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Royal Mail facing regulation probe

The communications watchdog has launched a "fundamental review" of the regulation of Royal Mail after the collapse of a rival letters service run by Whistl left it with no national competitor in that market.

Ofcom said its review would ensure that regulation "remains appropriate and sufficient to secure the universal postal service".

It will look at how best to ensure efficiency in the absence of national competition as well as whether wholesale and retail prices are both affordable, and sufficient to cover the costs of the universal service.

The regulator said it would consider whether Royal Mail's "commercial flexibility remains appropriate" and if not whether wholesale or retail charge controls might be needed.

Existing regulations for Royal Mail from 2012 were designed to ensure the continuation of a flat-price, affordable service six days a week.

Ofcom said this framework included greater commercial freedom for the firm to operate in a "challenging market", removing regulations that threatened the universal service and adding safeguards to protect postal users.

The review will incorporate an existing probe to assess Royal Mail's efficiency, as well as looking at its performance in the parcels market and its potential ability to set wholesale prices in a way that might harm competition.

Ofcom said it would also investigate the implications of the decision last week by rival Whistl to withdraw from the market for direct delivery - where an operator collects, sorts and delivers mail entirely using its own network.

The regulator said this left Royal Mail without any competition for direct delivery of letters - though competition remained strong in parcels and "access mail" where rivals collect and sort mail before handing over to Royal Mail to complete delivery.

Ofcom also said the group was now in a stronger position financially than when the framework was last reviewed. The Government has just sold off a 15% chunk of the business and intends to dispose of the remaining 15% it still holds.

The regulator said it would outline initial thoughts and begin seeking formal submissions next month, with the review expected to be completed and revised regulations put in place in 2016.

Royal Mail shares fell 2%.

Dutch-owned Whistl confirmed on June 10 that it was ending its house delivery letters service, after it was suspended in May - after losing funding - threatening up to 1,800 jobs.

It had been delivering around three million letters a week in London, Manchester and Liverpool in direct competition with Royal Mail.

Ofcom is understood to be considering the balance of regulation to ensure that Royal Mail remains efficient - so that its long-term future providing the universal service is secure - in the absence of this competition.

It is expected to focus on "charge controls" on its network. Currently there is some regulation on the way it provides wholesale services to rivals but this could be tightened.

The regulator may follow a similar model it has recently proposed for BT, which has been told to slash the wholesale prices it charges for using "leased line" high-speed data links.

The review of Royal Mail could also see changes to delivery time and quality of service obligations.

Earlier this year, Dave Ward, the new head of the Communication Workers' Union, called for measures to limit competition in the mail industry.

He said: "We cannot keep saying that the universal service obligation is a red line, and allow increased competition to creep in, cherry-picking parts of the business."

Last month, Royal Mail said annual profits had risen by 6% on an underlying basis to £740 million in the year to the end of March as a squeeze on costs helped offset a lower than expected performance from its parcels business.

The group warned that the parcels and delivery market remained challenging and pointed to the threat from Amazon's delivery network.

Chief executive Moya Greene saw her pay increase by 13% to £1.52 million in the last financial year as her basic salary was hiked for the first time since she joined the company in 2010.

Royal Mail said it would "c ontinue to participate fully" in Ofcom's review.

It added: " As the regulator notes, there is significant competition in the UK market in the mails and parcels segments. At the same time the letters segment is in structural decline of 4-6% a year.

"There is therefore a need for regulatory clarity and certainty for all market participants."

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