Thursday, August 16, 2018

Multi-Million Pound Fine for Anti-Competitive Behaviour Levied on Royal Mail

Watchdog Punishes Postal Giant Whilst Appeal Expected
Shipping News Feature
UK – The UK's regulator for communications services, Ofcom, has fined Royal Mail £50 million for a serious breach of competition law, after the company abused its dominant position in the postal and delivery market by discriminating against its only major competitor delivering letters. Royal Mail has said that it will appeal the decision, refuting any suggestion that it acted in breach of the country's Competition Act.

The penalty is a result of an investigation into a complaint, made to Ofcom by Whistl, one of Royal Mail’s wholesale customers. The complaint centred on changes Royal Mail made to its wholesale customers' contracts in early 2014, including wholesale price increases it was introducing.

At the time Whistl, formerly TNT Post, was expanding its service to compete directly with Royal Mail by delivering business letters, known as ‘bulk mail’, to addresses in certain parts of the UK – becoming the first company to challenge Royal Mail’s monopoly in the large-scale delivery of bulk mail. Whistl initially started delivering bulk mail in London in 2012 and planned to grow its operation to cover around 40% of all UK addresses by 2018.

In 2014, Royal Mail increased wholesale prices which meant that any wholesale customers seeking to compete with it by delivering letters in some parts of the UK, as Whistl was, would have to pay higher prices in the remaining areas – where it used Royal Mail for delivery. Following notification of these new prices, Whistl suspended plans to extend delivery services to new areas.

These services, where other operators have access to Royal Mail's delivery network, also known as ‘access mail’, are worth £1.5 billion to Royal Mail each year. They involve access operators such as Whistl collecting and sorting bulk mail from large organisations – such as bank statements, utility bills and information from councils – before handing mail over to Royal Mail to complete delivery.

Ofcom's investigation found Royal Mail’s actions amounted to anti-competitive discrimination against customers, such as Whistl, who sought to deliver bulk mail. Jonathan Oxley, Ofcom’s Competition Group Director, commented:

“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.”

Any company wishing to collect bulk mail has little choice but to use Royal Mail’s access mail services to deliver a large proportion of those letters. Royal Mail’s 2014 price changes involved different price plans for wholesale customers, depending on whether they were able to hit mail volume targets for areas covering the whole of the UK.

In practice, if a company wished to start delivering bulk mail in some parts of the country, as Whistl did, it would have to pay Royal Mail around 0.25p (1.2%) more per letter than companies that used Royal Mail to deliver across the whole UK. In this way, Royal Mail sought to charge higher prices for the same services.

Whistl complained to Ofcom that Royal Mail’s price changes were unlawful, and in February 2014 an investigation under the Competition Act 1998 was opened. Royal Mail promptly decided to suspend the implementation of the price changes.

Ofcom found that Royal Mail’s notified price changes discriminated against its competitors in bulk mail delivery. In effect, 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’s conduct was found reasonably likely to put other companies at a competitive disadvantage, and restrict competition from the moment the price changes were notified. The price difference between the price plans would have had a material impact on a delivery competitor’s profits, making it significantly harder for new companies to enter the bulk mail delivery market.

As part of its investigation, Ofcom analysed 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. Ofcom therefore found Royal Mail in breach of Section 18 of the Competition Act and Article 102 of the Treaty for the Functioning of the European Union, which prohibits a firm from abusing its dominant position.

In response, Royal Mail said that it was disappointed with Ofcom's decision to penalise the company arguing that the price increase had been ‘robustly stress tested by Royal Mail under competition law and the relevant regulatory framework’, adding that ‘it was designed to support the sustainability of the Universal Service from "cherry picking” end-to-end letters delivery and the general decline in mail volumes’. Royal Mail further believes that the decision will be overturned when subject to judicial scrutiny, stating:

“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.”