73. In 1996 when the Committee last looked at the issue of Community Postal Services, it was powerfully impressed by the performance of The Post Office and recommended that The Post Office serve as model for other Member States. Furthermore, the Committee was unimpressed by the then recent decision of the Swedish Government to liberalise the Swedish Post Office completely.

74. Five years on, the Committee would be hard put to sustain the admiration it once held for The Post Office. Services have deteriorated (QQ 66, 125, 150, 230, 259, 260, 339 and 361), though contrary to common assumptions, possibly more in urban areas than in rural areas. The Post Office admits that it has not considered the interests of its customers as it should have (Q 69). Criticism in the national press focuses on the preservation of practices under the monopoly which would not be possible in the market place."[4] "The Post Office is said to be the best known brand in the United Kingdom after Coca-Cola. It is also the country's biggest retail chain. But it is also an organisation that loses a million items of its customer's business per week; delivers a service at midday — when most recipients have gone to work; does not take credit cards; offers bureaux de change without computer access to exchange rates; and one that many people only visit because they have to."[5]

75. The Swedish experiment with liberalisation may still be viewed askance by national post offices which have yet to liberalise, and indeed there are features about it which might not accord with the sort of freedoms which we would associate with liberalisation. Nevertheless, according to the Swedish Regulator, it has proved to be successful in that it provides a top quality service and has maintained the universal service obligation. But it does so at a cost. Its tariff is higher than the European average, though the Swedes argue that much of this was the result of the imposition of VAT on services which had hitherto been excluded by virtue of the monopoly, and a one-off increase provided by a loophole in the legislation (now closed!). The Bureau Européen des Unions de Consommateurs (BEUC) quotes reports from the Swedish consumer organisation which contradict this. Sveriges Konsumentrad records increased uncertainty about the time for mail to arrive.[6]

76. What is more the Swedish example has been followed by Finland, though with different national features, and the Netherlands has privatised its postal services and part liberalised them. The most recent member of the liberalising tendency has been Deutsche Post which has bought a number of companies to create a postal services group which covers all aspects of mail, express, logistics and finance. The German government has unilaterally reduced the weight/price limit for Deutsche Post from 350 grams to 200 grams for letter mail and from 350 grams to 50 grams for direct mail pending the acceptance of the current EC proposals. Deutsche Post has gone to the money markets and offered 25 per cent of its shareholding to the public, raising 6.6 billion euros (£4.6million) in new capital, as part of the process of turning itself into a large global logistics company. This activity is likely to put Deutsche Post in a strong position as the postal market liberalises.[7] Deutsche Post's "competitive instincts" can be seen in the formal anti-trust proceedings which the Commission launched against it on 8 August 2000![8]

77. Against this background, the Committee was disappointed that the attitude of The Post Office appeared to be one of the dogged defence of existing markets under as high a reserved area as possible. We concur with those witnesses who have observed (Q 13 and 240) that the universal service obligation could as easily be called a universal service opportunity in that the incumbents have in place an infrastructure which would be prohibitively expensive for competitors to replicate. The Post Office argues that this is one of the grounds for their concern — that opening the market will simply permit "cherry picking" i.e. companies set up to exploit the most profitable areas of the postal service while ignoring the obligation to provide a universal service at a uniform and affordable tariff. This view is supported by the CWU/CMA, the Government and the National Federation of Sub-Postmasters, all of whom fear that any attack on the Post Office's income from competition would inevitably affect the ability of the Post Office to continue to offer the universal service at a uniform and affordable tariff.

78. It was difficult for the Committee to establish from the figures available to it whether or not the Post Office's fears were justified. Currently within the tariff structure of most national postal operators there are two elements of cross-subsidy:

—  geographical cross-subsidy such that a geographically uniform tariff may be levied;

—  cross-subsidy between users, typically from large users (businesses) to less frequent users (individuals).

Competition may put pressure on the universal service provider to:

(a) abandon a uniform tariff structure; or

(b) reduce service standards in high cost areas.

If the universal service provider maintains the universal service obligation at a uniform and affordable tariff and is unable to make improvements in efficiency, then competition could lead to a reduction in profits, which, in turn, could affect the viability of the operator. It is also likely that competition will lead to downward pressure on tariffs for business users and corresponding upward pressure on tariffs for individual users of postal services as The Post Office believe will happen (based on a study from the University of Toulouse) — although the no price discrimination clause of the draft directive, as well as the powers of the United Kingdom regulator, are presumably designed to seek to avoid this.

79. The Commission's proposals specify a system known as avoided cost to quantify the cost of sustaining the universal service obligation. "In a postal context [this system] focuses on answering the big political question: 'If the universal service provider could choose NOT to provide the universal service, by how much would its profits increase?'" In other words, on some routes costs which could be avoided from not offering a service are greater than the uniform price received for offering such service. "Adding up the difference between revenue and avoidable cost on each of these loss-making routes is the financial (net avoided) cost to the operator of having to run these services."[9]

80. The Post Office has, with the consultants, PricewaterhouseCoopers, developed a different method of calculating - the entry pricing method. This seeks to identify "under specific liberalisation assumptions by how much the profit of the business [would] be reduced if there remain[ed] the requirement to provide the universal service at uniform prices". In short, this approach was designed to model a dynamic market based on a pessimistic assumption that competition would reduce significantly The Post Office's revenues.

81. On the basis of the avoided cost method, the Commission argues that the implementation of the current proposals would put the cost of supporting the universal service obligation at no more than 5 per cent of revenue (Q 21). The Post Office disagrees saying that by its method of calculation. "The total amount of traffic that we think we would actually lose if there were a reduction in the monopoly down to 50g is only about 7 or 8 per cent of the total traffic we have at the present time. It is the loss of that traffic which will then equate, in terms of loss of profits, to the ability to finance the Universal Service Obligation, to a figure between £250 million and £300 million". (Q 76)

82. The Committee asked the Commission to say why it had chosen the net avoided cost method and how it responded to The Post Office's advocacy of the entry-pricing method. The Committee is persuaded by the Commission's argumentation, in its supplementary evidence[10], though it recognises that the Commission's method measures the current market environment and does not address the consequences of liberalisation in the way that the entry-pricing method does. The Committee feels that while there is merit in the entry-pricing method, too much depends on sensitive and subjective assumptions. The Committee regrets that The Post Office did not provide figures based on the net-avoided cost method while at the same time advancing the entry-pricing method as its preferred system for measuring the cost of the universal service obligation.

83. The difference produced by the two methods is so wide as to make it difficult to establish what the true picture might be. The Committee is, however, more inclined towards the Commission's view that the impact on the Post Office will not be as great as alleged by The Post Office, partly because the proposed liberalisation to 50 grams would still leave the incumbent with 60 per cent of its revenues from the reserved area, which many "businesses and companies would be delighted if that were the position which they faced" (Q 79), and partly because of the elusive nature of The Post Office's evidence. At one point the Committee was startled to be told by The Post Office that it had no means of determining revenues and costs on a regional basis. Nevertheless, the real problem here is not so much which of the two estimates of the true cost of the universal service obligation is accurate but whether disinterested evidence could be adduced to define the cost of maintaining the universal service obligation.

84. The Government argues that it is precisely because it is so difficult to define this particular cost, it would be unwise to support the existing proposals for a reduction on the weight/price basis from 350 grams to 50 grams, and that if a reduction has to be made as part of a negotiation, then the sticking point should rest at 150 grams. This figure was advanced with virtually the same supporting argument by the Post Office, the CWU/CMA, the National Federation of Sub-Postmasters, Mr Brian Simpson MEP, the Scottish Parliament (in a separate letter to Commissioner Bolkestein), and the French Post Office. It might appear that the figure has more to do with the bargaining process than with any reflection of the real cost of maintaining the universal service obligation — the Minister admitted he had no idea whether this figure would preserve The Post Office's ability to fund the universal service obligation (Q 343). The Government added that having enacted legislation — the Postal Services Act 2000 — it could not intervene further to determine this particular cost and that this was a matter for the newly established regulator, PostComm . Whatever PostComm came up with would be regarded as a major input into the Government's considerations (Q 344).

85. Under the Postal Services Act 2000, The Post Office is to be vested with public limited company status on 26 March 2001 and the regulator's first concern will be to license The Post Office within the reserved area. The Committee understands, however, that PostComm is heavily engaged in examining financial and other issues around maintaining the universal service obligation in the United Kingdom. The problem for the Committee in terms of the current proposals is that it is unlikely that PostComm will report until mid-2001 at the earliest.

86. In the United Kingdom, there is full competition outside the reserved monopoly area. Within the reserved area, the regulator can opt to lower the ceiling, as the European Commission proposes, or he can select services for which he issues licences to competitors. He can also exempt types of mail or permit downstream access and third party access to the postal route. It is not possible at this stage to predict which route PostComm will adopt, indeed the regulator might choose more than one.

87. If the European Commission's current proposal is adopted, then one of the tools which the regulator might wish to use will be blunted. PostComm, therefore, has an interest in preserving a higher ceiling in the reserved area than the actual cost, however calculated, which the universal service obligation might demand, in order to retain flexibility in pursuing its objectives. But if the ceiling is left at a high level, whether this be 350 grams or 150 grams, and the regulator proceeds to introduce competition by other methods, then The Post Office could be disadvantaged compared to its European competitors who would be able to continue to shelter the national incumbent beneath the higher ceiling without opening the reserved area by the introduction of selective competition.

88. A second problem is one of timing. The United Kingdom's Government's approach to liberalising the United Kingdom's postal system is out of step with the Commission's timetable. The French Presidency has called for the Commission's proposals to be considered at the Council on the 22 December 2000. The Minister told the Committee that little would probably be decided on this occasion, it would be an orientation debate only, and the Commission's proposals would not impact on PostComm's programme. But there is always the possibility that the French Presidency might see advantage in achieving an agreed position on 22 December on the basis of the Commission's proposals but with a compromise figure of a weight/price reduction to 150 grams. If the proposal was unresolved at this meeting then it would fall to the Swedish Presidency to pick it up. The Swedish attitude might be far more favourable to the proposal as the Commission has put it forward because Member States which have liberalised are at a competitive disadvantage in cross-border markets where such markets are still protected. Even if the French Presidency does advance compromise proposals on 22 December, there can be no certainty that the Council will give them a fair wind.

89. The Committee accepts the argument made by the Post Office, The CWU/CMA, the National Federation of Sub-Postmasters and the Government that it is important to get the right weight/price reduction because the process of liberalisation is irreversible. In the absence of a neutral and accurate means of assessing the cost of the universal service obligation, and given the apparent intention of PostComm to use competition within the reserved area to stimulate better services and innovation in the incumbent, the Committee concludes that at this stage it would be wiser to proceed more cautiously than the draft directive envisages. Having said this, the Committee still believes that only the rapid introduction of competition will effectively reform an organisation which is failing to offer the services, that the public has a right to expect. The Committee's preference would be to support the Commission's proposals for a reduction to 50 grams. The Committee was not convinced by the arguments put forward by those who sought to resist the Commission's proposal. However, the difficulty of reconciling the UK's national agenda — the implementation of the Postal Services Act 2000 — with the progress of the Commission's proposal in the EU institutions prompts us to withhold judgment until we are able to see how PostComm proposes to deal with its management of the reserved area.

DIRECT MAIL

90. The Commission's proposal couples letter mail and direct mail. Direct mail is already outside the reserved area in five Member States (Finland, Italy, Netherlands, Spain and Sweden) and partly liberalised in a sixth (Germany, where the Government has reduced the monopoly ceiling on direct mail to 50 grams). Many witnesses (AICES, EEA, MUA, DMA, UPS) argue that direct mail should be fully liberalised immediately. Direct mail constitutes a substantial proportion of items below 50 grams. The Committee does not think that it makes sense to break the link with the ordinary letter post until the regulator has been able to rule on the cost of maintaining the universal service obligation at a uniform and affordable tariff.

SPECIAL SERVICES

91. The Commission witnesses rehearsed clearly the definition of special services. "There are three criteria that are established in the Directive in order to qualify for a special service. One is that they have to be clearly distinct from the universal service; secondly, that they have to meet specific customers' needs and they have two or more value-added features" (Q 44).

92. The Post Office argues that not only is it unnecessary for the Commission to pronounce on this issue but confusing because the European Court of Justice has, in the Corbeau case"[11], already established principles about the extent to which it is possible to reserve "new services". In considering whether Article 90 (2) (now Article 86) (2)[12] could be used to justify extending the postal monopoly to "new services" the court held that such an extension was not justifiable provided that;

  (1) the new services in question were distinct ("dissociable") from the postal services offered by the incumbent postal administration, and

  (2) that placing such service in the competitive area would not undermine the economic equilibrium of the incumbent postal administration in providing the postal service of general economic interest.

93. The Post Office therefore rests its case on the second limb of the test in the Corbeau case, namely that "special services" (however defined) must not undermine the economic equilibrium under which the incumbent postal administration provides the service of general economic interest (the universal service obligation as defined in Article 3 of the Postal Services Directive). The Post Office goes on to say that it follows from the Commission's proposal that once a service is found to be "a special service then it is incapable of reservation, irrespective of the effect on the universal service provider's ability to provide a universal service".

94. In the new proposal, the Commission seeks to re-define more tightly the characteristics of special services to reinforce the distinction between special services and universal services because special services are excluded from the reserved area. The Commission argues that the Corbeau judgment applied only in the absence of harmonised Community rules; the 1997 Directive had since provided a harmonised maximum reservable area to sustain the universal service obligation. Hence, there was no conflict between the Corbeau judgment and the exclusion of special services from the reserved area as laid down in the 1997 Directive. On the contrary, "The Directive 97/67/EC and the proposed modification integrates the principles established in the Corbeau judgment…"[13] In any case, the issue of what constitutes special services will have to be considered by PostComm when the regulator licenses the universal service provider in March 2001 because the terms of such licence will presumably define the characteristics of the universal service obligation and, by implication, services which do not fall into the reserved area.

95. The Committee considers that the Post Office has failed to make a persuasive case on special services. We accept the Commission's attempt to define special services in a way that will lead to legal clarity and thus help preserve the reserved area. In our opinion, the Corbeau judgment has been overtaken by the provisions of the 1997 Postal Directive.

COMPENSATION FUND

96. "The Postal Directive enables a Member State to set up a compensation fund where it determines that the universal services obligation in Article 3 represents an unfair financial burden to the universal service provider. Since such a fund or any other state resource for this purpose might contain state aid elements, this Directive includes a recital which recall the notification requirements for such aid under Articles 87 (1) and 88 (3) of the Treaty".[14] The Committee notes that provision for a compensation fund remains an option under the 1997 Postal Directive. None of the evidence we have seen supports the setting up of a compensation fund. Nevertheless, the Committee believes it should remain an option which national regulators might use.

5   The Times 14 November 2000, Christine Buckley. Back

6   BEUC's comments on the Commission's proposal for a Directive amending Directive 97/67/EC with regard to the further opening to competition of Community Postal Services and its BEUC/284/2000 quoted in CEG's evidence, page (93). Back

7   See "Postal groups grow ambitious" by Frances Williams, Financial Times 19 November 2000. Back

8   European report No. 2533, 7 October 2000. Back

9   The Post Office's Supplementary Evidence Page (36) Back

10   Supplementary evidence from the European Commission. Page (15) Back

11   Case C-320/91, Corbeau, [1993] ECR I-2533. Mr Corbeau, a Liège trader, was prosecuted for providing postal services within the city and outskirts of Liège. He undertook to collect correspondence from the sender's address and deliver it the next morning provided the addressee was located within the area which he served. He also arranged to forward by the postal service correspondence for addresses outside that area. Belgian law reserved to the Belgian postal administration (the Régie des Postes) the activities of collecting, carrying and distributing correspondence. The Tribunal Correctionel de Liège (Criminal Court, Liège) sought guidance from the European Court of Justice on the compatibility of the Belgian rules with Community law. The court of Justice held that it was contrary to Article 86 (formerly 90) of the EC Treaty for a Member State which confers on a body the exclusive right to collect, carry and distribute mail, to prohibit an economic operator established in that State for offering certain specific services dissociable from the service operated of general interest which meet the special needs o economic operators and call for certain additional services not offered by the traditional postal service, in so far as those services do not compromise the economic stability of the service of general economic interest performed by the holder of the exclusive right. Back

12   The competition rules of the EC Treaty (in particular Articles 81 and 82) apply to both public and private undertakings. Article 86 (2) provides a limited exception: undertakings entrusted with the operation of services of general economic interest are subject to the competition rules of the Treaty in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. Back

13   Commission's supplementary evidence page 19. Back

14   (Paragraph 2.9.3 of the Explanatory Memorandum covering the proposed draft Directive) Back