New measures to secure the universal postal service

Ofcom today announced a package of measures designed to secure further the universal postal service in the UK, helping to make it both financially sustainable and more efficient, in line with Ofcom’s duties.

Under the universal service, Royal Mail must deliver letters and parcels six days a week to every address in the UK at a uniform price.

Ofcom has today concluded that the universal postal service is not currently under threat. However, Ofcom will initiate a broader review of factors affecting Royal Mail’s ability to deliver the universal postal service, concluding next year. This will consider Royal Mail’s efficiency and its parcel delivery performance.

Monitoring performance of the postal sector

Ofcom has today published its annual monitoring update on the performance of the postal sector over the last year.

The update finds that Royal Mail’s productivity is improving, but the rate of progress was flat on the previous year and below the company’s own targets. Royal Mail has also lost volumes in the parcels sector.

Effect of competition

Today’s monitoring update sets out new information on the scale of competition in the letters market.

Having carefully assessed this evidence, including the confidential business plans of Royal Mail and its largest competitor Whistl, Ofcom does not believe the universal service is currently under threat from competition in the ‘direct delivery’ market, where operators collect and deliver letters themselves without using Royal Mail’s network (see graphic below).

Ofcom has therefore decided, in a separate statement on competition today, not to impose new regulatory conditions on Royal Mail’s direct-delivery competitors.

The statement explains Ofcom’s view that, at present, competition is likely to provide Royal Mail with a further incentive to become more efficient. Continued progress on efficiency is crucial if the universal postal service is to be financially sustainable in the longer term.

Ofcom continues to monitor the development of direct delivery competition, and its effect on the universal postal service, as it has done since taking on responsibility for postal regulation in October 2011. Ofcom will intervene swiftly to secure the universal service if it finds that competition is threatening its future.

New rules on prices

Under European law, the UK was required to liberalise the postal services market to allow competition. In a new consultation today, Ofcom is proposing to amend rules governing the prices that Royal Mail can charge for ‘access mail’. This is where competitors collect and sort mail, before paying Royal Mail to deliver it through its network (see graphic below).

The new rules would allow Royal Mail to set fair prices for access services in different parts of the country based on the costs of delivery in those areas, allowing Royal Mail to make a fair profit on all ‘access’ letters regardless of where they are being delivered.

The proposals would enable Royal Mail to vary its prices between different geographic areas, but would also ensure that these variations reflect differences in its underlying costs.

Reviewing the future sustainability of the universal service

Today’s announcements are the completion of the first stage of a significant review into the sustainability of the universal postal service.

However, Ofcom’s duty to secure the universal service is on-going. Therefore, Ofcom has today begun a broader review of factors affecting Royal Mail’s ability to deliver the universal postal service, concluding next year. This will consider Royal Mail’s efficiency and its parcel delivery performance.

Ofcom may still conduct a further review of competition near the end of 2015 if necessary.

Ed Richards, Ofcom Chief Executive, said: “Ofcom’s Board has considered all the evidence in the postal market carefully over the past few months. We have concluded that there is no present risk to the financial sustainability of the universal service. This conclusion is based on Royal Mail’s own business plan and evidence as well as a range of other data.

“We take our duty to secure the universal service extremely seriously. Ofcom will continue to monitor carefully any risks that may arise and, if necessary, will act accordingly.”

All of today’s documents can be accessed here.

ENDS

Postal markets in the UK

NOTES FOR EDITORS:

1. Productivity: this is measured by Royal Mail as items processed or delivered per unit of time. On this measure, the company’s productivity increased by 1.7% in 2013/14, the same increase as in 2012/13 and below Royal Mail’s target range of 2-3%.
2. New rules on prices: Ofcom’s preferred approach outlined today is to require that, for each mailing item, the ratio of Royal Mail’s charges for different geographic ‘zones’ must equal the ratio of its unit costs for that zone.
3. Separately to the measures announced today, Ofcom is currently investigating whether Royal Mail has abused a dominant position in contravention of the Competition Act 1998, by virtue of the access prices that it announced in November 2013 and January 2014. This follows a complaint by TNT Post UK (now called Whistl). This investigation is on-going.
4. The Postal Services Act 2011 gives Ofcom a duty to carry out its functions in relation to post in a way that it considers will secure the provision of a universal postal service.
   The Postal Services Act 2011 also requires Ofcom to have regard to the need for the provision of a universal postal service to be financially sustainable, including the need for a reasonable commercial rate of return for any universal service provider; and to become efficient within a reasonable time, and then to remain so. Ofcom’s principal duty under the Communications Act 2003 is to further the interests of citizens in relation to communications matters, and to further the interests of consumers in relevant markets, where appropriate by promoting competition.