Guernsey Regulator has rejected Guernsey Post requests

Saturday 07 November 2009

Guernsey Post has asked the Regulator to approve changes to the Postal Tariff with effect from April 2010. The regulator has not approved the tariff requested and has also announced that he is to open the Guernsey Postal Market to Competition.

Guernsey Post needs the full Tariff increase to combat Royal Mail price increases. Guernsey Post is opposed to the market opening to full competition because of the financial impact on Guernsey Post and the threat to Guernsey Post’s ability to maintain standards of service to the people and businesses of Guernsey.

What is meant by opening the market to competition?
At the moment no competitor can offer a mail service on Guernsey on postage items with a stamp price £1.35 or less. Opening the market to competition means that any one can enter the market with no restrictions.

What is the “Reserved Area”?
The price level below £1.35 where currently no competitor is allowed is called the “Reserved Area”. It means that any postal service charged at £1.35 or less is reserved for Guernsey Post only.

Why is the Reserved Area there?
The Reserved Area is there so that competitors cannot undercut Guernsey Post by “cherry picking” the profitable parts of the business and leaving Guernsey Post with unprofitable parts of the business such as delivering social mail to Sark and Alderney. Guernsey Post has a legal obligation (known as the “Universal Service Obligation” (“USO”) to deliver at “uniform and affordable” prices, a six day a week collection and delivery to all addresses on the Islands of Guernsey, Herm, Sark and Alderney and maintain a network of branches. The Reserved Area is there to protect those services.

Why does Guernsey Post need a tariff increase?
There is a simple answer to that. Most mail goes into the Royal Mail system and Royal Mail has put up its charges to The Guernsey Post by £8m. As a result the tariffs must rise or Guernsey Post will make start making significant losses.

Can’t Guernsey Post absorb the £8m increase through increased efficiencies?
The Guernsey Post have managed to absorb £4m by increased efficiencies, working with their suppliers and by adopting the new Royal mail “Pricing in Proportion” method. But it still leaves a gap of £4m that we need to close from tariff increases.

What is “Pricing in Proportion”?
“Pricing in Proportion” (“PiP”), is a new way of pricing mail. Traditionally mail has been charged by weight but with “PiP” post is charged on a combination of size and weight. Effectively this divides mail into letters, large letters and packages. The reason for it is that it is more efficient to process mail in this way and the price of mail better represents the cost of processing it. Royal Mail introduced this system a few years ago and will soon start charging us on this basis. Therefore it was applied to the Regulator to allow Guernsey Post to adopt the PiP system from April 2010.

What did the Regulator allow in his draft decision?
The regulators draft decisions were-
1.The requested tariff increase would be refused with no revenue to cover £2m of costs (disallowed costs).
2.Permission to introduce PiP was granted, but with significant changes to the requested pricing structure.
3.Instead of granting an increase in the reserved protected price level he announced his decision to abolish it, starting with a first stage reduction to 65p starting in April 2010.

What effect will these draft decisions have on Guernsey Post?
The total effect of all these draft decisions on Guernsey Post is very significant. The combination of the “disallowing” of £2m of the requested tariff increase, the Regulators draft changes to the PiP tariff and the abolition of the reserved area will combine to put the future of the Universal Service Obligation (USO) at risk and Guernsey Post will make significant losses.

The Regulator has allowed you to introduce PiP as you requested. So why are you not pleased with that?
We do welcome the Regulators decision to allow us to introduce PiP. However he has rejected our PiP tariff and instead proposed a different one. His proposed PiP Tariff is not cost reflective, undermines some of the principles of PiP and has a negative financial impact on Guernsey Post. It also has some strange anomalies such as increasing prices for some bulk mailers and asking us to provide some services below cost.

The Regulator has announced his intention to abolish the Reserved Area and open the market to competition. Why is Guernsey Post opposed to that?
Abolishing the Reserved Area and opening the market to competition will enable competitors to enter the market and “cream off” the profitable parts of the business. This seriously threatens the ability of Guernsey Post to meet its Universal Service Obligation and would seriously damage its finances. This means that levels of service and the number of deliveries and branches will be threatened, postal charges could rise significantly, and that inevitably Guernsey Post would become a drain on the Island’s finances.It also means that income that currently stays on Guernsey will flow instead to Jersey, the UK or Holland.

The Regulator is introducing this in stages starting with a drop to 65P. Will this help?
No. A drop to a level of 65p would mean that only 25% of Guernsey Post postal income would remain in the Reserved Area. This means that even this first drop would have a very significant effect enabling competitors to “cherry pick” bulk mailers and therefore threatening Guernsey Post’s ability to meet the Universal Service Obligation and seriously affecting the finances of Guernsey Post.

Isn’t Guernsey Post just afraid of Competition?
We’re not afraid of competition but it has to be on a level playing field. Allowing competitors to cherry pick bulk mailers without them needing to meet the Universal Service Obligation is not fair competition.

How do Guernsey postage prices compare with Royal Mail prices?
Even after we have reflected the huge increase to us in Royal Mail charges our proposed prices compare favourably with Royal Mail.

Guernsey Post has proposed to increase the price of a small letter to the UK from 43p to 45p, an increase of just less than 5%. From the same date Royal Mail is increasing the price of a small letter from 39p to 42p, an increase of just less than 8%. However, in comparing our prices with Royal Mail we need to take account of the additional costs we incur in conveying our mail by air to the UK. For an ordinary, small letter this cost is slightly more than 5p so a comparable price for Royal Mail would be 48p.