Examination of Witnesses (Questions 100-119)|
TUESDAY 16 APRIL 2002
100. 70 per cent?
(Mr Carr) No. One of the major factors was the introduction
of VAT on the price of stamps. At the moment we do not believe
that is likely to happen here but it always could.
101. But VAT accounts for, what23 per
(Mr Carr) Yes, or is it 22?
102. It is of that order but there is still
another 47 per cent to go.
(Mr Carr) Absolutely, but we have not studied Sweden
in that depth.
(Mr McGregor) Chairman, I think it is important to
see the Swedish experience in context. What happened was that,
following the opening of the market place, a very successful competitor
established itself primarily in the urban areas in Sweden and
was developing a very successful business. Swedenpost chose to
respond to this with anticompetitive, predatory pricing and there
were not the same kind of pricing controls in place in the Swedish
regulatory regime as we have in the UK regime. That enabled Swedenpost
to cut the price of essentially its business mail to the point
where it put the competitor out of business but, in order to recover
revenues, it put up the price of its domestic and social mail
to the levels you have referred to. That cannot happen here in
the UK because of the pricing controls that are in place in the
103. What would be the impact on consumers of
cutting services to the legal required minimum?
(Mr Carr) You mean by reducing the?
104. Well, Royal Mail offer a lot more services
that are way above the licence but, because of the competition
that has been brought inunfair competition thanks to yourselves
supporting Postcommthere will be difficulty in keeping
the services that they have got?
(Mr Carr) Firstly, I do not think it is unfair competition
105. We will come back on that in a moment.
(Mr Carr)But the obligation, as you know, is
that the service has to be provided to every home every day, a
single delivery without a time limit on it, unless they choose
to impose that on themselves. The impact, therefore, should be
nil as far as the consumer is concerned simply because that Universal
Service will continue to be provided anyway and it has to be by
the terms of the licence.
106. That is right, so what we are saying is
fair competition; will the competitors have a Universal Obligation?
The answer is no. Are we going at a different rate from Europe?
The answer is yes. How can you justify that? I am baffled.
(Mr Carr) What you have just said is incorrect. There
is no reason why competitors coming in should not have a Universal
Service Obligation providing the regulator chose to do that. At
the moment we have a single licensed operator which is Consignia,
or Royal Mail, and that is a situation which can change.
107. So the rural services are being opened
(Mr Carr) Going back to something said earlier, and
I think it is perhaps worth making the point to you, every single
product covers its direct costsnot all of its costs but
its direct costand every service covers its direct cost.
But where there is a variation, because all costs are not covered,
the deficit is only 81 million out of 6 billion and that is not
taking account of any of the benefits that accrue to Consignia
being the Universal Service provider.
108. What do you call "fair competition"?
Having the profitable bits open to competition and the least profitable
bits not open to competition? To me that is not fair competition,
but you think it is.
(Mr Carr) I think fair competition is where there
is a very clear understanding of what services are being provided
and that is being provided at a profit. Therefore anybody coming
into that market has to compete on the same terms. What is missing
from your argument and the argument of others is that John Roberts
told you quite clearly that in terms of access pricing they would
remove from the retail price those elements of the functions that
are being performed by the potential competitor; therefore they
still receive the same revenue except for that work which is being
done by somebody else. Therefore their revenues will continue
to be sustained for the work they have to do, even if that includes
the final mile delivery. Revenues, therefore, will be generated
to Consignia by competition and competitors coming in, even if
they are using them for the final mile.
109. But you still do not get round the fact
that there will be no competition on rural services but it will
be on the business services first which is the profitable part.
Why not open up the whole market in the future like Europe to
ensure that we go at the same pace and ensure that there will
not be cherrypicking with the unfortunate ability for Consignia
to cherrypick in those European services?
(Mr Carr) One of the major problems for the European
programme is firstly it does not open up very much at all until
you get down below 50 gramsand I believe that is 2006and
furthermore there is no end date. All we are told is we might
get an end date around 2009. You have had the Chairman and Chief
Executive of Consignia sitting here and telling you that they
want certainty as something to focus on, and the one thing that
is not coming out of Europe is certainty.
110. Can I explore a bit more what you think
about the economics of the rural versus urban delivery? In your
evidence you make the point similar to the point that Postcomm
has made that the cost is the number of times a piece of mail
is handled rather than whether it is urban or ruralin other
words, distance does not come into it. You heard Consignia earlier
on say that it is not as simple as that, and it depends on the
mix of urban and rural. In the answer your colleague just gave
a few moments ago about experience in Scandinavia, a point was
made that competition came in on the urban services. What is different?
(Mr Carr) Before we give you the detail, the only
difference in the cost base on all of the services, whether urban
or rural, is a negative of £81 million out of £6 billion,
so however you cut the cake, that is the figure you end up with
as being the worst possible case.
(Mr McGregor) We have examined this and I have to
say we have looked at it very much on the basis of the data that
Consignia itself has supplied. They were explaining to you some
of the hesitations they have about their management systems and
the kind of data that generates, but nonetheless both we and Postcomm
need to take a view on the basis of Consignia's own data. Now,
the traditional view around costs, particularly urban costs versus
rural costs, is that there were three main cost drivers: one was
the distance mail had to travel, the other was the density of
the area of population being served with the thought that the
lighter the density of the population the more expensive it would
be to deliver mail, and the third was the weight of the item of
mail. That traditional thinking has been challenged, not only
by the work that Postcomm has done but also by Consignia itself
of Consignia now recognises that handling is actually probably
the major cost driver within the system, not the sole one but
probably the major one, and they themselves also now believe that
weight, which for 150 years has been one of the cornerstones of
their pricing regime, is not now a cost driver and they have gone
out to consultation on the idea that they might be wanting to
price according to the size of a piece of mail. With the very
major changes taking place in the traditional views around what
constitutes a cost we, and I think probably everybody who tries
to look at the cost data that is being generated in this debate,
need to be rather cautious because we think that the analysis
might well change and in a couple of years' time, driven by much
better management data from Consignia, the calculations might
look very different.
111. Understanding your worries about the absence
of end dates, if nobody really knows what the data is that is
reliable at the moment and, taking your words, if what everybody
needs to be is cautious, is it not ill advised to go full speed
(Mr McGregor) But it is not full speed ahead and that
is one of the reasons why we have welcomed the approach that Postcomm
has come forward with which is a carefully staged approach which
has three sets of safeguards built into it. There is a fairly
small initial opening of the marketplace with the ability to review
the effects of that both on the provision of the Universal Service
and Consignia's finances in 12 months' time, followed by a second
tranche of opening, again with the ability to review the effects
that might have, to be followed then by a third and final tranche
of opening also with the concept that Postcomm has referred to
of being able to put in place an insurance net should the unforeseen
consequences for the Universal Service emerge at the end of this
process. That safety net would ensure that the basic tenet of
the Universal Service, which is a delivery everywhere every day
at a uniform tariff, could continue to be provided through cross-subsidies
Sir Robert Smith
112. Of course that safety net is not allowed
under current legislation, so the first important thing for that
safety net would be for the Government to allow that safety net
if we are going to have confidence in it?
(Mr McGregor) Yes, that is right. In fact, we were
slightly surprised, since this is part of European legislation,
that it was not repeated in domestic legislation.
113. The reality surely is from the experience
I raised earlier with Consignia of my constituent with telecom
services, in the end when you do get competition and effective
competition where there is not competition the Universal Service
Obligation will be crucial because things will fall down to that
level whereas currently because of the nature of the beast a lot
of services have not been reduced yet to the bare minimum. Therefore,
is it not crucial that the consultation on the Universal Service
Obligation goes ahead and in a sense would it not have been better
to have worked out exactly what it was that had been guaranteed
before saying that it would be guaranteed?
(Mr McGregor) I could not agree with you more. One
of the areas where we have disagreed with Postcomm is their failure
to properly define a Universal Service.
114. Mr Carr, in December you said that you
had received complaints about the Universal Service not being
provided in certain parts of the country and you recounted in
some detail your attempts to investigate the South West and referred
to the obstruction from Consignia, the Regulator not backing you
up because you wanted to look at 14 postcodes and they said you
could only look at four postcode areas. Have you looked at those
four postcode areas? Have you done that work? Is there any outcome?
(Mr Carr) Yes, we have done the work and I am pleased
to say that there is an improvement in all the areas. It is still
not totally satisfactory. I think Bognor Regis was the principal
problem at the time and Slough was another. A huge effort has
gone in from the management to ensure that the daily service is
provided and that is being done on a much more regular basis than
before. We have another project that is to be undertaken in the
autumn across a number of postcodes just to verify this work.
115. The other issue, if I may briefly refer
to it, that we discussed was the question about consultation arrangements
with consumers with yourselves in particular when it comes to
relocating postal branches. I think we agreed that the current
Code of Practice is not adequate and you talked about the changes
you were hoping to "see rolled out very early in the New
Year". We have heard this morning we have not yet got there
and it is now April. Have you any idea when these new arrangements
might be agreed between yourselves and Consignia?
(Mr Carr) It is very much part and parcel of the network
re-invention programme and reference has been made this morning
to the closures in the urban districts. A great deal of progress
was made. We have been in the final phases of this now for several
weeks and this is what is worrying us. We are very happy with
the approach that is being taken by Post Office Counters in terms
of using the locational analysis systems to identify those areas
where there is an over-provision or those areas where the locations
are not ideal and it is the intention, as we understand it, that
once those judgements have been made they will be referred to
our regional teams to be able to make the same assessment and
to check within the communities in which those post offices are
located. That will be part of the process of making the judgment
as to which post offices are to close and which are to be relocated.
Therefore, we will be involved in that decision. The reason I
hesitate about this is because the ink is still not on the paper,
although that is the intention of both sides.
116. In your answer to Mrs Jackie Lawrence you
were talking about the low price of stamps and you also talked
about how the public do not post very manyten0 items a
yearand surveys have shown that the public would not be
averse to it going up. Consignia apparently may be putting in
for a price rise again of one penny on first and second class
but you are not in favour of allowing a price rise on stamps,
is that the case?
(Mr Carr) No, we have never said that. In actual fact,
when the price application is made it has to come to us simultaneously
as to Postcomm and we have a period in which we then make our
own judgments and advise Postcomm before they do their work. I
can think of a number of instances, reasons, which are perhaps
relevant now as to why they should not have a price increase but
I think the point that we have always made is that the price increase
should not be because of competition because we do not believe
that to be the case. It also should not be in order to cover up
the inefficiencies of the business. In other words, you have heard
a number of references recently, usually with an indignant tone
in the voice, that it costs 28p to deliver a 27p item. The only
reason it costs 28p is because of the way in which the business
has been managed, that is not the fault of the consumer, and therefore
should the consumer pay more for that reason? We have heard that
1.2 billion is coming off the costs of the business, which is
very welcome, and that equates to 6.6p on a letter. Once those
costs are out then the cost of delivering that same item will
be considerably less than it is today. For that reason they should
not get a price increase but I can think of other reasons why
they should, particularly those which are related to investment
in improving services to the consumer.
117. You would look at that situation. It is
just that this document we have got from you talks about the efficiency
argument which you have made. It says no increase in price is
justified at the moment.
(Mr Carr) That is under the current regime for all
prices. There are only two conditions subject to them running
an efficient business.
118. Is one of your reasons thenjust
so I understand it correctlyfor saying that they may not
be justified in securing a price increase yet that they simply
do not have sufficient information on which you can base a properly
cost reflective price level for the Royal Mail and if they could
demonstrate a level of cost then that would be a better basis
on which to set a price level for them?
(Mr Carr) Yes. If, genuinely, their ability to deliver
the universal service or any of their other obligations under
the licence is at risk then that is a case that justifies a price
increase. At the moment, on the latest figures that we have, which
I have to say are not very recent, the cash situation appears
to be perfectly adequate. Now whether this will change in the
near future with the high level of redundancy payments which will
have to be made, and this changes the financial situation, I do
not know. They cannot make an application for a price increase
without providing the figures. We will be able to make that judgment
when we receive the application.
119. Can I just revert back. You were talking
about network access charges, indeed we discussed those earlier.
Consignia earlier this morning said that they had made recommendations,
they had made proposals to Postcomm about access charges which
were based on the retail price less the upstream cost of handling
mail for collections and sorting. Does that seem to you to be
the right approach? Have you made different approaches to Postcomm
on this subject and would you share my viewI do not know
if it is anybody else'sthat access charges should be reflective
in the direct and variable costs?
(Mr Carr) Yes. Gregor, would you like to comment?
(Mr McGregor) Yes. I think we will be with you on
that. It is interesting to note the figure which has come out
from Consignia's approach which is 20p, that is a 20p cost to
use just a part of their distribution network whereas you can
use the whole of the distribution network to send a second class
letter for 19p. We think there is a bit of illogicality in the
way that they have approached it and your approach, which is essentially
a bottom up approach rather than a top down approach, will I think
give much more reliable access pricing but again I think it is
back to how far you can rely on the management data that they
have got at the moment.