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Postal Services Bill [HL]

My Lords, in speaking to Amendment 68, I shall speak also to Amendments 69 and 70 standing in the name of my noble friend the Secretary of State. These amendments relate to the operation of a Royal Mail licence condition—namely, the price control condition. The current price control, which was originally intended to be replaced at March 2010, is being allowed to run on but needs an adjustment to continue to operate as intended beyond March 2011. These amendments are therefore necessary to ensure a smooth transition for Royal Mail with the minimum of delay between the current regulatory framework and the new regulatory regime that Ofcom will administer. The price control includes a volume adjustment mechanism, which allows Royal Mail to recover additional revenue if volumes are lower than those forecast by Postcomm when the current price control was set. This is because Royal Mail’s profits are sensitive to the volume of mail that it delivers, because a large proportion of its costs are fixed. The adjuster compares volumes in the previous year with an index of forecast volumes calculated when the price control was set. Because mail volumes have fallen significantly in the past year or so, the impact of the adjustment on Royal Mail’s finances is significant. The licence currently contains no value for the index to enable the volume adjuster to continue to work beyond the financial year ending 31 March 2011. However, it is not expected that by that date Ofcom will have completed the market assessment, made the universal service order, completed its cost modelling and carried out such consultations as it considers necessary before it imposes a new price control. Assuming no other competing pieces of work need to be undertaken, Ofcom currently estimates that it will be able to put a new price control regime in place in January 2012. Clearly, to ensure stability and certainty for Royal Mail and the postal services market, the existing price control needs to continue until the new one can be put in place, and that assurance needs to be given as speedily as possible. The Government consider that Ofcom’s principal practical task in this regard should be the work required to build a transparent cost model and compete the market assessment. Revising the existing price control will be a very significant resource drain, and would lead to unacceptable delays in establishing a new regulatory regime. Postcomm is unable to effect the necessary change to the condition under the procedures in the Postal Services Act 2000 before Part 3 is likely to come into force. The provisions of the current price control will roll forward for the necessary extra year without the need for regulatory action, but there is one vital exception to this. Paragraph 14 of condition 21 of the Royal Mail’s licence currently includes a volumes forecast index, covering formula years one to four. This enables the volume adjuster to function until 31 March 2011, but no further. The volume adjuster is of great importance, as it allows Royal Mail’s revenues to be adjusted to take account of the continuing decline in mail volumes, which has been greater than Postcomm forecast when the current price control was imposed. Our amendments seek to give the Secretary of State power to make an order extending that adjuster on the same basis to cover a formula year 5, thus allowing the adjuster to continue beyond 31 March 2011. The order made by the Secretary of State may adopt "a forecast figure" that Postcomm has produced using the same methods that it has, ""used … to determine the forecast figure for the index years"" currently set out in the licence. The Government intend to make an order as soon as possible, using Postcomm’s figure—which, for the avoidance of doubt, is 102.46. Before making the order, the Secretary of State will, ""consult the universal service provider and such other persons as"," he "considers appropriate" for a period of 21 days, and "consider any representations" that might be received. We have already discussed this proposal informally with a number of stakeholders, including Royal Mail, the Mail Competition Forum, the Mail Users’ Association and the National Consumer Council. Given their feedback, we believe that this proposal will be entirely uncontroversial. It is anticipated that the resulting order will be sufficient to enable the current price control to be rolled forward until Ofcom has conducted its full market assessment and is ready to set a new price control reflecting the new regime. It will give Royal Mail and the postal services market stability and certainty through the transition period, without distracting Ofcom from the vital work of putting the new regime in place as quickly as possible. I hope that I have provided a clear description of this group of government amendments, which are important in order to ensure a smooth transition with minimal delay between the current regulatory framework and the new regulatory regime that Ofcom will administer. Amendment 68 agreed.