A radical shake-up of the postal market is set to herald an increase in the price of stamps in a bid to safeguard the six-day-a-week universal service, it was announced today.
Ofcom, the industry's new regulator, unveiled a raft of proposals aimed at giving greater commercial freedom to the Royal Mail, including handing the firm the power to set the price of first class stamps - currently among the cheapest in Europe at 46p.
The regulator is proposing a cap on second class stamps of between 45p and 55p, compared with the current 36p, but the price will also increase in line with inflation.
The Royal Mail described the new approach as "significant", while the Communication Workers Union said the current regulatory regime had finally been recognised as a "failure".
Ofcom said its proposals, which are subject to an 11-week consultation, were aimed at protecting the universal service obligation (USO) under which the Royal Mail has to deliver to any address in the UK for the same price, six days a week.
Without regulatory changes, there was a risk that the USO would not be delivered to the same standard, it was warned.
Ofcom chief executive Ed Richards said the Royal Mail had been under "inexorable pressure" in recent years because of falling mail volumes, which has seen the number of letters delivered every day slump by 22 million to 62 million between 2006 and 2010, contributing towards a loss of £120 million last year.
Consumers have also switched from first to second class mail - now posted in equal numbers - while stamp prices have lagged behind inflation for almost 20 years.
The price of a first class stamp in the UK is among the lowest in Europe at 46p, compared with 69p in Italy, 67p in Denmark and 60p in Greece, while service targets are among the highest, Ofcom pointed out.
The Royal Mail's target of delivering 93% of first class mail within a day of posting compared with "much easier" levels such as 90% within three days in Spain, while the target of delivering 98.5% of second class post within three days was stricter than in other countries including Germany and Italy.
Mr Richards said the universal service was not financially sustainable, adding that regulation needed "radical reform".
He refused to be drawn on how much Royal Mail could increase the price of a first class stamp but warned of the danger of pricing it so high that consumers would either switch to second class, or to other forms of communication.
Mr Richards said he expected the Royal Mail to think "very carefully" about prices because there was no point in seeing them "hammered up", only for people to stop buying them.
Royal Mail said the proposed new approach from Ofcom was a "significant step" towards securing the future of the six-day-a-week, one-price-goes-anywhere universal service to 29 million UK homes and businesses.
Chief executive Moya Greene said Royal Mail has been stressing the need for a different approach as the old regulatory framework has "accelerated" its financial decline.
Ms Greene said: "We welcome Ofcom's major review of the UK postal sector. This document merits a great deal of attention. We will give it just that before coming to our considered view on the new framework Ofcom is proposing. It is clear, however, that the Ofcom proposals are a significant step towards securing a sound and sustainable universal service.
"The proposals are timely too as radical action is needed now given the ongoing decline in volumes and revenues and the inability to cover the costs of our universal service activities."
Royal Mail said it will give its detailed view on Ofcom's proposals before the consultation ends in early January.
The Communication Workers Union described the proposals as a "radical change" and welcomed the recognition of "major failures" in the previous approach.
General secretary Billy Hayes said: "These appear to be major deregulatory steps from Ofcom and we broadly welcome this signal of a radically different approach to regulation which has finally been recognised as a failure.
"We do have reservations over the impact on consumers, and we'll be looking closely at the details of the proposals before making our submission to the consultation. The principle of a universal service with affordable and equal access to everyone is hugely important and we want to see it robustly maintained."
Mike O'Connor, chief executive of Consumer Focus, said: "This could be the biggest shake-up to the mail market that we have ever seen and we must ensure the right balance between putting Royal Mail on a stable footing and ensuring value and service for consumers.
"Mail services are going to get more expensive for consumers. While the unit cost of a stamp may seem small, consumers have a right to expect value for money for all services."
The average household spends around 40p a week on post, compared to around £30 on electricity, telephone and gas services.
Ofcom said its proposals, likely to take effect next spring, would last for seven years, with the possibility of reassessing second class stamp prices after two years.
A spokesman for TNT Post, a leading competitor of Royal Mail, said: "To enable end to end competition to take place in the UK, the Government needs to level the competitive landscape in terms of VAT immediately, as currently Royal Mail is exempt from charging VAT on business mail services, unlike its competitors.
"We are concerned however that Royal Mail has more freedom to price at individual customer level and need to analyse the detail of the proposals."