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Update: The Competition and Markets Authority’s consultation on proposed guidance for the evaluation of competition issues in passenger rail franchise awards

  • United Kingdom
  • Transport - Rail

01-02-2018

Background

The Competition and Markets Authority (“CMA”) has recently published draft guidance on its approach to assessing rail franchise awards under its merger control powers (the “Draft Guidance”)1. The guidance has been issued for the purpose of comment by interested parties.

Railway franchises are awarded under the provisions of the Railways Act 1993. The Secretary of State for Transport and Scottish Ministers have the power to award rail franchises and rail franchise procurement and management activities are undertaken by the Department for Transport and Transport Scotland respectively. Agreement has been reached to transfer certain franchising functions of the Secretary of State for Transport to Welsh Minsters in relation to the Wales and Borders franchise and relevant procurement and franchise management functions will be undertaken by Transport for Wales. The CMA’s powers (and the Draft Guidance) apply to the award of passenger rail franchises in England, Scotland and Wales.

The award of rail franchises constitutes an acquisition of control of an enterprise under the merger control provisions of the Enterprise Act 2002. The CMA has powers to investigate whether a franchise award could give rise to competition issues where the turnover of a franchise exceeds £70 million or where, as a result of the award of the franchise, the merged entity will account for at least 25% of goods and services of any description supplied in the UK. There is, however, no requirement to notify the CMA of a franchise award that qualifies for review and the issue of whether to do so needs to be assessed in light of all the facts of the case.

What does the Draft Guidance cover?

The Draft Guidance is made up of two individual guidance documents. The first guidance document (Part 1) provides answers to common questions about the bidding process in respect of passenger rail franchises (and is aimed at potential bidders) and the second guidance document (Part 2) is a technical document that describes in detail how the CMA will generally assess competition issues in this context (and is aimed at bidders and their advisers). These two documents build on the process and assessments carried out by the CMA in respect of recent awards of passenger rail franchises.

Key points to note in the Draft Guidance

Whilst the Draft Guidance reiterates the CMA’s existing practices, there are some key points that build upon this and clarify the process and approach that the CMA will take in assessing passenger rail franchise awards going forward.

Part 1 – The CMA Guidance for potential bidders, some key points to note:

  • Pre-notification discussions – considering entering into discussions with the CMA shortly after submitting a bid: The CMA is encouraging all bidders to enter into pre-notification discussions with the CMA shortly after submitting their bids to the relevant procuring authority. The CMA is recommending that bidders should begin formal pre-notification discussions (including the provision of a draft Merger Notice) 4 – 6 weeks prior to the expected date of the franchise award. Whilst the CMA will only conduct a formal merger investigation into the winning bid, the CMA believes that the benefit of pre-notification from all bidders will be to allow the investigation timetable to commence as soon as the winner is announced. The CMA states that it aims to engage with bidders on competition issues as part of the pre-award process to allow sufficient time for a Phase 1 review to be completed prior to the start of the franchise.
  • The starting point for analysis: The CMA has stated that as a starting point for analysis, it will identify point-to-point journeys (described as ‘flows’) on which rail services of new franchise overlap with the existing transport services provided by the winning bidder. The analysis of flows will consider factors including how closely the overlapping services completed prior to the franchise award, the extent to which pricing and service decisions are constrained by regulation, the number of current and potential competing operators and local factors affecting competition.
  • Impact of a CMA investigation on franchise timetables – clarification provided: Clarification has been provided on the impact of a CMA investigation on the applicable franchise timetable. As soon as the CMA deems that a merger notice is complete it will start its statutory 40 working day review and will provide the franchisee with a ‘state of play’ update between days 15 and 20 of the investigation. Where the CMA identifies potential competition concerns, an ‘issues meeting’ will be held with the franchisee around day 25 of the investigation. A decision will be announced by no later than day 40 of the investigation.
  • European Commission notification: The CMA has noted that some bidders for rail franchises may meet the jurisdictional threshold for notification to the European Commission under the EU Merger Regulation. The CMA encourages any bidders falling into this category to have discussions at the earliest opportunity with the CMA, given that there are likely to be strong reasons for a referral of a rail franchise merger back to the UK where it may have a significant impact on competition.
  • The potential for a franchisee to give undertakings in lieu of a Phase 2 Inquiry: If concerns are raised about the franchise award by the CMA, the CMA has commented that the franchisee should consider offering undertakings to seek to avoid a Phase 2 inquiry being launched by the CMA. Those undertakings should seek to address the competition concerns identified by the CMA in a clear cut and readily implementable manner.
  • The CMA can use interim measures including Initial Enforcement Orders: The CMA also has the power to impose initial enforcement orders (“IEOs”) in both anticipated and completed mergers. IEOs require merging parties to hold their business activities separate during the CMA’s investigation period. The CMA notes that an IEO will only be necessary in circumstances where the franchise begins prior to the conclusion of the CMA’s investigation (e.g. if the award is referred for a phase 2 investigation). In those circumstances, the purpose of the IEO will be to act as an interim measure to ensure that there is no unnecessary integration or any alteration to the supply terms for the overlapping franchise network unless in the ordinary course of business. The CMA notes that it will ensure that an IEO will not prevent the franchisee from meeting its obligations under commencement of the franchise.

Part 2 – CMA Review of methodologies and guidance

The second part of the CMA’s guidance is a more detailed review of the methodologies and guidance used by the CMA in its assessment of franchises. Although this article is not intended to be a detailed examination of the document, some key points to note are:

  • CMA application of filters in respect of overlapping flows: The CMA will apply filters to overlapping flows in its assessment based on the circumstances of the case and on the availability of relevant data. Filtering is a tool that the CMA uses to focus analysis on overlapping flows that are more likely to result in a ‘substantial lessening of competition’. In order to minimise the data collection burden on the franchisee, the CMA will apply those filters that require the least data first, and other filters sequentially;
  • Continued use of the MOIRA model: The CMA have confirmed that the MOIRA model (model of inter-regional activity) will continue to be used by the CMA in relation to rail-rail overlaps.
  • CMA methodology guidance: The CMA has proposed using different approaches for rail to rail and bus to rail overlaps. For example, for bus to rail overlaps (which are more sensitive to price increases and service degradation) the CMA will focus on changes to bus services;
  • Market analysis: Part 2 of the draft consultation sets out the CMA’s approach to market definition in rail franchise merger inquiries by the CMA. The guidance includes an overview of how the market will be analysed from a geographic perspective with an examination of flows (being journeys from a start point to an end point). “Overlapping flows” for the purpose of the analysis will be defined as (i.) rail services between the same two rail stations or the same two settlements (ii.) bus and rail services where the catchment area of a rail service contains bus stops and (iii.) coach and rail services between the same two settlements.

What are the next steps in respect of the Draft Guidance?

The CMA invited comments on the Draft Guidance until 18 December 2017 and are now considering the comments provided with the outcome to the public feedback to be published at a later date.

1. See: https://www.gov.uk/government/consultations/rail-franchise-mergers-guidance

 

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