Royal Mail's Price Control
16 April 2009
1. Summary
Following discussions with the interested parties about the form of Royal Mail’s price control beyond March 2010, Postcomm has decided to make no changes and, therefore, the current price control arrangements will continue.
Postcomm’s Commissioners consider this approach will best secure their statutory duties to safeguard the universal service, protect the interests of customers and to promote efficiency and competition. This has been informed by business plans submitted to Postcomm and assurances received from Royal Mail.
2. Background
The current price control regime, which Postcomm agreed with Royal Mail in 2006, was designed for a four-year term ending in March 2010. To protect customers, this regime sets limits on Royal Mail’s ability to raise its prices and sets minimum service standards.
A bill is currently progressing through Parliament to introduce a new Postal Services Act. If this bill were not before Parliament, Postcomm would, since August 2008, have been consulting on a new price control regime to take effect from April 2010. The key elements of Postcomm’s thinking about major changes to the regulatory regime were set out in its Strategy Review which was published in August 2007. However, if the Postal Services Bill receives Royal Assent there will be major changes affecting the funding of Royal Mail and regulatory responsibility for the mail industry will transfer to Ofcom.
Ofcom has said it will need up to two years to decide on the new regulatory regime that it wants to introduce. Therefore, both Ofcom and Postcomm’s preferred course of action would have been a two-year interim arrangement, to April 2012, to minimise short-term market uncertainty.
Postcomm has concluded that to secure its statutory duties a two-year interim arrangement would need to include some changes to the price control together with a licence commitment from Royal Mail to improve its accounting information. These changes to the price control would have provided Royal Mail with some breathing space, allowing higher revenues to make up for lower mail volumes and its growing pension deficit. The more detailed cost information proposed would be essential in terms of establishing the true picture as to whether Royal Mail’s terms for access by third parties to the “final mile” is profitable or not. Improved cost information was highlighted in Postcomm’s Strategy Review as a key component of a new regulatory regime and it has been generally welcomed by both competing operators and major customer groups as well as being a key recommendation of the Hooper Report.
Royal Mail has stated it will not make a commitment to Postcomm about providing improved accounting information required by this two-year extension of the price control. Changing the terms of Royal Mail’s licence requires either the company’s consent, or, if agreement cannot be reached between Royal Mail and Postcomm, a referral to the Competition Commission. Such a referral would take around 12 months and is, therefore, not an option given the current time constraints of the Postal Services Bill.
Given these circumstances, Postcomm has, therefore, concluded that the best way forward is to maintain the current price control which is capable of operating for a further year to April 2011 unchanged. Ofcom will have powers under a new Postal Services Act to decide on the longer term price control for Royal Mail and regulatory framework for the industry.
If the Postal Services Bill is significantly delayed or not passed, this way forward does ensure that Postcomm would not have fettered its own discretion as to how to proceed and be able to take the necessary steps to ensure that a robust regime, protecting the universal service, could be in place from April 2011.
