Three-way legal battle brews as Royal Mail fights £50m fine

A THREE-WAY legal battle is set to take place after Royal Mail vowed to appeal against a £50m fine for breaking competition law in an attempt to force rival Whistl to pay higher prices.

The penalty, the largest ever imposed by communications regulator Ofcom, relates to a change in the contracts Royal Mail offered wholesale customers more than four years ago.

At the time Whistl, then known as TNT, was expanding its letters arm by delivering “bulk mail” such as bank statements and utility bills in competition with Royal Mail, but was still reliant on it to deliver some letters on less profitable routes.

‘Royal Mail welcomes competition, provided it takes place on a level playing field’

Ofcom’s inquiry found Royal Mail’s decision to raise the cost charged to competitors such as Whistl by 0.25p per letter was part of a “deliberate strategy to limit competition” and it had “abused its dominant position” in the letter delivery market. However, the former state monopoly, which floated five years ago, said it planned to lodge an appeal within weeks. Royal Mail accused Ofcom of misunderstanding competition rules and coming to a decision that was “without merit and is fundamentally flawed”.

It said the proposed price hike, which was cancelled after Whistl raised concerns, was designed to prevent so-called “cherry picking”, whereby competitors without Royal Mail’s obligation to deliver to all UK addresses for the same price pick and choose the most profitable routes. “Royal Mail welcomes competition, provided it takes place on a level playing field,” it said. The fine is equivalent to around 10pc of the company’s forecast pre-tax profits for this year.

Jonathan Compton, partner at law firm DMH Stallard, said he thought Royal Mail had “a good case”.

Whistl said yesterday that it planned to seek damages for Royal Mail’s actions. The company left the bulk mail market in 2015. Royal Mail shares fell 1.6pc yesterday to 454.9p.

Who says the art of great letter writing is dead? Dive into Royal Mail’s response to its £50m monopoly abuse fine from Ofcom and bathe in the ink of a poison pen. We have a legal threat, three uses of “fundamentally flawed” to describe the regulator’s decision and thinly disguised rage throughout.

The company is clearly revelling in its new role as the villain. Less than a month ago Royal Mail provoked a 70pc shareholder rebellion after it handed hefty brown envelopes to departing chief executive Moya Greene and her Switzerland-based replacement, Rico Back.

Who wouldn’t want to turn to the dark side after centuries as a beloved public service? Nobody likes to be typecast. There should be some sympathy for the devil though. The dispute with Ofcom dates back to before privatisation and a misguided attempt to introduce competition to what was already a dying letters market. Royal Mail letter volumes are down nearly 50pc over the last decade.

Nevertheless, Whistl, then known as TNT and part of Postnl, decided to it wanted to compete with Royal Mail to deliver bank statements, utility bills and other bulk mail to front doors.

It wanted to do this only in densely populated urban areas where the costs would be lowest and only three days a week. Any letters outside that would be offloaded to Royal Mail.

Royal Mail understandably viewed this as cherry-picking given it operates under a universal service obligation to cover the entire country six days a week. It designed a pricing system that meant Whistl would pay a bit more per letter than other operators who outsourced delivery Royal Mail everywhere. This was an abuse of dominance, according to Ofcom. It meant Whistl pulled out.

The legal rights and wrongs of that decision will have to be decided by the High Court. Royal Mail claims its economic analysis showed its pricing proposal would have allowed Whistl to compete fairly. Ofcom says different.

Royal Mail’s contention that because it committed no offence – it never actually charged Whistl the proposed prices – may yet prove technically correct. If that is the case, then there is a problem with competition law, however. If Whistl was unable to enter the market because of abusive pricing there must be a way for Royal Mail to be punished.

Putting aside that important principle and the fate of £50m of Royal Mail shareholders’ money, it will otherwise be a fairly academic argument. Nobody else has attempted to compete with Royal Mail to deliver letters since, because it is a fundamentally unappealing and declining market. Postnl recently pulled out of similar attempts to compete with the national postal services of Germany and Italy.

In the four years since Whistl, nobody has attempted to enter the fray and Ofcom hasn’t seen fit to use its powers to regulate Royal Mail’s wholesale prices to encourage new entrants. The chances of one of the companies competing in the booming parcel market deciding to get involved in delivering letters seem slim.

The question is whoever thought investors would line up to replicate the Royal Mail letters network in the first place, even if they could cherry-pick the most lucrative areas?

Unfortunately, we’re now seeing the same thinking applied in the broadband market, with similar results. Ministers and regulators have been convinced for years that someone will build them a large scale, fibre-optic network to compete with Openreach and Virgin Media. Many are dabbling around the edges but Britain still languishes near the bottom of international league tables.

There may be an element of “use it or lose it” in Ofcom’s decision to use its Competition Act powers to rebuke Royal Mail rather than take what could have been a swifter regulatory route. Moves are afoot in Whitehall to consolidate the big guns of monopoly enforcement under the Competition and Markets Authority.

Regardless, the wisdom of Royal Mail going to war with its regulator over £50m is questionable. Just look at BT, which is still reeling from the its battle with Ofcom over control of Openreach. The stakes were much higher, but both sides agree that the aggressive stance taken early on by BT only spurred regulators on.

Rico Back has only been in his new job for a month and a half and Royal Mail has already upset its shareholders and laid into Ofcom. With a restless union and strengthening competition in the growing part of the market, he should be careful how many fights he picks.

‘New boss Rico Back should be careful in how many fights he picks’