UK competition authority proposes new guidance on assessing rail franchise awards

The Competition and Markets Authority (CMA) has published for consultation draft guidance on its approach to assessing rail franchise awards under its merger control powers. The CMA is inviting comments on this draft guidance by 18 December 2017.

The CMA’s statutory role

The CMA has a statutory role in reviewing the award of all UK rail franchises. Its jurisdiction, under the merger control provisions of the Enterprise Act 2002, is triggered by the entry into a rail franchise agreement.

Content of the new guidance

The new guidance consists of a brief summary of key points for bidders accompanied by a comparatively more technical document, aimed at both bidders and their advisers, which describes in detail the CMA’s methodologies when it undertakes a merger review. The CMA is seeking views on both these documents as part of the consultation.

The guidance is, in large part, a codification of existing decisional practice, and builds upon previous commentary produced by the CMA and that of its predecessor bodies, the Office of Fair Trading and the Competition Commission. In terms of the substantive approach that the CMA proposes to take, therefore, there is little that is likely to prompt surprise. Nevertheless, while the guidance reiterates a well-established approach, it is helpful to have this consolidated in one place.

Key points of detail to note include the following:

• Although leaving the door open to the possibility that other modes of transport may be a competitive constraint on rail in certain cases, the CMA will continue to take rail travel as its starting point for market definition.
• The CMA’s analysis of overlapping flows will continue to be carried out at a granular flow-by-flow level, with each flow generally being defined as rail services between the same two rail stations or the same two settlements.
• The CMA has set out clearly the filters that it will apply when carrying out a competition assessment of bus-rail and rail-rail overlaps to exclude non-problematic overlaps, including for example individual bus routes with a total revenue of less than £500,000, and bus services running on flows with a frequency of less than 50% of the overlapping service.
• The CMA is proposing to take a different approach for rail-rail and on bus-rail overlaps, noting that its focus for bus-rail overlaps will be on the possibility of negative changes to bus services as a result of the lighter regulation for buses, and the perceived higher risk of fare rises and service degradation arising as a consequence.
• In relation to rail-rail overlaps, the CMA will continue to use the MOIRA model (model of inter-regional activity) which relies on timetable information, passenger preferences and estimates of generalised journey times to test the substitutability of overlapping rail services.

Impact of CMA investigation on the franchise timetable

The guidance also provides clarification on the timetable: the CMA will start its statutory 40 working day review as soon as it deems that a merger notice is complete and will provide the franchisee with a ‘state of play’ update between days 15 and 20. Where competition concerns are identified, the CMA will hold an ‘issues meeting’ with the franchisee around day 25, with a final decision to be arrived at no later than day 40.

CMA investigation and interim enforcement orders should not delay the franchise start date

The CMA has also reiterated in the guidance that it is conscious of the tight timescales involved in the rail franchise process. Although the CMA clearly has no intention of returning to the days of accepting multiple merger filings for the same franchise, the guidance points to other methods to ensure that merger clearance does not delay the franchise start date.

First, the CMA is actively encouraging pre-notification discussions with all bidders post-submission of final bids, so that things can move quickly following the announcement of the award. The intention is that a Phase 1 review can be completed prior to the start of the franchise.

In circumstances where there is not sufficient time for the CMA’s merger investigation to conclude prior to the commencement of the franchise, although the CMA has the power to issue an interim enforcement order (IEO) – previously known as hold-separate undertakings – any IEO will not prevent the franchisee from meeting its obligations upon commencement of the agreement.

This clarification will no doubt be welcomed by bidders and their advisors alike, as well as the Department for Transport, particularly following the CMA’s recent high profile investigations into the Northern and South Western franchise awards. Those awards were cleared only when sufficient remedies, including price caps, were offered by the winning bidders. The guidance is clear that, although conscious of the challenges posed by the tight regulatory timetable, the CMA has no desire to prevent the winning bidder from being able to operate the franchise on the scheduled start date.

Responding to the CMA’s consultation

If you are considering responding to the CMA as part of this consultation, please contact one of our experts who will be able to assist with the response. The deadline for responses is 18 December 2017.