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November 2010 Decision

Postcomm proposes deregulation in increasingly competitive postal markets

Postcomm has announced that it is moving towards a lighter touch regulatory regime, following extensive evidence gathering and consultation with interested parties. The proposed new regime grants Royal Mail more commercial freedoms in markets where competition is starting to develop. It also requires Royal Mail to sign up to safeguards [1]  to ensure that it does not subsidise activities in competitive markets with profits made in markets where it still has market power.

In May this year Postcomm set out proposals for the introduction of the first phase of a new regulatory framework for the postal services market to replace the structure that has been in place since 2006. Postcomm has today published a series of documents which set out our decisions.

Postcomm’s extensive analysis demonstrates that Royal Mail retains market power in major segments of the postal market. We estimate that well over half of Royal Mail’s revenue comes from these markets. In particular, Royal Mail still handles 99% of letter volumes over the ‘final mile’ (ie. delivery to the door).

In markets where Postcomm has identified growing competition, we intend to give Royal Mail greater commercial freedoms and are therefore proposing the following deregulation:

  • Substantial deregulation of packets and parcels weighing more than 2 kilograms
  • Retail price controls will be removed from all packets and parcels weighing more than 500 grams, and in parts of the pre-sorted bulk mail market
  • Royal Mail will be given greater freedom to compete in the pre-sorted bulk mail market, where the company has lost significant volumes to competitors

Before this deregulation is possible, Postcomm will require Royal Mail to provide transparency of its product costings and to pilot the preparation of new forms of financial statements [2]. Such safeguards are crucial to reassure customers and competitors that there is no inappropriate cross subsidisation. 

Postcomm has been working in consultation with interested parties on the precise nature of this new regulatory framework since the implementation of the current price control in April 2006. Royal Mail, the wider industry, Richard Hooper CBE and Government have been calling for reform and for a stable regulatory environment to meet changing market needs. Postcomm is confident that significant changes in the mail market mean that reform, previously delayed by policy uncertainties, can no longer wait.

Nigel Stapleton, Chair of Postcomm, said: “This package forms the bedrock of a much needed new, lighter touch regulatory framework. We welcome the development of competition in parts of the postal market and where this is clear we want to ensure that Royal Mail is free to compete on a level playing field with its competitors.”

“Our proposals form an important package of measures which need to be taken together; it would not be in the best interests of customers to grant Royal Mail this greater flexibility without appropriate safeguards to ensure it is properly accountable to all its customers, particularly in demonstrating that no unfair cross subsidies exist.”


Postcomm consults on price increases to help fund ongoing modernisation required to safeguard the provision of the Universal Service

Postcomm has also announced that it is minded to accept Royal Mail’s request for additional revenues to help maintain the pace of its modernisation programme, required to safeguard the provision of the Universal Service. This is subject to Postcomm’s consideration of the views of interested parties and to further due diligence of the evidence provided by Royal Mail.

The Hooper Report, published in December 2008 and updated in September 2010, has clearly identified that the Universal Service will remain under serious threat if Royal Mail fails to modernise and tackle its long standing inefficiency. In 2007, Royal Mail quantified its level of inefficiency compared to the other three largest European postal operators at 40% [3]. The pace of modernisation since then has increased but it is still behind plan and securing its financial benefits has been made more difficult because of the accelerating pace of decline in mail volumes.

As part of its May 2010 consultation, Postcomm proposed a ‘roll forward’ of the existing price control, and today’s package confirms that we intend to proceed with this. This will give Royal Mail the flexibility to increase the prices it charges customers from April 2011 on average by 7%, which would mean it could realise up to £280 million in additional revenues. More recently Royal Mail has informed us that it requires additional funding for its modernisation programme. Royal Mail cannot get the funding it needs from its shareholder or from the range of other steps it is taking to increase its internally generated cash flow. Royal Mail has therefore requested that Postcomm relax the 2011-12 price control for one year to allow it up to a further £100 million in revenue. Royal Mail plans to raise this revenue by increasing the prices it charges business customers and for giving its competitors access to its network. 

Postcomm is minded to accept Royal Mail’s request for additional revenue because the company has demonstrated that it will come close to fully utilising its borrowing capacity in 2011-12 and the financeability of the Universal Service is under serious threat. Postcomm’s primary duty is to what we can to ensure the provision of the Universal Service, and we are confident that completion of Royal Mail’s modernisation will mitigate current risks to its financeability. Postcomm is mindful of the potential negative impact that bringing forward price increases of this magnitude may have on customers and on the market, even though significant increases may have been required in 2012 given the reduction in mail volumes since the last price control review. This is an issue on which we expect interested parties to share their views when responding to Postcomm’s consultation to inform our final decision.

Nigel Stapleton, Chair of Postcomm, said: “There is broad consensus that there is a risk to the Universal Service unless Royal Mail quickly becomes a lot more efficient. To help fund Royal Mail’s modernisation, Postcomm has allowed Royal Mail to increase the prices of stamped mail by double the rate of inflation over the past five years. Postcomm therefore welcomes Royal Mail’s decision to complete its modernisation programme as fast as possible but regrets that the company is unable to do so without making further demands on its customers.”

Following a two-month consultation, and further due diligence of Royal Mail’s plans, Postcomm will make a final decision on Royal Mail’s application. Taken in conjunction with our decision to roll forward the price control for 2011-12, this could mean price increases of up to 12% across all regulated products.

Regardless of the outcome of Postcomm’s consultation on Royal Mail’s application, the company will have the flexibility to increase prices on stamped mail by up to 10% (based on the latest RPI estimates) in light of our decision to roll forward the price control to 2011-12. If Royal Mail applied this maximum price increase, this would equate to approximately a 5p increase in the cost of a first class stamp to 46p, and a 4p increase in the cost of a second class stamp to 36p.

[1] Cost transparency and accounting separation

[2] In the first instance these financial statements will for Postcomm to review, with a form of publication aimed for Spring 2012.                                                                                                                        

[3] Royal Mail Holdings Plc, Report and Account Year Ended 25 March 2007

The closing date for responses is 7 January 2011

Repsonses should be sent to:

Tim Brown
Chief Executive
Postcomm
Hercules House
6 Hercules Road
London
SE1 7DB

Responses can also be emailed to: nov2010decision.responses@psc.gov.uk