GNER loses open access challenge

Leading off is the outcome of GNER’s High Court Application for a Judicial Review of the Office of Rail Regulation’s decision to award the available paths on the East Coast Main line to open access operators. Mr Justice Sullivan’s judgement provided an independent and dispassionate analysis of the structure and working of the privatised railway and, in particular the relationship between franchised and open access operators.

If you would like to read the full Judgement it comes as a recommended read. GNER's Press Release in response to the judgement is here.

GNER sought the Judicial Review on three grounds

First, charging access operators only variable Track Access Charges, while GNER paid both variable and fixed charges. was discriminatory.

Second, by not requiring Hull Trains and Grand Central to pay a share of fixed costs ORR was giving the two open access operators unlawful state aid.

Finally, ORR had breached its own policy by granting access to Hull Trains and Grand Central for new services which would depend more on abstracting significant revenue from GNER than generating new ridership.

On the second day of the hearing, GNER withdrew the third claim, so the case came down to the structure track access charges. And for someone coming cold to our convoluted industry, Mr Justice Sullivan did an impressive job. I particularly liked his conclusion that GNER’s fixed access charge is ‘an artificial construct’ which does not reflect the actual cost of maintaining the ECML.

He was also hot on the fact that GNER knew what the fixed charges would be when bidding for the franchise and so they were written into the much vaunted premium. ‘Even if the fixed charge were very low, then the level of fares set by the franchised passenger operator would not be affected as the lower fixed charge would simply result in a higher bid premium’ the judge explained.

He also highlighted the risky nature of open access operation compared with life as a franchisee. It may not seem that way to GHER at the moment, but the ‘blue machine’ is protected under its franchise agreement from increases in track access charges, enjoys cap & collar revenue-risk sharing agreements with the taxpayer and also has a force majeure clauses in the event of revenue shortfall due to external factors.

In contrast, open access operators are on their own. According to Mr Justice Sullivan, imposing fixed access charges on the open access operators would be discriminatory because ‘ORR would be treating two very unlike cases as though they were alike’.

In sum, any attempt to draw comparisons between the two types of business would be ‘an attempt to compare chalk with cheese’.

In rejecting the ‘state aid’ complaint, Mr Justice Sullivan came up with another memorable phrase ‘the charging regime simply treats them differently because … they are different (even though their trains may be distinguishable to the individual passenger only by their different liveries)’.

Naturally Sea Containers, GNER’s parent, disagreed with the decision, describing it as ‘truly extraordinary’. I have to say that when it comes to the contractually-bound, tightly-regulated UK passenger railway, Sea Containers just don’t get it – and who can blame them.

No sooner had I had sent the September column off to the Editor, than Sea Containers released an update on its financial situation which is posted here. This included the latest financial figures from GNER where the situation is dire, given that it covers only the first year of the new franchise. It was too late to get my preliminary analysis of this information into the column, but you will find it in the news section. More next month.

Something else emerged from the High Court hearing which could come back to haunt DfT Rail. At 16.30 on 18 march 2005, just as the InterCity East Coast Franchise Agreement was about to be signed, SRA’s chief negotiator received a phone call instructing him to withdraw the clause in the agreement protecting GNER against new open access competition. GNER was given two hours to sign the agreement without the competition caveat or see the franchise re-tendered.

As we know now, this was a massive bluff by SRA from a very weak hand. GNER’s £1.3billion bid was £300million ahead of second place, Stagecoach who also had the competition caveat. But determined to hang onto the franchise GNER folded.

Which leaves the question of who made the phone call. An informed source who was in the room, reckons it was DfT pulling the strings. This one could get very messy.