Postcomm, the independent regulator of the postal services market in the UK, has fined Royal Mail for breaching its licence by the terms it offered to other mail operators for use of its delivery network.

Since January this year, the postal market in the UK has been fully opened to competition. This means that operators other than the Royal Mail can be licensed to provide postal services for items that weigh less than 350g and which cost less than £1 to deliver, and they can offer those services to any postal customer, not just those who send mail in large batches.

However, the Royal Mail is still by far the largest postal operator and has 350 years' experience of collection, sorting and delivery. As a result, the Royal Mail delivery network extends to nearly every premise in the UK, an infrastructure new operators would find hard to replicate economically (although new operators delivered 106m of their own items in 2004/05). Royal Mail's licence therefore demands that it enters into agreements, with any operator who requests it, to allow the other operator to use Royal Mail's delivery network in return for a fee. New operators tend to collect and sort the mail of their own customers but rely on these 'downstream access agreements' with Royal Mail for what is called the 'last mile' of delivery. The latest figures, from March 2006, suggest that over 151million items are delivered through these agreements every month.

Whilst Royal Mail's universal service obligation requires it to charge customers a standard price for mail delivery from anywhere to anywhere within the UK, it does not have to observe such rules when making downstream access arrangments with other operators. Royal Mail has therefore classed each area of the country into one of five 'zones' and prices each zone differently depending on the cost of delivering to that particular zone.

In November 2004, Express Ltd, TNT Mail UK Ltd and UK Mail Ltd complained to Postcomm about the Royal Mail's approach to zonal pricing, alleging that the Royal Mail was operating the system in a way that excluded its competitors from providing a competitive service and discouraged them from developing their own networks. Postcomm has powers to investigate alleged anti competitive behaviour, but unlike other regulated industries, it is the OFT that remains ultimately responsible for pursuing anti competitive behaviour in the postal market.

Following its investigation and public consultation (which included an original proposal to fine Royal Mail £2.16m, Postcomm has found Royal Mail in breach of two of its licence conditions: 10(2) which, broadly, prohibits Royal Mail from obtaining an 'unfair commercial advantage' and 13(1) which requires Royal Mail to 'take all reasonable precautions' against the risk of failure to comply with its other licence conditions.

Postcomm concluded that there were four points which demonstrated Royal Mail's licence breach and which other regulated companies, who are subject to similar licence conditions, should take note of:

  • Royal Mail's commercial wholesale team was not independent of its regulatory affairs team. The Director of Regulatory Affairs therefore had conflicting roles; 
  • Royal Mail failed to put in place an effective staff transfer policy, which would have prevented staff from transferring between the commercial and regulatory teams without suitable quarantine or cooling off periods; 
  • Royal Mail failed to carry out a clear and thorough assessment of the competition and regulatory risks posed by its downstream access zonal pricing policy; and
  • Royal Mail failed to establish a clear policy for compliance with condition 10 before it embarked on its downstream access sales and marketing activities.

Royal Mail has since, voluntarily, reorganised its access arrangements and so has avoided formal enforcement action by Postcomm. However, this case demonstrates the scrutiny that Postcomm is willing to give to Royal Mail's actions and its willingness to take action against licence breaches. In post as in other industries, licence conditions are not aspirational and licensees ignore them at their peril.

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