By Daniel Hunter

Ofcom today (Tuesday) set out measures to ensure that UK consumers and businesses continue to benefit from a universally-priced, affordable postal service, six days a week.

The decisions outlined today give Royal Mail greater freedom in the way it sets its prices, but introduce safeguards to ensure that consumers and competition are protected.

Huge changes are affecting the postal industry, particularly the decline in postal volumes as consumers and businesses switch to other means of communications such as text, email and online services. The sustainability of the UK’s universal postal service in the UK is at severe risk.

The challenges facing the industry call for a new approach to regulation. Ofcom’s new regulatory framework for post is designed to secure the continued sustainability of the universal postal service.

Royal Mail, the designated Universal Service Provider, will have freedom to set its own prices for the majority of its products including First Class stamps and most business mail. In future, subject to the safeguards that are being put in place, Royal Mail will make decisions on the price of stamps, not the regulator.

Royal Mail will have considerably greater commercial freedom under the new framework but subject to important safeguards. They include:

1. A safeguard cap on Second Class stamps for standard letters

Ofcom has put a cap on the price of Second Class stamps for standard letters to protect vulnerable consumers. Over the next seven years, this will ensure that Royal Mail can price Second Class stamps no higher than 55p. The cap will be indexed in line with inflation.

The average household spends around 50p per week on post: low income families typically spend less. Ofcom believes the safeguard cap will ensure that postal services remain affordable for such families and vulnerable consumers more generally.

2. A safeguard cap to Second Class small parcels and large letters

To further protect vulnerable consumers and small businesses, Ofcom has decided to extend the cap to Second Class small parcels and large letters up to 2Kg in weight. This will be linked to the Second Class safeguard cap and Royal Mail’s price increases for 2012/13 will not be constrained. Ofcom will consult on the level of the cap in April 2012.

3. Effective monitoring of Royal Mail’s performance

The new regulatory regime will provide Royal Mail with more flexibility to manage the company and, most critically, improve efficiency levels. Ofcom will monitor Royal Mail’s performance closely, focusing particularly on the provision of the universal service, efficiency and affordability.

This will help ensure that Royal Mail meets its universal service obligations, becomes more efficient over time, and sets prices at levels which are both affordable and sufficient to cover the costs of the universal service.

4. Requiring Royal Mail to continue to provide network access to its

Ofcom will continue to require Royal Mail to provide competitors with access to its delivery network. Royal Mail will have the freedom to set the ‘wholesale price’ for access to its network but will be subject to rules regarding the margin between its wholesale and retail prices. This will help ensure that efficient competitors can compete effectively with Royal Mail.

Ofcom will also assess on a case-by-case basis any proposal to provide ‘end-to-end competition’ in the UK, where a postal operator collects and delivers letters without using Royal Mail’s network.

The central aim of the decisions announced today is to ensure that Royal Mail’s Universal Service Obligation (USO) is financially sustainable and provided efficiently. Without regulatory changes there is a risk that Royal Mail may not be able to continue to deliver the USO to the same standard as today.

The USO requires Royal Mail to collect and deliver letters six days a week (and packets five days a week) at an affordable and geographically uniform price to every address in the UK.

Ofcom’s decisions will incentivise greater efficiency at Royal Mail and ensure that the universal service is viable in the long term.

The regulatory framework will apply for seven years. This will be combined with ongoing monitoring and Ofcom will retain the ability to intervene if the new regime fails to safeguard the universal service and the affordability of mail services.

“Ofcom’s decisions are designed to safeguard the UK’s postal service, ensuring it is sustainable, affordable and high-quality, to the end of the decade and beyond," Stuart McIntosh, Ofcom’s Group Director of Competition, said.

“The measures ensure that Royal Mail’s products remain affordable for vulnerable consumers and small businesses.”

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