New EU Inspections to Introduce Competition in the Rail Sector

August 19, 2016

The European Commission’s Competition Commissioner, Margrethe Vestager, has recently announced that she is pursuing a clear strategy of removing anti-competitive practices in the European rail sector under the Treaty on the Functioning of the European Union (TFEU). To this end, the Commission has conducted on-the-spot raids on European rail sector operators on at least four occasions.

The first so-called "dawn raid" in the rail sector was carried out in 2015 in Austria while, on 28 June 2016, the Commission conducted no less than three dawn raids in Slovakia, the Czech Republic and Austria respectively. The raids have sought to identify cartels, restrictive business practices and the abuse of dominant market positions under Articles 101 and 102 TFEU. Both electronic equipment and mobile phones of company employees were inspected. Although the raids have thus far been focused on commercial practices in the passenger sector, there is no doubt that the freight sector – which was liberalized as long ago as 2007 –  is also a target.

• Austrian rail passenger operator (OBB)

  In November 2015, the Commission carried out a dawn raid on rail passenger operator OBB to investigate alleged anticompetitive practices aimed at excluding competing rail passenger transport operators from the market.

• Rail operators in Austria (OBB), Slovakia (Železničná spoločnosť) and Czech Republic (České dráhy)

  On 28 June 2016, the Commission raided rail operators in Austria, Slovakia and the Czech Republic. The probes involved, amongst others, suspicions about the refusal to sell used (but good quality) rolling stock units which may be used by competitors to carry out a competing business, other access issues (such as ticketing arrangements) as well as pricing strategies.

Under the procedures set forth under EU competition rules, the Commission may inspect companies unannounced as a preliminary step in its investigations into suspected anti-competitive practices. The inspections do not imply that the companies are by definition guilty of anti-competitive behaviour; dawn raids are only a preliminary step in an investigation and in no way prejudge the outcome of a case.  However, the Commission generally carries out rather few dawn raids (on average two to three annually). Four dawn raids conducted within six months in the same sector is thus not only highly unusual but bears witness to the Commission’s ambition of targeting anti-competitive practices in the rail sector.

There is no legal deadline restraining the Commission in its inquiries into anti-competitive conduct, with actions normally depending on a range of factors including the complexity of each case, the extent to which the companies concerned co-operate and the exercise of the rights of defence. However, Commissioner Vestager has a vested interest in completing a number of the rail cases before the end of her term in 2019 in order to be able to demonstrate that her rail liberalization strategy has been a success.

Although illegal State aid under Article 107 TFEU (i.e., illegal subsidies) has not been the object of the dawn raids carried out thus far, it is also covered under Commissioner Vestager’s overall rail sector strategy. Under the State aid procedural rules, the Commission is entitled to inspect companies (most often, the alleged beneficiary of subsidies) in order to uncover any public funding practices, which might violate State aids rules. The concept of State aid includes direct grants, but also tax exemptions, capital injections and other indirect economic advantages. The rail sector, which is still characterised by traditional monopolistic structures that are largely dependent on subsidies, is particularly at risk of infringing State aid rules. 

Despite the adoption of four regulatory rail liberalisation packages (the most recent of which dates back to 2013)[1], the ownership of rail undertakings still remains largely in the hands of the traditional monopolies which do not have any incentive to modernize these operations nor to give competitors access to the market.

While there are clearly competition problems at the infrastructure level, it is still an open question whether the State aid rules apply to such infrastructure. Several cases on this issue are pending before the European Courts (e.g., Case T-630/15 – Scandlines Danmark and Scandlines Deutschland v Commission), but there is no doubt that the Commission is under mounting political pressure not to extend the competition rules to infrastructure.[2]

Most recently, the Commission has issued guidelines on the Notion of Aid (adopted on 19 May 2016)[3] which explain which measures may be considered to involve the grant of subsidies under Article 107 TFEU. In these guidelines, the Commission devotes significant resources in explaining why infrastructure should fall outside the scope of the State aid rules and, as a consequence, also outside the antitrust rules. 

While the Commission’s approach may be understandable as the subject is politically sensitive, all traditional monopolies in other sectors have faced a similarly challenging situation when competition was introduced into many sectors during the 1990s (e.g., telecommunications infrastructure, energy infrastructure, and aviation infrastructure). Today, those sectors are characterized by high levels of competition which have brought growth and prosperity in Europe.   

While the rail sector has thus far not been excluded from the application of competition rules, most cases have focused on procedural aspects or accounting practices rather than on the core issue of network access by new competitors.[4] One reason for this is that competitors generally are wary of bringing a complaint against an incumbent operator which in many cases controls the national infrastructure and can retaliate in obscure and opaque ways. With Commissioner Vestager’s new strategy, there is no doubt that new entrants willing to compete and take up the contentious issues with DG Competition of the Commission will be seen in an even more positive light.

   [1]   European Commission press release dated 30 January 2013 available at: http://europa.eu/rapid/press-release_IP-13-65_en.htm and fourth railway package available athttp://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013DC0025&from=EN.

   [2]   See also Case T-631/15 Stena Line Scandinavia v Commission, and Case T-68/15 Scandlines Øresund I/S and Others v European Commission.

   [3]   European Commission press release available at http://europa.eu/rapid/press-release_IP-16-1782_en.htm Guidance on the notion of State aid published on 19 May 2016, available athttp://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52016XC0719(05)&from=EN.

   [4]   See for example Commission Decision 2011/3/EU of 24 February 2010 concerning public transport service contracts between the Danish Ministry of Transport and Danske Statsbaner (Case C 41/08 (ex NN 35/08)) appealed in case C 303/13 of 6 October 2015, European Commission v Jørgen Andersen. The Deutsche Bahn case (Judgment of the Court of 18 June 2015, Case C-583/13 P Deutsche Bahn AG and Others v. European Commission, not yet published), concerning the grant of preferential rebates is one of the few cases which focused on the position of competitor