QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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GREAT NORTH EASTERN RAILWAY LIMITED |
Claimant |
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- and – |
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THE OFFICE OF RAIL REGULATION HULL TRAINS COMPANY LIMITED GRAND CENTRAL RAILWAY COMPANY LIMITED |
Defendant Interested Parties |
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Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR RHODRI THOMPSON QC, MISS HELEN MOUNTFIELD and MR JULIAN GREGORY (instructed by NORTON ROSE) for the Defendant
MR CLIVE FLETCHER WOOD and MR IAN TUCKER of BURGES SALMON LLP for the First Interested Party
MR AIDAN ROBERTSON (instructed by WHITE & CASE LLP) for the Second Interested Party
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Crown Copyright ©
Mr Justice Sullivan :
Introduction
(a) "An order quashing the decision, and
(b) A declaration that the charging regime is unlawful, in
particular as being (i) discriminatory, contrary to the 2005
Regulations, (ii) a state aid under Article 87 of the EC Treaty,
which has not been notified to the European Commission, (iii)
in breach of Article 86 of the EC Treaty and (iv) in breach of
the ORR's own policy".
The Parties
The Issues
"(1) the Decision is contrary to the Railways Infrastructure (Access and Management) Regulations 2005 (SI 2005/3049) ("the 2005 Regulations") and Directive 2001/14 on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification ("the Directive"), which the 2005 Regulations implement, and is otherwise discriminatory and contrary to the general principles of European Community law;
(2) the charging regime proposed in the Decision amounts to an unlawful grant of state aid in favour of Grand Central and Hull Trains;
(3) the ORR has acted in breach of the principles of the EC Treaty and in particular the principles set out in Articles 3 (1) (g), 10, 82 and 86 (1);
(4) the ORR breached its own policy in granting access to Grand Central and Hull Trains on routes for which GNER previously had the highest level of Moderation of Competition protection and where the proposed new services will not have as their main effect the generation of new patronage but rather will abstract significant revenue from GNER; and
(5) the ORR has failed to comply with its duties as laid down in section 4 of the Act".
(a) Ground (3) was simply a different formulation of the "Discrimination" argument advanced in ground (1); and
(b) Ground (5) was parasitic upon grounds (1) – (3).
(a) Is the charging regime contrary to the 2005 Regulations and/or the
Directive because it unlawfully discriminates between franchise
operators such as GNER and open access operators such as the
Interested Parties?
(b) Does the charging regime amount to an unlawful grant of state aid
in favour of open access operators?
The Charging Regime
"(a) fixed track charge;
(b) variable track usage charge;
(c) traction electricity charge;
(d) capacity charge;
(e) incremental output statement charge;
(f) railway safety charge; and
(g) change of law charge".
"(a) a variable track usage charge;
(b) a traction electricity charge (where applicable); and
(c) a capacity charge".
The 2005 Regulations
"(1) (i) Subject to paragraph (3), the Office of Rail Regulation must establish the charging framework and the specific charging rules governing the determination of the fees to be charged in accordance with paragraph (5).
(ii) Subject to paragraphs (3) and (7), the infrastructure manager
must –
(a) determine the fees to be charged for use of the
infrastructure in accordance with the charging
framework, the specific charging rules, and the
principles and exceptions set out in Schedule 3;
…
(5) Subject to the provisions in paragraphs (1) to (4), the infrastructure manager must –
(b) charge fees for use of the railway infrastructure for
which he is responsible; and
(c) utilise such fees as are received to fund his business".
"13.(1) The Office of Rail Regulation through the access charges review…must lay down conditions, including where appropriate advance payments, to ensure that, under normal business conditions and over a reasonable time period, the accounts of an infrastructure manager shall at least balance –
(a) income from infrastructure charges;
(b) surpluses from other commercial activities; and
(c) public funds,
with infrastructure expenditure."
"(1) The infrastructure manager must ensure that the application of the charging scheme –
(a) complies with the rules set out in the network statement produced in accordance with regulation 11; and
(b) results in equivalent and non-discriminatory charges for different railway undertakings that perform services of an equivalent nature in a similar part of the market.
(2) The calculation of the fee may in particular take into account the mileage, composition of the train and any specific requirements in terms of such factors as speed, axle load and the degree or period of utilisation of the infrastructure.
(3) Except where specific arrangements are made in accordance with paragraph 3, the infrastructure manager must ensure that the charging system in use is based on the same principles over the whole of his network.
(4) The charges for the minimum access package and track access to service facilities referred to in paragraphs 1 and 2 of Schedule 2 shall be set at the cost that is directly incurred as a result of operating the train service".
It is unnecessary to consider the detail of paragraphs 1 and 2 of Schedule 2. The minimum access package and track access to service facilities include all the services that will enable the Interested Parties to operate their passenger services over the ECML. Regulation 7 places Network Rail under a duty to provide such services in a non-discriminatory manner.
"2. (1) In order to obtain full recovery of the costs incurred the infrastructure manager, with the approval of the Office of Rail Regulation under the access charges review…may levy mark-ups on the basis of efficient, transparent and non-discriminatory principles, whilst guaranteeing optimum competitiveness, in particular in respect of international rail freight.
4. (1) An infrastructure manager's average and marginal charges for equivalent uses of his infrastructure must be comparable and comparable services in the same market segment must be subject to the same charges".
The Claimant's case on discrimination
I will examine these arguments in reverse order.
Costs directly incurred
"6. The fundamental principle underpinning the SOCC review is that charges should reflect the long run incremental costs (LRIC) imposed on Network Rail by train operators. At the present time, however, charges that are variable with use will continue to be based on average variable cost (for practical purposes equivalent to short run incremental cost). ORR considers that the LRIC of providing additional capacity or capability represents long-term commitments and should be reflected in separate, focused charges for each TOC. As better cost and demand information becomes available at a route level ORR will give further consideration to implementation of a LRIC based approach, based on charges on a vehicle-km basis (i.e. the same way as the variable usage charge is currently defined)".
"4. However, we have concluded that the new information now available is not sufficiently robust to warrant a change in variable usage charges at this time. There has been a significant development in the transparency of Network Rail's cost data since PR2000, both in terms of its availability (for example, maintenance costs by asset type, previously aggregated within infrastructure maintenance contracts) and granularity (for example a breakdown of track renewal costs by activity). However, information does not yet exist to support either the better estimation of long run efficient costs, the proportion of such costs which are usage-related or cost disaggregation (or bottom up cost estimation) to route or local levels".
"16 We have considerable reservations about whether the quality and integrity of the information on usage-related costs which has become available since 2000 is sufficient to support a change in the level of usage charges at this time. Although there is better insight into cost drivers and more transparency of the composition of the costs themselves, there is a lack of evidence on which to support a revision to previous estimates of the extent to which costs are variable with usage."
"2. We have worked closely with Network Rail, consulted widely and commissioned a range of consultancy studies in our review of the current track access charges (including the variable usage charge, traction electricity charge, capacity charge and fixed charge).
3. Our conclusions in this document confirm our emerging conclusions, published in July 2005. We will not make changes to the structure of track access charges until April 2009, to enable us to take account of further work being done as part of periodic review 2008 (PR2008). We have reached this view because:
- There has been insufficient improvement in Network Rail's understanding of costs since the last review of the structure of track access charges (as part of the periodic review 2000 (PR2000)); and
- Our consultants Booz Allen Hamilton (BAH) (working in conjunction with TTCI UK Ltd (TTCI) have recommended that further work on understanding variable cost causation should be undertaken before changes to the variable usage charge are made, in order to ensure that track access charges are sufficiently cost-reflective and provide appropriate incentives.
4. The variable usage charge is the key variable track access charge,
therefore as a consequence of not making changes to this charge,
we have decided to defer making changes to any of the charges
until April 2009, when we will implement the conclusions of
PR2008. We will take forward and complete work on the traction
electricity, capacity and fixed charges started as part of this
review".
"that a LRIC-based approach is, at least in theory, the most appropriate approach to adopt in charging for access to rail infrastructure". (paragraph 4.14).
"There are some practical problems with calculating and using a measure of pure LRIC". (4.15).
The following paragraphs outlined these problems, and paragraph 4.21 concluded by
asking the question:
"Do consultees have any views on the use of a SRIC or
LRIC approach, on charging for enhancements and on
the alternative merits of the approaches discussed?"
The two Consultants' reports referred to above were produced as part of that
consultation process.
Similar part of the market
"5.49 GNER has argued that the current track access charging regime, where open access operators pay the variable charges associated with their usage of the current network but do not pay any fixed charge, is contrary to EU and domestic law, in particular Directive 2001/14 (the Directive) and the UK implementing regulations, the Railways Infrastructure (Access and Management) Regulations 2005 (the Regulations). The relevant provisions of the Regulations can be found in Schedule 3.5.50 The purpose of the Directive is to allow for greater integration of the railway sector, to open up the market and to encourage optimal use of railway infrastructure.
5.51 A key element of the Directive is to enable open access operations (freight and passenger) to introduce services on the rail network, facing fair and non-discriminatory charges for their operation. Recital 11 to the Directive clearly sets out that, 'The charging and capacity allocation schemes should permit equal and non-discriminatory access for all undertakings and attempt as far as possible to meet the needs of all users and traffic types in a fair and non-discriminatory manner'. Further, 'the level of charges must not, […], exclude the use of the infrastructure by market segments which can pay at least the cost that is directly incurred as a result of operating the railway service, plus a rate of return which the market can bear" (Article 8(2)).
5.52 DfT, in its consultation on the implementing regulations, stated that: 'the First Rail Package opens up access to the international rail freight market and provides a transparent regulatory regime for the allocation of capacity and charges for access to the rail infrastructure across the EU'. The reference to freight can reasonably be extended to other open access operators in the UK context. DfT is aware of the charging structures we have used in previous periodic reviews in 1999, 2001 and 2003. We further advised DfT on current charging structures during the transposition of the Directive.
5.53 In translating the broad principles of the Directive we have considered whether franchised passenger operators such as GNER and open access operators such as Grand Central are in the same market segment in terms of access to infrastructure.
5.54 We accept that there is a broad market for rail passenger services and that both franchised passenger and open access passenger operators' services may be included within this broad market. Customer choice on a particular route is likely to be relatively indifferent between whether the service required is operated by a franchised passenger operator or an open access passenger operator (assuming the same service characteristics).
5.55 However, in the upstream market for access to infrastructure, our view is that the market conditions under which operators seek access are significantly different and constitute different market segments.
5.56 There are a number of differences between franchised passenger operator and an open access passenger operator which affect the ability to obtain access:
- our 'not primarily abstractive test', which is applied only to open access applications to satisfy ourselves that revenue abstraction from existing franchised passenger operators would not be the primary impact of the new services;
- franchise agreements provide for a suite of services to be operated by the franchised passenger operator with levels of service specified by government, while open access passenger operators' services tend to operate at the margin and are not specified by Government;
- franchise agreements provide protections against changes to charges resulting from access charges reviews; and
- some franchise agreements provide risk sharing arrangements which protect the franchised passenger operators where revenues fall below specified levels in certain circumstances.
5.57 These differences have led us to consider the two types of service provider to be in different market segments for the purposes of the charging provisions. We consider that, given the differences in market conditions under which operators seek access, the differences in the UK charging structure between open access and franchised passenger operators give effect to the purpose of the Directives.
5.58 Where it is appropriate we adopt a consistent approach across all types of operators and services. For example, each additional service faces the same marginal track access charges for equivalent use of rolling stock (subject to the protection for franchisees against changes to variable charges resulting from access charges reviews).
5.59 Furthermore, we consider that the ability of franchised passenger operators to bear a mark-up above the marginal track access charges should be reflected through the franchise bidding process. We would expect that a bidder would take into account the level of the fixed charge in determining its costs for the purposes of the bid. We would, therefore, expect that a higher fixed charge would lead to a lower bid premium or a higher subsidy. Therefore, even if the fixed charge were very low, then the level of fares set by the franchised passenger operator would not be affected, as the lower fixed charge would simply result in a higher bid premium. The level of fixed charges faced by franchised passenger operators therefore has no impact on the relative competitive positions of franchised and open access operators.
5.60 As we stated in our proposed decision, we do not propose any changes to the current framework at this time outside the work currently in progress for the 2008 periodic review of access charges. In this context, we note that DfT agreed at the hearing that: 'this is an issue that ORR should look at again in the forthcoming review'. DfT had previously stated in its representations of 13 February 2006 that it believed this issue should be examined before then.
5.61 An access charges re-opener will be included in Grand Central's track access contract which would allow the implementation of the conclusions reached by that periodic review. We will also include a similar re-opener in Hull Trains' agreement for the additional right referred to in this decision."
"(5) To ensure transparency and non-discriminatory access to rail
infrastructure for all railway undertakings all the necessary
information required to use access rights are to be published in
a network statement.
(11) The charging and capacity allocation schemes should permit
equal and non-discriminatory access for all undertakings and
attempt as far as possible to meet the needs of all users and
traffic types in a fair and non-discriminatory manner".
"Charging and capacity allocation schemes should allow for fair competition in the provision of railways services".
Fair competition in the provision of railway services will not be possible if those operators who wish to provide such services are in an unequal position when seeking access to the necessary infrastructure, and the charging regime makes no attempt to address that inequality.
"(6A) The grounds on which the Office of Rail Regulation may reject, or approve subject to modifications, a proposed access contract submitted to it pursuant to subsection (5) above include that it considers that the use of the facility for which it provides might impede the provision of services –
(a) under a franchise agreement…"
However, section 4 which imposes a duty on the ORR to exercise its functions in the manner in which it considers best calculated to achieve a number of objectives, some of which tend to point in different directions, in practice confers a very wide discretion upon the ORR as to the manner in which it deals with applications for approval of/directions in relation to track access agreements.
"3.11 The Regulator has also noted that parts of the network are
already running at or very close to full capacity. These routes
are often the ones with relatively high passenger demand,
which would be attractive to new entrants. In contrast, parts
of the network with the greatest spare capacity are also likely
to have relatively low passenger demand and therefore be
unattractive to a new entrant (because the new entrant, unlike
the incumbent franchisee, would not receive any subsidy for
running services on those routes).
3.12 Taking all these considerations into account, the Regulator has
concluded that, whilst on-rail competition between operators
can bring benefits to passengers, there will in practice be
limited scope for such competition to develop in the
foreseeable future. He does not therefore believe that it is
necessary, in order to give existing passenger train operators a
reasonable degree of assurance to plan the future of their
businesses, to grant contractual MoC protection other than in
exceptional cases. These exceptional cases would involve
planned investment that can be shown would not otherwise
occur without contractual MoC protection. The Regulator
does not believe that it is likely to be necessary in future to
grant contractual MoC protection against cherry-picking, as
such cases would be identified and addressed by the normal
procedures by which the Regulator considers track access
applications. These procedures include consultation with
potentially affected operators and the SRA…"
Under the sub-heading "Protection from services that are primarily abstractive in nature", the Regulator said in paragraph 3.13:
"3.13 The Regulator acknowledges that competing services that are
primarily abstractive of incumbents' revenue without
compensating economic benefits – cherry-picking services –
are undesirable. Whilst the introduction of any new service is
almost certain to bring some benefits to the passengers who
use it, cherry-picking involves cases where such benefits are
more than offset by other factors."
"3.16 The Regulator will therefore consider applications for rights
involving potential new competing services in a way that is
consistent with his criteria and procedures for the approval; of
passenger track access contracts. As with any other
application for new track access rights, this will include, for
example, consideration of whether there is sufficient capacity
available to accommodate the rights sought, the performance
impact on other operators, the net benefits to new and existing
passengers and the impact the proposed rights would have on
relevant SRA [now DfT] strategies.
3.17 Where there is clear evidence that revenue abstraction may be
a material concern, the Regulator's assessment will also look
specifically at whether the new competing services would be
primarily abstractive of the revenue of existing operators. The
expression 'primarily abstractive' is not intended to imply a
rigid benchmark. The Regulator considers that such a test
would be unrealistic, given the uncertainties about forecasting
future revenue effects, and would not allow all relevant factors
to be taken into account. Instead, the Regulator will consider
whether the overall effect of approving the proposed rights is
likely to attract sufficient new patronage to rail such that this
could be considered the primary impact of the proposal. If an
application passes this test and is also acceptable against the
Regulator's usual criteria for considering new track access
rights (see paragraph 3.16 above), the Regulator would expect
to approve the rights sought. "
The assessment process is then described in considerable detail in the ensuing paragraphs.
"that the ability of franchised passenger operators to bear a mark-up above the marginal track access charges should be reflected through the franchise bidding process. "
Although the basic charging principle is that the operator will pay the costs directly incurred by the infrastructure manager as a result of the operation of the train service (paragraph 1 (4)) of Schedule 3 implementing Article 7.3 of the Directive), paragraph 2 (1) permits the levying of mark-ups "in order to obtain full recovery of the costs incurred by the infrastructure manager" (see also Article 8 (1) of the Directive).
(a) expected income from variable track access and other single till income (e.g. from freight, stations and property); and
(b) the amount paid by the DfT to Network Rail by way of network grants.
The ratio of network grant: fixed track access charges is entirely a product of horse-trading between the DfT, Network Rail and the ORR.
"…it is desirable for any infrastructure charging scheme to enable traffic to use the rail network which can at least pay for the additional cost it imposes."
"various means by which the ORR could provide access to the rail network on a non-discriminatory basis, including for example, by not imposing any fixed charge at all, reducing the fixed charge, transferring some of the fixed charge to the variable track access charge and providing for the remainder to be paid by direct grant from the DfT etc.".
"to ensure that Railtrack's accountability to its train operator customers was enhanced, not diluted".
Diluting Network Rail's accountability to its train operator customers would be contrary to the underlying purpose of the Directive and the Regulations.
"There are many parallel methods of acquiring and paying for the lease and licence rights". (paragraph 47).
Operators wishing to participate in the tender process, which was open, competitive, and undiscriminatory had been free to do so. Other operators could choose between various means of acquiring rights, e.g. capital payment or rent or royalty payments, and:
"No formula appears, a priori to be more advantageous in principle than another". (paragraphs 48 and 49).
The ECJ concluded:
"Since the various formulae are, or were, accessible to all the operators without discrimination, no distortion of competition can be inferred from such a system where several means of acquiring a single type of right coexist. Moreover, the order for reference does not contain any evidence to indicate that access to the various formulae was, or would be discriminatory."
State Aid
"any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods…insofar as it affects trade between Member States."
(a) it provides a benefit or advantage;
(b) it is imputable to the state;
(c) it is granted directly or indirectly through state resources;
(d) it favours certain undertakings; and
(e) it is capable of distorting competition and affecting trade between Member States.
(a) the setting of variable charges at a rate that does not cover avoidable costs, where these avoidable costs are paid by other operators through the fixed track access charge; and(b) the waiver of the fixed track charge, which is paid by franchised operators and covers both long term incremental costs caused by the train operators and other residual capital requirements of Network Rail.
"not reveal the existence of aid or special charges, within the meaning of Article 4 (c) of the ECSC Treaty, or discrimination between producers within the meaning of Article 4 (b) of the same treaty."
Delay/Relief
"to maintain a level playing field an open access operator should not be at a price advantage in terms of track access charges in comparison with an established operator." (letter dated 23rd December 1999).
On 20th December 2002, in response to the Regulator's Interim Review of Track Access Charges Initial Consultation GNER said:
"We also wish to see all users, including Open Access Operators paying an appropriate fixed charge. We are most concerned over this position post 2004."
Representations to the same effect were made by GNER on numerous occasions in 2003, 2004, 2005 and 2006. If GNER wanted declaratory relief it could have sought such relief against the Rail Regulator or the ORR at any time since October 2000.
"The principles relating to non-discrimination and comparability as regards average and marginal charges have all been incorporated into UK law through The Railways Infrastructure (Access and Management) Regulations 2005.
While we can understand an approach which is designed to reduce barriers to entering the rail industry thus improving competition, the fact that open access operators do not have to pay a share of the fixed charge seems to us to go against these principles. On the basis of the above we would expect, for example, all long distance operators on ECML to be charged on the same basis, all other things being equal.
We welcome your statement that you are minded to include an access charges re-opener in the track access contracts of both Grand Central and Hull Trains to take account of any changes to the current framework as part of the 2008 review. However that is some way off. We believe the issue should be examined before then."
It is somewhat curious that this is the first occasion on which the DfT raised this concern about a long-standing feature of the charging regime, but in any event it subsequently agreed that the ORR should look at this issue again in the 2008 periodic review of access charges: see paragraph 5.60 of the Reasons Document.
"the Regulator has previously written to GNER on this matter. GNER has submitted no new evidence or arguments in support of its views and the Regulator's policy, therefore remains unchanged."
Conclusions