British Postal Regulator: Inflation-based Price Caps a Failure

While a multitude of U.S. mailers appreciate postal rate hikes capped at inflation as measured by the Consumer Price Index (CPI), the British postal regulatory authority (Ofcom) deems this practice to be a failure.

According to a recent Ofcom report, in a highly uncertain market price controls “have removed the flexibility that would allow Royal Mail to adjust to changes in demand, while at the same time Royal Mail has been unable to improve efficiency, either at the rate expected by the regulator when the price control was set, or at the rate set by its own internal targets at the time.”

Price controls have served “less and less to protect customers from price rises,” the report says, “since 2006 Royal Mail’s financial position has led it to apply to the regulator for price rises over and above those consistent with the regulatory formula.”

In November 2010, Royal Mail applied to Postcomm for additional flexibility to increase prices, resulting in price rises averaging 12% for 2011-12. “We therefore consider that price controls in this sector have failed in recent years,” the report says.

A price control also reduces the flexibility of Royal Mail to adapt to unexpected changes in the market and its operating environment, the report says. It adds there are considerable risks in pursuing a traditional price control-based approach.

“There is also the related risk that Royal Mail raises prices to such a degree as to begin to raise affordability issues for vulnerable customers.”

In its recommendation, Ofcom proposed granting Royal Mail commercial freedom for seven years by not imposing a traditional price control.

Ofcom’s insight and recommendations are of interest to U.S. postal regulators as the U.S. Postal Service pursues its exigent rate case hike for 2012.

Under the Postal Accountability and Enhancement Act of 2006 (PAEA), postal rate hikes are capped at inflation as measured by the Consumer Price Index (CPI).