Universal Postal Service (Royal Mail) – Consultation on Large Letters and Packets

It is easy to forget the role of postal services in a world of electronic communications and social media. However, the goods you bought online need delivering to your door, and Royal Mail has its part to play amongst other competitive carriers.

When selling goods online, suppliers include the costs of delivery. If set too high, these costs could damage electronic commerce so it is essential that the right balance is struck.

Ofcom regulates communications services, include Royal Mail . In March 2012, Ofcom gave Royal Mail pricing freedom to allow it to ensure that the universal service becomes financially sustainable, subject to certain safeguards. One of these was a safeguard cap to ensure vulnerable consumers can afford a basic universal service. Accordingly, Ofcom set a 55p cap on the price of a Second Class stamp Letter effective from April 2012 and also stated it would apply a cap on Second Class stamp Large Letters and Packets up to 2kg.

This consultation sets out Ofcom's proposals for the structure and level of this cap.

Closing date

11th June 2012

Objectives

Ofcom's objectives in determining the level of the supplementary cap are to protect vulnerable consumers while preserving the pricing flexibility granted to Royal Mail to enable it to secure the provision of the universal service.

Ofcom considers it preferable to include the large letter and packet weight steps in a basket of products and set the level of cap across the basket as a whole. It considers this to be preferable to setting individual caps that would apply to each of the relevant products as that would embed historical pricing structures which may be unrelated to underlying market and cost factors.

Ofcom's research suggests that consumers’ use of large letters and packets is relatively infrequent and that the associated level of spend is low (at around 25p per week). It considers it reasonable that the safeguard cap for second class stamp large letters and packets up to 2kg should be consistent with, and not exceed, the safeguard cap set for second class standard letters. The latter effectively allowed for a maximum increase of 53% indexed by CPI over a seven-year period.

Ofcom proposes to follow a similar approach, with the level of the basket for large letters and packets up to 2kg being set at up to a 53% average increase on 2011-12 prices (plus CPI inflation) over a seven-year period, taking prices in 2011-12 as the base year.

Ofcom considers that, if priced subject to this cap (and based on the structure described in paragraph 1.4), these products are likely to be affordable for vulnerable customers while still providing sufficient commercial flexibility to Royal Mail in setting its prices so that it can secure the provision of the universal service.

A final statement is expected in Summer 2012.