POSTCOMM CONSULTATION

[Geezer]

Letter to Branches

No. 606/10 Ref: Date: 9th July 2010

TO: ALL BRANCHES WITH POSTAL MEMBERS

Dear Colleague,


POSTCOMM CONSULTATION – “LAYING THE FOUNDATION FOR A SUSTAINABLE POSTAL SERVICE”

This LTB provides the Postal Branches with a comprehensive overview of the above mentioned Postcomm Consultation Document, which was launched on the 27th May and closes on the 31st August.

We have attached a summary of the Postcomm Consultation Document and their background paper on current mail market trends.

In due course the Union will be submitting a major contribution to the Postcomm Consultation Document and initial meetings with Postcomm have already taken place.

In the coming weeks we must significantly raise the profile of the dangers posed by the current regulatory arrangements to the future viability of Royal Mail and the Universal Service.

Further developments will be reported in due course.

Yours sincerely

Dave Ward Billy Hayes
Deputy General Secretary (P) General Secretary




POSTCOMM CONSULTATION:
LAYING THE FOUNDATIONS FOR A SUSTAINABLE POSTAL SERVICE
MAY 2010


• Postcomm launched its consultation “Laying the foundations for a sustainable postal service” on 27 May 2010. The consultation closes on 31 August 2010.

• The document sets out steps towards a new regulatory framework for the short to medium term. It includes proposals for current consultation and outlines future work.

• The document is supported by five annexes containing specific proposals to take effect in 2011.

• Annex 1: USO: Contains ongoing research into the needs of postal users, affordability and the net cost of the USO. No changes are proposed for 2011, but a consultation will take place towards the end of 2010.

• Annex 2: Market analysis: Identifies where competition has developed in the postal market. Postcomm is now consulting on provisional conclusions drawn from this work.

• Annex 3: Cost transparency and accounting separation: Aimed at achieving greater clarity regarding Royal Mail’s costs. Current consultation covers the principles for cost reporting and accounting separation.

• Annex 4: Price control and access: Proposes a number of regulatory changes including some deregulation of the pre-sorted bulk mail market and the parcels and packets markets. Also proposes changes to downstream access pricing and ‘headroom’ regulation.

• Annex 5: Licensing review: Proposes minor licence modifications and updates.

• Postcomm’s current consultation contains the following proposals:

• Substantial deregulation of packets and parcels based on weight and volume.
• Partial de-regulation of pre-sorted bulk mail
• Changes to the regulation of access and the headroom control. Including reducing the level of headroom and creating a basket of regulated products to allow greater pricing flexibility.
• Rolling over other features of the price control for another year.
• Changes to condition 7 (Royal Mail’s notification requirement for new or changed products).
• Principles of greater cost transparency and accounting separation.
• Tidying up the current licence
• An increase in the price of the product “Private Boxes Transfer to P.O. Boxes 12 months”.

• A wider set of changes are intended for 2012 and beyond and further consultations will follow.









Annex 1: Provision of a universal service

• Postcomm is not currently making any proposals. Research is being undertaken with Consumer Focus on identifying customers’ needs. They intend to establish consumer forums across the UK to assess customer views.

• Analysis will also be undertaken to assess methods used to establish the affordability of the USO.

• Postcomm will seek to identify the net cost of the USO and intend to apply the “Net Avoidable Cost” approach.

• A further consultation will be published in November.

Annex 2: Analysis of markets

• The document looks at the market for packet and parcels services, mail retail and mail wholesale and aims to distinguish between markets in which Royal Mail has market power and markets in which it does not.

• Postcomm is consulting on the extent to which stakeholders accept its analysis.

Annex 3: Cost transparency and accounting separation

• In order to better understand Royal Mail’s costs, Postcomm is looking to introduce new principles for product costing via Royal Mail’s licence. It is also seeking to introduce greater accounting separation to be able to better distinguish between the cost of different products as well as certain upstream and downstream costs.

• Postcomm claims it needs greater clarity to prevent Royal Mail cross-subsidising products, to ensure charges are consistent with costs and to address problems with the access regime.

• Cost transparency: Postcomm is proposing a three-level framework to improve future transparency composed of the following:

1. Guiding principles
2. Methodological principles
3. A detailed costing manual

• The consultation sets out proposals for (1) and (2). Postcomm would like to see Royal Mail required by licence to observe them. (3) would be produced and maintained by Royal Mail.

• Accounting separation: Postcomm will work with Royal Mail on defining the principles and scope of further accounting separation.

• Postcomm states its preference is for accounting separation as opposed to the alternatives of ring-fencing, structural/functional separation or ownership separation.

• The consultation seeks views on the following lines of separation:

o a line delineating deregulated and non-deregulated products,
o a line delineating downstream and upstream products,
o a line delineating bulk and non-bulk products.

• Postcomm would prefer to introduce accounting separation across all three lines.

• Proposals for 2011 include a licence change requiring Royal Mail to start producing separate accounts; in 2011/12 these would be for Postcomm only.

• A full consultation will follow in May 2011.

Annex 4: Price control and access

• Postcomm is looking to reduce regulation where its market study has concluded that Royal Mail no longer has market power, or where the extent of competition is such that certain forms of regulation are no longer needed.

• Proposals include the following:

o remove price controls from packets sold to business customers and weighing over 750g

o replace retail price cap controls with wholesale price cap controls for pre-sorted bulk mail; introduce wholesale-led pricing, whereby Royal Mail and access operators set retail prices based on Royal Mail’s regulated wholesale prices

o introduce flexible access headroom control based on a basket of access products and reduce average headroom from April 2011

o widen scope of the basket to include retail third-class pre-sorted bulk mail services

• Postcomm is also proposing to roll over the current price control for a further year.

• The current quality of service monitoring regime will also continue.

• A full review of the form, structure and level of prices will take effect from April 2012.

• Postcomm notes that the pension adjuster - the mechanism by which Royal Mail can recoup increased pension costs through increasing prices - which was included in the last price control has not yet been used. However, should Royal Mail’s pension deficit payments go up significantly the company may be able to recover a proportion of the increase from customers. The intention of the adjuster was that up to 80% could be recovered. Royal Mail and the Trustee would need to agree that the customer base could take this extra burden. An increase of this magnitude could mean a 3% price rise for all Retail and Access customers.

• PO Boxes: Royal Mail wants to remove these products from the price control, claiming the market is competitive and its costs are double what it is currently able to charge. Postcomm supports an increase in prices, subject to a review of costs.

• Postcomm is also proposing to reduce the public consultation period for new products and product changes (licence condition 7) from twelve to six weeks.

• The proposed 2011/12 price control is expected to allow Royal Mail to make an additional £75m in revenue in real terms.

Annex 5: Licensing review

• The consultation covers changes to be made to the standard and universal service provider’s licence.

• Changes are intended to ensure consistency with legislation and to reflect current practice. Changes are also proposed to simplify language and clarify drafting, without changing policy.


POSTCOMM BACKGROUND INFORMATION

• Postcomm’s consultation documents and annexes contain background information on the mail market.

Mail volumes

• The postal market has changed dramatically in recent years. The current price control began in 2006 and was designed during a period when Postcomm expected mail volume growth. However, growth in digital media and the current recession has led to serious mail volume decline.

• Royal Mail has reported 7% mail volume decline in 2009/10.
• There has been a 15% decline in the daily number of letters, packers and parcels since 2006.

• Postcomm argue that there is no evidence to suggest that volumes will return post-recession.

• In 2008/09 Royal Mail had only 30- 40% of second and third class pre-sorted bulk mail; and Royal Mail now has less than 20% of second class pre-sorted bulk mail.

• Royal Mail’s retail bulk mail volumes have shown an increasing rate of decline: 24% in 2008/09, rising to an estimated 29% in 2009/10.

• Royal Mail has 70-80% of the high volume unsorted mail market

• Postcomm makes the following analysis of changes in mail volumes across the following five groups of mail:

• Social mail: Has been hardest hit by e-substitution; decline likely to continue.
• Transactional mail: Declining fast by comparison to other segments.
• Direct mail: Decline in overall volume but benefiting from a more targeted and integrated approach.
• Publishing mail: Steady but slow increase
• Fulfilment mail: Strong growth driven by online shopping.

• End-to-end volumes have not grown as expected. In 2006 it was predicted that by 2010 296m items would be delivered through end-to-end competition. However, in 2008/09 only 0.01% of total mail volumes were delivered entirely through a competitor network (23.8m items compared with 5.3bn items delivered by Royal Mail).

Access

• In February 2010 there were 28 access agreements with Royal Mail.

• Access mail volumes have increased more rapidly than expected.

• Access volumes rose 32% in 2008/09 and a further estimated 19% in 2009/10.

• Postcomm acknowledges that there have been problems with the access headroom regime [the system whereby the price Royal Mail can charge for wholesale products is linked by a fixed margin to their retail prices]. It identifies the scope of the regime, its form - specifically its inability to reflect changes in Royal Mail’s costs - and its level - that it doesn’t reflect relevant upstream costs – as core problems.


Finances

• Royal Mail’s actual cashflow has been £800m worse than forecast.

• Finances have been much weaker than was expected in 2006.

• The difference between forecast and actual cashflow is too great to bridge in 2011/12

• Royal Mail has reduced costs by nearly 10% in real terms in two years. The reduction in operating costs has been slower than the level of mail volume decline and therefore the cost per letter has risen.

[viking]

You know what...Billy Hayes and Dave Ward....I couldnt care less what your thoughts are on this. Dont tell me you didnt see this coming! Its a bit too late in the day to ask for the support of the Union workers who through No fault of their own, have lost money on the last deal you agreed on "for them."..supposedly. {stable doors and bolting horses spring to mind}