Chuka Umunna letter to Ofcom on the Universal Service Obliga

[TrueBlueTerrier]

Chuka Umunna letter to Ofcom on the Universal Service Obligation

http://www.labourbisteam.org.uk/chuka-u ... obligation" onclick="window.open(this.href);return false;

Friday 17 July 2014

Shadow Business Secretary Chuka Umunna has written to Ofcom to call for the regulatory authority to bring forward its review, currently due in 2015, to ensure that the Universal Service Obligation (USO) which guarantees the postal services which consumers and businesses rely on, is safeguarded in light of growing competition issues in the postal sector.

Labour wants to see the USO secured beyond 2015 and has called for other postal service operators to be held to the same high-quality performance and service standards as Royal Mail.

The next Labour government will:

- Act to safeguard the Universal Service Obligation beyond 2015

- Secure the future of the link between the Post Office network and Royal Mail and ensure that Royal Mail services continue to be available through the Post Office network.

- Ensure there is an appropriate degree of price control on stamp prices, given the hikes in stamp prices we have seen in recent years



- Other postal service operators must be held to the same high-quality performance and service standards as Royal Mail



Text of Letter:



Ed Richards

Ofcom

Riverside House

2a Southwark Bridge Road

London SE1 9HA



Dear Ed,

I’m writing to you in relation to the Ofcom review into the maintenance of the Universal Service Obligation (USO). I understand that you have until the end of 2015 to commerce the review.

The reason for writing is to ask that you commence the review as soon as possible, not to wait until 2015, given the potential threat to the USO. Conducting a review in 2015 could be too late.

As you are aware the USO is the foundation of the postal service in the UK. It guarantees fairness and standards for all citizens wherever they live. The USO means that by law Royal Mail is required to deliver to all 29 million UK addresses, six days a week, at a uniform price. Ofcom’s primary role is to ensure the maintenance of the USO.

You will also be aware that alternative providers of direct delivery have entered the market, including TNT. Ofcom oversees the regulatory and competition environment, and it has been a goal of Ofcom to encourage competition beyond its primary obligation with respect to the USO.

On Friday 20 June Royal Mail published a report submitted to Ofcom on the effect of competition on the USO and the threat to the USO. It makes for concerning reading.

The report says that the alternative provider TNT has grown so quickly and been able to ‘cherry-pick’ profitable inner city postcodes to such an extent that the economics of the USO are being undermined. The profitable inner-city areas enable Royal Mail to maintain the infrastructure and thus provide the USO in other areas. The cherry-picking of areas is happening so quickly that Royal Mail says TNT is delivering a significant portion of mail to these profitable postcodes (I understand that postcode penetration rate data has been submitted to you, showing the extent of the issue, and this is redacted from the publicly available submission).

Royal Mail says that TNT’s publicly-stated ambition is to deliver circa 42 per cent of UK delivery points but would cover only 8.5 per cent of the UK landmass by 2017. This, Royal Mail says, would equate to £200 million lost revenue in 2017-18. Royal Mail argues that the threat to the USO is not a distant prospect but very real; and because Royal Mail will not be able to cross-subsidize the USO, it could become uneconomic to deliver in two to three years (I include some of the detail Royal Mail has put forward at the end of this letter). This is not simply about Royal Mail profits being lower in relation to a competitor; it is about being able to fulfil the legal duty of the USO and Royal Mail being in a viable position to do this.

I understand that Ofcom is of the view that the regulatory environment is currently satisfactory to maintain the USO, that Ofcom’s role is to encourage competition, and that the VAT exemption for Royal Mail (which competitors do not have) balances the duty to maintain the USO. The Royal Mail report suggests that this is not now the case.

This is very concerning conclusion. I would therefore urge you to commence the review as soon as possible and not wait until some point in 2015 so we can learn whether Royal Mail’s conclusions are well founded.

Even if Royal Mail’s argument is found not to be wholly valid, or not as compelling as they have laid out, this is only going to be known once it has been fully investigated. To wait until the end of 2015 could be too late. It would take time for Ofcom to conduct the review and then time for any recommendations and change to the regulatory environment to be enacted and put in place. This process could well take two years. If Royal Mail is right then the review would be too late and could severely limit remedial action. It could be a case of shutting the stable door after the horse has bolted (so to speak).

It is therefore surely the best approach for all concerned - for Royal Mail, private providers and crucially customers - that the future of the USO is secured and the future horizon is clear.

I therefore urge you to initiate your review as soon as possible. I would be very happy to discuss this further.



Yours sincerely

Chuka Umunna MP

Shadow Secretary of State for Business, Innovation and Skills



Extracts from Royal Mail's Submission to Ofcom:

The obligation on Royal Mail to provide the Universal Service requires the business to maintain an inherently high cost network infrastructure. Royal Mail must be capable of delivering to 29 million addresses, and collecting mail from around 115,000 post boxes and 11,500 Post Offices six days a week. It must do so to a high common service standard for a uniform price.

Royal Mail supports effective competition as it can raise the standard of the social benefit delivered by the Universal Service provider. However, the question is whether direct delivery which relies on cherry picking by geography, service frequency and products is likely to produce such benefits.

The current regulatory regime supports TNT Post’s direct delivery operation. It provides TNT Post with the ability to freely hand any mail which is not profitable for TNT Post to deliver itself (for example because it has to be delivered to a less dense area) or mail which is difficult to deliver, e.g. parcels and large catalogues, to Royal Mail for delivery through Downstream Access (DSA).

Within the EU, the Universal Service obligation in the UK is particularly susceptible to harm from direct delivery entry. The UK has the highest concentration of large dense urban areas which are attractive to cherry-picking direct delivery.

Royal Mail is managing a structural decline in the addressed letter market of around 4-6% per annum. This means that the challenges of sustaining the USO are already significant. Our strategy aims to manage this through driving further efficiency improvements, focusing on customer needs and becoming a successful parcels business.

The combination of mandated access and direct delivery, when added to structural decline in addressed letter volumes and the UK’s economic geography, creates real risk for the financial sustainability of the Universal Service.

By May 2014, TNT Post was operating a now proven operational and commercial model in Manchester, Liverpool and large parts of London. Royal Mail has experienced the reality of reduced mail volumes (and associated higher unit costs) in those areas affected by direct delivery competition.

Direct delivery entry undermines the USO which consumers value and wish to see preserved in its current form. It does not deliver the benefits usually associated with competition: Direct delivery is in reality not level playing field competition that brings benefits to consumers. Rather it is ‘cherry picking’ arbitrage across three dimensions:

- Where: TNT Post UK Ltd (TNT Post) aims, by 2017, to deliver to c.42% of UK addresses. It believes it can achieve this by serving c.8.5% of the UK's geographical area. All of the areas TNT Post is delivering in are amongst the cheapest ‘costs to serve’ for a new entrant.

- When: TNT Post provides an ‘every-other-day’ service. Royal Mail must abide by the USO: six day delivery and collection service for letters (five for parcels).

- What: TNT Post is only delivering mail originating from business customers, much of which is machine-sequenced. This type of mail is valuable for the USO provider. It is easier to handle, provides dependable volumes and a good financial contribution. The mandatory access regime means we must handle any item TNT Post does not wish to deliver itself.

The Universal Service Provider’s ability to respond on price, frequency and product offering is constrained: For example, if a direct delivery entrant offers a lower price to a large company to entice it to move from using Royal Mail (access services) to the entrant’s own delivery network, Royal Mail cannot selectively match that price in order to keep those volumes within Royal Mail’s network and help to support the costs of delivering the Universal Service.

Direct delivery is threatening the economics of the Universal Service

Based on our estimates of the impact of TNT Post UK's publicly-stated plans, this could reduce Royal Mail revenue by over £200 million in 2017-18.