Ofcom proposes "biggest-ever" shake-up of UK mail market

The UK’s new postal regulator, Ofcom, is proposing to give Royal Mail the freedom to set its own postal rates for the majority of its products, including First Class letters and basic parcels. The proposals, within a new seven-year regulatory framework now out for public consultation – include a cap on Second Class stamps for basic letters of between 45p and 55p per piece. The cap could be reviewed in two years’ time to take account of any changes in the market.

But, Royal Mail would be able to set prices for First Class letters, large letters and parcels, as well as Second Class large letters and parcels up to 1kg in weight.

It would also be able to set its own prices for business mail (metered or franked, plus pre-printed envelopes) and bulk mail, which is now no longer part of the universal service obligation.

The changes are being seen by some as the biggest ever to the UK mail market.

Consultation on the proposals closes on 5 January, 2012, with the framework expected to come into force later in the spring of 2012.

Universal service

Communications industry regulator Ofcom took over oversight responsibility for the postal industry from Postcomm at the start of this month.

It said today a more flexible approach was needed to help sustain one of the toughest universal service obligations in Europe.

Royal Mail delivered 16bn letters to about 28m addresses last year, but mail volumes have declined 25% since 2006.

The operator made a loss of GBP 120m loss on its protected universal services last year, despite the fact that First Class stamp prices have risen by 70% since 2003, and Second Class stamps have seen a near-90% jump in prices.

Ofcom said regulatory changes were needed for the operator to continue providing the GBP 6bn universal service obligation while maintaining standards for 93% of First Class mail to arrive next-day, and 98.5% of Second Class mail to arrive within three days.

Stuart McIntosh, group director of competition at Ofcom (pictured top right), said: “The universal postal service – which ensures that letters are delivered to every address in the UK six days a week – is significant and highly-valued by the public. However, unless changes are made to the regulation of post, this service is under threat.”

Competition

Elsewhere in the Ofcom proposals, the regulator promised to monitor Royal Mail’s performance closely regarding its universal service obligation, and require Royal Mail to continue providing access to its network to competitors.

Competition will provide Royal Mail with the incentive to continue efficiency improvements and innovate in its services, the regulator said, but added the warning that encouraging more competition also brings risks for Royal Mail’s viability from rivals “cherry-picking” more lucrative areas of business.

Under the new proposals, Royal Mail will have the freedom to set wholesale prices for access to its network, but margins between the wholesale and retail prices would be subject to rules to ensure competitors can compete with Royal Mail. Margin controls would reviewed every 18 months.

In the consultation document, Ofcom also stated its preference for ultimately allowing Royal Mail to set zonal prices in future, to better reflect its own underlying costs “whilst retaining sufficient protection for customers”.

Ofcom also wants to open the door to operators who might want to provide “end-to-end” services, delivering mail without using any of Royal Mail’s network resources. Currently, such arrangements are seen in the UK only in limited geographic areas or for certain more-profitable products like parcel delivery.

New end-to-end service providers would have to notify their intentions, which would be reviewed by Ofcom to decide on the potential impact on Royal Mail.

Royal Mail: Timely changes

Commenting on today’s proposals from Ofcom, Royal Mail said the framework was a “significant step” towards securing a six-day-a-week, one-price-goes-anywhere universal service.

The company noted that its requirements under the universal service obligation exceeded those of other European operators, and also underlined its intention to continue modernising and streamlining its operations.

More pricing flexibility is needed, it said, in order to keep its services “affordable, especially for disadvantaged households” while average daily volumes have fallen by 18m items, to 62m, over the past five years.

Moya Greene, the Royal Mail Group chief executive, said the company would give Ofcom’s proposals a “great deal of attention” before coming to a view.

She said: “It is clear, however, that the Ofcom proposals are a significant step towards securing a sound and sustainable Universal Service. The proposals are timely, too, as radical action is needed now given the ongoing decline in volumes and revenues and the inability to cover the costs of our Universal Service.”

Union: “Deregulatory steps”

The Communication Workers Union said the Ofcom proposals had recognised the “major failures” of the Postcomm regime, and it welcomed the flexibility for Royal Mail to set prices, adjusting “artificially low” prices.

However, the union also revealed reservations about the impact that higher postal rates would have on affordability for consumers.

The UK’s largest union in the postal sector, with 200,000 members, said it also believed Ofcom’s revision of prices for competitors to access Royal Mail’s network could have gone further, although it welcomed removal of price controls on bulk mail.

Billy Hayes, CWU general secretary, said: “These appear to be major deregulatory steps from Ofcom and we broadly welcome this signal of a radically different approach to regulation which has been recognised as a failure.

“We do have reservations over the impact on consumers, and we’ll be looking closely at the details of the proposals before making our submission to the consultation,” added Hayes. “The principle of a universal service with affordable and equal access to everyone is hugely important and we want to see it robustly maintained.”

Consumer groups: Protections needed

National consumer watchdog Consumer Focus said the Ofcom proposals were potentially “the biggest shake-up to the mail market we have ever seen”.

Mike O’Connor, the group’s chief executive, said it was “clear” that the current situation at Royal Mail had become unsustainable with mail volume declines and a lack of business efficiency.

But, he warned that mail services were now going to get more expensive for consumers.

“While the unit cost of a stamp may seem small, consumers have a right to expect value for money for all service,” said O’Connor.

“If what emerges is a core regulated postal service centred on the current Second Class service, Ofcom must ensure that the scope of that service covers all consumer needs, and that necessary protections and standards of performance are hardwired into the service.”