Postcomm to examine Royal Mail's charges to new operators for access to the 'final mile'
22 March 2007
Postcomm, the independent regulator for postal services, has today written to mail operators and customers to tell them that it has started a review – that will be completed within six months – of two key features of the Royal Mail’s 2006-2010 Price and service quality control.
The regulator is examining requests from both TNT and Royal Mail to adjust the margin between the price Royal Mail charges its customers for bulk mail products and the amount Royal Mail charges other operators for access to its network and delivery of mail over the ‘final mile’. Royal Mail is seeking to reduce the margin between ‘access’ prices and its retail prices, while TNT is seeking to increase this difference.
Separately, Royal Mail is requesting that Postcomm should amend a second key feature of the 2006-2010 Price Control on the pricing flexibility within and between its captive and non-captive price baskets which it says will help it increase the extent and the speed with which it can align closer its prices to its costs. This would offer Royal Mail greater scope to lower the prices of business mail, where it is exposed to competition, and to increase the prices charged on other mail where there is currently little or no competition.
Nigel Stapleton, Postcomm Chairman, said:
“When a market is being opened up to competition and there is one very dominant provider, the cost of access to the ‘final mile’ of that provider's network can be ‘make or break’. In this case, Royal Mail has asked Postcomm for permission to make changes that will reduce the margins available for the new ‘access’ operators. On the other hand, one of the largest of the new ‘access’ operators – TNT – has asked for changes that will increase what it claims to be too low a margin.
“In concluding this review, we will obviously study in great depth the rationale behind these markedly different requests. Although the postal market has been steadily liberalised over four years, with full market opening taking place just over 12 months ago, competition is still at an early stage, Royal Mail still delivers over 99 per cent of all letters over the ‘final mile’.
“The experience of other sectors such as telecoms showed the importance of ensuring new market entrants were not crushed under the weight of ‘access’ charges and Postcomm shall be similarly vigilant. All postal operators should be under no illusion about Postcomm's determination to ensure a level playing field for competition which is demonstrably the route to better quality, more innovative and more efficient mail services.”
Through its request, TNT has told Postcomm it believes that the current ‘access’ margin does not offer enough scope to enable it to make a long term investment and does not promote effective competition in the longer term. Royal Mail argues that it needs more flexibility to align its prices with its costs. It states the current regulatory control of ‘access’ margins restricts Royal Mail from passing on savings that it makes in the upstream part of its network to its retail customers without also passing on those savings to competitors through lower ‘access’ prices.
Notes for editors
A key feature of Postcomm’s initiatives for opening the UK postal market to competition has been enabling other mail operators ‘access’ to Royal Mail’s nationwide and six day per week delivery network. Typically, through these commercially negotiated ‘access’ agreements, new entrants collect and sort mail from their customers and then give it to Royal Mail for delivery over the ‘final mile’. Royal Mail receives from the ‘access’ operator around 13p versus the typical retail price that they charge for an ‘end to end’ bulk mail letter which is around 18p.
This means that the new entrants work within a headroom of around 5p out of which they must cover their costs and offer a sufficient discount to encourage customers to switch from Royal Mail. The Royal Mail price control, covering the four year period from April 2006 regulates the minimum headroom between the ‘access’ price and the Royal Mail retail price for the equivalent product.
A full copy of Postcomm’s letter to the industry was issued today (pdf, 52KB). Postcomm must be satisfied that it has clear evidence that warrants any change to the access and/or tariff basket provisions of the price control package.
Postcomm will hold a stakeholder workshop in April where Royal Mail and TNT will present their cases for the changes they have requested. In addition to the workshop and responses to this letter, Postcomm is also keen to meet and receive views bilaterally from stakeholders.
The 2006-2010 Price Control provides for Postcomm to undertake a review during 2007 of the ‘access’ headroom that is incorporated in the control, should a request to this effect by made by Royal Mail or any other mail operator.
Postcomm will need to examine why the costs associated with ‘access’ have changed. In evidence given to the House of Commons Select Committee for Trade and Industry in October 2005, Royal Mail advised that the prices that they charge ‘access’ operators were “about right”. Royal Mail claims ‘access’ is now loss making.
