Competition and Markets Authority publishes new guidance on rail franchise award methodology

Introduction

On 15 March 2018 the CMA published two new documents designed to provide up-to-date guidance to all companies bidding for rail franchises in the UK. The guidance is a welcome update to the CMA's "Q&As on Rail Franchises" document, which was last updated in April 2014.

The guidance is split into a short guide covering common queries about the process and a technical guide, which deals with the methodology used by the CMA in assessing whether the award of any rail franchise could give rise to competition concerns.

Overview of the procedure

The CMA's statutory duty to review the award of rail franchises (under the Enterprise Act 2002) means that all bidders (not just the eventual franchisee) are encouraged to enter into pre-notification discussions with the CMA shortly after bids have been submitted. This allows the CMA to complete as much of its research as possible before it is required to enter into a formal merger investigation with the winning bidder.

Key elements of the March 2018 guidance

The March 2018 guidance focuses on the scope of the franchise being awarded and any potential overlaps in service provision that its award may cause. This is assessed by the CMA with reference to overlap of service between a bidder's already existing rail or bus operations with the proposed rail operations franchise. It also provides some useful guidance on how bidders should engage with the CMA once their bid has been submitted.

The key points to note from the CMA's guidance are:

1.  Engagement

• The CMA encourages bidders to engage with its information-gathering requirements as soon as possible after submitting their bid.
• Bidders should allow sufficient time to gather the data and present it in a form that will allow the CMA to easily assess how filters have been applied to it.

2. Theories of harm

• The theories of harm that the CMA will investigate will depend on the scope of the franchise being awarded.
• For example, in some cases the winning bidder may operate other rail or bus franchises in the same area as the franchise being awarded, which could have the effect of reducing the number of independent transport operators, rail or otherwise.

3. Market definition

• When considering the markets where a rail franchise award may have an impact, the CMA will consider other route options available to customers, the cost of the journey, frequency and waiting times, and any time spent travelling to and from the journey's starting point.
• The CMA considers that high levels of switching indicate close substitutability and a strong competitive constraint.

Comment

These guidelines are a welcome clarification of the CMA's likely requirements in the context of a rail franchise tender process. Their publication re-affirms the CMA's desire to streamline its process as far as possible in order to have any investigation completed before the franchise is put into operation.

It is therefore worth noting what will and will not be taken into account by the CMA – and the evidence that is likely to be persuasive in support of any arguments made by the winning bidder. With early CMA engagement key to the process, it will be beneficial to have these documents to hand well in advance of submitting your rail franchise tender.

It will also be interesting to note how regulators and rail operators factor greater open-access competition into future franchise bids, particularly given the ORR's recently stated support for plans to expand opportunities for open-access operators on key intercity routes.