1. Introduction

On 1 January 2006, the weight threshold of the reservable area under the EC postal services Directive 97/67 as amended by Directive 2002/39 (hereinafter: 'Postal Directive') reduces to 50 grams from 100 grams. The price threshold, which must also be met for mail to be within the reservable area, will be reduced from 3 times to 2.5 times the standard price for basic priority mail items. In most member states, the incumbent’s statutory monopoly is expected to be reduced in line with the requirements and timescales of the EC Directive, with no definite plans as yet for full liberalisation. By contrast, Sweden achieved full liberalisation in 1993.

In the UK, the reservable area was abolished under the Postal Services Act 2000 subject to the requirement to hold an license to provide postal services, and the UK regulator, the Postal Services Commission (‘Postcomm’) has announced that it will grant licenses to all operators as from 1 January 2006 subject only to compliance with certain essential requirements, instead of only bulk mail providers and certain other special categories of postal services operator as at present. In the
Netherlands, the government has indicated an intention to assume full liberalisation in 2007, subject to similar approach been taken in other member states, in particular the UK and Germany.

The ability of member state governments to reserve any part of the postal services market to the incumbent universal service operator is limited to what is necessary to ensure the maintenance of universal service under Article 7(1) of the Postal Directive. This paper will compare the status of liberalisation, including the differential scope and approaches to definition of the universal service, in the
UK and the Netherlands with the position in various other western European countries, particularly Belgium, France, Germany, Italy and Sweden.

These countries have been chosen because they represent various stages of liberalisation against the background of the same EC regulatory framework.
Sweden and the UK are (about to be) fully liberalized, although both maintain a universal service obligation for the incumbent postal operator. The Netherlands and Germany have chosen a more cautious pace of liberalisation, but are both well ahead of the timetable provided for by the EC postal regime. The third category of Belgium, France and Italy consists of reluctant followers of the liberalisation process, who take only those measures to the extent required by the Postal Directive and sometimes even postpone implementation where possible.

The liberalisation process take place against the background of slightly increasing mail volumes in some member states and slightly decreasing volumes in others. In the
UK, figures provided by Royal Mail and announced by Postcomm show that inland letter volumes grew by 1.5% in 2003/04, with expected market growth by at least 2% per annum for the following two to three years. By contrast, in the Netherlands, figures announced by the competition regulator OPTA for 2003 indicated decreasing mail volumes as a result of increased of electronic data traffic.

Any regulatory authority in the postal services sector needs to address four key areas of policy and to implement and/or apply rules in each of these four areas. These are: (i) the scope of the area of postal services reserved to the incumbent postal operator; (ii) the universal service obligations imposed on the incumbent postal services provider; (iii) the question of any price controls on the services provided by the incumbent universal service provider; and (iv) the extent and pricing of any required granting of access to competitors to the universal service provider’s postal network. This is quite apart from the application of general competition law to an incumbent operator occupying a dominant position.

Each of these areas of policy is, or should be, interrelated. The ability of an incumbent to fulfill its universal service obligation depends on the extent of competition which it faces from other licensed operators. Its ability to counteract competition effectively whilst at the same time fulfilling those universal service obligations, depends on the degree of flexibility it is allowed in the pricing of its services. Moreover, due to the labor intensive nature of postal services, full network competition is in practice unachievable outside the urban areas, without competitive service providers being granted downstream access to the incumbent’s network. On the other hand, this specific characteristic of postal networks also raises the question whether network access is essential for the development of competition in the postal services market. This in turn focuses on the key question of the price and terms on which an incumbent is required to grant such access, which in turn directly impacts upon it the ability to generate revenue and cover the costs of the universal service.

2. The statutory position

2.1 EC legislation

The Postal Directive provides for a step-by-step opening of the European market for postal services, in which each step represents a significant but controlled reduction of the reservable area while on the other hand the continuity and quality of the universal service can be ensured[1]. A first significant step was taken in Directive 97/67/EC, which required the EU member states to impose obligations on the universal service provider and to reduce the reservable area (statutory monopoly for the incumbent) to items of domestic and incoming cross-border correspondence.

In July 2002, Directive 97/67/EC was amended by Directive 2002/39/EC, which provides for two further steps in the liberalisation process. Article 7(1) as amended provides that the member states should have reduced the weight limit for reserved services to 100 grams and a price of not more than three times the tariff for an item of correspondence in the first weight step of the fastest category from
1 January 2003 on. As from 1st January 2006, it further reduces the combined thresholds for the area that can be reserved to the universal service provider to 50 grams and two and a half times such tariff as from 1st January 2006. However, such services can only be reserved to the extent necessary to ensure the maintenance of the universal service. Furthermore, all outgoing cross-border mail should be open to competition from 1 January 2003 (i.e. an additional 3 % market opening to competition), although exceptions are possible where these are necessary to maintain the universal service - for example if revenue from cross-border mail is necessary to finance the domestic universal service - or where the national postal service in a given Member State has particular characteristics.

With respect to the provision of non-reserved services, the Postal Directive offers the member states the choice between a general or no authorization, i.e. no approval required before starting the activity, and an individual license requirement. Of the member states discussed in this paper, only
France and the Netherlands have opted for a general authorization system. The other countries all require a license of some form, although some only for certain letter post services (UK, Germany and Sweden) and other for all universal services (Belgium and Italy).

Like Directive 97/67/EC, Directive 2002/39/EC stipulates that the reservable area relates to ‘items of correspondence’ (which includes any communications in written form on any kind of physical medium to be conveyed and delivered at the address indicated by the sender on the item itself or on its wrapping, with the exception of books, catalogues newspapers and periodicals). However, the amended Article 7(1) of the Postal Directive provides that “to the extent necessary to ensure the provision of universal service, direct mail may continue to be reserved within the same weight and price limits”. Although this means that member states may still include direct mail (which in practice constitutes the bulk of B2B and B2C mail volumes) in the reserved area, it puts a burden on the authorities to be able to justify that it is necessary to ensure the provision of the universal service.

The requirements of the Postal Directive dictate the minimum pace of liberalisation in the member states until 2006. With respect to future developments, the European Commission has announced that it will investigate the possible completion of the internal postal market by full liberalisation in 2009 and is expected to present its conclusions to the Council and the European Parliament before
31 December 2006. However, a number of member states, such as Finland, Sweden, UK, Germany and The Netherlands, are planning (or have already implemented) full liberalisation of their postal services before 2009.

As already mentioned, the exclusive or reserved area rights granted by a member state to a universal service provider cannot extend beyond the scope of the universal service itself. This follows from the ruling of the European Court of Justice (‘ECJ’) in the landmark Paul Corbeau case[2] that exclusive rights in favor of a universal service provider are not justified under Articles 86 as regards specific services which are dissociable from the universal service itself (the service of general interest), where these meet special needs of economic operators and call for certain additional services not offered by the traditional postal service, and can be performed without compromising the economic equilibrium of the service of general economic interest.

Express mail services are an example where the specific dissociable services do not, taking into account their nature and the conditions in which they are offered, affect the economic equilibrium of the universal service provider[3].

The Corbeau test was restated by the ECJ in May 2001 in it judgment of TNT Traco SpA and Poste Italiane SpA[4]. The ECJ held that the imposition by a universal service provider of postal dues (based on universal service postage prices) on the provision by independent operators of express postal services, could only be justified with reference to Article 86(2) if the maintenance of such rights was necessary for the universal service provider to be able to perform its public service tasks or to perform them under economically acceptable and financially stable conditions. Further, the ECJ concluded that compatibility with Articles 82 and 86 meant that the proceeds from the postal dues may not exceed the amount of the losses incurred in the operation of the universal service by the universal service provider, that the universal service provider must also be required to pay the same dues when itself providing an express mail service not forming part of the universal service, and that none of the costs of that service may be subsidized from the universal service.

2.2 Statutory position in the member states considered

Various member states failed to take the necessary measures by the required date
31 December 2002 to implement the Directive 2002/39 into national law, although all member states have since done so. France was the last one to implement the EU Directives, with its law of 20 May 2005, after the European Commission initiated infringement proceedings in the European Court of Justice against France concerning non-implementation of the Directive and also France’s alleged failure to appoint an independent national regulatory authority for postal service sector in accordance with the Postal Directive. This power/duty has now been granted to the independent telecommunications authority, which has now become the ARCEP, by the Law of 20 May 2005[5].

Despite attempts on EC level to steer the path of liberalisation of the postal sector, there are large differences in the extent and pace of liberalisation in the EU member states. The Swedish and
UK approaches to postal services regulation are more pro-liberalisation than most member states. Liberalisation in countries like the Netherlands and Germany is also ahead of the pace provided for in the Postal Directive. Belgium, Italy and most notably France seem more reluctant to open up their postal markets to (foreign and domestic) competition. The following table gives an overview of the regulatory position in the countries discussed:

Letters reserved?

Direct mail reserved?

Belgium

Y

Y

France

Y

Y

Germany

Y

Y

Italy

Y

Y

The Netherlands

Y

N

Sweden

N

N

UK

N

N

All countries which have a reserved area extend the scope of the reserved services to what is maximally allowed under the Postal Directive. Notable exception is the Netherlands, which has excluded direct mail from the reserved area and which has a more restricted definition of ‘letter mail’ instead of the definition of ‘item of correspondence’ in the Postal Directive that further narrows the scope of the reserved area.

The Commission recently published a report on the application of the Postal Directive, in which it considers the status of the transposition of the Postal Directive, its effect on the market opening in the European Union and the road ahead. Particularly interesting is the Commission Staff Working Paper underlying the Report, in which the transposition of the various provisions of the Postal Directive in the different member states is analyzed[6].

3. Regulatory obligations on incumbent postal operators

3.1 EC legislation

The Postal Directive requires all member states to ensure the universal service includes, as a minimum, the clearance, sorting, transport and distribution of postal items of up to 2kg; the clearance, sorting, transport and distribution of postal packages of up to 10kg (with an option to increase this to 20kg); the delivery of postal packages received from other member states weighing up to 20kg and services for registered items and insured items.

The Postal Directive requires member states to ensure that the universal service provision complies with the “essential requirements”, i.e. the need for confidentiality of correspondence, security of the network as regards the transport of dangerous goods and, where justified, data protection, environmental protection and regional planning. The Postal Directive requires the universal service offered to be identical to all users under comparable conditions, to be made available without discrimination, to be provided on an uninterrupted basis, and to evolve in response to the technical, economic and social environment and the need of users.

The Postal Directive contains various provisions concerning pricing and accounting for the universal service[7] and specifically in respect of the reservable services. Member states must ensure that, as regards the universal service, prices are affordable such that all users have access to the services, cost-orientated, transparent and non-discriminatory. The application of a uniform tariff must not exclude the right of the universal service provider to conclude individual agreements on prices with customers (i.e. in practice a lower price for example for bulk mail under transparent and nondiscriminatory conditions). Universal service providers are required to keep separate accounts for the following: each of the services in the reserved area, non-reserved services which are part of the universal service, and services outside the universal service. Internal accounting systems must operate on the basis of consistently applied and objectively justifiable cost accounting principles[8].

Accordingly, the main regulatory obligations on incumbent universal service providers can typically be divided into the following categories:

  1. Obligations to provide a universal service and accompanying definitions of the scope of the universal service;

  2. Quality of service requirements;

  3. Financial requirements including transparency of tariffs and separation of accounts for universal service and other activities, and only the reserved area and for other universal service operations respectively, in accordance with the Postal Directive;

  4. Pricing controls;

  5. Obligation of non-discrimination;

  6. Obligations to ensure a uniform tariff for the universal service.

The need to safeguard the universal service is both a fundamental objective and a source of limitations on licenses granted to other operators, under the UK regime. Moreover, under the Postal Directive, the need to safeguard the universal service is a pre-condition for granting any reserved area to the incumbent universal service provider. Until now, there has been no clear definition either at EC level of what is included within the universal service and what is not.

3.2 Regulatory obligations in the member states considered

Each of the member states considered imposes a universal service obligation complying with these minimum requirements. However, it is noteworthy that the approaches to defining the scope of the universal service differ as between EC member states. Other obligations are similarly imposed in all member states considered, sometime even without a requirement to do so in the Postal Directive. For instance, the universal service provider is required to apply a uniform tariff in each of Belgium, France, Germany, Italy, the Netherlands, Sweden (for single items of mail only), and the UK.

For the non-reserved services, some require a license for all postal operators, while others allow any company to carry out non-reserved postal services. Also, the authorization regimes differ greatly in the various member states.

Moreover, some member states have made use of the possibility provided for in Article 9(4) of the Postal Directive to set up a compensation fund to compensate the universal service provider for any undue financial burden which arises as a result of the universal service obligation. The relevant member states that have provided for such a compensation mechanism have done so, for example, on the basis of the other provider’s turnover exceeding a minimum level (as in Belgium) or on a pro-rata basis (as in France and Italy). In
Germany, the incumbent, Deutsche Post AG (“DPAG”), can demand compensation from the regulatory authority where it can prove that the cost of providing the relevant universal service sufficiently exceeds the income from that service.

For the countries considered, the following overview can be given.

License required?

Compensation for USO?

Belgium

Y

Y

France

N

Y

Germany

Y*

Y

Italy

Y

Y

The Netherlands

N

N

Sweden

Y*

N

UK

Y*

N

* for some (universal) letter post


As for the obligations imposed on the universal service provider, it appears that all member states considered have imposed regulatory obligations concerning reasonable, affordable, cost-oriented and uniform prices, nondiscrimination, accounts separation for reserved and other universal services, quality of service levels, some form of pricing controls, and secrecy of letter mail. However the precise extent of the obligations differs somewhat per member state, within the boundaries set by the Postal Directive.

In the UK, the license obligations on Royal Mail not to show any undue preference or discrimination for or against any person or categories of persons have to some extent been clarified by means of an investigation carried out by Postcomm in late 2004 and concluded by means of a decision of 20 January 2005 adopting certain commitments of Royal Mail: Investigation into Royal Mail Catalogue and Advertising Mail Promotion Scheme, Postcomm Decision dated 20 January 2005. The investigation concerned a trial promotion undertaken by Royal Mail with 12 catalogue mailing customers during July and August 2003, with the aim of verifying whether it was feasible to launch a wider catalogue and advertising market promotion with a view to growing the overall catalogue mailing market. This raises the issue of whether the granting of discounts to customers by reference to their incremental mailings as opposed to the absolute volume of their mailings, can constitute undue preference or discrimination, in so far as it could result in different prices after discount being applied to customers mailing equal volumes. Postcomm questioned whether such a policy could ever be implemented by a company with the dominance of Royal Mail, in a way that is acceptable in practice, but did not reach any conclusion, stating rather that it would be disproportionate to prohibit Royal Mail from seeking to introduce schemes intended to develop incremental mailing. In the present case, Postcomm considered that the evidence indicated that growing the postal market was not the only aim of the promotions and that Royal Mail had not taken adequate safeguards to ensure that in practice account handlers only applied the available discounts to incremental mailings, as opposed to using the discounts to grant incentives to customers to switch mailings from a competitor of Royal Mail.

In order to close the case, Royal Mail provided assurances to the effect that any new promotions launched by Royal Mail would first be subject to a promotion approval process involving regulatory and competition law approval at a senior level and that Royal Mail would pro-actively involve its Compliance Officer in this process. The Compliance Officer is required to be appointed under condition 13 of Royal Mail license for purposes of facilitating compliance by Royal Mail with competition regulatory provisions of the license.

4. Pricing controls

4.1 EC legislation

The Postal Directive imposes a basic requirement that tariffs for each of the services comprised in the universal service must be affordable, ensuring that all users of access to the services, and be cost-orientated. Against this background, various member states have imposed specific price controls on the incumbent universal service provider as regards the provision of the universal service, and especially as regards the provision of reserved area services.

4.2 Pricing controls in the member states considered

The predominant basis of price controls on the universal service provider in each member state now considered, can be summarised as follows:

Inflation
(Prices/Costs Index)

Cost – orientation

Belgium

X

France

X

Germany

X

Italy

X*

The Netherlands

X

Sweden

X

X

UK

X

* combined with quality of performance criteria

In France, the Competition Council condemned La Poste, in November 2004, for proposing tying rebates bundling services in competition. La Poste was reproached for two types of practices:

(i) the application of a “global tying rebate” for purchases of all products open to competition: La Poste granted its clients rebates on the basis of the total turnover achieved on the services opened to competition (nonaddressed mail, catalogues, B2B packages), thus inciting them (by using its wide range of products) to concentrate their purchases with La Poste.

(ii) the application of a “fidelity rebate”: La Poste granted rebates based on the increase of the clients' purchases from one year to the other[9].

5. The provision of downstream access to postal networks

5.1 EC rules relating to network access

As the Postal Directive does not provide for any regulatory obligations concerning access to the postal networks, this is left to the member states. Some member states consider access to the postal network as a fundamental element of liberalisation, while others regard access to postal networks unnecessary for the entry of new postal operators to the market. This is very much due to the fact that a postal network is not a physical infrastructure network like telecommunications or energy networks. Within a densely populated urban area giving rise to considerable volumes of inner city mail, it is arguably not unduly difficult to replicate a localized collection, sorting and delivery network. However the establishment of long distance conveyance and sorting networks capable of reaching remote areas involves much greater investments in infrastructure and, the wider the overall area and the more remote the individual delivery destinations, the greater the possibility that the postal network has the characteristics of a natural monopoly or “essential facility” for competition regulation purposes.

The Postal Directive (Article 12) provides that where a universal service provider grants access to its network by providing a service consisting of less than the complete range of features offered for the clearance, transport, sorting and delivery of postal items, for example to businesses, bulk mailers or consolidators, the universal service provider shall (in addition to applying the principles of transparency and non-discrimination) set tariffs which take account of the avoided costs, as compared with providing the full clearance, transport, sorting and delivery service. Further, the tariffs and conditions must apply equally both as between different third parties and as between third parties and universal service providers supplying equivalent services. Any such tariffs must also be available to private customers who post under similar conditions, i.e. those who carry out an equivalent degree of mail preparation for an equivalent volume of mail items.

The European Commission took a very significant decision in the application of Article 86(1) combined with Article 82 concerning La Poste of France “on the lack of exhaustive and independent scrutiny of the scales of charges and technical conditions applied by La Poste to mail preparation firms for access to its reserved services”[10]. The Commission decided, following the reasoning of the ECJ in GB-Inno-BM[11], that the French Government had allowed a situation to persist in which the public undertaking La Poste was faced with a risk of conflict of interest as the monopoly provider of basic postal services, in relation to determining the terms of access to its reserved services and especially its postal network, because of its activities as a competitor on the upstream market for mail preparation services. In such circumstances, it was the responsibility of the State to ensure an effective monitoring system so as to re-establish effective competition on the upstream market by ensuring that the drawing up of technical specifications and the monitoring of their application would be carried out by a body which is independent of La Poste as the relevant public undertaking. French legislation gave La Poste the power to set its own technical and financial conditions for access by mail preparing firms to its network, including for example conditions as to volume and standard presentation of the mail produced. These conditions were subject to only partial scrutiny by the relevant French public authority, which was not sufficiently independent and neutral in relation to La Poste. The Commission considered that La Poste was in a position to set technical and financial conditions for access to its network that, whilst apparently nondiscriminatory, would in fact put La Poste’s competitors at a disadvantage as compared with La Poste’s subsidiaries. Also, there was the possibility that La Poste could apply the rules less strictly to its own subsidiaries than to competing mail preparers, as regards enforcement of its rules on quantity, format, presentation and times and places of delivery. These factors had a direct impact on the competitive conditions under which the mail preparation firms operated, whilst La Poste was itself and through its subsidiaries a competitor in the upstream mail preparation business. The Commission concluded that the conflict of interest on the part of La Poste itself constituted an abuse without need to show commitment of an actual abuse in order for there to be an infringement of Article 86 (1) EC.

It is clear that in the La Poste case, it was a material factor that lack of satisfactory independent monitoring and regulation of La Poste in relation to the imposition of terms of access for mail preparation firms to its downstream network, would involve discrimination between the conditions applied to La Poste’s own subsidiaries and the two competing independent mail preparation firms, both as regards the specific terms and conditions applied and as regards the strictness with which they are enforced.

This European Commission decision has since been followed by a similar decision of the Commission under Article 86 EC against a provision of the German Postal Act, in October 2004. The European Commission concluded that certain provisions which prevent commercial mail preparation firms from earning discounts for handing over pre-sorted letter post at DPAG’s sorting offices induced DPAG to discriminate against such mail preparation firms. The discrimination resulted from the fact that individual large users (senders) were allowed to feed self-prepared mail directly into sorting offices and receive volume-related discounts, whilst postal consolidators or intermediaries were prevented from obtaining comparable discounts for mail preparation[12]. However, at the time of writing,
Germany and DPAG have filed appeals with the European Court of First Instance claiming that the Commission’s decision infringes Article 82 of the EC Treaty and the Postal Directive[13]. The appellants argue that the Commission has wrongly assumed that the relevant provisions of the German Postal Act extend the DPAG’s dominant market position in reserved area postal services into the upstream mail pre-sorting market (to the detriment of mail preparation firms). They also argue that it is not discriminatory for DPAG to be allowed to grant volume-based discounts to individual large users (mailers) for pre-sortation, whilst not granting such discounts to commercial postal service providers (i.e. intermediaries or consolidators).

5.2 Access regulation in the member states considered

To date, only Royal Mail (in the UK) and Deutsche Post (in Germany), but none of the postal service incumbents of any of the other member states now considered, are subject to specific regulatory obligations concerning the grant of access to their postal sorting, conveyance and delivery networks. In
Italy, the Ministry of Communication is empowered[14] to take regulatory measures to promote access to the postal network. However, no time period is specified for the introduction of such regulations and no such measures have so far been announced by the Ministry.

By contrast, in some member states such as the
Netherlands and France, there are specific rules on the incumbent in respect of granting access to P.O. boxes in post offices to other postal operators, as opposed to granting access to the main postal network[15]. Such access must be granted on transparent, non-discriminatory and reasonable terms to be negotiated between the incumbent and its competitors, under the supervision of the postal regulator.

In the
Netherlands, the government expressly considered that further network access was not necessary for competition, provided that TPG Post accepts pre-sorted bulk mail from its competitors on equivalent terms to those applied to its large customers. In Sweden, there is no access obligation to Posten’s postal network. Downstream access has been considered, but the committee advising the Swedish government concluded that such sectorspecific legislation would be too far-reaching and would create an unreasonable administrative burden on the supervisory authority[16]. In addition, it considered that the matter should be dealt with on Community level.

In
Germany, a postal services operator with a dominant position in the relevant market is obliged to offer access to parts of its overall postal services and to invoice accordingly. This obligation is subject to competitors’ demand. Furthermore, the terms of any agreement reached on the basis of this obligation must be economically reasonable for the dominant operator. Finally, the dominant operator must be factually able to perform to the request, and the necessary capacity must be available[17].

In the
UK, Royal Mail’s license (condition 9) requires it either to agree a code for a grant of access to other postal operators to its network, or to negotiate the grant of access with such other operators, with a view to agreeing terms for such access. Such terms must be on prices that are based on reasonable allegation of costs and must not unduly discriminate between persons having access to Royal Mail’s postal facilities. In the event that negotiations fail to lead to agreement, either of the parties can appeal to Postcomm to issue an direct to Royal Mail concerning the terms of access.

Royal Mail agreed downstream access with three competing operators in late 2003 or early 2004, UK Mail (December 2003) and a TPG Post, UK Ltd and Deutsche Post (April 2004), each of which agreements were hailed by Postcomm as a significant step forward for competitive innovation in service delivery. Each of the agreements involved the application of geographically averaged prices for mail deposited at Royal Mail’s inward mail centers.

By contrast, Royal Mail has more recently agreed the grant of access to another operator (on
14 October 2004) a price which are geographically – averaged), i.e. the price varies depending on the geographic mail profile (know as ‘zonal pricing’). This resulted in complaints by UK Mail, TPG Post, and Express Limited, prompting a Postcomm investigation which commenced on 7 January 2005. Postcomm is specifically investigating whether the system of zonal or de-averaged prices is unduly preferential or discriminatory for or against either the new entrants granted the de-averaged prices or the existing new entrants already granted access on geographically averaged prices, or whether such terms are duly preferential or discriminatory for or against Royal Mail’s own downstream businesses.

Further issues include whether or not Royal Mail may have obtained a commercial advantage from the disclosure of information gained as a result of granting access to its network and/or whether Royal Mail has properly complied with requirement to notifying published details of any zonal access price offer.

6. Conclusions

The
UK and Sweden (and also Finland) have taken the fastest progress towards full liberalisation of the postal services sector, given that Sweden has already liberalised in 1993 and full liberalisation of the UK postal services sector is now little more than six months away, on 1 January 2006. Meanwhile, the Postal Directive requires further reduction of the reservable area, to a 50 gram weight threshold, in other EU member states on the same date. The process of liberalisation raises important questions for the performance of the universal service. Whilst a pro-liberalisation, procompetition approach to postal services regulation, as seen in Sweden and the UK, may appear justifiable at the present stage of market development, with incumbents yet to face significant levels of competition, important competition regulatory issues need to addressed.

The national law and regulations of all the member states now considered impose a uniform tariff for the universal service. Each of the member states now considered also impose some form of specific price controls or caps on the incumbent universal service provider. Approaches differ to the means of controlling prices. Such controls are to a large extent inflation related, being based on a prices index or costs index, for example in Belgium, the Netherlands and the UK (or a combination of inflation and quality criteria as in Italy), whilst being more based on costs in France and Germany. The approach taken under the price index or cost index form of controls presupposes that the incumbent will, through its own efficiencies, prevent its costs escalating in excess of the rate of inflation from year to year, whilst the UK “RPI-X” approach requires the incumbent to achieve such efficiencies, measured by reference to the “X” factor.

As regards the compulsory grant of downstream access to the incumbent’s postal network (as opposed to P.O. boxes) only the national regulatory systems of
Germany and the UK (of the countries now considered) impose a specific obligation to grant such access. Other countries, like Sweden and the Netherlands have explicitly considered that specific regulation of downstream access is not necessary to establish competition, provided that the incumbent accepts, without discrimination, pre-sorted bulk mail from its competitors and large customers alike. It is in some ways surprising to find such disparity between the member states. This partly reflects the different approaches to liberalisation in the various countries, and it also may reflect a difference in views as to the extent to which a postal network could be replicated without undue difficulty and therefore whether or not it is a natural monopoly or “essential facility”.

Further, the issue raised in the
UK of whether the granting of access could in effect be treated as part of the universal service obligation, is of fundamental importance. Insofar as the provision of network access is granted to competing upstream postal services providers, the service is not provided, or at least not directly provided, to end users and therefore should not be treated as falling within the universal service obligation. However, as shown by the recent proceedings brought by the European Commission against Germany under Article 86 EC and by the Bundeskartellamt against DPAG under German competition law, the service to bulk mailers of accepting pre-sorted mail on a discounted basis is in essence a similar service. Insofar as the grant of downstream access should or were to be regarded as coming within the universal service obligation, this would mean that the associated universal service obligations would apply, including in particular the requirement for a geographically uniform tariff. This, in turn, would have certain implications, for example, as to whether Royal Mail should be entitled to impose a geographically de-averaged price for network access, which question is currently being investigated by Postcomm. It may well be that the appropriate and correct analysis is that downstream acceptance of pre-sorted bulk mail into the network on more favourable terms for users who wish to undertake pre-sortation represents, as regards such bulk mailers, an agreed departure from the universal service, rather than being an extension or part of the universal service itself.

In any event, where an obligation is imposed on an incumbent universal service provider to accept pre-sorted bulk mail into its network in return for work-sharing discounts, and the incumbent is required to do so on a nondiscriminatory basis as between individual bulk mailer users and postal services intermediaries or consolidators, the result is in effect the same as imposing an obligation of downstream network access. This is the position recognised in the
Netherlands, for which reason the Dutch legislator deemed it unnecessary to impose an obligation of downstream network access on TPG Post.

It is clear from the European Commission’s decisions of October 2001 and October 2004 that where downstream access is provided at discount prices to large users who feed pre-sorted mail into the network, there should, under Articles 82 and 86 EC, be no risk of discrimination either as between the incumbent operator’s own subsidiaries and competitors, and no discrimination as between large users carrying out pre-sortation and independent mail preparation firms or consolidators.

Based on these considerations, and in view of the increasing competition which incumbent universal service providers in EC member states can be expected to face as liberalisation is progressed further, the following key issues arise:

In the face of an expected increase in competition, especially if fuelled by a cost-plus basis of pricing downstream access to an incumbent’s network, the question must be raised of for how long it will be appropriate to require the universal service to be performed at a geographically uniform tariff.

Such a uniform tariff obligation deprives the universal service provider of the flexibility to take reasonable steps to protect its position in the face of competition, by adjusting its prices to make them more cost-reflective and to respond to specific competitive threats in relation to particular geographic areas of classes of customers. The case law of the European Court of Justice on abuse of dominant position does allow generally a dominant operator to take proportionate steps to protect itself in this way.

As regards price controls, the question must be asked whether, if competition takes hold as intended by the EC and national regulatory authorities, will there be a need for continuing pricing controls? The regulatory rationale for price controls is, or should be, to provide a surrogate for the price-constraining effects of competition. The greater the penetration of new entrants, arguably the less the need for price controls on an incumbent’s services.

As regards the terms of downstream access, the retail-minus or “avoided costs” approach to setting the price of access is expressly required to be taken into account under the Postal Directive. Once full competition has become established, the application of a cost-plus basis of charging for access to the network could in effect deprive an incumbent universal service provider of its ability properly to exploit its assets, especially if it would at the same time be required to bear the continuing burden of universal service provision. In the
UK, Royal Mail has taken a practical approach and agreed with its competitors UK Mail, TPG Post, and Deutsche Post a structure of access charges which seems to resemble retail-minus charging. Postcomm has allowed this, or at least not prevented it, stating instead that it welcomes the voluntary conclusion of access agreements. It is to be noted that even though the approach to access pricing in Germany is largely based on the incremental costs, the approach actually applied by Royal Mail in the UK, and also the approach required under Dutch legislation for pre-sortation or “work-sharing” discounts, in each case applies the avoided costs principle. A cost-plus basis of pricing, based on the incumbent’s costs of the downstream services actually provided, may fail to cover the costs to the incumbent universal service provider of maintaining and renewing the network. This is a feature of the cost structure to which an access seeker should properly be expected to contribute. The retail-minus or avoided costs approach does allow for such a contribution by the new entrant and it would be unfair to an incumbent universal service provider not to receive such contribution to the maintenance and renewal.

In any event, it would seem inconsistent, on the basis of the above objectives, for regulators to continue with the dual policies of encouraging cost-plus charges for downstream access to an incumbent’s network whilst at the same time imposing or maintaining rigorous price controls in respect of the incumbents services to end users.

In our view, it is not appropriate to bring the grant of downstream network access, whether based on regulatory access obligations or on the non-discrimination principle (obliging the incumbent to grant the same discounts for pre-sorted bulk mail delivered by competitors or by customers) within the scope of the universal service obligation. In postal services as in other regulated, network-based utilities, the granting of network access as a means of facilitating upstream competition is a different activity from the provision of a universal service to end users. In particular, the granting of discounts, on a work-sharing basis, for pre-sorted mail should in our view be seen as a departure from the universal service obligation whereby such work-sharing on mutually acceptable terms is agreed between the universal service provider and the customer in place of the universal service provision. The scope of the universal service obligation should be confined to the provision of upstream collection and downstream delivery on a geographically uniform basis. Any different approach would in our view result in unacceptable and unnecessary complications and could unfairly inhibit the universal service provider from being able to safeguard its competitive position upstream whilst both granting access to its network on reasonable terms where required and providing the universal service (sometimes uneconomically for remote geographical areas) for individual end users.

In this connection, it is helpful to note that Postcomm, in its February 2005 decision document Giving Customers Choice: A Fully Open Postal Services Market, stated that it recognizes the link between market opening and the definition of the universal service and the impact that this has on the amount of pricing flexibility Royal Mail is subsequently allowed. Postcomm stated that it aims to achieve a balanced package that allows Royal Mail the appropriate degree of pricing flexibility, and that in a fully competitive market place, Royal Mail should have a higher degree of flexibility.

In the
Netherlands, not only is the balance between market opening and universal service obligations taken into account but also the economic effects of liberalisation. Although the Minister of Economic Affairs concludes in his 2004 policy note on the future development of the postal sector that full liberalisation at the earliest possible date is in the best interest of consumers, consideration is also given to the position of TPG Post on an international level. Since full liberalisation of the Dutch market means that postal incumbents from neighbouring countries (like Royal Mail and DPAG which have already entered the Dutch market) may compete freely with TPG Post on the Dutch market, it is considered important to establish a level playing field by keeping the same pace of liberalisation as in Germany and the UK.

For the EU member states, which have chosen a more cautious approach towards liberalisation, the European Commission, meanwhile, continues to map out the path of liberalisation. In its recent report on the application of the Postal Directive, the Commission advocates an in-depth debate on the future postal policy and, to support that process, has announced the launch of two studies on the development of competition and the evolution of a regulatory model for European postal services as well as, towards the end of 2005, a study on the impact on the universal service of the full accomplishment of the internal postal market.

Article 14(3) contains detailed provisions on cost allocation, whereby costs that can be directly assigned must be so assigned and common costs should be allocated on the basis of the origin of the costs, or if this is not possible on the basis of any indirect linkage to another cost category, failing which they must be allocated on the basis of a general allocator computed by using the ratio of all expenses directly or indirectly assigned or allocated, to each of the reserved and non-reserved services.

Originally published in ”Progress toward Liberalisation of the Postal and Delivery Sector”, Chapter 19, pages, 321-339. @ 2006 Springer Science + Business Media, Inc.



[1] See consideration 14 of Directive 2002/39/EC

[2] Case C-320/91, ECR (1993) I-2533.

[3] The European Commission similarly drew a distinction regarding Spanish legislation, between basic letter services and international express services: Commission Decision 90/456/EEC, OJ (1990) L233/19.

[4] Case C-340/99,ECR (2001) I-4109.

[5] The government minister originally appointed also had certain responsibilities in connection with state property in the French incumbent operator La Poste as well as responsibilities for La Poste’s economic and financial performance, so was not considered by the Commission to be independent.
[6] Commission Report on the application of the Postal Directive, SEC(2005)388 and the underlying Commission Staff Working Paper COM(2005)102 final, both of which are published on the Commission’s website http://europa.eu.int/comm/internal_market/post/studies_en.htm

[7] Articles 12-15

[8]Article 14(3) contains detailed provisions on cost allocation, whereby costs that can be directly assigned must be so assigned and common costs should be allocated on the basis of the origin of the costs, or if this is not possible on the basis of any indirect linkage to another cost category, failing which they must be allocated on the basis of a general allocator computed by using the ratio of all expenses directly or indirectly assigned or allocated, to each of the reserved and non-reserved services.
[9] Decision 04-D-65 of 30 November 2004 (http://www.conseil-concurrence.fr/pdf/avis/04d65.pdf)
[10] Decision of 23 October 2001, OJ (2002) L120/19.

[11] Case C-18/88, GB-Inno-BM (1991) ECR I-5941.

[12] European Commission press release IP/04/1254, 20 October 2004. Decision is not yet published in the Official Journal, but the draft is available on the Commission’s website: http://europa.eu.int/comm/competition/antitrust/cases/decisions/38745/en.pdf
[13] Case T-490/04, Germany v Commission and Case T-493/04, Deutsche Post AG v Commission, OJ (2005) See 31/29.

[14]By Legislative Decree No. 269.99

[15]A similar obligation with respect to access to P.O. boxes also applies to Deutsche Post in Germany.

[16]Swedish Government Office Report SOU 2005:5

[17]See sections 19 to 28 of the German Postal Act.


Authors

Kuipers-Pauline

Pauline Kuipers

Managing Partner
Netherlands

Call me on: +31 (0)70 353 8800