Overview of regulatory product oversight
Royal Mail is subject to two types of regulatory oversight from Ofcom.
- 2c Stamp safeguard cap (direct price cap)
- Margin squeeze control, affecting both 2c Bulk Mail and Access products (price control for Access)
2c Stamp safeguard Cap
The vast majority of Royal Mail’s products and services are not subject to price controls. Today only around five per cent of Royal Mail’s revenue is subject to direct price control, which relates to our status as the sole provider of the Universal Service.
Under the current regulatory framework, 2c Stamp products (up to 2kg) are subject to a safeguard price cap. This was introduced by Ofcom to ensure a basic, affordable Universal Service product is available to all.
There are two caps – one for Letters; and one for Large Letters and Parcels up to 2kg.
The Letters cap is set at 55p in 2012/13 and allowed to increase annually with CPI to 2018/19.
The Large Letters and Parcels cap is calculated using a weighted average price in 2012/13 and allowed to increase with CPI to 2018/19.
Margin squeeze control
Royal Mail is also subject to a regulatory margin squeeze framework that restricts our ability to price freely.
The Margin Squeeze control has been put in place by Ofcom to promote competition. It ensures Royal Mail does not engage in anti-competitive behaviour by pricing below Royal Mail upstream costs. Over 50 per cent of all addressed domestic letters, and around 70 per cent of all addressed letters posted by large businesses, are handled by access competitors.
There are two ways a margin squeeze can occur; by increasing the Access price or by reducing the Retail price, to such a level that it does not allow an upstream competitor to compete.