Call for input: Review of postal regulation - pricing and affordability

Call for input: Review of postal regulation - pricing and affordability 714 KB

The provision of an affordable postal service is a key principle of the postal Universal Service Obligation (USO) and a consistent priority for consumers. While affordability is a vital element across essential markets, an affordable postal service now increasingly provides a vital ‘backstop’ through which more vulnerable users, such as those who are digitally excluded or have restricted mobility, engage with services. As letters are a monopoly market, it is down to regulation to ensure the affordability principle is upheld. 

Up to now, Ofcom’s approach to securing affordability has involved very limited price control (restricted to 2nd class products), combined with monitoring. This has provided minimal incentives for Royal Mail to control prices and operate efficiently. The temptation has been for the company to fall back on price increases for monopoly products, with 1st class letter prices more than doubling in 5 years. This has increased affordability challenges. It also raises important questions about the value for money now offered by the letters service, with consumers facing half a decade of missed delivery targets on top of soaring prices. 

Against this backdrop, Ofcom is now considering its approach ahead of the expiration of the 2nd class safeguard cap in April 2027. This Call for Input suggests clear opportunities to improve the current pricing regime, particularly in its willingness to consider new approaches to pricing regulation. Citizens Advice recommends an outcomes-based approach, using price control to make ongoing price increases conditional on quality of service improvements. This provides stronger commercial incentives for Royal Mail to invest in improving service standards, while also offering a form of compensation to consumers if they suffer poor service.

The Call for Input also raises important risks. A key focus of this CFI is the potential introduction of a ‘targeted discount scheme’ for stamps. This is framed as both an affordability protection for consumers and a financial sustainability measure for Royal Mail, in that the scheme may replace universal price caps. 

Affordability schemes now exist in many essential markets. But, given the practical hurdles inherent in these schemes and difficulties in capturing need, an affordability scheme can never take the place of price caps in a monopoly market and have not done so elsewhere. These measures would pose a direct threat to the affordability principles set out under the postal USO.