Arcep speaks

Joëlle TOLEDANO, ARCEP’s Commissioner Speech on the 17th Conference on Postal and Delivery Economics - Bordeaux, 27th May 2009

Thank you very much for this invitation. My first CCRI conference was the one held in Stockholm in nineteen-ninety-four (1994). Since then I attended 15 conferences and dozens of dinner speeches. As I am an aficionada, it is easy to understand why Michael’s and Paul’s proposal honoured me. At the same time I know very well, how everybody here, in Bordeaux more than anywhere else, is waiting for Michael‘s announcement " the bar is open ". So I will not ask for your attention for too long.

After a few words about the French regulator ARCEP and its main postal tasks I would like to share with you two issues:

The first one is a practitioner’s issue: what are the consequences of information asymmetry on the behaviour of operators and regulators and their strategies?

As it compares the present to the past, the second issue is not especially one a woman usually likes to address… but for you I’ll make an effort; all over the past fifteen years – and I hate to confess I have been there since those early times –, why so many questions have remained the same? Why so many topics still seem unsolved?

Let’s start with ARCEP, the French acronym for the French Telecoms and Posts Regulatory Authority. In 2005 the law gave the former Telecommunications Regulatory Authority (acronym ART) the additional responsibility of the postal sector.

  • Seven Commissioners – I am one of them – are appointed for six years and their terms are not renewable. The President of the Republic appoints three of us, including the Chairman, the President of National Assembly appoints two other members as also does the President of Senate.

  • The seven commissioners together are in charge of Telecoms and Posts. There is no specialisation.

160 people work in ARCEP as a whole, 11 on postal issues, 80 on telecom issues. The rest of the staff support departments The Economic, Legal, International, Communication and General Administration Department and works for both sectors.

Like other postal regulatory authorities and like almost all of us in this conference, ARCEP is mainly focused on USO and market organization.

1. We Monitor the USO, ensuring its funding while protecting consumers. This implies studying prices and setting price caps, cost accounting, monitoring quality of service, assessing the cost of (The ?) USO. The role of ARCEP is to check that La Poste carries out its universal service missions properly, especially in terms of quality of service, and to supervise the funding of these missions. In this capacity, we regulate La Poste's universal service tariffs, especially through designing the incumbent operator's price cap. Besides, ARCEP sets the accounting rules and establishes accounting system specifications, i.e. the reporting format for regulated accounts. Last but not least, we are in charge of monitoring the conditions under which universal service is financed. In particular, the Postal Law charges ARCEP with recommending to the government all measures necessary for guaranteeing the provision of universal service. The possibility of a compensation fund is also foreseen in the Law.

Bénédicte Bouin, from the Postal Department of ARCEP will address the price cap issue in another session of this Conference. For all other topics, we have produced an English version of our activity report and if you need to go further just learn French and go to our web site! We provided some parts in English.

2. Second main scope of Arcep’s postal regulation. besides USO, is Postal market organization and introduction of competition. This implies delivery of market authorizations, upstream regulation and statistical information. But the day-to-day regulatory activity may also include very technical matters, such as access to mail boxes in apartment's buildings or as multiple postmarks on mail items. Opening the postal market shows unanticipated switching costs that are not always easy to reduce.

During our last CCRI conference, in Albufeira, ARCEP presented the market situation in France. As concerns the letter mail, only some ten local operators are registered for domestic delivery. End to end competition is not significant at a macro level, but the upstream market is developed and it is quite open. 200 businesses are active in this market. It is estimated that mailing houses do process 85% of advertising items. As for international mail, almost all incumbents of neighbouring countries are present in that segment.

Let’s now come to informational problems.

Everybody knows how information is critical for regulation and how information asymmetry proves to be a strategic issue. However, we should care about it more than we have so far and in a more practical way.

It is common theoretical knowledge that the incumbent tends to keep secret as much information as possible in order to preserve its information rents. However, as a practitioner of the asymmetry dilemma, I have progressively acquired the strong intuition that cooperation with the regulator may also be a good strategic choice for an incumbent. I will try here to reconcile these two opposite statements.

Theoretical contributions have shown how repetition tends to reduce the incentives incorporated in a price-cap mechanism. Indeed, if the financial results at the end of the first period show undue rents, the regulator will modify the price cap for the second period, making it difficult to preserve rents. Fortunately, price cap is not the only "repeated game".

As a matter of fact, the relationship between an incumbent and a regulator is a durable one. For sure, all topics are not examined periodically. So it could be a winning strategy not to disclose some data. But a lot of issues come again periodically, such as accounting, quality of service, rates, etc… Everybody and especially regulators, don’t like discovering that request information, was hidden, or distorted. According to my own experience, it is one of the more sensitive subjects: information is the regulator’s raw material, as fuel is for an engine.

Fearing to be detected, an operator involved in a regulatory relationship may come to understand that "reasonable" cooperation may also be a long-term profitable good practice; and this even if a part of its information rent seems to be more specifically in danger. The question is then how the regulator can discover that information is false or hidden. We learn from economic history on monopoly regulation how difficult it is.

The quality of information available to the regulator should not depend only on the incumbent good will and good faith. The incentives for cooperative practice are bigger when the regulator can rely on alternative sources. There are at least four of them.

  1. The first source is trivial: competition, which enhances the quality of information except in the case of collusion. Indeed, markets yield information on prices and costs. This is duly observed in the case of telecommunications; in that sector competitors are also very helpful to the regulator as they provide valuable contributions in the process of public consultations. But, in the postal sector, competition is rather low. Moreover, the main competitors are incumbents in foreign countries. Although they are able to take part in the regulatory process and contribute to public consultation, they don’t want to disclose information that could harm their interests in their own countries. As for smaller competitors, it would cost them too much to participate efficiently as they lack the skills and the resources.

  3. The second external source of information is benchmarking. Comparing European operators provides a remedy to deal with information asymmetry. Benchmarking works as yardstick competition. In the telecom case rules and procedures of the European regulatory framework are highly harmonized. Regulators’ tools and practices are very similar. So benchmarks are useful and efficient tools. Unfortunately, things are not so easy in the postal sector. Only principles are harmonized in the postal European regulatory framework. Even the definition of the mail market may differ from one country to another! So it is more difficult to interpret discrepancies across Europe.

  5. The third source is to be found in reports about operator’s stock rating. This could be new for academic and/or postal economists. When I learned about telecom regulation at Arcep, I was actually surprised by the important role played by financial analysts. As the regulatory process is technical and time consuming, financial analysts appear to be almost the only observers who understand precisely debates and decisions. In order to understand the companies, they use benchmarks and stock market information. It may also be the case that operators do mind stock rating more than regulation! That is why financial analysts of the telecom sector can be so well informed and useful. In contrast, very few postal companies, even privatised ones, are listed on stock markets. So, postal analyses are much less informed than their telecom counterparts.

  7. With competition, innovation is another dynamic driver for information revelation. Innovation and other disruptive changes do create uncertainty for both operators and regulators. The present financial crisis and the drop in mail traffic may also be seen as a powerful incentive to share information. When preparing the recent UPU "High Level Conference" last month, operators, although usually reluctant to disclose data, decided to participate in a consolidated report devoted to the "Impact of the economic crisis on postal activities". Although no data on specific operators are available in the report, it reveals that the situation is similar in all countries and is similar to the express industry.

To sum up, competition, international benchmarking, financial analyses, innovation, or drastic contextual changes, provide nice incentives to convince incumbents that it could be interesting to share more, if not all, information with the regulator. Since regulation is a durable relationship, it could be more costly for the incumbent to hide information whenever caught in the act. I tried to explain why some operators give more information than their short-term interests would suggest; and why, from this viewpoint, information asymmetry is probably much more critical for Post than for others markets, as telecoms.

For sure, information asymmetry does exist in telecoms. It even is a huge stake! But if one compares the information available in the two sectors, respectively, and if one investigates how that information can be checked, it becomes very clear that the postal regulator does not enjoy the same opportunities of getting information as does the telecoms regulator.

It is difficult to conclude without any reference to the hard current period. As many markets, the mail market is falling. The trends observed before the financial crisis were already upsetting. On average and since the beginning of the nineties the traffic growth in industrialised countries lies below the economic growth rate. Even worse, in most of these countries, traffic has been stagnating since the beginning of the decade. What is worrying in the more recent data is the drop in direct marketing mail. Until the current crisis that market segment was seen as a growth driver balancing the decline in transactional mail. Is Internet the structural cause of an unavoidable electronic substitution? Or do we face the conjonctural economic impact of the financial crisis?

Although most problematic, the decline of mail is not a complete surprise. More amazing is the invariance that appears when matching the postal debates as they stood at the early nineties and as they do stand now. Hopefully, some sensitive issues at that time, such as quality of international service or terminal dues are less at the front of the stage. But very central issues, such as USO, counters network, and their financing, are still open. And they are at the core of the Postal US Regulatory Commission report or of our program this year. Accordingly, the British Hooper report published at the end of last year, by the way technically outstanding, just looks like a young brother of the British Green Paper, published in 1994.

In most other regulated sectors, whether or not regulation is well considered, it seems that questions have changed. Why such is not the case in the postal sector? Is it because our answers, as economists, are not accurate enough? Or is it because we don't answer the right questions?

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