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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