Postcomm treads the access price tightrope

In trying to liberalise the postal services market, Postcomm faces the prospect of a legal challenge by Royal Mail over the access price. The timetable may slip if it fails to set a mutually acceptable benchmark. David Reed reports

Has the starting gun for the race to open up the postal services market injured one of the runners? Or is it just a false start? As clients await the chance to send direct mailshots at a lower cost, postal services licence holders may have to wait for the outcome of legal action to find out if the race is even on.

On 19 May, postal services regulator Postcomm announced proposals to allow UK Mail downstream access to Royal Mail delivery services. It had been asked to step in during April 2002 when the newly licensed company found itself unable to negotiate terms direct with the existing monopoly.

Key to the Postcomm proposals was a final access price of 11.46p per item under 60g which UK Mail transported to a Royal Mail delivery office. This would apply where items had been sorted; unsorted items would be charged at 13.01p.

Within hours, Royal Mail chairman Allan Leighton pronounced himself shocked by the plans. In autumn 2002, Postcomm mooted 14p as the final access price, before moving it lower.

"If the regulator has got the access arrangements wrong, then it means the destruction of the universal, one-price-goes-anywhere service," claimed Leighton. "It will mean a two-tier, or even a multi-tier, postal service where the price of sending a letter depends on the distance it is travelling."

Three days later, Royal Mail announced improved annual figures, with losses of GBP611m to end March 2003. Halving losses in the first year of a three-year recovery plan was widely recognised as an important achievement.

But Leighton renewed his complaints against Postcomm: "It is absolutely essential the regulator gets the price of access for competitors right. Our initial view is that the sums are again wrong… If this is the case, we won't hesitate to challenge the plan in the High Court."

This was an important escalation in a dispute that had been running since November 2001, when Postcomm first issued an interim licence to UK Mail, a division of Business Post. As Andy Barrett, head of marketing at Deutsche Post Mail Services UK, which also holds an interim licence, says: "The first gun has been fired."

Unfortunately, the shot appears to have wounded Deutsche Post, which last week announced it was suspending its bulk mail service plans. (PM last week).

Barrett notes that the outcome of the price determination being undertaken by Postcomm will set an important precedent in the market: "It is really a three-way issue between Royal Mail, Postcomm and UK Mail, which has no direct relation to us. But everybody will look to this for their own negotiations."

In that respect, "a grenade has been lobbed into the whole negotiation", says Barrett.

Postcomm is involved in a public consultation phase over its final access pricing proposals for UK Mail. This is due to end on August 20. At that point, Royal Mail can either accept the plan or challenge it in the courts.

It puts the 11 rival licence holders in a difficult position. While only four are planning anything like broad geographical coverage for bulk mail services, they all need to know what the underlying costs will be of using Royal Mail to carry out 'final mile' delivery.

That there is a market to be exploited is evident from the continued growth of direct mail in the UK. Volumes rose by 5.9 per cent during 2002, over the previous year, to reach 5.23 billion. Expenditure was up by 6.6 per cent to GBP2.38bn, according to DMIS.

"In terms of Deutsche Post, the UK market is still attractive. It is our intention to pursue liberalised markets, and the UK is one of the largest in Europe. It is too big to just throw down our tools at the first challenge. This is not terminal," says Barrett.

Postcomm will certainly hope that this is not the case. It has set out ambitious plans to deregulate around 30 per cent of the market by March 2005. That timetable could slip if Royal Mail initiates lengthy legal action over its pricing proposals.

Postcomm's plans were not surprisingly given an enthusiastic welcome by the Business Post Group, backer of UK Mail, in May. The company saw the prices as a "feasible basis for its proposed service", even though it had hoped the price would be lower.

"UK Mail has been asked to pay rather more than we had hoped," said Paul Carvell, chief executive of Business Post. "However, 18 months after UK Mail was granted its interim licence, we are keen to get on with the launch of our service, which has stimulated a lot of interest among many large business customers."

All of which leaves Postcomm literally between a rock and a hard place. It is keen to open up the postal services market, but faces fierce protests from the current monopoly.

And these are not the sort of proposals that can be roughed out on the back of an envelope. The May proposals ran to 140 pages, with many complex mathematical equations.

Postcomm is only too aware of the importance of reaching agreement without recourse to the law. "This consultation is the first one of its kind, so we are trying to be as reasonable as possible. It will be a benchmark, so we are taking it carefully. But we need to get the job done," says a spokesman.

With two months to go before the end of the current consultation period, the regulator says: "It is too early to say what will happen."

One thing that is certain, however, is that Royal Mail will not be getting the 20p it originally pushed for. It is unlikely to end up even with a final access price of 14p per item under 60g.

"We have got to try to come up with a price that will give both sides a business incentive to do it," says the Postcomm spokesman. "If we price it too high, no-one will take it up, Royal Mail will keep its monopoly, and someone else will set up a network. We don't want two networks."

Yet this is precisely what two of the interim licence holders are looking to do. Express Dairies has milk deliveries covering 60 per cent of UK homes, which could stretch to 95 per cent if other dairies sign up. And TPG Post UK can cover 80 per cent of UK homes via the Circular Distributors field force. If they can put together a sufficiently robust, disciplined and regular delivery option, they could rapidly find a client base. Deutsche Post may well be the first in line following its own failure to agree terms with Royal Mail.

But Postcomm has another important consideration. "If the price is too low, Royal Mail gets into difficulties," says the spokesman. For now, the regulator is sanguine about the current complaints being made. "If both sides complain at the same rate, you are doing the job right," he says.