UK Postal regulation delivers a first-class dispute
UK Royal Mail is protesting vociferously to the public and government about the damage that will be wreaked by proposed price controls, while agreeing with many elements of those controls in private, its regulator has suggested.
"They have gone over the top in terms of public comment . . . and some of it is quite deliberate. A lot of the private discussion is much more reasonable – there is much more agreement," Sarah Chambers, chief executive of Postcomm, says in a Financial Times interview. "We're not very far apart at all but you wouldn't hear them say that publicly."
The assertion is typical of the steely determination evinced by the 46-year-old regulatory chief in the face of intense lobbying by Royal Mail. The regulator and company are at loggerheads over proposals for price controls for 2006-10 that Postcomm issued in June. The "rather highly-charged atmosphere" – as Ms Chambers puts it – reflects the amount at stake for Royal Mail.
The next few months could be make-or-break for the state-owned postal services operator. It faces Postcomm's final decision on price controls next month, full market competition on January 1 and a government decision afterwards on its future ownership and structure. The fact that it is technically insolvent, thanks to a Pounds 4bn pension fund deficit, further complicates the regulatory equation.
It is not only Royal Mail that is under pressure. Postcomm faces intense scrutiny, not least from MPs on the trade and industry select committee, who have launched an inquiry into the price control proposals and the "thinking behind Postcomm's decision to open up the UK market before the rest of Europe".
That regulatory thinking remains highly contentious. Allan Leighton, Royal Mail's chairman, warns the financial turnround he has achieved at the company in the past three years is under threat. Postcomm's price control proposals would, he says, send the business into "inexorable decline by ensuring it cannot compete in the open market". The company argues that the very tight price cap on the regulated business which Royal Mail is required by law to undertake – including the delivery of post to every address in the land – will hammer its cashflow and profitability, while competitors come in and cherry-pick the higher-margin, unregulated business.
Ms Chambers gives short shrift to this prognosis, saying Royal Mail "cried wolf" before the previous price control round in 2003. "They talked about wreckulation (combining wreck and regulation), this is the end of the business as we know it . . . and none of it happened." This time around, Ms Chambers says, the company has "massively exaggerated the danger to their business from the onset of full market opening".
Suggestions that competitors will cherry-pick the most lucrative sections of the market have been overblown, she suggests, pointing out that Royal Mail has faced competition on bulk mailings, which account for about 30 per cent of its business, since 2003 but still retains an overall 99 per cent market share.
Royal Mail reacted angrily last night to the suggestion it was overplaying the extent of the threat it faces from the price controls. "Royal Mail is now seeing for the first time ever a drop in the number of letters being posted. Yet in spite of the fact that the market is actually shrinking, Postcomm is suggesting the market will grow by 2 per cent per year," it said. The company predicted it will "this year alone lose more than 1bn items of mail to rivals who can collect letters under arrangements that allows them access to the Royal Mail delivery network. That's around the same number of letters lost to access that Postcomm predicts we would be losing in 2008-09."
The disagreement over the impact of market liberalisation is underscored by more detailed arguments, at least in public. Royal Mail puts its value at about Pounds 5bn, Postcomm at less than half that. Royal Mail asserts it can save 1.5 per cent a year from job cuts and other efficiency savings, Postcomm doubles that forecast.
The divergent views of the regulator and the operator are illustrated perfectly in the argument over compensation. Postcomm plans to increase the amount it can force Royal Mail to pay customers for missing service targets to Pounds 280m – a cap which the company says in effect wipes out the Pounds 285m operating profit (after allowing for pensions costs) which the regulator plans to allow it to make each year.
This could allow the unions to hold it to ransom, knowing a big strike would push the company into the red. Ms Chambers is unimpressed by this logic. "I'm slightly surprised that the management is saying it because it's almost suggesting a tactic to the trade unions." The argument could end up at the Competition Commission, should Royal Mail refuse to sign off the final price controls being issued by Postcomm next month. Ms Chambers refuses to speculate on whether this will happen, saying simply: "I'm optimistic but who knows . . . I think they want to reach agreement."
