17th Jul 2015 10:42
LONDON (Alliance News) - UK media and communications regulator Ofcom outlined the scope of its review into the regulation of postal service operator Royal Mail PLC, including whether any price controls should be imposed on the company given the lessening of competition in the postal services market.
Ofcom said in June that it had widened its review of the regulation of Royal Mail in light of the decision by competitor Whistl to halt its own direct delivery services in the UK. It said at the time that it would look at whether the commercial flexibility Royal Mail was given following the last regulatory review in 2012 was still appropriate and whether any pricing controls should be imposed.
The publication of the scope of the review on Friday confirmed that this remains on the table as an option, with Ofcom saying it will examine whether Royal Mail's wholesale costs and retail prices are affordable and sufficient to cover the costs of the universal service and whether the company's commercial flexibility remains appropriate within the changing market, including whether wholesale or retail charge controls may be appropriate.
The review also will examine whether any changes to the current postal regulatory framework could be appropriate in order to maintain the universal postal services and will study how to ensure Royal Mail continues to become more efficient given the absence of any significant end-to-end competition for the letters market.
Ofcom expects to complete its work and any revised regulatory framework put in place in 2016.
Royal Mail shares fell to the bottom of the FTSE 100 following Ofcom's announcement. They were down 2.7% at 512.71 pence in late morning trade, comfortably the worst performer in the blue-chip index.
In its last review into Royal Mail's regulatory framework back in 2012, Ofcom decided to remove the price controls which had been imposed on the operator in 2006. At the time, the regulator found that the volume of mail in the UK had fallen by more than a quarter since 2006 and, owing to the rise of email, forecast that the medium-term outlook for volumes also was poor. In addition, Royal Mail customers had moved away from higher-value products to lower-value services.
These factors had hit Royal Mail's revenue, putting the financial sustainability of the universal postal service under "severe pressure", Ofcom had said at the time.
The 2006 price controls had fixed the margin between Royal Mail's access services and its corresponding retail services. But Ofcom said in 2012 that the price control-based would not be effective in the specific circumstances facing Royal Mail at the time and, therefore, removed the controls to give Royal Mail pricing flexibility.
But on Friday, Ofcom said that given the pricing behaviour of Royal Mail since the price controls were removed in 2012, it is concerned that the current regulatory framework is not working as it had envisaged when it was introduced. In addition to this, the decision by private postal company Whistl to cease providing end-to-end delivery services means there is no prospect of any end-to-end competition for Royal Mail, and Ofcom said Royal Mail is in a substantially stronger financial position than back in 2012.
For the financial year to March 29, Royal Mail posted a pretax profit of GBP569 million, up from GBP421 million a year earlier, despite its revenue falling to GBP9.42 billion from GBP9.46 billion. The company posted lower-than-expected revenue from its parcels business and a decline in revenue from its letters operations, but managed to slash its costs sufficiently to keep its profit rising.
Revenue was flat in the company's UK parcels and letters business, as letter revenue fell 1%, while parcel revenue grew by the same amount. Operating profit before transformation costs improved to GBP615 million from GBP608 million as Royal Mail cut costs. Revenue in its European logistics business grew 7%, more than the company expected, and operating profit improved to GBP115 million from GBP108 million.
In addition to the fundamental review of Royal Mail regulation, Ofcom said it also will broaden its work to consider the market structures in the parcels and letters sectors and explore what competitive constraints Royal Mail faces and whether any changes have occurred to these constraints given recent market events.
This will let Ofcom determine whether any regulation could be needed to supplement the efficiency, innovation and quality incentives provided by market forces in different segments of the postal sector and whether any existing regulation on Royal Mail in bulk access and parcels should be modified or removed.
Royal Mail was floated on the London Stock Exchange back in October 2013. Its shares promptly surged higher, resulting in long-running and vitriolic criticism of then-Business Secretary Vince Cable that the UK government had priced the float too low, meaning taxpayers missed out on an extra windfall.
In June this year, with a majority Conservative government having taken power, the government sold off another 15% stake in Royal Mail, raising GBP750 million after selling the shares at 550 pence per share, significantly higher than the 330 pence per share IPO price.
By Sam Unsted; [email protected]; @SamUAtAlliance
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