1. Research DEVELOPMENTS IN REGULATION Presentation to Conference Natalie Jacottet, Head of Research Tuesday 24 May 2011

2. Introduction  Background  Changes in the last twelve months  Impact of the Postal Services Bill  Changes under consideration  Concerns for the future Research

3. Background  Liberalisation and competition  Declining mail volumes  Access  Restrictive regulation – access and new products  Two postal services bills  Delayed price control Research

4. Recent developments  Consulting on a new regulatory framework – gradual deregulation  2011/12 a transitional year  Key changes:  Deregulation of some parcels and packets  Change to access regulation  Mechanisms to monitor Royal Mail’s costs  Roll over price control with some increases  Postcomm go slower due to perceived lack of co-operation

5. Royal Mail’s special application  Royal Mail application for price changes  Relaxation of 2011 price control to generate additional £100m in revenue  Royal Mail: “Necessary to fund modernisation”  Follows ‘slippage’ from their business plan  Increases to bulk and access mail prices  Postcomm accepts Research

6. Postal Services Bill  Significant changes to regulation:  Ofcom takes over from Postcomm  Only universal service and downstream access products can be regulated  Postcomm must have regard for the efficiency and financial sustainability of the USO  ‘Reasonable rate of commercial return’ on the USO  Access only where it: promotes efficiency; promotes effective competition; and confers significant benefits on postal users  Potential for change in USO provider – after 10 years Research

7. Proposals from 2012  Postcomm consulting on proposals ahead of transfer to Ofcom  Looking for considerable deregulation:  Should the USO be price controlled?  Should access headroom regulation remain?  Should access prices be regulated?  Should bulk mail stay in the USO?  What does an affordable USO mean?  How, if at all, should Ofcom intervene on access? Research

8. Concerns for the future  Continued over-regulation of access  Insistence on inappropriate efficiency demands  Self-financing USO = significant stamp price rises  Inappropriate definition of ‘affordable’  Erosion of USO minimum requirements  Accounting separation and structural separation  Zonal pricing

9. Summary  Royal Mail’s financial difficulties and changes to the market have finally prompted regulatory change  Some change is encouraging  There are risks for USO users  Risks for the longer-term shape of Royal Mail