New Year, new postal USO?

24 January 2012 | Consulting

Article

New Year, new postal USO

The December peak of posted Christmas letters and gift parcels will now have subsided in most European countries. Postal operators will be back to ‘normal’ monthly volumes of personal letters, business communications, advertising mail and fulfilment deliveries, large and small. But as 2012 begins, two of the largest postal delivery companies in the developed world – USPS (in the USA) and Royal Mail (in the UK) – are having to consider the future costs, prices and standards of service that they will support in their nationwide collection and delivery networks, and in upholding their universal service obligations (USO). At the same time, their respective regulatory authorities – the PRC (USA) and Ofcom (UK) – are overseeing and reacting to the evolution of these issues.

The two examples shown in Figure 1 highlight the dramatically different options that can be taken in maintaining a sustainable national postal service.

Figure 1: Two examples of options for maintaining a sustainable national postal service [Source: Analysys Mason, 2012]

In the USA, USPS announced that it plans to change service standards to save costs and become profitable¹

USPS intends to optimise its collection, processing and delivery network for a less-stringent service standard than currently offered, in order to ensure a return to sustainable profitability. The plan includes:

reducing the ‘next-day’ service standard for first-class mail, to a two-to-three day service standard (though next-day delivery is still available under certain constraints)
the possible closure of up to half of the current number of mail processing centres to consolidate equipment and resources, though this affects transit time and thus the ability to process, convey and deliver distant mail by the next day.

At the same time, USPS has been involved in lengthy discussions with the PRC on moving from six to five delivery days, including debates on the cost savings that could be realised from this change to the delivery service standard offered.

In the UK, Ofcom issued a consultation paper in which it proposes a more-flexible regulatory regime for Royal Mail²

Ofcom’s proposals include less reliance on traditional price controls, allowing Royal Mail more commercial freedom to set prices and giving it greater flexibility to respond to the uncertainties of the evolving mail market. These should give Royal Mail the ability to address the financing of its universal service. Ofcom also comments that its proposals provide a more-effective route to incentivising efficiency gains, something that supports the UK government’s policy to privatise Royal Mail.

However, Ofcom also imposes certain safeguards to support its primary duty of securing the sustainable provision of the universal service, while also maximising the benefits of competition. These include:

a safeguard cap on the price of second-class stamps
an access condition at inward mail centres
potentially, imposing obligations upon end-to-end competitors to ensure that the USO is not undermined by competitive entry in delivery.

Regulators, policy makers and postal operators will increasingly need to answer fundamental questions about the postal USO, and may come to significantly different views. Such questions include:

what quality of service is actually needed, and how can it be achieved?
which user groups desire the different components of this service quality? (For example: Post Office and single piece mail inception; bulk mail access; duration and efficiency of transit and sortation; and timeliness and frequency of delivery.)
how are the (efficient) network costs caused, or changed, by the configuration of the service?
what are the costs of the USO?

Analysys Mason has growing expertise in the postal sector and can help to answer these questions. For more information on our experience in this sector, please contact Ian Streule (Partner).

1 For further details, see USPS (Washington, DC, 2011), Postal Service Progresses With Operational Efficiencies. Available at https://about.usps.com/news/national-releases/2011/pr11_132.htm.

2 For further details, see Ofcom (London, UK, 2011), Securing the Universal Postal Service. Available at http://stakeholders.ofcom.org.uk/consultations/securing-the-postal-service/summary.