Earlier this month, U.K. communications regulator Ofcom found Royal Mail to be in breach of Section 18 of the Competition Act following a complaint made by mail competitor and Royal Mail wholesale customer Whistl. Ofcom subsequently handed out a record penalty of £50 million (U.S. $64.3 million), which the parcel delivery firm has appealed based on claims that it complied with all competition and other regulatory laws.
The investigation into Royal Mail began in 2014 at the instigation of Whistl, because of changes that were announced to contracts for wholesale customers. In 2012, Whistl had announced that it wanted to “roll out end-to-end letters delivery (collecting, processing, and delivering business mail three days a week without using Royal Mail’s network) to about 42 percent of U.K. addresses,” according to Royal Mail’s response to Ofcom’s finding. “It would do so by serving urban areas covering just 8.5 percent of the U.K.’s land mass.” Whistl’s expansion covered delivering business letters, known as “bulk mail,” and would have made it the first company to challenge Royal Mail’s monopoly in the large-scale delivery of bulk mail.
“Royal Mail broke the law by abusing its dominant position in bulk mail delivery. All companies must play by the rules. Royal Mail’s behaviour was unacceptable, and it denied postal users the potential benefits that come from effective competition.”
Jonathan Oxley, Competition Group Director, Ofcom
While the Ofcom statement refers to wholesale price increases, Royal Mail’s response refers to “discounts” being offered to wholesale customers and involves “Access” mail. Access mail, which is worth £1.5bn (U.S. $1.93 billion) to Royal Mail each year, involves access operators like Whistl collecting and sorting bulk mail from large organisations—such as bank statements, utility bills, and information from councils—before handing this over to Royal Mail for delivery. According to a statement from Royal, such discounts meant: “a price differential (0.25 pence less per letter) when Access customers committed to advance monthly volume forecasts, based on a national mailing profile of 86 U.K. districts. Those who chose not to commit to the approach would not benefit from the price differential.” Whistl’s intent was to deliver this access mail itself in urban areas.
After the new pricing regime was announced, however, Whistl suspended its plans to extend delivery services and its chief investor, Lloyds Bank, pulled out.
“We took extensive legal and economic advice over many months to ensure we were operating in line with Competition Law. We also followed the available Ofcom guidance.
Royal Mail spokesperson
Ofcom’s investigation under the Competition Act determined that “Royal Mail’s notified price changes discriminated against its competitors in bulk mail delivery.” In effect, the regulator noted, “Royal Mail used its position as a near-monopoly provider of delivery services to penalise any wholesale customer that sought to compete with it in bulk mail delivery.”
Royal Mail, however, claims that the price change was stress tested under the relevant laws and regulatory frameworks, such as the Competition Act and the Postal Services Act. Therefore, the company argues, Ofcom’s finding was without foundation.
Significantly, Royal Mail’s defence relies on the differential prices never having been charged, as they were suspended automatically as soon as Whistl filed its complaint. This is not the same as claiming that the price differentials themselves did not break any laws. “For an allegation of abusive price discrimination to be established, the law is very clear,” Royal Mail says in its response. “The relevant prices must be actually paid.” In addition, says Royal Mail, even if the prices had been paid, “it is clear that they would not have foreclosed an ‘as efficient competitor’ (the ‘AEC’ test), which is the relevant legal test.” Royal Mail says it has submitted expert analysis as evidence, but notes that Ofcom has yet to respond.
Ofcom claims its case is also based on an analysis of Royal Mail’s internal documents regarding the price changes. “These show the changes were part of a deliberate strategy to limit competition in delivery as a direct response to the threat of competition from Whistl,” the regulator stated.
Royal Mail’s response? “We did the right thing with our announced price change. It was designed to support the sustainability of the Universal Service [Royal Mail’s mandate to deliver letters throughout the whole country six days a week] from ‘cherry picking’ end-to-end letters delivery and the general decline in mail volumes. We took extensive legal and economic advice over many months to ensure we were operating in line with Competition Law. We also followed the available Ofcom guidance,” said a company spokesperson.
Royal Mail has also complained that the investigation was conducted under the Competition Act rather than the Postal Services Act, which the company says could have meant the investigation was completed much earlier. The Postal Services Act, however, specifically gives Ofcom leeway to investigate under competition law if it thinks it is more appropriate. An anonymous source with knowledge of the investigation told CW that, even if it had been a regulatory investigation, Ofcom was likely to look at similar numbers of documents, so the timeline would probably have been similar. “The law is very clear,” the source said. “The damage was done when Royal Mail issued notification of the price changes that would be implemented within 70 days of the contract term change, regardless of the fact that prices were never actually paid. That breach was the notification, and it had significant consequences.”
The case is ongoing, as Royal Mail continues to fight against Ofcom’s claim that it broke competition law by charging different prices for the same service and putting Whistl at a competitive disadvantage. Royal says Ofcom’s decision is “without merit and fundamentally flawed” and will be appealed with the Competition Appeal Tribunal within the next two months.