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TERM CONTRACTS SCOPE OF INVESTIGATION

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					        TERM CONTRACTS: SCOPE OF INVESTIGATION

Complainant:                Mail Competition Forum (“MCF”) [and own-
                            initiative investigation]
Investigation Started:      28 March 2008
Issue:                      Undue Restriction
                            Undue Discrimination
                            Undue Preference
Licence Conditions:         11

Background

1. From April 2008, Royal Mail intends to begin offering Term Contracts. The
   main features of Term Contracts are as follows:

   •   Customers who enter into a contractual volume commitment in respect
       of qualifying mail services will receive a discount against that
       contracted volume, provided they meet a minimum annual volume of 1
       million items and have a minimum of one pre-scheduled collection of
       the qualifying mail service per week (in at least 48 out of 52 weeks per
       year);

   •   Qualifying mail services are Mailsort 120 (all classes); Mailsort 700 (all
       classes); and Mailsort 1400 (all classes);

   •   Both the minimum annual volume of 1 million items and minimum 48
       weeks collection applies per product and class of service contracted;

   •   The discounts are applied after all other applicable discounts on the
       qualifying mail services have been applied and amount to 1.4% (for a 1
       year commitment) and 2% (for a 2 year commitment);

   •   Actual posted volumes will be measured against contracted volumes
       on a quarterly basis, with discounts credited on a quarterly basis;

   •   Customers can terminate a Term Contract by giving three months
       written notification. If a customer terminates a Term Contract before the
       end of the contract period, or underachieves against their contracted
       mail volume, a reconciliation payment may apply.

2. Postcomm was first notified of the proposed service on 17 December 2007
   (when Royal Mail notified its 2008/09 prices) and began a review of the
   compatibility of Term Contracts with Royal Mail’s licence conditions. On


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   31 January 2008, the MCF wrote to Postcomm to complain about certain
   of the proposed retail and wholesale prices that Royal Mail proposed to
   introduce with effect from 7 April 2008. This complaint included specific
   concerns about the introduction of Term Contracts.

   The MCF’s Complaint

3. The MCF’s complaint raised the following issues in relation to Term
   Contracts, among others:

   •   There is no clear cost justification for the level of the discounts
       proposed;

   •   The discounts have the effect of tying customers into using Royal Mail
       services for up to two years and of committing them contractually to
       provide Royal Mail with the maximum volumes a customer anticipates it
       is likely to mail. This is exacerbated by the provisions relating to the
       possible agreement of volume growth plans;

   •   Outside a tolerance band, the discounts do not apply for excess
       volumes and customers who fail to meet 85% of contractually
       committed volumes may be required to make a reconciliation payment.
       Overall therefore, the potential for customers to divert some volume to
       competitor services, or even to test them, is reduced;

   •   Term Contracts are only available to customers with at least one
       collection per week; hence tying customers who mail reasonably
       regularly while unfairly discriminating against customers who mail less
       frequently (e.g. seasonal mailers such as travel firms or charities),
       without there being any apparent cost justification;

   •   The terms of the “Switching Plan” that forms part of the Term Contracts
       service are unclear and unfairly discriminatory.

Preliminary Assessment

4. In line with its procedures, Postcomm began a preliminary assessment
   and asked Royal Mail to comment on the various issues raised. The
   principal points made by Royal Mail in its response include the following:

   •   Term Contracts are not unduly preferential towards any particular class
       of customer, and are designed to show due preference to those
       customers willing to commit to large volumes of mail on a regular
       collection basis.

   •   Royal Mail believes that the cost justification provided for Term
       Contracts is sound and reflects the cost benefits to the company. Term
       Contracts are justified on the cost benefit – or customer contribution –
       to Royal Mail of avoiding costs associated with the permanent loss of



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       regular Mailsort volumes. It is customers who mail regular and uniform
       volumes that are most likely to give rise to cost benefits arising from
       predictable mail volumes.

   •   Term Contracts are offered in response to customer demands and the
       discount scheme being offered would not adversely affect competition
       or hinder customers’ choice of mail service providers.

   •   The terms and conditions, including the 1 million minimum annual
       volume and weekly collection criteria, are based on objective grounds
       that are related to the point at which the loss of volume has an impact
       on Royal Mail’s activities.

   •   Competitors have successfully built a foothold in the market, with 40%
       of bulk mail now in the hands of other mail providers.

5. Having carefully considered all the information received from Royal Mail,
   Postcomm considers that this is not sufficient to dispose of its concerns.
   Postcomm therefore believes that there is a case to investigate and it has
   sufficient reason to proceed to a full investigation.

6. One aspect of Term Contracts that particularly concerned Postcomm
   during its preliminary assessment of the MCF complaint was the
   possibility of a customer being required to make a “reconciliation
   payment” (where that customer terminates a Term Contract before the
   end of the contract period, or underachieves against their contracted mail
   volume) and, in particular, the level at which the reconciliation payment
   was set. Postcomm raised this issue with Royal Mail. In response, Royal
   Mail has undertaken, of its own initiative, to revise the terms and
   conditions for the reconciliation payment. This includes a commitment
   from Royal Mail that a customer will never be required to make a
   reconciliation payment that exceeds the level of discount received under
   the Term Contract.

7. Postcomm also remains dissatisfied with Royal Mail’s explanations and
   requires more information on the following points:

   •   The methodology applied that has been used to calculate the Term
       Contract discount;

   •   Whether Term Contracts discriminate against other customers who do
       not meet the Term Contract terms and conditions, including those who
       use other Royal Mail services.

Scope of the Investigation

8. Postcomm will consider whether Term Contracts contravene or are likely
   to contravene Royal Mail’s licence obligations relating to the promotion of
   effective competition. In particular, Postcomm will consider whether Term



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   Contracts will result in any undue preference and/or undue discrimination
   against and/or any undue restriction on any person or class of persons.

9. The scope may change, if necessary and depending on what Postcomm’s
   investigation uncovers. If the scope does change, Postcomm will publish a
   revised scope.


POSTCOMM
MARCH 2008




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