Select Committee on Public Accounts Thirty-First Report



29 Postcomm's proposals for competition form part of a wider framework for the regulation of the postal services market, and of Consignia as the dominant operator within that market. The way competition develops in future will depend on decisions that Postcomm will make on related issues.

30 Postcomm consider that a form of competition involving access to Consignia's delivery facilities, rather than duplication of the entire mail operation, is the most likely and attractive form of competition to new entrants. Consignia said that the success of this access-based form of competition depends on the price and terms set for access. If the price is set too high, then competition will be deterred, but if the price is set too low, Consignia's financial viability may suffer. Consignia told us that if the access price were not set at the appropriate level it would find that it would lose the revenue from the mailing customer, and that also it might have to offer a price to its competitors in line with its delivery costs without any kind of margin. Access terms would be negotiated between Consignia and the postal operator seeking access to its facilities, and Consignia told us that they had already received an approach for this purpose from Deutsche Post World Net. But, under Consignia's licence, Postcomm would have to determine access terms and prices in the event of a dispute. Postcomm told us that it would be wrong to assume that they would exercise their judgement in a way which was unfair to Consignia, since they recognised that a successful and growing postal industry required a successful and growing Consignia at its centre.[46]

31 Consignia expected to face significant price competition for some of their business mail as competitors might be able to offer business mailers better terms than Consignia. Consignia said that within the uniform pricing structure imposed by its licence, if it offered a lower price to one customer in response to competition, it would have to offer an identical price to all comparable customers. It would therefore be unable to match competitors' lower prices for some customers by reducing its own prices accordingly. Consignia said that, even if it could do so, it would need to re-balance its prices because, if one element of revenue reduced in response to competition there would need to be an equivalent increase in revenue elsewhere to maintain its financial viability. In our view, without a clear guide from Postcomm as to how much rebalancing they would allow, there might be uncertainty for both Consignia and for potential competitors.[47]

32 At present, Consignia's overall price levels are subject to a price control under the licence issued by Postcomm. This price control consists of a price freeze until March 2003 for mail costing less than £1 or weighing less than 350 grams, and a limit on price rises to the prevailing rate of inflation within the rest of the universal service area (up to 20 kilograms). Consignia can apply for a rise in these price limits before March 2003, and did so in April 2001, but subsequently withdrew the application after discussions with Postcomm.[48] This combination of price freeze and inflation-only rises continues the recent pattern of falling real prices for postage, with only one price rise in the last five years for 1st Class mail, and a 1 pence reduction in the price of basic 2nd Class mail.[49]

33 Companies cannot automatically assume that they can increase prices without some loss of customers, although as the Comptroller and Auditor General's Report showed, most of Consignia's customers were fairly indifferent to price. Consignia told us that it would initially expect a small amount of posting to be deterred - that is, for customers to find alternative media for their communications - but, after this small dip, volumes would pick up again. The company qualified these observations by saying they were based on past experience, and that the most recent price increase in 1st Class stamps had been five years ago. Its best estimate was that the impact of a 1 pence increase in the price of a 1st Class stamp, after taking deterrence into account, would be an increase in revenue of around £170 million.[50]

46   Qs 124, 186, 101 Back

47   Qs 250-259, 562 Back

48   C&AG's Report, para 3.6 Back

49   Q207 Back

50   C&AG's Report, Appendices 3 and 4; Q579 Back

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