Shares in Royal Mail fell sharply after its regulator confirmed the scope of a “fundamental review” in to the firm’s operations that could see it impose a cap on prices.
Ofcom said the inquiry will look at whether current regulation secures “the efficient and financially sustainable provision” of the country’s universal postal service.
The universal service is the Royal Mail’s commitment to make deliveries to all parts of the UK at a flat rate, six days a week. Shares in the firm slipped three per cent.
The regulator, which first said it would look at this area last month, has become concerned at the weakening of competition in parts of the letters and parcels markets.
The letter delivery service arm of Whistl and parcel firm City Link both folded within the last seven months. The collapse of the letter service run by Whistl - formerly known as TNT - left the Royal Mail with no national competitor in this market.
Ofcom added it will also look at the firm’s position in the parcels market “and assess the company’s potential ability to set wholesale prices in a way that might harm competition”.
The regulator says it may roll back some of the commercial flexibility it granted Royal Mail in 2012, including the ability to put up its prices.
Ofcom said it gave the Royal Mail this licence, which was set to last for seven years, because at the time the universal postal service was under threat.
In 2012 the volume of UK mail had fallen by over a quarter in the previous six years, because of the growth of email and other forms of electronic messaging.
This fall in volumes cut in to Royal Mail’s finances, and in 2010-11 it showed a loss of more than £100 million on revenues of about £7 billion.
But since then the Royal Mail’s financial position has improved, and while competition in the parcels business has grown, it has suffered in the letters service.
The Royal Mail reported a six per cent rise in annual adjusted operating profit to £740m in May, as a squeeze on costs helped offset a lower than expected performance at its parcel business.
The Royal Mail said it would continue to participate fully in Ofcom’s review.
It added: “In particular we will be highlighting the need for a consistent approach to regulation.
“Ofcom’s existing framework, put in place in 2012 was to have provided certainty for seven years.”