[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 18.10.2006

SEC(2006) 1291

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to theProposal for aDIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCILamending Directive 97/67/EC, concerning the full accomplishment of the internal market of Community postal services IMPACT ASSESSMENT

{COM(2006) 594 final}{SEC(2006) 1292}

Table of Contents

1. Introduction 4

2. Procedural Issues and Consultation of Interested Parties 6

2.1. Organisation and Timing 6

2.2. Consultation and Expertise 6

3. State of Play and Challenges in the EU Postal Sector 6

3.1. Current State of Play in the Sector 6

3.2. Main Issues 8

3.2.1. Reserved Area 10

3.2.2. Universal Service Scope 12

3.2.3. Universal Service Standards 13

3.2.4. Alternative Financing Mechanisms in the Absence of a Reserved Area 14

3.2.5. Downstream access 16

3.2.6. Access to certain means of the postal infrastructure 18

3.2.7. Other issues identified 19

3.3. Does the Community have the Right to Act? 19

4. Objectives 20

5. Policy Options 21

5.1. High level policy options 21

5.2. Specific policy options 24

5.2.1. Policy options related to universal service scope 24

5.2.2. Policy options related to universal service standards 25

5.2.3. Policy options related to the reserved area and universal service financing mechanisms 26

5.2.4. Policy options related to access to essential means 29

5.2.5. Policy options related to downstream access 30

5.3. Preliminary assessment of options 31

6. Analysis of impacts of retained options 35

7. Comparing the Options available 40

7.1. Comparison of remaining options 40

7.2. Conclusions and recommended options for the proposal 42

8. Monitoring and Evaluation 44

Figures

Figure 1 : Segmentation of the postal market 7

Figure 2 : Access to the postal network 16

Tables

Table 1 : Services reserved for the USP in Member States in 2006 10

Table 2 : Summary of all options considered 32

Table 3 : Comparison of high level policy options 33

Table 4 : First screening of specific policy options 34

Table 5 : Summary of overall impact of each specific policy option 40

Table 6 : Enforcement powers of National Regulatory Authorities 47

Table 7 : Comparison of current / future postal data collection activities under the proposed Article 22 A 50

Table 8 : Comparison of current / future postal data collection activities under the proposed Article 22 B 50

Table 9: Financial intermediary hourly wage rates, and number of postal sector enterprises 52

Table 10 Summary calculation of net administrative cost - activity breakdown 53

Annexes

Annex 1: Details on the public online consultation 45

Annex 2: Assessment of administrative burden for the collection of sector statistics 47

Annex 3 Access to services 54

Annex 4 Economic impacts of market opening in the postal sector 57

INTRODUCTION

In line with the Communication on 'Better Regulation for Jobs and Growth in the European Union', all proposals that feature in the Commission's legislative and workplan are accompanied by an Impact Assessment[1]. The purpose of this document is to explain the options considered for the 2006 proposal on postal services. In particular, the document seeks to highlight the economic and social impacts of the different options on users – be they business users, SMEs or individual consumers – and on other stakeholders such as employees, regulators, existing market players or new entrants.

The structure of this document is as follows:

Section 1 - Introduction and the context for the proposal

Section 2 - Procedural issues and consultation of interested parties

Section 3 - State of play and challenges in the EU postal sector

Section 4 - Objectives

Section 5 - Policy options

Section 6 - Analysis of impacts of retained options

Section 7 - Comparison of options, and recommendations

Section 8 - Monitoring and evaluation

In the postal sector, the aims of Community rules, as set out in the Commission Green Paper of 1992[2] and the current Postal Directive, can be summarised as the maintenance and positive evolution of the universal postal service, the improvement in the quality of service and the completion of the internal market for postal services. By providing for balanced harmonisation and the phasing in of competition in a gradual and controlled way, the Directive has initiated regulatory and market reforms in the Member States that are designed to result in a better, more efficient provision of universal postal services.

With the aim of achieving these objectives, and in line with the principles of subsidiarity and proportionality, the 1997 Postal Directive provided for a first phase of harmonisation of EU postal services[3]. Its provisions included the establishment of independent regulators at national level, the definition of a minimum universal postal service, a gradual reduction of the reserved area, the conditions governing the provision of non-reserved services, tariff principles and the transparency of accounts of incumbent operators, quality of service requirements, customer complaint procedures, and the harmonisation of technical standards.

The 2002 amendments to the Postal Directive provided for reductions to the maximum reservable area in 2003 and 2006, and thus the gradual and controlled opening of the postal market to competition[4]. In the Directive, the EU legislator not only implicitly endorsed the objective of full market opening but also set a target date of 2009 for the accomplishment of the internal market for postal services, or an alternative step towards this . Article 7 of the Directive envisages in 2006 a proposal by the Commission to achieve the internal market for postal services, based on a report and the conclusions of a prospective study, which will assess, for each Member State, the impact on universal service of the full accomplishment of the postal internal market in 2009. In 2006 the European Parliament reaffirmed this general direction[5].

The overall context and suggested starting point for the Community's deliberations on this proposal is as follows:

- according to its "sunset clause" in Article 27, the postal Directive will lapse on 31/12/2008 and without a further Commission proposal adopted by that date, the sector will be primarily subject to EC Treaty rules (in particular Article 86 EC, including individual Commission decisions and/or Commission Directives under Article 86, paragraph 3)[6];

- the Commission is required under the Directive to submit (according to Article 7) a proposal "for the full accomplishment of the postal internal market or determining any other step in the light of the [prospective] study's conclusions";

- alongside gradual market opening have been improvements in quality of service, and the associated reforms have not undermined the universal service[7];

- the Commission's Application Report[8] (on the current postal Directive) and the Prospective Study[9] on the impact of full market opening on universal service concluded that given certain safeguards, full market opening can be achieved by 2009 for all Member States, thereby confirming the approach signalled 15 years ago by the EU legislator;

- full market opening is already an evolving reality (the latest reduction of the maximum permitted reserved area applies from 01.01.06 - several Member States reducing still further or abolishing altogether before 2009);

- postal operators in the EU are already in rapid development towards rationalisation and readiness for full market opening;

- the Commission is ready to take its responsibility in actively assisting the "construction site" of EU postal reform.

Procedural Issues and Consultation of Interested Parties

Organisation and Timing

This proposal relates to the Commission's work plan item 2006/MARKT/006[10].

The main analysis for the Impact Assessment was conducted from January 2006 to September 2006. Given the broad range of potential impacts, a Steering Group composed of different services of the Commission was also established and convened between March and June 2006[11].

Consultation and Expertise

In the light of the Directive's requirement for a proposal in 2006, the Commission undertook a range of consultation activities, including:

- a public consultation, where 2295 replies to a questionnaire and 103 written submissions were received[12];

- 6 major studies, commissioned between 2004 and 2006, on issues related to future postal policy orientations, in addition to 14 other studies since the first postal Directive[13];

- 10 public workshops in Brussels on the topics covered by the studies since 2004;

- 25 focus groups on postal services in all EU countries, with a particular aim of understanding the needs and satisfaction of individual postal users, including those in outlying areas;

- the 'Eurobarometer' survey on consumer satisfaction with postal services;

- discussions with Member States, social partners, operators and all other stakeholders including consumers;

- participation in several consumer organisation, economic and social partner conferences focussing on postal issues.

The consultation activity undertaken by the Commission is in conformance with the current standards[14]. Sections 3 and 5 highlight how views expressed across the broad range of consultation activities have been taken into account. Further information on the results of the public online consultation is at Annex 1 .

State of Play and Challenges in the EU Postal Sector

Current State of Play in the Sector

Postal services in the EU earned about 90 billion EUR in 2004, and continue to make a significant contribution to the EU economy. Direct contribution to EU GDP is estimated at 37 billion (0.4%)[15] providing direct employment to 1.7 million citizens. While the national postal operators responsible for physical mail distribution are clearly key players, they are not in themselves the whole industry. Not only is there emerging competition in many national markets, but there are also important 'upstream' and 'downstream' related sectors (e.g. direct mail creation, print and production, collection and consolidation of letters, and mail order returns etc.) that depend on an effective and competitive mail distribution sector for these sectors' own growth and jobs. Estimates of the size of these related sectors are indicative, but account for additional revenues of c. 150 billion EUR, and an additional 3.5m jobs[16]. Postal and related services are of manifest significance for economic and social activity in the EU as part of the distribution and communications market, and - given their size - have also an important role to play in the context of the Lisbon agenda. In terms of users of the postal services, there are two basic categories: business/bulk users who buy postal services wholesale and individual/social consumers and many SMEs who buy them at the retail level. Individual/social users send just over 10% of postal items in most Member States. However these are the same people who receive about 70% of all postal items, mainly due to direct mail[17].

Figure 1 shows a schematic segmentation of the postal market. Public postal operators provide three types of postal services: letter post (letters and cards, small packets, etc.), parcel post (heavier packages) and express and guaranteed services. The grey irregular area represents non-postal items, e.g. unaddressed mail, newspapers. Only letter post, parts of parcel post and non-postal items are treated as universal postal services (indicated below the 'dotted line'). This is the main area of focus of this proposal.

Figure 1 : Segmentation of the postal market

[pic]

Note: the diagram above is only a schematic presentation of the postal market and

it does not illustrate the size, value or importance of each segment presented.

(Source WIK 2004)

Recent studies[18] suggest that in most Member States, universal service providers continue to be market dominant in the delivery of letter mail items (items of correspondence and direct mail), and that this is linked to the materially defined reserved area. The ‘reserved area’ constitutes a part of a letter market which is reserved to a postal operator (which may be either public or private) providing universal services within national boundaries. This is also known as the ‘monopoly area’. This dominance is less clear in the distribution of parcels, newspapers, periodicals and magazines and in the distribution of unaddressed items.

There is also an emerging trend for liberalisation (removal of the monopolised reserved area) in many EU Member States. Postal services in these countries generally have been characterised by improved efficiency, and sustained improvements in quality of service[19]. This tendency looks set to continue: by 2008 when market opening in Germany and the Netherlands is expected, approximately 60% of the total EU market (by volume) will be opened to competition. The process of liberalisation in some Member States will therefore continue its own dynamic, without further intervention from the Community. Moreover, rationalisation of the sector cannot be accounted for entirely by EU-led postal reforms however, since new products and business methods and the availability of substitutes also have had effects on the traditional postal sector[20]. These developments are also highlighted in the Commission's 2006 Application Report.

High quality of service, affordability, accessibility of postal services is also reflected in the satisfaction levels of the European consumers, with 78% satisfied in 2005[21].

It is worth mentioning here that the present Postal Directive indicates only the minimum basic obligations on Member States for the provision of universal postal service. However within the framework of the Directive, and in line with the principle of subsidiarity, Member States have considerable freedom to define universal postal service at national level.

Main Issues

The EU postal sector is currently undergoing significant change. The most important drivers of change have been gradual liberalisation, the rapid growth and falling costs of substitutive media (in particular email, telephony, fax, and internet), new automation technology and increasingly demanding owners/shareholders of postal operators. Together these changes increase the pressure on the sector to become more competitive and efficient. Denying the existence of these forces for change might have negative consequences for employment and the sustainability of services. Meanwhile however, it is crucial to maintain equal, affordable and easy access to postal services for citizens. This is an important issue from the point of view of the European social cohesion policy.

Therefore the main issue for the EU postal sector is how to ensure an efficient and competitive EU postal sector that continues to provide affordable and high quality service for European citizens and companies.

The current multi-speed liberalisation trend and the fact that some Member States have gone beyond the minimum obligations indicated in the current Postal Directives has resulted in a different legal and market environment for European operators. The lack of level playing field creates unfair competition in the Internal Market. As an example, where incumbent postal operators still enjoy a monopoly position in their own country, they can cross-subsidise their entry in other liberalised markets. This not only distorts competition, but Member States observing this kind of entry on their national market may also be discouraged from further reforms.

In addition to preventing unfair competition, it is important to permit effective competition in the postal market. In this respect, one can distinguish between the following barriers to operating in the postal market.

- Strategic entry barriers: new market entrants may face inappropriate use of a dominant position by incumbent postal operators in order to limit competition[22];

- Natural barriers: these exist for instance in the problem to compete against competitors that profit from economies of scale due to their higher market share, transaction costs faced by users which consider switching suppliers, or intangible effects such as the reputation of different operators in the market;

- Legal barriers refer to conditions on which the new operators could use the existing postal infrastructure, authorisations and licensing systems.

Concerning the universal services, there are a number of aspects to be considered. A universal service may imply an uneconomic cost in some Member States, but it is vital for the EU citizens and companies to ensure the provision of this universal service in all geographical areas. The present situation is that serving some geographical areas are unprofitable or uneconomic for market operators at current prices. Abolition of a reserved area would encourage competition but it would also mean that new ways of financing any uneconomic parts of universal service are needed. Other issues to consider are the minimum quality standards expected from postal service providers and the range of products to be included in the universal service. These also influence the extent of any uneconomic universal service obligations.

These are not issues that threaten the existence of the postal sector. Rather, these are challenges that should be addressed at this point if the Community is to maintain the universal postal service and ensure the quality of service alongside the completion of the internal market for postal services.

The following sub-sections describe these issues in detail, analyse how the situation may evolve, who is affected and how. The main identified issues are as follows:

- The abolition of the reserved area

- Scope and standards of universal service obligations

- Financing of universal service in the absence of a reserved area

- Access to infrastructure

- Access to 'essential means'

Reserved Area

Undoubtedly, the largest legal entry barrier is the fact that a substantial reserved area still remains in many EU countries. All Member States have limited their reserved areas within the upper limit set by the Postal Directive ( inter alia, that items above 50g may not be reserved). Three Member States have abolished the reserved area altogether in advance of the 2009 target date (FI, SE and UK). DE and NL apparently intend to abolish their reserved areas by 2008. Meanwhile other Member States have taken out direct mail (which is a substantial part of letter post) from the monopoly area. The overall picture is as follows:

Table 1 : Services reserved for the USP in Member States in 2006

MS | Domestic & inbound Cross Border | Direct mail | Outgoing Cross Border |

FI, SE, UK | Liberalised |

AT, CZ, NL, SI EE | Reserved | Liberalised | Liberalised |

IT, LV ES | Reserved | Liberalised | Reserved |

BE, DE, DK, FR, IE, LT | Reserved | Reserved | Liberalised |

CY, GR, HU, LU, MT, PL, PT, SK | Reserved | Reserved | Reserved |

Note: in this table, each row represents a higher degree of liberalisation than the row below it.

The reserved area in Spain includes outbound letters but excludes intra-city mail.

Source: WIK 2006 (data verified by Member States)

A reserved area of up to 50g accounts for between 70%-85% of postal items in a Member State; a reduction to a 20g limit for the reserved area would open up an additional 15% of mail approximately, which would fall significantly short of full market opening. The current Postal Directive permits a reserved area only to the extent necessary for the provision of universal service. Estimates of the cost of the universal service differ across Member States, and even within the Member State according to the methodology used[23] for example regarding whether the cost estimates are based upon pre-or post competitive entry simulations, assumptions about the level of competitive intensity and response of the incumbent, business user propensity to switch provider, the level of demand resulting from universal coverage, and other intangible benefits. A common theme however of all of the approaches is to identify those postal activities which would not be undertaken using normal commercial logic – because they are uneconomic or loss making, but which nevertheless are socially desirable.

By way of illustration, the following estimates of the uneconomic costs of universal service have been observed:

- In Norway, the postal operator receives a small income (equivalent to 2% of the costs) from the government as a proxy for the uneconomic costs;

- In Portugal, a study by the national operator suggested that between 4 and 6 % of the 15.9m EUR losses could be ascribed to the requirements of the universal service obligation;

- In Sweden the obligation was recently estimated at 100 million SKR a year (10.3m EUR) or about 4% of the operator's group-wide revenue.

- In the USA, the Postal Rate Commission estimated that the cost of the universal service obligation represented 5% of revenues

In monopoly postal markets, universal service has historically been funded by internal product cross-subsidies. The problem however is that a monopoly has a significantly broader effect than simply the maintenance of these socially desirable activities; for example market distortion, the prolongation of underlying inefficiencies, and reducing the incentive for innovation and improvement in standards of service to consumers.

The current Directive already signals that the Reserved Area is the main barrier to the internal market. In the light of the findings of the Commission's Prospective Study, and the already achieved and expected impacts of competition in the postal sector, the issue at Community level is whether to confirm the EU legislator's target date of 2009 for the abolition of the Reserved Area.

How can this issue develop?

If the Community does not adopt a market opening proposal, postal markets can be expected to develop their own liberalisation dynamics – with several Member States opening up markets in advance of the Community target date. However the pace and extent of opening is uneven. Under these circumstances – and in the absence of a proposal - the example of market opening in some Member States coupled with the possibility of Commission action under the EC Treaty may not be a sufficient incentive for continued reform, and the absence of a Community approach may lead some of the 'early market openers' to reconsider their decision to open up their national markets to protect themselves from competition in what they would regard as an 'un-level playing field'.

On the other hand, long term the full accomplishment of the Internal Market for postal services could (eventually) create the possibility of sector consolidation. To a limited extent, signals towards this future scenario are occurring already (with operators offering minority stakes to 3rd party investors, others becoming listed companies, and governments progressively divesting themselves of 'golden shares'). However the potential long term risk to the Internal Market that the progressive abolition of national monopolies would be simply replaced by pan-European market dominant oligopolies (consequently with adverse effects for users) would be addressed through the existing well established Community merger control regime.

Who is affected?

If the Community adopts a market opening proposal, the reduction and abolition of the reserved area has potentially broad effects on the following groups of stakeholders:

- businesses - who generate the vast majority of all postal items in most Member States and who depend on an effective postal market for their commercial activity;

- individual consumers - particularly those in remote or disadvantaged regions who have become accustomed to an indirectly subsidised service (as both senders and receivers of mail), and groups such as blind and partially sighted citizens who have often received free postal services;

- direct employees in universal service providers and their social partner representatives - already facing up to the challenges of new technologies and alternative media; abolishing the reserved area will underline the need for continued restructuring;

- indirect employees in 'upstream' and related sectors, where there are c.3.5m jobs.

Universal Service Scope

Within the postal sector, ‘universal service’ means the permanent and obligatory provision of a range of postal products, at sufficient points within a national boundary so it is easily accessible for users. Such services must also meet specified quality targets and be available at affordable prices. Universal service has two main elements – the product range (scope) of services, and the quality and availability standards they should be provided at. This section addresses the scope of universal postal services.

The existing Directive specifies in general terms the minimum range of postal items that should be provided on a universal basis: letters up to 2kg, parcels up to 10kg or 20kg (to be determined at Member State level), registered and insured services. But it leaves to Member States to determine the full and detailed range of products and ancillary services that should be classified as 'universal services', that is, to be provided at the minimum requirements set by the Community. In principle, National Regulatory Authorities are able to apply these obligations to almost all products to all types of users handled by the universal service provider.

On the other hand, some Member States have taken initial steps to redefine the universal service in a narrower way – in terms of a basic, regulated affordable postal service for non-bulk mail users (typically consumers and SMEs), with lighter obligations on the universal service provider for services to bulk users since in a Member State these users may have alternative suppliers or substitutes. This development, in principle, would be compatible with the concept of 'least market distortion'.

The nature of the universal service scope has a potentially material impact on the financial effects of full market opening on universal service providers. It is due to the fact that the more extensive the obligations, the greater likelihood that the obligations would not normally be provided by market forces on their own, and if so, the greater the balance to finance following market entry.

In the light of this, the issue at Community level is whether to harmonise the universal service definition in all Member States moving in the direction of a narrower scope of application.

How will the Universal Service scope issue evolve and who is affected?

In the absence of the Community’s universal service obligations (e.g. through the expiry of the Directive), it seems unlikely in the short term that Member States would seek a significant change to the basic product scope of the universal service – given this is also largely required by international (Universal Postal Union) rules. However these possibilities cannot be excluded. This scenario could have an appreciable impact on consumers as both senders and receivers of mail, reduce the social and economic cohesion particularly in rural or outlying regions, and have potentially a negative (though probably modest) effect on underlying demand for postal services (lower mail volume) to those areas that are experiencing a reduction in universal service.

Universal Service Standards

The current Directive places specific service standards on Member States – most explicitly regarding collection and delivery of postal letters and parcels at least 5 working days a week to all points of a Member State territory, and also requiring affordability and accessibility without further specification. All Member States have transposed the Postal Directive's universal service standards, only making limited use of the permitted derogations (for example reducing delivery frequency to very remote regions). Member States, however, have frequently gone beyond the minimum Community levels and used their legislative discretion to codify price uniformity, accessibility requirements, and require 6 days a week delivery frequency.

It is likely that these higher standards reflect - at least to some extent - users' needs. However given only a minority of Member States have undertaken a review of their universal service standards, it cannot be excluded that some 'gold plating' (through adding further rules to the minimum requirements) of the Community's universal service standards exists. Under a monopoly, high universal service standards can be financed through product cross subsidies with business mail (generally higher profit) cross subsidising consumer mail (generally lower profit or loss making). If the standards of service are 'gold plated' with prices that are not related to costs, the monopoly user effectively has no choice - and must pay up.

Where competition exists however, this will create commercial pressure on universal service providers to ensure its products are priced more closely to the costs of the service - otherwise the universal service provider will lose market share to competitors. The Community standards may play a part, but if the standards imposed by Member States on universal service providers for their competitive product types are much higher than what users are willing to pay, when combined with some Member State's characteristics (low volumes and delivery density) this could create a situation where funds from the users of a particular service under competitive prices are inadequate, and additional sources of revenue are needed.

Given the economics of the sector, one market entrant strategy would be to target high profit/low cost to deliver areas (towns) undercutting the uniform tariff that many universal service providers frequently use to cross subsidise low profit/high cost to deliver areas (rural). This is known as inefficient entry, or 'cream-skimming'. Where such competition is expected to be significant, the incumbent operator may wish to introduce non-uniform tariffs for some or all mail products that are subject to competition. Meanwhile National Regulatory Authorities may decide to monitor or regulate these changes ex ante to avoid price shocks on users, foreclosure effects and other inadvertent anti-competitive behaviour. Regulators will however be mindful that the failure by Member States to grant this pricing freedom, where in future it is shown to be required, could stimulate inefficient market entry and impact on the financial equilibrium of the current universal service providers, potentially to a material extent.

In the light of this, the issue at Community level is whether to harmonise and define more restrictively the universal service standards and preclude 'gold plating', and how to address the potential issue of inefficient entry or 'cream skimming' of uniform tariffs.

How will the Universal Service standards issue evolve and who is affected?

Through their National Regulatory Authorities, some Member States are acquiring a more in-depth understanding of users' needs. The standards imposed at Community level give some opportunity for service modification through exceptions to delivery frequency, and in the definition of accessibility. Even though the Directive requires that universal service should evolve in response to the technical economic and social environment and to the needs of users, Member States have been cautious in making exceptions to the minimum Community rules. Thus Member States' main choice has been with respect to the scope of postal products, not with respect to standards . Without the Directive it is unlikely that Member States would rescind all national provisions on universal service standards, but it is possible that increasingly divergent provisions could affect social and territorial cohesion of the Community.

Clearly all users of postal services are affected. However, at Community level it is very difficult to distinguish between genuine consumer needs (which would be valued and paid for), a right of citizens (in terms of access to a service of general economic interest) and 'gold plating' which exists either because Member State provisions simply codified accepted practices at the time, or indeed were framed with other considerations in mind (for example, creation of employment).

Alternative Financing Mechanisms in the Absence of a Reserved Area

In many Member States the restrictions on competition for postal items weighing less than 50g (items less than 50g generally constituting 70-85% of a country’s letter volume) means that many national postal operators have been operating under a part-monopoly. The historic justification for this is because these operators were also required to provide a universal service to all parts of a territory, parts of which were assumed to be substantially uneconomic[24] but at the same time socially desirable – for example collection and delivery to remote areas to ensure social and economic cohesion. With a monopoly, national postal operators were able to ‘balance’ overall profits across their product range, without the risk of losing business making super-profits on some, to finance others that were priced below their fully allocated costs.

It has been a long standing aim of the Community to facilitate the gradual phasing out of monopolies in services of general economic interest where they are shown not to be required, and this was signalled in the 1997 and 2002 Postal Directives. The abolition of a monopoly does not suddenly turn loss making but socially desirable services into profitable ones – but the contention is that such activities could be financed through means other than a reserved area, which is a blunt financing instrument and difficult to make proportionate.

The extent of any financing mechanism is to be proportionate to the purpose of financing of the universal service, although the Directive does not prescribe a particular calculation methodology, nor specify whether a burden resulting from universal service obligations in excess of the minimum required by the Directive may be considered a justification for a compensation fund. The Postal Directive already authorises the establishment of a compensation fund. Under this fund, all postal operators provide a proportionate contribution to universal service (e.g. an amount per letter) so in fact all operators (and indirectly all users of postal service) share the uneconomic part of the costs. Currently nine Member States have made provision for a universal service fund in their laws, only one has so far deployed it.

With a substantial reserved area still in place, it is not surprising that the actual use of alternative financing mechanisms is so infrequent. Without the reserved area however, it is likely that several Member States may revisit the need for compensation or cost sharing funds, or have done so in advance. Respondents to the public consultation suggest that a compensation fund system may not be appropriate in all Member States, and that complementary or alternative approaches may also be required.

In the absence of a reserved area, the issue at Community level is what alternative financing mechanisms are consistent with an internal market for postal services and how should the scope and extent of obligations on market entrants not providing universal service be defined.

How will the issue evolve and who is affected?

The current Directive requires a proportionality test in order to determine the method and level of financing allowed for the provision of the universal service. It can be done in the following ways: the maintenance of the reserved area, imposing comparable service level obligations on new market entrants or, as an alternative, asking entrants to contribute to the universal service financing. There is a concern that under the current Directive such safeguards could be used in combination and such interventions are very likely to be disproportionate. For example, the authorisation system would impose ex-ante obligations and at the same time a financing mechanism could collect contributions ex-post on the same market player.

The main affected stakeholders are:

- businesses - who depend on an effective postal market for their commercial activity, but who are denied the benefits of competition through a continuation of a monopoly;

- individual consumers in remote or disadvantaged regions who hitherto have received a subsidised service funded mainly through a monopoly paid for indirectly by other users or the state;

- universal service providers who are faced with providing certain uneconomic obligations, and the challenge of financing these from new sources;

- Member States – who under the current Directive are already required to ensure that the reserved area is proportionate to the need to meet universal service obligations;

- National Regulatory Authorities – who may have to set up and administer any alternative source of financing.

Downstream access

Access to the postal network can occur at multiple stages, it can be either upstream or downstream. Figure 2 shows the elements of both types of access. "Downstream" refers to the delivery network; "upstream" access activities are also commonly referred to as "worksharing" and include activities such as collection, consolidation and mail preparation/franking in advance of handover to the postal operator.

Figure 2 : Access to the postal network

[pic] |

Source: WIK, 2006 report

Whilst it is very difficult to make a convincing argument that significant parts of upstream access constitute an 'essential facility'[25], as competition is already established in this sub-market, it could be argued that downstream access has at least some of the elements of an essential facility depending on specific market conditions.

Regulation of the access terms under which dominant postal operators offer upstream or downstream access is already governed by competition law. The Postal Directive currently does not regulate upstream or downstream access of incumbent postal operators, save indirectly by reference to the general non-discrimination restrictions[26]. Currently seven Member States[27] have granted the National Regulatory Authority the authority to require downstream access to the public postal network under appropriate circumstances while other Member States have not. Three National Regulatory Authorities have used this power to encourage or compel access[28]. In the public consultation some respondents argued that this is sufficient, and that access should remain essentially unregulated by the Postal Directive, and subject to the normal process of business negotiation (i.e. in practice between a new entrant and an incumbent operator). This is also because (assuming a market is opened to competition) market entrants have the possibility to establish their own collection, sorting and delivery networks and therefore engage in 'end to end' forms of competition with the incumbent, bypassing his facilities altogether, and thus having no need for access.

Despite the above, some Member States may consider that market intervention for downstream access is appropriate, for a number of reasons:

- possible concerns over anticompetitive behaviour by the market dominant postal operator in price negotiations and associated conditions of access;

- the time to resolve allegations of such anticompetitive behaviour may be protracted;

- the preference for concentrating on the promotion of competition and universal service coverage outside the 'last mile of delivery';

- more pragmatically – to address the scale and unit cost challenge faced by entrants who may find it difficult to replicate nationwide delivery networks for a competitive price.

The issue here is whether the natural development of different models of competition or the active promotion of downstream access by some Member States may continue to co-exist or call for a Community level intervention. The follow-on issue is whether the Community should harmonise and/or strengthen Member State's ex-ante role in the monitoring and /or in mandating downstream access.

How will the issue evolve and who is affected?

Access in this sense is primarily relevant only to large mailers, upstream consolidators, and new sector entrants competing directly with the incumbent operators for business. The present Postal Directive does not restrict Member States from requiring access, or conferring the power to the National Regulatory Authority to determinate on this issue. Moreover, operators are not compelled under a European 'essential facilities' framework to offer special forms of access, but where they chose to do so, it has to be on a non-discriminatory basis. In the absence of Member State provisions, allegations of discrimination on this level would continue to be addressed through general competition law.

The absence of a Community framework may lead to the development of divergent forms of competition in Member States (‘access based’ or ‘upstream’ competition on the one hand, or ‘end to end’ competition), or a combination thereof as adapted to the local needs.

Access to certain means of the postal infrastructure

An internal postal market would imply the removal of legal restrictions on the use (or 'access') by other market players than the incumbent to the following:

- postal boxes - blocks of delivery boxes inside post offices;

- delivery boxes - inside multiple-occupier housing where customers pick up their mail rather than have it delivered to their door;

- a postcode database - to improve addressing/sorting/delivery accuracy;

- change of address databases - used to improve direct mail quality.

These parts of the postal infrastructure are not ' essential ' facilities or ' bottlenecks' in the economic sense, but the failure to make these means available to all market players could effectively restrict the development of competition. Additionally if mail quality standards declined as a result this would also undermine users' confidence in the media. In cases where an item of mail is incorrectly delivered, recipients of this mail may give it to the public operator to return to sender. The public operator may however be unwilling to perform this service for its competitors, particularly where it is not remunerated for doing this.

Five Member States have given their National Regulatory Authorities the authorisation to require access to the post office box (DE, FR, NL, PT, SE) and at least two have used this authority (DE, SE). Other Member States have not given this authority, and there is a concern that access to such crucial means would be unfairly restricted. In five Member States, the National Regulatory Authority has been authorised to require the universal service provider to give access to the address and change of address database (DE/DK/FR/MT/UK). In SE the incumbent and a new entrant have set up a jointly owned corporation to maintain a national postcode/address database. To ensure equitable access and cost transparency, in the UK this activity has been ‘structurally separated’ into a standalone business unit of the universal service provider. In eight Member States the National Regulatory Authority is empowered to define common operational procedures to deal with such return/undelivered mail (CY, DE, FR, IE, LT, PT, SE, UK) while in three others (HU, NL, SE) this is dealt with on a voluntary basis.

The issue at Community level is whether to strengthen Member States' or National Regulatory Authorities' ex-ante role in the monitoring and/or in mandating of access to essential means, and in the establishment of procedures that will help assure the reliability of postal services in a multi-operator marketplace.

How will the issue evolve and who is affected?

Given the differences in how postal services are provided, in practice the necessary means differ across Member States, as does their ownership, and the day-to-day management of these issues. It is clear today that the issue may not be a problem in all Member States. In at least 3 Member States, common operational procedures have been freely negotiated already. However the lack of guaranteed (through not necessarily free) access to 'essential means' would be a significant disincentive for operators to enter the market. If however operators did enter the market, without access to these means, it is probable that consumers would receive a poorer standard of service from these operators, and this could serve to undermine users' confidence in new entrants, or the mail service overall.

Other issues identified

The issue of VAT has not been addressed in this proposal since the Commission has already adopted a proposal on this that is pending approval by the Council[29].

If the Community chose to maintain a role in the sector and retain the current framework, the 2006 proposal for amending the Postal Directive could also be an opportunity to make minor adjustments to the current regulatory framework: for example clarifying the importance of de facto independence and tasks of national regulatory authorities; ensuring effective consumer complaints procedures are in place and providing a legal basis for collection of statistics by national regulatory authorities, and underlining the fact that Member States retain the possibility of having a free postal service for blind and partially sighted persons.

Does the Community have the Right to Act?

Legal Basis

In order to attain the accomplishment of the internal market for postal services, in particular the achievement of the freedom of establishment and free provision of services, it is necessary to adopt or amend some measures of the approximation of the provisions laid down by law, regulation or administrative action in Member States. In that context, as for previous Directives, the use of Article 47(2) Article 55 and Article 95 of the EC Treaty appears to be appropriate.

Necessity

The absence of a Community approach to this Service of General Economic Interest could result in cases where Member States would adopt divergent policy directions. These could endanger the effective functioning of the Internal Market, with knock on effects on those sectors dependent on postal services; such directions could as well be potentially prejudicial to social and economic cohesion particularly in disadvantaged or outlying regions of the Community.

With respect to improvements in cross border mail, and technical standardisation, compared to a Community approach, Member States have less effective instruments for action. The alternative would be a system of bilateral agreements, which would be difficult to obtain across all Member States.

Subsidiarity is further examined on each of the options considered to address the main issues: namely universal service scope and standards, its financing, and access to infrastructure and essential means to assess whether a particular option for action at Community level is more or less appropriate.

Fundamental rights

Reflecting the spirit of the EC Treaty (Article 16), the EU Charter of Fundamental Rights recognises the values underpinning services of general economic interest - specifically Article 36 reads: "The Union recognises and respects access to services of general economic interest as provided for in national laws and practices in accordance with the Treaty establishing the European Community, in order to promote the social and territorial cohesion of the Union."

Objectives

Postal services play an important role in underpinning territorial and social cohesion. Yet it is also because postal services are closely interlinked with general economic activity that a central aim of the Community policy is that all citizens and businesses should enjoy a high level of postal service provision. Market opening, combined with proportionate sector regulation has stimulated reforms for Member States. The aim is to ensure that market opening will secure benefits for all.

Thus, in response to the context of Community policy as outlined in Section 1, and the issues identified in Section 3.2, the Commission has identified the following policy objectives for this specific proposal.

Overall objectives:

To achieve an Internal Market for postal services where the benefits of reform are shared by all EU citizens and businesses:

- To maintain affordable and high quality universal service for citizens and businesses

- To achieve full market opening

- To reduce market distortions / barriers to the Internal Market

More specifically:

- To continue to pursue the reduction and the eventual abolition of the reserved area as the main obstacle to the Internal Market

- To ensure proportionate use of alternative universal service safeguards or financing mechanisms

- To ensure fair access to postal infrastructure

POLICY OPTIONS

The policy options are at two levels. The first covers the 'high level' options - which reflect the broad policy choices facing the Community concerning how to act (section 5.1).

The second level (section 5.2) concerns the specific policy options that correspond to the issues described in section 2. The selection of the 'second level' options will in many cases be linked to the high level choice – for example the high level option to let the current Directive expire and not to replace it effectively precludes some of the second level options which assume some form of EU intervention. At the same time, some specific policy options are possible under more than one high level option. At the end of this section a summary table with all options is presented.

High level policy options

The following four 'high level' policy options have been identified:

Option A - no action by the Commission - this is the so-called 'baseline scenario' which was already described in the issues sections under 'how will this issue evolve'. In this option there would be no legislative proposal. Given the expiry of the current Postal Directive on 31 December 2008 the postal sector would then be governed primarily by EC Treaty rules.

Member States would, under this option, determine universal service and associated quality standards throughout their territories, in accordance with international agreements and international treaties - such as the (more general, less demanding) Universal Postal Union obligations. Member States would be unlikely to quickly lower the current standards and revoke the provisions of the Community framework already transposed, but this possibility cannot be excluded with certainty. A more divergent framework could have negative impacts on social and territorial cohesion, and the probable increase in regulatory asymmetry across Member States would lead to a more 'uneven' playing field and maintain or increase barriers to an Internal Market in this sector.

Postal services are a part of Services of General Economic Interest. The Commission would still retain legal power to act according to Article 86 EC Treaty through Directives or Decisions in order to determine the balance between the Community interest in the development of trade and Member States' interest in the financing of universal services through, for example, reserved areas. A 'case by case' approach could lead to increased EU transaction and monitoring costs, and potential legal uncertainty of Member States and operators.

Option B - substantially new and comprehensive Directive for an open postal market - in line with the current Postal Directive's ambition for the full accomplishment of the postal internal market, a new regulatory framework could be proposed consistent with this.

With the current Directive's target date of 2009 for full market opening as a starting point, this option would provide a substantially modified Community framework anticipating a fully competitive postal market. It would provide stakeholders with a fully harmonised approach to all sector issues, and prescribe and enforce a 'level playing field'. By starting with an entirely new Directive, this approach would also facilitate legislative simplification, though would require substantial transposition efforts by Member States.

Although there remains some doubt that all provisions of the current Directive are being applied with equal rigour across the Community, there is no evidence that the current Community framework is substantially inadequate. Moreover, national characteristics and differences in users' needs are likely to preclude a universally valid, proportionate, and acceptable solution to Member States.

Option C - prolongation of the existing Postal Directive beyond 2009 , the date of the "sunset clause"- in this option the sunset clause ("expiry clause") in Article 27 would be deleted, but all other elements would remain unchanged.

This option would retain the Community minimum universal service standards, and regulatory framework. Yet it would also essentially retreat from the agreed target of a fully open postal market by 2009, since it would continue to explicitly permit monopolies in the sector. The current Postal Directive stipulates that the reserved area is permitted only to the extent necessary to maintain universal service – however, the proportionality test of the current Directive is rather loosely constructed and may trigger infringement proceedings by the Commission and with it legal and commercial uncertainty of operators and employees.

The reduction of Community impetus to market opening is likely to delay important sector restructuring, inhibit dynamic efficiency, limit the development of choice and innovation, and in the longer term could undermine the comparative competitiveness of the postal sector to other communications media and thereby put sector employment at severe risk. A decline in comparative competitiveness of mail could reduce demand by business for mail services. This is an important element as businesses generate almost 90% of mail volumes. It could consequently reduce Member State's ability to provide citizens with access to postal services at affordable prices, in addition to negative impacts on direct and indirect employment. This is sometimes termed the 'cost of no change'.

Option D - adapting the existing Directive to the extent necessary for an open postal market – it implicitly recognises that the maintenance of a high quality universal service and full market opening (i.e. abolition of the reserved area) are compatible and allow the closer attainment of the Community's objectives for the sector.

This option would maintain and build on the existing Directive's framework, which is already transposed and substantially applied, with modifications only where needed given recent and expected market developments, as highlighted in section 3. Full market opening implies that the reserved area existing still in some Member States would be abolished in all Member States from 2009.

The option does not trigger a 'back to basics' review of Community objectives. It does recognise that new technologies have had a differentiated impact across genders, population ages and regions which make postal services still an essential communication service for many citizens. But given rapid change in the broader communications market, this option implicitly recognises the increased risk to the sustainability of postal services by delaying or stopping altogether market opening, and with it, the associated sector reforms, dynamic efficiency and innovation.

A disadvantage of this option is that, by retaining the ‘enabling framework’ approach that requires interpretation and more detailed codification at Member State level prior to transposition, there is a risk that some Member States may not adapt existing national frameworks appropriately in the first instance, resulting potentially in increased infringements. Also, while this option would be guided by the principles of 'Better Regulation', it would not necessarily result in further substantial legislative simplification at EU level.

The table below examines the high level options specifically from the perspective of consumers and SMEs.

Option A: 'Do nothing' / Directive expires | Option B: 'Substantially new postal Directive' i.e. increased harmonisation of universal service elements and full market opening | Option C: 'Delete sunset clause – retaining all other elements' | Option D: Adapt current Directive to the extent necessary for full market opening; abolition of the Reserved Area |

Pros MS full flexibility to choose standards –(minimal supra-national regulation); in the short term no noticeable change to consumers since the current EU universal standards are transposed and already complied with | Pros Complete equivalence of universal service obligations (no consumer in Europe receives different service above or below a specified standard); would ensure equal social cohesion at EU level; also allows for competition in the sector which could bring indirect benefits to consumers (e.g. better quality and more reliable delivery). Increased clarity regarding the service level and funding of public service activities that are entrusted or provided de facto in parallel to the Community universal service obligations by some Member States. | Pros Current universal service standards remain unchanged at EU level; some consumer (non-competitive) services could remain subsidised by other users (e.g. business mail); current scale economies not diluted. | Pros Current universal service standards remain unchanged at EU level; MS can go above (but not below) EU standards in the light of consumer needs. Possibility of uniform tariff for individual consumers and SMEs, and affordability requirement maintained. Increased clarity regarding the service level and funding of public service activities that are entrusted or provided de facto in parallel to the Community universal service obligations by some Member States. |

Cons Longer term risk of degradation of standards at national and EU level and more difficult access, given no common EU universal service definition if Member States decide to change their national regulations; no immediate incentive on incumbents to become/remain efficient combining with the risk of sustained price rises given no affordability requirement | Cons Agreement by Member States on the specified standard likely only at a lower level than today – risk of a 'race to the bottom'. Takes away MS ability to define universal service according to consumers' needs, historic and future preferences Imposes a service level and network cost that may result in prices in excess of what consumers are prepared to pay for Increased competition may result in the curtailment of inadequately funded public service activities that are entrusted or provided de facto in parallel to the Community universal service obligations in some Member States | Cons Monopoly could stay in place – but given this would cover 70-85% of items, it is likely to limit operators' drive for postal service improvements for consumers, principally as receivers of mail. Medium term, could put at risk the viability of universal service due to the comparative decline in competitiveness and hence demand for the mail sector by business Risk of significantly weaker incentives on operators to innovate and restructure and improve the service to consumers. | Cons Financing of the universal service through cross subsidy between business mail and consumer mail gradually reduced, as prices become more cost reflective – may result in price increases for consumers purchasing mail (offset in part by indirect price reductions for consumers receiving mail from businesses). Increased competition may result in the incumbent operator curtailing inadequately funded public service activities that are entrusted or provided de facto in parallel to the Community universal service obligations by some MS, which could in turn have an impact on social and territorial cohesion |

Specific policy options

In this section the detailed policy options are presented. For each of the main issues described above in Section 3.2 - namely, scope and standards of universal service, reserved area and financing mechanism, access to essential means and downstream access, a number of options on how to tackle this issue are proposed. Each specific policy option also corresponds to a high level option. Each option starts with a short description, followed by a list of pros and cons listed in order of importance.

Policy options related to universal service scope

Option 1 - no change option – it leaves the provisions of the Directive unchanged – as described in section 3.2.2, only the minimum range of postal items would have to be provided on a universal basis preserving existing flexibility for Member States to define the detailed product scope.

Pros | Cons |

Existing framework already allows very light touch regulation of universal services to make "service-by- service" adjustments Pace and extent of development of effective competition in national bulk markets differs across Member States – option reflects this Allows for more Member States to carry out a more detailed sub-market / substitute product characteristics, analysis including consultation before taking a decision Allows for taking into account the expectations of those receiving mail in outlying/remote areas | Some legal/commercial uncertainty - present universal service providers remain dependent on Member State or National Regulatory Authority decision regarding scope; new entrants uncertain regarding likely development of competition, and extent of pre-emptory action by incumbent Time lags between changes in the market and deregulation decisions (i.e. if now or in future the market supplies a bulk service adequately, according to the least distortion principle the obligation should be progressively phased out) |

Option 2 - scope focussed on consumer / SME products - its main aim would be to limit at EU level the current scope of Universal Service obligations to single piece items only. Under this option the universal service would be defined in terms of a ‘consumer and SME safety net’, and bulk and direct mail would no longer explicitly be included as part of the universal service. Constraints on bulk mail would therefore be reduced, but affordability requirements would be maintained for the universal service. Member States would by implication retain the authority to require uniform tariffs for single item mail only.

Pros | Cons |

In many Member States, for some sub-markets there are alternative providers of bulk mail - competition provides bulk users with choices Bulk mail senders are often businesses with bargaining power (even SMEs may associate to obtain it) Restricting universal service scope to single piece focus (and associated public intervention) may be a more proportionate intervention than for all products | Competition is established but not yet effective (in terms of significant influence on market) in all Member States – and may take several years in lower volume markets Given this, a harmonised approach may be premature Does not take into account the expectations of receiving customers in outlying geographies Interferes in the basic conception of universal service as a last resort service vs. trade enhancing infrastructure |

Policy options related to universal service standards

Option 3 - harmonised standards to create harmonised obligations means a re-definition of the universal standards of the Directive (in Art 3) as obligatory and not minimum standards. This harmonisation option would imply a ceiling regarding obligations, but also a minimum level based on the current Directive.

Pros | Cons |

Creates a 'level playing field' in terms of postal services obligations and associated public intervention across all Member States Prevents exaggeration of consumers' needs based on other considerations, although difficult to distinguish between genuine and exaggerated needs | Not practicable at EU level in current framework – the present Directive not specific anyway regarding some standards, e.g. affordability, possibility of uniform tariff, domestic quality of service Does not allow the universal service to evolve according to consumer needs at national level – users needs not homogenous throughout the EU For UK/DE/DK/FR/NL and SK in some areas, this could mean a reduction in collection and delivery days per week from 6 to 5 Harmonisation of standards aims to achieve equality in obligations – but reality is that cost drivers (labour, scale, geographic density) highly significant and not harmonised, nor is the user's willingness to pay for a given service level the same in all Member States–resulting in practice in uneven obligations |

Option 4 - no change so current standards remain Community minimum rules - it leaves standards of the Directive as minimum rules e.g. collection and delivery at least 5 working days a week to all points of a Member State territory, requiring affordability and accessibility without further specification.

Pros | Cons |

Allows MS sufficient flexibility to adapt to national expectations Basic services to ensure Community cohesion retained On a general level, majority of stakeholders are content with the EU definition at present | Maintains only weak impetus for ensuring standards at MS level are in line with consumers needs Does not address some concerns that standards are sometimes 'gold plated' at national level, by Member States laws and/or Regulators |

Option 5 - unchanged standards but uniform tariff permitted for single piece items - it leaves standards of the Directive as minimum rules (collection and delivery at least 5 working days a week to all points of a Member State territory, requiring affordability and accessibility without further specification) but a uniform tariff may only be applied to single piece mail and certain other items.

Pros | Cons |

The possibility to price bulk mail non-uniformly creates a more 'level playing field', corresponds to the principle of cost-relatedness of prices and will assist an efficient universal service provider to retain sufficient market share in bulk mail markets to continue to finance consumer / SME obligations It allows Member States to apply uniform tariffs for single piece items where they judge it necessary – used particularly by individuals and SMEs The same or similar to already existing policies in several MS (NL, UK, DE, FI, SE, with no requirement in CZ, IE, IT) | Some Member States have addressed the scope of application of uniform tariffs through different user ways (e.g. applying uniform tariffs only to reserved services, or to non bulk correspondence), or by adjusting the product scope of universal services |

Policy options related to the reserved area and universal service financing mechanisms

Option 6 - no action – it means that the Directive expires at the end of 2008, the reserved area could be maintained, and there is no European sector-specific legislation. Universal service financing would be subject to the EC Treaty that allows in particular the Commission to adopt Decisions and Directives.

Pros | Cons |

Decisions and Directives may be undertaken by the Commission under Article 86 (3) EC Treaty State aid package has improved legal certainty and monitoring for state aids | Weakened Internal Market benefits if monopoly retained, and possibly lower drive for internal efficiency by protected operators Uncertainty of operators regarding whether they will satisfy the Court's Altmark criteria for state aids to support universal service provision, or that Member States will pre-finance obligations A Commission assessment on a case by case basis of any reserved areas will result in a likely increase in infringement and enforcement activities |

Option 7 - harmonised detailed universal service financing conditions in the absence of a reserved area – it would harmonise conditions for financing the universal service to choose one model covering: a) concept of "unfair financial burden", b) calculation method (calculation principles and tendering as an alternative calculation method), c) clarify who can be required to contribute, d) contribution principles.

Pros | Cons |

Would increase transparency for society on costs of universal service and allow comparability between Member States and limit disproportionate measures General contribution principles may be agreed on – done successfully in other sectors (e.g. telecoms) May limit market distortions (e.g. illegal cross-subsidies) | Divergent stakeholder views on how to calculate – agreement realistic only at a general level at EU level but insufficient for effective transposition Unnecessary for all given that for some Member States financing is not an issue A 'one size fits all' may not be available or appropriate |

Option 8 - maintain the current Directive through a deletion of Article 27 (i.e. taking out the expiration date) - it extends the existing Directive beyond 2008, such that universal service financing continues to be permitted through a reserved area proportionate to financing universal service. The imposition of universal service obligations on entrants, the establishment of a compensation fund and state aids under EC Treaty rules are also therefore retained.

Pros | Cons |

Minimal legislative intervention (though potentially increased monitoring) Commission would still retain legal power to determine necessity/extent of reserved areas (86 EC Treaty) on a case by case basis Maintains a (largely) predictable source of financing for the incumbent operator | A permanent reserved area would be incompatible with the Community goal of full market opening and would distort competition in postal sector. Substantially less, if any, 'level playing field' and postal internal market, and weakened benefits to postal users at a national level, and the wider EU economy Would de facto stop EU postal reform and frustrate the evolving dynamics of the market Proportionality test is not transparently applied currently for the reserved area Introducing a narrower reserved area through a lower weight step is unlikely to be significantly more proportionate (85% of items of correspondence generally weigh less than 50g, 70% are also under 20g) |

Some stakeholders have indicated that a delivery monopoly could be an appropriate intermediary step to full market opening, or indeed an appropriate 'final step' to create a situation analogous (to a limited extent) to the situation in the United States where the US Postal Service retains a delivery monopoly, but has controlled retail and wholesale prices, regulated access and is not permitted to make a surplus. Typically, delivery activities represent approximately 50% of the total universal service provider's costs for delivering letters.

There are a number of complex issues here that mean that a delivery monopoly is not considered to be an appropriate option:

- In some geographic areas (rural deliveries in particular) postal services exhibits some natural (not bottleneck) monopoly characteristics on account of the low economies of density of delivering to these areas. There is therefore an economic welfare case for retaining scale economies in delivery through a monopoly, rather than have them potentially dissipated across several competing delivery providers. However this implicitly (and probably incorrectly) assumes that in the absence of competition the incumbent operator would achieve lower unit costs than what would be achieved through a combination of competitive pressure, dynamic efficiency and innovation following market opening.

- In practice however, the retention of delivery economies of scale and density can already be achieved by the incumbent through offering efficient but non-discriminatory special tariffs to consolidators, or through a voluntary negotiated access regime or even through mandatory access.

- Given delivery costs represent c.50% of the total costs, a complete monopoly on delivery would seem disproportionate given that the actual uneconomic network costs of providing universal service obligations are significantly lower than 50% of the total costs.

- Given only parts of the postal value chain exhibit natural monopoly characteristics (next day delivery in rural areas) and competition is viable in other areas the application of a monopoly to the entire delivery process seems a disproportionate regulatory intervention.

- Alternative delivery businesses are already established in many markets the introduction of a complete delivery monopoly could potentially infringe property rights.

- The retention of a delivery monopoly for items under 50g would effectively kill off all non-niche competition for addressed mail since the vast majority of items are under 50g, and there would be insufficient available volumes to sustain efficient competition for this sub-market.

- Experience of market opening in other network industries suggests that there is a risk of the abuse of a dominant position in a vertically integrated enterprise where parts of the value chain remain under a de facto monopoly. Any 'last mile' monopoly option would almost certainly require strengthened ex-ante control to regulate this potential for abuse, i.e. in addition to the accounting and financial separation requirements already specified in the Postal Directive. Although ex-ante controls could conceivably be limited to organisational separation (ring fenced management) structural vertical separation (establishment of separate upstream and downstream companies) would be the probable end result. In the United States the risk of abuse is limited by the fact that prices are set by the Postal Rate Commission at a level that allows the operator to cover its costs and normal investment needs, but not to create 'super profits'.

Option 9 - exhaustive financing mechanisms list – under this option, the reserved area is abolished, therefore an exhaustive list of permitted models for financing universal service would be provided. It would include state aids, procurement procedures, internal cross-subsidies, compensation fund, and universal service fees on universal service market players – several of which are already available and/or applied.

Pros | Cons |

Leaves Member States initially to determine proportionality of the financing Highlights Member States' choices and ability to determine most appropriate mechanism but limits use of disproportionate safeguards, for some Member States no mechanism will be required Limits application of disproportionate safeguards Leaves Member States significant flexibility to regulate on the basis of national needs and features (subsidiarity). | Some may oppose judging that these are imperfect or no alternative to monopoly financing. Stakeholders tend often to want other groups (e.g. the state, other users etc) to contribute rather than themselves, and are distrustful of internal efficiency efforts of universal service provider to minimise the any financing required Assumes (optimistically) that the availability of financing will not affect rate of ongoing improvements in efficiency by the universal service provider, including gradual alignment of labour costs to market competitive rates Potentially increases the need for monitoring of proportionality by Commission |

Policy options related to access to essential means

Option 10 - mandatory access to harmonised and exhaustive list of means - it would allow a mandatory access for market operators to the following elements: postcode system, address database, post office boxes, collection and delivery boxes, information on change of address, re-direction service, and return to sender service.

Pros | Cons |

Complete achievement of objectives in terms of level playing field and consumer protection: all Member States regulate all issues in an equal way | May lead to overregulation /intervention– imposing a solution where there may not be a problem – some Member States have resolved without regulatory intervention |

Option 11- no change to the current situation – it would leave these issues to the market and to competition rules and essential facilities doctrine

Pros | Cons |

Member States may still regulate the issue when and how they consider it a problem (some have e.g. SE, NL, FR, DE) | May not provide a sufficient signal to tackle the potential problems, leading to uneven EU playing field, lack of competition, insufficient consumer protection in a crucial market opening moment |

Option 12 – leave discretion for National Regulatory Authorities - they could identify the essential means, and assess if access is necessary for any of these elements: postcode system, address database, post office boxes, collection and delivery boxes, information on change of address, re-direction service, and return to sender service.

Pros | Cons |

Respects subsidiarity: allows Member States flexibility to determine 1) whether access to any particular piece of infrastructure is a problem in its own national context, 2) how to address it Signal to achieve an even EU playing field with effective competition but provides also consumer protection in a crucial market opening moment Draws on experience of some Member States (SE, NL, FR, DE) Provides for certain degree of transparency | Might be considered as 'unnecessary' due to different Member State situations (e.g. potential for market entry). Limited harmonisation, inhibiting the application of pan-European competitive business models – possible negative Internal Market effect |

Policy options related to access downstream access

Option 13 - mandatory downstream access and harmonised rules

Pros | Cons |

EU level playing field by imposing same model in all Member States may (outside the delivery 'last mile') accelerate the development of competition and choice by removing one natural barrier to entry (delivery scale economies) May stimulate innovation, process reengineering and investment in the upstream processes by consolidators, and reinforce efficiency and restructuring by the incumbent in its upstream processes Access may protect delivery volumes and hence jobs in the incumbent | May be perceived as over regulating by imposing a solution instead of a "negotiated" access regime Probably contrary to the 'essential facilities' test May not increase quality and innovation /investment in the delivery network Not all Member States 'need' mandated access for competition to develop (e.g. high delivery density, low efficiency of universal service provider and high prices all make entry possible) In practical terms, technically difficult for regulator to identify optimal access pricing (i.e. competitively neutral, but which also retains efficiency incentives and a contribution to universal service) Difficulty exacerbated when end to end competition exists alongside mandatory access. Likely to result in some market distortion Low access prices may distort the development of end to end competition, and provide a de facto monopoly in delivery |

Option 14 – insert an explicit provision allowing MS to identify the need for mandatory access in order to promote competition

Pros | Cons |

Recognises that full market opening may not be sufficient for the development of choice in the marketplace in all Member States Particularly in low volume countries scale economies in delivery are important for maintaining low unit costs that contribute to an affordable universal service | Only reiterates what is already possible, and therefore may create legal uncertainty May be considered by some as an incentive to regulate downstream access; in turn this may lead to undesired results /new market distortions since access regulation is difficult to implement in a competitively neutral way |

Option 15 - oblige the dominant operator or the operator using a former public network not to refuse downstream access under appropriate conditions

Pros | Cons |

Promotes EU level playing field by imposing the same (albeit only general) model in all Member States Does not over-regulate leaving MS the choice for a "negotiated" access regime or a regulated one | No demand for it from most Member States In the main, already covered by general competition law (refusal to supply by dominant operator) |

Option 16 - maintain the current Directive rules - non discriminatory access taking into account avoided costs

Pros | Cons |

Allows Member States to take decision on the basis of national conditions Allows "competition" between business models: assumes no single winning model (both have advantages and disadvantages) but that the market will determine this Harmonisation may take place at a later stage on the basis of Article 11 (if the current framework is maintained) Competition Law provides a general framework with respect to abuse of dominant position, and non-discrimination | May lead to diverging national developments with possible implications for internal market – though probably minor May lead to protection / last mile monopoly of incumbent if Member States decisions are not correct/biased |

Preliminary assessment of options

Table 2 summarises the 16 options covered in the pros/cons section above together with corresponding high policy options. Table 3 reflects an initial evaluation of the 4 'high level' policy options (section 5.1) by assessing how they contribute to the achievements of the EU postal policy objectives.

Table 4 identifies 6 of the 16 policy options that have been 'screened out' at the preliminary stage based on either the evaluation of the pros and cons of the individual option, (lack of) consistency with the high level options, or (lack of) contribution to the overall proposal's objectives.

Section 6 then highlights the impacts of the 10 retained options.

This table summarises all the options considered in section 0, and aligns them to the high level options A/B/C/D from the section 5.1 to assess potential policy coherence.

Table 2 : Summary of all options considered

High level options in (section 5.1) | Option A 'Do nothing' / Directive expires | Option B 'Substantially new postal Directive' | Option C 'Delete sunset clause – retaining all other elements' | Option D Adapt current Directive to the extent necessary for the full accomplishment of the internal market; abolition of the Reserved Area |

Specific policy options (section 5.2) |

Universal Service Scope (Section 3.2.2) | No EU universal service scope – more general UPU rules apply | Option 1 - no change – existing flexibility' | Option 1 - no change – existing flexibility' | Option 1 - no change – existing flexibility OR Option 2 – scope focussed on consumers /SME products |

Universal Service Standards (Section 3.2.3) | No EU Standards – lower UPU rules | Option 3 - harmonised standards and obligations | Option 4 – no change – current EU standards remain minimum rules | Option 4 – no change – current EU standards remain minimum rules OR Option 5 – as option 4 but uniform tariff permitted for single piece items and other items if appropriate |

Reserved Area and Financing mechanisms (Section 3.2.4) | Option 6 - no intervention: EC Treaty rules; reserved area potentially allowed | Option 7 - harmonised conditions for financing, including calculation of universal service obligation costs, no reserved area | Option 8 - maintain the current Directive through a deletion of Article 27 therefore reserved areas, obligations on entrants and compensation funds retained | Option 9 – abolition of reserved area; exhaustive list of permitted models – including state aids and compensation funds |

Access to essential means (Section 3.2.6) | Option 11 - no change - Subject to general competition law and Member States discretion | Option 10 -mandatory access to harmonised and exhaustive list of 'essential means' | Option 11 - no change - Subject to general competition law and MS discretion | Option 12 - oblige NRAs to identify need for access to essential means |

Access to infrastructure / downstream access (Section 3.2.5) | For Member States to determine | Option 13 - impose mandatory downstream access and harmonised rules OR Option 14 - insert provision explicitly allowing MS to identify the need for access to promote competition / retain scale economies in delivery | Option 16 - current Directive's rules: non-discriminatory access, subject to commercial negotiation taking into account avoided costs | Option 15 - oblige dominant operator not to refuse downstream access under appropriate conditions OR Option 16 - current Directive's rules: non-discriminatory access, subject to commercial negotiation taking into account avoided costs |

These high level A/B/C/D options are summarised as follows assessing their contribution to the objectives.

Table 3 : Comparison of high level policy options

Evaluation Criteria Options | Maintains high quality universal service for citizens and businesses | Achieves full market opening | Reduces market distortions / barriers to the internal market | Strong on Subsidiarity |

Option A | ( | ( | (( | ((( |

Option B | ( | (( | ( | (( |

Option C | ((( | (( | ( | (( |

Option D | ((( | ((( | (( | (( |

Key ((( (Strong) (( (Moderate) ( (Weak) positive contribution to objectives ((( (Strong) (( (Moderate) ( (Weak) negative contribution to objectives

Although Option A has the strongest subsidiarity element, the objective of maintaining universal service and creating an internal market may be undermined by potentially divergent approaches across the Community, given that the Universal Postal Union rules that would apply are much more general. Full market opening would not be achieved with certainty.

By providing a harmonised approach, Option B may fail to take account of national characteristics. It could result in a universal service definition that does not meet the heterogeneous needs of users across the Community, and incorrectly anticipate the level of market competition and appropriate corresponding regulatory framework. High level options A and B were therefore rejected at the initial screening stage. Conclusions on high level Options C and D are made in the light of more detailed analysis of impacts of each retained policy options in section 6.

The following specific policy options were rejected at the initial screening stage.

Table 4 : First screening of specific policy options

Options eliminated | Rationale |

Option 3 - harmonised universal service standards and obligations with an EU ceiling | Contrary to subsidiarity |

Option 6 - no intervention - EC Treaty rules, reserved area allowed | Contrary to the goal of full market opening; the Prospective Study suggests a greater range of financing mechanisms could be beneficial |

Option 7 - harmonised conditions for financing, including calculation of USO, reserved area abolished | Theoretically attractive, but near-impossible to gain detailed agreement on content |

Option 10 - mandatory access to harmonised and exhaustive list of 'essential means' | Contrary to subsidiarity; over-regulates where voluntary agreements may suffice; may infringe ownership rights |

Option 13 - impose mandatory downstream access and harmonised rules in the Directive | Over-regulates where voluntary agreements may suffice; may infringe ownership rights; current Directive gives guidelines on special tariffs with Art 82 EC providing complementary 'backup' |

Option 14 - insert provision explicitly allowing MS to identify the need for access to promote competition / retain scale economies in delivery | Parameters of promoting competition essentially an issue for Member States to consider |

ANALYSIS OF IMPACTS OF RETAINED OPTIONS

Impacts of options on Scope of Universal Service

Option 1 - no change – existing flexibility - leave the provisions of the current Directive unchanged

Impacts on Users | Impact on sector Employment | Potential Economic Impact |

Consumers / SMEs No change to Directive so no change to Consumer / SME senders' access to basic products. However current Directive has subsidiarity element that still allows for Member States to have narrower product definitions – this could still mean that some consumer /SME products are decided by a Member State to be no longer 'universal' e.g. post restante, newspapers. Bulk users Positive or negative impacts linked to how Member States interpret the Directive – potentially negative if scope reduced prematurely (competition is inadequate force on incumbent and limits bulk users' access to choice of products) but any decline in universal service providers' service and choice would provide opportunity for alternative providers. | Essentially depends how flexibility is used – if product scope is already in line with consumer needs then impact is unlikely to be significant. Only where the universal service scope is used as a tool to maintain levels of employment servicing users (business and individuals) beyond what they are prepared to pay for could this have a negative employment effect (essentially this is increasingly unsustainable following market opening). | Positive If scope is allowed to adapt, in the light of market changes this should trigger a closer alignment of prices to costs, and in turn a closer alignment of users needs to willingness to pay. These features will vary by country, and hence a 'subsidiarity' approach may be economically more efficient. Negative Over specified price and service obligations could result in inefficient market intervention and the need for complex supervision / regulation at Member State level. |

Option 2 – universal service scope focussed on consumers / SMEs products

Impact on Users | Impact on sector Employment | Potential Economic impact |

Consumers / SMEs Consumer / SME senders protected so no change; slight risk that bulk and direct mail volumes to outlying areas would decline, or that rural consumers offered differentiated (higher) prices by business mailers. Bulk users Bulk users – potentially negative if scope reduced prematurely (competition is inadequate force on incumbent). Bulk users are likely to pass on some of the benefit of lower prices to consumers. | Positive Positive impact for sustainable incumbent employment- implies freedom for non-uniform prices for most or all bulk mail, allows incumbent to react to market entry, maintaining a significant market share and hence minimising job reductions. Positive for medium – long term entrants, in terms of sustainable new jobs created. Negative Restricts employment opportunities with 'inefficient' entrants i.e. 'cream skimming' business models. | Positive Progressively reduced cross subsidy between businesses and households - users of products and services would increasingly pay for the products and services they use on to more efficient provision of bulk mail. Reduced likelihood of requiring alternate financing mechanisms. Negative The apportionment of universal service costs between business and individuals is difficult to achieve – if not done correctly however households could end up indirectly subsidising businesses who want to reach them via a universal service. |

Impacts of options on universal service standards

Option 4 - no change – current standards remain Community minimum rules

Impacts on Users | Impact on sector employment | Economic impacts |

Consumers / SMEs Key product /services retained i.e. neutral impact. Bulk mailers Potentially disparate national regulation of competitive market standards – does not facilitate further proper functioning of the Internal Market. | Neutral | Positive Obligations defined at a minimal level to secure social and economic cohesion. Negative Would not prevent exaggeration of consumers' needs or gold plating based on other considerations – potentially flowing through to license conditions for entrants and/or need for financing. |

Option 5 - no change – current standards remain Community minimum rules, but uniform tariff permitted for single items only

Impacts on Users | Impact on sector employment | Economic impacts |

Consumers / SMEs – no change; SMEs may associate /use consolidators to gain access to non-uniformly priced postal services if they wish to. Difficult to define 'single items' Slight risk that businesses mailing to users living in destinations with above average costs to deliver would differentiate their prices – passing on savings to some but surcharges to others. Bulk mailers Potentially disparate national regulation of competitive market standards – does not facilitate further proper functioning of the Internal Market. | For universal service provider – the right to apply non-uniform tariffs to bulk mail allows them to fight market entry on a 'level playing field' and – assuming they maximise their scale advantage and improve their efficiency – to retain significant market share and employment levels. Employment creation by new entrants / SMEs based on undercutting the uniform tariff on business mail would be effectively prevented. | Positive May foster efficient market entry Still allows for some internal cross-subsidy of business mail profits to fund consumer area. Negative Authorises ex-ante regulation on one element where the same would probably be achieved through commercial decision making anyway (complexity / transaction costs of multiple tariffs for single item mail) – so in some instances this would be inconsistent with 'least market intervention'. |

Impacts of options on reserved area and universal service financing mechanisms

Option 8 - maintain the current Directive through a deletion of Article 27 - reserved areas, also obligations on entrants and compensation funds retained.

Impact on Users | Impact on Sector employment | Economic impacts |

Consumers /SMEs – In those countries that retain a reserved area, in the immediate future no significant change at national level – but also no incentive to improve quality /choice/innovation. Bulk users Likelihood of a growing disparity of prices and service between countries that have opened up vs. those that retained a reserved area. Other impacts If service obligations imposed on new entrants are imposed in addition to contribution obligations (i.e. disproportionately) this could effectively kill off any opportunity for market entry – and the development of choice in service provider for users. | Employment In the short term maintenance of the reserved area reduces pressure on incumbent to restructure. May have advantages where a Member State is in a phase of high unemployment, but probably not sustainable long term. Dynamic efficiency and innovation brought about by market opening may provide more sustainable employment. Disproportionate application of safeguards would limit jobs created by new entrants. | May simply delay the restructuring that is necessary because of other exogenous developments (e.g. new technologies /alternative media). Likely to reduce opportunity for dynamic efficiency. However, if the reserved area was genuinely proportionate to the uneconomic activities and the services in the monopoly area were provided efficiently – then the retention of economies of scale by a monopoly provider could be more welfare enhancing than a combination of competition and dynamic efficiency offset by economies of scale dissipated across several providers. Divergent examples of liberalised industries, but preponderance of empirical economic studies suggest that greater welfare gains are achieved without monopolies, not withstanding the (theoretical) attraction of the monopoly provider operating at the efficiency frontier. |

Option 9 – a reserved area abolished and therefore an exhaustive financing mechanisms list is proposed, including state aids, procurement procedures, internal cross–subsidies, compensation fund, and universal service fees on universal service market players.

Impact on Users | Impact on Sector employment | Economic impacts |

Permits a broad range of financing mechanisms – with the exception of the reserved area, which will ensure the maintenance of universal service and would be complementary to Option 5 preventing inefficient 'cream skimming' entry Allows Member States to also factor in contribution by individual users (e.g. through retail price controls), or market players (e.g. through fees). Increased competition may result in the incumbent operator curtailing inadequately funded public service activities that are entrusted or provided de facto in parallel to the Community universal service obligations by some MS, which could in turn have an impact on social and territorial cohesion[30] | No direct impact as different financing mechanisms do not affect levels of employment as such – provided that they are each applied in a proportionate way to any uneconomic obligations. Employment by universal service providers would have to decrease if there was inadequate application /revenue collection of a financing mechanism at Member State level. Disproportionate application of safeguards would limit entry jobs created by new market players. | Positive Universal service retained – direct and indirect contribution to economic cohesion. Increased proportionality of alternative financing measures likely to enhance economic welfare. As shown in many studies, market opening in postal sector has resulted in lower prices and increased productivity[31]. Lower prices have the biggest impacts on business users as they send majority of postal items. Negative Universal service providers still required to pre-finance their activities – potential cash flow issues to be managed. If balance to finance is significant (because of high levels of efficient market entry) then this may create regulatory costs in the setup and monitoring of alternative mechanisms. New entrants may face investment uncertainty (in case of future universal service contribution obligations) leading to reduced competition in some Member States. |

Impacts of options on 'access to essential means'

Option 11 - no change - leaving access issues to the market and to competition rules/essential facilities doctrine

Impact on Users | Impact on Sector employment | Economic impacts |

Leaves to Member States the issue of how to protect users' interests in a multi-operator environment; risk that some Member States may only take action once a problem has emerged– and consumer satisfaction already diminished. | No direct effects however legal uncertainty would not facilitate small /regional based entrants (and hence employment) – since only large potential entrants likely to tackle these issues based on a competition law complaint. | Positive Does not risk distorting adjacent sectors (e.g. geographic routing software/address database markets) which allow equitable access in some Member States Negative Could create a distortion to level playing field and development of user choice if access to the same feature is refused in one Member State and granted in another – Internal Market reduced. |

Option 12 - oblige National Regulatory Authorities to identify the essential means, to assess if access is necessary for postcode system, address database, post office boxes, collection and delivery boxes, information on change of address, re-direction service, return to sender service

Impact on Users | Impact on Sector employment | Economic impacts |

Ensures business and consumer protection - underpins mail quality in a multi-operator environment without introducing unnecessary procedures