Updated: June 22, 2010 (Initial publication: June 22, 2010)
Bibliographic Reports : Grey Litterature
III.2-7: Postcomm, the British Postal Services Commission, publishes a new regulatory framework for a sustainable postal service on May 27, 2010.
Through the publication of a new regulatory framework by Postcomm, the British Postal Services Commission, on May 27, 2010, Postcomm outlines its plans for regulating the postal sector in the years following 2012. This framework plans to adapt postal regulation to allow {Royal Mail} to profitably fulfill its Universal Service Obligations faced with drastically declining mail volumes and increased competition.
Attached documents
The current regulatory framework for postal services in Britain has been in place since January 1, 2006, when the British postal services market was entirely opened to full competition.
This framework was introduced at a time when Postcomm predicted that mail volumes would continue to grow, and could not yet predict the level of competition that would exist on the market.
The current framework is now seen as too restrictive, and Postcomm intends to shift postal regulation away from sector-specific regulation, and towards general Competition Law.
This document’s principle goal is to use sector-specific postal regulation only where required to (i) maintain universal postal service, (ii) maintain competition in areas where Royal Mail is in a dominant market position.
In order to achieve this goal, Postcomm plans for:
- The substantial deregulation of parcel service based on weight and volume
o It has been concluded that Royal Mail retains a dominant position only within the market for parcel items sent by consumers from postal collection points (post offices), and for low-weight (>1Kg) packets sent by business with low volumes of packets sent.
o Therefore, price regulation would be removed from express parcel services sent by businesses.
o Price regulation would be removed from regular parcel services sent by businesses for (i) packets above 750g; (ii) high-volume consignments with average weight above 1Kg per packet; (iii) any consignment with an average weight above 2kg.
o This would allow Royal Mail to freely set and negotiate prices in the above service categories.
- Partial deregulation of pre-sorted bulk mail
o Royal Mail has a dominant market position in all categories (pre-sorted, unsorted bulk, and unsorted individual letters) and all levels of service (priority and economy[1]). However, competition is increasing for pre-sorted and unsorted bulk economy mail.
o Many of Royal Mail’s competitors rely on Royal Mail’s inward sorting and delivery facilities to provide service.
o In order to foster competition, retail price caps would be removed from bulk mail services, but would be replaced with wholesale price cap rates. This would allow Royal Mail to freely fix rates charged to consumers, but maintain a regulated price for charging competitors. This would foster competition by allowing Royal Mail to compete for consumers by pricing, but would prevent it from evincing competitors by predatory wholesale pricing by maintaining fixed prices for access to its facilities.
- Changes to “headroom” and improved competitor access to facilities
o Associated with the change from retail to wholesale price caps is a change in headroom control, which is the amount of price reduction that Royal Mail is required to accord competitors using its facilities, in order to allow them to compete on retail pricing.
o Postcomm would expand the range of products subject to headroom control.
o Postcomm would remove explicit headroom control per product (in other words, there would no longer be a specific discount per product).
o Explicit headroom control would be replaced by a “basket”, in which Royal Mail would be able to freely fix its amount of headroom-per-product itself, within a range, and with the obligation of maintaining a general percentage of headroom.
o Elements of packets and parcel service would be completely deregulated, allowing Royal Mail to freely set prices for these services in a competitive market.
- Roll-over of other features of price controls
o Stamps and unsorted bulk mail would remain subject to current price controls
o Prices for small customers rise at an average of inflation rates minus 0.14%; prices for business customers rise at an average of inflation minus 1.96%. Individual services have a 3% flexibility, as long as overall pricing does not exceed the aforementioned inflation-based limits.
o There is a volume adjustment included in price controls, to compensate Royal Mail for fixed-costs related to network management.
o Price controls also include a component to raise prices if Royal Mail’s pension deficit rises.
o Finally, prices are required to be reduced if Royal Mail does not meet its quality-of-service targets.
- Greater cost transparency and accounting separation
o Costing methodology must be improved in order to (i) introduce guiding principles to define the fundamental requirements for Royal Mail’s cost reporting to be suitable for regulatory reporting purposes; (ii) introduce methodological principles to define the basic rules and concepts and specific methodology for such reporting; (iii) introduce a detailed costing manual for internal purposes, with any changes reported to Postcomm in advance.
o Accounting separation must be further implemented and adapted in order to perfectly reflect the difference between regulated products and non-regulated products, upstream and downstream operations, and bulk and non-bulk products.
o The accounts must also better show true costs and inputs, and must continue in the direction of their reconciliation with audited statutory accounts.
o Accounts must also be independently audited for their conformity with a regulatory accounting framework.
- Modifications to Royal Mail’s universal service provider license[2]
o Royal Mail’s license must be clarified and modified to reflect changing circumstances and legislative changes.
o The compliance officer attributed to Royal Mail will be assigned an expanded role, in order to oversee compliance with all provisions of the license, rather than simply oversee that full and complete information is provided to Postcomm (according to conditions 6 and 7 of Royal Mail’s license)
This new framework is intended to be progressively implemented over the coming years, with partial implementation by April 2011 and full implementation achieved by April 2012.
PS: The main document is 80 pages long, and is followed by five annexes (1. Provision of a universal service ; 2. Analysis of Markets; 3. Cost transparency and accounting separation; 4. Price control and access; 5. Licensing Review).
[1] Priority mail is supposed to be delivered the day following posting; economy mail is supposed to be delivered two or more days following posting.
[2] Full-text License available at ftp://ftp.royalmail.com/Downloads/public/ctf/rmg/Royal_Mail_Licence_25%20May__2006.pdf
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