Ofcom rejects Royal Mail’s demand for action against letter service rivals

Britain’s postal regulator has insisted that the universal postal service is “not currently under threat” from Royal Mail’s competitors. Ofcom said today that it will not introduce new regulatory measures to clamp down on Royal Mail’s rivals in the letters market, in light of the universal service provider’s lobbying efforts.

The regulator said it has reviewed confidential business plans from Royal Mail and its rival Whistl (formerly known as TNT Post UK), and that there is “no evidence” that the latter’s new end-to-end delivery services present a threat to Royal Mail’s ability to deliver the universal service.

However, Ofcom said it will now review broader factors affecting Royal Mail’s ability to provide the universal service — considering the company’s own efficiency and its parcel delivery performance.

The review will conclude next year, but a further review could take place towards the end of 2015.

The regulator said according to its latest annual monitoring report, Royal Mail’s productivity is improving, but that the rate of improvement had slowed in recent years. The company privatised in October 2013 has also lost parcel volumes in the face of competition in the parcel sector.

Today, Ofcom also announced plans to bring in new rules to allow Royal Mail to adjust its downstream access letter prices to include regional differences, to better reflect differences in costs for delivering letters to various parts of the UK.

The regulator said the move would allow Royal Mail to set “fair prices” and make a “fair profit” for delivering letters collected and sorted by other companies.

Ed Richards, the Ofcom Chief Executive, said: “Ofcom’s Board has considered all the evidence in the postal market carefully over the past few months. We have concluded that there is no present risk to the financial sustainability of the universal service. This conclusion is based on Royal Mail’s own business plan and evidence as well as a range of other data.

“We take our duty to secure the universal service extremely seriously. Ofcom will continue to monitor carefully any risks that may arise and, if necessary, will act accordingly.”

Ofcom does have the powers to impose conditions on Royal Mail’s rivals if it believes the universal service is under threat, which might include requiring a certain level of service such as six-day-a-week delivery, or for rivals to pay into a central fund to support the less profitable parts of the universal service.

But it said today that it does not consider these measures necessary at this time.

“We continue to consider that competition, including end-to-end letter competition at the delivery end of the network, provides an important degree of choice for users of postal services, and can have an important incentive effect on Royal Mail to provide the universal service in an efficient manner,” Ofcom concluded.

The regulator added that in its view, any uncertainty facing the universal service comes from factors other than Royal Mail’s competition.

Competition

Royal Mail has been lobbying to urge Ofcom to bring forward its review of competition in the letters market ever since rivals TNT Post UK (now Whistl) started its end-to-end delivery service in West London in April 2012.

Whistl, which is owned by Dutch postal service PostNL, has since expanded its service to other urban areas in England, including other parts of London, Manchester and Liverpool, and plans to expand across the UK.

Last week Royal Mail chief executive Moya Greene told Parliament’s Business, Innovation and Skills Committee that Whistl was targeting its most profitable routes, and can “siphon off revenue that is much needed to support the universal service”

Greene said Royal Mail needed Ofcom to accelerate next year’s required review of competition in the letters market in the light of Whistl’s challenge.

“I think the risks of waiting are far greater than accelerating the review now, because once the revenues to support the universal service are siphoned off and lost, it’s very difficult to retrench from that,” she said.

Whistl’s chief executive Nick Wells told the same Committee that it was “impossible” for his firm to cherry-pick the best routes from Royal Mail and leave it with the least profitable routes, because of an arrangement it has with the universal service provider.

He said: “Although we will gradually roll out our end-to-end delivery, and this will take four to five years to get to any real coverage, we pay Royal Mail a fair and reflective price that’s been agreed with them to cover the more difficult rural areas — which takes out any opportunity at all for cherry picking.”

Wells said Ofcom had repeatedly stated that end-to-end delivery competition is not currently a threat to the universal service, but he said: “What is potentially a threat to the universal service is two things — structural decline in the mail market and e-substitution.

“What Royal Mail needs to do is improve their efficiency levels and modernise and change their labour relations policy. And the catalyst to that change is, of course, competition,” said the Whistl CEO.

Britain’s business secretary Vince Cable said in a television interview last week that Royal Mail should not be complaining about operating in a competitive market now it was a private company.