Mr. Kevin O'Brien:

I thank the joint committee for the invitation to attend today to discuss important matters relating to the future of the universal postal service. As members are aware, as well as responsibility for postal regulation, the Commission for Communications Regulation, ComReg, is also the regulator for the electronic communications sector. In my presentation I will give an overview from ComReg’s perspective of the matters in hand. We also have made available to the committee some factual background material.

Our remit to regulate the postal sector comes directly from legislation, in particular from the EU postal services directive and the Communications Regulation (Postal Services) Act 2011. Under the Act, An Post is designated as the sole universal postal service provider. The Act sets out a general description of the universal postal service that An Post is required to provide. This includes delivery to all addressees in Ireland and collection of posted mail five days a week. Under the Act ComReg's core function is to ensure that all persons in the State can avail of an affordable universal postal service that meets their reasonable needs. We also have a role to protect the interests of postal service users, inter alia, by ensuring complaints and redress procedures work properly. We are charged with specifying aspects of the scope of universal service and we measure the quality of service achieved by An Post. ComReg also sets certain price controls with regard to the service. We do not regulate the price of mail which is outside the scope of universal service. Less than one third of An Post group revenue is subject to our price cap control. I understand that price regulation is of particular interest to the committee today, given the proposed amendments to the Act. ComReg has no role in the postal network and has no prudential function with regard to An Post.

The universal postal services are those necessary postal services where there is no effective competition. The nature of the universal postal service is set by an EU directive and transposed into Irish legislation by the Act. In many European states, and further afield, we see a serious and marked decline in letter volumes, offset to some degree by growth in packet and parcel traffic arising from e-commerce. Such packet and parcel traffic tends to be outside the scope of universal postal service and is largely based on commercial negotiations. In Ireland the universal postal service consists largely of the posting of letters. As there is no effective competition for these postal services, the EU directive and the Act require that the prices for such monopoly universal postal services are cost-oriented and affordable.

As An Post is the sole designated provider of the universal postal service, we remain concerned about the liquidity situation of An Post, which has declined from a cash-in-bank balance of some €350 million in 2008 to less than €40 million. The liquidity issue facing An Post has been steadily developing over several years. Since 2013 ComReg has engaged experts to review the financial situation of An Post and has informed its shareholders and stakeholders of these findings through reports and in our publications. The universal postal service has been losing a lot of volume and according to An Post these volume declines are to accelerate significantly while costs have not fallen at the same rate. To date ComReg has taken measures to allow prices for universal postal services to increase significantly to ensure continued provision of the universal postal service. For example, the price of a stamped letter has increased by 31% in recent years, from 55 cent in 2013 to 72 cent today. This has mainly been achieved through the current price cap control, specifically required in legislation and established by ComReg in June 2014. The price cap in place took forecasts from An Post on volumes and costs, sought certain efficiencies and allowed An Post to make a profit. As a result, losses on the universal postal services subject to the price cap have reduced significantly, from €57 million at the end of 2012 to €19 million at the end of 2015.

When ComReg set the price cap control, it was designed to bring the universal postal services segment of An Post’s business back to profitability over five years. This was, however, dependent on certain assumptions provided to us by An Post and the success of the price cap in bringing the service back to profitability has also been dependent on certain actions to be taken by An Post.

The forecasts and assumptions, provided by An Post as input to the price cap, have not transpired in four significant ways. First, An Post forecast that there would not be any wage increases to be made within the five-year term of the price cap but, as mentioned earlier, wage increases have been agreed. It is worth noting that in rough terms, each 1% increase in wages adds €4 million in costs per year. Second, the decline in mail volumes has exceeded An Post's decline forecast. Each 1% decline in volume reduces revenue by about €4 million each year. Third, An Post has not achieved the target of a 2% improvement in efficiency per year. This modest efficiency target was based on internal benchmarking in An Post that showed potential inefficiency of up to 22%. However, An Post has failed to meet the 2% annual target in any year, as confirmed to ComReg by An Post in a letter in September 2016. Finally, An Post has not increased prices by the full amount permitted by the price cap mechanism. Therefore, ComReg commenced a review of the price cap last September.

According to An Post's media release of December 2016, we understand that following the proposed repeal of the price cap, An Post is planning price increases in 2017 of the order of between 14% and 35%. ComReg is concerned that price increases of such magnitude could appreciably hasten the ongoing decline in mail letter volumes. Given that our core function is to ensure the provision of a universal postal service for all, I will make a number of key points. First, large mailers are price sensitive and will move to electronic substitutes. Research conducted for ComReg confirms that most mail in the State is comprised of letters. Most of those letters emanate from 20 large customers of An Post. They are comprised of the larger consumer-facing businesses and organisations such as utility providers, financial service providers and State agencies. These customers use bulk mail products, which usually require a minimum volume of 2,000 items.

Our research has also confirmed, through customer interviews and observing behaviour, that An Post's biggest customers generally seek the cheapest price and will prioritise cost of delivery over speed. This means that they generally opt for the cheaper deferred delivery option. They are content for their mail to be delivered in two to three days rather than one day if slower delivery costs less. For example, a lot of bulk mail has moved to a bulk mail product that delays the mail for three days rather then two days but at a price that is only 2 cent cheaper. It is worth noting that half of all post is not next-day delivery.

Second, in terms of price, there is limited scope to gain significant additional revenue from SMEs. The universal postal service consists largely of the posting of letters. Letters posted by SMEs are mainly stamp or meter payment. An Post's annual revenue from stamped and metered letters is about €100 million, which is one eighth of its total annual revenue of €800 million. This means there is limited scope for An Post to gain significant additional revenue from increasing prices for its stamped and meter letter service. For example, the proposed 35% increase for stamped and metered letters would only provide an extra €17 million or so in revenue at a maximum. It is likely that this additional revenue will be much smaller when subsequent volume declines are factored in.

In conclusion, ComReg is an independent regulatory body. Therefore, we recognise the necessity for the Minister and Government to develop the policy framework and for the Oireachtas to consider and pass legislation. We wish the recently-appointed chief executive officer and chairperson of An Post well in their endeavours. We recognise the commitment and contribution made by An Post staff. Our role is to carry out whatever tasks and duties are given to us in legislation. We will carry out our remit as proposed by the amending Act upon its commencement, including the proposed requirement to produce a report to the Minister in two and a half years after the amendment. Our overarching function will remain that of seeking to ensure the provision of a universal postal service that meets the reasonable needs of users. Undoubtedly, the pricing freedom proposed by the amendment will allow An Post to increase the price of certain universal products. However, significant restraints to price increases exist for the majority of mail as bulk mailers can choose cheaper options, including electronic substitution. With a view to the medium-term sustainability of the universal postal service, price increases must be combined with the development of new business models, the achievement of cost structure changes and efficiencies and ultimately a fundamental consideration of what type of universal service is required and desired by the State. I thank the committee for the time to discuss this important matter.