Comments on the CBb ruling on the multimillion fine imposed on NS
A 100% market share but no dominant position. That is the instinctively contradictory opinion on the basis of which the Dutch Trade and Industry Appeals Tribunal (CBb) has reversed the €41 million fine imposed on Dutch Railways (NS) by the Netherlands Authority for Consumers & Markets (ACM). According to the CBb, there was sufficient competition when the Dutch State granted the concession for the main rail network to NS. For that reason, in the CBb’s opinion, NS did not have a dominant position and therefore could not have abused it.
We believe that this conclusion of the CBb is incorrect and that ACM rightly found that there was insufficient competition when the concession was granted to NS at the time. In our opinion, the CBb’s assessment is too limited, because it focused too much on potential competition and paid little attention to the actual competition, both during and after the granting of the concession. The CBb furthermore paid insufficient attention to the fact that the State only wished to award the concession to NS. This ruling therefore reinforces the legal necessity of a public award procedure in which all potential competitors may participate. Our conclusion is that this is an exceptional case that has no significant impact on investigations by ACM into abuse of a dominant position in other sectors.
Background
In 2014, the Province of Limburg organised a call for tenders for a regional train and bus transport concession (the Call for Tenders). During the tender procedure, Veolia, a regional rail service provider, filed complaints with ACM regarding NS’s conduct. Partly in response to those complaints, ACM launched an investigation and found that NS had abused its dominant position as the holder of the main rail concession. The CBb ultimately ruled this year that ACM had failed to prove that NS held a dominant position; it therefore cannot have abused that position. The other relevant facts and the CBb’s ruling can be found here.
Actual competition with NS?
This ruling once again defeated another large-scale and important ACM procedure. ACM focused primarily on actual competition, while the CBb takes potential (read: theoretical) competition into account. In our opinion, however, these two options are more interconnected than the decision to impose a fine and the CBb’s ruling suggest: the ability to compete in rail services depends on the ability to operate on the rail tracks. A company that is de facto unable to actually operate the main rail network will be considered unsuitable when the concession is awarded. We therefore consider the distinction to be somewhat artificial.
The CBb furthermore concluded that NS does not hold a dominant position because the railway concession was subject to sufficient (potential) competition. According to the CBb, it therefore did not go without saying that the concession would be awarded to NS. The CBb is in fact implying that the State is not dependent on NS and can therefore exercise sufficient buyer power, because it could choose another transport provider to operate the main rail network. We doubt whether that was in fact realistic at the time.
We believe that the CBb attributes great value to the State's authority to split up the main rail network and to put it out to tender in parts. Besides the fact that the CBb itself has found that the State did not follow FMN’s plan (which is aimed at decentralisation) and decentralised only a few regional lines, the laborious course of events (the CBb itself acknowledges that this process is proceeding “slowly”) also demonstrates that decentralisation is by no means the State’s favourite option. The CBb itself furthermore suggested in an earlier ruling regarding the concession granted to NS for the main rail network in 2015 that the main rail network constitutes a “coherent transport system”. The preservation of the main rail network as a whole is therefore allegedly of great importance to travellers.
The fact that the State is not in favour of decentralisation is apparent from a letter from the Minister of Infrastructure and Water Management of 11 June 2020, stating that in the next main rail network concession (i.e. 2025-2035) the Zwolle-Leeuwarden slow train service will be decentralised and that at a later date the Zwolle-Groningen and Apeldoorn-Enschede slow train services may also be included in regional concessions. The Minister notes that decentralisation may not lead to fragmentation and that national cohesion in the rail network is the main focus. In other words, it is unlikely that the main rail network will be split up in the next fifteen years. NS need not fear competitors in the coming period.
No company would most likely be able to do what NS is doing. The size of the current main rail network calls for a specialised company with sufficient knowledge and capacity. In principle, the fact that a new concessionaire will take over NS’s staff and equipment does not necessarily make a company suitable for such operation. Operating such a large company involves more than staff and equipment alone. A (lengthy) start-up period must therefore be taken into account. It also remains to be seen whether a smaller company could cough up the substantial operating fee that NS pays to the State. These circumstances as a whole will make it difficult for other companies to operate the main rail network.
Any buyer power that the State might exercise by considering alternative providers is therefore not as obvious as the ruling suggests. In addition to these practical objections, the CBb's conclusion that it does not go without saying that a next concession will again be awarded to NS is already outdated, in light of the possibility of decentralisation and against the backdrop of the European Commission’s Fourth Railway Package, which made it clear that future concessions (as from 2023) may no longer be awarded directly, since the policy intention to award the main rail network directly to NS as of 2023 is already in place.
To what extent can the CBb still maintain that there is sufficient alternative competition for NS? The CBb’s assessment framework (the FMN plan and the impact analysis) focuses on a decentralised main rail network, but in actual fact that is by no means the case and will not be in the near future. Although potential competition does play a role in determining market power, it would have been interesting if the CBb had asked the European Court of Justice to issue a preliminary ruling on the weighting of contraindications; all the more so because the existence of competition must be established on realistic grounds. An analysis of the theoretical possibilities does not suffice for that purpose.
This brings us back to the actual impossibility for other rail service providers to operate the entire main rail network in its current scope. This means that there is only one suitable candidate for this task: NS. The obvious approach – and therefore the approach that the CBb should have taken – would have been also to take the practical objections described above into account. On that basis it could have been assessed whether the now established theoretical competitive possibilities actually impact the competitive conditions also in the long run.
It should be noted here that it remains to be seen whether, if the CBb had identified a dominant position, NS actually abused it. From a development of law perspective, it would in any event have been interesting to get an answer to the question to what extent NS’s behaviour actually constituted abuse, or whether it represented the exercising of its commercial discretion.
PSO Regulation
We furthermore wonder whether the State is acting in line with European legislation, specifically the PSO Regulation. That Regulation aims to improve the safety and quality of public passenger transport. The PSO Regulation provides that public service contracts may be awarded directly, provided that that is not prohibited by national legislation. Public service contracts are defined in Article 2(i), briefly stated, as contracts between a competent authority and a public service operator to entrust to that public service operator the management and operation of public passenger transport services.
The PSO Regulation applies to public service obligations. A public service obligation is defined in the PSO Regulation as a service that a public passenger transport operator would not provide without public service compensation. A public service obligation therefore arises only in the event of market failure. However, NS receives no public service compensation, but pays the State €80 million a year for its right to operate the main rail network. This suggests that the main rail network does not consist of unprofitable lines alone, that no market failure is involved, and that it is questionable whether this concession includes a public service obligation that was eligible for direct award.
Insofar as the State therefore opts to continue its direct awards, we believe that, as a shareholder, it is well advised to exert more influence and control over state-owned companies (such as NS) that attempt to thwart publication decisions and that challenge fining decisions. State-owned companies may be expected not to push the boundaries of current legislation and regulations. The problems at NS appear to suggest that that is nevertheless sometimes the case. To overcome this issue, the State could, for instance, demand that NS may no longer issue tenders for railway sections where concurrence is possible.
Impact
The CBb’s ruling again confirms that it is by no means easy in practice for ACM to demonstrate a dominant position (or abuse of such a position). A few relevant examples are the prohibited rebate schemes of CR Delta, the excessive rates charged by Interpay, and the refusal of electricity transport by NV Samenwerkende elektriciteitsproductiebedrijven.
The reversal of most of these fines demonstrates that ACM has not been very successful in abuse cases. Fortunately, that has not discouraged ACM. Last year, for instance, it imposed a high fine on pharmaceutical company Leadiant for charging excessive prices for a medicine against a rare metabolic disease. Leadiant appealed the fine. Outside the Netherlands, it has also become apparent that it is not impossible to establish abuse of a dominant position, even regarding practices on complex digital markets, as illustrated by the recent Google Shopping judgment of the EU General Court.
However, we consider the broader impact of the reversal of the fine to be limited, since ACM’s burden of proof regarding dominant positions appears to be unchanged: this case concerned an atypical, regulated procurement market. ACM rarely deals with such markets. We therefore do not expect this judgment to have significant consequences for future ACM investigations into abuse of a dominant position in other sectors. But the ship appears to have sailed for ACM to take action against NS: only the Dutch State now has the means of doing so.
This blog was also published, in a more extensive form, as an article in the Mededingingsrecht in de Praktijk journal. The article can be found here.
