Annex D
UNIVERSAL POSTAL SERVICE AND FULL MARKET
OPENING
ROYAL MAIL'S
PRICE CONTROL:
POSTCOMM'S
INITIAL PROPOSALS
Royal Mail would like to increase the price of
stamps
1. Royal Mail has made it known to Postcomm
that it would like to increase the price of a first class stamp
from 30p to at least 40p. Postcomm has made it clear that it supports
Royal Mail's wish to adopt a set of prices that better reflect
its costs. For example, Postcomm has recently decided that Royal
Mail should be allowed to implement "Pricing in Proportion"
(previously referred to as size-based pricing). This will allow
Royal Mail to introduce a price structure that is more cost reflective
than the current price structure. However, where such proposals
lead to sharp price increases, especially for vulnerable customers,
they may need to be implemented gradually over a transitional
period.
2. Postcomm has carried out a detailed analysis
of Royal Mail's pricing proposals. Postcomm's initial view is
that some increases to first class stamp prices would be justified
to improve cost reflectivity, but Postcomm is not yet convinced
that Royal Mail's proposed level is cost justified. As we continue
our work to review Royal Mail's costing system we will be particularly
concerned to ensure that Royal Mail does not seek to increase
stamp prices for domestic and small business customers to recover
costs such as its pension deficit and profit allowance that should
be funded by all customers.
Postcomm is concerned about significant price
rises for captive or vulnerable mailers
3. Postcomm is concerned that Royal Mail's
proposals for stamp prices may jeopardise the continued provision
of an affordable universal service for smaller customers. It is
particularly important that domestic and small business customers
do not pay an unreasonable share of Royal Mail's costs as competition
develops for larger business customers.
4. Postcomm considers that Royal Mail should
be able to make a reasonable profit. Our proposals forecast a
profit of around £285 million per year from the price controlled
activities after pensions costs of £261 million pension deficit
and £271 million from ongoing pension payments. However,
this is not a maximum profit—Royal Mail will earn more if
it achieves volume growth or efficiency savings that are greater
than forecast (as happened with the present price control).
5. We also consider that, although customers
should contribute towards the cost of Royal Mail's pension deficit,
in the form of higher prices, other stakeholders, such as the
shareholder might also need to contribute, for example, in the
form of lower dividends than would otherwise be the case. This
is in line with precedent set in other industries.
6. The profit forecast under our price control
proposals cannot be compared directly with past profits, because
it allows for a substantial increase in pension contributions
during the period of the next price control. Postcomm has included
within the proposals an allowance for the full costs of the pension
deficit, but spread over 20 years. While this is a longer period
than Royal Mail proposed for contributions from 2006, it is shorter
than the 40-year period over which Royal Mail is currently making
contributions.
7. Postcomm has also proposed (and consulted
upon) what it considers to be challenging but achievable efficiency
targets. Postcomm considers that Royal Mail should be able to
make efficiency savings of 3% per annum, while Royal Mail proposes
that it be required to achieve savings of 1.5% per annum. Postcomm
considers its achievable efficiency gains should benefit both
domestic and business customers.
8. Under Postcomm's initial proposals, the
most that Royal Mail could increase the price of a first class
stamp to during the next price control period is 34p. Higher stamp
prices affect the most vulnerable customers—those individuals
and small businesses who are likely to have no realistic alternative
to Royal Mail for their postal needs. We are also concerned about
the risk of Royal Mail using increased revenue from vulnerable,
captive customers to subsidise lower prices for products against
which it is facing competition.
Postcomm intends to allow Royal Mail enough cash
for much needed investment
9. Historically, Royal Mail has underinvested
and lags behind some of the more efficient postal operators in
Europe, and Postcomm is keen to encourage Royal Mail to make efficient
investment in its business. However, further investment will clearly
mean that Royal Mail has difficult decisions to make over the
appropriate staffing levels.
10. Postcomm does not specifically approve
individual investments by Royal Mail. We do, however, determine
an overall amount that Royal Mail can invest over the course of
a price control (and recoup the cost of investment through the
price mechanism).
11. Our initial price control proposals
include around £750 million for capital expenditure over
the four years of the next control. In addition, in the event
that Royal Mail does invest more than the forecast amount, Postcomm
proposes that Royal Mail can recover (at the next price control)
the value of additional efficient investments it makes, including
a return per annum above inflation.
Postcomm is proposing greater pricing flexibility
for Royal Mail
12. Although Royal Mail is already in a
strong position, with some significant advantages over its competitors,
such as its huge scale and VAT exemption, Postcomm agrees with
Royal Mail that it should have more flexibility to compete on
price. Therefore, the current price control allows Royal Mail
to adjust its prices, but within certain constraints.
13. A key concern for Postcomm is the risk
of Royal Mail increasing the prices faced by smaller customers
with little or no choice of mail operator, and using profits to
subsidise products against which Royal Mail is facing greater
competition (eg bulk mail products aimed at large customers).
Therefore, we have structured the price control to prevent this
happening. However, under the proposed price control, Royal Mail
will still have the scope to amend the relative prices of those
products facing competition in order to, for example, make prices
more cost reflective or to encourage customers to use products
that allow mail to be sorted more efficiently by machine.
14. Royal Mail also wants to introduce prices
for some non-universal services that vary depending on where mail
is delivered. It has already introduced these "zonal prices"
for its access services. Postcomm is not opposed to the principle
of zonal prices for non-universal services, if genuinely cost
reflective. But, in line with our statutory duties, we are concerned
about the potential impact of such a move on both customers and
operators.
15. Our recent business customer survey
suggests that most business customers are not in favour of zonal
pricing. Zonal pricing may well place an extra burden on customers
in having to comply with more onerous conditions of posting. Zonal
pricing could also have a big impact on rival operators.
16. Postcomm is proposing that zonal pricing
would be subject to our prior approval (in the same why that Pricing
in Proportion required pre-approval). Therefore, in the price
control initial proposals, Postcomm will respond to any request
from Royal Mail for zonal pricing, within 12 months, subject to
Royal Mail supplying sufficiently robust cost information, and
to consultation with affected customers and stakeholders.
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