House of Lords - Tunnel vision? Completing the European rail market

Tunnel vision? Completing the European rail market - European Union Committee Contents

CHAPTER 2: legislation and regulation

The beginning of liberalisation

13. The Commission began its attempts to liberalise the European rail market in 1991 with the adoption of a Directive which aimed to adapt the railway network to the requirements of the Single Market, as well as making it more efficient.[12] Its initial focus was the freight market. In order to allow 'open access' to domestic rail markets by new entrants, it required the separation of infrastructure managers—the bodies responsible for providing and maintaining the rail network—from railway undertakings—the train operating companies. This required separation in accounting terms; organisational separation was optional. The Directive also sought to prohibit discriminatory systems of infrastructure charging and capacity allocation. Around the same time the Government began to develop plans to privatise British Rail, which culminated in the Railways Act 1993.

14. In 1995, further EU Directives were adopted on the licensing of railway undertakings[13], on the allocation of railway infrastructure capacity and the charging of infrastructure fees.[14] Three Railway Packages were subsequently adopted between 2001 and 2007. These packages, which revised and extended these measures further to facilitate the development of the railway market, now make up the current legislative and regulatory framework.[15]

The Railway Packages

15. The First Railway Package was adopted in 2001 and focused on further liberalisation of the international rail freight market to ensure that operators could gain fair access to run services throughout the EU. Directive 2001/12/EC amended the 1991 Directive to require the functional separation of infrastructure managers from railway undertakings. While both functions could still exist within the same organisation, they were required to have independent decision-making procedures in addition to separate accounting. Directive 2001/14/EC laid down rules for setting infrastructure charges and for capacity allocation. It included a requirement for infrastructure managers to publish network statements setting out the infrastructure capacity, as well as the access arrangements and charges. It also required each Member State to establish a regulatory body to oversee the rail market. Such regulators, although allowed to be part of the transport ministry of the Member State, were required to be independent in organisation, funding decisions, legal structure and decision-making from any infrastructure manager, charging body, allocation body or applicant.

16. Since the First Railway Package came into force, two subsequent packages have been agreed. The Second Railway Package[16] was adopted in 2004 and made provision for the complete opening of the international and domestic freight rail markets, increased network interoperability and for a common approach to be adopted regarding safety matters. This common approach not only required each Member State to establish a safety authority[17], but also established a European Railway Agency to advise the Commission on safety and interoperability issues. On 26 September 2007 the Third Railway Package was adopted, with the intention of liberalising international passenger services by 1 January 2010. To this end, Directive 2007/58/EC governs the allocation of infrastructure capacity and the charges imposed for the use of railway infrastructure; Directive 2007/59/EC makes provision for international train driving licences; and Regulation 1371/2007 ensures basic rights for passengers (including those with reduced mobility) regarding insurance, ticketing and access.

17. We published a report which considered all three Packages in 2005[18]. We considered, among other things, that the Channel Tunnel posed "major constraints on the ability of the United Kingdom to benefit from rail freight liberalisation". To remedy this, the Committee urged the British and French governments to ensure full compliance with the First Railway Package with respect to their joint interest in the Channel Tunnel, and to work together to ensure fair and open access through it, including by setting more competitive access charges.[19]

Liberalisation of international passenger rail services

18. It has been only two years since international passenger services in the EU became open to competition and so far only one new service has commenced operating as a result. Nevertheless, all of our witnesses were enthusiastic about the prospects for achieving greater competition in this part of the market and some, not unreasonably, considered that it was too early to judge whether the operation of this measure had been successful so far.[20]

19. However, Deutsche Bahn highlighted a potential shortcoming of the Third Railway Package in Directive 2007/58/EC. Article 1 allows Member States to restrict market access in instances where the introduction of an international service may have a detrimental impact on an existing local or regional service covered by a public service contract.[21] The Man in Seat Sixty-One provided an interesting example of this provision being applied to a new international rail service in northern Italy.[22] While we are aware that the Commission has attempted to clarify this provision's application in a 2010 Communication[23], it is likely that this issue will require close attention. We hope that it will also be considered as part of the Commission's report on the implementation of the Directive which is due to be published by the end of 2012.[24]

20. Looking further ahead, the Commission's White Paper contains a proposal to liberalise domestic passenger services. Unlike the majority of Member States, Germany, Italy and the United Kingdom already allow open access to their domestic passenger railway services. As a result the Office of Rail Regulation (ORR) suggested that this measure, once adopted and implemented, was unlikely to have as much impact on the British market as it would in other Member States.[25]

21. We support the liberalisation of international passenger rail services and believe that the Directive 2007/58/EC forms a sound basis for ensuring more services and greater competition, including through the Channel Tunnel.

Continued fragmentation of the European railway market

22. All of our witnesses were enthusiastic about the Commission's ongoing attempts to liberalise the rail market, and most were positive about the prospects for growth in the international passenger and freight rail markets. However, it was clear that many were disappointed with the lack of progress and the inconsistent implementation of the Railway Packages in different Member States, rather than the legislation itself.[26]

23. Some witnesses suggested that the European rail market was still dominated by incumbent national rail companies.[27] Ferrovie dello Stato, the Italian national rail infrastructure operator, told us that while liberalisation had taken place in the United Kingdom, Italy, Germany, Sweden and Denmark, it had not taken place elsewhere. It felt that this asymmetrical liberalisation had led to "unfair competition between those railway undertakings operating in open markets and those enjoying monopoly in their own countries".[28] Deutsche Bahn also stressed the importance of consistency, symmetry and harmonisation across the EU to market development.[29] Professor Vickerman referred to the "Balkanisation" of rail services across Europe, and the difficulties involved in achieving a "balance between competition and regulation".[30] David Briginshaw, editor of the International Rail Journal, pointed to the paradox that while "incumbent national railways generally do not welcome open access operators, particularly in France, Italy and Germany ... on the other hand they are actively looking to operate in other countries, often through joint ventures with or shareholdings in private operators".[31] The Government, who strongly support greater liberalisation, told us that "barriers to market entry throughout Europe are caused by the different and varying level of implementation of the First Railway Package across EU Member States, insufficient administrative capacity and powers vested in the regulatory bodies, the lack of technical and operational harmonisation, and the failure to provide open access to service and terminal facilities across the whole of Europe".[32]

24. This asymmetry is also described in the 2011 IBM Rail Liberalisation Report. It describes six countries as being at an "advanced" stage of liberalisation, 15 as "on schedule" and six as "delayed". The Report also suggests that, while most countries had improved since the survey was last conducted in 2007, the gap had widened between those in the former two groups.[33]

25. We regret the continued fragmentation of the European rail market. We therefore support the White Paper's call to overcome all remaining technical, administrative and legal obstacles that still impede entry to national railway markets in order to complete the internal market for rail services. This will result in a better deal for European rail passengers and freight users.

Problems with implementation: infringement proceedings and the 'Recast'

26. In 2006 the Commission decided that the implementation of the First Railway Package had been inadequate and commenced infringement proceedings against 24 Member States.[34] This included the United Kingdom and France, but did not concern their joint management of the Channel Tunnel.[35] On 24 June 2010, 13 of these Member States were referred to the Court of Justice of the European Union.[36] It is clear that there is still a long way to go before full compliance with the First Railway Package across the EU is achieved. Problems also persist with regard to the implementation of the Second Railway Package. On 16 June 2011, the Commission made a formal request to eight Member States, including the United Kingdom, to implement fully the Directive 2008/57/EC on interoperability.

27. On 17 September 2010 the Commission also adopted a draft proposal to 'Recast' the First Railway Package.[37] This sought to simplify the package by consolidating the three Directives into a single measure, as well as clarifying certain provisions in an attempt to tackle identified market problems. The Recast is still subject to negotiation in the Council and the European Parliament. We discussed the proposal to Recast the First Railway Package in a previous report, which recommended, among other things, the full separation of infrastructure managers from railway undertakings and the need for strong, independent and well resourced rail regulators.[38] When the Recast proposal was published following our report, we were pleased to note that some of its provisions go some way towards achieving these recommendations.[39]

NATIONAL REGULATORS

28. During our inquiry, concerns about the implementation of the First Railway Package were raised frequently by our witnesses. Despite the requirement under the First Railway Package to establish national regulators, many contributors suggested that this had not been achieved consistently across the EU. Professor Vickerman stated that some Member States had been "dragging their feet"; he argued that the European Railway Agency could get involved in ensuring Member States' compliance in this respect.[40] The ORR emphasised the importance of having independent regulators in place in order to foster greater competition[41] and Eurostar expressed a desire for regulators to have more "bite" in this respect.[42] In December 2010 France established an independent rail regulator—the Autorité de régulation des activités ferroviaires (ARAF)[43]—a development which was welcomed by the ORR and Network Rail.[44]

SEPARATION BETWEEN INFRASTRUCTURE MANAGERS AND RAILWAY UNDERTAKINGS

29. Other witnesses expressed concerns that the required degree of separation between infrastructure managers and railway undertakings had also not yet been achieved.[45] We understand that following the publication of their White Paper, the Commission intends to publish a further proposal on this particular topic before the end of 2012.

30. Continuing disparities between Member States' implementation of the Railway Packages create barriers to entry and discrimination. We reiterate our recommendation that the Commission should use the powers at its disposal to ensure the full implementation and enforcement of the First Railway Package, including the full separation of infrastructure managers from railway undertakings and the establishment of strong, independent and well-resourced regulators.

31. We regret that a significant number of Member States have yet to achieve these obligations, which continues to present a significant barrier to the development of the European rail market with negative consequences for consumers and railway operators.

Is greater regulation required?

32. The regulation of the rail sector is split into three: economic matters, safety/technical issues and security concerns. In the United Kingdom, the ORR is responsible for economic and safety regulation[46] and the Department for Transport is responsible for security.[47] The IGC handles the first two matters with respect to the Channel Tunnel, which is considered in more detail in the following chapter.

33. During our inquiry into the Recast of the First Railway Package, some witnesses called for an EU-level economic regulator. However, we concluded, in line with most witnesses, that such a step would be premature. Instead, we considered that cooperation between independent regulators and infrastructure managers was sufficient to mitigate the cross-border problems that were outlined. However, given that national regulators continue to be disparate, it was necessary during this inquiry to look again at the merits of having an EU-wide economic regulator, or investing greater powers in existing EU bodies such as the European Railway Agency.

INDEPENDENT REGULATORS GROUP-RAIL (IRG-RAIL)

34. The Independent Regulators Group-Rail (IRG-Rail), established on 9 June 2011, is comprised of independent regulators from 16 European countries.[48] The group aims to facilitate the creation of a single, competitive, efficient and sustainable internal railway market in Europe. It has already established a number of working groups on infrastructure charges, the regulation of international corridors and the Recast, among others, as well as initiating dialogue with other European rail organisations.[49] This development is in line with the existing requirement under Directive 2001/14/EC for cooperation between national regulators.[50] The group is firmly of the view that an EU-wide economic regulator would be "neither useful nor necessary".[51]

35. Most witnesses welcomed the establishment of IRG-Rail.[52] Alstom said that it would have a useful role to play in "sharing common issues and sharing best practice".[53] The ORR, a founder member of IRG-Rail, endorsed the group as a way of overcoming "cultural or legal differences in approach that regulatory bodies take".[54] While Theresa Villiers MP, Minister of State for Transport, also welcomed its creation, she emphasised that the Government did not want it to evolve into a "single regulator for rail matters across the EU". Such an evolution, she asserted, would raise sovereignty concerns and result in inherent practical difficulties.[55]

36. The creation of an EU-level economic regulator would be premature. Informal cooperation between regulators should be sufficient to resolve cross-border problems. We welcome the establishment of the Independent Regulators Group-Rail and urge independent regulators from the remaining Member States to join it. We encourage IRG-Rail to produce regular reports on their progress toward a Single European Railway Area.

EUROPEAN RAILWAY AGENCY (ERA)

BOX 3

European Railway Agency (ERA)

The European Railway Agency (ERA) was established in 2004 and began operating in 2006. Based in France its overall objective is to "contribute, on technical matters, to the implementation of the Community legislation aimed at improving the competitive position of the railway sector by enhancing the level of interoperability of railway systems and at developing a common approach to safety on the European railway system, in order to contribute to creating a European railway area without frontiers and guaranteeing a high level of safety".[56] Its specific roles include:

Making recommendations for secondary European legislation such as Technical Specifications for Interoperability (TSIs) or Common Safety Methods (CSM), drawn up by working parties composed of representatives of the competent authorities from the Member States and the European railway representative bodies;
Providing opinions upon matters within its competence, such as national technical or safety rules, and refusals by national safety authorities to authorise placing railway sub-systems or vehicles in service;
Acting as a neutral facilitator and coordinator to encourage understanding of common problems affecting the competitiveness of the railway sector, common understanding of priorities and consensus solutions; and
Providing technical opinions on safety related matters, if requested to do so by the national regulatory bodies referred to in Article 30 of Directive 2001/14/EC.

37. Following the establishment of the ERA in 2004, there has been substantial progress in fostering EU-wide cooperation on safety and technical harmonisation. The ORR told us that it had already established a strong relationship with the ERA and that both worked together closely in various working groups.[57]

38. Some witnesses argued that the ERA needed more powers to enhance its status[58] and others supported the status quo.[59] Deutsche Bahn supported calls for stronger powers for the ERA, including closer supervision of national regulatory authorities on homologation[60] matters. Despite this, it considered the creation of a much stronger agency to be a distant prospect.[61] Eurotunnel were relaxed about a more robust ERA; indeed, it wanted the ERA to become a "regulator of the regulators"—increasing interoperability and standardisation between Member States, including the rules which apply to the Channel Tunnel.[62] The ERA themselves appeared open-minded about assuming more powers and responsibilities in due course.[63]

39. Other witnesses were more cautious about greater powers for the ERA. High Speed 1 considered that the provision of impartial advice by the ERA when called upon, which had proved to be a beneficial arrangement, could be lost if its role became more formalised.[64] Professor Vickerman also emphasised the importance of subsidiarity and a local approach to regulation.[65] We agree. We do not condone the suggestion by Ferrovie dello Stato that, in time, national safety authorities should become "national branches" of the ERA.[66]

40. The case has not been made for the expansion of the European Railway Agency's remit or powers. The ERA should be more proactive in its approach. The Commission should ensure that the agency is resourced adequately and support its efforts to achieve greater harmonisation by enforcing the relevant safety and technical measures already in place.

12 Directive 91/440/EEC on the development of the Community's railways. Back

13 Directive 95/18/EC Back

14 Directive 95/19/EC Back

15 These measures do not apply to either Malta or Cyprus, neither of which has a railway system. Back

16 The Second Railway Package consists of Directive 2004/51/EC, Directive 2004/49/EC, Directive 2008/57/EC and Regulation 881/2004. Back

17 Under Article 16 of Directive 2004/49/EC Back

18 At which stage the proposed Third Railway Package had not yet been adopted. Back

19 European Union Committee, 4th Report of Session 2004-05: Liberalising Rail Freight Movement in the EU (HL Paper 52) Back

20 Q 7, Q 204, Alstom and Ivor Morgan Back

21 Q 91 Back

22 Q 236. This service is discussed in more detail in the following chapter. Back

23 Q 91 and Deutsche Bahn Back