Securing the Universal Postal Service - Safeguard cap for Large Letters and packets

1.1 On 27 March 2012, we published our decision on the new regulatory framework for the postal market ("the March 2012 statement"). ^(-1-) In this document we set out our decision to grant Royal Mail significant pricing freedom to help secure the ongoing provision of the universal postal service. At the heart of our proposals was the imposition of key safeguards, including a safeguard cap to ensure that vulnerable consumers are able to afford a basic universal service.

1.2 We decided in the March 2012 statement that the safeguard cap needed to cover all Second Class stamp products up to 2kg. We confirmed the form and level for the cap on the Second Class stamp Letter. ^(-2-) We set this cap at 55p, which represented a 53% increase on the stamp price at the time which was 36p (2011-12 prices). This cap applies for seven years and is subject to indexation at CPI.

1.3 We also noted we would consult on the structure, form and level of the safeguard cap for Second Class Large Letters ^(-3-) and packets up to 2kg. As a result we published a consultation on 27 April 2012 that set out our proposals in this regard for these products ("the April 2012 consultation"). ^(-4-) Designing such a cap is slightly more complex compared to the cap applied to Second Class stamp Letters, as Royal Mail offers Large Letter, packet and Standard Parcel products at a variety of different weights.

1.4 We proposed a simple basket approach that would give Royal Mail flexibility to set the structure of individual prices subject to a cap on the maximum overall price increase for users of Second Class stamp Large Letters and packet products up to 2kg.

1.5 In considering the level of the cap, we noted that in general consumers buy Large Letter and packet products even less frequently than Letters and have a low weekly spend on these products (when this is averaged across the year). Therefore we proposed that it was appropriate to set the cap at the same price increase as for Letters (53% plus CPI). This would limit the maximum increase over a seven year period to protect consumers from very significant increases in the cost of these products, while giving Royal Mail sufficient flexibility as part of our overall approach to price deregulation.

1.6 In this document, we consider responses from stakeholders to our proposals and set out our conclusions. The majority of respondents were concerned about the level of price rises that could occur under our proposals. Consumer Focus and the CWU reiterated their concerns that higher prices could result in these universal services no longer being affordable. However, respondents did not provide any specific evidence that the proposed levels for the safeguard cap were unaffordable.

1.7 Royal Mail reiterated its arguments that such a cap on Large Letters and packets was unnecessary. It was also concerned that the cap should be set at a level that enabled it to set prices that respond to market conditions and cover its costs in the growing packets markets. Royal Mail did not in our view demonstrate that the proposed level of the cap would prevent it meeting these objectives.

1.8 We have concluded that we will, as proposed, set the level of the safeguard cap at a 53% increase over 2011-12 prices for the seven year duration of the regulatory framework, increasing with CPI inflation.

Footnotes:

1.- Securing the Universal Postal Service Decision on the new regulatory framework (http://stakeholders.ofcom.org.uk/consultations/review-of-regulatory-conditions/statement/)

2.- "Letters" means any item up to length 240mm, width 165mm, thickness 5mm, and weighing no more than 100g

3.- "Large Letters" means any item larger than a Letter and up to length 353mm, width 250mm, thickness 25mm, and weighing no more than 750g

4.- Securing the Universal Postal Service Safeguard cap for Large Letters and packets (http://stakeholders.ofcom.org.uk/consultations/postal-service-letters-packets/)

Responses

Responder name	Type
Communication_Workers_Union.pdf (PDF File, 26.8 KB)	Organisation
Consumer_Focus.pdf (PDF File, 452.2 KB)	Organisation
Hughes_Mr_S.pdf (PDF File, 14.2 KB)	Organisation
Knowles_Mr_J.pdf (PDF File, 12.9 KB)	Organisation
Peel_Mr_M.pdf (PDF File, 12.1 KB)	Organisation

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