Postcomm confirms price and service quality controls for UK Royal Mail

Following consultation on its final proposals, issued in December 2005, Postcomm – the independent regulator for postal services – has made only very limited modifications to Royal Mail’s price and service quality controls that will apply for the four year period commencing 3 April 2006. Accordingly, retail stamp prices can go up by no more than 2p this year (to 32p for first class, and 23p for second class).

The modifications reflect feedback from stakeholders during the consultation period. These are now subject only to agreement with Royal Mail and to the statutory 28-day process required under the Postal Services Act.

The changes Postcomm is making to the December proposals are designed to strengthen customer protection against Royal Mail’s dominant position and to provide further safeguards for the “one price goes anywhere” universal service. They are:

Retention of Presstream 2 – a second-class mail product used extensively by magazine publishers – within the price control. It has been demonstrated during the consultation that effective competition does not yet exist, and does not appear imminent, in this important market segment.
A more gradual phasing of the proposed price caps, so that the extra revenue allowed to Royal Mail will be more evenly spread over the period of the control. The extra revenue in the year from April 2006 will be limited to 4%, rather than the 6.2% provided for in the final proposals.
An adjustment to the mechanism by which the risk of an increase in Royal Mail’s pension deficit is shared between the company, its shareholder and its customers. This will offer further assurance that the company has sufficient funds to provide the universal service. This change to Postcomm’s “pension pass-through” mechanism will have no impact in 2006/07 but if the deficit has risen to more than £5.9bn Royal Mail would be allowed an increase in its revenues of up to 0.8% for each of the subsequent years until 2010. If triggered, this modification to the risk sharing mechanism could add up to 1p extra on the price of first class stamps by 2010.
Clarification of the intent in the December proposals to allow Royal Mail commercial freedom to respond to contract tenders in the competitive market.
Postcomm chairman, Nigel Stapleton, said: “Customers are already starting to experience the benefits of a fully competitive mail market. Postcomm’s new price and quality controls, to apply until April 2010, will provide a robust framework by which both Royal Mail and new operators can be successful in a growing and innovative market. Royal Mail has recently acknowledged that competition is prompting it to improve service quality and to drive down costs, to the benefit of all its customers. We believe this framework will enable Royal Mail to invest in the business, meet its obligations to the pension fund and build on these achievements going forwards.”

Following Postcomm’s consideration of the responses to the consultation which closed on 6 March, Royal Mail was notified of the substance of the changes to Postcomm’s modified proposals to meet points raised by all stakeholders during the consultation process. Postcomm has acted promptly so as to enable Royal Mail to confirm or withdraw the price increases it announced in January – to take effect on 3 April – which are conditional on its acceptance of all the proposed changes to its current licence.

Notes for editors

Postcomm published its final proposals on Royal Mail’s prices and service quality from 2006-2010 on 7 December 2005. These proposals which are intended to safeguard the one-price-goes anywhere universal postal service and promote a competitive mail market:

Provide an unprecedented £1.2 billion over the next four years for Royal Mail to invest in modernising its network
Allow Royal Mail an average of £320m a year towards reducing its £4.6bn pension fund deficit
Require Royal Mail to improve its efficiency by 3% per year.
The customers’ contribution towards funding these initiatives would require an increase in stamp prices. The proposals estimated this at a 2p increase in the price of 1st and 2nd class stamps, to 32p and 23p respectively in April 2006.

The revenues allowed to Royal Mail in today’s final package are essentially unchanged over the four year duration of the price control except that the risk-sharing mechanism between the company, its customers and its shareholder has been modified. This will provide further help for Royal Mail should its pension fund deficit increase significantly during the term of the price control. Were the deficit to increase above £5.9bn (versus a £4.6bn deficit as at March 2005) Postcomm will allow Royal Mail to recover extra revenues of up to 0.8% per annum from April 2007 onwards. Depending on how Royal Mail recovers such additional revenues from its customers, this (combined with the effect of the re-phasing of price caps) could lead to an extra 1p on the basic 1st class stamp price next year, up to a total of 37p for by 2010.

If Royal Mail accepts this package, it is subject to 28 days statutory consultation before the changes can be incorporated into Royal Mail’s licence and take legal effect. The changes can be backdated to 3 April once the 28 days consultation is over.

Postcomm expects to publish its formal decision document and to start the statutory licence modification process before the end of March.

In August, Royal Mail is due to change the way it charges for mail to take account of the size as well as the weight of each item. This will not affect the basic rate stamp prices for standard letters and it will not enable Royal Mail to earn more revenue. However, prices for bulky but lightweight mail items will rise, whereas prices of heavier items are expected to fall. Royal Mail is expected to announce price details of its “pricing in proportion” initiative later this month.

Postcomm and the mail market

Postcomm regulates Royal Mail’s prices and service quality in the letters market.

In the UK postal market
Over 80 million items are delivered each day six days a week to more than 27 million addresses
The letters market was opened to full competition on 1 January 2006
Postcomm has licensed 13 companies to compete with Royal Mail
Royal Mail is by far the biggest operator with more than 97% of the market
Royal Mail made a profit from operations of £452 million on its regulated activities last year (excluding exceptionals and pension deficit payments)