Safeguard cap for Second Class Large Letters and packets

On 27 March 2012, we published our decision on the new regulatory framework for the postal market (PDF, 1.5 MB) ("the March 2012 statement"). This granted Royal Mail significantly more pricing flexibility to help secure the ongoing provision of the universal postal service, subject to certain key safeguards. These included a safeguard cap to ensure vulnerable consumers could afford a basic universal service.

Accordingly, we set a 55p cap on the price of Second Class stamp Letters ("Letters") effective from April 2012 which would be increased by CPI inflation over the period of the regulatory framework. We also determined that it was appropriate to impose a cap on Second Class stamp Large Letters¹ and packets up to 2kg ("Large Letters and packets") and noted that we would consult on the structure, form and level of such a cap. This consultation was published in April 2012 and included the statutory notification for the Designated Universal Service Provider ("DUSP") condition (PDF, 335.5 KB).

The calculation of the cap on Large Letters and packets was more complex than the Letters cap as there were a number of different formats and weight steps involved. The basket structure of the cap that we proposed was designed to give Royal Mail significant flexibility to set its prices for individual products as long as the overall level of the cap was not exceeded (given the weighted average of the seven² products included in the basket).

In considering the level of the cap, we noted that in general consumers buy Large Letter and packet products less frequently than Letters and when this is averaged across the year they have a low weekly spend on these products. We therefore proposed that the level of the safeguard cap should be at the same percentage increase as for Letters (53% plus CPI) for the seven year duration of the regulatory framework.

On 20 July 2012, we published the statement setting out our decision to set the level of the safeguard cap for Large Letters and packets (PDF, 264.6 KB) at a 53% increase over 2011-12 prices, increasing with CPI inflation for the seven year duration of the regulatory framework.

Following adoption of DUSP Condition 3, Royal Mail identified a problem with the formula for the calculation of the maximum price to be charged for the services specified in DUSP Condition 3. Having considered Royal Mail's concerns, we agreed that the formula as drafted did not accurately implement our intended policy.

In light of these concerns, we published a consultation on 14 February 2013 ("the February 2013 consultation") which proposed some minor modifications to DUSP Condition 3 (PDF, 217.8 KB) to correct this error and ensure that the condition would work as originally intended.

This statement sets out our decision to make the modifications to the safeguard cap for Large Letters and packets that were proposed in the consultation. In addition, the statutory notification of the modified DUSP Condition 3 is contained in Annex 1. Annex 2 contains an unofficial consolidated version of the modified DUSP Condition 3 which has been marked up to show the modifications that have been made and Annex 3 contains an unofficial consolidated clean version of the modified DUSP Condition 3.

Footnotes

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

2. In 2013-14 there are eight products within the basket, due to changes in Royal Mails Second Class stamp products and prices.