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Safeguarding the UK’s universal postal service

Ofcom today published proposals designed to ensure that UK consumers continue to benefit from a universally-priced, affordable postal service, six days a week.

The proposals, subject to an 11 week public consultation, would give Royal Mail greater freedom in the way it sets some of its prices, but introduces safeguards to ensure that consumers and competition are protected.

Safeguarding the universal service and improving efficiency

The central aim of the proposals is to make what is known as the Universal Service Obligation (USO) placed on Royal Mail financially sustainable. Without regulatory changes there is a risk that Royal Mail may not be able to continue to deliver the USO to the same standard.

The USO requires Royal Mail to collect and deliver letters six days a week (and packets five days a week) at an affordable and geographically uniform price to every address in the UK.

The USO also sets performance standards on Royal Mail: 93% of First Class mail must arrive the next day and 98.5% of Second Class mail must arrive within three days of posting.

Royal Mail’s universal service obligations – such as six days a week delivery – are amongst the highest in Europe.

Today’s proposals would incentivise greater efficiency at Royal Mail and ensure that universal service is viable in the long term.

Why changes are needed

Although Royal Mail delivered 16 billion letters to around 28 million addresses last year, since 2006 there has been a 25% decline in postal volumes as customers have moved away from traditional mail to digital technology such as email.

According to the 2010 Hooper Report on the postal sector, mail volumes are expected to continue to decline globally by between 25% and 40% in the next five years as businesses and residential customers make increasing use of online services and email.

Royal Mail’s letters business made a loss of £120m in 2010/11 and has a significant pension deficit. It is estimated that the cost of the network necessary to meet the USO is more than £6bn a year.

While consumers and businesses rely on postal services, the average household spends around 40p per week on post, compared to around £10 per week on each of electricity, telephone and gas services*.

Proposals to secure high quality UK postal services

The current regulatory model for post has failed to ensure the ongoing viability of universal service. The huge changes affecting the industry – particularly the decline in postal volumes – call for a new approach to regulation.

Ofcom therefore proposes to give Royal Mail freedom to set its own prices for the majority of its products including:

  • First Class deliveries – letters, large letters (A4 in size and up to 750g in weight) and parcels;
  • Second Class deliveries – for large letters and parcels up to 1Kg in weight;
  • standard parcels;
  • business mail – metered or franked mail and pre-printed envelopes; and
  • bulk mail – mainly large businesses sending a large volume of post in a single mailing for example, bank statements.

Safeguards to protect consumers

Ofcom proposes a number of significant regulatory safeguards to help ensure that the universal service remains viable and to protect consumers. They include:

1. A cap on Second Class stamps for standard letters

Ofcom proposes to put a price cap of between 45p and 55p on Second Class stamps for standard letters to protect vulnerable customers from significant price rises. The cap would be indexed in line with inflation.

2. Effective monitoring of Royal Mail’s performance

Ofcom proposes to monitor Royal Mail’s performance closely, focusing particularly on the provision of universal service, efficiency, profitability and pricing. This would ensure that Royal Mail meets its universal service obligations and becomes more efficient over time.

3. Require Royal Mail to continue to provide network access to its competitors

Ofcom proposes to require Royal Mail to continue to provide competitors with access to its delivery network. Royal Mail would have the freedom to set the ‘wholesale price’ for access to its network but would be subject to rules regarding the allowed margin between the wholesale and retail prices. This would help ensure that efficient competitors can compete effectively with Royal Mail.

Ofcom also proposes to assess on a case-by-case basis any interest in providing so-called ‘end-to-end competition’ in the UK, where a postal operator receives the letter and delivers to an address without using Royal Mail’s network.

The proposed regulatory framework would apply for seven years. It would provide the freedom, time and certainty required to restore the viability of universal service and improve efficiency within Royal Mail.

Ofcom is conscious of the need for regulatory certainty but would nonetheless retain the ability to intervene in the event that the new regime failed to safeguard the sustainability of universal service and the affordability of mail services. Ofcom also proposes to leave open the possibility of reassessing the level of the pricing cap on Second Class stamps in two years, in light of any relevant changes in the market.

Regulation of post

Ofcom took over regulation of postal services from Postcomm on 1 October 2011. This followed the recommendations of the 2010 Hooper Report into the postal services sector, which were accepted by the Government.

Royal Mail is currently regulated in the following ways:

  • the prices of universal service products, including the retail price of stamps;
  • the prices that Royal Mail charges other postal operators, such as UK Mail, TNT and DHL, to deliver their sorted mail to businesses and residents; and
  • meeting its universal service obligations and its Quality of Service targets.

Ofcom’s Group Director of Competition Stuart McIntosh said: “The universal postal service – which ensures that letters are delivered to every address in the UK six days a week – is significant and highly-valued by the public. However, unless changes are made to the regulation of post, this service is under threat.

“Ofcom’s proposals are designed to safeguard the UK’s postal service, ensuring it is sustainable, affordable and high-quality, to the end of the decade and beyond.”

The public consultation, which can be accessed here, will close on 5 January 2012. Ofcom expects to publish a decision on these proposals in spring 2012.

*Based on most recent 2009 Office of National Statistics data. Prices for other utilities are now higher.

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