UK Royal Mail vows to fight against regulator’s new price controls

Postcomm is to change the way it regulates Royal Mail by establishing price controls linked to efficiency improvements and freezing average prices until 2010.

The proposals, published today, toughen up existing controls on Royal Mail less than a month after it announced record profits of Pounds 537m from operations.

The plans, which also include changing Royal Mail's service standards to reflect customer needs better, are to be introduced in April 2006, three months after the market is opened up to full competition.

But Royal Mail reacted angrily and vowed to fight the proposals, if necessary, through the Competition Commission. It claimed they threatened universal service, the commitment to deliver to every household, and encouraged cherry-picking by rivals.

The price controls, based on an asset value for Royal Mail of Pounds 2.2bn, would allow the company to make a regulated profit of about Pounds 285m a year until 2010, although it could improve this by raising its efficiency levels and growing volumes.

Royal Mail said Post-comm's asset valuation wiped more than Pounds 2bn off the value of the business and limited the company's return on sales to less than 5 per cent, compared with 22 per cent for TPG, its Dutch rival TPG and 16 per cent for Deutsche Post.

Adam Crozier, Royal Mail's chief executive, said the proposals would "starve" the postal operator of investment. "Royal Mail has been asking Postcomm to take off the handcuffs and let us compete. Instead, they've put us in a straitjacket."

Royal Mail's average domestic prices will be frozen between 2006 and 2010, under Postcomm's proposals. However, the company will be allowed to increase individual items by up to 4 per cent if it reduces other items by the same amount.

This will enable Royal Mail to increase the price of first-class stamps from 30p to 34p and second-class post from 21p to 23p by 2010.

Postcomm also announced plans to regulate some of the "access" prices that Royal Mail charges competitors for delivering items over the last mile.

The existing 16 service standards for specific Royal Mail products will be cut to six more general targets. However, four new standards will be added to measure correct delivery, the proportion of mail collections each working day, the proportion of mail delivered each working day and a target for post going to European destinations.

The proposals were welcomed by Peter Carr of Postwatch, who said: "The regulator has clearly learnt some of the lessons from the expiring price round."

Postcomm said that over the past two years Royal Mail had invested Pounds 40m less than it was allowed to. It added that the Pounds 285m did not include an allowance for Royal Mail to pay off its pension deficit, valued at Pounds 4.5bn under international accounting rules. Nigel Stapleton, Postcomm's chairman, said the new price controls would not starve Royal Mail of investment. "It is giving them a guaranteed return on efficient investments they make," he said.

ROYAL MAIL WARNING OVER PRICE FREEZE
PA News, p 1 06-01-2005
By PA Industrial Correspondent By Alan Jones
(ADVISORY: First ran yesterday under embargo)

The Royal Mail issued a stark warning today that plans to freeze its prices over the next five years would lead to the postal group's “inexorable decline” and threaten its ability to delivery letters to every address for the same price.

The organisation attacked proposals by industry regulator Postcomm which would only allow the price of a first class stamp to rise by 4p and a second class stamp by 2p up to the year 2010.

Postcomm said its proposed price caps were “challenging” but insisted they offered customers a better deal and would secure the so-called universal service, under which the Royal Mail delivers post to the UK's 27 million addresses for the same stamp price.

The regulator also unveiled measures which could cost the Royal Mail £280 million in refunds if it missed performance targets.

Four new performance standards would be introduced under Postcomm's plans, including a target of delivering 99% of mail every working day.

The Royal Mail warned that the “massive extension” of regulation into all aspects of its pricing would threaten the universal service and encourage “widespread cherry-picking” by rival firms when the postal market is opened up to full competition next year.

Chairman Allan Leighton said: “These proposals will literally starve Royal Mail of vital investment and so wreck the quality of service we have fought so hard to improve. We cannot accept them. It's as simple as that.

“Royal Mail's postmen and postwomen have achieved a fantastic turnaround and are now delivering the best quality of service in a decade.

“These proposals are a kick in the teeth for our people. They destroy the hard-won gains on quality of service and push Royal Mail back into a spiral of decline.”

Postcomm's proposals, which will go out to consultation for three months from today, were much tougher than Royal Mail had been expecting.

Nigel Stapleton, chairman of Postcomm, said: “Royal Mail still has over 99% of the letters market, but even limited competition so far in the marketplace has made the company more efficient and more customer-focused. The UK mail market is dynamic and growing. These proposals build on the momentum already generated by competition.

“Our proposals seek to strike an appropriate balance between Royal Mail's regulatory freedom in a newly liberalised market and the interests of mail customers and rival postal operators.

“This is good news for domestic customers, who would benefit from a freeze on Royal Mail's average prices and stronger incentives on the company to improve its quality of service.”

Royal Mail would be allowed to make an annual profit of about £285 million, but Postcomm said it could make more by increasing efficiency or growing its volumes.

“Royal Mail says it's ready for full competition and if it continues to improve its efficiency, this price control will enable the company to earn attractive returns for its shareholder, and at the same time pay down progressively its £4.5 billion pension deficit,” added Mr Stapleton.

Under a planned formula for pricing, a first class stamp could only rise from the current 30p to 34p and second class to 23p from the current 21p, assuming inflation remained at 2.5%.

The Royal Mail warned that unless the proposals were “substantially” changed it will take a complaint to the Competition Commission.

Mr Leighton said the plans would starve his organisation of funds, halve profits from current levels and force it to subsidise competitors by compelling it to carry rural letters at a loss.

Rivals would be able to cherry-pick mail that was easy to deliver, threatening the future of the universal service, while return on sales would be limited to less than 5%, compared with up to 22% for Royal Mail's competitors.

Chief Executive Adam Crozier said: “Royal Mail has consistently said it welcomes competition as long as it is fair. But with just over six months to go before the postal market is open to full competition, the regulator is proposing a pricing regime that starves Royal Mail of investment, denies us flexibility against competitors who can charge what they like and puts a brake on further improvements in quality.

“Royal Mail has been asking Postcomm to take off the handcuffs and let us compete. Instead, they've put us in a straitjacket.

“The regulator's proposals amount to a blueprint for the decline of Royal Mail. We will fight these proposals very hard indeed. They are totally unacceptable.”

Peter Carr, chairman of consumer group Postwatch, welcomed the proposals, adding: “The Regulator has clearly learnt some of the lessons from the expiring price control. This allowed Royal Mail to increase prices rather than focus on service and internal efficiency.

“The new proposals represent a better deal for customers and we strongly urge Postcomm's commissioners to resist outside pressure to weaken them.”

The Communication Workers Union called on the Government to immediately implement its election promise to review the impact of competition on postal services, and warned that the proposals could lead to job losses.

General secretary Billy Hayes said: “It is simply unacceptable for an unelected body to make such irresponsible proposals that put the future of the industry in doubt.

“Postcomm's suggestions would more than halve the profits Royal Mail recently recorded, increase the unsustainable losses it is making on stamped mail and stifle its ability to compete in a competitive market.

“It is absolutely imperative the Government introduces the review it promised into competition as soon as possible. The users of postal services, and the people who have worked so hard to turn this industry around, deserve no less.

“How can it be right for Royal Mail to have its prices restricted, its profits capped and be forced to meet 27 separate targets when its competitors can do as they please?

“As an absolute minimum we call upon the Government to put back the date when full competition is introduced to give the company time to prepare.”