Committee (4th Day)

Postal Services Bill [HL] – in the House of Lords at 9:15 pm on 22nd April 2009.

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Clause 34 : USP access conditions

Amendment 87B

Moved by Lord Hunt of Wirral

87B: Clause 34, page 18, line 42, leave out from "it" to end

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills) 9:16 pm, 22nd April 2009

Our amendments in this group would ensure that any USP access condition imposed under subsection (1)(a) was accompanied by an appropriate assessment of costs. As the drafting stands, an access condition could be imposed, including one with price controls, without a transparent and relevant set of accounts being drawn up specifying the different costs of the relevant matters. This form of drafting is repeated in Clause 44 for a general access condition.

Our first amendment in this group would insist that an access condition contained both the access requirement and the relevant accounting separation. Access conditions are, as the independent Hooper review made clear, a particular area of contention between the various stakeholders. It would be extremely unhelpful for the sector in general, and especially the relationship between the regulator and the universal service provider, if it was felt that access conditions had been based on anything other than clear and transparent figures.

In conversations about this drafting, various parties, including Ofcom, indicated that they welcomed the flexibility that the either/or gave them, because the relevant accounting separation might have already been required under Clause 35 and to repeat the requirement would be unnecessarily burdensome. As a result, I have tabled the second of my amendments to take account of that possibility. There is also the possibility that Ofcom might think that an accounting separation of access matters was needed but not a requirement to give access or to impose price controls. In this case, surely Clause 35 gives it enough power to impose the necessary accounting standards. I beg to move.

Photo of Lord Carter of Barnes Lord Carter of Barnes Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Parliamentary Under-Secretary (Department for Business, Enterprise and Regulatory Reform) (Communications, Technology and Broadcasting) (also Department for Culture, Media and Sport), Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Communications, Technology, and Broadcasting) (also in the Department for Business, Enterprise and Regulatory Reform)

While I think that I understand the driving logic behind the amendments to create a binding connection between the requirement to impose an access condition and the requirement for a transparent level of accounting disclosure and clear financial information, the Government believe that these two amendments, in practice and in course, would provide no additional regulatory benefit but, perversely, could risk an increased regulatory burden on Royal Mail and possibly a delay in implementation.

Under Clause 34 as drafted, Ofcom may impose a USP access condition for either access to Royal Mail's postal network or accounting separation relating to access, or both elements together. Amendment 87B would join these elements, thereby reducing Ofcom's flexibility under Clause 34 to impose an access condition without having also to impose a related accounting separation condition.

Amendment 88A would allow for an accounting condition under Clause 35 to be sufficient to satisfy Clause 34(1)(b). Amendment 88A presupposes that a condition under Clause 35 has been imposed and is sufficient to cover the access being required under Clause 34. Again, that has the potential to constrain Ofcom and could mean delaying the imposition of an access condition pending imposition of an accounting condition under Clause 35. It would also mean that Royal Mail had to be subject to both a USP access and a USP accounting condition rather than just a USP access condition alone.

The Bill rightly requires Ofcom to act in a proportionate manner when imposing any regulatory conditions. That applies equally to accounting conditions, whether they are imposed under the powers set out in either of the two clauses that we are discussing. We believe that this will ensure that there will be no unnecessary repetition of accounting conditions. I hope that this explanation is clear and I invite the noble Lord to consider withdrawing his amendment.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills)

I have listened carefully to what the Minister has said. I shall consult further in the light of the explanation that he has given. In the mean time, I beg leave to withdraw the amendment.

Amendment 87B withdrawn.

Amendment 88

Moved by Lord Clarke of Hampstead

88: Clause 34, page 18, line 42, at end insert "on commercial terms"

Photo of Lord Clarke of Hampstead Lord Clarke of Hampstead Labour

I think that I can do away with declaring an interest. It should be evident by now that I have an interest in Post Office matters from my previous employment.

Amendment 88 is, from the point of view of running the Royal Mail, one of the most important things that we will be looking at, putting aside the other major parts of the Bill. It is important because of the history of the last eight to 10 years, when the Royal Mail was not allowed to act on a commercial basis, and because of the way in which the whole thing was sorted out in the early days. I was going to bore the Committee; I have put down about 10 references that I have made in the House to the whole business of pricing. However, it is getting a bit late, so I will not go through them all, but I might pick up one or two of them.

Many of the problems of today stem from the fact that our Government got it terribly wrong in allowing Postcomm to misinterpret its brief and to favour the route for competition. It is not surprising that establishing competition for Royal Mail involves setting up a comparable network to Royal Mail. The Royal Mail network currently involves daily collections from 115,000 pillar boxes, 11,500 post offices and daily delivery to 28.4 million addresses with fewer than 3,000 delivery exemptions. It has a workforce of around 167,000, 69 mail centres, 1,400 delivery offices and one national hub. It has around 31,000 vehicles, two trains and 42 flights a day.

Competitors would have to consider whether they could mirror or match that infrastructure, which gives the Post Office such a unique position. As we heard the other night, Royal Mail is really the only potential provider for the universal service. Those sorts of resources are necessary if the UPS is to be provided. Therefore, what we are looking at is the fact that competition has baulked at making such a substantial capital investment, despite all the fluffy talk about the investment that competitors could make. Instead, the competitors have concentrated on part-sorting mail and trunking it to Royal Mail offices for completion in sortation and delivery by Royal Mail.

This access work has been carried out at prices for Royal Mail that have allowed exceptional profits for competitors. In fact, there is a subsidy provided by Royal Mail. Nobody has done the work. Even Hooper could not reach a conclusion on how you do this costing to get a commercial basis. This subsidy is often talked about as 2p an item. You are talking about millions of items a day. Because of a law that the Labour Government introduced, the competitors are enjoying this subsidy from Royal Mail, which delivers at a loss while having to maintain that infrastructure. That is why I mentioned the infrastructure earlier; it is quite a costly operation.

No one can say with accuracy how much Royal Mail has lost because of this misguided Postcomm policy, but I should think around £100 million a year for the competitors has been a nice little feather bed. I have just looked up some of my comments from eight years ago; all this was accurately prophesied. As I say, Richard Hooper could not come to a conclusion in his report. He just left the matter for further examination by Ofcom.

My Amendment 88 seeks to guarantee the position for the future. If access is carried out on commercial terms, services are purchased at their value rather than through a subsidy. Royal Mail is currently unable to compete for access work, not because of inefficiency but because the regulator has established a system of pricing that is completely unfavourable to it. Richard Hooper's report recognised that the system of access pricing with Postcomm's headroom regulation is unlike any other system of access offered by other European postal providers.

The access headroom regulation prevents Royal Mail from lowering the price that it can charge retail customers for its bulk end-to-end service without also lowering the access price by the same proportion. This means that any cost savings made on upstream activity cannot be passed on to retail customers without the business then losing revenue by also having to lower the access price. With the lowering of the access price to competitors, those competitors can pass the savings on to their own customers and retain contracts. The only additional efficiency being provided is that created by Royal Mail, which, in turn, gains no benefit. In regulatory terms, this would be characterised as a perverse outcome, yet Postcomm has sat on this perversion and no one has seen fit to address it—notwithstanding the fact that the House of Lords has been told on many occasions that what was going on was not only morally wrong but commercially daft when you think of Royal Mail's position. If my amendment is accepted by the Government, such an outcome would have to be addressed by the regulator.

Amendment 96 in this group deals with information about performance conditions, which is important when you consider the amendment about commercial charging. The new clause says:

"(1) Any information about performance condition is a condition that OFCOM may impose requiring a postal operator to do one or more of the following—

(a) publish information about the extent to which it is providing specified postal services in accordance with specified standards;

(b) publish annually an independently audited performance report; and

(c) provide specified information (at such times and in such manner as OFCOM may direct) to other postal operators and users of postal services about the service provided by that postal operator.

(2) The reference in subsection (1)(b) to an independently audited performance report is to a report that—

(a) contains information about the postal operator's performance in complying with any regulatory conditions; and

(b) is audited for accuracy by a person who is independent of both OFCOM and the postal operator.

(3) Any information about performance condition may require the postal operator to meet the costs of the audit required by subsection (1)(b)".

The new clause would provide the public with information about the performance of postal operators.

As the Bill stands, it is only the universal service provider—we have all agreed in this House that, although it has not been written in the Bill, we are talking about Royal Mail—that is obliged to publish information and audited performance details. Many noble Lords will be anxious for Royal Mail to compete on a level playing field. Indeed, I note that the Parliamentary Labour Party brief issued by the Secretary of State on 26 February in support of First Reading was entitled "A Level Playing Field for the Royal Mail". The noble Lord, Lord Hunt, reminded me the other day that that term is correct terminology for these Europeans. Is it too much to hope that the Government will move beyond such pieties in order to implement the measures necessary to secure a level playing field?

The Bill asks very little of a postal company that competes with Royal Mail. Clause 45 is entitled "Consumer protection conditions". Ofcom decides which are appropriate from the following:

"(a) to assume specified liability in respect of specified loss of or damage to specified postal packets,

(b) to establish and maintain procedures, standards and policies with respect to consumer protection matters,

(c) to make payments relating to qualifying consumer expenses of the National Consumer Council or the Office of Fair Trading".

Those requirements are all necessary and useful, but they are hardly sufficient. Along with that, Clause 46 indicates that Ofcom may require postal operators to provide a "redress scheme", which is clearly to allow for some consumer protection in the case of failure in the service offered. In total, the conditions that Ofcom may impose are minimal. At no point does the customer or independent observer have an opportunity to compare an audited performance of these firms with that of Royal Mail. I hope that the Government will take this amendment in hand.

Much has been made of the term "transparency", not least in Richard Hooper's report. We should be clear that, to date, what is being spoken about as transparency is merely the exchange of information between the regulator and Royal Mail. None of us will see this material unless we work with the regulator, Royal Mail management or limited circles of government. Such transparency is merely about reducing friction between the regulator and Royal Mail management on the provision of Royal Mail data; it is nothing larger than that. Broader transparency would allow the customer and independent observers to actively compare and contrast the performance of postal operators. I hope that there is more substance to the Government's commitment to transparency than has so far been suggested. I beg to move.

Photo of Lord Hoyle Lord Hoyle Labour 9:30 pm, 22nd April 2009

My noble friend, as always, has put his finger on the pulse. He has described in some detail the difficulties that Postcomm created for Royal Mail. Indeed, I must join him in saying that I welcome the demise of Royal Mail, even if my noble friend who speaks from the Front Bench has not. He mentioned that it is difficult to estimate the costs. In fact, when the Business and Enterprise Select Committee interviewed Mr Crozier, he said that the loss per item was about 2p. The chairman of the committee went on to ask, "You said you lost 2p per item. For the record, how many items are we talking about?". Mr Crozier replied, "About 5 billion". At 2p per item, they are losing roughly £100 million.

It seems absolutely ridiculous that people whom I would term predators are cherry-picking the items they want and taking business away from the Post Office. The Post Office will then have to subsidise that to the tune of £100 million. That does not make any commercial sense whatever. It is no wonder that one can get into problems. That is why this amendment is very important. We hope that Ofcom will adopt a different policy. It is important that the phrase "on commercial terms", which my noble friend suggests, is included in the Bill. A public service should not subsidise the people to whom I have referred.

Repeated interviews with Postcomm and its appearances before the Select Committee in the other place have always indicated that it seemed to be more interested in competition than in the provision of a universal service; in other words, it had its priorities the wrong way round. Therefore, we should not allow Ofcom to make the same mistake that Postcomm did.

I am not suggesting for one moment that Ofcom is the same animal as Postcomm. A lesson has been learnt in that regard. As we have discussed on many occasions, we opened up this market far earlier than others did. Indeed, my noble friend has asked on many occasions when the French intend to open up their market. Some of the competitors that are mooted to take a 30 per cent stake, such as TNT, had their markets liberalised only in March this year. Another competitor reported to have shown an interest in taking up a shareholding, Deutsche Post, is now losing money. That just proves that we were too far ahead of the game. However, it was not just a matter of being ahead of the game but of putting conditions on Royal Mail that should not have been imposed on it. It was absurd to impose on it losses running into billions of pounds.

We shall listen to the Minister's reply, but we should press the amendment at some stage. I hope that his mind is not completely on Chelsea at the moment. I am sorry that I cannot give him any good news in that regard.

Photo of Lord Hoyle Lord Hoyle Labour

Is it still nil-nil? Thank you. Sometimes the Opposition are invaluable. At least my noble friend knows that Chelsea is not losing at the moment, but anything can happen. But, coming back to losing, we no longer want—

Photo of Lord Hoyle Lord Hoyle Labour

Until about 9.45 or 9.50 pm; I estimate another 15 minutes. By the time the Minister has replied to the amendment, we shall have the result. I return to the serious matter of Royal Mail and what happened to it under Postcomm. We are trying to ensure that if Royal Mail is obliged to deliver certain items, it should do so on a commercial basis. It should make a profit rather than subsidise predatory competitors. I am pleased to support my noble friend's amendment.

Photo of Lord de Mauley Lord de Mauley Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister, Children, Schools and Families, Shadow Minister, Innovation, Universities and Skills

I will try to be brief. We agree with the principle of Amendment 88 in the name of the noble Lord, Lord Clarke. Certainly, since any access condition will impact on contracts between Royal Mail and other postal operators, the noble Lord is right that care should be taken to maintain conditions that take account of commercial realities.

Amendment 96 goes a little wider and I am afraid that we have reservations about it. It seems to impose a potentially substantial burden on postal operators who might have nothing to do with the universal postal service at all. We fully appreciate the benefits of transparency. However, it is one thing to expect the universal service provider, which will just have been bailed out by the taxpayer to the tune of several billion pounds, to be transparent about how it is maintaining the UPS, it is quite another to demand that private companies open themselves up to criticism about how they operate their businesses when they are providing services that have no impact on the UPS.

Photo of Lord Carter of Barnes Lord Carter of Barnes Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Parliamentary Under-Secretary (Department for Business, Enterprise and Regulatory Reform) (Communications, Technology and Broadcasting) (also Department for Culture, Media and Sport), Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Communications, Technology, and Broadcasting) (also in the Department for Business, Enterprise and Regulatory Reform)

In the dying moments at Stamford Bridge, I, too, will try to be brief. However, I shall try to address the amendments and the points that have been made in the debate because, to my mind, they are central to a fundamental ambition of the Bill. I have come to be aware of and appreciate the interest and expertise of my noble friend Lord Clarke in this area. I hope that by the end of the debate he may be persuadable that it is possible to create a regime that is both fair and transparent, underpins the universal service and allows for productive competition. It is not the view of the Government that those things are in conflict.

I begin with Amendment 88. I am grateful to my noble friend Lord Clarke for allowing me the opportunity to provide further clarity on USP access conditions and the Government's position and to explain why the proposed new regulatory regime is adequate to the task at hand. The amendment seeks to introduce an additional threshold of "on commercial terms" on any USP access condition. The amendment risks creating additional regulatory burdens and may constrain the nominated company's management—in this case Royal Mail—in its ability to run the business. While I fully appreciate and understand his concerns around cross-subsidisation, particularly unfair cross-subsidisation, it is difficult to see what meaning "commercial terms" could have in relation to Clause 34(1)(b), which deals with accounting separation relating to access. Furthermore, the amendment would create uncertainty, as "commercial terms", which is not defined, could be interpreted widely and increase the possibility of either legal challenge or judicial review.

Clause 34 improves on current postal regulation by clearly setting out, and for the first time bringing on to a statutory basis, the grounds that Ofcom must have regard to when imposing a USP access condition. Clause 34 and concurrent competition law powers provide the tools through which Ofcom can ensure that access prices are not set too high or indeed too low. I am conscious that it is late, but I will digress to make a specific point. This exemplifies one of the central findings of the Hooper review, which was not that there is not a case for a transparent, accurately costed wholesale pricing regime, but that it did not currently exist, and it needs to exist on terms that are fair and transparent. The noble Lord is right to point out that Hooper did not do that transparent cost analysis. However, he was not asked to do it and nor was the review team equipped to conduct it. Its commissioning by Ofcom was central to his report.

Although I welcome my noble friend's sentiments, the amendment risks creating uncertainty without adding materially to the safeguards provided by the Bill. He can rest assured that the Bill gives Ofcom the necessary powers to establish the cost of access at Royal Mail on fair terms and to ensure that access prices are set appropriately and are subject to Ofcom's explicit primary statutory duty to secure the provision of the universal postal service. The noble Lord, Lord Hoyle, raised by way of example the question of the precise and accurate nature of the costs, the losses and the subsidisation. One of the ambitions of this new regime must be a fair, accurate and transparent wholesale access regime that preserves and funds the universal service and stimulates not parasitic but purposeful competition.

My noble friend also tabled Amendment 96, which he is proposing should be inserted after Clause 44. The amendment would give Ofcom the discretionary power to require any postal operator to publish information about its performance. In doing so, it mirrors Clause 33, which requires the nominated universal service provider, if Ofcom imposes any designated USP condition, to publish details of performance.

As the noble Lord opposite observed, the amendment has the potential to significantly increase the regulatory burden on what may be very small businesses, while achieving little more than is already allowed for in the regulatory powers of Ofcom in Schedule 8 to the Bill. One has to bear in mind that these operators are already in active competition with one another and, indeed, with the Royal Mail. If customers of these alternative operators are dissatisfied with the level of service, they are able to change providers with relative ease.

I should direct my noble friend Lord Clarke's attention to Schedule 8, paragraph 3. There we have set out the powers for Ofcom to require postal operators to provide all the information that Ofcom considers necessary to carry out comparative overviews of the quality and prices of postal services. That overview must be carried out with a view to publication and in the interest of users of postal services, whom he referred to.

We are satisfied that this Bill as it stands provides the necessary powers for Ofcom either to ask for any information they might require on performance conditions, or to require other operators to publish such information if it can show that to do so is objectively justifiable and proportionate. Given these explanations, I hope that my noble friend Lord Clarke will not only see fit to withdraw his amendments but think again about the balance between preservation of the universal service and fairly priced access to wholesale competition.

Photo of Lord Clarke of Hampstead Lord Clarke of Hampstead Labour 9:45 pm, 22nd April 2009

I thank my noble friend for that quite conciliatory and helpful reply to this short debate. My noble friend Lord Hoyle drew attention not only to the situation at Stamford Bridge, but to the number of times that the unfairness of the current Postcomm regime has been raised in this House. On his first point about Chelsea, he should have been watching the famous Arsenal last night, who scored four goals. Unfortunately the other team scored four as well.

Seriously, I shall not go into my earlier comments, but in my innocence I actually believed that when you put a case showing that something was wrong, people would take action. I turned up at meetings, not only of Postwatch, but Postcomm, and I argued the case. Now, after all this time we are told that the Hooper review cannot answer the questions that my noble friend Lord Hoyle and I have been asking for a number of years.

I am pleased that the noble Lord, Lord De Mauley, agrees with the principle of my amendment. He suggested, and the Minister picked it up, that Amendment 96 could be unfair to smaller organisations. The problem with all this unfairness is that if you put an obligation on Royal Mail, it should be fair to put the same obligation on its competitors, because that has caused a lot of the upset for at least the past eight years, probable longer. It has to be seen to be fair. I quickly looked up Schedule 8, paragraph 3, which does give food for thought, and there could be some merit in my noble friend Lord Carter's comment that he might consider it possible to create a fair system. However, if the outcome does not make it clear that the role of the regulator is not the role of the promoter of competition, but is the watchdog to see that the competition meets the requirements of the Bill, that would be worth looking at.

I am glad that he understands my concern, because it is getting to the point where, because of Postcomm's interference and biased approach, money has been drained; it is like shovelling £1 coins down the drain. I am prepared to look at the possibility of finding a better way of expressing what I have tried to do in Amendment 96. It is essential that we try to get this as clear as we can. I have said many times during the passage of the Bill that clarity, transparency and accountability must be the watchwords if we are producing legislation that we hope will resolve some of these problems. Ultimately, someone should do the work on the costs on the final mile. Hooper's team could not do it and they said that they were not asked to do it. There was a bit of a slip-up there if that is the reasoning on which the charging regime is being based.

You cannot compare going from Chadford and Moretonhampstead in a nice little van to deliver a letter to the next village—I think it is called Gidleigh; I went there once on a visit—with the final mile of someone going to South End Close in Hampstead, where there are 14 blocks of flats with 140 steps in each block. Someone needs to work out whether there is some measurement that will take into account the various weighting factors required for a fair pricing policy for the final mile. It will not be easy but it is possible. These days, there are ways of weighing up all the differences between a rural area, an urban area and a densely populated area, such as the Abbey Estate in Abbey Road, where I used to live. In North End in Hampstead, you walk down a lovely leafy lane to Northstead or North End Avenue. It can be done and someone needs to do it properly.

I am sure that the Government are prepared to look at the possibility of getting a proper pricing policy with proper guidance regarding Ofcom's responsibilities. With proper consultation, that should be possible. However, for tonight, I beg leave to withdraw the amendment.

Amendment 88 withdrawn.

Amendment 88A not moved.

Amendment 88B

Moved by Lord Hunt of Wirral

88B: Clause 34, page 19, line 18, leave out "might" and insert "is likely to"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills)

In working my way through the various conditions that the Bill allows Ofcom to impose, one of the most important concerns has been whether it requires Ofcom to show that the condition is necessary. Unlike in Clause 44, which imposes general access conditions, Ofcom does not have to show that a USP access condition is necessary—merely that it is appropriate for the promotion of efficiency, effective competition or the conferring of significant benefits on the users of postal services. I should be interested to hear from the Minister what sort of burden of proof there is on a requirement to be "appropriate".

The vagueness continues in subsection (4), when Ofcom must consider whether to impose a price control. The drafting seems to make it appropriate as long as there is the possibility of the universal service provider having the ability to fix prices at an excessively high level or impose a price squeeze.

We frequently have debates in this House over the words "may" and "must", and even "must" and "shall". I am afraid that I am now including "might" in the list of potentially ambiguous modal verbs, but I look forward to hearing the Minister explain, in particular, whether subsection (4) will have any reference to the intent of the USP. I beg to move.

Photo of Lord Carter of Barnes Lord Carter of Barnes Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Parliamentary Under-Secretary (Department for Business, Enterprise and Regulatory Reform) (Communications, Technology and Broadcasting) (also Department for Culture, Media and Sport), Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Communications, Technology, and Broadcasting) (also in the Department for Business, Enterprise and Regulatory Reform)

My most recent example of negotiating on "must", "may", "shall" or "would" was with the German telecommunications Minister in a European Council meeting, where, rather to my chagrin, he outnegotiated me in English on the wording of the telecoms framework. Let us hope that we can do better on this one.

I shall try to give some clarification. As we understand it, Amendments 88B and 88C seek to increase the threshold—or at least question whether the threshold is correct—that needs to be reached before Ofcom may impose access price controls on Royal Mail.

These amendments challenge whether the Bill contains the appropriate checks and balances in the various subsections and schedules on Ofcom's ability to impose access prices. We contend that the balance is right. Furthermore, by raising this threshold by the introduction of "might", the amendments would risk tilting the regulatory balance too far away from the benefit of consumers to the benefit of the company. In the long run, that would serve neither the consumers nor the company well.

Clause 34 already provides that Ofcom may not impose a USP access condition, which includes access to price controls, unless the regulator considers it appropriate either to promote efficiency and effective competition or to confer significant benefits on the users of postal services. A USP access provision that imposes a price control is also subject to a standard general test for imposing or modifying regulatory conditions as set out in Schedule 6. Ofcom must ensure that access price controls are objectively justifiable, do not duly discriminate and are proportionate and transparent.

As we have stated previously, Royal Mail currently delivers 99 per cent of all items posted in the United Kingdom and no other company is likely to have an equivalent national network in the foreseeable future. A balance has to be struck between regulation that protects the consumer and allowing the company to flourish. The Bill, as drafted, attempts to provide such a balance and we believe that it does. I hope that these explanations give some certainty to the noble Lord as to our preference for the language as drafted and we ask him to consider withdrawing his amendment.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills)

I shall carefully consider what the Minister has said and in the mean time I beg leave to withdraw the amendment.

Amendment 88B withdrawn.

Amendment 88C not moved.

Amendment 88D

Moved by Lord Hunt of Wirral

88D: Clause 34, page 19, line 22, leave out "may" and insert "must"

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills)

Our amendments in this group contrast the differences between the drafting of Clause 32(4) and that of Clause 34(3)—the first listing the factors that Ofcom mustconsider when setting price tariffs and the second listing the criteria that Ofcom mayhave regard to when setting access prices.

To return to the old debate between "may" and "must", our first amendment would make it necessary, not optional, for the criteria in subsection (5) to be taken into account. Our second amendment relates to the requirement that the price control must be based on clear and transparent accounts. I understand from Ofcom that the difference in drafting is a hangover from what has been described as previous legislation. Ensuring that drafting is consistent with precedent legislation is generally a good principle, but consistency within a single piece of legislation should prevail. Although there are differences in the interests of public and retail customers that might justify differences between the criteria to be taken into account, I do not think that the differences are so great as to suggest that cost transparency would be inappropriate. I beg to move.

Photo of Lord Carter of Barnes Lord Carter of Barnes Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Parliamentary Under-Secretary (Department for Business, Enterprise and Regulatory Reform) (Communications, Technology and Broadcasting) (also Department for Culture, Media and Sport), Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Communications, Technology, and Broadcasting) (also in the Department for Business, Enterprise and Regulatory Reform)

My answer may give the noble Lord some comfort but I am advised that I must do this quickly, so I shall do it at a canter. By replacing "may" with "must", Amendment 88D would require Ofcom, when imposing access price controls, to have regard to prices at which services are available in comparable competitive markets and to determine what it considers represents efficiency by using cost accounting methods. Our view is that, by constraining the manner in which Ofcom can regulate the sector, the amendment oversimplifies the complexity of the task of regulation and the need to allow the regulator the appropriate flexibility.

All network businesses with large common costs are complicated, as my noble friend Lord Clarke said earlier. Royal Mail is a network business with high levels of complexity. The current drafting of the clause guides Ofcom to consider areas to which it might have regard when imposing access price controls, but it seeks not to constrain Ofcom's discretion in these areas. Ofcom has a track record of doing similar tasks, perhaps with an even more complex, multilayered network business. Given the complexity of these markets and businesses, our sense is that Ofcom should retain the flexibility to consider what methodologies to use when setting access prices.

Amendment 88E would add an additional requirement on Ofcom to ensure that if it sets any access prices, it must seek to ensure that the prices take account of the costs of providing the service. Against the backdrop of a rapidly changing market and, we hope, an accelerated modernisation programme for Royal Mail, as we have stated before, Ofcom will need to ensure that access prices are set neither too high or too low nor, indeed, indulge in artificial cross-subsidisation. If access prices are too low and below cost, that damages the Royal Mail's ability to provide a universal service. Conversely, if access prices are too high, that will in the long term encourage users to move to alternative forms of distribution, such as digital media, far more quickly.

Clause 34 is explicit in stating that Ofcom cannot impose an access price control unless it appears that the universal service provider might set its prices excessively high or begin imposing a price for a margin squeeze adversely affecting users. Evidence suggests that Royal Mail has not modernised as quickly as other leading European operators and is therefore not as efficient as it could be—and, we all hope, will be. Ofcom will need to take into account that it will take time and expense to reach an efficient cost base. Again, that is an area where Ofcom has considerable experience in establishing coherent and what are generally regarded as sensible glide paths for that adjustment.

In the intervening period, a balance must be struck by Ofcom ensuring that Royal Mail does not provide an unfair subsidy to other access operators—a point regularly and rightly made by my noble friend Lord Clarke—while ensuring that that inefficient costs are not locked in for the long-term, as both outcomes would damage Royal Mail's ability to provide the universal service. However—the brief cold comfort—the noble Lord, Lord Hunt, has raised some interesting points with which I have some sympathy and the Government will take them away and give them further thought. I hope that in the light of those explanations, the noble Lord will not press his amendments.

Photo of Lord Clarke of Hampstead Lord Clarke of Hampstead Labour

My noble friend may not have the answer to his fingertips, but he just made a comment that is often bandied around: that the Royal Mail has not modernised as quickly as other European postal administrations. Between now and when we meet again, could he get some evidence of that, because it causes a lot of concern? What modernisation is he talking about? What machines is he talking about and how much do they cost? I asked those questions in the Second Reading debate. I do not expect an answer tonight, but I hope that before we meet again to discuss the subject, we will get some information on that.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Shadow Minister, Business, Enterprise and Regulatory Reform, Shadow Minister (Business, Innovation and Skills)

In the light of the assurance that the Minister has given me, I beg leave to withdraw the amendment.

Amendment 88D withdrawn.

Amendment 88E not moved.

Clause 34 agreed.

Schedule 3 agreed.

Clause 35 : USP accounting conditions

Amendment 89 not moved.

Clause 35 agreed.

House resumed.

House adjourned at 10.04 pm.