Fourth Railway Regulation Package

The Fourth Railway Regulation Package
Economics of Regulation Csaba Gbor Pogonyi
Outline
Introduction to rail passenger industry What do we want? What is the Fourth Railway Package about?
Discussion of its proposed solutions Possible problems with the solutions
Conclusion
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Economics of Regulation
Introduction
2011: Transport White Paper: vision for a Single European Railway Area (SERA)
Enhance to role of rail Efficient and attractive services + eliminate regulatory and market failures (barriers to entry, administrative burdens)
Last years: public sector investments nearly doubled in six years

rail demand increased only moderately (around 10% modal share) a regulatory failure?
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The Actors
Government Competent Authority (CA) Infrastructure Manager (IM)
Railway Undertakers (RU)

The Actors
Government Competent Authority (CA) Infrastructure Manager (IM)
Railway Undertaker (RU)

Where Do We Stand?
Former regulation:
progressive market opening Since 2000: 3 packages:
progress!
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Where are we going?

EU: every MSs system is designed to be a single country level network.
Efficiency of infrastructure = intensive use
Infrastructure is likely stay to be a state-owned

otherwise: too high prices for the usage of infrastructure inefficiency
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Where are we going?

Existing EU legislation:
separation between IM (Infrastructure Manager) and RU (Railway Undertaker)
IM should ensure fair and equal treatment of all RUs

Full independence of the IM: key to ensure equal access in charging and capacity allocation
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Where are we going?

RUs should compete!
Downstream market is not a natural monopoly
2 ways of price bidding:

Franchise bidding: 1 line 1 RU (continental)
Works with not too asymmetric firms... Incentices for cost-reducting investments (gets all )
Licence auction: 1 line several RUs (UK)
Quality bidding: Requiring certain quality levels, or
multidimensional bidding costs both for RU and CA go up
Length of contract: 5-10 years minimum (hold-up)

The Fourth Rail Package

Separation of IM and RUs Opening up of the domestic market to competition EU wide approval of standards Protection of skilled workforce
January 2013: adopted by the European Comission, but not yet been approved by the European Parliament
Sounds nice, but what could be the problem with the fourth Rail package?
Separation of IM and RUs

Problem: IM and RU in the same holding
natural monopolies: no incentives to provide the needs of the market new market players are given higher charges and insufficient capacity Information asymmetries: competitive advantage for the incumbent risk of cross-subsidisation (no financial transparency)

Solution: further regulation of IMs
Economic incentives and performance indicators Guarantee: involvement of all the RUs in decisions Establishment of SERA: overseeing IMs Stressing again the vertical disintegration
HOWEVER: where MS wish to maintain existing holding structures with the IMs ownership, it proposes strict safeguards
Why is it not satisfactory?


HOWEVER: where MS wish to maintain existing holding structures with the IMs ownership, it proposes strict safeguards
Loophole, strict safeguards have no proper enforcement Still there is no real enforcement
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Opening up the domestic market

Problem
Domestic passenger markets are still closed
Low quality, lack of proper availability, high costs
Solution
Competing in the market
Differenct RUs offerings Incumbent has to allow access to rolling stocks
Competing for the market

Compulsory competitive tendering of contracts (2019) No maximum contract volume
Opening up the domestic market

Why not satisfactory?
In the market
Lack of proper enforcement + what is the fair rate? We know nothing about the enforcement power of the ERA
For the market

No maximum contract volume (flexibility!)
CA can construct only one huge tender for the whole country, so only the incumbent will be able to compete for it credibly!
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EU-wide approval of standards

Problem: Entry barriers
No interoperability Huge administrative costs
Solution
European Railway Agency (ERA) has more responsibilites in setting administrative decisions
licencing, safety certificates, vehicle authorisations, etc. 20% reduction in time and costs for new entrant RUs
Why not satisfactory regulation?

EU-wide approval of standards

Why not satisfactory regulation?
Very very costly No borders between countries no market barriers
Implicit collusion between the big players
BB and DB have implicitly agree which CEE country to monopolize
No real competition, layoffs and CA becomes dependent on the international RU

Maybe a worse-off outcome?
Protection of skilled workforce

Problem
Aging workforce, rail industry not attractive Market opening: layoffs
Solution
CAs are allowed to push the transfer of staff to entrants
Setting standards for labor

Protection of skilled workforce

In most MS rail workers already have a strong union
Expensive labor: High wages, pension, state-pension
Making it more difficult to lay them off

Market less effective Entrance is more costly
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Conclusion
The Fourth Railway Package
Good direction Has been significantly watered down
Holdings of IMs and RUs are still allowed
All European standards very important
5th Package?
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20
Links
http://europa.eu/rapid/press-release_MEMO-1345_en.htm http://www.youtube.com/watch?v=8GHz-stzCso http://ec.europa.eu/transport/modes/rail/packag es/2013_en.htm http://www.etcr.eu/ VVH 591-609. Sherman 540-589. Pogonyi (2012)
Thank you for your attention!
05/30/2013
22

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Fourth Railway Regulation Package

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The Fourth Railway Regulation Package

Economics of Regulation Csaba Gbor Pogonyi

Last years: public sector investments nearly doubled in six years

Railway Undertakers (RU)

Railway Undertaker (RU)

Where are we going?

Infrastructure is likely stay to be a state-owned

Where are we going?

IM should ensure fair and equal treatment of all RUs

Where are we going?

2 ways of price bidding:

Licence auction: 1 line several RUs (UK)

Quality bidding: Requiring certain quality levels, or

multidimensional bidding costs both for RU and CA go up

Length of contract: 5-10 years minimum (hold-up)

The Fourth Rail Package

Separation of IM and RUs

Separation of IM and RUs

Why is it not satisfactory?

Separation of IM and RUs

Opening up the domestic market

Competing for the market

Opening up the domestic market

For the market

EU-wide approval of standards

Why not satisfactory regulation?

EU-wide approval of standards

No real competition, layoffs and CA becomes dependent on the international RU

Protection of skilled workforce

Why is it not satisfactory?

Protection of skilled workforce

Making it more difficult to lay them off

All European standards very important

Thank you for your attention!

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