Postcomm modifies UK Royal Mail’s licence to include new price control

Postcomm today announced amendments to Royal Mail’s licence to include new three-year price control arrangements, to which Royal Mail agreed on 20 March.
The new arrangements allow Royal Mail to raise prices of 1st and 2nd class stamps by 1p shortly, as Postcomm understands Royal Mail intends to do. In all, the price control allows Royal Mail approximately £750m extra cash over the three years of the control.
The licence amendments also open the way to an enforceable scheme to compensate domestic and business users for late delivery of post.
Today’s announcement follows consultation on Postcomm’s final proposals. Apart from some minor changes in wording to satisfy new accountancy guidelines, the price control package is in all material respects the same as the final proposals published on 6 February.
Graham Corbett, chairman of Postcomm said:
“It is essential that there is a healthy Royal Mail at the centre of a healthy competitive postal market. I am pleased that after a total of six months consultation, including numerous meetings with Royal Mail, the consumer body Postwatch and other stakeholders, we have been able to put together a price control package that Royal Mail accepts will allow it sufficient revenue to cover its costs and to manage its risks over the next three years.
“The extra revenue will enable Royal Mail to press ahead with its renewal programme, and improve its efficiency so it can provide better services for all postal users.”
Notes for editors
The new price control will take effect from tomorrow, 1 April, and last until 31 March 2006. It replaces a price freeze which was imposed when Royal Mail was granted its first licence in March 2001.
The price control package is based on the retail price index (RPI) and uses the familiar RPI-X formula to control price rises. It includes:

a 3% increase in prices this year
further increases of RPI-1% in years two and three. Assuming an RPI of 2.5%, this means prices in 2004 and 2005 can increase by 1.5% each year.

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

flexibility to allow Royal Mail to raise or lower prices of individual products to bring prices better into line with costs. Increases of more than 1.5% above inflation will be subject to Postcomm’s prior approval. Any increases must be balanced by reductions elsewhere

specific consent to immediate increases of 1p in the price of both first and second class stamps, and the facility, without Postcomm’s prior approval, of a further increase of 1p for second class stamps in 2004 or 2005, in each case subject to balancing these increases with reductions elsewhere to keep within the overall limits

provision for 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

provisions to permit the first enforceable scheme to compensate domestic and business customers for late deliveries of their post and

safeguards for the universal service by permitting Royal Mail to seek relief if, in exceptional circumstances, it is faced with unavoidable and unforeseen shortfalls over the next three years.
The licence amendment and Postcomm’s decision document are both published today on the Postcomm website, www.postcomm.gov.uk . Bound copies will be available shortly from Postcomm at 6 Hercules Road, London SE1 7DB.