Postcomm proposes a faster route to ending UK Royal Mail’s postal monopoly

Postcomm today (20 September 2004) launched a consultation on a package of measures designed to bring forward competition in postal services, promote greater efficiency and service quality from Royal Mail and make it easier for competitors to enter the market. The proposals would:

• Advance Postcomm’s current timetable for full market opening by 15 months to 1 January 2006.

• Provide Royal Mail with an extra nine months to prepare for full liberalisation by cancelling the interim stage of market opening that had been planned for April 2005.

• Safeguard the continuing provision of a universal service for 1st and 2nd class stamped post at a geographically uniform price.

• Set a framework for Royal Mail’s price and service quality control from April 2006 onwards that:

o rewards it for success in continuing to grow mail volumes;
o rewards improvements in operating efficiency; but
o reduces the company’s allowed revenue if it fails to meet its quality of service commitments.

• Provide more freedom for Royal Mail to offer new, innovative, services to help it compete in the fully liberalised market.

• Give customers more choices, so they can select a postal supplier that meets their service quality requirements and offers innovative postal products.

Commenting on these proposals, Nigel Stapleton, Chairman of Postcomm said:

“We know that these proposals will, in the main, be warmly welcomed by Royal Mail’s emerging competitors, by the major postal users and by the consumer watchdog, Postwatch.

"Postcomm is pleased that Royal Mail also welcomes the prospect of an earlier opening of the mail market. Clearly, this reflects a changing culture within the organisation and bodes well for its prospects in a fully liberalised market.

“Postcomm remains fully committed to ensuring the continued viability of the universal postal service and to protecting the interests of Royal Mail’s retail and small business customers, for whom it will probably take longer to deliver the benefits from a fully competitive postal market. That is why our 2006 price control proposals envisage stronger incentives for Royal Mail to improve operating efficiencies and service quality and to share the benefits with its customers.”

Postcomm is strongly encouraging feedback from all stakeholders on their consultation documents. After considering this feedback, Postcomm’s final determination on the timetable for market opening will be made in February 2005.

BACKGROUND BRIEFING

Market opening timetable
A key announcement in today’s package of measures is the proposal to bring forward full market opening in postal services to 1 January 2006.

Stage 1 of postal competition — which has operated since April 2003 – opened around 30% by value of the letters market to companies handling bulk mail in batches of 4,000 letters or more. In addition, companies could apply for consolidation licences for access to Royal Mail’s local delivery network and “defined activity” licences for certain niche segments. Up to now it has made almost no impact on Royal Mail’s monopoly of the business and the state-owned company still has more than 99% of the market.

This was to be followed by a further stage of market opening in April 2005, to open up a further 30% of the market by value, leading up to full opening in April 2007. Postcomm’s proposals cancel the second stage and allow stage 1 to continue up to the new date for full market opening on 1 January 2006.

Full market opening will mean that licensed operators can deliver any mail, from single letters to huge bulk mailings, in competition with Royal Mail. They can set up collection boxes, provide collections and deliveries between businesses, offer tracked mail services, mail deliveries at a guaranteed time and much more, depending on what customers want.

Competitors to Royal Mail will still be required to apply for an operating licence from Postcomm. We will be consulting, in November, on changes to the licensing framework needed to implement these proposals: these will be of a ‘light touch’, but with a focus on promoting confidence in the market.

Royal Mail will be required to continue to provide a universal postal service including first and second class mail of one delivery and one collection each working day at a uniform price throughout the UK, and to provide a business mail service on universal service terms.

The document also looks at whether a bulk mail service should sit within the Universal Service. Postcomm believes such a service should be Mailsort 1400.

Postcomm has considered carefully the impact of earlier market opening on Royal Mail’s ability to finance its universal service obligations. They have concluded that Royal Mail will be able to deal with the challenges of a fully liberalised postal market. In the financial year that ended on the 28 March 2004, the company earned a 6% operating margin on revenues from its price control letters business – an operating profit of £348m – and that is before it had started to deliver significant efficiencies from its Renewal Plan, which is now nearing completion.

Other key points covered in today’s proposals include:

Competitive market review document
Postcomm is seeking a government review of Royal Mail’s exemption from VAT. The consultation document supports reforms to the European Postal Services Directive to ‘level the playing field‘ in postal competition. Postcomm wants a VAT solution that does not lead to significant price increases and suggests a reduced rate of VAT (around 5%) should be applied to all postal operators, including Royal Mail.

Postcomm cannot itself make any changes to VAT, but will continue to discuss possible solutions with the Treasury and other interested departments.

2006 price control review document
The third of Postcomm’s consultation documents explains Postcomm’s initial thinking about what framework it may adopt for the 2006 price and service quality control. It envisages that the next control should cover a period of five years from April 2006, provided Royal Mail can provide sufficiently robust information.

Postcomm is envisaging a framework for the 2006 price control which will allow the degree of regulation over Royal Mail to be relaxed progressively as genuine competition develops. Royal Mail will be permitted to retain any benefit from continuing to grow its mail volumes but will be required to share with customers the benefits from efficiency improvements. Further steps may be taken if there were to be a significant drop-off in volumes.

The price control process will consider the results of a customer survey and proposals from Postwatch and Royal Mail, on the key yardsticks for measuring quality of service. Given Royal Mail’s recent performance, Postcomm expects to strengthen the company’s incentives to meet these targets in the 2006 Control.

Postcomm will consider whether different parts of the market warrant different approaches to price control, rather than ‘one size fits all.’ This could be achieved with different tariff baskets for, say, public tariffs and business tariffs. Postcomm will also consider whether access products should fall within the scope of the price control.

Royal Mail dominates the UK letters market. In the 0-350g licensed part of the market, Royal Mail has a market share in excess of 99%. This part of the market is worth around £4.5bn.

In the first year of the present price control, Royal Mail made a 6% operating margin on its price controlled business.

Postcomm will be making its next set of proposals on the 2006 price control in April 2005.

Today’s proposals are described fully in three consultation documents that Postcomm is publishing today on its website, www.postcomm.gov.uk. They are:

Revised Market Opening Timetable – proposals for consultation: A re-evaluation of the three step timetable that Postcomm developed in 2002 to open the postal market to competition

Competitive Market Review: A detailed assessment of the current competitive situation in the postal market and the barriers to entry.

2006 Royal Mail Price and Service Quality Review – consultation on principles: Initial proposals on the framework for the new price and service quality controls over Royal Mail, which are due to come into effect on 1 April 2006.

Paper copies are available from Postcomm at 6 Hercules Road, London SE1 7DB. Responses are requested by 20 December 2004.

Postcomm – the Postal Services Commission – is an independent regulator. It has been set up to further the interests of users of postal services. Postcomm’s main tasks are to:

• Seek to ensure a universal postal service at an affordable uniform tariff
• Further the interests of users wherever appropriate through competition
• License postal operators
• Control Royal Mail’s prices and quality of service
• Give advice to government on the future of the post office network.

Postcomm’s policies are steered by a board of seven commissioners, headed by the chairman, Nigel Stapleton.

More details are on Postcomm’s website, www.postcomm.gov.uk.