Competition issues in the postal sector

This is a note of a lecture given in March 1999 by Dr. John Temple Lang* of DG-Competition. It is an excellent intoduction to the effect of EC competition law on the postal services industry.
1. All the provisions of Community competition law (Articles 85-86, 90, 92-94 and the Merger Regulation) apply to postal services.
This includes Article 90 which says that even enterprises entrusted with the operation of services of general economic interest are subject to Community competition law insofar as the law does not obstruct the performance of the particular tasks assigned to them. The development of trade must not be affected to an extent contrary to the interests of the Community.
In practice, this means that Member States may establish a monopoly in the postal sector in order to provide a defined service of general economic interest, provided that the objective defined cannot be achieved by means which restrict competition less. Article 90(2) must be interpreted strictly.
Since a postal service is clearly of general economic interest, the key issue is whether the scope of the statutory monopoly in question is necessary to achieve the statutory objectives, or whether the objective defined could be achieved by less restrictive means. These issues should be taken seriously: we no longer take it for granted that all monopolies are "natural" or necessary to achieve given results. There may be a question whether a monopoly is justified at all, or whether its scope is unjustifiably wide.
2. In the Corbeau case (1993 ECR I, 2533), the issue was whether a Member State was objectively justified in maintaining a monopoly which included, apart from the basic postal service, a "rapid delivery service". (This question is quite separate from any question whether a given postal enterprise has infringed Community competition rules and, if so, whether it has done so because of a State measure, in which case State responsibility arises, and is also separate from the question whether the monopoly is efficient or inefficient). Even if a monopoly on basic postal services is justified in a given Member State, the scope of the monopoly may still be questioned.
In particular, a monopoly is not justified if the monopolist is necessarily led to abuse its dominant position, e.g. by preventing others from supplying a service which it is not itself able to provide.
After a very clear opinion from Advocate-General Tesauro, the Court in Corbeau ruled that the starting point for the examination of the justification for this postal monopoly is the assumption that it can offset less profitable sectors against profitable sectors so as to break even overall. However, no monopoly is justified as regards specific services, separable from the service of general interest, which meet special needs and involve additional services, and which are not essential to the monopoly’s ability to break even. It is for the national court to decide into which category the facts of each case fall.
The Postal Directive and Notice
3. After the Corbeau judgment, it was open in theory to anyone having standing to challenge either the legitimacy or the scope of any postal monopoly if the facts enabled them to do so. The Postal Directive, while of course it could not amend Article 90(2), harmonised the maximum scope of the monopolies intended to ensure the funding of the universal service, and imposed a minimum standard of universal service. It also set up a timetable for gradually opening up markets for items below 350 grams. The aim was to end, as far as possible, any controversy over the justification for existing postal monopolies, and to minimise controversy over their scope. The Postal Directive allowed a reserved area "to the extent necessary to ensure the maintenance of universal service".
The Notice on Postal Services was intended to make clear how the Commission intended to apply Community competition rules to postal monopolies, in particular to prevent monopoly positions being used to prevent or restrict competition in liberalised activities, to prevent discrimination at the expense of small users, and to prevent unlawful restrictive agreements between postal monopolies. It was also intended to ensure non-discriminatory rights of access to the public postal network at appropriate points on the basis of avoided cost.
In early 1999, the Commission has been considering what proposal to make for a new directive on further liberalisation of postal services.
The next stage
4. Substantially, there seem to be several possible courses of action for the Commission and the Council and Parliament in due course.
(1) Specify the next step of liberalisation, to be taken in 2003, but without
deciding what further steps would be taken after that. This is not the approach used in the telecommunications sector, where it was thought essential to say what the final result (full liberalisation) would be, so that companies could plan accordingly. It also has the disadvantage that it would reduce the pressure on the less efficient post offices to become more efficient. A further disadvantage is that it would make it more likely that competitors would challenge, in the courts and before the Commission, the justification for the existing reserved areas, or their scope: if the competitors knew what the final regime would be, they would be less likely to litigate in the meanwhile. Litigation might of course accelerate liberalisation, but would do so only at the cost of uncertainty and controversy.
There may also be another disadvantage, which is harder to assess: companies which are now big users of postal services might decide that they could not wait until after 2003 to find out what the third stage of liberalisation would involve and might therefore e.g. plan to do as much as possible of their direct marketing by e-mail and the internet. Insofar as this occurred (and of course it may occur whatever the Commission, the Council and the Parliament may decide), it would reduce the demand for traditional postal services. (In the USA and Canada, alternative technologies have broken the link between use of letters and general economic growth).
In other words, this approach would be easier in the short term but might prove unwise in the long term, and contrary to the interests of the post offices themselves.
2. The other approach would be to decide as soon as possible on what the
ultimate goal should be, and adopt an intermediate stage and at least an indicative timetable for reaching the final goal, even if Member States for special reasons could negotiate derogations to allow their post offices a longer time to adapt. This would provide enough certainty to encourage investment. It would give Member States an incentive to prepare their post offices for real competition. It would avoid the disadvantages of the one-step-at-a-time approach. But it would involve choosing between full liberalisation (controversial, even at a distant future date) and some compromise ultimate solution, which would almost certainly be regarded as illogical, impermanent, and unsatisfactory, and difficult to agree on.
Either of these two approaches would of course allow Member States to liberalise their postal sector more quickly and more fully if they wish, to get the benefits of cheaper and more efficient services, and to deal with the need for universal service in other ways (tendering for the service in uneconomic areas, State subsidy, or a universal service fund). However, it would be thought unsatisfactory that some post offices would have large reserved areas generating revenue which they would (perhaps) be free to use to invest in other Member States where the sector had been liberalised.
On either approach, what would the most appropriate next steps be? Much the simplest minimum measure would be to reduce the weight and price limits for reservable (i.e. monopoly) mail to e.g. 50 grams and 2.5 times the basic tariff in each Member State. A possible long-term reform would be to decide that the universal service should no longer be financed out of cross-subsidising and that the cost (which may be up to 15% of total revenues, but the cost estimates are debatable) should be covered in another way, e.g. by contributions to a fund, to pay for the services to be provided by a company selected for e.g. 5-year periods by competitive tender.
In any case, the first Directive required the Commission to make a proposal, and one which would take into account economic, social and technological developments.
The principal current issues
5. Apart from the questions about the interpretation and implementation of the existing directive, and what should be contained in the next postal directive, the main current issues of Community competition law on postal affairs are:
– multilateral agreements on terminal dues ("Reims II");
– whether some national monopolies are too wide in scope, and so partially unjustified (raised in Italy in the Article 177 case C-336/98, and in the Corbeau case);
– how far, if at all, postal monopolies may halt incoming cross-border mail on the grounds that it originated, in any sense, on their territory (raised in the International Express Carriers Conference case, decided in September 1998, now on appeal to the Court of Justice);
– how far postal monopolies should be permitted to acquire other companies carrying on liberalised activities;
– how to ensure that postal monopolies do not unlawfully restrain competition in liberalised services by cross-subsidising, using profits from their reserved services;
– other exclusionary practices by dominant postal companies;
– State subsidies to postal services under Articles 92-94.
Multilateral agreements on terminal dues (the "Reims" agreements)
6. In December 1998, the Commission published a notice of its intention to approve, subject to conditions, the Reims II agreement. This agreement increases terminal dues substantially, provided that the post office receiving the mail meets certain standards of promptness. The Reims agreement as originally drafted provided insufficient benefits for users of postal services, and the Commission insisted on a number of changes. No increase in terminal dues is allowed, in principle, if the quality of service goes down. Clear arrangements for making facilities for bulk rates for commercial mail (Level 3) available to users outside each State must be made. In particular, the problems of lost, late and damaged mail must be tackled, and proper cost accounting systems introduced.
The Commission has once again received many criticisms and comments on this notice. Some interests asked the Commission to oblige all post offices in Europe to sign Reims II (which the Commission has no power to do). Many interests said that Reims II would cause too big increases in terminal dues too quickly, with too large increases in domestic tariffs in the Member States whose post offices will have to pay more.
A number of more specific criticisms have been made of the Reims II agreement:
– 80% of domestic tariffs is not a real estimate of the receiving post
office’s costs, and it is unsatisfactory that tariff increases should be caused without proper cost estimates (according to some UPU data, costs of handling incoming cross-border mail are 60% of tariffs);
– quality of service standards should be adopted for end-to-end transit, not just for mail after it has crossed the border (it is not clear that this could be insisted on in connection with an agreement on terminal dues);
– provisions for late, lost and damaged mail are inadequate;
– stronger and clearer arrangements needed for Level 3 mail to be satisfactory;
– the Reims agreement does nothing to keep costs down, and the tariff increases which are certain are not yet balanced by any increase in competition;
– the Commission should prohibit post offices from interfering with remail or using Articles 25 and 49 of Universal Postal Union Convention.
In general, critics commented that there were insufficient benefits for users to counter-balance the big tariff increases which would result, and that this is contrary to Article 85(3) which requires users to get a fair share of the benefit.
The Swedish-Dutch bilateral agreement limits terminal dues to 70% (not 80%) of tariffs and is conditional on full liberalisation in the importing State, so it is much more favourable to consumers.
Whatever the Commission finally decides about timing and substance, it is clear that the Reims II agreement is only a step towards an improved system and that the Commission will have to reconsider the whole arrangement as soon as proper cost accounting data are available, which unfortunately will not be the case for a year or two.
The scope of existing monopolies
7. As in the Corbeau case, the question of the scope of an existing monopoly has been raised in an Italian case under Article 177. As the case is not yet decided, it would be wrong to go into detailed analysis. However, the essential issues seem to be as follows. In Italy, a limited number of licences may be granted to private operators when the monopolist is not able to provide the service concerned. In practice it seems that the Italian post office has some discretion to grant licences in other cases. The issue therefore is whether, in these circumstances, the monopoly is still justified (licensees have to pay a fee to the incumbent).
Intercepting incoming cross-border mail
8. In the International Express Carriers case, the Court of First Instance ruled that the existence of a postal monopoly cannot in itself justify interception of ABA remail under Article 86. To say that defence of a monopoly does not fall under Article 86 would amount to saying that the mere existence of the monopoly took certain kinds of behaviour out of the scope of that Article. The fact that terminal dues on ABA remail do not cover the cost of delivery does not justify interception, because the post offices had agreed to another formula for terminal dues. Interception, to offset the effects of an agreement to which the post office concerned is a party, is not an objective justification under Article 86. Also, the Court added, the receiving post office could recover the costs from the senders without holding up the mail, and this would be less restrictive.
Deutsche Post is appealing against this judgment: I therefore should not analyse it in detail. However, it has always been clear that a company in a dominant position is not free to defend its dominance by all means available to it.
One question which may arise in the appeal is whether the justification for interception in defence of a postal monopoly should be decided under Article 86 or under Article 90(2). If, as the Court of First Instance said, interception is not justifiable under Article 86, it could in theory be justified under Article 90(2), if the requirements of that Article were fulfilled.
Another question is when mail should be considered as "originating" in a State, in any sense which would give a post office a right to intercept it or demand additional payment for delivering it. A dominant postal company cannot be allowed to define the "origin" of mail at its own discretion, under Article 86: the Court of Justice has repeatedly said that dominant companies must not regulate their own competitors, and they cannot be the arbiters of the lawfulness of their own behaviour. The UPU definition of the sender is imprecise and is surprisingly little help in resolving this problem.
Acquisition by postal monopolies of companies carrying on liberalised services
9. This issue has arisen in several cases.
The Commission has taken the view that (assuming the monopoly in question is lawful) such acquisitions are legal unless they involve the creation or strengthening of a dominant position, or unlawful cross-subsidisation or discrimination (or, although this has not yet been found to arise, a breach of the principle in the Philip Morris case). The mere fact that the funds of the postal operator are partly or wholly obtained from a monopoly does not, in itself, mean that they cannot be used to acquire companies carrying on liberalised services.
In practice, in the cases decided by the Commission, undertakings against unlawful cross-subsidies were given by the parties.
In these cases, the Commission concluded, in effect, that there were enough express courier service companies and the acquisition of one by the dominant postal company did not make much difference. This would not be so if there were few other competitors of the relevant kind, or if the company acquired was a sufficiently strong competitor. Dominant postal companies will not be allowed to swallow their principal competitors in their own Member States.
However, the fact that a post office is dominant in one Member State does not in principle prevent it from acquiring a small postal operator in another Member State: this is likely to be pro-competitive, but of course Articles 86 and 92 remain applicable.
All such acquisitions however raise another issue. If a postal monopoly has enough money to buy up competitors outside its reserved area, it is clearly making profits and not merely breaking even, and this suggests (especially if the total sums involved are large) that its monopoly is substantially wider than can be justified.
Cross-subsidies and predatory pricing
10. It is contrary to Article 86, at least in some circumstances, for a dominant postal operator to subsidise its activities in a liberalised sector from its monopoly revenue. Its prices for liberalised services should cover its average total costs of providing them, including an appropriate proportion of its common and overhead costs, i.e. fully distributed costs.
If a dominant postal enterprise has not got cost accounting information enabling the costs of each activity to be measured, the Commission will use the information available. The Commission will not allow a post office to take advantage of its own failure to have basic cost accounting data.
The Postal Directive, of course, requires separate cost accounting for the reserved and competitive sectors.
A strict rule prohibiting cross-subsidising, whether deliberate or unintentional, is necessary in the postal sector, because cross-subsidising by a dominant postal enterprise of its liberalised activities is likely in practice to have exclusionary effects. (Analysis is complicated insofar as the universal service obligation covers liberalised services). A dominant postal enterprise could not justify cross-subsidising liberalised activities on the grounds that it is incurring start-up costs, since that would hardly be true and would give it an advantage over its competitors which might make it impossible for them to establish themselves. The Community objective of liberalising postal services must not be frustrated by exclusionary practices, and competitors must know that they will be protected, either by the Commission or by national regulatory or competition authorities, against such practices. If necessary, interim measures may be necessary to ensure this. A dominant postal enterprise is able to carry on multi-product activities, to an extent not possible for its competitors as long as its statutory monopoly exists, but it cannot be allowed to take advantage of this by allocating all its overhead costs to its reserved area and so artificially reducing its costs in the competitive sector.
Exclusionary practices by dominant postal companies
11. In other markets being liberalised, dominant companies have tried various ways to tie their customers to them and to protect themselves from competition. They have offered favourable terms in the sectors in which they were dominant, on condition that the customer used their services in the competitive sectors ("tying" or "bundling"). They have tried to get their customers to enter into long-term exclusive contracts in competitive sectors. They have offered exclusivity or quantity discounts across both competitive and reserved activities. It is unlawful for a dominant company to insist on a statutory monopoly over services which it is not able to provide. It is unlawful for a dominant company to discriminate in providing access to its network, to both customers and intermediaries.
All devices of these kinds are unlawful under Article 86 if they have significant effects on competition. If they are contrary to Article 86, they cannot be validly approved by a national postal regulator or competition authority.
It may be important to remember that all national measures, in any sector, which restrict freedoms given or guaranteed by Community law are permissible only if they are non-discriminatory, for a legitimate public purpose and no more restrictive than is essential to achieve the objective in question. National measures conferring privileges or exemption on a dominant postal enterprise from e.g. traffic laws or physical planning laws would have to meet this test and, unless they obliged the enterprise to behave in a particular way, could not justify a violation of Article 86.
State subsidies to postal operators
12. Member States are obliged under the general directive of 1980 (on disclosure of their financial relations with public enterprises) to disclose anything which might be a State aid. Payments out of State funds which objectively are calculated so as not to exceed losses due to providing a universal service would be permitted. Any other tax concession given only to the principal postal enterprise is a State aid. State aid to a postal monopoly should not benefit its activities in competitive sectors.
In general, Community State aid rules do not permit continuing subsidies for operating losses.