Regulatory reform

Royal Mail has recently experienced a major step change in the regulatory framework that governs its one-price-goes-anywhere, six-days-a-week Universal Service.

Reform was driven by the Postal Services Act 2011, which came into force on 1 October 2011. Most of the main changes were implemented by early 2012.

These changes included the abolition of the former regulator, Postcomm, and the transfer of its powers to Ofcom. Ofcom have reformed the regulatory framework, including price control. Less than 10 per cent of our revenue is now subject to direct price control. Previously, more than 80 per cent of our revenues were directly price controlled.

Ofcom

Ofcom’s duties and responsibilities as regulator of postal services focus on protecting the UK’s Universal Service – the primary purpose of the Postal Services Act 2011.

As the sole provider of the Universal Service, Royal Mail is more closely regulated than its competitors in both the letters and parcels markets. Ofcom’s reform of the regulatory framework has been extensive.

The table below indicates the key changes that have been made by Ofcom.

 

Regulatory Changes
Before After
Intrusive and complex price regulation on Universal Service Obligation and non-Universal Service Obligation products and services. No price cap on the majority of products and services. A “safe- guard” price cap will remain for second class standard letters, second class large letters, and standard packets up to 2kg.
 

More than 80 per cent of Royal Mail’s revenue subject to direct price regulation. 

  

Royal Mail is now free to set prices that account for 90 per cent of revenue (subject to price control of access mail through margin control). 
 

Royal Mail’s rivals had potential access to any part of Royal Mail’s universal service network and explicit price advantage through a prescriptive price control.

 Access is mandated to a limited part of Royal Mail’s universal service network but Royal Mail is free to set fair and reasonable commercial terms and to set access prices that give a reasonable commercial return. Access prices will be monitored under a “margin control” test. Access is now restricted to letters and large letters at the inward mail centre only.
  

Royal Mail was generally obliged to provide three months’ notice when changing prices or terms and conditions for products. These restrictions limited innovation. 

 Royal Mail is now able to change prices and terms of service with no regulatory notice period for non-Universal Service products and 30 days’ notice for Universal Service Obligation services. This allows us to innovate and introduce new products more quickly.
Royal Mail’s competitors were able to take substantial volumes of business mail from its end-to-end letters business under a regulatory licensed regime, which established a guaranteed price differential between upstream and downstream mail activities, subject to those competitors complying with their licence conditions.

  

Competitors will have to provide notice to Ofcom if they decide to introduce or expand any part of its letters business along the end-to-end delivery pipeline. Ofcom has the ability to impose regulatory conditions on operators offering services on parts of or on the entire end-to- end delivery pipeline where there is a demonstrable threat to provision of the Universal Service.
  

No explicit statutory requirement for the regulator to have regard to the need for the Universal Service Provider to make a commercial rate of return on its USO activities.

 As part of its primary duty, Ofcom must now have regard for the need for the Universal Service Provider to make a “reasonable commercial rate of return” on its Universal Service activities. Ofcom has determined that 5-10 per cent EBIT is the appropriate range, but acknowledges that in the short term Royal Mail may need to return a higher margin.

 

Full details of the new regulatory framework for postal services is available on the Ofcom website.

Documents and resources on the previous regulatory regime can be viewed at our document library.

Further regulatory change

Under the Postal Services Act 2011, Ofcom must complete a “user needs review” of the Universal Service provision by 31st March 2013.

Under this review, Ofcom will undertake extensive research and analysis on user preferences for postal services in the UK. As a result, Ofcom will consult on any further proposals for reform in Autumn 2012.