Postcomm allows Royal Mail GBP750m to improve services and prepare for competition

Postcomm today announced its revised proposals for a price control that will permit Royal Mail to raise the price of 1st and 2nd class stamps by 1p from April 2003 – and give it the option to raise 2nd class stamp prices by a further 1p in 2004 or 2005.
Today’s proposals take account of 21 responses to the consultation on Postcomm’s initial proposals, published in October 2002.
The three-year control, published today for statutory consultation, will allow Royal Mail approximately GBP750m extra cash over the three years.
In a letter to Allan Leighton, Chairman of Royal Mail Group, Graham Corbett, Chairman of Postcomm, says:
“These proposals enable you to maintain the momentum that you have begun to build, by covering all Royal Mail’s reasonable costs including capital expenditure and the costs of its renewal plan over the three years of the control.
“The control provides customers with important protections against excessive price rises, introduces raised service quality standards and, for the first time, provides a formalised compensation scheme for delayed mail.
“We believe that these proposals should encourage Royal Mail to push ahead with rebuilding both its reputation and its profitability. We want to see it firmly established as the robust and healthy core of what we hope will become an increasingly vibrant and competitive postal market. This will not just preserve the universal service. It will also benefit all of Royal Mail’s stakeholders – its customers, its shareholder and its people.”
Most postal prices have been frozen for the last two years. Nevertheless the Royal Mail’s regulated mails business has remained profitable. However, Royal Mail has argued that it needs a price rise to fund its renewal programme, as well as to cover expenditure on higher National Insurance Contributions which it had not previously asked Postcomm to allow for, and payments to its pension fund.
Postcomm does not yet know whether Royal Mail will accept these proposals. If not, the Competition Commission will be asked to adjudicate.
Other parts of the wider Royal Mail Group – including Parcelforce, Post Office Counters and various overseas interests – have experienced serious financial difficulties, culminating in losses for the group of around £1m a day. Postcomm does not regulate these businesses.
In more detail
Based on the retail price index (RPI) the new control uses the familiar RPI-X formula. It includes:

a 3% increase in prices from April this year

further increases of RPI -1% in years two and three. Assuming RPI of 2.5%, this means prices in 2004 and 2005 can increase by 1.5% each year. Within this limit Royal Mail will be able to increase 2nd class stamp prices by 1p in 2004 or 2005, providing it balances this with price reductions elsewhere

the £750m is made up of about £170m in 2003/4, £250m in 2004/5 and £330m in 2005/6.

a ‘tariff basket’ form of price control that will ensure that revenues move in line with costs in the event of any change in its product mix towards higher (or lower) priced products

a facility under which Royal Mail can raise or lower prices of individual products within the tariff basket to bring prices better into line with costs

provision for genuinely new products to sit outside the price control

a tightening of Royal Mail’s service standards, including tighter targets for the delivery of 1st class letters, and

the first enforceable scheme to compensate domestic and business customers for late delivery of post.
The tariff basket
The tariff basket achieves two aims. First, it means that permitted revenues can move in line with costs as the proportion of higher priced product (such as Special Delivery) increases, thus avoiding the product mix effect concerns raised by Royal Mail and identified in Postcomm’s initial proposals.
Second, to allow Royal Mail more pricing flexibility, the price of individual products can rise and fall provided the “basket” of tariffs remains within the overall price control. This means, for example, that Royal Mail would be able to reduce the prices of some of its products, and within certain limits balance this by raising the price of other products, without prior regulatory approval. Outside those limits, Royal Mail would need approval in advance. The limits are 2.5% above the price control – a total of 4% assuming forecast rates of inflation. In addition, Royal Mail has been given dispensation to raise the price of a second
3class stamp by 1p (5%) in year two or three (but not both) if it wishes, but again will have to rebalance this by reductions in prices of other products.
Service quality
New quality of service targets have been agreed with Postwatch, the consumer watchdog. For first class post, averaged across all postcode areas, the target will increase from 92.5% delivered next day to 93% for the year ending March 2006. Standards for regional performance will be raised to iron out variations in service quality between postcode regions throughout the UK.
Compensation
For the first time Royal Mail will be subject to enforceable compensation schemes for late mail.
Business customers will be compensated at the rate of 1% of their Royal Mail bills for each 1% that Royal Mail fails to meet national targets. The minimum payment will be at a shortfall of 1% and increase by 0.1% increments up to a maximum of 5%.
For domestic users a simpler scheme is proposed. For basic claims, where it is not so easy to prove how many days a piece of mail has been delayed, compensation will be set at 12 first-class stamps. Where there is clear evidence of delay, compensation will be £5. This is doubled to £10 if the delay is 10 days or more after the due date of delivery. For Special Delivery, in addition to the compensation, there will also be a refund of postage costs.
Notes to Editors
The consultation period ends on Monday 10th March 2003.
Royal Mail has already announced its intention, subject to Postcomm’s approval, to increase the price of first and second class stamps by 1p from 17 April 2003.
The figures in this press notice are in nominal terms. The £750m of extra revenue is in comparison to not allowing Royal Mail any price increases over the period of the control.