UK regulator defends intent to remove Royal Mail price controls

Members of the UK Parliament grilled regulator Ofcom today over its plans to allow Royal Mail to make “outrageous” increases in its postage rates to prop up universal service. Ofcom took over regulatory control of the postal market last October, and is currently consulting on proposals to remove all price restrictions on Royal Mail other than for Second Class single-piece letters. It is expected to make a decision on price regulation in the next few weeks.

MPs on the House of Commons’ Business, Innovation and Skills Committee took Ofcom to task for its proposals today, particularly the impact that vulnerable mail customers might face from a Second Class price cap that would allow a 53% increase in prices.

If Royal Mail took up the full price-changing power proposed, the increase would see the current 36p price of Second Class stamps taken to as much as 55p, above the current 46p level of First Class stamps.

MPs on the committee criticised Ofcom’s decision to tie the price cap for Second Class stamps only indirectly to service costs, and for essentially abandoning the First Class rate altogether.

Conservative MP Nadhim Zahawi warned: “This is likely to take the UK overnight from one of the lowest First Class stamp prices in the European Union to the highest.”

“Dead hand”

Stuart McIntosh, the Ofcom group director of competition, agreed that with Second Class prices going up substantially, First Class would have to rise significantly as well, although he appeared clueless regarding what kind of prices an unrestricted Royal Mail might impose on First Class mail and its other services, and how price increases would impact on mailers.

He argued that whatever Royal Mail decided to do with its prices would remain “affordable” because low-income families and small businesses do not currently spend a lot on mail services each week.

The Ofcom director dismissed the mail industry as being dominated by business customers that could simply avoid significant price increases in postage thanks to bulk mail discounts, and insisted that impacts on mail volumes would “not be that huge” in the short term.

McIntosh said Royal Mail knew the postal market better than a regulator could, and would therefore know not to put its prices up too high for fear of driving volumes away to other communications channels.

“We believe that the company Royal Mail and the industry is in a much better position than the regulator to figure out how prices need to be set across the whole market in order to sustain its viability,” he said.

“The changes we are putting in place are going to take away the dead hand of regulation from day-to-day management of the company, so they will have some more flexibility.”

Ofcom’s view in front of the committee was that under the previous regulatory framework, price controls have seen Royal Mail losing hundreds of millions of pounds in its mail business since 2006, and as a result price controls should be abandoned to protect the universal service.

Efficiency

Also giving testimony to the Commons committee today, national consumer advocates Consumer Focus expressed the concern that if Royal Mail is allowed to make major increases in its prices it would no longer have the incentive to continue major efficiency improvements.

“We don’t underestimate the scale of the challenge that Royal Mail face to drive out efficiency from their business and build a sustainable, profitable model given the characteristics of the market,” said Consumer Focus director of policy Adam Scorer. “We just don’t want to see any pressure taken off that impetus by a price control mechanism that would allow it to do the far easier thing of raising prices in what is often a captive market.”

Consumer Focus insisted that its modelling found that even a “very modest” 5% improvement in efficiency at Royal Mail could see the company turning around its poor financial performance “significantly” without relying on price increases.

The group said it was “particularly concerned” about the impact of price rises on vulnerable sectors of society, including those in rural and remote areas, those on low income and those with limited access to the Internet as well as the elderly and disabled.

Next week the Commons Committee is due to hear evidence from Royal Mail and from the Post Bank coalition, a group including unions and small business federations supporting the expansion of financial services to shore up the post office network.