Postal prices to be frozen for three years after 1p rise next April

The price of first and second class post is to rise by 1p from next April but after that it will be frozen for three years, the postal regulator Postcomm is set to announce.

Postcomm is also preparing to unveil new performance targets for Consignia which will require it to compensate customers if it fails to deliver 91.5 per cent of first class letters the next day in any part of the country. The overall national target for first class letter delivery is also being increased to 93 per cent.

The price changes, due to be unveiled later this week, will increase the cost of a first class stamp to 28p and a second class stamp to 20p and will be worth £170m to Consignia in a full year.

However, under the new performance regime, it faces having to pay millions of pounds back in compensation to customers if it fails to improve standards of service. Last year it was liable for fines of £8m but the regulator decided to waive them in view of the £1.5m Consignia is losing a day.

The price freeze is likely to be welcomed by consumer groups such as Postwatch which have been sharply critical of Consignia's performance and supportive of the regulator's move to introduce competition to the Royal Mail.

Under the present system, Consignia is only penalised if its standard of service drops below the nationally agreed target. But under Postcomm's new proposals it will have to compensate customers if the percentage of first class letters delivered on time drops below 91.5 per cent in any of the 118 mainland post code areas.

This will present the Royal Mail with a tough challenge in many parts of London and the Home Counties, such as the east London postcode area where the percentage of first class letters arriving the next day is only 83.2 per cent.

The main feature of the new compensation scheme is that Consignia will have to pay back money to large mail users on a pro rata basis. So, if its performance drops 2 per cent below the target then it will have to pay back 2 per cent of the income it has received. Consignia will also have to pay compensation for lost letters. Last month it admitted that 500,000 letters went astray each week.

Alongside the new price proposals, Postcomm will also publish a damning report from the consultants WS Atkins which concludes that Consignia is 20 to 25 per cent less efficient than it ought to be and has a complete lack of control over its capital expenditure.

Consignia has embarked on a three-year cost-cutting exercise involving 30,000 jobs losses which is designed to save £1.4bn a year.