Elsevier

Utilities Policy

Volume 31, December 2014, Pages 266-277
Utilities Policy

Postal-sector policy: From monopoly to regulated competition and beyond

https://doi.org/10.1016/j.jup.2014.03.002Get rights and content

Abstract

This paper discusses the main aspects of the competitive and regulatory state of the postal sector. It presents the different models for postal competition and regulation in the EU and the US and their history, together with their implications on regulation, with a focus on universal services and network access. While postal monopolies used to be the main source of funding for universal service obligations, the need for alternative funding sources after full liberalization has increased the interest of regulators and the public in knowing the cost of these obligations. In parallel, new means of electronic communication and consumer needs call the traditional scope of universal services into question. This paper outlines the economic rationale of current policies and directions for future postal regulation to strengthen the postal services' commercial viability in a competitive age, while safeguarding their relevant characteristics for the economy.

Introduction

The postal sector encompasses activities performed by historic and new operators involving the collection, sorting, transport, and delivery of addressed mail, unaddressed mail, parcels and express services. There is no physical network consisting of cables and rails, as found in more typical network industries. Instead, the postal network consists of postal outlets (or franchised counters) for the collection of items and mailmen who build up the delivery network anew every day by driving or walking. The postal sector may also be considered a network industry based on the network effect arising from the two-sidedness of delivery services (see Section 3.1). Unlike other network industries, it is mostly the sender who is the direct customer of postal operators, since the sender makes the decision to buy services or not, and it is also the sender who pays. Recipients usually do not have to choose a postal operator and do not pay for postal services.

Fig. 1 shows the traditional postal value chain.

Compared to sectors such as telecommunications, energy or rail, the postal sector is very labor-intensive. In Europe, it represents a significant part of the economy, accounting for approximately 0.6 percent of GDP (EUR 70 billion) and 0.75 percent of employment (EUR 1.6 million) (Okholm et al., 2010).

This paper explores the postal sector's evolution from state-run monopolies to regulated competition and beyond, with a focus on developments in the US and the EU. It also discusses the regulatory policies related to universal services and network access. An analysis of the current economic rationale of these policies in the postal sector suggests directions for their further development.

Recent developments in the legal framework of the postal sector can be understood in terms of regulation, liberalization, and privatization:

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    Regulation is the entirety of legal constraints on economic activity in the sector. The postal sector is characterized by a dense regulatory framework. Regulations may be concerned with fair competition, and be symmetrically targeted to all operators in the sector (market regulation). Alternatively, regulations may focus on correcting market failures by providing a socially desired level of service quality or redistribution. This second kind of intervention (universal service regulation) is often integrated as part of universal service obligations (USO), which have long been the main motivation for establishing state monopolies (reserved areas). Such monopolies have implemented necessary further regulations to deal with market dominance.

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    Liberalization is the abolishment of reserved areas and the opening of markets for new operators. In recent years, the postal sector has become liberalized in many countries. Moreover, new services based on electronic communication have become available, stimulating indirect competition by creating substitutes for mail or complementing the delivery of parcels, thereby rivaling brick-and-mortar businesses.

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    Privatization is the process of transferring ownership of a postal operator from the public sector (government-owned) to the private sector. The precursor to privatization is corporatization, which transforms postal government agencies into corporations.

In parallel with liberalization and increased competition, sector-specific regulation in the postal sector has become a widely discussed topic among academics, policy makers, industry economists and regulators themselves. The focus of these debates has usually been on whether such regulation is necessary, and, if so, what its optimal design should be. Some argue for deregulation (that is, the abolishment of price regulation or USO), whereas others propose re-regulation, which involves the replacement of pre-existing (monopoly-related) regulations with new regulations that aim to safeguard service levels and competition. The resulting compromise is often somewhere in between de- and re-regulation.

This paper follows the approach of (Jaag and Trinkner, 2011a) in analyzing the interaction of various elements of regulation with competition (see Fig. 2). The market equilibrium in the postal sector is determined by regulatory policies in two domains: First (on the left-hand side of Fig. 2), market regulation aims to ensure fair competition. It governs market access (for example through a reserved area or a licensing regime) and network access to monopolistic bottlenecks. It also regulates interconnection, such as through provisions related to addresses or post-office boxes, and flanking measures, such as labor conditions. Second (on the right-hand side of Fig. 2), universal service regulation intends to ensure the provision of quality postal services to the entire population in all regions of a country. The first aspect to be governed is the concrete definition of obligations. In a second step, one or several operators have to be designated if the market does not spontaneously provide the desired level of service quality. If USO constitute a binding economic constraint and a relevant burden on the designated operator(s), a financing mechanism is needed to compensate. Depending on the mechanism, and if the universal service provider (USP) cannot finance USO by itself, this requires a calculation of the actual burden or the net cost of USO.

Liberalization and access to the market may require further regulation concerning network access and other flanking measures, such as regulation of labor conditions (see Heitzler and Wey, 2010) to ensure consistency in the regulatory and market framework. Due to the labor-intensity of the postal sector, labor laws may potentially hinder new entrants by denying them the full flexibility in employment conditions that would otherwise be permitted under general labor legislation (such as flexibility in wages and work rules). Hence, they may restrain the direct competition that liberalization is intended to foster. (Dieke et al., 2013) found that sector-specific labor regulations do not pose a significant impediment to liberalization of the postal sector markets in the EU as whole, although provisions in certain member states (such as Belgium or the Netherlands) may warrant further consideration.

USO are politically motivated by efficiency or equity considerations, and potentially necessitate a proper financing mechanism if the cost of USO is significant. Due to strong interrelations, fundamental trade-offs have to be made: for example, USO are often shaped asymmetrically by binding only one operator in the marketplace. The financing USO either removes the burden from the USP by granting compensation, or shares the burden with other operators via a USO fund. Both USO and their financing affect competition and distort the market outcome.

The remainder of this paper focuses on the core policy issues and their interactions in the postal sector. It is structured as follows: Section 1 outlines the history of postal legislation and regulation in the EU and the US. Section 2 discusses recent developments and the current state of competition in the postal sector in general. Section 3 covers the rationale, scope and financing of USO. Section 4 discusses competitive and regulatory aspects of network access. Section 5 concludes.

Section snippets

Postal regulation and legislation in the EU and the US

In the late 15th century, the invention of the printing press and the expansion of education created demand for letter mail, and made carrying mail a profitable business in Europe. The most extensive delivery system was built by the Thurn and Taxis family. Their system developed throughout the 16th century until it covered most of Europe, using 20,000 couriers to operate a relay system that was fast, efficient, and highly profitable (Encyclopedia Britannica, 2013). The rise of nation-states

Recent developments and current state of competition in the postal sector

Addressed mail volumes are generally shrinking in all industrialized countries as a result of increased competition from electronic means of communication. According to Dieke et al. (2013), between 2007 and 2011 the European letter post sector declined in terms of revenues and volume: between 2007 and 2010 the volume declined on average by 4.3 percent per year, while the revenue dropped by 5.2 percent per year. Between 2010 and 2011 the decline slowed to 3.3 percent in terms of volume, and 1.4

The scope of universal service obligations

For the EU member states, the Postal Directive defines the minimum characteristics of the USO as: (a) one collection from appropriate access points every working day; (b) one delivery to all addresses every working day; (c) including postal items and packages up to 20 kg; plus (d) a service for registered items and insured items. The concrete specification and implementation is country-specific. Typical dimensions of postal USO are displayed in Table 2.

Some of these dimensions address the needs

Network access regulation

As in other network industries, exclusive control over network elements or facilities that are essential for competition is an important issue in the regulation of the postal sector. Essential facilities (monopolistic bottlenecks) constitute assets of incumbent USPs that can be characterized as stable barriers to entry for potential competitors. While essential facilities are easily identifiable in other network industries, it is not clear a priori in the postal sector which infrastructure

Conclusion

The postal sector is one of the oldest network industries, and is of high economic importance in many countries. This paper highlighted the main aspects of the competitive and regulatory state of the sector. The paper also discussed the different models for postal competition in the EU and the US, as well as their history, together with the implications of regulation and the financing of USO. While markets for parcels and unaddressed mail have long been open to competition, the segment for

Acknowledgments

The author would like to thank Matthias Finger and three anonymous referees for their constructive criticism and very helpful suggestions to improve this paper.

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