carrier of information, and this is clearly reflected in the declining letter volumes. On the other hand, postal services, whether it concerns a letter or package, are becoming an increasingly important prerequisite for efficient e-commerce. The need for smart and customised delivery solutions is a future issue, as is achieving 9

transparency when it comes to prices, terms and payment solutions. As presented in Section 1.2.2, the European Commission is continuing to focus on matters relevant to this discussion. Cross-border flows represent a substantially larger share of the e-commerce chain than what the current perception would suggest. According to a study by the Boston Consulting Group 2, purely domestic e-commerce only constitutes 30 per cent of total e- commerce globally, i.e. where the whole chain from production to end consumer takes place within the country. For the remainder, there is always something or some flows that cross national boundaries. Given that Sweden is a small country with an open market, the transnational/national difference is likely even higher here. One obstacle to the development of e-commerce in Europe is the terminal dues system applied within the Universal Postal Union (UPU 3 ) that provides many non-european countries, including China and India, considerable postage discounts, which can make it difficult for European actors to compete with these countries. The reason is that these countries are considered as developing countries and therefore in that capacity receive special discounted terminal dues. 1.2.2 A lack of regulatory adaptation To a greater extent than before, there is currently a lack of regulatory adaptation associated with both the application and the impending changes in the European regulatory framework. 1.2.2.1 Application of the Postal Directive rules on non-discrimination On 11 February 2015, the European Court of Justice pronounced a judgment in case C-340/13 (bpost vs. BIPT 4 ). The key issue in the legal case was whether Article 12 of the Postal Directive 5 (which is an important part of the Swedish postal regulation and the basis of Chapter 3, Section 2 of the Postal Services Act) applies to operational discounts and volume discounts without distinction, or whether volume discounts 6 instead fall outside its application area. 2 Presentation on 10/02/2015, WIK 15th Königswinter Seminar on Postal Economics, Herbert Goetz, IPC 3 Universal Postal Union 4 bpost is the postal operator, the former Belgian Post Office, which is designated provider of the universal postal service in Belgium. BIPT stands for Belgisch Instituut voor postdiensten en telecommunicatie, and is Belgium's national regulatory authority for the postal and telecommunications market. 5 Directive 97/67/EC 6 The Court defines volume discounts in the following manner: volume discounts are rate reductions which increase in size in relation to the amount of postal consignments during a reference period (point 29 in the judgment). 10

The Court found that in terms of non-discrimination there are grounds to distinguish operational discounts from volume discounts. Non-discrimination applies always to operational discounts, but when it comes to volume discounts there may be circumstances which allow discrimination between sender and intermediary.. 7 Whether or not the companies we usually term consolidators in Sweden are impacted by the judgment is unclear. The judgment is namely based on the specific Belgian case which states that the consolidators collected several senders consignments, with the aim of granting larger volume discounts without, in that connection, conducting any form of operational activity. In Sweden consolidators often also conduct operational postal activities such as, for example, collecting unsorted post and separating it to sorted consignments which are subsequently delivered to PostNord. Until a similar case is tried in Swedish law, PTS has no reason to interpret Article 12 of the Postal Directive in any other way than before. The European Commission considers Article 12 to be of vital importance in preventing behaviour harmful to competition without necessarily having to apply competition legislation. The Commission has therefore turned to the ERGP 8 requesting that the organisation conduct an analysis of how the judgment affects the conditions in the member countries. A report on the subject is scheduled to be presented in connection with the ERGP's plenary meeting in July 2015. 1.2.2.2 Exemption from VAT on postal services The European Commission has sued Sweden stating that the country is infringing the EU's VAT Directive in that Swedish legislation does not contain any VAT exemption for the public postal services, which (according to the Commission) is prescribed in the Directive. The case will be examined in the European Court of Justice as Case C-114/14. Sweden has disputed the Commission's claim and argued that the VAT exemption does not apply to the Swedish situation. A main line of argument is that Sweden has no public postal services in the sense referred to in the VAT Directive's exemption provision, but also that the VAT Directive's wording, stipulating that exceptions must not distort competition, exempts Sweden from the obligation to introduce a VAT exemption. A previous judgment in Case C-357/07 concerned the interpretation of the term public postal services and the VAT exemption's scope in the UK. This judgment states that the term public postal services shall be construed as relating to those operators who commit to, 7 Judgment, points 45-47. 8 European Regulators Group for postal services. A co-operation organisation for the national regulatory bodies of the EU/EEA area and which, among other things, shall function as an advisory body to the European Commission. Partly through cooperating on various issues of interpretation and application, the idea is to contribute to a correct implementation of the Postal Services Directive throughout the EU. 11

within a Member State, providing universal postal services as defined in the Postal Directive. However, the VAT exemption does not apply to services for which terms are negotiated individually. If the Commission's action is approved in accordance with that aforementioned judgment, there will be major consequences for competition in the postal services market. Banks, insurance companies, etc. not engaged in activities subject to VAT will in reality obtain a discount of 20 per cent for services for which terms are not individually negotiated and which are provided by the designated operator of the universal postal service. Thus, competing companies will in practice be excluded from this market segment. PostNord to a significant extent employs subcontractors that charge VAT on the services they provide. Since the company's ability to deduct input VAT is curtailed if the Commission's action is approved, it will also have major consequences for PostNord. Against this background, an approval may bring to the fore the question of the universal service's design and scope. Judgment in the case has been scheduled for 21 April 2015, and it is only then that the consequences and possible courses of action can be assessed. 1.2.2.3 Further initiatives in the field of e-commerce In the end of 2012, the European Commission presented the Green Paper An integrated parcel delivery market for the growth of e-commerce in the EU. During the summer of 2013, the International Post Corporation's (IPC) European members launched the so-called E-commerce Initiative, which primarily aimed to develop cross-border e-commerce within the EU/EEA. The Initiative was a way to satisfy the wishes for improved and increased possibilities for cross-border e-commerce put forward by the Commission in the Green Book. In December 2013 the European Commission presented A roadmap for completing the single market for parcel delivery. The intention is for the roadmap to guide the continuing work. The roadmap contains three main goals: - Greater transparency and more information for all actors in the value chain of e-commerce - More accessible delivery solutions of higher quality and at more reasonable prices - Better handling of complaints and increased possibilities for customers to receive reparations 12

An evaluation is to be made after 18 months, i.e. around mid-year 2015, to assess whether further measures are needed. As recently as in December 2014 the Commission clarified that no regulatory initiatives would be implemented prior to the evaluation's completion. From PTS side, this was judged as a reasonable arrangement, not least because it would then be possible to see the effects of IPC's E-commerce Initiative. Now, however, some signals indicate that there is an interest within the Commission in initiating regulatory measures without waiting for the evaluation. This creates considerable uncertainty about what future regulation may imply, the data on which it will be based and when it might enter into force. 1.2.2.4 Work on a new Postal Directive postponed The current EU Postal Directive was conceived in light of the conditions that prevailed in the early 1990's, when the letter volumes increased, the mail order companies were responsible for distance trade and the Union had 14 Member States with reasonably similar conditions. Since then, the situation has fundamentally changed. Steadily declining letter volumes and developed e- commerce is the reality. Furthermore, the number of Member States has doubled since the early 1990s and the distance between the countries in terms of, for example, available infrastructure and communication patterns is far greater than before. The declining letter volumes not only raises the question of how the universal service is to be maintained in the long term. Equally important is the fact that the declining volumes are also a clear signal that the users' needs have changed and that these needs must be met within the framework of the universal postal service. PTS considers that the real needs of users increasingly deviate from the universal service that is ensured by the current Directive. Up until November 2014 the Commission really urged the establishment of a new Postal Directive. The ambition as we perceived it was for a new directive to be in place by 2017 at the latest. The rapid pace inspired some concern, while at the same time it can be considered a very pressing task to revise the Directive which justified the work being carried out promptly. In December 2014 the surprising news was announced that the plans for a new directive had been put on hold. The understanding is that sights are now set on 2019/2020. With the rapid pace of development that can be observed, it appears that the differences between what users need and the universal service ensured by the Directive has become substantial. It is therefore pressing that, from the Swedish side, the work with establishing the new Directive gets underway as soon as possible. 13

1.2.3 Focus on the work of the regulators organisation, the ERGP With its experience of the Swedish market, PTS still has a vital role to play in the international cooperation in the postal services sector through ensuring the real impact of the measures to liberalise the markets in other EU countries. Similarly to previous years, this work has primarily taken place within the ERGP. PTS is joined by the Italian regulatory authority AGCOM, chair of one of the ERGP's working groups, which is now called The Implementation and Evolution of the USO 9. The summer of 2014 saw the publication of the report Exploration of challenges to overcome when implementing a net cost calculation methodology based on a reference scenario Benchmark of experiences, which was prepared by the working group. The working group's continued efforts have been concentrated to a report on the design of the future universal postal service and how it can be made sustainable in the long term, as well as the needs it reasonably should satisfy. The supporting data for this report has been obtained through a discussion paper being subject to an open consultation process and discussed at a workshop with an estimated 150 participants. Work on the report should be completed in 2015. The report was intended as an essential basis for the development of a new Postal Directive with a view to entering into force in 2016/2017. In light of the rapid developments in the market and the rate at which users' needs are changing, it is not surprising that many of the views put forward during the consultation process and workshop concerned the need for greater flexibility to allow for adaptation to national conditions and to changes over time. PTS shares this view and believes, as previously mentioned, that it is important that work on a new directive begin as soon as possible. For this to be possible, this need must be further clarified and the issue must be brought before the European Commission in an appropriate manner. During 2014, other working groups in the ERGP have been working on such issues as cost-oriented pricing and price regulation, quality issues and customer satisfaction, complaints management, access regulation, market indicators and cross-border e-commerce. PTS has participated in three of these working groups. 1.2.3.1 Other international work PTS also takes part in activities organised by the European Commission, including meetings of the Postal Directive Committee and workshops. The formation of the ERGP has resulted in a scaling back of PTS's work in the 9 Universal Service Obligation = responsibility for providing the universal service 14

European regulators organisation CERP 10, which has increasingly become a forum for representatives of ministries. In light of the authority's assignment to deal with issues relating to Sweden's participation in the Universal Postal Union (UPU), the engagement in CERP is focused mainly on issues of coordinating viewpoints for the UPU's congresses. The next congress will be held in 2016 in Istanbul, which is why involvement in CERP will increase during 2015. PTS also has ongoing contact with the Ministry of Enterprise, Energy and Communications and PostNord when it comes to UPU-related issues. 1.3 Current trends and events national 1.3.1 E-commerce focus on the last mile One link in the e-commerce chain that has received considerable attention in 2014 is what is usually referred to as the last mile 11, which was particularly topical at the market meeting PTS arranged when last year's report was presented 12. It refers to the final link in the e-commerce chain, i.e. from terminal to recipient/agent. The first step of the return handling is often also included in the concept. The emergence of digitalisation and e-commerce has led to a shift of power from producer/seller to consumer. The consumers in turn impose demands on availability, convenience and flexibility on the last mile, including the possibility of returning goods. For the e-retailer it is therefore important to be able to, as rapidly as possible, sell the goods that are returned. Thus simplicity for the customer is a key to success. Put another way, it is clear that the public needs associated with larger letter consignments and parcels have changed and continue to change. These are key issues for the continued growth of e- commerce and thus the business opportunities for both existing and any future operators. The established model in the Swedish market is that larger items that can be delivered via the recipient's letterbox are delivered there. Otherwise the item ends up with an agent (where you normally also go to return goods). Within the rural postal service, larger mail items are delivered, but in this case, time, place and return handling depend on the placement of the letterbox and the design of the rural postal service's delivery routes. 10 European Committee for Postal Regulation 11 Sometimes subject to the questionable direct Swedish translation den sista milen 12 http://www.pts.se/sv/bransch/post/marknadstraffar/pts-postdag-2014/ 15

The system of agent networks can certainly be supplemented and made more flexible for the recipient, but it is hard to see how this is sufficient to meet the needs of tomorrow. Even today, many agents in the cities are overloaded and the opportunities for large-scale start-ups are limited due to difficulties in finding suitable agents. Parcel machines and various kinds of box solutions could be the solution that eventually, like what has happened in many other countries, will be established in the market. The question then is what is required in order to take the next step closer to the recipient and what problems arise from a social and regulatory perspective. Parcel machines have high fixed costs and necessitate a wide coverage to be able to serve as a realistic alternative. At the same time, there is limited availability of ground area where people frequent and are interested in being able to collect their parcels. What is needed to bring about the establishment of parcel machines and is it reasonable that different operators establish parallel infrastructure? Economically it is probably most efficient if operator-neutral stations are established. In that event, financing and access issues become important issues that may require new and/or changes to existing regulations within the areas concerned. Communal letterboxes with parcel letterboxes in multi dwelling units is another supplementation of the distribution chain that may need to be developed to respond to the somewhat changing needs of the public. It is also possible here that there may be reason to modify some regulations. Most of the regulatory issues that may come into question are likely to be found outside the postal legislation and PTS's regulatory oversight, which may consequently require coordinated efforts between different authorities to enable the development of the market. However, one issue with a more direct connection to PTS is addressing and access to addresses for postal operations. There are several interesting and challenging issues relating to this. What happens when items that traditionally have been detained within the operator's network instead take the leap into what could be termed as the extended letterbox - a parcel letterbox in the property or adjacent to the dwelling? In all probability, the addressing system would need to be modernised to handle this part, i.e. that it becomes possible to connect a 16

delivery point for larger items to the destination address. How should such a registry then be managed and which actors would be able to access this? A further extension of the parcel distribution seems possible: private letterboxes with the capacity to receive and return parcels. Here the main concern is the willingness to invest in a significantly more expensive private letterbox, which is a reality in some countries, but the addressing issue is also of importance. For recipients who do not live near urban areas, and thus have long distances to PostNord and other actors' agent networks, there is an increasing disparity in the ability to take advantage of the developments taking place. Will the future entail automated parcel and service stations and/or the ability to manage the receipt and return of larger mail items via private parcel letterboxes farther out in the country? 1.3.2 Increased need to coordinate distribution networks Declining letter volumes, rising parcel volumes and an increased demand for and various types of home deliveries, as well as a declining and increasingly sparse population in some regions, is resulting in the need for change and adaptation in the production model for postal services. The development therefore creates a need for increased co-distribution and the shared use of existing distribution networks. In early 2014, PostNord consolidated the business areas Mail & Communication and Logistics with a clear intention to coordinate and, as far as possible, integrate the letter and parcel flows. There is already also established partnerships between Bring Citymail and DHL, as well as between MTD and Schenker, in order to utilise each other's respective network. Bring Citymail has also acquired a share of Bussgods to strengthen their access to agents. MTD's operation is in itself an example of postal distribution coordinated with the existing distribution of morning newspapers. For PTS it is important to monitor these processes to ensure that privacy issues and the quality of distribution are not neglected when the distribution paths change. 1.3.3 The growing importance of the market for post-related services In last year's report, PTS highlighted the consolidation and packaging of letter services. This concerns various holistic solutions where postage is included and which therefore limits the need for having to handle the payment of postage 17

separately. This also includes the ability to enjoy various forms of discounts that are otherwise reserved for major customers with sufficient volumes to themselves be able to perform different cost-saving measures for the postal operator. PTS emphasises here the importance of ensuring that prices, including discounts and terms, for these actors are compatible with the Postal Services Act 13 requirements that pricing should be cost-oriented, nondiscriminatory and transparent. Equally important is that no cross-subsidising occurs within the services covered by the definition of universal postal services, or between postal services included in any holistic solution offered by PostNord. If the requirements concerning pricing in the Postal Services Act are disregarded, other operators may find it hard to compete in fields where PostNord offers similar (peripheral) services and thus risk being excluded from the market. The postal production chain is complex, whether it pertains to letters or parcels, where flows are also being increasingly integrated and the number of parameters impacts service content and pricing. Postal services are therefore difficult to procure for everyone, both public and private actors, regardless of size. The complexity is further compounded by the increasing digitalisation, with a direct connection to administrative systems of businesses and management of all forms of outbound communication and dispatches. E- commerce development with demands for flexible delivery solutions and greater opportunities to choose price and service level rather than solely between operators, better service in terms of traceability and notifications, etc., also adds to the complexity. At the same time, new sub-markets are emerging and new actors of importance for development and customisation within the postal market are establishing themselves. Coinciding with this is a need for existing operators to extend the value chain when the letter volumes are declining and there is increasing pressure on prices in the parcel and logistics market. There is then a risk that small and innovative actors may be forced out by way of the existing operators' stronger market position. The more complex the market is for those purchasing postal services, the more important the availability of independent intermediaries who can balance the weak position the customer finds themselves in. This is especially true for small and medium-sized postal customers with little bargaining power. Here, an efficient market ultimately favours the end customer - in this case the recipient. 13 Postal Services Act SFS 2010:1045 18

The expansion of the postal services market can be seen as part of an ongoing trend towards a widening of the concept of postal operations and a disintegration of the boundaries between letters and parcels. However, the basis for PTS's oversight is still that the regulations contained in the Postal Services Act must be complied with. 1.3.4 Digital mailboxes and My messages In addition to the existing official mailbox Min Myndighetspost 14, Bring's Digimail and Kivra have been authorised to handle the official mail. Kivra is a pure mailbox operator and currently the largest actor with 600,000 registered users. Developments within this area are very important for what happens on the physical letter market. Experience from the development of the Danish postal services market shows that when public communication with citizens and businesses is digitalised, the private sector also follows suit. The consequences are that the current trend of declining letter volumes continues and perhaps even accelerates. The function My messages has not yet reached its full potential. At present the development is slowly moving forward and the impact on the Swedish letter market is not yet significant. However, there are already signs that the situation may change when certain structural problems are resolved, such as the persistent high costs for the banks' e-identification. 14 With the mailbox Min Myndighetspost, one can receive mail from government authorities and municipalities digitally instead of on paper. 19

2 Developments in the Swedish postal services market The term the postal services market is generally used to refer to the entire market for the distribution of letters and parcels. As the sub-markets for these differ significantly in structure, function and regulation, it is necessary to analyse the letter and parcel markets separately. For this reason, the letter market will be discussed below in Sections 2.1 2.3 and the parcel market in Section 2.4. The letter market covers the distribution of addressed mail items weighing at most 2 kg 15. In order to conduct postal operations for a charge, a licence is required under the Postal Services Act. 16 However, no licence is required to distribute parcels, an activity which, beyond what is included in the universal postal service, is not regulated further in the Postal Services Act. This being the case, there is also no clear-cut definition of the term parcel. 2.1 Development of volumes and market shares in the letter market Given all the reports of declining letter volumes in recent years, one might believe that the letter market nowadays is quite small in scope. This, however, is not the case at all. Instead, the letter market in Sweden has a turnover still close to SEK 12 billion per year. While volumes have fallen by nearly 25 per cent over the past decade (since 2005), the turnover on the market has only fallen by just under 11 per cent during the same period. If you also add the closely-related distribution of unaddressed advertising, the turnover approaches SEK 14 billion, which indicates that the sector for physical distribution to our letterboxes is still of major economic importance. In 2014, over 2.4 billion letters were distributed in Sweden, representing a decrease of over 100 million letters or 4.4 per cent compared with the year before. The long-term trend of declining volumes is therefore continuing, but still at a fairly stable rate (between 3 and 5 per cent per year). Overall, the letter volume has now decreased by 29 per cent since the turn of the millennium (see Table 1 for further information). 15 Enligt definitionen i 1 kap. 2 postlagen är ett brev: en adresserad försändelse som är innesluten i kuvert eller annat omslag och som väger högst 2 kg samt vykort, brevkort och liknande försändelser. 16 The Postal Services Act (2010:1045) 20

Year Number of letters (millions) Index 2000 3,426.3 100 2010 2,875.0 83.9 2011 2,767.7 80.8 2012 2,645.0 77.2 2013 2,545.1 74.3 2014 2,433.0 71.0 Table 1: Trend in the total letter market 17 Despite the overall decline in the letter volume, the amount of letters distributed by competitors of PostNord has not decreased in recent years, but instead has grown significantly (albeit from relatively low levels). In 2014, the volume growth was about 3.5 per cent for PostNord's competitors (see also Figure 1). This means both that PostNord's market share continues to decline slightly, and that PostNord's letter volume is decreasing faster than the total letter volume. However, PostNord still has a very dominant position in the letter market. 17 As of 2011, the measurement method has been made more precise in order to eliminate the risk of certain volumes being counted twice the figures reported as of 2011 are distributed volumes. The need for this more exact definition has arisen due to new business models with some of the smaller operators, which mean that a certain letter may be handled by more than one postal operator on its way from sender to recipient. Comparability with the volume figures of previous years is, however, only affected for 2010, as these business models did not exist before that time. A conversion of the 2010 volume statistics according to the more exact specification produces a figure of 2,871 million mail items, compared with the 2,875 million reported above. 21

Figure 1: Trend in the total letter market The biggest competitor of PostNord, Bring Citymail, has continued to increase its market share during the year and now distributes 14.4 per cent of the volumes in the market. As mentioned, PostNord has reduced its share slightly, but still has a market share of just under 85 per cent of the distributed volumes. With regard to the third largest stakeholder in the market, Svensk Morgontidig distribution (MTD), the volumes for their affiliated local distribution companies have increased to 11.7 million mail items, an increase of 48 per cent. Other operators, which largely consist of locally active small businesses, on the whole maintain a fairly stable level of around 5 million distributed mail items. With the odd exception, the small operators individually maintain stable volume levels, and most of them show either increased or unchanged volumes. 22

Number of distributed letters (millions) 2014 (2013) Share of distributed letters 2014 (2013) Share of collected letters 2014 (2013) PostNord 2,066.6 (2,191.2) 84.9 % (86.1 %) 83.3 % (85.2 %) Bring Citymail 349.8 (341.0) 14.4 % (13.4 %) 15.3 % (13.6 %) Operators belonging to MTD (exklusive Pressens Morgontjänst) 11.7 (7.9) 0.5 % (0.31 %) 0.48 % (0.31 %) Other 4.9 (5.0) 0.20 % (0.20 %) 0.89 % (0.75 %) Total 2,433.0 (2,545.1) 100 % 100 % Table 2: Distributed volumes as well as market shares of distributed and collected volume respectively. Figures in parentheses pertain to 2013. 18 If the number of handled letters for other operators 19 is instead calculated on the basis of the volumes that the operators collect from senders (postal customers), it emerges that the other operators received close to 22 million letters from these customers/senders. This is an increase from the previous year's corresponding number of 19 million letters. 20 However, of these 22 million letters, almost 17 million were not distributed by the small operators themselves, but were forwarded for distribution mainly by PostNord or Bring Citymail. One operator that engages other operators for the final distribution is Mailworld Office AB, whose collected volumes increased by 20 per cent in 18 The operator Pressens Morgontjänst, formerly part of MTD, has merged with Bring Citymail's distribution operation, and is now part of Bring Citymail. For accurate comparisons, the figures presented in Service and Competition 2014 regarding MTD and Bring Citymail for 2013 have been adjusted so that Press Morgontjänst is also included in Bring Citymail for the comparative year 2013. 19 I.e. excluding PostNord, Bring Citymail and the MTD operators. 20 Note that in last year's report the MTD operators were counted in these figures. 23

2014. It is clear that this type of activity, consolidation, continued to increase during the year. Bring Citymail has also started to engage PostNord in this way for letters with a destination outside the company's distribution area, but has also started to cooperate with some local operators. Aside from the aforementioned postal operators, the postage optimisation company 21 21 Grams AB, for example, has a large consolidation operation (which is however not included in the statistics above, due to their not being postal operators in the formal sense). In an economic analysis of the situation in the letter market, a market share estimate based solely on volume data is somewhat misleading. The reason for this is that the various operators have significantly different product offerings and business models, and thereby a substantial difference in earnings potential per letter. To gain a better picture of the relative strengths in the market, PTS also calculates market shares based on the turnovers of the operators' letter distribution (Table 3). This demonstrates even more clearly PostNord's dominant position in the Swedish letter market. Estimated market share based on turnover in 2014 (2013) PostNord 92.3 % (92.7 %) Bring Citymail 6.6 % (6.3 %) Other postal operators 1.1 % (1.0 %) Total 100 % (100 %) Table 3: Market shares (turnover) 22 2.2 The competition situation in various parts of the letter market As the letter market is heterogeneous in terms of function, it needs to be broken down when conducting market analyses. Earlier market analyses have often broken the market down into the sub-markets bulk mail and single letters. However, it is appropriate to break it down even further when conducting a more detailed analysis, primarily in the following dimensions: priority of the letter services (i.e. overnight delivery or not), sorted and unsorted bulk mail respectively, 21 A postage optimiser helps senders to best utilise the postal operators' offers by finding the cheapest combination of operator distribution solutions based on the sender's agreements with the operators. 22 The figures for 2013 have been updated from what was reported in the Service and Competition 2014 so that, where appropriate, the reported data received following the publication of Service and Competition 2014 has replaced the previous forecast values. 24

single letters from office mail and letterbox mail respectively, break-down in relation to geographical coverage, structure/adaptation of various services for different customer groups, such as consumers vis-à-vis corporate customers. In schematic terms, the most important dimensions (or sub-markets) for the letter market are described in accordance with Figure 2. Figure 2: Diagram of the letter market The submarket with the greatest volume and the greatest importance for the competition situation is bulk mail not sent overnight, which constitutes approximately 62 per cent of all letters. Bulk mail in total corresponds to 79 per cent of the total letter market in terms of volume. With respect to single letters (which in total cover approximately 21 per cent of the letter market), letters delivered overnight are still the most common, with just over 70 per cent of the single letters. 2.2.1 Bulk mail The market segment called bulk mail (or industrial mail) comprises mail in the form of series of items which are deposited at the same time. They are usually produced industrially and with the help of computer support. The sender can send mail items for a substantially lower price compared to the postage for single mail items, provided the sender attains the cost-saving volume required for the postal operator to classify it as bulk mail. 25

Bulk mail can also be broken down into two categories: unsorted and sorted. Unsorted bulk mail is significantly more expensive than sorted. However, bulk mail is usually produced so that it has already been sorted when handed over to the postal operator, for which the sender receives a further discount for having performed this service; a sorting discount. In these cases the level of sorting can vary from the deposited mail items having been sorted by postcode to mail items being sorted in the order in which the mail should be delivered for each individual postman s route ( sorting in delivery route order ). Since 1993, development in large parts of the bulk mail segment has been characterised by tough competition between PostNord and Bring Citymail. Competition was largely based on pricing. Based on the lower price levels this has brought about with regard to bulk mail, it is probable that it is the large postal customers that are, and have been, the ones to benefit most from the competition (see Section 3.1) 2.2.1.1 Market for bulk mail sent overnight (first class bulk mail) There has been a decline in the demand for first class bulk mail, i.e. bulk mail deposited for sending overnight. In recent years, however, the proportion of bulk mail being sent as first class mail has remained fairly constant at around 20 per cent (calculated in letter volume). PostNord has a virtual monopoly for first class bulk mail, as its major competitors focus mainly on letters with a longer distribution time (lower priority), known as economy class bulk mail. 2.2.1.2 Market for bulk mail not sent overnight (economy class bulk mail) PostNord and Bring Citymail are currently the two major competitors in the market for economy class bulk mail (i.e. bulk mail that is not sent overnight). PostNord covers the whole of Sweden, while geographically Bring Citymail s delivery operation focuses on the Stockholm region and the Mälar Valley in a broad sense, large parts of West Sweden, western Skåne and Gotland, corresponding to approximately 54 per cent of all mail recipients in Sweden. PostNord still has more than three times the volume of Bring Citymail with regard to economy class bulk mail. In the last two years, the businesses that distribute morning papers have made a breakthrough, even where letters deposited as economy bulk mail are concerned. The newspaper distribution companies that now cooperate within MTD have during the year increased their total letter volume by 48 per cent to 11.7 million items, representing less than 1 per cent of the submarket. In this submarket, Bring Citymail shows clear growth in volume (3.7 per cent) in a generally declining market. The company has carried out cost 26

rationalisation initiatives in the letter distribution and expanded its range of offers to customers, which as a whole has led to the company approaching a position where they can report a profit for the first time since the mid-00s. The changed market situation involving distributors of morning papers also making a breakthrough as letter distributors has perhaps affected the situation at first more for Bring Citymail than for PostNord. Because of this, it was not surprising when Bring Citymail and Pressens Morgontjänst (the morning paper distributor of the Stockholm area) just before the turn of the year 2013/14 announced a merger. The joint distribution operation in the Stockholm region in now being conducted in the newly formed company Bring Citymail Stockholm. For a long time the market for economy class bulk mail has been characterised by a tough competitive climate between PostNord and Bring Citymail. Leverage effects arise, as all of those customers who want to reach the whole of Sweden have to use PostNord, and PostNord s pricing for that part of the volume that goes with PostNord changes if the customer chooses to send parts with Bring Citymail. This means that it is not enough for Bring Citymail to have better offers for those volumes that both companies are competing for, but must also compensate for the discounts lost on that part that can only be sent with PostNord. 2.2.2 Single letters Single letters refers to letters delivered one at a time (or at least in a smaller amount) in letterboxes, to a post outlet or the like. Formally, letters are considered single if they are deposited in fewer numbers than the operators' defined limits for qualifying as bulk mail. Single letters can also be broken down into office mail and letterbox mail. The office mail segment normally comprises mail from companies that is stamped using a franking machine or marked postage paid. Office mail constitutes around 12 per cent of the total volume in the letter market. PostNord has a very strong position in terms of nationwide office mail. Mailworld Office, which has been operating for a couple of years and whose business concept is to collect office mail and convert it into bulk mail, is also on its way to becoming an established actor in this sub-market and cleared approximately 17 million mail items in 2014. Competition at a local level comprises just over twenty or so postal operators, with relatively small volumes. However, local operators have achieved a significant share of the letters distributed locally in some districts, and also compete with PostNord for post-related services, such as franking and collection and delivery services. 27

Luleå Mail HB is the largest local postal operator with just under 1.4 million distributed mail items in 2014. Letterbox mail is mail posted in letterboxes usually stamped and distributed as single mail items. Letterbox mail corresponds to just under 9 per cent of the volumes in the letter market. The number of stamped letters still constitutes just over 6 per cent of all mail items. PostNord has a virtual monopoly on all nationwide letterbox mail, regardless of delivery priority. The marginal competition that exists relates to local mail in a smaller number of localities. 2.3 Barriers to market entry The formal barriers to entry in the Swedish postal services market are low. Licences for postal operations are granted by PTS if applicants may be expected to conduct operations in accordance with the requirements of the Postal Services Act. The requirements of Chapter 2, Section 6 of the Postal Services Act mean that operations must be conducted in such a way that the protection of the personal privacy of senders and recipients is maintained. The Act also contains provisions on the duty of confidentiality. However, there are significant financial barriers on account of the market largely being dominated in such a significant way by PostNord. Another general barrier to entry of a more practical nature is that a new operator must build up its own address register as the address registers of PostNord (and other established operators) are not publicly available. This poses particular problems in non-urban areas, where there is sometimes a lack of direct connection between addresses and the actual location of letterboxes. An important prerequisite for a new actor to be able to establish themselves is naturally to be able to build up a sufficient customer base in order to either directly, or further down the line, start up their own distribution operation. In the latter case, an operator can initially start a business that is consolidated in order to build up volumes and establish a customer base. In the first phase, other established operators are thus used for the distribution. The judgment mentioned in Section 1.2.2 (bpost vs. BIPT) can in this case create an additional barrier to entry as, under certain conditions, it exposes the possibility for consolidators to be discriminated against in terms of volume discounts. If the operator cannot exploit its total volume to obtain discounts from PostNord, the ability to establish itself in the letter distribution market more or less disappears through consolidation. 28

If the coming judgment concerning the Commission's lawsuit against Sweden (Case C-114/14) leads to some of PostNord's services being exempt from VAT, this will also entail a new and formidable barrier to competition for new and existing competitors of PostNord. This is because VAT-exempt services for certain customers (who cannot deduct input VAT on their purchases) will in practice, compared to today, be discounted by 20 per cent in relation to corresponding services of other operators. When an actor is well established with its own distribution operation, it has become increasingly important, in order to develop its customer base, to be able to offer the customer the service of also handling their mail for distribution outside one's own distribution area. This requires that the transfer of letters to another postal operator (most often PostNord) takes place as simply and efficiently as possible. An obstacle that may arise for a new or smaller operator is that requirements and terms regarding the transfer to the end-distributor lead, for example, to the new/small operator needing to require their customers to use alternative envelopes used for dispatch with the nationally or regionally distributing operator which effectively stops customers from switching to the new/small operator. For barriers to market entry to be surmountable, it is important that the postal infrastructure can be provided in a non-discriminatory manner. One important part of the postal infrastructure is, for example, the smooth and competitively neutral transfer of mail items between postal operators. Therefore PTS welcomed the agreement reached between PostNord and Fria Postoperatörers Förbund (the Federation of Free Postal Operators) (FPF) in 2014. The agreement entails, through the use of unique postal operator designations on the mail items, that the postal operator is identified as the sender and recipient of returns in relation to PostNord, no matter what designations the original customer has printed on the envelope. 2.3.1 Bulk mail sent overnight Apart from locally distributed bulk mail (e.g. within a municipality), purely economic barriers to entry must be considered to be high in this segment. The reason is primarily that the distribution network in this case must be adapted, firstly for deliveries each working day, and secondly for rapid intermediate transports to be able to encompass the entire area of coverage in one night. It is more natural for competitors to focus instead on less time-critical mail items when building up their networks. Furthermore, it is obviously difficult for a new competitor to challenge PostNord s strong position, with its well-known brand, long since established contacts with all postal customers and strong business concept that covers the whole of Sweden overnight. 29

2.3.2 Bulk mail not sent overnight Market entry in this segment also involves substantial investments for stakeholders seeking to enter this section of the market, as it requires an extensive distribution network. These large investments militate against potential new operators that do not have some pre-existing form of logistics network being able to achieve any major geographical coverage at the initial stage. Consequently, it is crucial for competition legislation and sector-specific postal services legislation to prevent dominant stakeholders from, for example, applying an improper and selective geographical pricing strategy against potential competitors. The size and financial strength of a dominant stakeholder, together with its nationwide distribution, afford it considerable opportunities to eliminate any competition. However, PTS considers that there is potential for the bulk mail market to be penetrated by operators that can use other existing distribution networks. One example of this is MTD, an umbrella company for Swedish morning newspaper distributors, which entered the market a few years ago. Parallel distribution networks also exist within parcel distribution, which at least gives a theoretical possibility for parcel companies also to become established in the bulk mail market. Judging by the resulting collaborations between letter and parcel distributors (e.g. between Bring Citymail and DHL), it seems more likely that we will see continued developing collaborations between letter and parcel distributors rather than these distributors, further down the line, choosing to independently compete in the bulk mail segment. The competition authorities have reason to focus on all anti-competitive behaviour to ensure that both existing and new potential competitors cannot be inappropriately excluded. This may involve, for example, offers of an exclusivity or loyalty creating nature. 2.3.3 Market for the nationwide distribution of single letters PostNord is basically the only operator that delivers single letters nationwide. In the assessment of PTS, it is unlikely that more operators will establish themselves in this segment of the market, as the costs associated with establishing a national infrastructure suitable for clearance, sorting and distribution throughout Sweden are basically so great that they are unjustifiable from a financial perspective. On the other hand, due to the segment's relatively high price level, there is potential scope for stakeholders to use new sorting technology to transform single letters into bulk mail and then engage some of the existing operators for the final distribution of these letters. 30

2.3.4 Market for the local conveyance of single letters In the market for the local conveyance of single letters, the conditions necessary for competition are significantly better than for nationwide distribution. It has been observed that most local postal undertakings are established in small towns or in the countryside. However, becoming established in the market also requires a great deal of effort, which has meant that there have only been a limited number of new entrants in recent years. One of the greatest potential threats to local postal undertakings is if the regulations governing uniform prices for the universal postal service were to be rendered less effective in some way. If such a situation were to arise, PostNord would be able to offer disproportionately low prices to certain key customers in districts where there is competition from local postal undertakings with a view to eliminating such competition. Another significant threat to local postal undertakings is if PostNord were to conclude central exclusivity agreements with major customers that have nationwide operations (e.g. the big banks) which prevent local offices from taking on any other operator. Due to the local operators often also offering services such as collection and distribution of all the customer's mail, it is important that PostNord is not allowed to, through for example cross-subsidising, compete improperly with similar peripheral postal services. 2.4 The parcel market and e-commerce The growth within e-commerce and the increase in larger letters consignments and parcels resulting by e-commerce is important for today's postal operators. At the same time, this development creates new needs and increased demands on postal operators from the general public and businesses. 2.4.1 E-commerce in Sweden The e-barometer's full-year report 2014 shows that the growth rate in Swedish e-commerce remains high at 16 per cent for the full year 2014 23, compared to a growth of 5.1 per cent for the retail sector overall 24. 23 E-barometern 2014, PostNord in cooperation with Svensk Digital Handel [Swedish Digital Commerce Association] and HUI Research. E-commerce is defined in the e-barometer as the sale of goods via the Internet to be delivered to the home of the buyer, to a pick-up point, or to a store, stockroom or delivery point for collection by the consumer. This means that the following is not defined as e-commerce in the e-barometer: Purchases in a store that have first been booked via the internet; sales of services (e.g., travel sales, hotels and concert tickets) conducted over the internet; downloads of, for example, music files, films and applications; sales via the internet between businesses; sales via the internet between private persons 24 DHI December 2014, HUI Research/SCB 31

2.4.2 The Swedish parcel market For parcel distribution services aimed at the companies market, there has long been well-developed competition. It also appears that the increased competition within those services that cater to the general public and which have been established in the market in recent years is stable. Access to outlets/delivery points outside PostNord's network is also favourable. However, that part of the parcel distribution carried out via rural delivery must still be seen as a critical factor when it comes to meeting society's need for postal services. In the most sparsely populated parts of the country, it is hardly likely in the foreseeable future that there will be commercial incentives to establish alternatives to PostNord networks, while at the same time the ability to e-shop and engage in e-commerce is becoming increasingly important for those living in areas outside the major cities and towns. The trend towards a tighter coordination and integration between letters and parcel flows is likely something that will continue and develop. During the year, PostNord integrated the business areas Mail & Communication and Logistics, and Bring acquired Smartpak (which is part of Bussgods) to enhance access to delivery points for parcels to private individuals. Bring has also previously collaborated with DHL and the postal operator MTD collaborates with DB Schenker. The different companies' agent networks present somewhat of a fluid picture, as some shops that act as agents are shutting down, or being liquidated for other reasons, while new ones are emerging. The table below is based on the information provided by the companies themselves on their websites. Distributor Approx. number of agents Cash payment Maximum weight 25 PostNord 1,600 Yes >20 kg DB Schenker 1,600 Yes Max 10kg 26,27 DHL 1,300 Yes >20 kg Bussgods 600 Yes >20 kg Table 4: Parcel services 28 Packing materials Customer/D istributor Customer/D istributor Only distributor Customer/D istributor Booking and freight documents Home page/at agent Home page/at agent Only home page Home page/at agent 25 Due to weights up to 20 kg being the limit of the definition of the concept postal service in the Postal Services Act, PTS has only examined the possibility of sending mail items weighing up to 20 kg. 26 >10 kg (>20 kg) at some of the 28 terminals. 27 The service Blocketpaketet in cooperation with Blocket, up to 20 kg via agent. 32

In addition to the parameters touched upon in the table, all distributors offer a wide and varied range of parcel services. As the services appear to be very varied among themselves it is not possible to compare and judge differences in price between different distributors in a simple and clear manner. Compared with the previous year, however, it can be stated that the range of services has generally increased. During the year, several trials with parcel letterboxes in or near properties have been initiated. PostNord has also supplemented the existing agent network with simpler delivery points, as well as additional delivery points during the Christmas season. The question for 2015 is whether there will be any kind of breakthrough with the establishment of parcel letterboxes and thereby the potential to bring e-commerce even closer to the customers. Furthermore, within the field of flexible (home)deliveries, some innovative solutions have appeared, such as DHL's MyWays and the company Urb-it, which in different ways use private individuals who deliver parcels/ecommerce mail items to other private individuals in return for payment. The transport of weapons can be said to be a variation on parcel delivery and is circumscribed by specific handling rules. Considering, among other things, the safety aspects and that nowadays there are other forwarding agents that can offer equivalent service, PostNord has notified PTS that it wishes to discontinue the service in question. The matter is currently being considered by the authority. 28 Source: Home pages of the various distributors. 33

SEK The Swedish Postal Services Market 2015 3 Pricing in the postal services market 3.1 Price developments in the postal services market The supervision by PTS includes making sure that the pricing of the universal postal service that PostNord is obliged to provide is transparent, nondiscriminatory and cost-oriented, and also promotes efficient provision of the service, in accordance with Chapter 3, Section 2 of the Postal Services Act. Supervision is conducted, in part, where warranted when PTS receives complaints concerning PostNord's prices from operators, postal customers and other interested parties, and also through PTS's annual review of the postcosting estimate of PostNord, which is to constitute the basis for the company's pricing levels. 3.1.1 Price development of postage for single letter consignments In the early 1990s, postage had not yet been subject to VAT and a first class stamp (20g) cost SEK 2.50 at the former Posten. 1995 saw the introduction of 25 per cent VAT on postage, which is why the price of the same first class stamp (along with the annual increase) rose to SEK 3.70 including VAT. Postage development, first class stamp (20g*) 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 1990 1995 2000 2005 2010 2015 Year postage incl. VAT Postage excl. VAT * 2014 the postage refers to 50g Figure 3: Postage development, first class stamp After 1998, PostNord raised the stamped 20-gramme postage in stages by SEK 0.50 every five years until 2014. The reason behind the intermittent increases is 34

the price ceiling imposed by the Postal Services Ordinance 29, which also regulates PostNord's pricing for domestic overnight delivery of single mail items weighing a maximum of 500g (see also Section 3.2). In April 2014, PostNord revised the weight limits for single postage and the lowest weight class was increased from 20g to 50g. The result was that the new minimum postage for a first class stamp was SEK 7 instead of the previous SEK 6, but then the letter could also weigh up to 50g. An international comparison that PTS conducted in 2014 shows that PostNord first class postage is among the cheapest in the Nordic countries (see section 3.5). 30 The price ceiling is probably a big part of the reason that this postage has not increased by more than around SEK 4 over a 25-year period. A positive effect is that the stamped economy letter 20-gramme postage has therefore also not increased more than around SEK 4 since 1990, and in 2015 costs SEK 6.50 excl. VAT. 3.1.2 Price development of postage for bulk mail PTS's annual review of pricing is based on PostNord's official price list. PTS does not make a general report on PostNord's prices according to agreements, as the agreements are often subject to industrial secrecy. However, when illustrating price developments in the bulk mail market 31, there are a number of public agreements from which to obtain data, such as the government framework agreement concerning letter conveyance services. The State is one of the largest buyers of bulk mail services and sends approximately 10 per cent of the volumes in the Swedish bulk mail market. As a major buyer of letter conveyance services, the State has good opportunities to get offered favourable prices during government procurement. By comparing the pricing in PostNord's price list with PostNord's prices in the government framework agreement, the reader can gain insight as to the extremes and the trends of pricing in the bulk mail market, which is also the largest sub-market (see Section 2.2). 29 SFS 2010:1049 30 Consumer prices for letters and parcels, An international comparison, PTS-ER-2014: 3, Ref. no. 14-460. 31 PTS does not at present have access to relevant statistics for illustrating developments in the Swedish parcel market due to a large part of parcel volumes being distributed by businesses like DHL, Schenker and UPS, who are not postal operators and thus not obligated to supply volume data to PTS. 35

Figure 4: Price development bulk mail 20 grammes The two upper lines in Figure 4 above show the price in SEK for a 20 g letter in a first class unsorted domestic bulk mail consignment of 500-4,999 items. Here we can see that while the price per item in PostNord's official price list has had a fairly even rate of increase since 2006, the prices for the same service in the government framework agreement are down to basically the same price level as they had in 2006. As of 2014, the difference in price for a framework agreement customer and a non-framework agreement customer who are both sending a first class unsorted bulk mail consignment nationally is SEK 0.86, i.e. 18 per cent lower, per 20 g letter. The lowered framework agreement price for these bulk mail consignments can be viewed as an attempt to stimulate government agencies' demand for unsorted first class bulk mail. The opposite effect can be seen if we look at price trends for a sorted economy bulk mail consignment of 5,000-10,000 items sent to PostNord's low price zone. In the government procurement conducted in 2011 which covered 2012-2014, the price was significantly lowered for sorted economy bulk mail consignments. In the latest procurement that was conducted recently, the price returned to a higher level. From having cost SEK 1.63/item in 2014 for a framework agreement customer to send a 20g letter in such a consignment, as of 1 April 2015 it costs SEK 2.20, which is a price increase of 35 per cent. However, the framework agreement customer is still offered a discount of 29 per cent (SEK 0.89) per letter compared to a price list customer who wishes to 36

purchase the same service. The price adjustment since 2014 is probably an adjustment of the framework agreement price for PostNord's new pricing model for 2015. The figure thus illustrates that the price development for bulk mail consignments in the Swedish letter market has not been standardised since 2006. Instead, it indicates that the prices for non-agreement customers have increased continuously while those for agreement customers have not at all increased at the same rate. This appears to be a continuation of the trends observed ever since the market was deregulated in the 1990s. Before the deregulation, discounts under agreement were rare, and basically all customers were offered prices according to the same fixed price list. The reasons for the price differences are therefore, in addition to customer-specific cost-saving efforts and submitted annual volumes, strong competitive pressure in the bulk mail market. Bring Citymail has continually increased their total market share from approximately 1.5 per cent in the mid-90s, via 8 per cent in 2005 to 14.4 per cent today, counted in volume. In the sub-market of bulk mail not sent overnight, the market share of Bring Citymail is approximately 23 per cent, counted in volume. 3.2 Regulation of prices in Section 9 of the Postal Services Ordinance There is a price ceiling on letters delivered overnight. Under Section 9 of the Postal Services Ordinance, the operator providing a universal postal service (i.e. PostNord) may not increase the price for domestic overnight delivery of single mail items (first class letters) weighing a maximum of 500 grammes by more than the change in the consumer price index (CPI) between July of the immediately preceding year and July of the year prior to this. As noted in Section 3.1.1 above, as of 1 April 2014 PostNord changed the weight intervals that the price list for single letters follows. PTS's review shows that this change does not signify a general increase in price, due to a large portion of letters (those weighing between 21 and 50 g) having received a significantly lower postage (from SEK 12 to SEK 7). Therefore, the average price change for 2014 followed the intentions of the price ceiling. During 2015, no price changes have occurred so far in the services affected by the price ceiling. 3.3 Compliance with Chapter 3, Section 2 of the Postal Services Act 37

3.3.1 PostNord's new pricing model 2014/2015 According to Chapter 3, Section 2 of the Postal Services Act, the pricing of the universal postal service must be transparent, non-discriminatory, cost-oriented and promote efficient provision of the service. PTS exercises continuous supervision of PostNord's pricing, in particular, the provision of discounts and terms. In the past year, PostNord has implemented a change in its pricing model in two stages (1 July 2014 and 1 January 2015). The operator has indicated that the purpose of the change is to clarify the pricing structure for its customers by establishing base prices for its bulk mail services to which additional services, discounts and supplementary fees and service charges may be applied. In connection with the implementation of the pricing model, PostNord lowered the highest level of the annual volume discount available to customers who submit large bulk mail consignments, from 25 per cent to 15 per cent. There was also a reduction of the performance rebate offered by PostNord when the mail items are sorted, processed and deposited in such a way that it reduces the cost of Post Nord's production, from 16 per cent to 14 per cent. In conjunction with PostNord's new pricing model, PTS has initiated a supervisory commission to ensure that PostNord, as of 1 January 2015, consistently applies their new pricing model in customer agreements and that the pricing is thus non-discriminatory. As part of the commission, PTS also intends to check that PostNord's pricing is transparent according to the clarifications made by PTS in PostNord's license terms in 2013. 1.6 of the license terms states that PostNord must openly present the principles which form the basis for the calculation of specific prices (if the prices deviate from the official price list) and performance-based discounts. Similarly, PostNord must also disclose the principles for other special terms that differ from the official terms/general terms and conditions. 3.3.2 Legislation work - Chapter 3, Section 2 of the Postal Services Act PTS's goal is to ensure access to postal services at affordable prices regardless of where you live in the country. At the same time, the authority shall work to ensure effective competition in the postal services market, as effective competition is a prerequisite for good access to postal services. PTS has observed for some time that the price regulations in the Swedish postal legislation are not clear enough for the actors in the postal services market, which in some cases has led to distortions in PostNord's pricing, terms provision and underlying cost calculations. This uncertainty has, among other things, expressed itself in the legal cases that have arisen between PTS and the 38

former Posten AB, such as the zone pricing case in 2010 32 (cost-oriented pricing), Posten AB's appeal of its license terms in 2010 33 (pricing transparency) and the SAC case in 2010 34 (uniformly applied principles for cost accounting). In the latest Postal Services Act review in 2010, PTS was given the right to issue regulations on the requirements of the first three paragraphs of Chapter 3, Section 2 of the Postal Services Act. In the first paragraph, the legislature states that the pricing of the universal postal service must be transparent, nondiscriminatory, cost-oriented and promote efficient provision of the service. The second paragraph states that the party appointed to provide all or part of the universal postal service must have different accounts in order to clearly distinguish between services and products included in the universal postal service and those that are not. In addition, the internal accounting must be set up in compliance with the European Parliament and Council Directive 2008/6/EC and activities must be reported annually to the licensing authority in accordance with the Directive. The third paragraph states that if the party designated to provide all or part of the universal postal service applies special prices and other special terms, this means that, in addition to what is set forth in the first paragraph, pricing and related terms must be transparent and nondiscriminatory. In order to establish clear game rules on the market and provide PTS with tools to ensure compliance with the law through supervision, PTS initiated a so-called impact assessment in 2014 as the basis for a provision relating to Chapter 3, Section 2 of the Postal Services Act. The impact assessment investigated, inter alia, the need and scope of the provision in question and its consequences in terms of cost and otherwise. In the initial stage of the work, PTS has chosen to focus on the accounting rules in Chapter 3, Section 2, second paragraph of the Postal Services Act. As these rules at present only apply to PostNord, PTS has consulted with PostNord on a number of key concepts in the field. In 2015, PTS will focus on the rules for cost accounting, cost-oriented pricing, rules relating to non-discriminatory pricing and pricing transparency. During the assessment, PTS will, among other things, gather feedback from the market 32 The Administrative Court, case no. 43082-10. 33 The Administrative Court of Appeal, case no. 4041-11. 34 The Administrative Court of Appeal, judgment in case no. 4132-11. The Administrative Court of Appeal approved PostNord's appeal and reversed the decision of the Administrative Court (case 46519-10) and PTS's decision from 8 November 2010 (ref. 10-9595), pertaining to the distribution of costs in PostNord's calculation model between letters sent overnight and not sent overnight. 39

and will regularly provide information about the work on the authority's website. 3.4 Conclusions from PTS's review of PostNord's postcosting estimate for 2013 35 The process for reviewing the calculations has become routine and serves its purpose well. In conjunction with this year's review, there have also been discussions regarding changes in the terminal structure, organisational changes and future implications for the post-costing estimate. In addition to the ongoing changes in the terminal network, PostNord implemented major organisational changes during 2014. The business areas Mail & Communication and Logistics were integrated, a new group structure was introduced and huge savings on the administrative staff were instituted. These changes, not least the fact that the production flows are becoming more coordinated between different types of service, will place greater demands on clear and accurate cost allocation/cost accounting between the different services/service types. 3.4.1 Mail & Communication - letter services The negative volume trend for letter services overall is a great challenge for all postal operators and one of the most important issues for the future of the entire postal industry. For the results at the service level in 2013, however, it is found that the efficiency measures implemented by PostNord hitherto have had a minor positive effect on the overall viability of the letter services. PTS has submitted comments indicating that the Unaddressed Direct Mail service is exhibiting incomplete cost recovery while volume-wise it constitutes the largest service. The service operates on the same postman network as the universal postal services. However, PTS has not been authorised to take any action to regulate the pricing of the service as it is not covered by the definition of the universal postal service. PTS also notes that the category of service which represents the single largest negative impact on earnings, Import, is located outside the sphere of control of both PTS and PostNord. In 2013, the losses due to the receipt of international mail items have increased significantly, mainly due to the rapid growth in e-commerce from China/Hong-Kong. The underlying cause is distortions in the tariff system regulated through the Universal Postal Union Congress (UPU). PostNord does not obtain full cost recovery for these 35 PTS carries out a review of calculations during the second half of the year after the end of the financial year. In other words, these conclusions are based on the review that took place during the third and fourth quarters of 2014. 40

deliveries and is thus forced to subsidise e-commerce mail items from certain countries, mainly in Asia (see also Section 1.2.1). 3.4.2 Logistics - parcel services With regard to cost accounting for parcel operations, PTS has basically no objections regarding the 2013 post-costing estimate. However, the authority can observe that there are several question marks pertaining to the cost accounting and pricing of parcel services aimed at the general public (including small businesses and associations). Not least due to the margins for these services being considerably higher than the margins for the more competitive services aimed at businesses. The share of this segment (C2X) 36 certainly only represents a little more than 1 per cent of the total parcel operations, but as the services target those customer groups that lack the ability to negotiate their prices, the authority monitors developments closely. In addition, PTS noted in the report Consumer prices for letters and parcels, An international comparison 37 that: [In] a comparison between the Nordic countries, the Swedish consumers [must] pay the most for sending a domestic postal parcel. It is not surprising if one looks at the significant price increases that have occurred in this service in Sweden in recent years. For postal packages sent to Europe and the rest of the world, the price in Sweden is also relatively high. See also Section 3.5 below. PTS therefore intends to monitor the development of the margins for these services and has asked for the costs to be clarified in a better way starting with the post-costing estimate for 2014. 3.5 Value for money letters and packages The mandate of PTS involves monitoring how the prices develop in the Swedish postal services market. In 2014, the authority thus conducted an international comparison of the prices for letter and parcel services. The report dealt with both the price trend in the past decade (2004-2014) and how PostNord's consumer prices in the current situation relate to corresponding prices in the other Nordic countries, as well as in Germany and the UK. In this report, PTS has focused the analysis on the most common services geared toward consumers and small businesses: first class letters and postal packages, divided into domestic and international destinations. The price trend in Sweden differs between different services. The ordinary domestic postage for letters is price regulated by the price ceiling model 36 C2X = Consumer to consumer, business etc. 37 PTS-ER-2014:3, 2014-11-25 41

presented in the Postal Services Ordinance (see Section 3.2 above), and it has meant that only one price increase for stamped first class letters has been implemented in the last decade (until and including 1 January 2014). As a result, the price increase on stamped first class letters has during this ten-year period stopped at about 9.1 per cent. At the other end of the scale are domestic postal parcels which, for example, for the lowest weight class (up to 3 kg), increased by 34.8 per cent during the same period. As a comparison, it can be mentioned that the CPI over the comparative period increased by 13.3 per cent. The international comparison also shows that there are large variations between different services. In Sweden it is, for example, relatively inexpensive to send domestic first class letters, where the price level is lower than in most other Nordic countries (see Figure 5 below); Only Iceland is lower. Taking into account the differing VAT rules, the difference in relation to both Iceland and the big countries Germany and the UK appears marginal. In contrast, the Swedish prices along with the Danish and Norwegian are highest in the Nordic countries when it comes to sending letters to Europe. However, as shown in Section 3.4.2, the Swedish consumers must pay the highest rates compared with other Nordic countries when it comes to sending a domestic postal parcel, see Figure 6 below. Figure 5: Consumer prices in SEK (incl. VAT), domestic first class letters 38 38 PTS-ER-2014:3 42

Figure 6: Consumer prices in SEK (incl. VAT), domestic first class postal packages 39 Overall, the picture becomes fragmented across the price levels for letter and parcel services in Sweden compared with that of neighbouring countries. Given the diverse geographic and demographic conditions in the different countries, PTS cannot find that the current Swedish prices, despite large margins in some cases, could be considered unreasonable from an international perspective. One parameter not be forgotten in this context is the quality of the services on offer. Independent measurements of quality tend to show that PostNord maintains a healthy position in an international comparison. 39 PTS-ER-2014:3 43

4 Complaints from the general public 4.1 Complaints received by PTS By far the most common reason for the public to refer to PTS is to make complaints about shortcomings regarding delivery; either mail items not arriving for some reason or the receipt of someone else s letters. Other common complaints are disagreements with PostNord regarding the location of letterboxes and how PTS's general advice on the distribution of mail (PTSFS 2008:6) should be interpreted. If the authority finds there to be reason, PostNord is contacted to investigate the root of the problems in the case in question and what needs to be done to address them. Sometimes, the complainant may also be advised to turn to PostNord's central council for distribution issues for a review of the local organisation's decision. In 2014, approximately 650 requests (around 550 the previous year) were received in different types of mail-related matters, including complaints. 4.2 PostNord's reporting of complaints Chapter 4, Section 10 of the Postal Services Act (2010:1045) on dealing with complaints stipulates that those who are licensed to conduct postal operations must have procedures to deal with the users' complaints. PostNord has assigned the responsibility for this task to its Customer service. Since PostNord is the largest player in the market, it is vital that the company has an effective customer service that can handle all customer queries in a way that inspires confidence among the public. Customer service was previously divided into two separate units, one for Posten Mail & Communication and the other for Posten Logistics (parcels), but in conjunction with PostNord's reorganisation in 2014, it was decided to merge these two units. PostNord distinguishes between customer comments and complaints. The latter refers to complaints about specific services included in PostNord's range of products and for which the customer, under certain conditions, may demand compensation if PostNord has not fulfilled its commitments under the specific product and service conditions. The grievances reported in Annex 1 refer specifically to complaints within the universal postal service and that are reported according to the template given in the European CEN standard EN 14012. 44

Customer comments cover all forms of response from consumers. This can be anything from inquiries, comments and praise to grievances that are not classified as complaints. PostNord registered about 76,000 customer comments during 2014 in respect of letter and parcel distribution, which is a decrease of about 5 per cent compared to the previous year. The majority of comments, around 44,000 (approx. 58 per cent), concern distribution-related complaints regarding letters and parcels. This is a decrease of approximately 14 per cent compared with the previous year. Around 2,600 customer comments were received in the form of ideas and praise. 4.2.1 PostNord's trend in complaints 2011-2014 Below, PTS has compiled the trend in the number of complaints relating to domestic and international letter services as well as domestic and international postal parcels for the past four years (2011-2014). Figure 7: Complaints, Domestic letters The complaints pertaining to domestic letters peaked in 2011 and then amounted to about 29,000. Subsequently, the number of complaints have dropped, and in 2014 these amounted to less than 20,000 - while the letter volumes continue to decline gradually. The number of complaints in relation to the quantity of mail has, however, remained unchanged during the period, amounting to approximately 0.001 per cent. The complaints relate mainly to missing mail items, which represents between approximately 63-66 per cent during this period, while a smaller percentage relates to delayed mail items (approx. 6-7 per cent) and damaged mail items (also about 6-7 per cent). 45

Figure 8: Complaints, International letters The number of complaints pertaining to international letters peaked in 2013 and amounted to about 8,000. The number of complaints in relation to the quantity of mail at most amounts to 0.024 40 per cent. As with domestic letters, the complaints primarily refer to missing mail items, which represent about 78-82 per cent of the complaints. Figure 9: Complaints, Domestic postal parcels The number of complaints concerning domestic postal parcels has increased during this four-year period, the most being between 2011-2013, where the complaints had increased by approximately 34 per cent. However, despite complaints having increased over the entire four-year period, the number of complaints in relation to the volumes has declined gradually during this period; from approximately 0.2 per cent in 2011 to approximately 0.1 per cent in 2014. There has thus been an improvement in quality when it comes to domestic postal parcels. Unlike the domestic and international letter, here there is a smaller percentage of complaints relating to missing mail items (approx. 43-52 per cent), while a 40 The figure applies to both 2013 and 2014. In 2011, the percentage of complaints amounted to approximately 0.018 per cent, and in 2012 the figure was approximately 0.019 per cent. 46

larger percentage relates to damaged mail items (8-17 per cent). The complaints regarding damaged mail items peaked in 2014, which can be compared with 2012 when they were at their lowest. During this two-year period, these complaints increased by approximately 133 per cent which, however, in terms of numbers is a low number in relation to the number of complaints and produced volume. With regard to missing mail items during the entire period in question, the number of complaints peaked in 2013 (16,129) which is an increase of approximately 74 per cent compared with 2011 (9,273). Figure 10: Complaints, International postal parcels The number of complaints relating to international postal parcels has fallen sharply between the years 2012 and 2014 by about 30 per cent, despite volumes continuing to increase gradually each year. In 2012, when the number of complaints peaked, the number of complaints in relation to the volumes amounted to about 0.21 per cent. In 2014 the year when the number of complaints was lowest this has resulted in a decrease in the percentage of complaints to about 0.13 per cent. There has thus been an improvement in quality in the last two years when it comes to international postal parcels. The complaints here relate mainly to missing mail items (approximately 66-75 per cent during the four-year period), while a smaller percentage relates to damaged mail items (approx. 3-12 per cent) and delayed mail items (approx. 4-8 per cent). 4.3 Complaints - Bring Citymail The complaints that Bring Citymail has reported to PTS for 2014 regarding domestic letters 41 amounted to 6,605, which is a clear improvement compared 41 Bring Citymail does not handle parcels 47

to 2013 (9,867). The company distinguishes further between complaint cases and information cases. In the first case it involves, among other things, wrongly delivered mail, while in the second case it can involve questions about addresses and entry code changes, etc. 48

5 Service and accessibility 5.1 The population's use of postal services Within the framework of the PTS regulatory activities, the authority carries out periodic user surveys. The purpose of the surveys is to, among other things, describe the Swedish population's use of postal services and their views on the quality of PostNord's service in the company's capacity as designated provider of the universal service. The latest survey to map the population's mail habits was conducted in early 2014 42. Overall, the respondents had given good grades to PostNord both in terms of service and accessibility. The respondents were, for example, pleased with the staff's knowledge and attitude, both at PostNord's own service points and at their agents. These results are in line with previous years' surveys, which means that there has been no fundamental change in people's views on PostNord's service network. A new survey of the Swedish population's mail habits is planned for 2016. During 2015, PTS will also conduct a qualitative study which mainly concerns different target groups' current and future needs of postal services. The results of the study can, inter alia, act as a factual basis for the inquiry into postal service that the Government has announced in the budget proposal for 2016. 5.2 PostNord's service network The service network is the physical structure in the form of business centres, postal outlets and service points through which PostNord makes their products and services available to users. PostNord's various outlets are mainly supermarket stores that are part of the Axfood, COOP or ICA groups, with which PostNord has concluded central cooperation agreements. This gives PostNord access to a virtually nationwide network of service points. In areas where there are no outlets covered by these central agreements, PostNord instead enters local agreements with independent shops or service establishments. In 2014, there have not been any major changes to PostNord's service network as, in autumn 2010, PostNord re-negotiated the central agreements with their agents. In 2015, PostNord will conclude new agreements with agents, pertaining to the period 2016-2020. PTS has during the year been informed of 42 PTS-ER-2014:9 49

this and will continue to monitor PostNord's actions prior to the new agency agreements. 5.2.1 Postal outlets and stamp agents According to data provided by PostNord 43, there were 1,535 postal outlets in December 2014, which is a similar level compared with the same month in 2013 (1,539). It has also not come to the attention of PTS through complaints or other means that accessibility has changed in a way that has disregarded the needs of users. The primary factors influencing the localisation of postal outlets are postcode division, population base, infrastructure, communications options and the users' travelling habits (particularly concerning work commutes and purchasing trips). According to the law, stamp agents are not considered office and deposit points as they only offer the sale of stamps and packaging. In December 2014, the number of stamp agents was 2,350. 5.2.2 Business centres Business centres are today the only part of the service network run under the auspices of PostNord. PostNord reports that, at the end of 2014, there were 274 business centres. These are mainly concentrated to areas that have many companies. Last year, the number of business centres was 276. Regarding the drop in the number of business centres, it is, according to PostNord, due to a weak customer base. Customer base primarily means the customers who come in and deposit mail. PostNord states that the delivery of various mail items is easy to redirect to outlets with good accessibility for the recipient. PostNord does not have any plans to decrease the number of business centres to a certain level, but rather closes them once the depositing customers have become very few; often only a couple of customers a day. 5.3 Collaboration with regional actors on postal services in sparsely populated areas PostNord has reported to PTS on the challenges it is facing with regard to postal service in sparsely populated areas in the near future. A more sparsely populated countryside where certain parts of other existing infrastructure, for example regional bus lines, are decreasing in extent also has consequences for PostNord's service. In order for PostNord to still be able to fulfil its social commitment at a reasonable cost, it may therefore become necessary to make 43 Ref. 14-10387 50

changes to the distribution of mail and parcels. It may take the form of, for example, moving letterboxes or altered distribution routes for rural postmen. At the same time, there are changes in terms of household and business communication and purchasing habits, among other things, through the significant increase in e-commerce in Sweden's more sparsely populated regions. This calls for continued good delivery service, as this is a necessary requirement for residents and businesses in sparsely populated areas to be able to take advantage of the possibilities provided by increased e-commerce. PTS has in recent years in several different reports described the feasibility and design of postal service in sparsely populated areas: - Survey of postal services in rural areas 44, - Survey of the distance to mailboxes outside urban areas 45, - The population s use of postal services2014 46, - Postal services in rural areas A Nordic comparison 47 and also - Regional service programs and post 48. These reports show that PostNord offers a delivery service that generally corresponds to the needs of society and PostNord's mandate as designated provider of the universal postal service. However, mail recipients have perceived a negative trend in the service at certain locations in recent years and there are worries about further deterioration. The reports also show that it is not unique to Sweden that the provider of the universal postal service encounters challenges. In all the three Nordic countries studied more closely by PTS, work is underway to create long-term sustainable conditions for the provision of the universal postal service. Similar work is also being pursued in most other European countries. As regards postal service in sparsely populated areas, cooperation with different regional actors is crucial. Therefore, in 2014, PTS initiated discussions with PostNord on the need and potential for developing cooperation in postal matters with regional authorities in particular. PTS and the Swedish Agency for 44 PTS-ER 2013:22 45 PTS-ER 2013:13 46 PTS-ER 2014:9 47 Ref. no. 15-2691 48 Ref. no. 15-2691 51

Economic and Regional Growth have also initiated a discussion on how the work with postal matters can be developed within the framework of the service programmes. The importance of regional initiatives is also stressed in the inquiry Service in sparsely populated areas - final report 49. The inquiry regards postal services as basic service and highlights the importance of both an open and flexible approach and collaboration between PostNord and other actors in order for the service to be maintained in the longer term. 5.3.1 Lidsjöberg, Strömsund Municipality As an example of the change in postal service in sparsely populated parts of the country, there is the Lidsjöberg area in Strömsund Municipality. Based on actual changes in the delivery service that PostNord implemented in the area in summer 2014, the inquiry Service in sparsely populated areas presents a discussion on the need for regional development projects. Such projects can provide important experience for developing the work to ensure access to postal service in the most sparsely populated areas. According to the inquiry, initiatives should be able to be taken by county administrative boards and other bodies with responsibility for regional development without abandoning the principle of responsible practitioners' responsibility. The change that was implemented in the Lidsjöberg area in summer 2014 entailed, inter alia, that households and businesses received mail five days a week instead of the previous three days a week. However, as part of this change, a few (3) of these recipients had a very long distance, up to 40 km, to their letterbox. Since it is questionable whether this change initiative can be considered acceptable, PTS has initiated a supervisory commission in connection with this and, during the processing, has met with representatives of the mail recipients in question on two occasions, including once during a visit to the area in January 2015. PTS has subsequently discussed, among other things, the possible alternative delivery forms with PostNord. PTS has also initiated a more general discussion with PostNord about how to develop and clarify the basis for evaluations of different alternative delivery forms in connection with changes in rural distribution. 5.3.2 System support for the monitoring of accessibility and changes The changing demand for postal services and the rapid pace of urbanisation create challenges for the postal service in the country and for the ability to 49 See the report Service i glesbygd [Service in rural areas], SOU 2015:35, pp 235-237. 52

meet the demand for existing postal services, especially in the more sparsely populated regions in the country 50. PTS has therefore seen a need to build a support system (GIS 51 ) to obtain more detailed control over distances to letterboxes/groupings of letterboxes, frontdoor letterboxes and postal outlets, and to monitor the changes taking place. By doing so, PTS is better prepared to analyse the complaints received by the authority and to answer the questions posed by the Government/ministries and the Commission. The development work is to some extent carried out in collaboration with Growth Analysis. A collaboration that PTS sees a need to develop in order to effectively be able to support the work is pursued within the framework of the regional service programmes. As of autumn 2014, this development work has been intensified and will continue during 2015. PTS expects GIS support to become an integral part of PTS's future monitoring and analysis of accessibility and changes in mail delivery and other service networks, especially in sparsely populated areas. 5.4 Supervision and monitoring of the quality of mail delivery Supervision by PTS is designed to verify that postal operators comply with the requirements of the Postal Services Act and other regulations that have the support of the Postal Services Act. This supervision is either exercised on its own initiative, e.g., in the form of inspection visits to operators, or following comments/complaints received from the public or other actors in the postal services market. A specific part of the PTS supervision is devoted to the special requirements imposed on PostNord, in its capacity as designated provider of the universal postal service. In 2014, PTS carried out an inspection visit at PostNord 52. The areas concerned included how delivery operations had been affected by the changes made by PostNord on the occasion of their reorganisation in 2014. The inspection visit did not yield any remarks by the authority. 50 It should be emphasised here that due to the strong concentration of population around urban areas that we have in Sweden, various forms of rural issues arise, even in areas that are relatively close to larger cities and towns. 51 GIS stands for Geographic Information System. 52 Ref. no. 14-6473 53

For various reasons, PostNord needs to review and change its operations. PTS has noted that such changes can lead to the deterioration of service in delivery operations. Recently PTS has received some complaints from mail recipients in Stockholm regarding quality problems with the delivery. Some complaints relate to the same area that has repeatedly come up in the past. It is primarily an issue of delayed or lost mail. In late January 2015, PTS initiated a supervisory commission and has had dialogue with PostNord regarding delivery problems in southern Stockholm. According to PostNord, these are of transient problems. Based on this, and the fact that PostNord themselves are receiving complaints (see Section 4) concerning delivery deficiencies, it is important that PostNord, in connection with organisational changes, carefully investigates and where necessary remedies any deficiencies in quality. In light of this, PTS is positive with regard to the changes that PostNord has made in respect of the handling of complaints that concern delivery operations. Since November 2014, PostNord's Customer service follows up these complaints which, among other things, involves the responsible production area manager. The changes made by PostNord as a result of their reorganisation in 2014 have also led to other challenges. In conjunction with these, PTS received some complaints from consumers regarding PostNord's customer service which mainly concerned the long waiting times, which led to dissatisfaction among those affected. The authority has therefore initiated a dialogue with the responsible functions within PostNord due to these shortcomings in quality. During the end of 2014, PTS received far fewer complaints from consumers regarding PostNord's customer service, which is why the supervisory commission was discontinued without further action by the authority. 5.4.1 Modified delivery procedures within PostNord PTS has received information regarding the trials with modified delivery procedures initiated by PostNord in Uddevalla. The trial involves an increase in the proportion of pre-sorted mail and a reduction in the sorting of mail out at the local offices. According to PostNord, this should lead to coordination gains and to the possibility of letters and parcels being distributed simultaneously. PTS welcomes this coordination. Among other things, the change leads to both economic and environmental benefits when there is no longer a need for two trucks, one with letters and one with parcels, to drive to the same address. This will instead be coordinated. However, another consequence of this change is that the postmen have longer distribution routes, which in turn leads to many mail recipients receiving their mail much later in the day. This can lead to problems for those recipients who need and are accustomed to being able to send return mail directly during the 54

same day. For example, if a recipient is used to receiving their mail by 15:00 at the latest, they can send return letters before 18:00, but if the mail is instead first delivered at 17:00, it makes it difficult for them to make the evening deadline. The change can thus be perceived as a deterioration by some mail recipients and lead to an increased number of complaints. PostNord has announced that the current procedures will be implemented throughout the country. PTS has so far not received information about the precise timetable for the implementation in the different parts of the country, but has emphasised the importance of taking into account the needs of users in this process and of conveying very clear information to mail recipients, both private individuals and business owners, regarding those changes that concern them, e.g., relating to changes in emptying times. 5.4.2 Distribution issues that concern other postal operators PTS also receives complaints from the public regarding postal operators other than PostNord. At the end of last year, it was brought to the attention of PTS that letterboxes belonging to Bring Citymail had been stolen from two different locations in Kungsängen. As a result of the incident, the company's local postal delivery office changed its risk analysis and ordered wires and locks that lock down the letterboxes to reduce the risk of this happening again. PTS has had a dialogue with Bring Citymail regarding the problems with the stolen letterboxes and will pay particular attention to whether this type of theft is repeated. At the end of 2014, PTS was informed that the company Västsvensk tidningsdistribution (VTD) had set up their own letterboxes for the delivery of mail at a number of locations. As a result, residents have complained that they have to collect their mail from two places; both from the letterbox where they have so far received their mail and from the one which VTD has set up. Since the matter concerns the principle that all recipients are entitled to receive all their mail at one address, this is now the subject of discussion between PTS and all postal operators. 5.4.3 Residential customers without five day deliveries One of the fundamental requirements of the universal service is that PostNord shall be able to deliver mail to recipients on every working day regardless of where in the country they live. However, an exception may be made from five day deliveries owing to circumstances or geographical conditions approved by the licensing authority. The number of mail recipient without five day 55

deliveries was approximately 900 53 at the end of 2014, which is a decrease of approximately one hundred recipients compared to 2013 54. According to PostNord there are two principal reasons for the decrease. One reason is that the number of residents in the most sparsely populated areas is decreasing. The other reason is that several postal delivery offices have, during the year, made changes to their rural delivery lines, which has led to households being able to receive mail deliveries five days a week, the downside being an increased distance to their letterboxes 55. The political objective for the number of households without five day deliveries not to increase is set forth in the Government Bill 1997/98:127 (p. 23). At that time, there were 1,600 residential customers that did not have five day deliveries. 5.4.4 Delivery times For the universal postal service, the Postal Services Ordinance (2010:1049) states that it should be possible to deliver at least 85 per cent of the letters deposited for overnight delivery within Sweden on the next working day and at least 97 per cent within three working days. On assignment from PostNord, TNS-SIFO carried out a survey in 2014 with the aid of approximately 164,000 first class letters. The result for 2014 showed that 93.26 per cent (with a statistical margin for error of 0.12 per cent) of first class letters could be delivered on the first working day after being deposited, which is well above the minimum requirement of 85 per cent and a result at the same level of quality as 2013. In the latest international comparison made by WIK-Consult, Sweden fares comparatively well within the EU/EEA. 56 PostNord's result is an average for the entire country and for all the months of the year. The best result was achieved in May 2014, with 94.66 per cent of letters being delivered on time, while the worst month was December with 89.49 per cent delivered on time. The last month of the year has the poorest measurements almost without exception due to the sharp increase in letter volumes before Christmas, while winter weather often impedes distribution. 53 It may be the case that voluntary agreements about forgoing daily delivery (in exchange for the mail recipients receiving mail delivered closer to home) are not included among the approximately 900 recipients that do not have five day deliveries. The is due to data being gathered from PostNord's various regions, and different regions having assessed differently whether or not households who voluntarily renounced five day delivery were to be included in the report or not. 54 Ref. no. 13-10926 55 Ref. no. 14-10387 56 WIK-Consult Main Developments in the Postal Sector (2010-2013) Country Reports. The latest data applies to 2012 56

The result from December 2014 was a considerable improvement compared with the same month in 2013, when 87.2 per cent of letters arrived on time. The somewhat poorer results from the autumn of 2014 are also attributable to some initial problems during autumn 2013 in connection with the start-up of the postal terminal in Hallsberg. The results also vary in geographical respects; the Malmö terminal shows the highest result (95.12 per cent) while the terminal in Hallsberg shows the lowest (89.52 per cent). According to PostNord, this is explained by the terminal being new and having had initial teething problems, but the quality has been improved during 2014. 5.4.5 Introduction of communal letterboxes The trade association Forum for Communal Letterboxes (FFF) noted a slight increase during 2014 in the proportion of households in multi dwelling units receiving mail distributed to communal letterboxes. Nearly 910,000 households in multi dwelling units, approximately 37 per cent of all households in multi dwelling units, today receive their mail in communal letterboxes, compared with 34 per cent at the same time in 2013. 5.4.6 Undeliverable letters The undeliverable letters are not decreasing in number at the same pace as the total number of letters sent in the country is diminishing. PTS concludes that there is a skewed relationship between the number of undeliverable letters and the total amount of letters. From Figure 11 we understand that while PostNord's letter volumes have diminished since the start of the 21st century from 3.26 billion to 2.07 billion, the number of letters arriving at PTS has increased from about 270,000 to approximately 380,000 per year. 57

Figure 11: Undeliverable letters and the total amount of letters At the start of the 21st century, one in every 12,000 letters was classed as undeliverable, and now one in every 5,400 letters is classed as undeliverable. There may be several reasons as to why the undeliverable letters are increasing in number. One explanation may be that the general public no longer possesses the same knowledge as before regarding the importance of writing the correct recipient address and also stating who the sender is on the envelope. A second explanation may be that many businesses and associations do not have up-todate address registries for yearly dispatches. A third explanation may be that increasing numbers of letters are directed to PTS without further investigation of the address by the operator. Finally it may be the case of a lack of knowledge on the part of the operator's employees concerning what an undeliverable letter is and how it should be handled. In the case of undeliverable registered letters, the agents' lack of knowledge may be a reason for no sender or incomplete information being indicated on the letters. 5.5 Risk and vulnerability analysis of the postal services sector In its provision (2010:7) 57, MSB (the Swedish Civil Contingencies Agency) emphasises that the operations analysed should be of critical importance to society and that critical dependencies exist, which means that a loss or disruption in delivery operations leads relatively promptly to impairments that may result in a serious crisis occurring. However, it has not been fully established whether the universal postal service, or parts of it, are to be considered of critical importance to society. According to the Ordinance, PTS 57 The Swedish Civil Contingencies Agency's provisions on governmental agencies' risk and vulnerability analyses 58

only has responsibility for emergency preparedness in the area of technical infrastructure. In 2014, within PTS's areas of responsibilities, a special risk and vulnerability analysis was conducted for the postal sector, which is included as part of the report PTS shall submit to MSB in accordance with the Emergency Management and Heightened Alert Ordinance (2006:942). The analysis is the third one conducted for the postal sector (PTS-ER-2014:30) and, as with the others, has been limited to PostNord since the company is still the dominant actor in the market and is also responsible for the provision of the universal postal service. The analysis was performed using a predetermined basis of assessment based on the requirements on and expectations of the postal sector as can be deduced from the laws and regulations governing the universal postal service. This is because the dependence of critical societal operations' on the universal postal service in the current situation are not clear. Consideration has, however, been given to business commitments related to key customers and the organisation's ability to manage the effects of disruptions in excess of 24 hours. Since the 2012 analysis (updated by PTS 2013), only a few changes that impact the risk profile have been made. Two new terminals have been put into use, Hallsberg and Rosersberg. The terminal in Hallsberg replaces the now closed terminals in Karlstad and Västerås. The terminal in Rosersberg has been put into operation during autumn 2014 and will replace the terminals in Uppsala and Tomteboda as well as parts of the terminal in Årsta during 2015. The new terminals have new sorting machines which are deemed to be more reliable than the old ones. However, the fact that the total number of letter terminals is being reduced by 2 and, after Uppsala and Tomteboda have been shut down, amounts to 10, entails a decrease in the ability to reroute mail and increases the vulnerability of each network point. The ability to reroute decreases partly due to a reduced number of facilities but also because of an increased distance between the terminals. The increase in handling at the new terminals also means that the consequences of a significant disruption at these facilities may be more serious than at the replaced and smaller terminals. In summary, this year's analysis has identified a number of critical processes and resources (internal and external) within PostNord's operations. In general, however, PostNord is assessed as having a good overall ability to withstand and manage serious disruptions in the operations that can be regarded as critical for society. Although some sub-operations are more vulnerable than 59

others, the operator is still assessed as having a robust operation capable of maintaining the universal postal service at an acceptable level. 60

Concluding remarks This report shows that PostNord adequately fulfils its obligations in its capacity as designated provider of the universal postal service. The report also describes the general situation in the postal services market today and the conditions for maintaining a good postal service in the future, in light of the major changes that can be expected in the coming years. Although the situation in the Swedish postal services market can still be said to be characterised by a certain stability, inter alia, with regard to maintaining service quality, there are several elements of uncertainty just around the corner. The outcome of the judgment to be pronounced by the European Court of Justice on 21 April 2015 is the most imminent. If it would mean that large parts of the universal postal service must be VAT exempt, this will change the game plan on the Swedish market altogether and give rise to various regulatory measures to mitigate the damaging effects of such an outcome. Added to this is the uncertainty about how the European Commission will act in terms of the development of a much needed new Postal Directive and possible regulation of cross-border e-commerce. The Government has announced that it intends to appoint a special investigator to review the appropriateness of the entire Swedish postal legislation in light of the growth in digitalisation. The inquiry directive is likely to be broadly worded and relate to, inter alia, the continued need for requirements on overnight delivery and the current price ceiling for single mail items; two key issues for the development of the Swedish letter market. There are also other conditions that require regulated oversight for these to be better adapted to the postal reality as it looks today. What is to be considered postal operations as defined by law and what should be included in the universal service are two examples in this context. Without exaggerating, it appears that 2015 will be an especially interesting year for those who follow developments in the postal services market. Sweden is relatively well equipped to meet the challenges now facing the postal industry, which is hopefully evident in this report. This does not rule out the fact that significant regulatory changes may be necessary. The purpose of these should be to, through necessitated or anticipatory adaptations to the regulatory framework, create as favourable conditions as possible for a sustainable and high quality postal service throughout the country. 61

Appendix 1: PostNord's report of the number of complaints regarding letters and parcels, 2014 Number of complaints Domestic letters Number of complaints Number of complaints where compensation has been paid out All categories 19 139 652 Missing mail items 12 118 257 Delayed mail items 1 333 193 Damaged mail items 1 403 43 Number of complaints International letters Number of complaints Number of complaints where compensation has been paid out All categories 7 619 494 Missing mail items 5 916 355 Delayed mail items 473 39 Damaged mail items 443 45 Processing time Domestic letters All complaints Average processing time % processed within 30 days Number processed within 30 days All categories 15 88% 16 882 Missing mail items 11 93% 11 303 Delayed mail items 21 87% 1 149 Damaged mail items 11 92% 1 284 62

Processing time International letters All complaints Average processing time % processed within 40 days Number processed within 40 days All categories 38 60% 4560 Missing mail items 38 59% 3462 Delayed mail items 35 63% 298 Damaged mail items 29 66% 292 Number of complaints Domestic postal parcels Number of complaints Number of complaints where compensation has been paid out All categories 28 197 7 310 Missing mail items 14 655 2 134 Delayed mail items 1 754 698 Damaged mail items 4 680 1007 Number of complaints International postal parcels Number of complaints Number of complaints where compensation has been paid out All categories 12 443 798 Missing mail items 8 870 719 Delayed mail items 494 35 Damaged mail items 372 15 63

Processing time Domestic postal parcels All complaints Complaints with compensation Average processing time % processed within 30 days Average processing time % processed within 30 days All categories 27 69% 30 60% Missing mail items 26 74% 27 70% Delayed mail items 18 90% 18 90% Damaged mail items 35 46% 54 15% Processing time International postal parcels All complaints Complaints with compensation Average processing time % processed within 40 days Average processing time % processed within 40 days All categories 41 49% 52 42% Missing mail items 42 48% 54 19% Delayed mail items 33 74% 31 71% Damaged mail items 29 74% 50 33% Report on complaints, total for 2014 Total compilation Number of complaints Number of complaints where compensation has been paid out All categories 67 398 9 254 Missing mail items 41 559 3 465 Delayed mail items 4 054 965 Damaged mail items 6 898 1 110 64

Number of complaints in relation to quantity of mail Total number of mail items % of total number with complaints % of total number where compensation has been paid out Domestic Letters 2,066.6 million 0.001% 0.000% International Letters 32.2 million 0.024% 0.002% Domestic Parcels 27.5 million 0.10% 0.02% International Parcels 9.5 million 0.13% 0.01% 65