And now a word from the deregulator…

Anybody for a change of name? The Post Office is now Consignia, so how about postal regulator Postcomm becoming the Deregulator? For that’s what we’re really doing — deregulating the postal market and allowing Consignia to compete in the real world.

Before Postcomm was created, the Post Office not only had an absolute letter monopoly but it was also closely controlled by the government. DTI Ministers made all key decisions and, in particular, decided whether or not to increase the price of stamps. Things began to change in 1 999 when the government decided to allow the company more commercial freedom so it could compete with overseas postal operators who were setting up international operations. It also needed to compete more effectively with electronic communication, such as email, which was threatening to eat into its core business traffic. In exchange for the new freedom, and to force the pace of change, the government ruled that the Post Office should lose its monopoly and face competition. And it set up a deregulator, Postcomm, to oversee this substantial liberalisation of a key public service.

Postcomm is deregulating on three fronts: price, competition and service quality.

One of Postcomm’s first decisions, in March 2001, was to remove price controls from a wide range of Consignia’s products. The new pricing mechanism works like this:

A. In the fully competitive market (express parcels, courier services and the like). No price controls on Consignia.

B. Where Consignia faces limited competition (letters above 350g/£1 where competition is not yet well established). Prices can rise by the rate of inflation.

C. Where Consignia has a monopoly (letter post below 350 grams or £1). Prices are frozen.

So even at this early stage around a third of Consignia’s prices are deregulated completely or linked to rises in inflation. Over time the aim is for C to move towards B and B towards A. In the shorter term there remains a need to protect the public from unnecessary price rises. We are therefore examining the Royal Mail’s efficiency to see whether its investment needs mean that its customers should pay a little more for monopoly mail products, or whether there is scope for efficiency
savings which might allow the company to reduce its prices. Eventually, however, we hope competition will develop to the stage where there is no need for price controls.

More controversially we have announced proposals to remove restrictions on competition in the postal market. Like many others, we were concerned that competition would destroy the universal service — the collection and delivery of post six days a week at a uniform tariff throughout the UK. There seemed a danger that competitors would “cherry pick” the best parts of the business and that Consignia would be left with the parts of the universal service that the others don’t want, such as deliveries to isolated farmhouses and 1 0-storey blocks of flats.

However our research has shown that competition will not harm the universal service. The universal service is a commercial imperative as well as a social necessity. The mail is totally unlike the other utilities. Electricity companies and so on dislike the high fixed costs and low revenues associated with rural customers. It is true that the Royal Mail’s customers are also mainly in towns and cities. But they are mainly big organisations. (86 per cent of all mail is posted by business and half of all mail is posted by only 500 customers.) And big organisations need to get through to their customers wherever they are. They are not going to stop sending bills, or tax returns

— or even advertising material — to people who live on farms.

It’s a sort of daily postal tsunami: 80 million items last night, another 80 million tonight, another 80 million tomorrow night, and so on. An unstoppable tidal wave whose weight ensures that it reaches every corner of the land. And it is not practicable to charge a different price for a tiny proportion of hard-to-reach addresses. (Which
is why Rowland Hill originally introduced the fixed tariff in the form of the penny black. He realised that the cost savings associated with the simplicity of the fixed tariff more than outweighed the “losses” on longer journeys.)

And now to service quality: the most contentious area of all because almost everyone in the UK is a customer — often daily — of the postal industry. So should we allow the market to determine service quality — or should we continue to require the Royal Mail to meet specified service standards? Should we continue to require early morning deliveries, or require Consignia to improve the reliability of its first class service, if this would require price increases? And should we leave new entrants to the postal market to develop their services free of detailed surveillance by Postcomm. After all, noone “regulates” courier and express companies, which transmit packets of great value and importance. But many will expect Postcomm to ensure the integrity and quality of any new public postal service.

Finally should we require Consignia to contribute to the delivery of wider social and environmental objectives? This could lead to the company experiencing a level of regulatory control which is higher than that experienced by its competitors, and so arguably impose an unfair burden on the company, leading to job losses and a long term regulatory cost on the economy.

These and other issues will require careful judgement and, keen though we are to deregulate, we will be paying close attention to parliamentary and consumer opinion before we make final decisions.