Regulation Impact Statement for proposed changes to prices surveillance of Australia Post reserved letter services

Regulation Impact Statement for proposed changes to prices surveillance of Australia Post reserved letter services

2 Background Australia Post’s reserved services Australia’s postal service is delivered by Australia Post, a Government Business Enterprise (GBE). The Australian Postal Corporation Act 1989 (the APC Act) imposes a community service obligation (CSO) on Australia Post to supply a letter service. A CSO arises when a service provider is tasked to undertake a non-commercial business activity to meet social objectives. The APC Act requires Australia Post to supply a letter service that is ‘reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business’1 .

In particular, the letter service must be available at a single uniform rate for standard letters carried by ordinary post (‘the basic postage rate’). Subordinate legislation sets the performance standards Australia Post must meet in providing its services2 .

Under the APC Act, Australia Post has the exclusive right to collect, carry and deliver letters within Australia that (subject to exceptions) weigh not more than 250 grams. These statutory monopoly services, along with the right to issue postage stamps, are termed Australia Post’s ‘reserved services’3 . Australia Post was given this statutory monopoly so that revenue from its reserved services could fund the cost of meeting its CSOs4 . However, Australia Post must deliver its CSOs regardless of whether revenue from its reserved services is sufficient to cover the costs of the CSOs. Other letter services Within the domestic reserved letter service Australia Post offers a number of different categories of mail.

Ordinary letter services are offered at three postage prices—currently $0.60 for small letters (the basic postage rate), $1.20 for large letters up to 125 grams, and $1.80 for large letters over 125 grams and up to 250 grams. Other letter services—used mainly by businesses, government agencies and not-for-profit organisations—are generally offered at prices lower than those of equivalent ordinary letter services, as follows.

The PreSort Letters service offers discounted prices to customers who can apply barcodes when addressing their letters, sort them into a particular order, place them in appropriately-labelled trays, and complete documentation prior to lodgement at designated postal outlets. Australia Post offers the PreSort Letters service with regular and off-peak delivery time frames. The minimum lodgement volume is 300 barcoded letters of the same size and weight step.  Charity Mail provides discounted prices for barcoded PreSort small letters sent by income taxexempt charities. Mailings must meet all other requirements of the PreSort Letters service.

The Acquisition Mail service allows customers to geographically target an addressed-mail campaign to residential addresses in specific postcodes, suburbs or Census Collection Districts. 1 See Division 1 of Part 3 of the Australian Postal Corporation Act 1989 (APC Act) at 2 The Australian Postal Corporation (Performance Standards) Regulations 1998 at 3 See Division 2 of Part 3 of the APC Act. 4 The 1989 explanatory memorandum for the APC Act stated: ‘The right to carry letters within Australian and between Australia and overseas is reserved to Australia Post in recognition of the CSOs imposed on Australia.’

3 Letters must be barcoded, sorted into appropriately-labelled trays and lodged at designated postal outlets. The Acquisition Mail service is provided on the off-peak delivery time frame and has a minimum lodgement volume of 30 000 letters.  Clean Mail is a service for smaller machine-addressed letters prepared in accordance with specific addressing and presentation requirements. Addressing conditions include certain mandatory requirements such as layout and font size and style. Articles do not require sorting but must be lodged in trays at designated postal outlets. Clean mail is provided at the regular delivery time frame and has a minimum lodgement volume of 300 letters.

Impact Mail covers non-rectangular mail (such as shaped postcards, form-cut brochures, die-cut booklets or multidimensional folds) and attracts higher prices than ordinary postage prices. The minimum lodgement volume is 300 articles.

Under the Metered/Imprint Mail service, a discount is available against ordinary postage rates where the postage is paid for by postage meter, or via the use of the ‘Postage Paid’ imprint (and payment by an Australia Post charge account).  The Local Country Letters service provides for discounts where senders who reside or carry on a business in specified postcodes lodge letters at an Australia Post delivery office for delivery in that, or an adjoining, delivery area. The minimum lodgement volume is 50 letters (or 10 in small communities with fewer than 1000 delivery points).

The Reply Paid letters service provides for the charging of mail recipients rather than senders.

Some Reply Paid postage prices are higher than the equivalent ordinary postage prices as there are additional costs associated with extracting and counting the letters to bill recipients. Additionally, Australia Post sells a range of prepaid envelopes and postcards, and offers a discount on postage for seasonal greeting cards during November and December. The term ‘other letter services’ is used in this paper to cover all those domestic reserved letter services that are not ordinary letter services, as listed in Appendix A. This includes categories of letters commonly referred to as ‘bulk mail’, given minimum volume requirements5 .

Other letter services represent just over 80 per cent of Australia Post’s domestic reserved letters service business, both by volume and revenue6 . PreSort Letters are the single largest category of mail and represent approximately half of total letter volumes and revenue. Some other letter services are offered at a significantly lower rate than the equivalent ordinary letter service. For example, the least expensive price for an Acquisition Mail small letter is approximately half the basic postage rate at $0.31, while the least expensive price for a small PreSort letter is less than three quarters of the basic postage rate at $0.424.

However, other non-ordinary services are offered at rates much closer to the equivalent ordinary letter service. So, for example, postage for metered/imprint letters is only 3 per cent less than equivalent ordinary rates. (Appendix A details current prices for domestic reserved letter services.) 5 For further details of bulk mail categories, see 6 Statistics in the following discussion were provided by Australia Post.

4 Other letter services are used by a range of businesses, charities and government agencies, either directly or through mailhouses. Australia Post estimates that there were some 7500 users of PreSort, Charity, Acquisition, Impact and Clean Mail in 2010–11. Almost 60 per cent of letters in these categories were in lodgements of 10 000 or more. Approximately three quarters of all letters in these categories are sent by business in the communications and financial and insurance industry segments, and by government agencies. The top 50 PreSort, Charity, Acquisition, Impact and Clean Mail customers were responsible for approximately 60 per cent of such letters in 2010–11.

Table 1 shows numbers of customers by annual lodgement volumes.

Table 1: PreSort, Charity, Acquisition, Impact and Clean Mail customers in 2010–11 by annual letters volume Annual volume Number of customers† (rounded to nearest 10) Total volume (m)† Less than 5000 2930 6 5001–10 000 1090 8 10 001–100 000 2380 79 100 001–1 000 000   1 000 001   Total 7510 2181 † These numbers reflect customers paying by account—a further 17 million letters were sent by customers paying by other means. Additionally, around 60 000 businesses and organisations use Australia Post charge accounts for Imprint Mail, and around 14 000 have postage meters. Around 19 000 customers have permits to use Reply Paid.

Other letter services are predominantly used for transactional and promotional purposes. Transactional mail covers the communication of information to existing customers concerning their existing dealings, and includes things such as bills, statements, invoices, changes to terms and conditions, new credit or membership cards, business/membership/subscription renewals, payments, etc. Promotional mail covers the communication of offers and requests to new or existing customers, and includes things such as offers of goods or services, requests to donate. Prices surveillance of the reserved services Australia Post’s reserved letter services are notified services (and Australia Post is a declared person) under the prices surveillance provisions of the Competition and Consumer Act 2010 (the CCA)7 , previously the Trade Practices Act 1974.

This means that Australia Post must notify the Australian Competition and Consumer Commission (the ACCC) if it proposes to:  increase the price of a reserved letter service  introduce a new service that would fall within the definition of reserved letter services 7 Prices surveillance provisions are found at Part VIIA of the CCA—see The Treasurer has made a declaration pursuant to section 95X of the CCA—see

5  provide an existing reserved letter service under terms and conditions that are not the same or substantially similar to the existing terms and conditions of that service. The ACCC must notify Australia Post that it has no objection to the proposed changes prior to Australia Post giving effect to them. This scrutiny by the ACCC is intended to promote efficient pricing and consumer protection where there is reduced competition. The current prices surveillance provisions can be traced back to the enactment of the Prices Surveillance Act 1983 (the PSA). The PSA was introduced at a time of relatively high inflation, and was intended to bring about pricing restraint among private and public sector business enterprises.

However, since then the economic environment has changed and the focus of prices surveillance has moved from a prices and income policy role to one of competition policy. Today, the criterion for declaring areas for prices surveillance is focused on those markets where competitive pressures are insufficient to achieve efficient prices and to protect consumers.

Australia Post’s commercial obligations Australia Post is prescribed by the Commonwealth Authorities and Companies Regulations 1997 as a GBE8 . A principal objective for each GBE is that it adds to shareholder value by, among other things, earning at least a commercial rate of return. Earning a commercial rate of return includes fully recovering the costs of resources employed, including capital, and working towards a financial target and a dividend policy agreed with shareholder ministers. The rate of return should be at least sufficient to justify the long-term retention of assets in the business, and to pay commercial dividends from those returns9 .

Similarly, the APC Act imposes commercial obligations on Australia Post. Section 26 of the APC Act imposes an obligation on Australia Post, as far as practicable, to perform its functions in a manner consistent with sound commercial practice. Section 38 specifies a number of matters that Australia Post must have regard to in setting financial targets, including the need to earn a reasonable rate of return on Australia Post’s assets, the expectation of the Commonwealth that Australia Post will pay a reasonable dividend, and the need to maintain Australia Post’s financial viability. Additionally, Australia is a member of the Universal Postal Union (UPU) of the United Nations.

Under article 3.4 of the UPU convention, Australia is required to ensure that its universal postal service is provided on a viable basis, thus guaranteeing its sustainability10 .

For Australia Post to meet these commercial and international obligations, it is important that, to the maximum extent possible, its reserved letter services operate on a financially self-sustaining basis. 8 See 9 Department of Finance and Deregulation, Governance Arrangements for Commonwealth Government Business Enterprises, 1997, para. 1.6. See 10 See

6 The problem Increased competition from digital communications such as email and social networking websites has lead to a decline in letter volumes.

Domestic letter volumes declined by 4.1 per cent in 2008–09 and a further 4.2 per cent in 2009–10, or approximately 400 million items over two years11 . Without increased flexibility to respond to market opportunities and customer needs in its letters products and services, Australia Post’s ability to counter this decline will reduce. This, in turn, will compromise Australia Post’s capacity to fund the delivery of its CSOs from monopoly reserved services revenue. If losses from reserved services continue to grow, they could not only adversely impact Australia Post’s ability to deliver a universal letter service but also reduce Australia Post’s capacity to make dividend payments to government.

The physical letter market has changed substantially over the last two decades and there is now considerable and increasing competition to letters from digital communications, such as email and social networking websites. These digital services provide competitive pressures on the reserved letter services and so reduce Australia Post’s ability to exercise monopoly market power. As long as ordinary letter postage rates continue to be subject to scrutiny by the ACCC, these will act as a natural ceiling to the prices that Australia Post can charge for other letter services. These two factors combine to mean that ACCC scrutiny of changes to the prices of other letter services is no longer necessary.

Flexibility in reserved services Given the complexity of the issues considered by the ACCC and the need to consult with stakeholders, prices surveillance processes can be time-consuming—the ACCC took approximately five months to consider price notifications in 2008 and in 2009—and reduce Australia Post’s flexibility to respond quickly to market changes and opportunities. Following receipt of a draft notification from Australia Post, the ACCC typically releases an issues paper and a draft decision, and calls for public submissions on each of these documents, prior to making a final decision.

The regulatory requirement for prices surveillance itself, along with the lengthy processes to implement it, restrict Australia Post’s ability to plan and to innovate in the design of the products it offers to businesses and organisations in response to their needs.

Australia Post has introduced a number of new reserved letter services to meet market needs— Impact Mail in October 200412 and Acquisition Mail in September 200813 —and changed the terms and conditions of existing services—revisions to Off Peak delivery timeframes for PreSort letters, Charity Mail and Acquisition Mail in July 201114 . However, in each of these cases, Australia Post had to submit its proposed changes to the ACCC, thus delaying their introduction. In its non-reserved mail business, Australia Post has been able to introduce new products and services—such as the 11 Australia Post, Annual Report 2009–10, 2010, p.

10. 12 Prior to the introduction of Impact Mail, non-rectangular mail was charged at parcel rates, which are considerably more expensive than the rates that now apply to Impact Mail.

13 Acquisition Mail was designed to fill a market gap between unaddressed / broadcast delivery and addressed mail targeted to a specific individual. 14 A key objective of these changes was to make Off Peak delivery a more attractive option to customers by providing greater certainty in the delivery window (reduced from four days to two days) and increasing the price differential between Off Peak and Regular delivery.

7 eBay co-branded flat-rate satchels and Click and Send service, eLetter ticket, Sample Post and new 24/7 parcel collection hubs—without reference to the ACCC.

Funding the community service obligation Until about 2000, a strong correlation existed in Australia between growth in letter volumes and growth in GDP. This is no longer the case—the decoupling of mail volume from GDP is shown in Figure 1. Similar trends have occurred worldwide and reflect changes in technology and consumer behaviour, which are driving a global decline in letter volumes as consumers substitute physical mail with electronic communications. This decline was exacerbated by the global financial crisis. In effect, digital communications such as email and social networking websites are competing with physical letters in markets where postal operators such as Australia Post have had a traditional monopoly.

Postal operators around the world are revising their business models to adapt to the loss of revenue from this decline in mail volumes.

Figure 1: Real GDP and mail volume (index 1992–93 = 100) At the same time as mail volumes have been decreasing, the size of Australia Post’s delivery network has increased. This is because Australia Post is obliged to deliver to all addresses in Australia, and new business and household addresses are increasing by around 200 000 per annum15 . In 1999–00 Australia Post handled some 5.2 billion mail articles and delivered to approximately 8.8 million delivery points, or approximately 590 mail articles per delivery point. In 2009–10 the equivalent figures were 5.1 billion mail articles handled, 10.7 million delivery points and 480 mail articles per delivery point.

15 Australia Post Media Release 23 June 2011, ‘Australia Post welcomes ACCC final decision’, at 80 100 120 140 160 180 200 Real GDP Mail Volume

8 Declining letter volumes and rising costs have led to unsustainable financial losses in Australia Post’s domestic reserved letter services in recent years. Reported losses were $58 million in 2008–09 and $127 million (excluding one-off restructuring expenses) in 2009–10. Additionally, Australia Post is forecasting a loss of more than $100 million for 2010–11.

Losses from the reserved services are currently covered by other, profitable, commercial activities undertaken by Australia Post. Table 2 shows the decline in letter business revenue, both outright and as a proportion of goods and services revenue. It also shows the impact on the decline in dividends to government in recent years. Table 2: Decline in letter business revenue16 2006–07 2007–08 2008–09 2009–10 Goods and services revenue $4.57 billion $4.76 billion $4.85 billion $4.75 billion Profit before tax $562 million $592 million $381 million $103 million‡ Dividend $297 million $335 million $334 million† $79 million Mail volume 5.52 billion 5.61 billion 5.32 billion 5.15 billion Domestic reserved letters volume 4.19 billion 4.27 billion 4.10 billion 3.88 billion Domestic reserved services revenue $1.82 billion $1.84 billion $1.87 billion $1.78 billion Domestic reserved services EBIT $36 million $12 million –$67 million –$218 million‡ CSO ‘cost’ $97 million $109 million $114 million $121 million † Includes impact of special dividend of $150m paid in 2008–09.

Includes impact of one-off restructuring expenses of $150 million. There is a financial ‘cost’ associated with meeting the CSOs. The cost arises where the charges for mandated services do not recover the costs of providing them—the cost is measured on a net basis after reduction of related revenue. CSO costs have increased over time, and have been in the order of $120 million over the last two years17 . Australia Post was given its statutory monopoly over reserved letter services in order to meet the costs of delivering its CSO. At the time the APC Act was enacted 22 years ago it was envisaged that profits from reserved services would be sufficient to fund CSO costs.

In effect, Australia Post has previously funded its CSOs by means of an internal crosssubsidy within its reserved letter services. However, in 2008–09 and 2009–10, domestic reserved letter services as a whole have operated at a loss. Given that Australia Post must deliver its CSO regardless of whether the reserved services statutory monopoly delivers sufficient profits to fund the costs of the CSO, it has effectively had to be funded by Australia Post’s non-reserved mail business and other commercial activities18 . How long this can continue will depend on the level of 16 Source: Australia Post annual reports and regulatory accounts.

17 Australia Post calculates CSO costs on a long run avoided cost methodology. Therefore, these costs are not directly comparable with reserved services profitability figures, which Australia Post prepares on the basis of its full-cost absorption cost allocation model.

18 The ACCC identified reserved letter services as a potential recipient of a cross-subsidy in 2009–10 on the basis that revenues were less than direct and attributable costs. See p. 13 of Assessing cross-subsidy in Australia Post 2009–10—An ACCC Report at 0eda5921706df&fn=Assessing%20c ross%20subsidy%20in%20Australia%20Post%202009-10.pdf

9 future losses from the reserved service and profits from Australia Post’s commercial activities19 . Without action in the short-to-medium term, it is likely that Australia Post’s letter services will become a drain on the Commonwealth Budget.

Consequences of no action As a result of the current pricing surveillance arrangements, Australia Post is not able to make rapid changes to reserved services postal products to respond to changing market conditions. Financial losses from the reserved services are currently covered by profits from Australia Post’s other non-reserved mail and commercial activities. If no action is taken and losses from reserved letter services continue to grow, they will undermine Australia Post’s ability to fund its CSO to provide a universal letter service, along with financial dividends to the government.

Is there relevant regulation in place?

There is now significant competition to letters from digital communications such as email and social networking websites, making Australia Post’s reserved services increasingly unprofitable. In this environment, Australia Post needs to be able to position itself flexibly in the communications market and respond to market opportunities and changing consumer demands, so that it can maintain a sustainable letters business and meet its CSOs. Given the growing take-up of electronic communications, the competitive pressures on Australia Post’s reserved letter services are increasing, and the value of its statutory monopoly is declining.

While there may be limited price elasticity of demand for letters (see discussion below), in the wider context of the overall communications market the continued application of ACCC prices surveillance to the entirety of Australia Post’s reserved letter services could be considered to be unnecessary regulation. The regulatory framework has clearly not kept pace with changes in communications technology, and business and society’s adoption of these changes. Objectives The government’s objective is to provide a regulatory framework that contributes to Australia Post’s flexibility to operate a viable and sustainable letters business, in the context of the CSOs identified in the APC Act and the Australian Postal Corporation (Performance Standards) Regulations 1998.

At the same time, the government has an objective of ensuring that an appropriate level of protection continues for consumers of Australia Post’s monopoly services. 19 The United States Postal Service (USPS) is facing the same dilemma but appears to be at a more critical stage. It was recently reported that the USPS may not have enough cash flow to be able to meet its 2011 financial obligations. See Post and Parcel, ‘USPS future hangs in balance after $3.5bn loss revealed’, 5 August 2010, -loss/

10 Options The Prime Minister has agreed that the following two options be considered in this regulation impact assessment: 1. removal of ACCC surveillance of other letter services prices, and 2. retention of current arrangements. Under the first option, notified services would be limited to Australia Post’s ordinary letter services (currently the basic postage rate of $0.60, and large letter rates of $1.20 and $1.80) and all other letter services listed in Appendix A would be removed from the CCA declaration. Postage rates for ordinary letters would remain subject to ACCC scrutiny and would effectively operate as ceilings for most other reserved letter services.

Additionally, Australia Post would have the flexibility to introduce new reserved letter services without reference to the ACCC. Impact analysis General The impact on stakeholders of the proposed change will depend on the nature of new reserved letter products that Australia Post introduces and the level of future price increases it puts in place. The ACCC has not generally objected to price notifications for other letter services20 . If future price variations are reasonable and not excessive, all other things being equal it is likely that removing prices surveillance will make little difference to stakeholders over the long term, relative to what would have occurred if prices surveillance had remained in place.

Price elasticity of demand for letters Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. A price elasticity of 0.5, for example, means that for a 10 per cent increase in price there will be a 5 per cent reduction in demand. In general, the demand for a good is said to be inelastic when the price elasticity is less than one and changes in prices have a less than proportional effect on the level of demand. In the recent price notification process for selected other letter services21 , Australia Post asserted that such letters are inelastic to price, and that econometric modelling for PreSort letters has not 20 In August 2009 Australia Post lodged a draft price notification in relation to reserved letter services generally.

The ACCC decided to object to this draft notification in December 2009 (see Australia Post resubmitted the price notification in April 2010 with further supporting information and the ACCC decided not to object (see However, in the case of the 2002 price notification process, Australia Post decided not to pursue certain price increases in its formal notification, including for barcoded PreSort letters and Charity Mail, following the ACCC’s preliminary view to object to these proposed increases (see

Australia Post did not pursue an increase for these categories again until 2008.

21 On 25 January2011, Australia Post provided the ACCC with a draft price notification proposing to increase prices of a number of its reserved services—PreSort letters, Charity Mail, Acquisition Mail and Clean Mail—with effect from 4 July 2011. See

11 identified real price as being statistically significant22 . On this basis, Australia Post assumed that the proposed notification price increases would not affect aggregate letter volumes. However, Major Mail Users Australia has argued that ‘postage budgets’ are being replaced by ‘communications budgets’, and that any increase in postage prices will hasten the search for ealternatives to paper mail23 .

Allowing Australia Post to set prices for other letter services is expected to have some impact on aggregate mail volumes.

A 2006 meta-study of 45 previous studies across a number of advanced economies and postal products identified a range of price elasticities between 0.2 and 0.824 .  A study commissioned by the United States Postal Service Office of Inspector General implies a price elasticity of demand for the US Postal Service of 0.425 .  A recent report from the Postal Services Commission of the UK supports Royal Mail’s estimate of an overall price elasticity of mail of around 0.35, with different price elasticities for different mail segments—0.2 for transactional mail, 0.4 for social mail and 1.0 for advertising mail26 .

Similarly, when conducting a sensitivity analysis of Australia Post’s price notification earlier this year, the ACCC assumed a price elasticity of 0.427 . It is likely that price elasticity of demand will vary between Australia Post customers. For example, businesses and organisations that deal with people who tend not to use online services, such as the elderly or communities without access to the internet, are likely to have lower price elasticities. Similarly, it is likely that price elasticity will not be constant, but rather will be stepped and depend on the size of any price increase.

A large price increase may have a higher price elasticity, whereas smaller price increases may have much smaller or negligible price elasticities. While there is considerable and increasing competition to letters from digital communications such as email and social networking websites, there are some documents that must be sent by post. In 2009, an Australia Post analysis identified some 2500 references in legislation, regulations and codes of practice across all Australian jurisdictions to sending or serving of documents such as notices, decisions or ballot papers by post or mail28 . Over 80 per cent of these provide for alternative means 22 Australia Post, Australia Post Response to ACCC Issues Paper, 16 March 2011, p.

5. See d19c83dea0cca&fn=Australia%20P ost.pdf 23 Major Mail Users Australia Limited, Comments on Discussion Paper, p. 5. See tralia-MMUA.pdf 24 Alan Robinson, A Review of Price Elasticity Models for Postal Products, 2006. See 25 George Mason University School of Public Policy, Implications of Declining Mail Volumes for the Financial Sustainability of the Postal Service, 2010, Table 3 p.

15. See 26 Postal Services Commission, The building blocks for a sustainable postal service—Analysis of Markets, March 2011. See 27 ACCC, Australia Post draft price notification for bulk letter services—Preliminary view, May 2011, pp. 24–25. See 253dd8405611f&fn=ACCC's%20Prel iminary%20View.pdf 28 The Australia Post analysis was undertaken with external support and involved a search of the Australasian Legal Information Institute (AustLII) database for the words ‘post’, ‘mail’ and other relevant provisions.

The analysis also involved

12 of communication29 . However, a number of consumer codes, for example, do not allow for ecommunications on documents related to repossession or default proceedings. Australia Post estimates that less than 150 of these legislative references have anything other than a minimal impact on mail volumes. While it is difficult to estimate the volumes of transactional mail that are mandated by legislation as the only method of communication, they are likely to decrease as governments move to develop other communications channels in the context of the developing digital economy.

1. Removal of prices surveillance from other letter services prices Impact on Australia Post Australia Post is likely to be a significant beneficiary of any move to remove ACCC prices surveillance from other letter services.

Removal of ACCC prices surveillance of other letter services would allow Australia Post to respond more quickly to market opportunities and to innovate and introduce new products. At the same time, it would provide Australia Post with more certainty in its financial planning, as it would be able to plan for price increases without the uncertainty of ACCC processes. It would also lead to reduced costs to Australia Post in the order of $1 million a year associated with no longer having to prepare and pursue price notifications for other letter services30 . These factors would assist Australia Post to counter the decline in the profitability of its domestic letters business, and hence increase its ability to meet its CSOs.

It is not possible to predict precise price changes to other letter services in the absence of ACCC scrutiny, nor whether these changes would have occurred anyway. However, they are more likely to increase than decrease, given the current losses made by reserved letter services as a whole. If, for example, Australia Post was to increase its prices for PreSort Letters, Acquisition Mail and Charity Mail by 5 per cent, it would generate some $25 million (GST-exclusive) in additional revenue in a full year, assuming a price elasticity of 0.431 . The equivalent increase for a 2 per cent price rise would be $10 million.

Impact on business and not-for-profit organisations Businesses and not-for-profit organisations would benefit from these changes to the extent that Australia Post works with them to introduce new reserved letter products and services to meet their needs. As noted above, Australia Post has previously introduced new products to meet market needs. They would now benefit from quicker implementation of such changes. Businesses and nota review of less formal sector specific instruments such as codes of practice, guidelines, customer charters and ombudsman schemes that prescribe communication channels.

29 For example, section 49B of the Migration Act 1958 provides for the giving of documents to a person by a number of means—giving by hand, dispatch by prepaid postage, fax, email or other electronic means. 30 Avoided costs advised by Australia Post 1 July 2011. 31 Appendix 5 to Australia Post’s recent formal price notification for PreSort letters, Charity Mail, Acquisition Mail and Clean Mail estimated that revenue from the first three of these categories would be just short of $900m in 2011–12. See c247fa4b86d32&fn=Supporting%20 information%20to%20formal%20notification%20%20(Attachment%202).pdf.

25m  $900m × 98% × 105% – $900m.

13 for-profit organisations are likely to have a greater range of letter products available with which to tailor their communication with their customers. As noted above, it is not possible to predict precise price changes to other letter services in the absence of ACCC scrutiny but it is likely that they would increase. A 5 per cent increase to prices for PreSort Letters, Acquisition Mail and Charity Mail would be likely to increase cost to a business sending 20 000 small PreSort letters somewhere in the order of $420 to $500 (GST-inclusive). The equivalent increases for a 2 per cent price rise would be $170 to $200.

Postage rates for ordinary letters would remain subject to ACCC scrutiny and would effectively operate as ceilings for most other letter services. Price differentials between ordinary letters and services such as PreSort Letters, Acquisition Mail and Charity Mail in part reflect the additional costs incurred by senders in preparing and lodging their letters in such a way that reduces costs to Australia Post. If Australia Post reduces these price differentials such that senders no longer consider they adequately compensate for their preparation costs they could chose to use ordinary letter services instead, thus shifting costs back to Australia Post.

Similarly, for those services where current prices are higher than ordinary postage rates Australia Post would be constrained by what customers are willing to pay for these value-added services. Customers could choose to use ordinary letter services where it is more cost-effective for them to do so. Therefore, while demand for postal services may be relatively price-inelastic, there will still be constraints on how much Australia Post can increase postage rates.

Increases to other letter services postage rates would have an adverse impact on businesses and not-for-profit organisations to the extent that such mail is an input cost. Some businesses and organisations produce significant volumes of transactional mail, and/or use promotional mail to generate new business and revenue. To the extent that price increases result in reduced mail volumes over and above decreases already occurring as a result of e-substitution, secondary businesses such as printers, stationery providers and mailhouses may face adverse impacts. Impact on ordinary consumers Consumers are likely to benefit from an increased range of letter-service options by which businesses and not-for-profit organisations are able to communicate with them.

It is likely, though unknown, whether any increase in postage rates would result in senders of mail increasing their prices to consumers of their products and services. Postage costs are likely to be just one of many costs that feed into the determination of their prices. Postage is not the only cost associated with sending letters, as there are also costs such as stationery and printing. Impact on the ACCC Removal of prices surveillance may allow the ACCC to redirect its limited resources more efficiently to other priorities. However, the ACCC has advised that it expects realisable resource savings associated with proposed changes to be negligible32 .

32 Email from ACCC dated 6 July 2011.

14 The ACCC will, however, retain two other legislated roles in relation to Australia Post. Section 32B of the APC Act and Part 3 of the Australian Postal Corporation Regulations 1996 (APC Regulations) provide for the ACCC to inquire into certain disputes about bulk mail services33 . These provisions relate to the terms and conditions of rate reductions (including the amount of rate reductions) for the delivery of bulk quantities of letters by Australia Post in return for the customer performing functions in relation to the letters that could otherwise be performed by Australia Post.

The object of the provisions is to ensure that customers who use bulk mail services receive fair and reasonable rate reductions. While there have not yet been any disputes notified to the ACCC under these provisions, they would act as a deterrent to Australia Post increasing prices significantly. Part 4A of the APC Act provides for the ACCC to require Australia Post to keep records and to provide these records to the ACCC34 . One of the purposes of these powers is to address concerns raised by some of Australia Post’s competitors that it is unfairly competing by using revenue from its reserved letter services to cross-subsidise the services it provides in competition with other businesses.

Each year the ACCC issues a report of its analysis of Australia Post’s regulatory accounts for the previous year and identifies whether there are any potential cross-subsidies both between and within its reserved (monopoly) and non-reserved (competitive) services. In the case of removal of prices surveillance from other letter services, these cross-subsidy reports would assist in identifying if Australia Post was abusing its price setting powers to achieve monopoly profits. Impact on the Commonwealth To the extent that Australia Post becomes more profitable, the risk of the Commonwealth’s overall Budget position being adversely affected will be ameliorated, as Australia Post may be able to make higher dividend payments.

Additionally, the government’s postal policy objectives in terms of CSOs will be supported by a more sustainable and viable letters business. However, at the same time, to the extent that government agencies as senders of mail are subject to price increases greater than indexation of their funding, there could be some impact on program budgets. Summary of costs and benefits Removal of ACCC prices surveillance from other letter services would benefit Australia Post by providing greater flexibility in its ability to respond to the market, and greater certainty in its financial planning. To the extent that Australia Post is able to counter the current decline in letter volumes by offering new letter products, it may improve the sustainability of its letters business.

To the extent that it increases prices for other letter services, Australia Post may improve the sustainability of its letters business. Australia Post’s customers may benefit from an increased range of letter services with which to communicate with their customers. Any prices increases would adversely impact mail users such as businesses, charities and government agencies. However, price increases occur under existing arrangements in any event. Additionally, the ACCC would maintain a role in helping to ensure that Australia Post could not abuse its monopoly position, through continuing to scrutinise ordinary letter prices and its other legislated roles.

33 See 34 See

15 2. Retention of current arrangements Retaining the status quo may mean ongoing, and possibly increasing, financial losses from the reserved letter services if letter volumes continue to decline. This would not meet the objective of a financially self-sustaining letter business. In the past, falling revenue has been countered, at least partially, by cost efficiencies and/ or postage price rises. Australia Post has also diversified into other related activities to build business sustainability. Ducasse et al (2008) note the difficulties postal operators face in balancing competing priorities as part of their efforts to find sustainable business models35 .

While increasing the range of products aimed at different customer segments may increase revenues, it also runs counter to the objective of reducing costs as postal operators need to support the increased range of products. Cost reductions Costs of providing a postal universal service obligation arise from two main sources—the need to provide a service to everyone no matter where they live, at an affordable price, and the need to operate and maintain a network of post outlets that are accessible to everyone36 .

Labour costs make up over 60 per cent of costs for Australia Post’s reserved letter services delivery37 , and it is in the process of making staffing reductions in response to declining letter volumes. While labour costs suggest an obvious place for cost reductions, the ability to make reductions in staffing is not necessarily directly linked to declines in letter volumes, as Australia Post is required to deliver to all delivery points regardless of whether there is one letter or one hundred letters for a particular delivery point. These staffing reductions will be offset, at least in part, by growth in other areas, particularly parcels and warehousing and logistics38 .

These adjustments are being made through Australia Post’s Value Optimisation Program (VOP), which commenced in October 2009. The VOP consists of three elements—a new organisational design, a new operating model and establishment of a performance-based culture39 . Staff will also be affected by Australia Post’s business renewal program (Future Ready). Australia Post has also implemented cost efficiencies by changes to its operating procedures. The ACCC note that Australia Post’s Future Delivery Design Program includes three key elements40 :  using enhanced optical character recognition (address recognition) software to provide additional labour savings 35 Ducasse, J-P, Jimenez, L, and Morelli, M, Technological innovation and postal reform, in Crew, MA, Kleindorfer, PR and Campbell JI (Jr) (Eds), Handbook of Worldwide Postal Reform, Edward Elgar, Cheltenham, UK, 2008, p.

171. 36 Buser, M, Jaag, C and Trinkner, U, Economics of post office networks: strategic issues and the impact on mail demand, in Crew, MA, Kleindorfer, PR and Campbell JI (Jr) (Eds), Handbook of Worldwide Postal Reform, Edward Elgar, Cheltenham, UK, 2008, p. 80.

37 Australian Competition and Consumer Commission, Australian Postal Corporation 2010 Price Notification—Decision, May 2010, p. 50. 38 Australian Competition and Consumer Commission, Australian Postal Corporation 2010 Price Notification—Decision, May 2010, p. 51, quoting Australia Post’s submission to the ACCC in support of its 2010 price notification. 39 Australian Competition and Consumer Commission, Australian Postal Corporation 2010 Price Notification—Decision, May 2010, p. 52.

40 Australian Competition and Consumer Commission, Australian Postal Corporation 2010 Price Notification—Decision, May 2010, p.

16  extending automated small letter sequencing to enable the sorting of machine-addressed mail to the street delivery sequence, and  reconfiguring the mail delivery network to obtain benefits from automation such as through optimising delivery rounds. Despite these measures, the ACCC considers that Australia Post is still falling behind world’s best practice in the deployment of automated sorting and sequencing technology41 . However, further capital investments in automated processing may be difficult to justify in the context of declining letter volumes. Without government intervention to stem losses from the reserved service, further productivity improvements and greater cost efficiencies will be necessary.

Summary of costs and benefits Retention of current arrangements would provide benefits to mail users to the extent that they would be able to raise concerns about proposed price increases for other letter services as part of the ACCC prices surveillance process. However, it would not necessarily stop any proposed price increases. Additionally, it would continue to limit Australia Post’s flexibility to respond to market opportunities, and limit certainty in its financial planning. Retaining the status quo may mean continued losses from the reserved letter services—compromising not only Australia Post’s ability to deliver its universal letter service CSOs, but also a return to government through payment of dividends.

Consultation section The Department of Broadband, Communications and the Digital Economy prepared a discussion paper on possible changes to prices surveillance arrangements and placed it on its website on 8 June 201142 . This was linked to the ‘What’s new’ section of the department’s homepage. The department wrote to the following organisations that have consistently provided submissions to the ACCC on previous Australia Post price notifications on the same day seeking their comments:  Major Mail Users Australia Limited (MMUA)  Post Office Agents Association Limited (POAAL)  Australian Direct Marketing Association (ADMA)  Printing Industries Association of Australia (PIAA).

Additionally, the department wrote to Australia Post and the ACCC seeking comments. The due date for submissions was 7 July 2011, and the department received five submissions. Submissions are available on the department’s website43 , and can be summarised as follows.

41 Australian Competition and Consumer Commission, Australian Postal Corporation 2010 Price Notification—Decision, May 2010, p. 68. 42 See 43 See

17 MMUA MMUA represents customers who collectively lodge over 80 per cent of bulk PreSort mail and is strongly opposed to the proposal to ‘give Australia Post a free hand in setting prices within its monopoly services’. MMUA considers that it is a question of principle as to whether or not an organisation given a statutory monopoly should be able to set its own price levels.

Or, indeed, whether such a monopoly should be allowed to continue without some form of examination of the continued relevance of the conditions that gave rise to the monopoly, and how the organisation has handled the monopoly powers.

MMUA notes that current price discounts for bulk mail are tied inextricably to prior work by mail generators (for example, presorting and barcoding) in preparing the mail prior to its lodgement. MMUA notes that, in accordance with the Australia Post – MMUA code of practice, these productivity gains should be shared amongst all stakeholders. MMUA considers that there is no need to change current prices surveillance arrangements, as it would reduce the already limited opportunities for consumers to have a say in these arrangements. MMUA notes that the proposal would remove all opportunities for its members to challenge bulk mail price increases before an independent umpire, including whether there has been adequate consultation or whether discounts adequately reflect the work done by mail generators.

MMUA suggests that the current proposal appears to be predicated on making life easier for Australia Post and the ACCC by removing customers from the equation.

MMUA notes that for high-volume users of Australia Post letter services there is no marketplace competition available, and that therefore prices surveillance should be retained, as there are insufficient competitive pressures to achieve efficient prices and protect consumers. However, the MMUA also notes that businesses are replacing ‘postage budgets’ with ‘communications budgets’, and that its members advise that every increase in price of postage simply means a shrinkage in usage of paper-mail and the search for ways and means of using e-alternatives to communicate. MMUA suggests that Australia Post has been unwilling to consider suggestions by it to improve the efficiency of bulk mail processes.

MMUA suggest that before bulk mail is removed from ACCC scrutiny there needs to be a reconsideration of and public inquiry into Australia Post’s CSO. MMUA notes that Australia Post has extended its business reach into a myriad of other products on the basis of its CSO and monopoly. It suggests that areas that should be considered in any review could include separating reserved services from other areas of Australia Post’s activity, changing the parameters of the CSOs and funding them from the federal Budget, removing business and advertising mail from Australia Post’s monopoly and appointing an industry regulator to examine proposals to make the reserved services more effective.

POAAL POAAL is the membership association for the owners and operators of licensed post offices and for mail and parcel contractors who deliver on behalf of Australia Post. POAAL supports the focusing of

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