Mark McLeish
Director – Postal & Financial Services Oversight
Australian Competition and Consumer Commission
GPO Box 520
MELBOURNE VIC 3001
Dear Mark,
The following is provided by way of response to the Australian Competition and Consumer
Commission’s (ACCC) 2 June 2008 request, that Australia Post provide some ‘further
submissions’ on the issue of the ACCC considering whether price increases are required for
individual services.
In responding we have endeavoured to keep the information brief and non-confidential. Australia
Post believes some points are more conducive to discussion and an opportunity to discuss these
points further would be appreciated.
As indicated previously, Australia Post strongly asserts that the proposed price changes to the
domestic reserved letter service be considered as a whole. This is consistent with the approach
adopted by the ACCC in assessing Australia Post’s price notification in 2002 whereby the
ACCC’s Decision of October 2002 noted that:
“The Commission’s predominant concern is normally with the overall level of pricing for
regulated services rather than the structure of relative prices for individual products,
especially where there are numerous products as with Australia Post.” 1 and
“… the Commission generally prefers to leave questions of price structure to the
regulated business, providing the overall level of prices does not seem excessive.” 2
As noted in Australia Post’s current draft notification (5 February 2008), Australia Post’s
proposed prices would not generate revenue in excess of the required revenue as based on
efficient costs and a reasonable rate of return.
The Letter Pricing Principles that Australia Post has traditionally followed in setting domestic
reserved letter prices underpin the setting of the proposed prices in the current draft
notification. These principles also underpinned the proposed prices that were submitted in the
2002 price notification and were not rejected by the ACCC as a basis for setting prices.
The Letter Pricing Principles are shown at Appendix 2 of Australia Post’s draft notification (5
February 2008). A key point of the principles is that “Letter prices will be set to enable Australia
Post to meet its statutory requirement to provide an adequate commercial return and to fund
the Community Service Obligation” (CSO). As noted in the ACCC’s 2002 Preliminary View,
1
2
Page 103 of the ACCC’s Decision of October 2002 in respect of Australia Post’s 2002 price notification
Page 149 of the ACCC’s Decision of October 2002
2
“The Commission emphasises that it is not its role to recommend an appropriate
method of funding the CSO. Rather, the Commission must accept that the uniform rate
of postage as a constraint upon Australia Post’s discretion in pricing.” 3
Australia Post’s CSO
Australia Post’s CSO is outlined in section 27 of the Australian Postal Corporation Act, 1989 (AP
Act), in particular this section sets out the following requirements:
s27 (3) Australia Post shall make the letter service available at a single uniform rate of
postage for the carriage within Australia, by ordinary post, of letters that are standard
postal articles; and
s27 (4) Australia Post shall ensure;
(a) that, in view of the social importance of the letter service, the service is
reasonably accessible to all people in Australia on an equitable basis, wherever
they reside or carry on business.
Australia Post believes that both of these requirements are recognised in its Letter Pricing
Principles.
In assessing a price notification from Australia Post, the ACCC is required under Direction 11
(14 September 1990) to give special consideration to certain matters; which include:
-
Australia Post’s obligation to pursue a financial policy in accordance with its Corporate
Plan as set out in sections 35-41 of the APC Act; and
Australia Post’s functions and obligations under sections 14-16 and 25-28 of the APC
Act.
Australia Post believes that assessing the proposed revenue from domestic reserved letters as a
whole is consistent with Direction 11 and ensures that Australia Post is not only able to
generate a reasonable rate of return but is also able to continue to provide a letter service
consistent with the requirements of section 27.
In addition, section 33 of the APC Act requires Australia Post to notify the Minister of any
proposed change in the BPR, the Minister may, within 30 days, disapprove any such proposed
change. Any move now by the ACCC to consider the proposed domestic reserved letter prices
on a product by product basis – rather than as a whole – could cause significant issues in terms
of the Minister’s exercise of this particular power in relation to the BPR.
Notwithstanding Australia Post’s assertion that the proposed changes to domestic reserved
letter prices should be considered as a whole, Australia Post, in setting the individual prices,
considers the relativities between price points and looks to encourage and provide incentives to
customers to adopt more efficient processes in the preparation and lodgement of mail. This is
also recognised in the Letter Pricing Principles where Bulk Interconnection prices (eg for PreSort
3
Page 90 of the ACCC’s Decision of October 2002
3
Letter services) will, in addition to the requirements of section 32A(2)(c) of the APC Act, broadly
reflect the level of work saved by Australia Post through work carried out by customers.
There are examples in recent times where Australia Post has changed / adjusted its pricing
structure and conditions – within the context of its Letter Pricing Principles – to provide
incentives to encourage customers to adopt more efficient processes in the preparation and
lodgement of mail. These changes include the introduction of the Clean Mail and Barcode
PreSort Letter services, the reduction in minimum volume for PreSort and the encouragement of
the use of efficient payment channels such as Postage Meters.
Additionally, assessment of prices within the domestic reserved letter service must recognise
that Australia Post provides / offers the domestic letter service through a single network where
costs and the assets are shared between letters lodged under different services (and prices).
When enhancements to the network are made (including implementation of Capital
Investments) the benefits are shared by all users of the letters service through either cost
reductions or service improvements. As previously advised to the ACCC, there are no cases of
Australia Post’s activities or Asset that exists solely for a particular letter service.
As shown in the following table, excluding the price changes in 2000 (when Australia Post was
required to absorb the GST on the 45c BPR price and - to maintain price incentives - reduced
some PreSort Barcoded Prices) each price change has resulted in an increase in the difference
between the BPR and other services
Year
1992
1994
1999
2000 6
2003
2008 (proposed)
Basic
Postage
Rate
45c
45c
45c
40.9c
45.5c
50.0c
Clean
Mail Small
40.9c
43.6c
Var’n
to BPR
4.6c
6.4c
Small
PreSort
Direct 4
38.25c
37.0c
36.0c
34.0c
34.0c
36.3c
Var’n to
BPR
6.75c
8.0c
9.0c
6.9c
11.5c
13.7c
Small
PreSort
Residue 5
42.75c
43.0c
40.0c
38.5c
38.5c
40.8c
Australia Post believes that these price changes have provided an incentive for senders to move
mail from the BPR component of “Small Full Rate” to lower priced services such as “Clean Mail”
(which is included within “Small Full Rate” subtotal) and PreSort. This in part is a reason why
the volume of “Small Full Rate” has declined by an average rate of 2.1% pa (2001/2 to 2006/7)
compared to “Small PreSort” volumes which over the same period increased by an average rate
of 2.2% pa.
4
PreSort Direct shows the “lower level” “regular” price applicable to a PreSort small letters for same state delivery.
Up until 1999 the price shown is for “unbarcoded” PreSort from 1999 the price shown is barcoded PreSort letter
5
PreSort Residue shows the “upper level” regular price applicable to a PreSort small letter. Up until 1999 the price
shown is for “unbarcoded” PreSort from 1999 the price shown is for a barcoded PreSort letter
6
Prices from 2000 are shown exclusive of GST
4
As the ACCC noted in its Decision of October 2002 in relation to the introduction of Clean Mail,
“The new services appear to have merit, in that they offer discounts that reflect the
fact that mail lodged in this way provides a cost saving to Australia Post” 7
In setting prices to encourage senders to utilise these other price points (and efficient
preparation / lodgement practices), Australia Post recognises that the type of mail that this
encourages to move from the BPR is the more profitable component. As an example, while
Clean Mail is included in the “Small Full Rate” subtotal its introduction would have led to lower
total revenue for “Small Full Rate” than would otherwise have applied. However, in following the
Letter Pricing Principles, Australia Post is able to provide such encouragement to senders to use
more efficient preparation and / or lodgement arrangements, but not to the detriment of the
pricing of the BPR or the funding of Australia Post’s CSO.
It is also worth noting that the price structure for Full Rate (or ordinary letters) has also been
simplified (full rate letter prices reflect multiples of the basic postage rate) to encourage the self
assessment of Full Rate letters (which can avoid unnecessary acceptance costs).
In the Major Mail Users of Australia Ltd (MMUA) submission to the ACCC in response to the
ACCC Issues Paper (February 2008) the MMUA commented (pages 19 & 20 ) on the price
difference between a PreSort Small Letter and a single “full rate letter” lodged in a street
posting box (SPB) at the basic postage rate. The suggestion appears to be that the price
difference (15 cents in the example given) seems too low. Clearly the examples are not
comparable and completely ignore the fact that Australia Post has a legislative requirement to
provide a uniform price for the letter lodged in the SPB.
As noted in Australia Post’s response to the ACCC on the public submissions received in
response to their Issues Paper, if each major part of the letters business was required to
immediately meet a separate required rate of return for the letter business as a whole, the
package would involve a significant rise for the BPR which would not be acceptable from a
broader social perspective. This would also lead to;
-
the more profitable components of the BPR moving to PreSort (ie through an over
incentive to move to PreSort prices);
-
the responsibility of funding the CSO (including the universal rate) to a smaller user
base (generally ad hoc / non structured mail from individuals and businesses); and
-
a cycle of high increases to the BPR.
The proposed package is designed to restore profitability to the domestic reserved letters
business as a whole, with an internal cross-subsidy 8 remaining within the domestic reserved
letters price structure. This involves a larger increase for the BPR and a lesser rise for PreSort
7
Page 148 of the ACCC’s Decision of October 2002
The reference to a “cross subsidy” reflects a different level of return, this does not suggest that a service is the
recipient of a subsidy because the revenue generated is less than the incremental cost. As noted in the ACCC’s
Assessing Cross Subsidy in Australia Post 2006-07 each reserved service group generates revenue that exceeds its
direct cost (direct and attributable).
8
5
Letters (barcoded mail from businesses), thus reducing the variability in contribution below the
level it would have reached otherwise.
As indicated above, Australia Post has put forward the proposed package to be taken as a
whole. This approach:
-
reflects the need to restore the letters business to commercial profitability consistent with
the Corporation’s obligation under section 26 of the APC Act;
-
reflects the judgement of what is commercially, socially and politically sustainable, ensuring
that Australia Post is able to meet is CSO under section 27; and
-
is consistent with the approach applied in relation to the 2002 price notification.
As mentioned above Australia Post would appreciate the opportunity to discuss this issue
further before the ACCC finalises their Preliminary View.
Yours sincerely,
Mark Pollock
Manager Letters Strategy & Planning