Ofcom:‘Royal Mail should be free to increase DM prices’

Royal Mail should be free to increase the prices it charges direct marketers to deliver their bulk and business mail but only if it makes efficiency improvements, according to the postal regulator.

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Ofcom, which assumed oversight of postal and mail services on 1 October, proposes that the postal operator be able to set its own prices for metered or franked mail, pre-printed envelopes and large volume mail.

The proposal is one of several designed to enable Royal Mail to deliver its Universal Service Obligation (USO) – which requires it to collect and deliver letters six days a week – in the face of declining mail volumes.

Ofcom’s group director of competition Stuart McIntosh says the changes, which would be fixed for seven years, aim to ”safeguard the UK’s postal service, ensuring it is sustainable, affordable and high-quality, to the end of the decade and beyond.”

Royal Mail is struggling to meet the cost of delivering the USO, estimated at £6bn a year. Its letters business made a loss of £120m in its last financial year and it has a multi-billion pound pension deficit.

In return for greater commercial freedom, Ofcom vows to “monitor Royal Mail’s performance closely”, focusing particularly on the provision of the USO, efficiency, profitability and pricing.

It will also put a price cap of between 45p and 55p on second class stamps for standard letters “to protect vulnerable customers from significant price rises”.

Royal Mail, which charges rivals such as UK Mail, TNT and DHL to deliver their sorted direct mail, should also continue to provide competitors with access to its delivery network, Ofcom says.

It will be free to set the “wholesale” price charged for access to its delivery network but should “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,” the watchdog adds.

Royal Mail, which has called for a shake-up of the regulatory system, welcomed the proposals, describing them as a “significant step towards securing a sound and sustainable USO”.

Rival TNT Post UK says that it welcomes the announcement of the regulatory review of Royal Mail and its emphasis on securing the long term health of the USO, while at the same timerecognising the need for competition within the UK postal market whether through Downstream Access or End to End.

A spokesman adds: “To enable End to End competition to take place in the UK, the Government needs to level the competitive landscape in terms of VAT immediately, as currently Royal Mail is exempt from charging VAT on business mail services, unlike its competitors.

“We are concerned however that Royal Mail has more freedom to price at individual customer level and need to analyse the detail of the proposals.”

A spokesman for the Direct Marketing Association adds: ” A profitable Royal Mail is essential for the postal services market and we’re pleased that the regulator is emphasising that this should be through efficiency improvements, not just price increases.

“We also welcome the continued requirement for Royal Mail to grant access to its network that allows downstream access competition. Customer choice has contributed to sustaining bulk mail volumes and funding the Universal Service.

“Royal Mail has a monopoly with regard to postal services and although we understand the need for Royal Mail to have more commercial freedom we are concerned that there doesn’t appear to be safeguards for bulk mail users against potential abuses of that monopoly.”

A consultation will be open until 5 January. A decision on the proposals is expected by spring 2012.

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