Postal regulator set to unveil plan to split Royal Mail in two

Radical plans to split the Royal Mail in two and reduce the volume of letters covered by its one-price-goes-anywhere guarantee are to be canvassed next month by the postal regulator.

Postcomm is preparing to launch a strategic review of the organisation which will float a number of far-reaching ideas for increasing competition in the mail market.

One idea is to separate Royal Mail's trunk network from its "last mile" delivery network of postmen and postwomen to make the business more transparent to rival operators.

Another is to remove more categories of mail from the universal service obligation (USO) which requires Royal Mail to deliver to all addresses in the country at a uniform price. At present, about three-quarters of all letters, including normal first- and second-class deliveries and the two biggest categories of business mail, are covered by the USO.

Alongside this, Postcomm is due to bring forward proposals for "zonal pricing" of some categories of mail which are now outside the USO but still covered by price controls. This would enable Royal Mail to charge different rates according to whether mail was being delivered to densely populated urban areas or remote regions.

Postcomm began to open up bulk mail to competition three years ago and since the beginning of this year the entire postal market has been open for competition. Although 17 new operators have entered the market, Royal Mail has so far managed to hang on to 97 per cent of its monopoly. Of the 3 per cent accounted for by rival operators, almost all is covered by so-called "access" agreements whereby they collect the mail and deposit it at local sorting offices, leaving Royal Mail to deliver to the final address. Only 0.2 per cent of the 86 million items sent every day are handled by companies operating genuine end-to-end delivery networks.

Royal Mail's letters business increased operating profits to £344m last year despite a decline in inland letter volumes. Dividing its long-distance network from the last mile would be very similar to what has happened at BT, where the telecom company's network assets are now owned by a separate company called Openreach, which has its own board and accounts and is ring-fenced from BT's retail division.

Under the idea to be floated by Postcomm, the two halves of Royal Mail would remain under the same ownership but would produce separate accounts. A spokesman for the regulator stressed the strategic review was designed to stimulate debate and pose questions about the future shape of the market rather than produce immediate solutions. It would be "like the greenest of Green Papers", Postcomm said.

Meanwhile, Royal Mail is gearing up for the biggest change in the way letters are priced in decades. From 21 August, it will move from weight-based pricing to a system based on weight and size. Henceforth, a 32p first-class stamp will cover only letters which fit into an A5 envelope, are less than 5 millimetres thick and weigh less than 100 grammes.