CMA wants to put on-rail competition back on track

Competition for rail passenger services in Great Britain basically takes two forms: The main one (at the moment) is of the ‘for’ the market type, where the competition is between rival bidders to secure a particular passenger franchise; the other form is called ‘in’ market competition, where it is between rival train operators. The first form of competition is called indirect; the latter is direct.

‘In’ market competition covers not only services provided by open access operators (OAOs), but also those between passenger franchise operators (also known as train operating companies (TOCs). Two (or more) TOCs may compete for custom on routes which are jointly shared (on ‘overlapping’ franchises), or between two places linked by different routes (on ‘parallel’ franchises).

The Competition & Markets Authority (CMA) – which has a statutory duty to promote competition – is very keen to promote competition of the ‘in’ market, or on-rail type.  It has invited passenger train operators (and other interested parties) to respond to its latest consultation document and report back by 16 October.

The CMA has selected four options for possible reform:

(1) To keep the existing franchising structure but introducing more OAO operations;

(2) To create two franchisees for each franchise;

(3) To have more ‘overlapping’ franchises; or,

(4) To license multiple operators, subject to certain conditions (i.e. public service obligations).

No changes to the existing system are likely to take place before 2023 at the earliest (until existing franchising agreements expire), and the three main lines – the ECML, WCML and GWML – are likely to be the main candidates.

The CMA is not the only public body keen to promote on-rail competition. In July 2013, an ORR document maintained:

“There is an opportunity for there to be much greater on-rail competition in the future, if governments desire it. The addition of (new) network capacity, including HS2, and the introduction of new signalling technology that allows much more dense use of network capacity, will open up new route paths that allow greater on-rail competition between operators.”

Full bloodied on-rail competition was the original intention of privatisation (in 1993) but was thwarted, mainly by practical considerations (to prevent abstraction of revenue from the franchised operators). Franchising was seen originally as an interim measure to get things moving, not as a permanent feature.

OAO operations were initially hampered by moderation of competition (MOC) rules that prevented Network Rail from granting track access agreements to potential competitors. These were later relaxed when the ORR introduced the net primary abstraction test (NPA), requiring OAOs to generate 30p of new traffic for every £1 abstracted from existing operators.

Currently, two OAO operators (First Hull Trains and Grand Central) operate on three routes, all on the ECML. There have been no new OAO entrants for five years, but three cases are pending. OAOs currently account for less than 1% of all passenger rail miles, and along with freight operators (FOCs) only pay variable track access charges, whereas TOCS pay fixed track access charges as well.

Open access operator Grand Central currently operates two services on the ECML. A train for Kings Cross leaves Bradford Interchange.
Open access operator Grand Central currently operates two services on the ECML. A  Kings Cross bound train  leaves Bradford Interchange.

The CMA says the OAOs have pushed down fares, introduced innovations and improved efficiency. Citing a 2011 ORR report, CMA maintains OAO costs are between 10% and 30% lower than comparable TOC costs for a given density of operation.

CMA lists 34 separate corridors where competition exists between rival TOCs on ‘overlapping’ and ‘parallel’ franchises. In eight corridors, three TOCs are competing for traffic. However, competition is largely confined to price as service quality, timetable provision and innovation is largely governed by the franchise specification.

The CMA notes: “We consider the current degree of specification in some franchise agreements significantly restricts the ability of TOCs to manage their businesses commercially. Reducing the level of specification would be particularly important alongside the implementation of options to increase competition in the market.”

677/Jul 15

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