Royal Mail "breached competition law", says regulator Ofcom

Regulator Ofcom has accused Royal Mail of breaching competition law in the way it dealt with door-to-door letter delivery rivals.

A month after Ofcom launched a review into Royal Mail's operations, the watchdog said the charges set by the company to carry rivals letters amounted to "unlawful price discrimination".

Ofcom alleged that the changes to Royal Mail’s wholesale prices for bulk mail delivery services announced in January contained higher prices for bulk mail delivery services, known as "access services", to customers that competed with Royal Mail in delivery than for customers that did not compete on delivery.

A statement sent by Ofcom setting out its provisional view "that Royal Mail breached competition law by engaging in conduct that amounted to unlawful discrimination against postal operators competing with Royal Mail in delivery".

The regulator added that it felt the higher access prices "would act as a strong disincentive against entry into the delivery market, further increasing barriers to expansion for postal operators seeking to compete with Royal Mail in this market, and leading to a potential distortion of competition against the interests of consumers".

Ofcom had begun the investigation into Royal Mail following a complaint by Whistl, then trading as TNT Post UK, that until last year competed with the UK incumbent in the door-to-door letter market.

Whistl made its complaint in January 2014, following changes by Royal Mail to its prices, terms and conditions for access services, by which it allows rival postal operators to hand over letters that they collect from large business customers to Royal Mail for final sorting and delivery.

A quickly issued response from Royal Mail on Tuesday said they were "disappointed" by the announcement and will "submit a robust defence to Ofcom in due course".

Royal Mail said it "considers that the pricing changes proposed in 2014 were fully compliant with competition law. They were an important part of Royal Mail's commercial response to both changing market conditions and to Ofcom's statements in its March 2013 guidance document on end-to-end competition in the postal sector.

"Under the terms of our access contracts, these pricing proposals were suspended following the opening of Ofcom's investigation. Accordingly the pricing proposals were never implemented and were withdrawn altogether in March 2015."

Ofcom's powers allow it to impose financial penalties of up to 10% of the target’s turnover in a relevant market.

Analysts' opinions

Analyst Martin Brown at Shore Capital noted the timings of the various events. Royal Mail made the changes on 10 January 2014, Whistl submitted a compliant almost immediately and Ofcom opened an investigation on 21 February and on 4 March Royal Mail suspended the changes and on 11th March announced they had been withdrawn.

He pointed out that the actions Ofcom proposes to take have not been made available, "so unfortunately we will have to wait before drawing firmer conclusions".

"We do think it is important to take into account that the changes were only in place for a less than two months at the beginning of 2014. While we await further detail on Ofcom’s proposed actions, we once again would highlight that interest from and indeed reviews and objections by the regulator is something that Royal Mail investors should become accustomed to as they will be a near constant theme in the years ahead."

Analysts at RBC Capital Markets said: "The complaint seems to relate to RMG's (withdrawn) attempt to introduce differential access pricing - which we think was meant to reflect the higher cost to service and lower drop density of rural and low address density areas - where Whistl relied on RMG to deliver. In our view, Whistl cherry picked dense high-drop-density urban areas."

"It is unclear (to us) if the Ofcom issue is on the differential per se (historically our notes from a public Ofcom meeting record Ofcom figures suggesting that justified differentiation might be allowed), or the rate it was set at, or the way the rate was set. RMG (and Whistl) now have the opportunity to respond, and provide more evidence before any firm conclusions and potential fines are made."

RBC said it saw an unfavorable risk/reward outlook in RMG shares at present levels.