Royal Mail statement on Ofcom investigation

RNS Number : 4468E

Royal Mail PLC

09 April 2014

 



9 April 2014

Royal Mail plc

Royal Mail statement on Ofcom investigation into Access contract changes

Royal Mail plc (RMG.L) has been notified by Ofcom of the powers under which it will conduct its investigation into certain changes to Royal Mail's Access contracts, following a complaint by TNT Post UK. Royal Mail believes TNT Post UK's complaint is unfounded.

We are concerned that Ofcom's decision to investigate under its Competition Act powers may create a period of uncertainty in the UK postal market. We are keen that the investigation is completed as quickly as possible.

Royal Mail's Access contracts require it to suspend Access changes that are the subject of an Ofcom investigation and in February we wrote to customers notifying them of those changes¹ that are suspended. They are:

·     The introduction of a 0.25p price per item differential between:

a) a price plan that requires customers to provide monthly volume forecasts including significant changes for up to 2 years ahead, based on a national mailing profile across 86 local districts and,

b) price plans that do not require that forecast information, therefore providing additional flexibility for customers.

The price differential reflects the cost benefit Royal Mail would gain by being able to plan more accurately at a local level and deliver greater efficiencies.

·     Changes to the zonal price differential between our four zones (London, Urban, Suburban and Rural), so they are more reflective of relevant costs and market conditions.

The RPI-related price increase for all Access customers was implemented on 31 March 2014.

The planned changes to Access contracts are an important part of Royal Mail's commercial response to changing market conditions, including the expansion of direct delivery competition. We believe the changes are fair, reasonable and fully within the guidance provided by Ofcom's March2013 document on end-to-end competition.   The regulator highlighted the importance of this to mitigate the impact on the universal service from a competitor cherry-picking easier to serve parts of the country, while Royal Mail is required to deliver mail in higher cost areas.

The suspension of these changes creates a significant asymmetry in the market - as upstream and direct delivery competitors are not constrained in the same way. Unconstrained direct delivery competition could impact the economics of the universal service network - the protection of which is Ofcom's primary regulatory duty.

In the light of this, we are again calling for Ofcom to commence immediately a full review of how it will protect the universal service from the serious risk presented by unfettered direct delivery competition. It should take action as soon as possible to safeguard the finances of the universal service.  This is necessary to give clarity and certainty to all market participants.

Separately, Ofcom has notified us that it intends to review the Universal Service Provider Access conditions imposed on Royal Mail in March 2012.

We wish to see these matters resolved as quickly as possible so that our planned Access changes can be put into effect to help secure the sustainability of the Universal Service. Royal Mail will cooperate fully with Ofcom in both these matters and will share with it the comprehensive and robust rationale for our proposals.

ENDS

For further information please contact:

Media Relations

Mish Tullar

Phone: [phone]

Email: [e-mail]

Investor Relations

Catherine Nash

Phone:  [phone]

Email: [e-mail]

NOTES

¹ The planned Access changes are an important part of Royal Mail's commercial response to both changing market conditions and to Ofcom's comments in its March 2013 guidance document on end-to-end competition in the postal sector. In that guidance document², Ofcom noted Royal Mail could use its commercial freedom to amend the pricing and terms of Access contracts, to ensure they are reflective of relevant market costs.

² Ofcom: End-to-end competition in the postal sector: Final guidance on Ofcom's approach to assessing the impact on the universal postal service - (27 March 2013):

"Royal Mail could change its commercial strategy (i.e. pricing and terms). In particular, under the current regulatory regime Royal Mail has the ability to change the prices it charges access operators. This includes the ability to change how access prices are set for different geographic areas (currently the "zonal access pricing regime") to ensure they are reflective of relevant costs. This is particularly important given that in general an end-to-end competitor will still need to rely on access to Royal Mail's network to offer its customers full coverage of all addresses in the UK. Royal Mail's flexibility in setting zonal access prices can enable it to ensure that end-to-end competitors pay a cost reflective price for Royal Mail delivering mail in the areas where it has chosen not to enter (which may be the harder to reach, and hence less profitable parts of the UK). In this way, Royal Mail may be able to mitigate the impact on the universal service from an entrant 'cherry picking' by delivering in lower cost areas and handing over the rest of the mail to Royal Mail to deliver. In addition, Royal Mail has the flexibility to negotiate changes to its contracts both with its retail and access customers (subject to competition law and the existing ex ante regulatory conditions on access)."

About Royal Mail plc:

Royal Mail plc is the parent company of Royal Mail Group Limited, the leading provider of postal and delivery services in the UK and the UK's designated universal postal service provider. UK Parcels, International and Letters (UKPIL) comprises the company's UK and international parcels and letters delivery businesses operating under the "Royal Mail" and "Parcelforce Worldwide" brands. Through the Royal Mail Core Network, the company delivers a one-price-goes-anywhere service on a range of parcels and letters products. Royal Mail has the capability to deliver to more than 29 million addresses in the UK, six days a week (excluding UK public holidays). Parcelforce Worldwide operates a separate UK network which collects and delivers express parcels. Royal Mail also owns General Logistics Systems (GLS) which operates one of the largest ground-based, deferred parcel delivery networks in Europe

 

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