18 June 2015

Ofcom to review the regulation of Royal Mail

Ofcom, which regulates the UK’s postal industry, has this week announced a “fundamental review” of the regulation of Royal Mail to secure the universal postal service.  In particular, Ofcom highlights the recent withdrawal by Whistl from the ‘direct delivery’ letters market, which has resulted in Royal Mail no longer being subject to national competition.  The latest review will also incorporate the plans Ofcom announced last December to assess Royal Mail’s efficiency and parcel delivery performance in the parcels market.

Ofcom established a regulatory framework for Royal Mail in 2012 that ensured UK consumers and businesses continued to benefit from a universally-priced, affordable postal service, six days a week.  This reflected Ofcom’s duty to secure the provision of a UK universal service under the Postal Services Act 2011.  The framework gave Royal Mail greater commercial freedom to operate in what was seen at the time as a challenging market.

Since then, there have been changes in the market.  Royal Mail highlights that the letters delivery industry is declining by 4% to 6% each year.  Further, with Royal Mail’s competitor Whistl withdrawing from the market for direct delivery - where an operator collects, sorts and delivers bulk mail entirely using its own network - Royal Mail is left without any national competition for this part of the market.

However, Ofcom notes that competition remains strong in other postal markets such as parcels and ‘access mail’ - where operators collect and sort mail before handing over to Royal Mail to complete delivery.  Ofcom also flags that Royal Mail itself is in a stronger position financially than when Ofcom last reviewed the postal framework. Royal Mail also now operates as a public company, following partial sale by the UK Government. The Government has also outlined its intention to release its remaining 15% stake in Royal Mail.

Given these developments, Ofcom’s review will examine:

  • what changes to the overall postal regulatory framework might be appropriate to secure the universal postal service;
  • how best to ensure Royal Mail continues to become more efficient in the absence of national competition for the direct delivery of letters (so helping the universal postal service to remain sustainable);
  • whether Royal Mail’s wholesale and retail prices are both affordable and sufficient to cover the costs of the universal service; and
  • whether Royal Mail’s commercial flexibility (under the 2012 regulatory framework) remains appropriate in the changing market; and, if not, whether wholesale or retail charge controls might be appropriate.  Notably, second-class stamps are one of the few areas that currently face a price cap in the UK.

Ofcom will outline its initial thoughts and begin seeking formal submissions from stakeholders in July.  The review is expected to be completed, and a revised regulatory framework put in place, during 2016.

Separately, Ofcom is investigating whether Royal Mail has abused a dominant position in breach of the Competition Act 1998, by virtue of the access prices that it announced in November 2013 and January 2014. This follows a complaint by TNT Post UK (now Whistl).  Ofcom intends to provide a copy of a provisional decision to Royal Mail in the first half of July 2015.

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