Royal Mail agrees to 'bombshell' price curb

Royal Mail backed down yesterday and agreed to accept a set of price controls which its chairman, Allan Leighton, described only a month ago as a "bombshell", an act of "wreck-u-lation" and an example of "regulatory treacle".

The move paves the way for the price of first and second-class stamps to rise by 1p from 8 May. In each of the following two years Royal Mail will have to cut prices by 1 per cent in real terms but it will have the option of putting a further penny on the price of second-class stamps.

Had Royal Mail rejected the price controls proposed by the regulator Postcomm and referred the dispute to the Competition Commission for an inquiry it would have foregone about £100m in extra revenues.

Adam Crozier, Royal Mail's new chief executive, said Postcomm had made "major changes" to the price controls, which now made them acceptable. "After 11 months of detailed discussion with Postcomm we have seen real improvements to the package on the table and we are now able to agree the new deal," he added.

However, Mr Crozier said Royal Mail still had concerns about unresolved issues such as protecting the universal service, which guarantees deliveries to all addresses in the country for the same price, and the amount which Royal Mail will be able to charge rival operators for access to its delivery network.

Postcomm said the new price controls would allow Royal Mail £750m in extra revenues over the next three years but the company said inflation would swallow up more than half of that.