Royal Mail Ofcom review could deliver new price caps on stamps

The postal regulator is concerned that Royal Mail has no rivals

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Ofcom could cap the price of first-class stamps as part of a "fundamental review" of Royal Mail’s monopoly in the letters market.

The postal regulator is concerned that Royal Mail has no rivals who will put pressure on it to become more efficient in letter delivery, after Whistl, its biggest competitor, pulled out five days ago.

At the same time, Ofcom wants to make sure that Royal Mail can continue to deliver letters for the same price anywhere in the country – the so-called “universal service”, which it says must remain “affordable” to all.

Ofcom said: “The review will ensure regulation remains appropriate and sufficient to secure the universal postal service, given the recent withdrawal by Whistl from the ‘direct delivery’ letters market, which has resulted in Royal Mail no longer being subject to national competition.”

Ofcom has hinted that it will have to tighten price controls on Royal Mail, which were relaxed in 2012 to help Royal Mail to operate in a challenging market.

Since 2012, only about 5 per cent of Royal Mail’s income is subject to price controls, compared with about 80 per cent before that.

While second-class stamps are price capped and can only be increased in line with inflation, Royal Mail can put up the price of first-class stamps as much or whenever it likes.

Controls over how much Royal Mail charges competitor couriers like TNT, Amazon and Whistl to access its network could also be subject to price controls.

Ofcom said it would look at whether “wholesale or retail charge controls might be appropriate” in the light of the significant change in the direct delivery market. It also pointed out that Royal Mail was now in much better financial health than it had been four years ago, when Ofcom began regulating postal services.

Royal Mail said it would participate fully in Ofcom’s review, which will conclude during 2016. Royal Mail pointed out that the letters market is in structural decline – of 4 to 6 per cent a year. “There is, therefore, a need for regulatory clarity and certainty for all market participants. It is essential that Royal Mail is able to sustain the UK’s valued, high quality, high fixed cost universal service for the benefit of all consumers and businesses,” it said.

Robin Byde, an analyst at Cantor Fitzgerald, said: “It is clear to us that the regulator is somewhat concerned about Whistl’s withdrawal from the direct delivery market.”

The Dutch-owned Whistl could not make delivery of letters to households work, even though Royal Mail accused it of cherry-picking the best routes in London, Manchester and Liverpool.

Ofcom’s intervention comes just days after the Government sold half of its shareholding in Royal Mail last week, raising about £750m. Ofcom has said that the latest review will incorporate an existing investigation into Royal Mail, started in December, which was looking at the company’s role in the parcels market, where Royal Mail competes with Amazon, TNT, Yodel and others.

Royal Mail had been banking on growth in the parcels market of up to 10 per cent a year, but it has warned that growth is more likely to be just 1 to 2 per cent since retailers like Amazon decided to launch their own delivery networks.

Shares in the postal group ended up 1.5p at 506.5p, still way below the post-flotation peak of 604p it reached at the start of January 2014.