A NERA team, led by Associate Director Stuart Holder and working in conjunction with Consult Sirius, was commissioned by Ofcom to review approaches to measuring the efficiency of postal operators. In 2012, Ofcom introduced a new seven-year regulatory framework for the UK postal industry, which gave Royal Mail greater flexibility and commercial freedom to return the universal service to financial sustainability. Alongside measures to ensure the affordability of universal postal services and, where appropriate, to promote effective competition, Ofcom is also monitoring Royal Mail's performance, including its rate of efficiency improvement, to ensure its regulatory objectives are met. While Ofcom is not intending to set specific efficiency targets, its monitoring of Royal Mail will need to be informed by a view of what might represent a reasonable rate of improvement. If the monitoring regime identifies potential concerns about the rate of efficiency improvement, or in the event of a review of the impact of end-to-end competition on the universal service, Ofcom may also need to carry out more detailed analysis. And further in-depth analysis would be required if Ofcom were to decide to re-introduce a more comprehensive price control, or needed to establish a universal service compensation fund.
This report considers methods of assessing efficiency that might be most useful to Ofcom in each of the situations described above. It reviews the methods used in recent price control reviews in postal industries internationally as well as the UK rail, airport, air traffic control, water, energy, and telecoms industries. The report examines a wide range of different methods, including both "top-down" reviews of most or all of a firm's costs and "bottom-up" reviews of the efficiency of specific activities.
To read the Report in full, please click here.
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