Early in 2002 the ODTR granted An Post an interim increase in postal charges while indicating that it was considering whether a further increase in rates might be justified. Various media reports suggest that An Post’s financial difficulties stem from a failure to implement cost reduction measures. Such reports raise questions as to whether an increase in charges is an appropriate response. Arguably only a firm in a monopoly position can pass on the cost of inefficiencies to its customers in the form of higher prices. The decision to increase postal charges raises a number of important policy issues which need to be addressed.
Liberalisation
The EU is seeking further liberalisation of postal services. Such moves have clear implications for postal charges and services in Ireland. Already competition is permitted in certain areas, e.g. packages above a certain size. Introducing competition into all areas of postal services raises questions about whether postal services constitute a natural monopoly along with the nature of the universal service obligation (USO) and how it should be funded.
In much the same way that electricity can be broken down into generation, transmission, distribution and supply, it is possible to break postal services down into a series of separate activities. These involve the collection of mail, sorting, transportation between different destinations, sorting for delivery and final delivery. The indications are that all of these activities with the possible exception of final delivery are potentially competitive. It is unclear whether the latter activity actually constitutes a natural monopoly.
It appears that there are significant economies of scale in final delivery, i.e. the unit cost of delivering an item of mail is lower when there are a large number of items to be delivered to the same address or to adjacent addresses. While that would tend to indicate that duplication of final delivery services would be inefficient, there may be economies of scope from combining delivery of mail with delivery of other items. Evidence suggests that final delivery may account for as much as 65% of the total cost of postal services. In New Zealand liberalisation has been introduced up to the final delivery stage, reflecting a view that it constitutes a natural monopoly. In contrast Sweden has introduced full-scale liberalisation of all stages of postal services.
At present An Post is required to charge uniform prices for delivery to all areas despite the fact that the costs of delivery may be very different. This represents a very strict form of USO. In other jurisdictions operators are often allowed to differentiate in respect of some aspects of services. For example, there may be differentiated rates for different levels of services, i.e. first and second class rates. Such differences in service levels are a response to the peak load problem.
In many countries it is recognised that the objective of creating equal opportunities and similar living conditions throughout the country does not necessarily require uniform prices. A weaker form of USO might require that, at a minimum, similar qualities of service should be offered everywhere in the country, and that price differences between regions should not be too large. Another alternative, which applies in the US, is to have uniform prices but different levels of service. Thus, for example, deliveries to more remote households are only made to a post box on a postal route rather than to each individual doorstep as in more densely populated areas.
There are four possible means of funding the USO in liberalised markets.
Simply imposing the same level of USO on all firms means that entry would occur if, and only if, the entrant were more efficient overall than the incumbent, i.e. it had lower costs for serving both profitable and unprofitable customers. Such an obligation would also require new entrants to roll out national networks. This may be highly inefficient in that it may result in undesirable duplication of fixed networks and may deter beneficial niche entry. In addition if the new entrant were more efficient than the incumbent in serving one class of customers but not the other it might lead to either inefficient entry or deter efficient entry, depending on the relative size of the entrant’s advantage. The option of imposing a USO on all firms does not appear to have been applied anywhere in practice.
A number of countries have left responsibility for the USO with the incumbent. To prevent cream skimming new entrants have been required to fund the incumbent for the provision of the USO. Such an approach removes the scope for inefficient entry. Only firms that are more efficient than the incumbent would enter in such circumstances. There are, however, disadvantages with such a mechanism. While it discourages inefficient entry in the profitable market, it provides no incentive for a more efficient firm to enter the loss making market. In addition if payments by new entrants are based on the loss incurred by the incumbent in providing the USO, the incumbent has an obvious incentive to exaggerate such costs since it is likely to be very difficult for the regulator to calculate the cost of the USO accurately. Indeed .the incumbent has a clear incentive to reduce its overall charges since this automatically increases its losses and increases the payments that entrants must make to it.
The alternative to the previous option is to require all firms to make payments into a USO fund. Each firm would make a contribution to the fund in respect of every customer served in the profitable market and receive a payment for every customer served in the loss making market. The benefit of this approach is that it both discourages inefficient entry in the profitable market and encourages efficient entry in the loss making market. Provided there is sufficient competition then it is likely to ensure that the USO is provided at the lowest possible cost. Similarly competition eliminates the need for the regulator to devote time and resources to measuring the true cost of the USO.
The government could provide a direct subsidy to firms to cover the cost of USO. For example, certain internal air services which are operated on social policy grounds are financed in this way. This option needs to be distinguished from one of requiring the incumbent to operate the USO and subsidising it directly. Under such an arrangement the incumbent would have no incentive to minimise the cost of the USO, while it might also be difficult to ensure that the incumbent did not switch costs between market segments, artificially increasing the cost of the USO and using this to reduce its prices in the competitive market. Subsidising the incumbent would obviously raise competition issues. Similarly the payment of a subsidy to one or more operators might raise concerns under EU law regarding illegal state aids.
It is also necessary to carefully examine what measures, if any, may be required to ensure the development of effective competition in the postal services sector. Such an examination needs to take account of various options that have been adopted overseas including:
© CompEcon Limited 2002.
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