The Competition Commission will today call for the Department for Transport to launch reforms to stop taxpayer-subsidised train companies paying over the odds for rolling stock, people familiar with the probe said.

The findings show the potential for friction between competition watchdogs and ministers, who are likely to face calls to override competition laws to save struggling companies by allowing rescue deals such as the Lloyds TSB takeover of HBOS.

The commission will rule that the government-run franchising system for rail rolling stock needs an overhaul because official conditions imposed on train-leasing companies are stifling competition, people familiar with the investigation said.

The watchdog will urge ministers to consider introducing longer franchise terms, to give the market a greater flexibility that should lead to lower prices.

The investigation potentially has a knock-on impact for taxpayers, who fund much of the train operating companies' £1bn annual rolling stock leasing costs.

One lawyer involved in the case said it reflected how "the whole attempt to micro-manage everything that goes on on the train, off the train and around the train produces markets that are not attractive to entrepreneurs".

The 20-month-old probe is a reminder both of the new assertiveness of the commission and its sister watchdog, the Office of Fair Trading, and of the limits of the powers they acquired under the 2002 Enterprise Act.

The commission has wide-ranging authority over companies - such as its plan to force BAA to sell key airports - but has no similar sway over government.

Lawyers say the commission may struggle to win changes in the train market, just as its obligation to defer to ministers over planning laws limited its scope to act against supermarkets accused of hoarding land.

The Department for Transport triggered the probe by claiming train-leasing companies were making excess profits of £34m-£177m annually. It has hit back at the commission's preliminary conclusions, claiming that changes to the franchising system would not provide a "reliable, or even remotely timely, remedy" to the problems in the market.

Lawyers expect further contentious competition cases in the New Year, as the government must decide whether to allow the creation of behemoth businesses in key industries where companies say they will fail if obliged to go on alone.

The government cleared the Lloyds-HBOS deal by using rules rarely invoked that allow it to wave through potentially anti-competitive mergers in "certain public interest cases".