Royal Mail price caps confirmed for large letters, small parcels

The UK postal regulator Ofcom has confirmed its decision to extend Royal Mail’s remaining price cap on Second Class letters to include Second Class large letters and small parcels. The move followed the deregulation of most of Royal Mail’s prices back in April, when Ofcom decided the universal service provider was in a better position to control its own postal rates, since customers now have the option of alternative communication channels like the Internet.

The retail Second Class letters price cap was set at 55p to guarantee an affordable rate for vulnerable consumers – a 53% hike on the 2011-12 rate – and applies for a seven-year period. Ofcom needed more time to decide on large letters and small parcels because of the complexities of weight differences in the rates, it said.

Today Ofcom issued its final decision setting the cap for Second class large letters and small parcels, up to 2kg in weight, at a rate 53% above the 2011-12 rate.

Both caps will also take account of inflation as measured by the Consumer Price Index, and do not apply to franked or business mail rates.

Regardless of today’s decision, rates for Second Class large letters and small parcels have gone up by around 19% since the end of April. Setting the price cap at 53% above last year’s rates means that Royal Mail now has the power to increase the rates further by about 34%, plus inflation, in the period up to 2019.

For Second Class large letters up to 100g, that means the 58p rate of 2011-12 increased to 69p in April 2012, and could now rise to as much as 88p, plus inflation.

Competition

Ofcom’s decision came following a public consultation in which Royal Mail said extending the price cap to large letters and small parcels was “unnecessary”, particularly in the light that consumers have access to competitor delivery services if they consider Royal Mail rates too high.

In response, Ofcom said today “the evidence suggests that awareness and/or use of these
competitive options is currently relatively low” among the public, and Royal Mail had not provided information to challenge such a view.

The regulator said in general respondents to its consultation backed the move to extend the cap, although the Communication Workers Union had pressed the regulator to extend the cap to all universal postal services.

Commenting on its decision, Ofcom said it believed it had struck a balance between Royal Mail having enough commercial freedom to fund the universal service and compete in the postal market, and providing safeguards for vulnerable consumers to ensure an affordable postal service.

“We may review the level of the cap in two to three years’ time if there is further evidence on affordability or concerns about Royal Mail’s ability to finance the universal service,” said the regulator today.