UK: The Competition And Markets Authority's Consultation On "Competition In Passenger Rail Services In Great Britain"

Last Updated: 24 August 2015
Article by Zara Skelton

On 17 July 2015, the Competition and Markets Authority (CMA) published its consultation document regarding competition in passenger rail services in Great Britain. This followed its announcement in January that it intended to undertake work in this area. Since then, it has taken soundings from a wide variety of railway industry stakeholders including the Office of Rail and Road (ORR), franchised train operating companies, open access operators and applicants for open access status, Network Rail and freight industry and passenger representatives.

CMA remit

Before considering the detail of the issues that the CMA is consulting on, it is worth pausing to consider its remit for instigating such a consultation. The CMA's consultation document explains that its statutory duty is to promote competition for the benefit of consumers. It also notes that intervention such as this is part of its "key role in challenging government where government is creating barriers to competition". This key role is set out for the CMA in the government's "strategic steer" for the CMA, published when the CMA was created in 2013 and to be updated imminently. The strategic steer is a non-binding ministerial statement of strategic priorities for the CMA, and it makes clear that the government wants the CMA to examine markets to see how competition can be improved. This is the first consultation of this type that the CMA has issued in reliance on these provisions.

Scope and timing

The CMA indicates that its objectives in issuing the consultation are to seek improvements in the railways in Great Britain and benefits for passengers and taxpayers by, for example, securing better value for money, enhancing service quality, encouraging innovation and unlocking efficiencies. The CMA is clear that it does not want any recommendations resulting from its consultation to disrupt the current and forthcoming rounds of franchise awards or impact adversely on areas such as investment in the network or the provision of services that are socially valuable but not commercially viable. Thus, it does not envisage any of the options explored in the consultation coming into effect until after the end of the current rail franchise terms, which would be around 2023. The CMA therefore sees this consultation as the start of a long-term debate. It is also clear that the options the CMA suggests are not intended for commuter services, due to the different competition considerations that apply to them. The CMA's view is that the proposals, if implemented, would be likely to deliver most benefits on three major intercity routes: the East and West Coast Main Lines and Great Western.

Competition "for" the market and competition "in" the market

As the CMA sets out, the competitive model that currently applies to the vast majority of Great Britain's passenger railways is a model that sees competition "for" the market by way of franchise bidding for the right to operate specified services for a period of between 7 and 15 years. The CMA's view is that this competitive approach has delivered benefits, including increased capacity and improved passenger satisfaction. The CMA also recognises that there have been recent changes to franchising following the Brown review of franchising in 2012-13, and, in general, seems to view these changes as positive contributions to competition. It notes that there is also a limited amount of competition "in" the market, which arises by way of overlapping or parallel franchise routes and also where open access operators have successfully applied to the ORR for the right to run a specific service in competition with a franchised operator. 

In this context, the driving question behind the CMA's consultation document is whether significant improvements could be achieved by introducing a greater degree of competition in the market, which it refers to as "head-to-head on-rail competition".

The options put forward by the CMA

The four options put forward by the CMA to increase on-rail competition are as follows:

Option 1: Existing market structure, but significantly increased open access operations.

The proposal is that, in return for their increased access, open access operators would pay proportionately towards fixed track access charges and also pay a universal service levy. This is intended to make up for shortfalls in government revenues from the lower franchise premiums that the CMA considers would result in such a model and help fund unprofitable "social" rail services. The intention is that franchisees and open access operators would have broadly similar risks and charges in this model. The CMA believes that this would allow the ORR to review and potentially remove the "not primarily abstractive" test that it currently applies when considering open access applications.

The CMA's view is that this approach would be broadly in line with open access systems in some other European countries, and that it could drive greater competitive pressure on fares, efficiency savings, improved service quality and significant innovation. The key disadvantages of such an approach highlighted in the CMA's paper are the risk of a possible adverse effect on government funds from lower franchise premia and the possibility that it will lead to a loss of economies of scale.

Option 2: Two franchisees for each franchise.

The proposal is that each of the two franchisees would be responsible for a specified proportion of the franchised services, but exactly how the services would be split between them would depend upon the services concerned. For example, services could be split 50:50 or there could be an anchor franchisee responsible for socially valuable but unprofitable services, with both franchisees then being responsible for a share of the potentially profitable services. The CMA's view is that this approach would result in greater competitive pressure on fares and incentives to improve service levels and deliver efficiencies. It suggests that the disadvantages are the same as those outlined for Option 1. The CMA also notes that the potential for innovation and efficiencies may be more limited in Option 2 than in Option 1, depending on the way in which the services are split between franchisees.

Option 3: More overlapping franchises.

This proposal is essentially to reverse the decision taken by the Strategic Rail Authority in the years following privatisation that saw overlapping routes removed as much as possible. The CMA's suggestion is that the franchise map could be remodelled over time to reintroduce overlapping routes and thus increase head-to-head on-rail competition. The CMA considers that this option should lead to lower fares for passengers and growth in passenger numbers. An accompanying reduction in franchise specification would also allow competition other than on price, leading to innovation. This option would not require a change to the existing legal framework. The key disadvantages identified by the CMA are broadly the same as for Option 1. However, the CMA indicates that such an approach may limit the dynamics of the market more than some of the other options as there is no potential for franchisees to take over each other's services outside of franchise competitions.    

Option 4: Licensing multiple operators, subject to conditions (including public service obligations).

This option would involve replacing the franchising system with a system akin to competition between open access operators within the framework of a licensed regime that places restrictions and obligations on operators. Licences could be established by an administrative body, or tendered for by licensees through a trading-based system. The CMA's view is that this would generate strong competitive pressure on prices and incentives to improve service quality and that it would be more flexible than Options 2 and 3. The disadvantages identified include the potential for loss of economies of scale and also possible increased costs of administering a larger number of operators.

Next steps

It will be interesting to see whether this consultation sparks the long-term debate that the CMA intends it to. The consultation papers suggest that the CMA intends to make recommendations based on one or more of the options it is proposing although it stresses that it has not reached a view as to which is to be preferred. 

The proposals it puts forward, particularly proposals 2 and 4, certainly have the potential to change the face of the industry significantly. There are, however, several other significant reviews and consultations currently going on in the industry, which may lead to changes that impact on competition in the industry within the timescale in which the CMA intends the debate to continue. Their impact on the options offered by the CMA could be substantial. They include the Shaw report on Network Rail, which will look at the long-term future shape and financing of Network Rail. The ORR is also reviewing the structure of track access charges and related charges paid to Network Rail. In addition to such policy and structural considerations, the CMA recognises that technical constraints on the industry are likely to evolve during the timescale of the debate. For example, it notes that capacity constraints may relax as a result of Network Rail's enhancement programme. It may well be, therefore, that the CMA has to update its proposals as the industry evolves. 

Consultation responses are due by 16 October 2015, after which the CMA intends to undertake further work before recommending one of the options consulted upon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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