First-class stamps may be capped after Royal Mail rival pulls out

The review was launched by Ofcom after the recent collapse of a rival letters service run by Whistl left the 499-year-old postal service with no competitors in that market.

It is designed at ensuring efficiency for the service in the absence of any rivals, and a cap on the cost of first-class stamps –which is currently unregulated – is not being ruled out, although the focus is understood to be on the charges for providing services used by competitors.

Ofcom said the review would consider “whether wholesale or retail charge controls might be appropriate”, and it will also look at whether wholesale and retail prices “are both affordable and sufficient to cover the costs of the universal service”.

Currently there is some regulation on the way that Royal Mail provides wholesale services to rivals, but this could be tightened. For stamps, second-class prices are capped at the rate of inflation, but there is no such limit for first-class.

Ofcom may follow a similar model to the one it has recently proposed for telecoms giant 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.

Ofcom said: “The review will ensure regulation remains appropriate and sufficient to secure the universal postal service.”

Shares in Royal Mail fell by one per cent.

Last year the company called for a review of the direct delivery market saying the fact rivals could “cherry pick” the best routes threatened its ability to use these to subsidise universal services covering harder-to-reach communities.

But one of these competitors, Whistl – formerly known as TNT – has itself complained to Ofcom about Royal Mail’s charges.

Ofcom’s 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.

It 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.

Dutch-owned Whistl confirmed last week it was ending its house delivery letters service – after it was suspended last month – threatening up to 1,800 jobs.

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

The regulator said the collapse left Royal Mail without any competition for direct delivery of letters – though this remained strong in parcels and “access mail” where rivals collect and sort mail before handing it 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 per cent chunk of the business and intends to dispose of the remaining 15 per cent it still holds.

Royal Mail said it would “continue to participate fully” in Ofcom’s review. Once the review has been completed, the revised regulations are expected to be in place by next year.