Structural Options for Royal Mail
The Situation
Postcomm launched a consultation exercise in January 2008 on the future regulatory framework for postal services. The context for this consultation was the faster than expected development of upstream competition to Royal Mail, from companies such as TNT and UK Mail, and the risk that Postcomm's method of "headroom" regulation (adopted, among other reasons, because of the lack of available data to support other methods of regulation) was discouraging the possible development of end-to-end competition.
Several of the regulatory scenarios listed in Postcomm's consultation document involved some form of separation between different parts of Royal Mail, as a means of promoting effective competition where new operators seek access to some part of Royal Mail's network. To inform its consideration of these options, in March 2008 Postcomm commissioned NERA to assess the economic costs and benefits of a number of options for introducing further ring-fencing or separation to Royal Mail.
NERA's Role
NERA led a team including operational and commercial experts (Sirius Solutions and Condition 9 Ltd) to advise Postcomm on the expected costs and benefits of a range of options for restructuring Royal Mail. The options considered by the study were defined by both the degree of separation (accounting separation, ring-fencing, structural separation, or divestment) and the specific functions that would be separated from the rest of Royal Mail (sales and marketing, bulk mail collection and trunking, outdoor delivery, or separate regional divisions).
The study considered how each option would operate in practice, in particular the extent to which it would facilitate competition within the industry, and impacts on costs, including any costs of implementing the separation. It also considered implications for access charge regulation.
The study drew on both the project team's in-depth knowledge of the postal sector and a thorough review of evidence from other industries. This covered experiences of previous separations and impacts of competition and liberalization.
The Result
NERA's team provided two sets of recommendations to Postcomm, involving different degrees of likely short-term disruption (depending among other things on union reaction) and different potential long-term benefits. NERA identified the changes to the regulatory framework that would be required under each recommended option, and also other opportunities (such as a chance to promote outsourcing) associated with each. NERA and Postcomm staff also prepared and presented a joint paper on the study at the 2009 Conference on Postal and Delivery Economics in Bordeaux.
Following further analysis, and a delay because of the possible transfer of regulatory responsibilities to Ofcom, Postcomm launched a consultation exercise in May 2010 that included, among other things, different forms of accounting separation.
