Postcomm proposes price caps, service targets for Royal Mail UK

Industry regulator Postcomm is proposing tighter price and service targets for Royal Mail in proposals put out for consultation today.

The proposals freeze Royal Mail’s average domestic prices from 2006-2010, introduce service quality targets more suited to customers’ needs, and create the conditions that will enable new operators to establish themselves successfully in the mail market, Postcomm said.

The Royal Mail said the proposals would lead to a decline in its service, in a statement to the BBC.

Postcomm’s proposed price cap guarantees that first class stamps will have risen to no more than 34 pence by 2010.

Royal Mail stamps are currently 30 pence for first class and 21 pence for second class.

Postcomm also proposes tougher penalties for missing delivery targets which could cost Royal Mail 280 mln stg in refunds, according to the BBC report.

Royal Mail chairman Allan Leighton was cited: ‘These proposals will literally starve Royal Mail of vital investment.’

Four new performance standards would be introduced under Postcomm’s plans, including a target of delivering 99 pct of mail by the next working day.

The proposed pricing caps, which would also see second class stamps limited to a price of 23 pence by 2010, assume inflation does not exceed 2.5 pct.

Nigel Stapleton, chairman of Postcomm said the revised price caps are challenging but achievable as Royal Mail prepares for the full opening of the market in 2006.

Royal Mail still has over 99 pct of the letters market, but even limited competition so far in the marketplace has made the company more efficient and more customer-focused, he said.

The proposals, which are out for consultation for three months, cover revised controls for four years, from April 2006 until March 2010.

The structure of the control allows Royal Mail the freedom to make a regulatory profit of about 285 mln stg a year, although it could improve on this figure by increasing its efficiency or growing its volumes above the levels projected in the control.

Postcomm said a comprehensive assessment of Royal Mail’s costs suggests it can achieve efficiency savings of between 2.75 pct and 3.25 pct per year. Assuming 3 pct, Postcomm said it should be able to achieve the proposed price caps.

The proposals create a framework to increase investment in the universal service network.

Postcomm also said Royal Mail is under-invested compared with some European operators and the proposals provide strong incentives for the company to increase its capital investment, such as by automated sorting of mail.

Postcomm also said its proposals provide sufficient money for funding the present pension deficit over the four year period.