The Italian Competition Authority closes proceedings for abuse of dominance in the rail sector by accepting commitments from the incumbent operator
Introduction
With a decision adopted on 13 November 2008 the Italian Competition Authority (AGCM) has closed proceedings against Ferrovie dello Stato (FS) and Rete Ferroviaria Italiana (RFI) for abuse of dominant position in the market for railway transport by the approval of a set of behavioural commitments offered by the FS and RFI to resolve the competition concerns raised by the AGCM (Autorità Garante della Concorrenza e del Mercato, 13 November 2008, Case A389 - Rail Traction Company/Rete Ferroviaria italiana-Ferrovie dello stato, Provvedimento n° 17327, Chiusura istruttoria; Bollettino n° 43/2008).The abusive conduct complained of consists in the non-application of the so-called K-2 discount, which, under some circumstances, railway undertakings are entitled to on the charge access to the rail network.
The factual and regulatory background
In order to modernize the ageing Italian rail network, the installation of a new signalling system (SCMT) has been decided. This system consists of two components, one to be placed on the track by RFI, the manager of the rail network, and one to be fitted to locomotives. RFI has also to adopt a set of technical rules in order to allow single driver-trains. The Ministry of Transport laid down that the installation of the trackline equipment must be completed by December 2007, while rail operators have to fit the onboard equipment by June 2008.
The Ministry of Transport with decree n° 44/T of 22 March 2000 introduced the K2 discount as a provisory measure to compensate rail operators for the higher costs they incur in for having to operate trains with two drivers due to the obsolete technological conditions of the network. The discount is granted by RFI, through public funding and upon transparent and non-discriminatory terms, on the charges paid by rail operators for access to the routes of the network over which the operation of trains with one driver is prohibited because of regulatory restraints.
With resolutions adopted in 2004 and 2005 RFI communicated to the rail operators concerned that it would have no longer applied the K2 discounts with regard to the routes over which the SCMT was already in place. The RFI, with the support of the decree of July 2007 of the Ministry of Transport, declared that the only relevant factor for the application of the K2 discount was the obsolete technological conditions of the network. With the modernization of the network, achieved through the installation of the trackside equipment of the SCMT, rail operators had no right to the K2 discount, irrespective of whether they have provided locomotives with the onboard equipment and they so able to operate trains with only one driver. Finally, the Government made available public funding only for the application of the discount to the years 2004-2005.
The RFI decisions have been opposed by Rail Traction Company (RTC) Nord Cargo and Railion Italia. They claimed that a rail operator was entitled to the discount until when the SCMT enabled it to operate single driver- trains. Such a condition was met when RFI published the technical regulation for single driver-trains, which it did only in December 2006, and the trainborne equipment was installed. That was confirmed by the sector regulatory body (Ufficio per la Regolamentazione dei Servizi Ferroviari), which found the refusal of RFI to apply the discount unlawful.
Therefore RTC, Nord Cargo and Railion Italia refused to pay the whole access charge, by detracting from the above sum the amount correspondent to the non-applied discount. Then in August 2007 RFI, upon the basis of decree of the Ministry of Transport of July 2007, asked the rail operators to pay the whole amount of track charges for the period 2004-2006 or it would terminate the access contract.
The preliminary analysis of the AGCM
The contested conducts affect the market for the access to the rail network in which RFI has a dominant position, having a legal monopoly for the management of the network and being entrusted with some important tasks as for the safety of the network. These conducts may have anticompetitive effects in the downstream market for the supply of rail traction services, which comprehends both the supply of locomotives and qualified drivers. In this market Trenitalia, controlled by FS, which also controls RFI, is the dominant operator with a 90% market share.
Apparently, FS and RFI, have as a strategic objective to hamper the entry of new operators in the market for the supply of rail traction for freight transport competing with Trenitalia. Namely, the RFI decisions to withdraw the K2 discount for the routes over which the trackside equipment of the SCMT has been installed and to require the payment of all the sums due for charge access for the years 2004-2006 seems instrumental in pursuing this objective.
Indeed, these conducts have as effect to raise new operators’ costs since the K2 discount is proportionally more important for the latter, due to their small size, than for the incumbent Trenitalia. Being unable to rely on the discount, new train operators may not have enough financial resources to fit their fleets with the trainborne equipment of the SCMT. Thus, the AGCM sees the alleged abusive conducts as an attempt of FS to impede new train operators from taking fully benefit from the completion of the modernization programme of the rail network and operate single driver-trains. Thanks to their more flexible industrial organization, new rail operators will find it more easily to profitably operate trains with one driver than Trenitalia.
Therefore, the AGCM decides to open formal investigation, upon the basis of Article 14 of Act no. 287/1990 against FS and RFI. The conducts will be assessed against Article 82 EC, since they may impede or hamper the entry in the market of rail operators based in another Member states.
The AGCM decision
The investigation was closed in November 2008 when the AGCM accepted and rendered binding a set of behavioural commitments proposed by FS on the basis of the Article 14-ter of the Act 287/90. First, FS gives to rail operators entitled to the K2 for the period 2004-2007 the choice between two options, to be decided within 30 days starting from 13 November when the AGCM took the now commented decision:
• a lump sum of € 5,7 million, the payment of which is conditional to drop cases against RFI with relation to K2 rail operators have commenced (option 1); or
• free technical assistance and engineering services RFI will provide in order to obtain type approval of “best of class” rolling stock to be used with a single engine-driver; in addition RFI will pay any penalty for which the rail operators may be liable as a result of breaking contracts with other providers of services similar to those to be provided by RFI and will also reimburse any amounts already paid for services under such contracts. The overall value of the supply and reimbursement undertaken by RFI is up to of € 5 million and rail operators opting for that will not be required to drop cases (Option 2).
Second, regardless of which of the two options rail operators choose, FS also commits to sell to interested rail operator a sufficient number of its on-order SSB devices to fit up to 210 locomotives with the SCMT and to provide them with technical standards to purchase car kit equipments as a temporary solution towards the installation of the SCMT. Third, FS commits to amend the termination clauses of access contracts with the view to ensure that the decision to terminate such contracts may be more transparent and less arbitrary.
Comment
In line with the AGCM latest practice, also the RTC/RFI-FS case has been settled by means of a commitment decisions. With its 13 month length RTC/RFI-FS slightly exceeds the average 10 month length of commitment procedure before the AGCM. FS asked twice for an extension of the time limit of the procedure and also amended the originally offered commitments to meet the concerns of the AGCM and competitors. This was due to the difficulty to shape a set of commitments compliant with the principle of proportionality and suitable to address the competition problems caused by the costs new operators have to bear to equip their locomotives with SCMT in order to be able to operate single-driver engine trains.
To resolve such problems, FS offered commitments in the form of an alternative obligation. To the train operators concerned it promised either the payment of a lump sum or the supply/reimbursement of engineering services. The AGCM has positively evaluated such undertakings given that the payment of a lump sum may set off the costs incurred by new operators for fitting their locomotives with SSB; while the supply/reimbursement of engineering services allows rail operator to have the different class of locomotives they own compliant with RFI technical regulation. The obligation of FS to make available a number of SSB devices it had previously ordered may also facilitate the transition to a single-driver engine operational mode.
One last interesting point regards the scope of application of the FS commitments. These are not limited to the complainants but are also open to every interested rail operator as reflected by the classes of rolling stocks FS is ready install the SSB on. These also include diesel and electric motive units for passenger services. So, train passenger operators can take the opportunity given by FS commitments and make their rolling stocks fit for single-driver engine operations over the RFI rails. Thus they will be able to compete more effectively in the soon-to- be-liberalized rail passenger transport market.
With a decision adopted on 13 November 2008 the Italian Competition Authority (AGCM) has closed proceedings against Ferrovie dello Stato (FS) and Rete Ferroviaria Italiana (RFI) for abuse of dominant position in the market for railway transport by the approval of a set of behavioural commitments offered by the FS and RFI to resolve the competition concerns raised by the AGCM (Autorità Garante della Concorrenza e del Mercato, 13 November 2008, Case A389 - Rail Traction Company/Rete Ferroviaria italiana-Ferrovie dello stato, Provvedimento n° 17327, Chiusura istruttoria; Bollettino n° 43/2008).The abusive conduct complained of consists in the non-application of the so-called K-2 discount, which, under some circumstances, railway undertakings are entitled to on the charge access to the rail network.
The factual and regulatory background
In order to modernize the ageing Italian rail network, the installation of a new signalling system (SCMT) has been decided. This system consists of two components, one to be placed on the track by RFI, the manager of the rail network, and one to be fitted to locomotives. RFI has also to adopt a set of technical rules in order to allow single driver-trains. The Ministry of Transport laid down that the installation of the trackline equipment must be completed by December 2007, while rail operators have to fit the onboard equipment by June 2008.
The Ministry of Transport with decree n° 44/T of 22 March 2000 introduced the K2 discount as a provisory measure to compensate rail operators for the higher costs they incur in for having to operate trains with two drivers due to the obsolete technological conditions of the network. The discount is granted by RFI, through public funding and upon transparent and non-discriminatory terms, on the charges paid by rail operators for access to the routes of the network over which the operation of trains with one driver is prohibited because of regulatory restraints.
With resolutions adopted in 2004 and 2005 RFI communicated to the rail operators concerned that it would have no longer applied the K2 discounts with regard to the routes over which the SCMT was already in place. The RFI, with the support of the decree of July 2007 of the Ministry of Transport, declared that the only relevant factor for the application of the K2 discount was the obsolete technological conditions of the network. With the modernization of the network, achieved through the installation of the trackside equipment of the SCMT, rail operators had no right to the K2 discount, irrespective of whether they have provided locomotives with the onboard equipment and they so able to operate trains with only one driver. Finally, the Government made available public funding only for the application of the discount to the years 2004-2005.
The RFI decisions have been opposed by Rail Traction Company (RTC) Nord Cargo and Railion Italia. They claimed that a rail operator was entitled to the discount until when the SCMT enabled it to operate single driver- trains. Such a condition was met when RFI published the technical regulation for single driver-trains, which it did only in December 2006, and the trainborne equipment was installed. That was confirmed by the sector regulatory body (Ufficio per la Regolamentazione dei Servizi Ferroviari), which found the refusal of RFI to apply the discount unlawful.
Therefore RTC, Nord Cargo and Railion Italia refused to pay the whole access charge, by detracting from the above sum the amount correspondent to the non-applied discount. Then in August 2007 RFI, upon the basis of decree of the Ministry of Transport of July 2007, asked the rail operators to pay the whole amount of track charges for the period 2004-2006 or it would terminate the access contract.
The preliminary analysis of the AGCM
The contested conducts affect the market for the access to the rail network in which RFI has a dominant position, having a legal monopoly for the management of the network and being entrusted with some important tasks as for the safety of the network. These conducts may have anticompetitive effects in the downstream market for the supply of rail traction services, which comprehends both the supply of locomotives and qualified drivers. In this market Trenitalia, controlled by FS, which also controls RFI, is the dominant operator with a 90% market share.
Apparently, FS and RFI, have as a strategic objective to hamper the entry of new operators in the market for the supply of rail traction for freight transport competing with Trenitalia. Namely, the RFI decisions to withdraw the K2 discount for the routes over which the trackside equipment of the SCMT has been installed and to require the payment of all the sums due for charge access for the years 2004-2006 seems instrumental in pursuing this objective.
Indeed, these conducts have as effect to raise new operators’ costs since the K2 discount is proportionally more important for the latter, due to their small size, than for the incumbent Trenitalia. Being unable to rely on the discount, new train operators may not have enough financial resources to fit their fleets with the trainborne equipment of the SCMT. Thus, the AGCM sees the alleged abusive conducts as an attempt of FS to impede new train operators from taking fully benefit from the completion of the modernization programme of the rail network and operate single driver-trains. Thanks to their more flexible industrial organization, new rail operators will find it more easily to profitably operate trains with one driver than Trenitalia.
Therefore, the AGCM decides to open formal investigation, upon the basis of Article 14 of Act no. 287/1990 against FS and RFI. The conducts will be assessed against Article 82 EC, since they may impede or hamper the entry in the market of rail operators based in another Member states.
The AGCM decision
The investigation was closed in November 2008 when the AGCM accepted and rendered binding a set of behavioural commitments proposed by FS on the basis of the Article 14-ter of the Act 287/90. First, FS gives to rail operators entitled to the K2 for the period 2004-2007 the choice between two options, to be decided within 30 days starting from 13 November when the AGCM took the now commented decision:
• a lump sum of € 5,7 million, the payment of which is conditional to drop cases against RFI with relation to K2 rail operators have commenced (option 1); or
• free technical assistance and engineering services RFI will provide in order to obtain type approval of “best of class” rolling stock to be used with a single engine-driver; in addition RFI will pay any penalty for which the rail operators may be liable as a result of breaking contracts with other providers of services similar to those to be provided by RFI and will also reimburse any amounts already paid for services under such contracts. The overall value of the supply and reimbursement undertaken by RFI is up to of € 5 million and rail operators opting for that will not be required to drop cases (Option 2).
Second, regardless of which of the two options rail operators choose, FS also commits to sell to interested rail operator a sufficient number of its on-order SSB devices to fit up to 210 locomotives with the SCMT and to provide them with technical standards to purchase car kit equipments as a temporary solution towards the installation of the SCMT. Third, FS commits to amend the termination clauses of access contracts with the view to ensure that the decision to terminate such contracts may be more transparent and less arbitrary.
Comment
In line with the AGCM latest practice, also the RTC/RFI-FS case has been settled by means of a commitment decisions. With its 13 month length RTC/RFI-FS slightly exceeds the average 10 month length of commitment procedure before the AGCM. FS asked twice for an extension of the time limit of the procedure and also amended the originally offered commitments to meet the concerns of the AGCM and competitors. This was due to the difficulty to shape a set of commitments compliant with the principle of proportionality and suitable to address the competition problems caused by the costs new operators have to bear to equip their locomotives with SCMT in order to be able to operate single-driver engine trains.
To resolve such problems, FS offered commitments in the form of an alternative obligation. To the train operators concerned it promised either the payment of a lump sum or the supply/reimbursement of engineering services. The AGCM has positively evaluated such undertakings given that the payment of a lump sum may set off the costs incurred by new operators for fitting their locomotives with SSB; while the supply/reimbursement of engineering services allows rail operator to have the different class of locomotives they own compliant with RFI technical regulation. The obligation of FS to make available a number of SSB devices it had previously ordered may also facilitate the transition to a single-driver engine operational mode.
One last interesting point regards the scope of application of the FS commitments. These are not limited to the complainants but are also open to every interested rail operator as reflected by the classes of rolling stocks FS is ready install the SSB on. These also include diesel and electric motive units for passenger services. So, train passenger operators can take the opportunity given by FS commitments and make their rolling stocks fit for single-driver engine operations over the RFI rails. Thus they will be able to compete more effectively in the soon-to- be-liberalized rail passenger transport market.
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