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Fares increases: can Passenger Focus appeal?

This article appeared in Viewpoint: Franck on 1 June 2007.

I speculated a few weeks ago about the reception that Passenger Focus' complaint about alleged excessive fares increases by South West Trains might get at ORR: see South West Trains fares increases | viewpoint: Franck.

My view was that, in this case, given the structure of the industry and its public financing, ORR would probably be justified to refuse to consider the complaint on the grounds that fares were legitimately affected by a Government objective to minimise subsidy. Whilst South West Trains itself does not receive direct Government funding, subsidy to the railway occurs through other routes, including directly to Network Rail. The Government's way of minimising the net amount of support is to use franchise contracts with large premium payments which push operators to squeeze all possible revenues from passengers, including by increasing unregulated off-peak fares where the opportunity presents itself. My view was that Article 86(2) and equivalent provisions in the Competition Act 1998 mean that the subsidy-minimisation objective justifies fares increases that might otherwise have been abusive.

ORR acted with very creditable speed on this matter: only three weeks from the Passenger Focus complaint to an ORR decision notice.

ORR confirmed my initial feeling that no action would be taken, but for different reasons than the ones that I speculated about.

The details of the reasons might not seem to matter much to passengers who are now paying the higher fares, but they could be crucial to the prospects of an appeal against ORR's decision. And Passenger Focus reacted to ORR's announcement as follows:

Commenting on the Office of Rail Regulation's decision, Anthony Smith, Passenger Focus chief executive said; "What this ruling seems to imply is that off peak passengers are left totally unprotected against unreasonable fare rises. Unless you are using tickets that are protected by fares regulation, such as savers or season tickets, or happen to have a service provided by a competing train company it seems that competition law will not protect you." Mr Smith continued; "We think substantial numbers of off peak passengers will have no choice but to pay the new fares — the assertion by the Office of Rail Regulation that people have a choice simply does not ring true. We will challenge this ruling in an attempt to give off peak passengers some protection against massive price rises."

This article discusses the prospects for such a challenge.

Challenge through the Department for Transport

Passenger Focus could simply accept ORR's view that fares policy is a matter for the Department for Transport, and/or my argument that Article 86(2) (and its equivalent in Schedule 3 of the Competition Act 1998) may place an insurmountable barrier to a claim of abuse of a dominant position, and bring its challenge to the Government.

If so, it will presumably make representations to DfT about the passenger interest in relation to off-peak fares and argue for those fares to be brought within the scope of DfT fares regulation.

This would not be so much of a challenge to ORR's decision — more a way of bypassing it.

Whether it succeeds is more to do with politics than law or economics. Whilst I would not nail my colours to any particular forecast about the identity or fares policy of the Secretary of State for Transport in the next few months, it seems somewhat unlikely that there will be a complete change of policy from the well established rule that off-peak fares can be adjusted for revenue maximisation purposes.

In the case of South West Trains, regulating off-peak fares would also seem likely to involve a substantial renegotiation of financial terms in a newly awarded franchise with many years to run — not the most appealing of prospects for whoever would be in charge of it at DfT rail.

Challenge through the Competition Appeal Tribunal: admissibility

Assuming that the DfT route leads nowhere, Passenger Focus might consider its options for an appeal against ORR's decision to the tribunal specifically set up to hear appeals against Competition Act 1998 decisions, the Competition Appeal Tribunal.

Doing so will involve, as a preliminary step, establishing that ORR made an appealable decision, and the exact scope of that decision. This is necessary to establish admissibility of the appeal, as the Tribunal can only hear cases to the extent that its has explicit jurisdiction under the Competition Act 1998 (as amended, in particular by the Enterprise Act 2002).

There is a reasonably substantial body of case law from the Tribunal about admissibility. From these past cases, it seems fairly clear to me that ORR made an appealable decision by publishing its 30 May 2007 notice, but that the scope of the appealable decision does not extend to the totality of that notice and the 2006 briefing note that it incorporates by reference.

What I see as not being appealable to the CAT are the 2006 briefing note, the background material, and the following words from the 30 May 2007 notice:

Just because a ticket price is raised significantly does not mean that it is 'excessive' and an abuse under competition law.

These are general comments which cannot be linked to any specific conduct, and ORR has been careful to state that it will “assess each complaint on its individual merits”. On the same basis as in Aquavitae v Ofwat, none of this seems to be open to appeal at the Competition Appeal Tribunal.

The only possible challenge to this part of the decision would seem to be to the Administrative court for unreasonableness; and I do not see any way in which the views expressed by ORR in the above can be construed as views that could not have been reached by a reasonable competition authority.

What I see as disclosing an appealable decision by ORR are the following words:

Our first step is to decide whether there is enough evidence for a case to be sufficiently promising to justify opening an investigation, having regard to the high burden of proof required to demonstrate that a fare is 'excessive' for the purposes of competition law. However, we have not had sufficient information supplied to us to date to support opening an investigation. ... The saver off-peak fare offered by South West Trains, for example, although showing a significant increase for travel into London before noon, is still well below the regulated commuter fare which itself has shown an annual fare rise of less than inflation since 1995. On this basis, given competition law on conduct related to pricing, we do not consider that there is evidence to suggest that the new prices are 'excessive' and we do not therefore think it is appropriate to open an investigation.

This is, in my view, an appealable non-infringement decision because it amounts to saying that ORR has looked at the evidence up to the point where it concluded that it could not support a finding of infringement. This is similar to the Competition Appeal Tribunal's rulings on admissibility in a series of cases (Bettercare, Freeserve, Claymore) summarised in the Pernod judgment.

ORR's decision can be contrasted with cases in which the authority just decided on "administrative priority" grounds to close its eyes to the evidence available to support an allegation of infringement, as the OFT did in the Cityhook and Casting Book cases (because of a perceived lack of impact on final consumers), or as Ofwat did in the Independent Water Company case (because of a parallel regulatory process under the Water Industry Act 1991).

Put it another way: in Cityhook, Casting Book or Independent Water, if the competition authority got it wrong, it was due to an unwillingness to put the time and effort in to consider the possibility of infringement. Parliament has decided not to give the Competition Appeal Tribunal jurisdiction over the competition authorities' priorities. But here, as in cases like Pernod, if ORR has got it wrong, it would be, according to the reasons stated in ORR's notice, because of an error in finding the relevant law or in applying it to the available evidence. The Competition Appeal Tribunal exists to hear claims about these types of alleged errors.

I assume that Passenger Focus, as the official passenger representative body, has sufficient standing to bring a case. On that basis, it seems to me that it could get past the admissibility hurdle.

Challenge through the Competition Appeal Tribunal: substance

If Passenger Focus brings an appeal to ORR's 30 May 2007 decision in the Competition Appeal Tribunal and passes the hurdles outlined above, then what happens next depends on how the claim is formulated.

If Passenger Focus merely asks the Tribunal to quash the decision on the grounds of insufficient reasoning, then the question is whether ORR can justify its reasoning as expressed in the words above.

I for one do not understand the reasoning by which ORR established a link between the ratio of peak to off-peak fares, the increase in peak fares relative to the RPI over a period of 12 years, and the United Brands concept of prices that are “a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition”, or “excessive in relation to the economic value of the product supplied”.

It is of course possible that the evidence supplied by Passenger Focus was so unsatisfactory that ORR was justified in finding no grounds for investigation in it. This would probably dispose of the case, because I would have thought that it was reasonable for ORR not to spend too much time trying to repair deficiencies in evidence supplied by the official passenger representative body.

But if Passenger Focus has done a competent job of alleging all the components of an exploitative abuse and providing relevant factual information about the circumstances, then I am not sure how a case for quashing the decision on the grounds of insufficient reasoning could be resisted by ORR.

There is a risk that quashing the decision on those grounds could force ORR into a painstakingly detailed investigation of dominance, cost allocation and so on. This would be a waste of everyone's time if I am right to think that Article 86(2) disposes of the case.

But surely this risk would not materialise in reality: the Tribunal, if it quashes the decision, would presumably order ORR to reinvestigate the matter and highlight in its judgment the need for early consideration of Article 86(2) in this re-investigation to avoid wasting time and money on work on dominance or cost analysis that might prove unnecessary.

Passenger Focus might nevertheless be wary of the delays associated with a remittal to ORR, and seek a decision on the case from the Tribunal to replace ORR's decision. There is no doubt that the Tribunal could, if the evidence supported it, make an infringement decision: see for example the Burgess case.

It is also clear since the Floe case that the Tribunal can make use of ORR's investigatory capabilities to collect evidence, and then make its own decision. This would mean that questions such as the meaning and application of Article 86(2) in the context of passenger rail franchises would be determined by the Tribunal after full adversarial argument.

Speaking as an observer, I think that this would be the best way of clarifying this difficult and interesting part of competition law. The judgment from that case, if it were to happen, would be a most welcome replacement for OFT's current (and deficient) guidance on Article 86(2).

But I am not holding my breath.


Article added to Viewpoint: Franck by Franck Latrémolière on 1 June 2007. Full list of articles.

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Last changed by Franck at 5:20 PM on Saturday 23 June 2007.

Reference for this page:
Reckon Open "Fares increases: can Passenger Focus appeal? | viewpoint: Franck" 2007-06-23T17:20:43