Postal Services Bill

Lord Young of Norwood Green Excerpts

Tuesday 17th May 2011 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)]

My Lords, I shall also speak to Amendments 68 and 72 standing in my name. During our discussions, many of your Lordships, who are leaving the House quietly, have raised concerns about the prospect of other operators cherry picking profitable parts of Royal Mail’s delivery business. We have listened to these concerns and, as indicated in Committee, we have looked again at the Bill to check that there is sufficient protection in place. While we are confident that Ofcom has the necessary tools to ensure fair and effective competition in the market, we have come to the conclusion that there may be occasions when Ofcom will need to build in greater time to inform its use of these tools. These amendments therefore give Ofcom the power to require operators to pre-notify it of a planned commencement or expansion of a letter delivery operation on a specified scale.

This notification mechanism will ensure that Ofcom has the necessary time to evaluate the potential impact on the universal service of such an operation before the operation has commenced and before any potential damage has been done to the universal service. The detail of exactly how Ofcom will calculate what constitutes a significant service will need to be determined, but the policy intention is for only significant letter delivery operations to be caught. As such it will not impose any additional burden on, for example, current access competitors, courier services or parcel delivery businesses.

This is a light-touch, narrowly focused regulatory safeguard that will help Ofcom address an issue that has concerned many of your Lordships. I hope therefore that your Lordships will be able to support Amendments 58, 68 and 72 and I beg to move.

[Lord Young of Norwood Green]

My Lords, Amendments 58, 68 and 72 constitute a welcome and positive strengthening of regulation of the postal sector. By abolishing the licence system the Bill carries potential dangers of destabilising universal service provision by deregulating the provision of competition. The proposed new clause goes some way to averting this danger and will allow Ofcom, whether directed by the Secretary of State or not, to impose notice of condition on anyone intending to introduce a delivery of letters within the scope of the universal service beyond a specified level, so we welcome this set of amendments.

The objective of Amendment 67B is that in setting prices Ofcom should not exclusively focus on the cost of providing the network, which would satisfy the current requirement under Clause 37(6), but should take account of the true cost incurred by Royal Mail in providing the universal service itself. It is important to be clear—this amendment would not require Ofcom to ensure the cross-subsidy of the universal service from access products. It would ensure that Ofcom considers the true cost of the USO to Royal Mail in setting these prices. I look forward to a brief response from the Minister.

[Baroness Wilcox]

My Lords, Amendment 67B seeks to ensure that, when imposing prices to access the network of the universal service provider, Ofcom must have regard to the costs associated with meeting the universal service. I agree with the noble Lord on this issue and that is why we have tabled Amendment 61, which is in another group but is entirely relevant to this debate. Amendment 61 will ensure that when carrying out its functions, including when imposing access conditions, Ofcom must have regard to,

“the need for a reasonable commercial rate of return for any universal service provider on any expenditure incurred by it for the purpose of, or in connection with, the provision by it of a universal postal service”.

While I agree with the intention behind Amendment 67B, I hope that I have explained that government Amendment 61 in the next group and the government amendments in this group will fulfil the same objective. Therefore I hope that the noble Lord will consider withdrawing Amendment 67B and support government Amendments 58, 68 and 72.

[Lord Young of Norwood Green]

My Lords, in the light of what the Minister has said, I beg leave to withdraw my amendment.

[The Lord Speaker (Baroness Hayman)]

The noble Lord has not moved his amendment and he cannot withdraw it. We are still on Amendment 58. I think the Question is whether Amendment 58 be agreed to.

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[Baroness Wilcox]

My Lords, I beg to move Amendment 59 and in doing so speak to Amendments 61 and 62 in my name.

We must strike the right balance between promoting competition and protecting the universal service, and I thank your Lordships for the many important contributions on this issue. However, the Bill by itself will not secure the future of the universal postal service or Royal Mail. To achieve that, Royal Mail needs to become financially self-sustaining. Therefore there needs to be certainty that, just as has been done in other sectors, Ofcom will have regard to the need for the provision of the universal service to be financially sustainable in establishing the regulatory framework.

Amendment 61 adds flesh to this requirement, specifically that “financially sustainable” should include,

“the need for a reasonable commercial rate of return for any universal service provider on any expenditure incurred by it for the purpose of, or in connection with, the provision by it of a universal postal service”.

The intention of this amendment is to allow the company the opportunity to earn a reasonable return on all expenditure incurred in providing the universal postal service and any regulated access services, in so far as they make use of the universal postal service network. The term “reasonable commercial return” in the amendment is intended to mean simply that in applying this duty Ofcom could, among other things, and when it deems it appropriate, take into account private sector international operators in the postal market, their respective levels of efficiency and the different markets they are operating in, as well as regulated commercial companies in other regulated sectors.

To be clear, it would be for Ofcom to determine exactly what to take into account when considering what constitutes a reasonable commercial return. This requirement is in the context of the need to ensure that provision of the universal service is, and remains, efficient after a reasonable period. Obviously, it is not within the gift of the regulator to determine precisely what returns Royal Mail can make; that should depend on the market and the company’s performance. However, it is essential that the regulatory framework should provide the space and incentives for Royal Mail to be successful, to make the necessary efficiency improvements and to allow for good performance to be rewarded, without regulation eroding the effect of increased efficiency.

The Government believe that, in the long term, the universal service should be both financially sustainable and efficient, and that this will be possible if Royal Mail continues with the good progress it has made in modernising. But of course this takes time. We have therefore tabled two other amendments to Clause 28 to specify that the requirement for efficiency should be,

“before the end of a reasonable period”,

to give Royal Mail time to continue its vital modernisation.

The amendments to Clause 28 constitute a major strengthening of the Bill. They provide even greater security for the universal service. I hope your Lordships will be able to support them.

[Lord Young of Norwood Green]

My Lords, we welcome government Amendments 59 and 62, which would allow Ofcom to establish the timescale for the universal service provider to achieve the levels of efficiency which it is reasonable to expect. This is a recognition that Royal Mail is going through the difficult process of modernisation. The amendment acknowledges this process, which is entirely welcome. Government Amendment 61, which is also most welcome, recognises the universal service provider is entitled to achieve a reasonable commercial rate of return in the provision of the universal postal service, as indicated by the noble Baroness.

Amendment 60 seeks to prevent unnecessary regulatory intervention in areas of the market where effective competition exists. According to the regulator Postcomm, Royal Mail has complained of considerable overregulation since 2006, with approximately 80 per cent of Royal Mail letters revenue subject to price controls. A range of changes introduced in April this year has reduced this figure by just 5 percentage points. For example, Postcomm had previously proposed to remove regulation from pre-sorted bulk packets and parcels of more than 500 grams, but when Postcomm reached its final decision, it deregulated only for items above 1 kilogram. This was despite Royal Mail evidence suggesting that there was significant competition in the market for items weighing less than 1 kilogram. Preventing overregulation is seemingly a shared aspiration, and therefore I hope that Amendment 60 will find favour. The current regulator is clear that it would rather not regulate where Royal Mail faces competition; our Amendment 60 will make it imperative that Ofcom does not do so.

[Viscount Eccles]

My Lords, I am a bit bothered about the amendment that the noble Lord, Lord Young, spoke to because of the great difficulty for anybody to define “effective competition” in a statutory way. The competitive market for communications is very complicated. Ofcom is a very big and well established regulator that no doubt understands that market better than Postcomm did, but Ofcom still has to determine the regulatory framework that it is to follow. Work is going on in the last days of Postcomm that will not be completed until next year.

That is not the only point. Effective competition includes digital competition. Many other means of communication have been developed that have superseded the forked stick, and I think that this amendment is a step too far. I cannot support it.

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Moved by

[Lord Young of Norwood Green]

63A: Clause 28, line 4, after “points” insert “and post office outlets”

[Lord Young of Norwood Green]

My Lords, we welcome government Amendments 71 and 73, which are welcome improvements. Amendment 63 would empower the Secretary of State—not simply Ofcom, as currently set out in Clause 28—to direct Ofcom to take appropriate action for ensuring an adequate number of access points. That is a welcome improvement on accountability. I also welcome the Minister’s assurance about access points including post offices, which is the subject of our Amendment 63A.