Pricing criteria are intended to be applied to prices charged as from 01.01.2015.
Weighing on the one hand the uncertainty as to the future evolution of demand for correspondence, editorial mail and parcel postal services and on the other hand the guarantee of stability and regulatory predictability, it is deemed that the pricing rule must be applied for a three-year period, that is, from 01.01.2015 to 31.12.2017, being thus adopted the minimum multiannual period of application provided for in paragraph 3 of article 14 of the Postal Law.
The purpose here is to determine a pricing rule that counterbalances evolution forecasts of unit costs for the 2015-2017 period, which result from traffic and cost evolution forecasts for this period, and simultaneously encourages the universal service provider to continue to implement efficiency measures for the provision of the universal postal service.
This price control mechanism is in accordance with the principle of cost-orientation of prices as it makes it possible to:
- Achieve the objective of limiting the overall margin of services covered by the pricing rule, via the application of a maximum price variation of services that integrate the basket; and, at the same time,
- Improve the margin of services that present a negative margin, by rebalancing tariffs “within” the basket of services, in this case by increasing the prices of services that present a negative margin;
- Promote an efficient provision of the universal service, as it provides incentives to the operator to minimize costs, given that, as referred earlier, in case the operator is able to reduce costs below levels forecasted when the maximum price variation was defined, then any excess profits may be retained.
Incentives are also created to ensure affordability of the service, to the extent that, where it is provided with increased efficiency, in the subsequent period, lower prices may be established or price increases may be limited.
For this purpose, although it is not possible to forecast with accuracy the evolution of traffic and of costs for the 2015-2017 period, ICP - ANACOM has drafted evolution estimates, described below.
Costs
At the level of costs, it is estimated that in 2015 an annual variation of staff-related costs occurs, as reported by CTT in the scope of the public consultation to ICP-ANACOM’s previous Draft Decision on this issue, dated 29.07.2013, that is: a reduction by (BCI) (ECI) %.
This reduction of staff-related costs is a result, specifically, of: (a) the forecasted reduction of personnel employed (at the level equivalent to Full-Time employment); (b) broadening of the CTT’s contributory base to Caixa Geral de Aposentações (the Civil Servants Pension Fund); (c) CTT’s forecasted evolution of burdens related to health and post-employment benefits.
Moreover, consideration must be given to change measures aimed to support CTT’s operational efficiency, namely the implementation of the change programme or programmes for the distribution operations, such as the one launched by CTT in 20131, which according to this operator deepens processes of rationalization and reorganization that have been carried out and which aim for the increase of productivity and the improvement of operational efficiency.
It is likely that these measures supporting efficiency may continue to entail the reduction of total costs related to staff and supplies and external services (SES), which represent CTT’s main operational expenses.
At the level of SES costs, it is stressed that annual savings of around 14 million euro are estimated by CTT (Group) to be obtained in the course of the next three years, resulting from the award of new contracts for the supply of information and communication technology services2. Given the nature of services concerned, and their characteristics, the whole activity of the CTT Group will be covered. Taking into account CTT’s contributions in the scope of the draft decision, it is estimated that SES costs will decrease for CTT (individual company) by around (BCI) (ECI) %.
For 2016 and 2017, it is estimated that, overall, a lower reduction of total costs related to staff and SES will occur, compared to forecasts for 2015, as in those years the referred reduction of costs with contracts for the supply of information and communication technology services will not take place.
It is estimated that, in average annual terms, from 2015 to 2017 a total reduction of costs by 1.27% per year will take place3.
In order to encourage the service provider to continue to implement efficiency measures in the provision of the universal postal service, it is deemed that only half the estimated cost variation should be taken into account, that is an annual variation by -0.63%, the remaining reduction representing profit for CTT.
It must be stressed that the total evolution of costs, in the 2015-2017 period, may obviously be higher or lower that the level now being considered.
Moreover, the impact of traffic evolution (estimated below) on costs must also be taken into consideration, assuming that part of costs varies with traffic. Bearing in mind that 75% of CTT’s costs are fixed costs, the estimated variation of traffic will result in a variation of CTT’s costs corrected by the weight of variable costs in CTT’s total costs. That is, for each 1% variation in traffic, it is estimated that only 0.25% of CTT’s costs will vary.
Traffic
At the level of traffic, it is deemed that its evolution for 2015 will correspond to the development in the last twelve months ending in September 2014, that is, -4.6%.
For 2016 and 2017, ICP - ANACOM estimates a lower traffic reduction than in the previous years, considering that in 2016 the traffic drop will be lower than that estimated for 2015, and that in 2017 it will be lower than estimates for 2016.
On the basis of traffic evolution estimates for correspondence and editorial mail, according to a study prepared in 2011 by Copenhagen Institute for Futures Studies for the International Post Corporation4, which includes traffic evolution estimates in Europe for the 2010-2020 period, ICP - ANACOM, considering, where appropriate, the worst-case scenario in terms of traffic evolution, estimates that in 2017, the average annual variation of traffic of services covered by the pricing rule is -3.7%5.
For 2016, the traffic variation is estimated to reach an intermediate point between the traffic variation estimated for 2015 (-4.6%) and that estimated for 2017 (-3.7%), amounting to -4.1%.
Inflation
The following levels of inflation are deemed to be reached in the 2015-2017 period:
- For 2015, a level similar to that forecasted for 2015 in the State Budget Report for 2015, that is an inflation by 0.7%;
- For 2016, a level corresponding to the variation of the Harmonised Index of Consumer Prices (HICP) forecasted by the Bank of Portugal, in its Economic Bulletin-June 2014, for 2016, that is, inflation by 1.1%;
- 1.1% for 2017, assuming ICP - ANACOM that in 2017 the inflation will correspond to that estimated in 2016.
|
|
2015 |
2016 |
2017 |
|
Inflation |
0.7% a) |
1.1% b) |
1.1% c) |
|
Traffic |
-4.6% d) |
-4.1% e) |
-3.7% f) |
|
Costs |
-1.8% g) |
-1.7% g) |
-1.6% g) |
(a) Inflation forecasted for 2015 in the State Budget Report for 2015.
(b) Inflation corresponding to HICP variation, forecasted by the Bank of Portugal, in its Economic Bulletin-June 2014.
(c) It is assumed that in 2017 the inflation will correspond to that estimated in 2016.
(d) Traffic variation [for correspondence (except bulk mail), parcels and newspapers and periodicals, all of the national service and international outgoing service] occurred in the last twelve months ending in September 2014 is taken into account, compared to the same period in the previous year.
(e) ICP-ANACOM assumption.
(f) At the level of correspondence and editorial mail, traffic variations similar to those estimated by Copenhagen Institute for Future Studies for Europe for the 2010-2020 period are deemed to occur (estimates quoted in the study “Main developments in the postal sector 2010-2013” prepared by WIK - Consult for the European Commission), being adopted the worst-case scenario (with higher traffic decrease) where more than one scenario is presented. Average annual variation estimates considered are as follows: -4% for transactional mail; -2.3% for social mail; (iii) -2.7% for newspapers and periodicals. As far as parcels are concerned, in the scope of the US, ICP-ANACOM considers a zero variation of traffic.
(g) Average annual variation by -0.63% per year, plus 0.25% variation per each 1% traffic variation.
Value of the annual price variation
Taking into account the referred evolution estimates for inflation, traffic and costs, for the 2015-2017 period, and the weight of costs related to staff and SES in CTT’s cost structure, the price variation that counterbalances the evolution of unit costs considered for the 2015-2017 period is CPI + 1.6% (vide Table 6).
|
Variable |
Year |
||
|
2015 |
2016 |
2017 |
|
|
Inflation |
0.7% |
1.1% |
1,1% |
|
Traffic variation |
-4.6% |
-4.1% |
-3,7% |
|
Variation of total costs [= -0.37% + 25% of traffic variation] a) |
-1.8% |
-1.7% |
-1,6% |
|
Variation of unit costs |
3.0% |
2.5% |
2,2% |
|
Annual average variation of unit profit to maintain the margin |
2.6% |
||
|
Price variation (CPI - X) |
CPI + 1.6% |
||
a) It is assumed that total costs related to staff and SES correspond to (BCI) (ECI) of total costs (source: CTT, letter No. 53631 of 05.09.2014).
Traffic estimate correction factor
In the light of the degree of uncertainty as regards the traffic evolution in the period of application of the pricing rule, it is deemed appropriate to provide for a traffic correction factor (TCF) that takes into account deviations that take place between traffic forecasted in this decision for the purpose of the definition of the formula on the maximum annual variation of prices and traffic that actually occurs, thus being corrected part of deviations that take place in the percentage margin of services covered by this pricing rule.
As referred, it is estimated that a 1% traffic variation leads to 0.25% of (total) costs variation. As such, assuming that profits vary in the same proportion as traffic6, the impact on the margin with be 0.75%.
So as not to transfer this risk fully to consumers, it is deemed that only a part of this traffic deviation should be incorporated into the pricing rule. It seems appropriate to share only half of this deviation and as such to share equally this risk. As such, if a traffic decrease that is higher than expected occurs, a part of it is allowed to be incorporated into the pricing rule, and so the incentive for a more efficient universal service remains for the service provider. Likewise, in case of a lower traffic decrease, or even of an increase thereof, part of that benefit is transferred to users and a similar part to the provider.
As such, for each one-off traffic deviation compared to forecasts, the allowed price variation is corrected by a value corresponding to half of 0.75, that is, to 0.375.
The correction value in the pricing rule is limited to a minimum and to a maximum value, which correspond to values that apply in situations of traffic deviations of 5 percentage points (positive and negative). As such, the annual value of TCF is found within the range [-1.9; 1.9].
This correction factor applies only as from the second year of validity of the pricing rule, that is, it is applied to the pricing rule of 2016 and 2017.
Inflation estimate correction factor
Additionally, as has been standard practice, it is deemed that the pricing rule should include an inflation correction factor (CPICF), which aims to incorporate into the maximum annual price variation any deviations compared to the inflation level initially provided for the previous year.
This correction may occur in the pricing rule for 2016 and 2017, and does not apply in 2015, as this is the first year of application.
Conclusion
In the light of the above:
(i) Bearing in mind limitations in terms of traffic and cost evolution forecasts;
(ii) Aiming to protect user interests; and
(iii) With the purpose of creating incentives, in the framework of the principle of cost orientation of prices, for an efficient provision of the universal postal service, and admitting that it is reasonable for productivity gains exceeding those required by the defined pricing rule to be passed on to CTT’s margins,
It is deemed appropriate to define the following maximum variation rule for the average price of the basket of services that includes correspondence, editorial mail and parcel services, covered by article 14 of the Postal Law:
- For 2015: CPI + 1.6%;
- For each of the following years: (CPI + CPICF) + 1.6% + TCF, where:
CPI - corresponds to the inflation expected for each year which is officially forecasted by the Government and as such entered in the State Budget Report in each year, as a rule disclosed in October of the previous year.
CPICF - CPI correction factor, which corresponds to the difference between the inflation value forecasted in the State Budget Report of a given year for the preceding year, and the inflation value that had been forecasted for the preceding year under the preceding paragraph, the upper threshold value for this difference being limited to 2.5%.
TCF - traffic correction value, which is calculated as follows:
TCF = -1.9%, if (Δqrn-1 – Δqin-1) ≥ 5 percentage points;
TCF = 1.9%, if (Δqrn-1 – Δqin-1) ≤ -5 percentage points;
TCF = 0.375% * (Δqrn-1 – Δqin-1), in remaining situations7;
Where:
Δqin-1 = -4.6% in 2015, -4.1% in 2016 and -3.7% in 2017; and
Δqrn-1 = (Qn-1 / Qn-2) – 1;
Qn-1 - traffic of the total of services covered by the pricing rule in the 12-month period ending in June of year n-1;
Qn-2 - traffic of the total of services covered by the pricing rule in the 12-month period ending in June of year n-28.
Additionally, in the light of the principle of affordability and so as to protect users, especially residential users and small and medium-sized enterprises, it is deemed appropriate to define a maximum annual variation for the price of national standard mail up to 20 g, which consists in the most relevant facility in terms of traffic for the segment of occasional users.
As such, it is considered appropriate to define that the price of national standard mail up to 20 g, applicable to the segment of occasional users (as a rule corresponding to residential users and also small and medium-sized enterprises, and which are paid mainly through stamps and postage stamps at post stations/CTT stores), shall not be subject to an annual price variation, either a one-off variation or an average annual variation, exceeding 7.5%. With this rule, the price for this facility will be at the most 0.45€ in 2015, 0.48€ in 2016 and 0.51€ in 2017, which is estimated to allow this price to remain below or very close to the average price applied in the European Union, which in 2012 was 0.49€9, and at the same time to bring closer the level of prices of unit costs of providing such a service.
1 Vide, for example, CTT’s Prospectus for Open Bid and Admission to Trading at Euronext Lisbon, of 18.11.2013 (pages 109, 127, 131, 139, 140, 160, 161 and 225 to 227), as well as CTT’s annual accounts and report for 2013 (page 33).
2 As notified by CTT on 29 July 2014.
3 Taking into account that costs related to staff and SES represent (BCI) (ECI) % of costs borne by CTT (source: CTT letter No. 53631, of 05.09.2014).
4 Study quoted by WIK-Consult in its study on developments of the postal sector in the 2010-2013 sector, prepared in 2013 for the European Commission. Average annual variation estimates for correspondence and editorial mail considered by ICP-ANACOM, included in the referred study, are as follows: (i) -4% for transactional mail (mail essentially sent by companies regarding transactions carried out; in the best-case scenario, the traffic variation for this type of mail would be -3%; (ii) -2.3% in the case of social mail (mail between consumers) - ICP-ANACOM assumed that this mail corresponds to 5% of traffic covered by the pricing rule; (iii) -2.7% for the delivery of newspapers and periodicals (in the best-case scenario the traffic variation for this mail would be -1.8%).
5 ICP-ANACOM also takes into account the stagnation of parcel traffic (in the universal service scope).
6 Assuming that the traffic composition remains unchanged.
7 In other words, in this case the annual TCF value lies within the range [-1.9%; 1.9%].
8 Account is taken of the traffic information for the twelve-month period ending in June every year, being used as information source statistical indicators of postal services reported every quarter by CTT to ICP - ANACOM, to allow CTT to prepare in a timely manner price proposals to take effect in the beginning of the following civil year. Data for the following quarter, concerning the 3rd quarter of the year, are reported to ICP - ANACOM by the end of October, that is, close to the submission by CTT of price proposals in the case of entry into force by the beginning of the year.
9 Source: ERGP Report on market indicators (13) 33 Rev. 1.
