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Ofcom to extend UK’s Second Class postal price cap

Monday, April 30th, 2012

UK regulator Ofcom has formally proposed extending Royal Mail’s limited new price controls to include Second Class large letters and small parcels.

The British universal postal service provider was given free reign to set its own prices as of this month, but a price cap was retained for Second Class letters to provide some protection for customers requiring a lower-price delivery service.

Royal Mail’s latest price increases, including a 30% increase for First Class rates and 40% increase for uncapped Second Class rates, comes into effect today.

On Friday, Ofcom launched a six-week consultation to extend the “safeguard cap” to large letters and small parcels up to 2kg in weight “to further protect vulnerable consumers and small businesses”, while allowing Royal Mail some flexibility to secure provision of the universal service.

Second Class large letters and small parcels would join a price cap for Second Class letters that is to run for seven years from this month, limiting Royal Mail to price increases to 53% above rates seen in 2011-12, plus inflation as indexed with the Consumer Price Index.

The extended price cap would apply from April 2013.

The regulator said research suggested that as much as half the average weekly spend by households on postal services – about 25p a week – was on large letters and small parcels.

Stuart McIntosh, the group director of competition at Ofcom, said: “Ofcom’s decision to extend the safeguard cap will further protect vulnerable consumers and businesses.

“Our proposals ensure that prices of large letters and small parcels up to 2kg will remain affordable.”

Price control

Ofcom decided last month that Royal Mail has a better knowledge of its postal market than a regulator could, and therefore had a better idea what level prices should be set for most of its products and services.

The key controlling factor, the regulator suggested at the time, would be the knowledge that if Royal Mail set its prices too high, it would drive customers to rival delivery firms or competing communications channels like the Internet.

The price cap for Second Class letters, effective this month did allow a price increase of 53% from the 2011/12 rate, but as of this month Royal Mail did not choose to raise Second Class letters to the full 55p as allowed by Ofcom, increasing the rate 40% to 50p.

Second Class large letter prices were raised between 8% and 19% as of this month, depending on weight. Although the rate for packets up to 100g was increased 65% compared to the year before, overall the average for large letters and small parcels was 14%, Ofcom said, leaving room within the 53% price cap for further price increases over the next seven years.

Ofcom is now consulting on its proposals until 11 June, 2012, with expectation of a final decision this summer.

Soften the blow

“Something had to give to keep the six day delivery Universal Service Obligation”

National consumer advocacy group Consumer Focus said today that the price cap on second class large letters and small parcels would “soften the blow” of stamp price rises for vulnerable consumers and also small businesses.

But Adam Scorer, director of policy and external affairs at Consumer Focus said Royal Mail could not rely only on increasing its rates to secure the universal service.

He said: “The economics of Royal Mail meant that something had to give to keep the six day delivery Universal Service Obligation. Consumers will have to pay more to put Royal Mail on a more sustainable footing. But the onus shouldn’t be all on consumers. Royal Mail knows that it cannot just rely on price rises to make a better return but must also deliver greater efficiencies throughout the entire business.”

The Communication Workers Union said that Royal Mail’s need to increase prices was the “inevitable result of competition and privatisation” in the UK market, but welcomed the additional safeguards from the proposed extended price cap.

The UK’s largest communications industry union said today’s price rises followed on from decades of below-inflation price increases at Royal Mail.

CWU deputy general secretary Dave Ward said of the extended Second Class price cap: “This is good news for many people and also for many small businesses, while still allowing Royal Mail to raise the revenues it needs.”

Source: Post&Parcel/Ofcom

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