Discussion Papers

Alex Kalevi Dieke, Petra Junk, Martin Zauner

Quality Factors in Postal Price Regulation

No. 361/November 2011

(Full version only available in German)

Summary

The prices for single piece letters of Deutsche Post AG need approval from the Federal Network Agency (BNetzA) are regulated by a price cap system. In principle, prices and costs of postal services are closely linked to the quality of these letter services. In some EU Member States, such as Great Britain or Portugal, price cap formulas explicitly include quality factors. The German price cap regime does not explicitly consider quality aspects so far. This discussion paper raises the question whether and how quality should be considered for price cap regulation. The study evaluates the experience of European regulators with quality factors in postal price regulation and draws conclusions for considering quality aspects in German price regulation for letters. 

International experience shows that the introduction of a quality factor is associated with different goals, for instance to create an incentive to improve quality, to ensure existing quality levels, to avoid cost or quality reductions in favor of higher profit margins or to control quality in general. Technically, quality factors are implemented in different ways: Quality factors can be designed as a bonus for (over-) achieving quality targets (Belgium), as well as a penalty for failure to achieve quality standards (Portugal). Likewise, quality factors have different legal bases: Laws or management contracts (Belgium), ministerial orders (Italy), agreements between regulators and incumbents (Portugal) or conditions in the incumbent’s license (Great Britain). All international examples use transit time as the main quality indicator. In some countries, however, quality factors are very complex to calculate and monitor, but have only very little impact on the potential price variation of the regulated company.

For Germany, we do not recommend including a quality factor into the price cap formula. In the countries considered, the main intention of a quality factor was to improve quality of postal services. But improving quality is not a formal objective of postal regulation in Germany. By contrast, the intention of quality considerations in Germany is to avoid that cost savings are made at the expense of quality since, in this case, regulated prices would no longer be cost-reflective. In our opinion, the relationship between cost and quality can be taken into account more effectively by adding constraints to pricing decisions (revocation clause: approval of prices is subject to quality no falling below a specified minimum). This minimizes the complexity of regulation, reduces effort for planning and monitoring, and reduces interventions in the market generally. 

We recommend such revocation clauses should be tied to transit time targets as well as delivery frequency because both these indicators are directly related to costs of the regulated services. To date, the Federal Network Agency has no possibility to control transit time by Deutsche Post AG directly. To enable the regulator to check compliance with quality standards, pricing decisions should therefore include a duty to report regular on quality performance as well as on the methods used for measurement.

Discussion Paper is available for download.

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