Extensive support on policy and regulatory issues associated with the liberalization of the postal sector and the provision of universal service

Project executed on behalf of Cyprus Office of the Commissioner of Electronic Communications and Postal Regulation (OCECPR)

Projects Objective

The regulator of the postal sector in Cyprus (Office of the Commissioner of Electronic Communications and Postal Regulation, OCECPR) required expert support throughout the postal liberalization process, for the development of regulations, and appropriate methodologies, regulatory tools and market/competition analyses.

Projects Description

Axon Consulting supported OCECPR in several activities associated with the liberalisation of the postal sector, including, in particular:

  • The development of an analytical tool that allowed the client to understand the economics of the incumbent, Cyprus Post (CP). Due to the early stage of the regulatory framework at that time, the Office asked that the tool should be suitable for sensitivity scenarios to calculate the impact of alternative policies and obligations to be introduced in the market. Axon Consulting developed the first techno-economic bottom-up model for postal services, which followed the LRIC standard (Long-Run Incremental Costs). The model is able to calculate the resources (e.g., employees, vehicles, offices) and the corresponding costs associated with all the activities performed by the postal incumbent. As an example, the following exhibit presents the unitary costs of regular letters (by weight) obtained through this BULRIC model, depending on overall demand (letters per capita):
Figure 1: Unit cost of regular mail depending on the overall demand. Note: Figures have been altered, for confidentiality purposes
  • Axon Consulting developed a Competition Tool to support OCECPR in its analysis of the tariffs set by CP. The tool allows the Office to compare all tariffs against Average Total Costs (ATC) and the Long-Run Incremental Costs (LRIC) associated with the provision of the relevant service. It further allows the Office to identify any potential anticompetitive practice (such as predatory pricing) or any excessive pricing policy that is contrary to the interest of service beneficiaries. The following exhibit illustrates a main result of the Competition Tool:
Figure 2: Illustrative comparison of the regular mail prices with the provision costs demand. Note: Figures have been altered for confidentiality purposes
  • Axon Consulting developed a methodology to be used for the calculation of any potential compensation due to  the incumbent (Cyprus Post) for its universal service obligations. The methodology was consistent with international best practice in Europe. In particular, it was used to calculate the net costs associated with specific target KPIs and obligations, such as daily collection and delivery, free services for blind users, etc. The methodology also considered the intangible benefits resulting from the incumbent’s license. Specifically, it took into account the benefits associated with the incumbent’s services’ exemption from VAT. For the calculation of these intangible benefits, the resulting variations in demand due to demand-elasticity and the associated variations in revenues and costs were taken into account. The following exhibit presents the calculation methodology thus defined:
Figure 3: Methodology for the calculation of the VAT-exemption Indirect Benefits associated to the incumbent
  • Axon Consulting developed a module that would allow the OCECPR to calculate the compensation associated with the Net Cost of the Universal Service (NCUS), based on the methodology defined by the Office (see previous activity). The NCUS Calculation Module obtained the differences in costs and revenues associated with the KPIs and the incumbent’s obligations, based on the BULRIC Model developed previously by Axon Consulting. The Module also takes into consideration potential side effects, such as main variations in demand associated with any changes in KPIs. For instance, periodical services would not be provided in the regions where delivery is not daily. The following exhibit presents the breakdown of the NCUS result by service and activity:
Figure 4: Breakdown of the results of the NCUS Calculation Module by service and by activity. Note: Figures have been altered with confidentiality purposes
  • Axon Consulting developed an Electronic Inquiry Form and a set of Automatic Interface Tools (AIT) that would allow the OCECPR to easily update the BULRIC Model, the Competition Tool and the NCUS Calculation Model from information extracted from Cyprus Post’s new regulatory cost accounting system and other management systems. We also developed a module to forecast the demand of postal services. The following exhibit presents the blocks developed for the OCECPR and their interaction:
Figure 5: Overview of modules developed for OCECPR

Finally, the above activities were complemented with:

  • Advice on potential integrations and modifications to the regulations associated with the monitoring of the regulatory accounts of Cyprus Post and the tariff-setting of regulated services
  • A market and competition analysis of the different regulated segments and services provided by Cyprus Post, based on the applicable prices, the results of the BULRIC Model and the trends observed in the market (demand evolution, new competitors etc…)
  • Workshops and other knowledge transfer sessions associated with the update and use of the tools developed, the analysis of proposed tariffs by Cyprus Post and the determination of regulated retail and wholesale tariffs.

Key Takeaways

The project provided OCECPR with the required regulations, tools and knowledge to implement the liberalisation of the postal sector in the country. It created, among other benefits, the

  • Capability to assess the incumbent’s prices in order to identify potential anticompetitive practices
  • Tools to assess the economic impact, on postal services, of different regulatory and policy measures
  • Methodology and tools necessary to calculate the compensation associated with universal service obligations
  • Mechanisms to easily update and maintain the existing tools, based on the incumbent’s regulatory accounting reports.