The Postal Services Bill - Business and Enterprise Committee Contents


Memorandum submitted by the Business Post Group Plc

POSTCOMM AND ROYAL MAIL

"FOR THE RECORD"

  I read with interest and concern the transcript of the BERR Select Committee's hearing on 24 February, when you heard oral evidence from Postcomm and Royal Mail, and I am writing to you to put on record my views on two of the topics covered.

ACCESS HEADROOM

  UK Mail (part of Business Post) was the first company to reach an agreement with Royal Mail for Downstream Access to Royal Mail's network for final delivery of mail. I was responsible for those negotiations back in February 2004, and so have first-hand knowledge of how the charges for Access were established.

  The negotiations focused on "commercially" acceptable arrangements for both UK Mail and Royal Mail. In parallel Postcomm were about to give a regulatory determination of the Access price. Both UK Mail and Royal Mail had some feel for what that price would be if the negotiations failed. There is no doubt that the Postcomm rates for access would have been less attractive to Royal Mail. From UK Mails perspective, whilst Postcomm rates were probably going to be better, there was no guarantee that Royal Mail would accept them, which would only delay our business from commencing. It was therefore apparent that both parties were well placed to strike a commercial deal.

  Only after agreeing that first access price did we look at how it related to the equivalent Royal Mail retail price—ie what the "commercial headroom" was—and then only so that we could agree with more prices, across the full weight spectrum for letters and packets that were at similar "headroom".

  Later in 2004 and subsequently, UK Mail agreed further prices with Royal Mail for Access services that were comparable to other retail services. Those negotiations were without any regulatory background and so, due to commercial imperatives and Royal Mail's stronger position, were agreed at prices that offered far less commercial headroom than the first Access price.

  Hence, we developed by commercial agreement a set of prices for Access services that gave varying commercial headroom from the comparable retail service prices.

  It was not a case of deciding Access headroom' and then working out what Access price resulted.

  Access headroom became part of the regulatory framework in April 2006 when Postcomm formalised the existing commercial headroom into the Royal Mail Price Control, to give Access operators protection from price squeeze.

  Therefore I would suggest that, we are where we are, through commercial history rather than regulatory price-setting.

  I would also comment on the current Access prices. It is very misleading for media and others to compare an Access price of 13p with a "normal price" of 27p. For The record: the Access price is now about 14p (new rates from April for high volume, pre-sorted mail) and the comparable Royal Mail retail price is circa 18p, (for high volume, pre-sorted mail.)

ROYAL MAIL PROFIT ON ACCESS

  The transcript of the Select Committee on 24 February shows Postcomm saying Royal Mail makes a profit on Access and Royal Mail saying they make a loss. Both are right because Postcomm and Royal Mail are using a different process to calculate the costs of Access.

  For me, this confirms the need for a proper regulatory investigation of Royal Mail's costs and the correct allocation of them to Royal Mail's activities—and hence valid pricing.

  I am encouraged by the intention that Ofcom will become the postal regulator as they are likely to apply the expertise and rigour needed to establish full knowledge of Royal Mail's costs.

  UK Mail does not want a "subsidised" Access price. We want Royal Mail to make a fair profit on its Access service to us—that will encourage Royal Mail to treat us an important and valuable customer. UK Mail is the largest Access operator in the UK and will pay Royal Mail approximately £125 million this year for Access services.

  What we do want is for the Access price to be based on a correct allocation of Royal Mail's costs—and for Royal Mail retail to be charged the same price as Royal Mail wholesale charges us.

  For as long as Royal Mail is dominant in the market, (in Access it is 100% dominant,) it should be regulated to improve efficiency and price correctly. Development of competition can then be fair and in the best interest of the customers we serve.

9 March 2009





 
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