Price regulation
Basic Issues
Workshop on Postal
Communication Systems Armenia 46798
Price Regulation – Basic Tasks
• NRA shall establish a price regulation regime that
– Removes and prevents excessive pricing within the US-segment
(C2C-letter segment)
– Provides incentives to improve efficiency
– Ensures that the charged prices are cost-oriented
– Allows incumbent to react to competitive challenges within the
business segments (B2B- and B2C-letter segment)
– Prevents distortion to competition by discriminatory and
discounting pricing policies (rebate scheme/ zonal pricing)
– Removes inappropriate cross-subsidies in non-regulated areas
with advantages stemming from the monoplized (legal or actual)
areas
price-regulation
methods of price-regulation
Ex-ante-regulation
Ex-post regulation
Procedure of the price approval
cost
orientation  impacts on competition/
consumers
3
Regulatory Regime
• Factors to be considered
– Level of competition
• Fully competitive Markets = ex post
• Non-Competitive Markets = ex ante
– Scope of US
• Large scope = ex ante (price cap)
• Limited scope = ex ante (single piece)
– Quality and Availability of volume, cost and revenue data submitted by
the USP
• Yes = ex post procedures
• No = ex ante procedures
– National legal framework
• Can the regulator directly apply EC and national competition legislation/ Law
– Yes = ex post
– No = ex ante
Tarification – Basic Tasks
• Factors to be considered (2)
– Ownership structure
• Price cap with I-X approach gives incentive to improve
efficiency
– The benefits may be restricted for Government owned
operators
– Degree of wholesale separation
• If there is effective separation of downstream delivery
operations, upstream products are more contestable
– Ex ante price control for wholesale products
– Ex post for retail products (e.g. pre-sorted bulk mail)
Tarification – Basic Tasks
Circumstances where ex-post investigations can be used exclusively
Development Low
Factors
Price Approval
Level of
Low level of competition in
retail competition
markets with significant
barriers to entry
Medium
Price Cap
Competition developing in
fully contestable markets
High
Ex-post
High degree of competition
in fully contestable markets
Scope of Universal
US is limited to singleService ("US") provided piece services to
by the incumbent
customers with low posting
profiles
Level of private capital Publicly owned operator
in ownership
with no effective
shareholder pressure on
management
US scope being reduced
over time but still accounts
for the majority of
products
Partial private ownership
with some pressure on
management to improve
efficiency
US covers a wide range of
products in terms of
volumes and revenue for
the incumbent
Full private ownership
where incentive to achieve
efficiency targets are
maximised
Degree of separation
of wholesale/retail
markets of incumbent
Operations are fully
vertically integrated and
lack of access regime
Operations are fully
Structural and accounting
integrated but obligations separation is in place that
on incumbent to provide provide for full equivalence
access
Robustness of product Cost allocation is highly
Some disaggregated cost Robust FAC and LRIC
cost data
aggregated - ie. no data on but no data on different
exist for individual
individual products
formats
products and formats
Scope of competition law No competition law
Licence conditions that
Ex-post - Full concurrency
powers available to the powers for investigations replicate some powers
of powers with Article 81
NRA
& 82
Key: Areas in grey represent circumstances where ex-post investigations can be used exclusively
7
Ex-ante-regulation
methods of ex-ante-regulation
Single price regulation
(individual authorisation
process)
Price-cap-regulation
Procedure of the price approval
cost orientation  impacts on competition
8
Tarification – Basic Tasks
•
Examples for choice of pricing system
– A I-X price cap would be most appropriate
when:
•
•
•
prices within the letter segment are already fully
compliant with the principle of cost orientation,
the scope of universal service includes services
to business customers for which there is
significant competition,
possibility to forecast the cost development for
the next 3-4 years
Tarification – Basic Tasks
•
Examples for choice of pricing system
(cont.)
– An appropriately designed ex ante single
price approval model should be given
priority if:
•
•
•
actually charged prices are not cost oriented,
the scope of universal service is restricted to
single piece mail (C2C-letter segment) for which
there is little or no significant competition,
uncertainty or in relation to the cost trends in
future
Price-Cap-Procedure
• Roadmap and steps of procedure:
– stage 1: benchmark procedure - key elements
•
•
•
•
conception
Publication and commentation of key elements
Public oral hearing/ consultation process
Finalization of decision in relation to the fixed benchmarks
– stage 2: application and approval of the price scheme
price-cap-procedure
1
Stage 1
2
Composition of basket
Determination of the
benchmarks
Stage 2
3
4
Determination of the
basic price level
Price-approval-procedure
12
conceptual framework
• Composition of the baskets
• Determination of the initial price level for services grouped in same
basket
• Specification of benchmarks
1. The rate of price increases in the economy overall (RPI-index)
2. The expected rate of growth in productivity of the regulated
company (X-factor)
3. Constraints suited and required to guarantee compliance with
requirements of the Postal Act (no abusive surcharges and
discounts, no discrimination)
13
Composition of baskets
PS 1
PS 2
............
PS 3
PS i
Postal services that need rate approval (Point 1)
Expected level of competition
(intensity of competition)
basket 1
basket 2
basket 3
PS ..
PS ..
PS ..
PS ..
PS ..
PS ..
PS ..
PS ..
PS ..
basket n
.........
PS ..
PS ..
PS ..
14
X-Factor
1.
2.
3.
4.
When setting benchmarks the initial price to the efficiently
incurred costs of providing services must be taken into account
The efficiently incurred costs are derived from the concept of
long running incremental costs (LRIC) considering the generally
recognized business management principles and decisions
Exceeding expenses deriving from the obligation to provide
postal services nationwide and the costs of staff pensions for
those employees as result of legal succession to the Deutsche
Bundespost
The expected productivity growth rate can be computed based
on the concept of total factor productivity.
15
status quo
• Actually cost based Price-regulation implies price cuts as a result of
efficient based price limitation
– Reference toward quality standard by PUDLV (minimum
standard)
– Incentive for the incumbent to increase process quality
(automation), but no incentive to improve product- and servicequality
• Efficient based regulation induces cost-cuts while reducing qualitylevel
• Investments and costs for quality measurements cannot
appropriately be reimbursed
16
procedure
• Design of price-cap-procedure involving quality aspects
 Extension of X-factor by Q-element
 Definition of quality parameters and valuation
• Delivery time,
• Delivery frequency (5 or 6 days per week),
• Degree of territorial or regional coverage
 Definition of weighting coefficient
Bonus-/ malus-system
 Determination of the data-base
 Examination of compliance with the price-cap regulations
17
18
Ex post regulation
European competition and regulatory rules
with regard to pricing strategies
Illustration and discussion of different
rebates scheme and their compliance with
EU competition and sector-specific rules
Recommendation with regard to
discounting consistent with EU-legal
framework
Ex post regulation
• Status Quo
– After full liberalization USP retains its dominant
position
– As a result it`s commercial behaviour is subject to
competition law as well as sector specific rules
• Reactions of USP
– market-oriented pricing policies mostly in the areas of
business mail
– Typical tool employed by the USP is the widespread
use of rebates
Ex post regulation
 Motivation for USP
 Use of rebates might be the natural way for exmonopolist to defend its market share
 Consequences:
 In this regard the USP is subject to the same legal
restrictions applied to every dominant provider
 Certain protective measures are necessary in order to
allow the new market entrants to establish a position
in the newly opened market
Legal Framework
 Abuse of a dominant position
 Discrimination
• Discriminatory pricing does not automatically constitute an
abuse of dominant position under general competition rules
 Foreclosure or exclusion of competition
• There must be the additional aspect of foreclosure or exclusion
of competition in order to qualify this behaviour as an abuse in
the meaning of Article 102 TFEU
Prohibition of competition is also addressed in Article 12
of the Third Directive
• Third Directive contains further constraints for USP
• These constraints affect the incumbent`s choice of pricing
strategies
Postal Directive and third party access
Article 12:
(…)
- Whenever universal service providers
apply special tariffs, for example for
services for business, bulk mailers or
consolidators of mail from different
customers, they shall apply the principles
of transparency and non-discrimination
with regard both to the tariffs and to the
associated conditions. ...............
Types of rebates relevant
in postal sector
•
•
•
•
Quantity rebates
Fidelity rebates
Worksharing rebates
Zonal pricing
Quantity rebates
• A discount granted when customer
achieves a certain (minimum) volume
• Price scheme reflects economies of scale
arising from large quantities
• Price-Scheme is offered in networkindustries by two-part tariffs
– Flat component (independent of volume)
– Variable component
Economic effects
• Volume reflect economies of scale
• Higher purchased volumes induces an
improved workload/ network utilization and
lower resulting production costs
• As long as the discounts correspond to the
scale effect in the same way there are no
negative effects on competition.
Fidelity rebates
• This type typically focuses on the customers´
entire demand of a product or service and not on
a predefined volume
• Customers only receive rebate only if they cover
their total (or high share) need with the seller
• This has an anticompetitive and discriminatory
effect
– as the rebate ties the customer to the granting
company
– As customers with different turnovers get the same
rebate even though their different volumes cause
different economies of scale.
Economic effect
• Such rebates are targeted “predatory and
exclusionary pricing”
– By offering below-prices for units above
threshold
– focus on “contestable” part of demand of big
customers
– Targeted foreclosure of the “contestable” part
of the market for entrants
– Recoupment story necessary
Worksharing rebates
• Work-sharing discounts set equal to (unit)
avoided costs of the USP
• Worksharing minimizes the end-to-end
costs in the postal sector between USP
and upstream competitive providers
• Postal operator typically offer a worksharing discount based (among other
things) on where a mailer injects his
volume into the mail stream
Structure of Postal Network
The Value Chain
Clearance
Transport
outward
sorting
Letter Boxes Consolidation
Sorting Center
or Post Offices Points
BZA
Transport
inward
sorting
Sorting Center
BZE
BZA: Letter Mail Center for outbound mail
BZE: Letter Mail Center for inbound mail
Transport and
Fine-Sorting
Delivery Base
Delivery
Addressee
Provision of partial services:
Rebate structure
before 01.01.2008
from 01.01.2008 until 31.06.2010
BZA:
BZA:
Rebate:
Amount of postal items:
Rebate:
Amount of postal items:
3 %
minimum of 5.000 to 10.000
8%
minimum of 5.000 to 10.000
6 %
10.001 to 15.000
11%
10.001 to 15.000
10%
15.001 to 20.000
15%
15.001 to 20.000
14 %
20.001 to 25.000
19 %
20.001 to 25.000
18 %
more than 25.000
23 %
more than 25.000
BZE:
BZE:
21 %
minimum of 500
26 %
minimum of 250
The quantity scale for bigger sized and higher weighted letter post items were decreased at
the beginning of year 2008.
On 1st July 2010 the rebates again were increased about 12 %.
Zonal pricing
• Characterized as a price reduction based
on – alleged or real – cost advantages
such as higher density in metropolitan
areas.
• Form of price discrimination
• It may be abusive, but justified depending
on effect and goal of pricing strategy
Assessment on zonal pricing
• Fundamental principles:
– Positive effect of using cost-based prices
– Potential discrimination among customers
– Potential impact on the total costs of the universal service if
zonal price is not cost neutral
• from perspective of competition geographic price
differentiation remains problematic as it leads to
discrimination among customers of the same dominant
undertaking
• ENTEGA
– Justification: geographic differentiation is limited to the
deployment of new markets as in the ENTEGA case
– Price discrimination is subject to stricter control in a nearmonopoly market