TRAN Committee presentation 1

Unbundling and Regulatory Bodies in the context of the recast of the 1st railway package

Tuesday 12th April 2011

Steer Davies Gleave28-32 Upper Ground

London, SE1 9PD+44 (0)20 7910 5000

www.steerdaviesgleave.com

Presentation of briefing notes to the Committee on Transport and Tourism

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Contents

Ι Introduction

Ι Market overview

Ι Typology and structure of Regulatory Bodies in the railway sector

Ι Impact of separation between infrastructure management and transport operation in the railway sector

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Introduction

Ι The TRAN Committee has requested two briefing notes on:

■ Typology and structure of Regulatory Bodies

■ The impact of the separation between infrastructure management and transport operations

Ι Aim: To gather a comprehensive overview of different models of regulation in force across Member States and the existing cases of vertical separation compared to cases of vertical integration.

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Market review (1) – Trends in rail passenger transport since 2000

Ι Rail share of total passenger transport at around 6%. Significant growth in Denmark (+41.9%), UK (+36.4%) and Belgium (+35.7%).

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Powered 2-wheelers Buses & Coaches RailwaysTram & Metro Air SeaPassenger Cars

Non car passenger market share evolution

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Market review (2) – Trends in freight rail transport since 2000

Ι In freight transport rail share slightly greater than 10%. Significant growth in Latvia (+55.3%), Germany (+44.1%) and Austria (+42.5%).

0 %

5 %

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1 5 %

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2 5 %

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3 5 %

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4 5 %

5 0 %

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8

Road Se a Rail In lan d W ate rway O il P ip e lin e A ir

Evolution of freight market share

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Market review (3) – evolution of freight market shares

Ι Market shares of non-incumbent RUs: UK (100%), Estonia (57%), Romania (45%), the Netherlands (36%) and Poland (32%).

Ι Average market share increased from 10.5% in 2005 to 22% in 2009

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10%

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30%

40%

50%

60%

70%

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90%

100%

AT BE BG CZ DE DK EE ES FI FR HU IT LT LV NL PL PT RO SE SI SK UK

2005 2006 2008 2009

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TYPOLOGY AND STRUCTURE OF REGULATORY BODIES IN THE EU RAILWAY SECTOR

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Introduction on Regulatory Bodies (RBs)

Ι Primary objective: to ensure independent and impartial oversight of the market, to ensure free market access to new RUs.

Ι Article 30, Directive 2001/14/EC requires RB to be independent of the IM, RU and charging and capacity allocation bodies.

Ι The ongoing parliamentary debate on the recasts of the 1st railway package has shown that the role of the Regulatory Bodies, as supervisors of the railway market, should be improved.

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Types of Regulatory Bodies

Ι RBs have different powers, financial resources, staff and structure.

StandaloneBulgaria; Czech Republic; Greece; Spain; France; Hungary; Italy;Latvia; Lithuania; Austria; Poland; Portugal; Romania; Slovenia;Slovakia; UK

Integrated

Wider transport regulator: Belgium; Denmark; Finland; Sweden

Wider utilities regulator/competition authority: Estonia; Germany; Luxembourg; Netherlands

Completely independentCzech Republic; Germany; Estonia; Greece (transition to be completed shortly); France; Hungary; Luxembourg; Netherlands; Austria; Finland; Sweden; UK

Tied to MinistryBelgium; Bulgaria; Denmark; Spain; Italy; Latvia; Lithuania; Poland; Portugal; Romania; Slovenia; Slovakia

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Ι European Commission identified (2009) problems with implementation of Article 30

Ι In 2010 the European Commission referred Greece, Czech Republic,Germany and Spain to ECJ

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Overview of infringements identified by the Commission

MEMBER STATES OBSERVATIONS

Denmark, Greece, Spain, France, Italy, Lithuania, Luxembourg, Romania, Slovenia

Insufficient independence of RB from the (incumbent) RU and/or the IM.

Czech Republic, Denmark, Estonia, Spain, Lithuania, France, Luxembourg, Latvia, Slovenia

Insufficient power of RB to monitor competition in the rail service market.

Czech Republic, Denmark, France, Greece, Italy, Lithuania, Luxembourg

Insufficient enforcing powers of RB to take and enforce the necessary decisions.

Denmark, Greece, Italy, Lithuania, Luxembourg, Romania Slovenia, Spain.

Part of or subject to the same ministry that contributes to control the state owned RU.

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Market share of new entrants and infringements

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0%

20%

40%

60%

80%

100%

BG FI SK PT BE AT HU DE PL SE NL UK LV EE ES RO CZ EL SI FR IE LU LT IT DK

No infringements

1 2 3

Infringements

4

NA NA

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Review of administrative capacity

Ι Most RBs <60 staff. Half employ around 20 staff. e.g. Italian RB with 10 staff (budget of €30,000 + salaries) oversees a market of >25 operators.

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FI SI EE LV ES RO BE IT AT LT LU BG DK HU EL DE FR SK CZ UK NL SE

Num

ber

of

licen

ces

Staf

f nu

mbe

rs

No. of active freight licenses & No. of staff in RBs

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Independence and funding for RBs

Member StateSame office

addressSame website

& emailRB & IM/RU

overlapSource of funding

Belgium, Latvia No No No Industry (IM)

Bulgaria, Czech Republic, Estonia, Finland, Germany, Netherlands, Portugal, Slovakia, Sweden

No No No State

Hungary No No No Industry & State

UK No No No Industry (All)

Denmark, France, Lithuania, Luxembourg

No No Yes State

Austria No No No Industry (RUs)

Poland Yes No No State

Italy, Slovenia, Spain Yes Yes Yes State

Greece - - Yes State

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Conclusions on Regulatory Bodies

Ι Effectiveness of RBs across the EU varies significantly.

Ι Clear case for strengthening existing legislation to better guarantee

the independence of RBs. Also need adequate resources & ability to

act quickly and effectively.

Ι A need for RBs to function independently of government, particularly

where the latter has a direct interest in national RUs or IM.

Ι Future policy options should ensure that RBs are properly resourced

and have appropriate powers, recognising that the need for

regulatory intervention and oversight may vary between MSs.

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THE IMPACT OF THE SEPARATION BETWEEN INFRASTRUCTURE MANAGEMENT AND TRANSPORT OPERATIONS IN THE EU-RAILWAY SECTOR

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Introduction on unbundling/separation

Ι Other utilities subject to vertical separation and liberalisation to increase competition.

Ι Railways retain substantial technological barriers (interoperability).

Ι The IM must be independent of any RU for capacity allocation.

Ι There are a number of advantages and disadvantages to separation.

Ι Different approaches to vertical separation have produced different results, with differing impacts on competition.

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Vertical separation in the railway sector

Ι Different MSs adopted different models:

■ Full separation: in legal, organisational and institutional terms. IM is independent of RU(s).

■ Partial separation: IM and RU(s) organisationally & legally separated. The main RU effectively retains responsibility for key infrastructure management functions.

■ Partial integration: IM and RU(s) organisationally separate, but are subsidiaries of the same holding company.

■ Fully integrated: no separation of IM and RU(s).

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Degree of separation in Member States

Ι The degree of separation monitored by the Commission (RMMS 2009)

Ι The Commission concluded that many of the current models are not fully compliant with the requirements of the 1st Railway Package.

CATEGORY MEMBER STATE (2009)Full separation Great Britain, Finland, Denmark, Netherlands,

Norway, Spain, Sweden, Portugal, Slovakia, Lithuania, Romania, Czech Republic, Greece

Partial separation Estonia, France, Hungary, Slovenia, Luxembourg, Latvia

Partial integration Austria, Belgium, Germany, Italy, Poland

Full integration Ireland, Northern Ireland

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Degree of independence of IM and incumbent RU

Member StatesCommon

board members

Offices in same

building

Incumbent undertakes some infrastructure

management

Incumbent controls access to some assets

Denmark; Great Britain; Netherlands; Norway; Spain; Sweden;

No No No No

Germany; Portugal; Slovakia No No No Yes

Belgium Yes No No No

Austria Yes No No Yes

Czech Republic; France; Poland No No Yes Yes

Italy No Yes No Yes

Estonia No Yes Yes Yes

Slovenia Yes Yes No No

Hungary; Lithuania; Luxembourg; Northern Ireland;

Yes Yes Yes Yes

Ι Links between IM and RU

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Overview of infringements identified by the Commission

Member States Date of EC action

13 MSs referred to ECJ: Austria, Czech Republic, Germany, Greece, France, Hungary, Ireland, Italy, Luxembourg, Poland, Portugal, Slovenia and Spain

June 2010

Reasoned opinions to 21 Member States October 2009

Opened infringement proceedings against all Member States except the Netherlands

June 2008

Ι Most common infringement: “not sufficiently ensuring the independence of the IM”

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Case studies on vertical separation (1)

Ι Great Britain: ■ Competitive franchise bidding has helped to stimulate market growth +

encouraged service innovation. ■ Costs increased substantially since 2000. ■ Some argue that industry costs are excessive partly as a result of

complexities and inefficiencies of the contractual matrix.

Ι Sweden: ■ No evidence of coordination issues following separation. ■ Improvement in performance & reduction in delays since separation. ■ Excluding investments there has been a fall in the cost.

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Case studies on vertical separation (2)

Ι Netherlands: ■ Separation lead to improvements in punctuality, reliability, capacity and

safety. ■ No clear evidence of an increase in costs.

Ι Italy: ■ Substantial entry into freight market. ■ New entrant operators continue to identify barriers hindering access. ■ No clear evidence of an increase in costs.

Ι France:■ Separation only partial.■ Some entry but competition delayed. ■ ‘GID’ limiting potential entry.

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Separation and liberalisation

Ι Different views on liberalisation

Ι Both agreed markets are now more open across Europe

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EE UK RO PL DE HU AT FR LV BE ES FI LT PT SI

H-H

inde

x sc

ore

Rail freight market opening score

RMMS 2009

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Separation and market shares of non-incumbents

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20%

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100%

EL FI LT SK ES PT SE NL RO DK UK SI HU FR LV EE BE LU AT IT CZ DE PL

Fully separated Partially separated

Partially integrated

No infringements Infringements

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Conclusions on vertical separation (1)

Ι Despite structural changes, established relationships between the

IM and incumbent RU remain in place in some MSs.

Ι Regulation alone is unlikely to guarantee non-discrimination in

access.

Ι More rapid market opening is likely to depend on greater separation

of the IM and RUs than has been achieved in many MSs to date.

Ι Issues, such as the ability of a dominant RU to unduly influence

capacity allocation and other decisions through co-location with the

IM should also be addressed.

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Conclusions on vertical separation (2)

Ι Future mechanisms could assess the various policy options including

independence of operational decision making as distinct from legal

separation.

Ι Costs of vertical separation may be significant if complex contractual

frameworks are required e.g. for timetable co-ordination, payment

of liquidated damages for delays etc.

Ι Observed trends in costs, fares and service quality can be explained

by a wide range of factors and cannot be attributed only to

separation.

TRAN Committee presentation

Thank you