Great North Eastern Railway Ltd v Office of Rail Regulation & Ors

In these proceedings the Claimant challenges the Defendant’s decision under the Railways Act 1993 (the Act) to grant the two Interested Parties track access rights which will enable them to operate passenger services on the East Coast Main Line (ECML) on which the Claimant operates the passenger services franchise.

The Defendant’s decision was notified on 23^rd March 2006 (the decision) and very detailed reasons, extending to 108 pages (the Reasons Document), were given on 6^th April 2006. The Claimant applied for permission to apply for judicial review on 22^nd May 2006.

The claim form sought:

“An order quashing the decision, and

The Defendant and the Interested Parties contended that permission should not be granted and/or that no relief should be granted because although the claim was, in form, a challenge to the decision, it was in substance a challenge to the lawfulness of the charging framework first adopted by the Defendant in October 2000, and was therefore very much out of time.

All the parties were agreed (albeit for different reasons) that the case raised an issue of considerable importance for the railway industry, and that a decision was urgently needed before the Long Vacation. On 12^th June I ordered that there should be a “rolled up” hearing of both the application for permission to apply for judicial review and the substantive application for judicial review, expedited the hearing, and set a timetable which enabled the Court to hear both applications in the week beginning 10^th July.

The Claimant is a long established train operating company (TOC) which has, since March 1996 been providing passenger services on the ECML pursuant to franchising agreements, made initially with the Office of Passenger Rail Franchising (OPRAF), and most recently with the Strategic Rail Authority (SRA) on 18^th March 2005. The SRA’s functions in this respect were transferred to the Department for Transport (DfT) by the Railways Act 2005 .

The Defendant is the Office of Rail Regulation (ORR). The ORR is an independent statutory body which, since 5^th July 2004, has been charged with regulating the railway industry. These regulatory functions, which include taking decisions on applications for track access, such as the decision in these proceedings, were previously carried out by the Rail Regulator appointed under the Act.

The First Interested Party, Hull Trains Company Limited (Hull Trains), is an “open access operator” which has been operating passenger services on the ECML under a series of supplemental agreements modifying its track access contract which commenced on 22^nd September 2000. The decision granted Hull Trains one additional contingent right each way (Monday to Sunday) for services between King’s Cross and Hull until the end of its current contract in June 2010. The additional service has been running since June 2005, and the decision effectively extended the expiry date from December 2006 to June 2010.

The Second Interested Party, Grand Central Railway Company Limited (Grand Central), is a new entrant to the railway industry, and wishes to operate open access passenger services on the ECML. The decision granted Grand Central three rights each way (Monday to Sunday) for services between King’s Cross and Sunderland, to take effect no earlier than December 2006.

Although it did not appear as an Interested Party, Network Rail Infrastructure Limited (Network Rail), is the successor to Railtrack PLC (Railtrack), and is the monopoly provider of the railway infrastructure, comprising the track, stations, signalling and other installations, over which both franchise operators, such as GNER, and open access operators, such as the Interested Parties, provide their passenger services.

In their letter before claim dated 13^th April 2006 the Claimant’s Solicitors made numerous criticisms of the decision, including allegations of irrationality and procedural unfairness. The Defendant responded to these allegations in a letter dated 28^th April.

The Claim Form challenged the lawfulness of the decision on five grounds:

On the second day of the hearing Mr Singh QC, who appeared on behalf of the Claimant, withdrew ground (4). He had previously confirmed that:

There are therefore, two remaining issues on the substantive application:

Although the decision responds to the Claimant’s criticisms of the charging regime (see paragraph 42 below), and it is clear that the charging regime will be applied when track access agreements are entered into between Network Rail and the Interested Parties, the decision neither establishes the regime, nor is it directly concerned with it. As mentioned above, those aspects of the regime which are in issue in these proceedings have been in existence in the same, or substantially the same form since October 2000.

They were left unchanged in the Rail Regulator’s “Criteria and Procedures for the Approval of Passenger Track Access Contracts: Third Edition”, June 2003. That document explains that there are different track access charges for franchised operators and open access operators (paragraph 5.2).

The charges for the former comprise the following elements (paragraph 5.3):

The charges for the latter comprise:

Although there is a very considerable amount of documentary material (contained in no less than 30 volumes, including authorities) the Claimant’s complaint is, in a nutshell, that the Interested Parties will not have to pay the fixed track charge. The Claimant contends that the fixed track charge amounts to approximately 60% of its overall track access charges. In 2005/2006 it amounted to £60.5 million, and this will increase to £127.5 million (equating to £10.81 per train mile) in 2006/2007.

The 2005 Regulations implement, albeit belatedly, the provisions of the Directive. The relevant national law should have been brought into force by 15^th March 2003 (Art.38). In the event, the 2005 Regulations came into force on 28^th November 2005 following a judgment of the European Court of Justice on 7^th October 2004 in infraction proceedings brought by the Commission (Case C - 483/03).

While it is necessary to have regard to some of the fifty recitals in the Directive, it is not otherwise necessary to consider the Directive in any detail, since there is no dispute that its requirements have been properly transposed by the 2005 Regulations.

Part 4 of the 2005 Regulations deals with infrastructure charges. Regulation 12 provides, so far as relevant:

Network Rail is the “infrastructure manager” for the purposes of the 2005 Regulations: see the definitions in regulation 3. Before turning to Schedule 3 it is convenient to mention regulation 13 (1), which provides:

income from infrastructure charges;

surpluses from other commercial activities; and

public funds,

Schedule 3 deals with “Access Charging”. Under the sub-heading “Principles of Access Charging”, paragraph 1 relevantly provides:

Under the sub-heading “Exceptions to the charging principles”, the relevant provisions of paragraphs 2 and 4 are as follows:

The Claimant contends: (a) that both it and the Interested Parties are railway undertakings that are (or in the case of Grand Central will be) performing services of an equivalent nature in a similar part of the market, and accordingly the differential charging regime, under which it, but not the Interested Parties has to pay the fixed track charge, is discriminatory and contrary to paragraph 1 (1) (b) of Schedule 3; and (b) that the variable track usage charges that will be paid by the Interested Parties will not cover the avoidable costs of their operations to Network Rail and will therefore be in breach of regulation 1(4) of Schedule 3 to the 2005 Regulations.

There is no doubt that it is the Defendant’s policy “that open access operators should pay charges based on the incremental costs that Network Rail incurs from accommodating their services”: paragraph 2.26 of “Structure of Costs and Charges [SOCC] Review: Initial Consultation Document November 2004”. As part of the review process the ORR published “Emerging views on key issues” in April 2005. Paragraph 6 of the Executive Summary at the front of that document explained:

Paragraph 12 explained that the ORR had engaged consultants, Booz Allen Hamilton/TTCI (UK) to review, inter alia, the existing variable usage charge, and said that the consultants had produced an initial document which contained recommendations for a review of the charge.

The Executive Summary to the consultants’ report submitted in June 2005 referred to the enhancements to the charging model that they had considered as part of their review, and said in paragraph 4:

Under the heading “Conclusions”, the Consultants said:

The ORR published its conclusions in respect of the SOCC review in October 2005. Under the heading “Track Access Charges” the Executive Summary said:

There has been insufficient improvement in Network Rail’s understanding of costs since the last review of the structure of track access charges (as part of the periodic review 2000 (PR2000)); and

Our consultants Booz Allen Hamilton (BAH) (working in conjunction with TTCI UK Ltd (TTCI) have recommended that further work on understanding variable cost causation should be undertaken before changes to the variable usage charge are made, in order to ensure that track access charges are sufficiently cost-reflective and provide appropriate incentives.

In his submissions on this topic Mr Singh relied upon another report prepared for the ORR by consultants, AEA Technology, “Recovery of Costs” dated 24^th August 2005. He submitted that this report demonstrated that the fixed charge did include an element of avoidable cost. However, the Consultants acknowledged that “There is considerable room for more analysis to refine the approach….. Therefore the results should be treated as only indicative at this stage”: see the Executive Summary on page (iii) of their Report.

Mr Singh also referred to paragraphs 4.12 – 4.14 of the November 2004 Initial Consultation Document. In summary, these paragraphs recognised the shortcomings of an approach which based the variable usage charge on short run incremental costs (SRIC) rather than long run incremental costs (LRIC) and stated the ORR’s belief:

Mr Singh submitted that it was therefore plain from the ORR’s own documents that the variable track usage charge covered only short run incremental costs, and that the fixed charge included long run incremental costs.

However, the next paragraph in the Initial Consultation Document pointed out that:

Drawing these threads together, the Defendant accepts that the variable track access charge should fully reflect the cost that is directly incurred as a result of operating the relevant train service, and further accepts that in an ideal world the charge would reflect not merely short run incremental costs but also long run incremental costs.

However, having carried out a lengthy, and very detailed consultation exercise, and having obtained advice from independent consultants, the ORR has concluded that the information presently available does not justify making any change to the variable track access charge, and that further work should be undertaken, so that as better information becomes available, the charge can be made more cost-reflective.

Ascertaining the cost that is directly incurred as a result of operating any particular train service is a complex and difficult task, and the answer to the question: “what is that cost?” will be very much a matter of expert judgment. In a nutshell, the ORR considers that the variable track access charge, although imperfect, is the best answer that can be provided on the information presently available. As more information emerges it believes that it will be possible to devise a better answer, but until then it has done the best that it can.

Given the ORR’s expertise in this highly technical field the Court would be very slow indeed to impugn the ORR’s view that the variable track access charge is currently the best available measure of the cost that is directly incurred for the purposes of paragraph 1(4) of Schedule 3: see paragraphs 27 – 34 of the judgment of Moses J (as he then was) in R (on the application of London and Continental Stations and Property Limited) v The Rail Regulator [2003] EWHC 2607.

While GNER is entitled to its view that the variable charge does not cover the avoidable costs of open access operators, that does not mean that the ORR’s view can be said to be in any way unreasonable. It follows that this limb of the Claimant’s discrimination ground must be rejected.

GNER contended in its representations to the ORR that the charging regime is discriminatory and in breach of paragraph 1(1) (b) of Schedule 3 to the 2005 Regulations because both it and the Interested Parties are “different railway undertakings that perform services of an equivalent nature in a similar part of the market”, but only GNER has to pay the fixed track access charge. This argument formed the principal plank of Mr Singh’s submissions before me.

The ORR’s answer to GNER’s argument is contained in paragraphs 5.49 – 5.61 of the Reasons Document dated 6^th April 2006 under the heading “Track Access Charges”. It is necessary to set out the ORR’s reasoning on this issue in full:

The purpose of the Directive is to allow for greater integration of the railway sector, to open up the market and to encourage optimal use of railway infrastructure.

A key element of the Directive is to enable open access operations (freight and passenger) to introduce services on the rail network, facing fair and non-discriminatory charges for their operation. Recital 11 to the Directive clearly sets out that, ‘The charging and capacity allocation schemes should permit equal and non-discriminatory access for all undertakings and attempt as far as possible to meet the needs of all users and traffic types in a fair and non-discriminatory manner’. Further, ‘the level of charges must not, […], exclude the use of the infrastructure by market segments which can pay at least the cost that is directly incurred as a result of operating the railway service, plus a rate of return which the market can bear” (Article 8(2)).

DfT, in its consultation on the implementing regulations, stated that: ‘the First Rail Package opens up access to the international rail freight market and provides a transparent regulatory regime for the allocation of capacity and charges for access to the rail infrastructure across the EU’. The reference to freight can reasonably be extended to other open access operators in the UK context. DfT is aware of the charging structures we have used in previous periodic reviews in 1999, 2001 and 2003. We further advised DfT on current charging structures during the transposition of the Directive.

In translating the broad principles of the Directive we have considered whether franchised passenger operators such as GNER and open access operators such as Grand Central are in the same market segment in terms of access to infrastructure.

We accept that there is a broad market for rail passenger services and that both franchised passenger and open access passenger operators’ services may be included within this broad market. Customer choice on a particular route is likely to be relatively indifferent between whether the service required is operated by a franchised passenger operator or an open access passenger operator (assuming the same service characteristics).

However, in the upstream market for access to infrastructure, our view is that the market conditions under which operators seek access are significantly different and constitute different market segments.

There are a number of differences between franchised passenger operator and an open access passenger operator which affect the ability to obtain access:

our ‘not primarily abstractive test’, which is applied only to open access applications to satisfy ourselves that revenue abstraction from existing franchised passenger operators would not be the primary impact of the new services;

franchise agreements provide for a suite of services to be operated by the franchised passenger operator with levels of service specified by government, while open access passenger operators’ services tend to operate at the margin and are not specified by Government;

franchise agreements provide protections against changes to charges resulting from access charges reviews; and

some franchise agreements provide risk sharing arrangements which protect the franchised passenger operators where revenues fall below specified levels in certain circumstances.

These differences have led us to consider the two types of service provider to be in different market segments for the purposes of the charging provisions. We consider that, given the differences in market conditions under which operators seek access, the differences in the UK charging structure between open access and franchised passenger operators give effect to the purpose of the Directives.

Where it is appropriate we adopt a consistent approach across all types of operators and services. For example, each additional service faces the same marginal track access charges for equivalent use of rolling stock (subject to the protection for franchisees against changes to variable charges resulting from access charges reviews).

Furthermore, we consider that the ability of franchised passenger operators to bear a mark-up above the marginal track access charges should be reflected through the franchise bidding process. We would expect that a bidder would take into account the level of the fixed charge in determining its costs for the purposes of the bid. We would, therefore, expect that a higher fixed charge would lead to a lower bid premium or a higher subsidy. Therefore, 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 level of fixed charges faced by franchised passenger operators therefore has no impact on the relative competitive positions of franchised and open access operators.

As we stated in our proposed decision, we do not propose any changes to the current framework at this time outside the work currently in progress for the 2008 periodic review of access charges. In this context, we note that DfT agreed at the hearing that: ‘this is an issue that ORR should look at again in the forthcoming review’. DfT had previously stated in its representations of 13 February 2006 that it believed this issue should be examined before then.

An access charges re-opener will be included in Grand Central’s track access contract which would allow the implementation of the conclusions reached by that periodic review. We will also include a similar re-opener in Hull Trains’ agreement for the additional right referred to in this decision.”

This explanation was amplified in the ORR’s evidence and Skeleton Argument. In summary, it was submitted that any discrimination assessment should focus on the “upstream market” for access to the railway infrastructure where the supply was by the infrastructure manager, Network Rail, and where it was contended the position of franchise operators and open access operators was quite different; and not on the “downstream market” for rail passenger services where the supply was by franchise operators and open access operators who were competing for passengers in the same market.

While such an analysis may well be impeccable as a matter of economic theory, and it is in any event no part of the Court’s function to substitute its own view on matters of economic judgment (see the London and Continental decision cited above), the question is not whether the ORR’s approach to this issue makes good sense in terms of transport economics, but whether it is compliant with the 2005 Regulations. Unfortunately, since economists and lawyers do not speak the same language neither the Directive nor the 2005 Regulations refer to “upstream” or “downstream” markets.

A literal interpretation of paragraph 1 (1)(b) of Schedule 3, considered in isolation and out of context would tend to favour the Claimant’s submission that the words “a similar part of the market” refer to the “downstream”, rather than the “upstream” market.

However, such an approach would ignore the need to consider the 2005 Regulations as a whole, and to adopt a purposive approach to their interpretation, bearing in mind their intended aim: to implement the Directive. The numerous recitals to the Directive explain why it was adopted. The most relevant recitals for present purposes are:

The focus of the Directive is clearly on the need to ensure that all railway undertakings have “equal and non-discriminatory access” to (the “upstream” market for) rail infrastructure. If the ORR’s charging scheme does not reflect differences between the ability of undertakings that perform services of an equivalent nature in a similar part of the “downstream” market to obtain access to the “upstream” market it will not achieve the objectives of the Directive.

I do not overlook recital (16) which states that:

The ORR’s view that “the market conditions under which franchised operators and open access operators seek access [to Network Rail’s infrastructure] are significantly different” is explained in some detail in the evidence, and in particular in a Witness Statement dated 20^th June 2006 by Mr Thomas, its Director of Regulatory Economics. Mr Thomas’s view was challenged in a Witness Statement dated 28^th June 2006 by Mr Caltieri, GNER’s Planning and Development Manager.

It is unnecessary to rehearse the details of this disagreement between the ORR and GNER in this judgment because it is no part of the Court’s function in judicial review proceedings to “second guess” an economic judgment made by the ORR (see above). Recognising this, Mr Singh submitted that the differences between franchised operators and open access operators relied upon by the ORR were simply irrelevant. Since a franchise agreement does not grant track access rights, both the franchise operator and the open access operator are legally in the same position (in the upstream market) when seeking such rights from Network Rail.

It is common ground that a franchise agreement does not grant track access rights. The franchise operator will have to enter into an access contract with Network Rail and any such contract must be approved, or entered into pursuant to directions issued, by the ORR: see Sections 17 and 18 of the Act. Access agreements may be amended with the approval of, or pursuant to directions given by, the ORR: see sections 22 and 22A-C of the Act.

By way of example, in the present case the decision dealt not merely with the applications by the First and Second Interested Parties under sections 22 and 17 respectively, it also dealt with an application made by GNER under Section 22A of the Act for additional contingent rights for five weekday Leeds-King’s Cross services each way. In response to this application the ORR ordered Network Rail to complete a timetabling exercise which would establish, no later than 30^th June 2006, whether it would be possible to path the additional GNER services because ORR had been unable to reach a conclusive view on whether there was sufficient capacity for the additional rights. The exercise has been carried out, and that it seems that, subject to more detailed timetabling, there is sufficient capacity.

It is true that the Act does not expressly place an application for track access rights by a franchise operator in a privileged position. The closest the Act comes to giving franchise agreements preferential treatment is in sub-section 18 (6A) which provides that:

Moreover, sub-section 4 (5) (c) requires the ORR “to have regard to the funds available to the Secretary of State for the purposes of his functions in relation to railways and railway services” and since franchises are, in essence, a supply contract between the DfT and the franchise operator for the supply of passenger services by the latter in return for either payment of a subsidy by, or payment of a premium to, the former, the ORR is able to have regard to the public interest in ensuring that franchising agreements are not frustrated by refusal of track access.

Where the statutory framework confers such a large measure of discretion upon the Regulator it would not be appropriate to focus solely upon the wording of the Act and to ignore the very detailed policies which are applied by the ORR when considering track access applications. It would also be unrealistic, in a market which is (both “upstream” and “downstream”) so heavily dependant on government subsidy, to ignore the mechanisms, including franchise agreements, through which the subsidy is delivered by the DfT. When these policies and practices are considered it is clear that the market conditions under which franchised operators and open access operators are able to seek access to the railway infrastructure are, in practice, very different indeed.

This point is best illustrated by reference to the Regulator’s Moderation of Competition (MoC) Policy, published in May 2004, which was the subject of the complaint in (the now abandoned) ground (4) in the Claim Form. By way of background, the Regulator, when considering “The scope for on-rail competition”, said in paragraphs 3.11 and 3.12:

The Regulator’s (now the ORR’s) approach to the assessment of applications involving potential new/competing services is explained in paragraphs 3.16 and 3.17:

The Regulator’s “Criteria and Procedures for the Approval of Passenger Track Access Contracts: Third Edition, June 2003” publication contains more details of the information that an applicant for track access rights which involve a significant change in the pattern of services will be encouraged, and may be required, to provide to the ORR, including “specimen timetables, to demonstrate that the required capacity is available” (paragraph 4.25).

It is true that a franchise operator making a track access application for a new service will have to demonstrate that the required capacity is available (as illustrated by the ORR’s response in the decision to GNER’s application for additional rights between King’s Cross and Leeds). However, the reality is that on those routes which are likely to be attractive to new entrants most, if not all, of the available capacity will have been taken up by the long established services provided by successive franchise operators. The first franchise operators inherited (with some variations) the basic service pattern operated by British Rail in the pre-privatisation era.

While the details of the timetable will change from year to year, the existing services provided by the franchise operator are, in effect, the incumbent in terms of available capacity, and the open access operator is always in the position of the interloper, having to demonstrate not merely that there is spare capacity for its proposed new service, but also that it will not be a “cherry-picking” service. That these are very real hurdles which have to be addressed with very great care by any would-be open access operator is well illustrated by the Reasons Document in the present case: see also Part D of the Network Code, 27^th March 2006, which deals with “Timetable Change” in immense detail, and in particular condition D6 – Decision Criteria.

Mr Singh’s submissions under this head focussed upon paragraph 1 (1) (b) of the Schedule, but it is necessary to construe the 2005 Regulations, and in particular Schedule 3, as a whole. Paragraph 5.59 of the Reasons Document states that the ORR considers:

The ORR is entitled to consider the fixed track access charges levied on franchise operators as “mark-ups”, i.e. payments made to Network Rail over and above the costs “directly incurred”, to enable it to obtain full recovery of its costs. As explained by Mr Winsor, who was the Rail Regulator between 5^th July 1999 and 4^th July 2004 and is now a legal advisor to Grand Central, the amount raised by way of fixed track access charges is simply a residual figure reached by deducting from Network Rail’s total revenue requirement:

expected income from variable track access and other single till income (e.g. from freight, stations and property); and

the amount paid by the DfT to Network Rail by way of network grants.

By way of example, Mr Winsor decided in December 2003 that access charges should be £18.9 billion for the control period between April 2004 – March 2009. The DfT pressed for a much higher proportion of Network Rail’s income to be provided by way of network grants. It wanted the proportion to be as high as 80% grants: 20% access charges. The outcome of the horse-trading was that the Regulator agreed that Network Rail could reprofile income totalling £3.14 billion, and borrow the shortfall, and that the net revenue requirement would then be recovered by £10.29 billion in grants (54% of the total) and £8.96 billion in fixed and variable charges (46% of the total): See “Access Charges Review 2003: Regulator’s approval of Network Rail’s proposed financing arrangements, March 2004”, paragraph 2.1.

Thus, the fixed track access charge paid by GNER is an artificial construct, and does not reflect the actual costs incurred by Network Rail in maintaining the ECML. As the Reasons Document points out (paragraph 5.59), this should have been of no concern to GNER when bidding for its franchise. It knew the level of the fixed charge, and (all other things being equal) a higher fixed charge would have led GNER to offer either a smaller premium payment to, or to seek a subsidy from, the DfT, whereas a lower fixed charge would have led GNER to offer a higher premium.

In their negotiations with the DfT franchise bidders are able to, and do, obtain protection by way of indemnity (often referred to in the documents as clause 18.1 protection) against any increase in charges resulting from access charges reviews. They may also negotiate “cap and collar” risk sharing agreements with the DfT which give them (and the DfT) a measure of protection if revenues fall (or rise) below (or above) certain specified levels.

Since none of these protections against the imposition, or subsequent alteration, of a charge that is a wholly artificial construct, are available to open access operators it would be contrary to non-discriminatory principles, on which mark-ups may be levied under paragraph 2 (1), if the fixed track access charge was imposed on them. It would be discriminatory because the ORR would be treating two very unlike cases as though they were alike.

Paragraph 2 (2) of Schedule 3 implements the second indent in Article 8.1 of the Directive and reflects the final sentence of recital (39) which, while allowing member states to determine the extent to which they are prepared to contribute to railway infrastructure costs by way of government funding, makes it clear that:

For the reasons set out above, (paragraphs 27– 40) the variable track usage charge is the best available measure of the cost that is “directly incurred” as a result of the additional services provided by an open access operator. Mr Singh submitted that there was no evidence that the Interested Parties could not afford to pay the fixed track charge, or an additional rate of return, and that there was no indication that this issue had been considered by the ORR when the charging regime was introduced in 2000, or when it was reviewed in 2003.

In my judgment these criticisms of the ORR’s approach are unrealistic. Both of the Interested Parties have made it plain that their operations would not be viable if they had to pay a fixed track charge in addition to the variable track usage charge. While GNER is entitled to respond “well they would say that, wouldn’t they?” there is no reason to believe that the Interested Parties would be able to pay the fixed track charge, not least because, unlike GNER, they would not have taken it into account in any of their business plans for their proposed services.

The underlying thrust of the Directive (as implemented by the Regulations) is that would-be operators who are able to pay for the costs that will be directly incurred as a result of their operations should be encouraged to use the railway infrastructure (subject to ensuring its optimal use, see Recital (7)), not discouraged from using it. In practice, the fact that open access operators are not required to pay the fixed track charge has not led to a large number of applicants. Setting aside certain special cases (such as Eurostar and Heathrow Express) which are not relevant for the purposes of the present dispute, Hull Trains is the first and only open access operator.

I realise that the present Moderation of Competition Policy was not introduced until May 2004, and that immediately following rail privatisation the first Rail Regulator gave franchisees very substantial protection from competition. As explained in Mr Winsor’s Witness Statement the degree of protection given to franchisees has been reduced, in stages, to that contained in the May 2004 Policy. Nevertheless, it remains the fact that, since May 2004 there has not been a large number of applications for track access for open access operations. If Grand Central begins its services in December 2006 it will be only the second open access operator. Given the hurdles that any would-be entrant to the open access market has to surmount (see above) that is hardly surprising, but the dearth of applicants does not suggest that the market is capable of bearing any significant rate of return over and above the existing charges.

For the sake of completeness under this head I should mention that GNER relied upon the fact that Hull Trains was required to pay a “Fixed Track Charge” under its initial track access contract which was entered into on 22^nd September 2000, and that this fixed charge continued to be payable until July 2004. However, that fixed charge was not the same as the fixed track charge under the current charging regime. It was a negotiated charge entered into under the previous charging regime (which permitted such charges), and the bulk of the charge is now represented by the capacity charge in the current charging regime, which has been applied to Hull Trains since July 2004. Some elements of the negotiated fixed charge no longer feature in the present regime (under which there was a substantial increase in the variable track usage charge), while others are charged separately, e.g. additional signalling costs of £26,000.

Before leaving Schedule 3 it is necessary to mention paragraph 4(1) (above), and Mr Singh’s submission that since GNER and the Interested Parties provide “comparable services in the same market segment” (for rail passenger services) they must be subject to the same charges. While it is true that both franchised operators and open access operators are in the same broad market for rail passenger services, as was acknowledged in paragraph 5.54 of the Reasons Document, and that from the point of view of the individual passenger who wishes to make a particular journey, e.g. from King’s Cross to Hull, they will be providing a “comparable service”, I do not accept GNER’s submission that the ORR is obliged to treat them as providing “comparable services in the same market segment”.

Even if one focuses on the downstream market for rail passenger services, as soon as one looks beyond the individual train service between King’s Cross and Hull to the wider picture it becomes clear that any attempt to draw comparisons between the overall position of the franchise operator and the overall position of the open access operator in the rail passenger services market is an attempt to compare chalk with cheese. By virtue of their franchise agreements with the DfT and the application in practice of the ORR’s policies, in particular, the policies relating to track capacity and Moderation of Competition, the franchised operators and the open access operators play very different roles. As explained in the Interested Parties’ evidence open access operators try to reach those parts of the rail passenger market that are not reached by the franchise operator, either because the DfT in negotiation with the bidders did not identify the opportunity, or did not think that it was appropriate to require its provision in the franchise agreement.

GNER’s case has focussed attention on the fixed track charge in isolation, but it is only one element of a wider, and much more complex picture. Imposing the fixed track charge on open access operators, while holding all the other parts of the picture constant, would not result in a non-discriminatory charging regime for access to the railway infrastructure, but in a regime which was manifestly unfair to open access operators.

Perhaps in recognition of this difficulty GNER said that it was not submitting that the Interested Parties should be required to pay the fixed charge, and that there were:

Simply abolishing the fixed charge and not replacing it with any other source of income for Network Rail is not an option. Network Rail’s infrastructure expenditure would greatly exceed its income (contrary to regulation 13 above) and it would cease to be able to maintain the rail infrastructure. If the fixed charge was reduced by transferring some part of the charge to the variable usage charge that would result in a breach of paragraph 2 (2) of Schedule 3 because the latter would then exceed the ORR’s current best estimate of the “directly incurred” costs (see paragraphs 27-40 above). In reality, the fixed charge could only be replaced or reduced if the DfT made a commensurate increase in the level of grants paid to Network Rail, but this was precisely the solution which was rejected by Mr Winsor in his Access Charges Review 2003, published in March 2004 (see paragraph 63 above) because he was concerned:

For these reasons I am satisfied that the ORR’s approach is consistent with the Directive and with the 2005 Regulations purposively construed as a whole. None of the authorities cited are precisely on all fours with the present case, but the closest by way of analogy is the ECJ’s Decision in Case C-390/98 Banks v The Coal Authority [2001] ECR I-6117.

The case arose out of the privatisation of the UK coal industry. The UK Government sold the English part of British Coal’s business, including its licences and leases to extract coal, through an open competitive tendering process. The successful tenderer, RJB, did not have to make any subsequent payment for the right to work coal under the licences and leases acquired. Following the sale of British Coal’s business to RJB, the Coal Authority granted licences and leases to other mining companies in exchange for royalty payments. One of these companies, Banks, stopped paying the royalties, arguing that they constituted a form of discrimination within the meaning of Article 4 (b) of the ECSC Treaty because RJB was not required to make such payments.

The ECJ rejected that argument. It stated that, in the period under consideration, no operator had obtained its leases and licences without consideration, and that:

Mr Singh sought to distinguish Banks on the basis that, whereas in that case there had been alternative ways of acquiring coal mining rights (participating in the tender process or subsequently acquiring leases/licences), the franchise agreements in the present case do not confer track access rights, and both franchisees and open access operators have to apply for track access rights under the same statutory procedures. For the reasons set out above (paragraphs 53 ff), looking at the Act alone is an unduly legalistic approach and does not reflect the reality of the position given the involvement of the DfT as paymaster and the ORR’s policies as regulator. In reality there are two, very different, ways in which operators are able to enter the “downstream” rail passenger market: by tendering for a franchise on a competitive basis, and by seeking open access. Since both routes are open to all would-be operators without discrimination “no distortion of competition can be inferred from such a system”.

I therefore reject grounds (1) and (3) of the challenge.

In the light of my earlier conclusions I can deal with this ground of challenge quite shortly. Article 87 (1) of the EC Treaty prohibits:

It is common ground that a measure constitutes state aid within the meaning of Article 87 (1) if it satisfies five criteria:

it is imputable to the state;

it is granted directly or indirectly through state resources;

it favours certain undertakings; and

it is capable of distorting competition and affecting trade between Member States.

Mr Singh submitted that there were two potential benefits or advantages in the present case:

the setting of variable charges at a rate that does not cover avoidable costs, where these avoidable costs are paid by other operators through the fixed track access charge; and

the waiver of the fixed track charge, which is paid by franchised operators and covers both long term incremental costs caused by the train operators and other residual capital requirements of Network Rail.

I have dealt with the argument in sub-paragraph (a), and with so much of the argument in sub-paragraph (b) as relates to long term incremental costs, in paragraphs 27-40 (above). Insofar as the fixed track charge covers the residual capital requirements of Network Rail (after grants and other income have been taken into account) I do not accept that the “waiver” of the charge for open access operators is a “benefit or advantage which distorts or threatens to distort competition by favouring” them, as opposed to franchise operators because the two ways of entering the rail passenger market are so very different, and the franchise operator can take full account of the fixed track charge when bidding for the franchise. While a bidder will not be able to secure the waiver of the charge itself, it will be able to either seek a commensurate subsidy, or make a commensurate reduction in its premium offer.

Again, GNER’s approach to this issue isolates out one element of a complex regime which, when viewed as a whole does not distort competition by favouring franchise operators or open access operators. The charging regime simply treats them differently because, for the reasons set out above in relation to grounds (1) and (3), they are different (even though their trains may be distinguishable to the individual passenger only by their different liveries).

The position is similar to that in Banks where it was argued that, as well as being discriminatory, the fact that its competitors did not have to pay the same royalty payments also constituted unlawful state aid to them. The ECJ rejected that argument in paragraph 51 of its judgment saying that the situation did:

It is also helpful to apply a measure of common sense when evaluating GNER’s underlying claim: that competition between franchise operators and open access operators is distorted because the latter are given favourable treatment by the charging regime. If that really was the case then surely there would be many more track access applications by such operators eager to enjoy the benefits of such favourable treatment.

For these reasons I reject ground (2) of the challenge, and it follows that ground (5) must also be rejected.

Much of the argument in the Defendant’s and the Interested Parties’ Skeleton Arguments and oral submissions was devoted to this issue, but in the light of my conclusions in relation to the substantive issues I will deal with it relatively briefly. The following paragraphs under this heading are written upon the premise that the conclusions set out above are wrong, and the fact that open access operators do not have to pay the fixed track charge does amount to unlawful discrimination and/or state aid.

It would not be appropriate to quash the decision. As mentioned above, the charging regime pre-dates the decision by some years. The decision determines the Interested Parties’ track access applications, but it does not determine the basis upon which the right thereby granted shall be charged for by Network Rail. The Reasons Document responds to GNER’s representations about the charging regime in chapter 5 under the heading “Further Issues”. Even if this response is legally erroneous that would not be a justification for quashing the operative part of the decision. However, since the ORR’s response makes it clear that the current track access charging regime will in due course be applied to the track access contracts, and there is clearly an issue as to the lawfulness of that regime, some form of declaratory relief would be appropriate, subject to consideration of issues relating to delay/hardship/prejudice/detriment to good administration in accordance with CPR Rule 54.5 (1) and Section 36 (1) of the Supreme Court Act 1981.

In submitting that there had been no undue delay and/or that if there had been such delay it was relatively modest and that time should be extended, Mr Singh emphasised that the 2005 Regulations had not come into effect until 28^th November 2005. That submission ignores the fact that ground (3) is simply an alternative way of formulating the complaint made in ground (1), and that both grounds (2) and (3) could have been advanced by GNER in proceedings for a declaration that the charging regime was unlawful at any time since it was adopted in October 2000.

Although numerous authorities were cited in relation to delay, I did not find them of any real assistance because each delay case tends to be fact specific, and the facts of this case are very unusual. The ORR (and previously the Rail Regulator) engages in a remarkably thorough consultation process with the railway industry in respect of all of its statutory functions, including the review of track access charges and the consideration of track access applications. At all relevant stages GNER has been a party to those consultations.

GNER has consistently argued in its representations to the Regulator and subsequently to the ORR that:

Putting the position of the Interested Parties to one side for the moment, I would accept that, as between GNER and the ORR, the mere fact that a policy has been in force and applied to the rail industry for some years without legal challenge by GNER would not be a reason for refusing to grant GNER any relief whatsoever on delay grounds if the policy was found to be unlawful, but it would be a powerful reason for ensuring that any relief was prospective and not retrospective. Since the EC rules on non-discrimination and state aid pre-date the policy a declaration that the charging regime was unlawful under ground (2) and/or (3) would declare the true legal position, not from the date of the Court’s Order, but from the date when the regime was adopted in October 2000.

Thus, in granting any declaratory relief the Court would have to make it clear that it was refusing to grant any mandatory relief which would have the effect of requiring the ORR to re-open past track-access charges (because to do so would plainly be detrimental to good administration), but was merely requiring that steps should be taken to give effect to the declaration for the future. While the Court would leave it to the ORR to decide how to respond to any declaration, it would make it clear that the timing of the review process must not be such as to be detrimental to good administration.

For the reasons set out above altering the charging regime so as to impose the fixed track charge on open access operators could not sensibly be considered in isolation from the other aspects of the track access and track charging regimes. There would have to be extensive consultations with the railway industry, including the DfT, Network Rail, other franchised operators and the Interested Parties. The Interested Parties would no doubt argue that if one element of their “package deal” was to be altered to their detriment, then there should be a fundamental reappraisal of the “package deals” on offer to both franchised operators and open access operators.

The ORR sent a “minded to” letter dated 27^th January 2006 to those who had responded to the consultation exercise in respect of the Interested Parties’ track access applications. In its response to that letter dated 13^th February 2006 the DfT said (inter alia):

Work on the 2008 review is already under way, and the ORR published a consultation document on the future structure of track access charges and station long term charges on 8^th June 2006. Had it been appropriate to grant GNER some form of prospective declaratory relief I can see no basis for requiring the ORR to address the question – what alterations should be made to the charging regime given that both franchise operators and open access operators must pay the fixed track charge on an equal basis? – other than in the context of the 2008 review.

In reaching that conclusion I bear in mind that GNER has been in no hurry to challenge the lawfulness of the charging regime, and the problem does not appear to be at all widespread. The Moderation of Competition Policy refers to the “limited scope for (on-rail) competition to develop in the foreseeable future” (see paragraph 56 above). Indeed, at the moment “the problem” is confined to the operations of the Interested Parties over the ECML.

In this respect it is necessary to distinguish between Hull Trains and Grand Central. The former has been operating its services over the ECML since 2000. Initially, it was granted three daily return paths between Hull and King’s Cross. Its business has gradually increased so that with the additional path granted by the decision it now has rights to six return paths on weekdays, five on Saturdays and four on Sundays. The additional service has been running for a year, approval was initially granted until December 2005, and extended to 10^th December 2006 by a decision dated 9^th December 2005.

In reality therefore, while there has been incremental growth in Hull Trains’ operations since 2000, the nature and scale of the business as a potential competitor to GNER, which ran 122 services each weekday when it was re-awarded the franchise in 2005, has remained substantially unaltered. GNER has been consulted on all of Hull Trains’ track access applications and has opposed all of them. It could have challenged the lawfulness of the charging regime as it was applied to Hull Trains at any time since Hull Trains’ first track access agreement on 22^nd September 2000. It knew in advance that the negotiated “fixed charge” would end in 2004, and whether one considers the date when the Directive should have come into force in the UK on 15^th March 2003, or even the date when the Regulations came into effect on 28^th November 2005, it is simply far too late for GNER to seek any relief in respect of Hull Trains’ one additional daily return service which was the subject matter of what is merely the most recent decision in a long line of decisions since September 2000.

Grand Central is in a very different position since it runs no services on the ECML, and indeed no services at all. However, that is not for want of trying. It has spent some £1.5 million in submitting two applications for track access rights: the application which is the subject matter of the decision was preceded by an earlier application made on 16^th October 2003 for track access rights over the Trans-Pennine route between Newcastle and Manchester Victoria. That application was refused by the ORR on 18^th June 2004 on Moderation of Competition grounds. For present purposes, it is highly relevant that GNER objected to that earlier application, and that in doing so it repeated its concerns about the charging regime to the ORR. The ORR responded by saying that:

Grand Central’s application in the present case was made on 24^th February 2005. It is clear from the Reasons Document that the application process is very demanding in terms of an applicant’s time; and it is bound to be commensurately expensive as the sum expended by Grand Central shows (even though there is no breakdown between the two applications). Having repeated its objection to the charging regime GNER stood by and allowed the application to proceed. While I would accept the proposition that in many cases it may well be appropriate for a consultee having explained his legal objections to the decision maker, then to await the outcome of the decision making process, since judicial review should be a remedy of last resort, I do not accept that GNER’s failure to bring a challenge at an earlier stage was appropriate in the particular circumstances of this case.

GNER knew what the Regulator’s attitude was. The reference in the June 2004 decision refusing Grand Central’s Trans-Pennine application to earlier correspondence was a reference to an exchange of letters at the highest level, between Mr Garnett, the Chief Executive of GNER and Mr Winsor, in which the latter made it clear (in a letter dated 5^th February 2004) that he did not accept GNER’s oft repeated arguments. Absent any new argument there was no reason to suppose that the ORR would alter its view that the charging regime was consistent with the Directive. The coming into effect of the 2005 Regulations did not alter the position since they merely transposed the provisions in the Directive.

If GNER’s argument, which it had been advancing since the charging regime was adopted by the Regulator in October 2000, was correct it rendered the time consuming and expensive application process pointless from the point of view of Grand Central since its business plans had not made any allowance for payment of the fixed charge. It is clear from Grand Central’s evidence as to its ability to pay the fixed charge that, if that issue had been determined against it at an earlier stage, then it would not have wasted its time and money on pursuing the application.

GNER was well aware of Grand Central’s application for track access rights, and of the fact that they were being sought under the terms of the current charging regime, when it entered into its new franchise agreement with the SRA on 18^th March 2005. Thus, it was able to make, as a matter of commercial judgment, an appropriate allowance for the prospect that the application might succeed on those terms.

There is, therefore, no unfairness to GNER in concluding that it could, and should have challenged the charging regime at an earlier stage even in the context of Grand Central’s application for track access rights; whereas there would be considerable unfairness to Grand Central if GNER was now to be granted any relief which would have the effect of having rendered the application process pointless from the outset.

Having heard submissions for four days it would not be in the interests of any of the parties if I simply refused permission to apply for judicial review. I therefore grant permission, but reject GNER’s discrimination and state aid grounds of challenge and dismiss the substantive application. If I had concluded that the charging regime amounted to unlawful discrimination/state aid I would have granted GNER declaratory relief, while making it clear that it was for the ORR to decide how to give practical effect to the declaration as part of the work in progress for the 2008 periodic review of access charges. I would not have quashed the decision or granted any further relief.

In conclusion, I would like to thank all the advocates for their very helpful submissions.