Update railway law: the 4th European Railway Package and competition on European railway markets
Introduction
In our blog of 26 May 2023, we discussed some developments in the field of railway law. The focus was in particular on the then upcoming concession for the Dutch Main Railway network (in Dutch: Hoofdrailnet, “HRN concession”) in light of the 4th European Railway Package. The HRN concession for the period 2025 to 2033 has now been directly awarded to the Dutch Railways (in Dutch: Nederlandse Spoorwegen, “NS”) on 21 December 2023. In this blog, we will discuss the background and relevant legal framework of the unconditional direct award of the HRN concession. In doing so, we will also examine the European Commission’s (“Commission”) objections to the procedure by which the concession was awarded. Finally, we highlight several other recent developments regarding Dutch and European railway regulation.
4th Railway Package and the HRN concession
Central to assessing the legality of the HRN concession, and the award to NS, is the 4th Railway Package. This package consists of European law aimed at liberalising European passenger railway transport and is divided into two pillars. The technical pillar deals with the safety and interoperability of the European railway system. The market pillar deals with opening up the railway market. This pillar includes the SERA Directive (Single European Railway Area) and the PSO Regulation (Public Service Obligation), most of this legislation is implemented in the Netherlands in the Passenger Transport Act 2000 (Wp2000) and the Railway Act.
Prior to the entry into force of the 4th Railway Package, the Dutch railway network was divided into two tiers: one central and multiple (smaller) decentralised concessions. The HRN concession is the primary concession. All rail lines and services not covered by the central HRN concession are granted as decentralised concessions to (alternative) transport operators. Currently, several railway companies operate on decentralised concessions including Arriva, Connexxion, Syntus/Keolis, Qbuzz, Abellio and Eurobahn. Apart from small overlaps between the concessions, the concessionaires have an exclusive right over the relevant rail lines and services. Whereas decentralised concessions are publicly tendered, thus allowing for competition between railway companies, the HRN concession has, to date, always been awarded directly and privately to NS.
Figure 1: railway companies & concessions on the Dutch railway network
The 4th Railway Package brought change to this system. In principle, the entire railway network should be served by normal market conditions on the basis of open access. Infrastructure managers (ProRail in the Netherlands) must grant all railway companies access to their railway networks (Article 13 SERA Directive). This ensures maximum competition between railway operators. Nonetheless, the 4th Railway Package foresees that not all railway services benefit from unbridled competition. This is particularly the case where certain services are unprofitable and, therefore, provide an insufficient impetus for railway companies to operate those services. To ensure that these services, although perhaps commercially uninteresting for the operator but important for passengers, are also provided for, a Member State can designate them as a public service obligation.
Article 2(e) of the PSO Regulation explains that a ‘public service obligation’ is an obligation imposed on an operator by the relevant competent authority to provide railway services that it would not provide under normal circumstances (i.e. without compensation). A public service obligation can be granted under Article 1 Wp2000 and Article 3 PSO Regulation as an exclusive right, for example in the form of a concession. However, to promote competition even in the case of public service obligations, Article 5(6) PSO Regulation stipulates that their direct award was only possible before 24 December 2023. Public service contracts must in principle be awarded through a public tender procedure after 24 December 2024. Only under strict conditions is the direct award of a concession still allowed after that date (see articles 8 paragraph 2 sub iii and 5 paragraph 4a PSO Regulation). The HRN concession for the period 2025-2033 was awarded directly to NS on 21 December 2023 (on the basis of Article 19a and 19b Wp2000).
Infringement procedure European Commission
On 14 July 2023, the Commission sent a letter of formal notice to the Dutch government explaining that it considers the proposed HRN concession to be unlawful. The Ministry of Infrastructure and Water Management (“Ministry”) had previously received a formal warning from the Commission in relation to the HRN concession. This second letter constituted the initiation of an infringement procedure. The opening of the infringement proceedings by the Commission did not go unnoticed in Dutch politics and led to several questions from the House of Representatives. In response, the Ministry reiterated several times, such as in a letter to the House of Representatives, that it was sticking to its plan to directly award the concession to NS. Following the direct award of the HRN concession to NS on 21 December 2023, the Commission sent a supplementary letter of formal notice to the Dutch government on 13 March 2024.
In its letters of formal notice, the Commission identifies two concerns based on which it opposes the direct award. First, the Commission criticises the fact that the Ministry has already awarded the HRN concession 2025-2033 a year before its commencement, on 21 December 2023. The reason for this was that directly awarding the HRN concession would no longer be possible after 24 December 2023 without justification under strict conditions. However, the Commission sees no objective justification for this long period of time between the date of award and the date of commencement of the concession, and even considers it a circumvention of the obligation to initiate a public tender procedure.
The Commission’s second objection concerns the scope of the HRN concession. The Commission questions whether (parts of) the HRN concession actually qualify as a public service obligation. As explained above, the award of a public service contract requires the existence of a public service obligation within the meaning of Article 2(e) PSO Regulation, and must thus be limited to services that are not commercially beneficial to the concessionaire. According to the Commission, the Ministry should have conducted a market analysis to test whether parts of the HRN concession could be operated under normal commercial conditions and on the basis of open access. The fact that NS pays a tariff for the concession suggests, according to the Commission, that parts of it could be fulfilled under regular market conditions.
Interestingly, in doing so, the Commission seems to break with the ruling of the Trade and Industry Appeals Tribunal (“CBb”) of 9 February 2017. In that case, the CBb ruled that the HRN concession 2015-2025 as a whole constituted a public service obligation. The fact that part of that concession, specifically the HSL-South (high-speed rail line), could be profitable did not alter that. In the CBb’s view, Article 2(e) of the PSO Regulation does not prevent a concession from being “a mix of profitable and loss-making lines”. By contrast, in the Commission’s view, the Ministry is required to examine whether parts of that “mix” could be operated as an open access service.
For the time being, it is unknown how the Ministry responded to the second letter of formal notice, for which the deadline to respond has now expired, and if so, whether this was enough for the Commission to refrain from further pursuing the infringement procedure. If the Commission is not satisfied with the response, it may choose to send a reasoned opinion. If the Dutch government then fails to comply with the Commission’s requirements within a specified period, the Commission may refer the case to the Court of Justice of the European Union (“CJEU”). Several scenarios are conceivable should the CJEU rule in favour of the Commission. In the most drastic scenario, the HRN concession will have to be awarded through a public tender procedure after all. It is also possible that the Dutch government will have to decentralise parts of the current concession. In both cases, alternative railway operators will have the opportunity to compete for services currently provided by NS.
Scope of the HRN concession and open access services
In addition to the Commission’s objections, the scope of the HRN concession also came under scrutiny at the national level. The scope of the HRN concession is of particular importance in the context of the old Dutch system of concessions for railway operators wishing to offer train services on the Dutch railway network alongside NS. Against that background, at the time of our previous blog, it was not yet established whether the Groningen-Zwolle and Leeuwarden-Zwolle sprinter routes would become part of the 2025-2033 HRN concession. Besides NS, Arriva was also interested in running train services on those routes. In the end, the Ministry chose not to decentralise these services. State Secretary Heijnen considered that these routes are of great importance to regional travellers and that they should be protected against austerity or discontinuation of train services by commercial parties as a result of disappointing revenues. Although these routes will continue to fall under the HRN concession for the time being, the Ministry may decide halfway through the course of the HRN concession, during the mid-term review, to still decentralise these services.
The 4th Railway Package allows for a railway operator to offer train services even without a concession, and even if a concession has already been granted to another undertaking for the same route. It follows from Article 11(2) SERA Directive that the right to open access may only be limited if new (open access) services threaten the economic equilibrium of a concession. In the Netherlands, this threat primarily concerns the HRN concession, but also all decentralised concessions. Upon notification of a new service based on open access, the grantor (the Ministry), the concessionaire (NS) or the infrastructure manager (ProRail) may ask the ACM to carry out an objective analysis to examine whether the economic equilibrium of the relevant public service contract is disrupted (Article 10 Implementing Regulation 2018/1795).
In 2023 and 2024, a relatively large number of transport operators indicated their intention to use the Dutch railway network on an open access basis, especially for long-distance services within the Netherlands and internationally. For instance, Arriva has notified 26 new domestic train services and an international service between Groningen and Paris. Qbuzz has also notified new (international) train services, for example between Amsterdam and Berlin. In addition to these transport operators already operating in the Netherlands, Flixtrain has notified a new service between Rotterdam and Oberhausen, and new entrants Heuro and Flywise plan to offer international train services.
In response to each of these notifications, the Ministry and NS requested the ACM to conduct an economic equilibrium test (“EET”). The ACM declared those requests inadmissible in all cases. The ACM’s position is that it can only conduct an EET in respect of an existing public service contract (section 19a(2) Wp200), while the HRN concession 2025-2033 had not yet been granted at the time of the notifications. As an exception to that rule, the ACM can conduct an EET when a competitive tender procedure is initiated (Article 5(2) Implementing Regulation 2018/1795). However, as no competitive tender procedure has been carried out for the award of the upcoming HRN concession, this exception is not applicable. Without an EET, the ACM cannot prohibit the train services of alternative operators.
Competition in the European railway market
The 4th Railway Package is (also) stimulating increased competition on railway networks throughout the rest of Europe. Thanks to liberalisation of the European railway network, previously nationalised, incumbent railway operators are facing increasing competition from alternative operators on an open access basis.
Most developments are taking place in the area of European high-speed routes. The increase in competition among high-speed train service providers is partly driven by a growing desire among consumers to travel more environmentally conscious. Train travel is more likely to be seen as an alternative to low-cost flights than it was 20 years ago. In response, national railway operators Renfe (Spain), Trenitalia (Italy) and SNCF (France) are expanding their open-access high-speed services to neighbouring countries. In addition, several new high-speed service providers have become operational on the basis of open access, such as Nuovo Trasporto Viaggiatori in Italy and Iryo in Spain. To date, Eurostar has had a monopoly on the high-speed route connecting the UK to continental Europe via the Channel Tunnel, but this may change in the future. Several established railway operators as well as start-ups Evolyn and Dutch firm Heuro have announced plans to offer services between London, Amsterdam and Paris.
In contrast to the trend of international expansion by French, Spanish and Italian national railway operators, NS and Deutsche Bahn (“DB”) have in fact divested their foreign operations in recent years. DB received Commission approval for the sale of Arriva to I Squared Capital on 5 January 2024. In the Netherlands, the Ministry of Finance publicly announced on 23 April 2024 that NS will sell its subsidiary Abellio Germany to BeNEX. The primary consideration is that Abellio Germany plays no role in cross-border railway transport or international services between the Netherlands and Germany. For this reason, the subsidiary provides insufficient added value for Dutch travellers. Combined with the fact that Abellio Germany is loss-making, the Ministry of Finance, in its capacity as shareholder, approved the sale.
Are your business operations affected by developments regarding the HRN concession? Are you coming into contact with the ACM in a regulatory matter or dispute? Or are you curious about the impact of new regulations? If so, contact one of our specialists.