Royal Mail Plc (LON: RMG) will appeal Ofcom’s decision taken under its Competition Act powers which was announced today. The decision relates to a price change announced in 2014 – which was never implemented or paid – under Royal Mail’s Access1 Letters Contract.
The infringement decision relates to an Access price differential (see below) which was announced in January 2014, automatically suspended about four weeks later, before it was due to enter into effect at the end of March 2014. The announced price change had been robustly stress tested by Royal Mail under competition law and the relevant regulatory framework. It was designed to support the sustainability of the Universal Service from “cherry picking”2 end-to-end letters delivery and the general decline in mail volumes.
Royal Mail is very disappointed by Ofcom’s decision to impose a fine of £50 million. Royal Mail strongly refutes any suggestion that it has acted in breach of the Competition Act, and considers that the decision is without merit and fundamentally flawed. The company will now lodge an appeal with the Competition Appeal Tribunal within the next two months. No fine is payable until the appeals process is exhausted.
Royal Mail’s position
The key reasons why Royal Mail believes that Ofcom’s decision will be overturned when subject to judicial scrutiny are as follows.
For an allegation of abusive price discrimination to be established, the law is very clear. The relevant prices must be actually paid. And, the party paying such prices must be placed at a competitive disadvantage as a result. In this case neither of these essential elements exist. In addition, 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 has submitted detailed expert economic analysis which clearly shows this, and during its 4 year investigation, Ofcom has provided no answer to it.
Ofcom’s claim that the notification of the price changes itself had an anti-competitive effect is fundamentally flawed. First, there is no case in which a mere notification has been found to be anti-competitive. Second, there is no basis on which it can be unlawful to notify a lawful price. This claim therefore provides no shortcut to Ofcom in establishing that discriminatory prices were applied and parties were placed at a competitive disadvantage.
Supporting the sustainability of the Universal Service
Ofcom has a primary legal duty to secure the financially sustainable provision of the Universal Service, which is particularly important in light of the structural decline in letters volumes and intense parcels competition. The UK is also unique as Access letters account for 62% of addressed mail. In no other EU country does that percentage exceed 25%.
Royal Mail welcomes competition, provided it takes place on a level playing field. Independent reports commissioned by the Government and prepared by Richard Hooper in 2008 and 2010 identified the risk that cherry-picking by an end-to-end letters delivery competitor would pose to the sustainability of the Universal Service.
In 2012, TNT Post (now Whistl) announced it would 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% of UK addresses. It would do so by serving urban areas covering just 8.5% of the UK’s land mass. Royal Mail, by contrast, is legally required to deliver many kinds of letters six days a week to every part of the country.
Acting within the Access Framework
In 2014, after careful consideration and robust economic and legal analysis, and following the available Ofcom guidance, Royal Mail announced changes under the access contract. In particular, Royal Mail announced it would introduce a price differential (0.25pence less per letter) when Access customers committed to advance monthly volume forecasts, based on a national mailing profile of 86 UK districts. Those who chose not to commit to the approach would not benefit from the price differential. They would continue to be charged on the basis of the four existing geographies.
The Access Letters Contract provides that any price change is automatically suspended if an Access Operator complains to Ofcom and the regulator decides to investigate. Whistl complained to Ofcom when the price changes were announced. This resulted in the suspension of the announced changes after Ofcom opened its investigation. Royal Mail and Whistl asked Ofcom to open a regulatory investigation to quickly resolve the matter. But Ofcom chose to conduct a competition law investigation. Four years later, Ofcom has announced an infringement decision which Royal Mail believes is fundamentally flawed.
