Putting up fees is like putting up the price of a second class stamp

Out in Ofcom-land, the Universal Service Obligation (USO) is in trouble. That’s the thing that’s supposed to ensure nationwide and consistent delivery of the mail at uniform prices, and sets the expectations for the types and performance of services Royal Mail has to provide.

It’s a crunchy set of requirements. Royal Mail is required to deliver letters six days a week (Monday to Saturday) and parcels five days a week (Monday to Friday) to every address in the UK.

Collection and delivery services have to be available across the entire country, ensuring no area is left out, regardless of how remote.

And Ofcom limits the price that Royal Mail can charge for some essential postal services to ensure they remain affordable. Their key focus is on bog-standard second-class letters and small parcels, with price caps to prevent them from becoming unaffordable for the general public.

It’s not the only USO that Ofcom runs. There’s one for telecoms (broadband and phone services) that includes landline telephony. There’s a sort of one for universal access to public service broadcasting (PSB). And Ofcom is also responsible for ensuring that telecommunications providers offer universal access to emergency services.

For the post, like the Office for Students, Ofcom defines minimum service levels that providers must meet for each of the universal services, monitors the performance of service providers, and takes action if they don’t meet the standards. It also has a duty to ensure services are affordable and accessible – and so directly regulates the price of a second class stamp.

Meeting that USO for all homes while keeping a stamp at a reasonable price is getting harder and harder for Royal Mail to pull off. So like in higher education, officials (conscious that ministers will take the heat regardless of the arm’s length nature of the regulator) are caught between hiking prices and the service not meeting the basic requirements.

Price and quality

There are of course vast differences between Ofcom and the Royal Mail and OfS and providers of HE. OfS has nothing like the sort of data it needs on the “service” being provided in HE, so uses outcomes as a sort of dodgy proxy for it.

Unlike with the post, there’s a large number of providers in HE where the Royal Mail is pretty dominant. That’s not true with parcels of course – providers can (and do) undercut the Royal Mail by not being subject to the USO and cherry picking what they deliver, and how they treat their staff. And in Ofcom-world, it sets prices while the government lays out the basics of the USO – in HE, it’s the other way around.

But notwithstanding how easy or hard it is to read telecoms regulation access from HE regulation and vice versa, what is fascinating is the role that Ofcom plays outside of monitoring, threats, complaints and fines.

Ofcom, like OfS, regularly reviews the financial health of Royal Mail – but Ofcom does it in the context of the USO. The regulator explicitly examines whether the cost of providing the service is balanced with the revenue generated.

If Royal Mail struggles to sustain the USO, Ofcom explores adjustments to the scope of the obligation like delivery frequency – and makes recommendations to government either about pricing, or the USO, or both.

OfS just asserts its regulatory conditions as a kind of law. They must all be deliverable, all of the time – they are minimums, after all.

Ofcom also reviews wider market conditions to determine whether the current USO requirements are still relevant. So given the shift towards digital communication, where letter volumes have declined sharply, it’s been discussing whether the six-day delivery requirement should be adjusted.

What we never hear from OfS is any reflection on whether it thinks it’s still possible – and will continue to be possible – to deliver all of the B Conditions, the As on access and participation, other stuff like consumer protection law “keep all your promises” requirements, and new stuff like its harassment and sexual misconduct regulation.

Refocusing the regulator

The point isn’t that I’d take anything in the OfS regulatory framework and water it down. But the point is that there must come a point when the requirements are not able to be met by all providers given the continued squeeze on the unit of resource.

Of course some providers find it easy to deliver on the unit of resource – although presumably nobody wants all of HE to be priced-high delivered cheap business qualifications in office blocks. And increasingly that looks like a kind of provision not meeting HE’s USO anyway.

Some might privately argue that we passed the point of now being able to do it all a long time ago, as providers (for example) weigh up the risks of students suing under the Consumer Rights Act for cuts to provision against going bust, and conclude that the former is a smaller risk than the latter.

Ditto plenty of the other aspects of OfS’ expectations. Even if you take the view that the full package of requirements was designed with financial slack in mind for innovation and competing to offer more in a distinct way, at some point the decline in the UG fee must mean it stops being possible.

Ofcom goes beyond phoning up Royal Mail’s boss to ask if it’s about to go bust, as OfS has apparently been doing with VCs. As well as financial health, it evaluates Royal Mail’s operational efficiency – scrutinising whether costs incurred in fulfilling the USO are justified, looking at factors like as delivery methods, staffing costs, and investments in automation.

And a critical part of Ofcom’s role is ensuring that Royal Mail’s costs associated with the USO are separated from costs related to its other activities. That allows Ofcom to understand whether the costs directly attributable to the USO are being managed efficiently.

Just as in HE, ministers and Ofcom will from time to time assert that Royal Mail is an independent company responsible for its own business plans and suchforth, however little chance there is of the public buying that framing.

But unlike in HE, Ofcom wields its power by undertaking a proper analysis of costs for the aspects that it in theory doesn’t allow providers to drop or compete over.

In other words, the day I believe that ministers and its new chair David Behan are serious about a refocusing of the regulator’s role is the day there’s an OfS insight brief on TRAC data – and a report from OfS recommending a fee increase.