Postal regulator to climb down over Royal Mail price controls

The postal regulator Postcomm is set to climb down over price controls on the Royal Mail after warnings that its proposals could put the organisation out of business.

Martin Stanley, the chief executive of Postcomm, said yesterday that he expected the regulator to come up with a modified set of proposals which would be acceptable to Royal Mail.

Allan Leighton, the Royal Mail chairman, claims the price proposals as they stand would cut its revenues by £460m and force the organisation to default on a £3bn loan agreement with the Government.

Royal Mail is particularly unhappy about one aspect of the proposals which would require it to keep to an average-weighted price across all 21 billion items of mail it delivers. It claims this alone would cost it £300m in lost revenues.

Mr Stanley said: "We have accepted Royal Mail's argument that the average-weighted price formula is problematic. They want us to meet their concerns and we expect to meet their concerns."

This would represent the second time that Postcomm has backed down over the regulation of Royal Mail. Earlier this year it agreed to delay the timetable for the introduction of competition by the best part of a year.

Rival operators had been due to start competing with Royal Mail in April but this was deferred until January next year. Full liberalisation of the postal market was delayed from April 2006 until 2007.

Mr Stanley argued, however, that the UK would still have one of the most competitive postal markets in the world when Royal Mail's monopoly is progressively opened up from next year. The UK will also become the first country in Europe to open its postal system to full competition.

The consultation period on Postcomm's proposals closes on 2 December. It expects to put a new set of price controls to its board for approval on 19 December and then announce them early next year.

These will allow Royal Mail to increase the price of first and second-class mail by 1p to 20p and 28p respectively from next April. The price rise will bring in £500m over the next three years.

Postcomm is also close to agreeing a ground-breaking deal setting out how much Royal Mail can charge rival operators for access to its local delivery network or "last mile".

The regulator is arbitrating in a dispute between Royal Mail and UK Mail, part of the Business Post group, which wants to start collecting mail from business customers and then shipping it to Royal Mail's local mail centres for delivery by postal workers to home addresses. UK Mail says it should be charged 10p an item. Royal Mail says the cost is 20p.

Postcomm will fix the charge at somewhere in between the two amounts and in doing so set a precedent for similar deals in future.