I am glad to respond to your request for a note describing the involvement of the Competition Commission ("the CC") in passenger rail franchising.

  It would in principle be possible for the CC to be asked (by the Office of Fair Trading—"the OFT"—or by the ORR) to examine a number of aspects of the railways market, such as access arrangements. In practice, however, our only involvement to date has been as follows.

  The Enterprise Act 2002 requires the OFT to examine all significant mergers between UK companies, and to refer to the CC any mergers which the OFT believes may result in a substantial lessening of competition—and so might lead to customers facing higher prices, and/or lower service quality etc. The OFT typically examine around 200 mergers a year (most of them in advance of completion) and refer around 15 or so to the CC. Some of these mergers are subsequently abandoned, for a wide range of reasons, and we typically allow more than half of the remainder to proceed.

  Most, if not all, proposed awards of rail franchises fall within the definition of mergers for the purposes of the Enterprise Act, and are therefore always examined by the OFT, and sometimes, where OFT identify a competition problem, by ourselves. It is important to note that each separate bid for a franchise counts as a separate (potential) merger.

  The following franchise bids have been referred to the CC since 2002. All the mergers were allowed to proceed without conditions, apart from the award of the Scotrail franchise—see further below.

(a)  FirstGroup plc and the Scottish passenger rail franchise, referred 13 January 2004;

(b)  National Express Group PLC/Greater Anglia Franchise, referred 27 May 2004;

(c)  FirstGroup plc/InterCity East Coast Franchise, referred 21 December 2004 but cancelled when the franchise was awarded to another bidder;

(d)  National Express Group PLC/Thameslink/Great Northern Rail Franchise, referred 3 August 2005 (although the CC did complete its report, the franchise was awarded to another bidder); and

(e)  The three bids by FirstGroup plc, National Express Group PLC and Stagecoach Holdings plc for the Greater Western Passenger Rail Franchise, referred 30 September 2005, of which the last two were cancelled when the franchise was awarded to First Group.

  It might be helpful to the Committee if I comment on two questions which seem to me to arise as a result of the interaction of the franchising and competition regimes.

  First, it does at first seem odd that a Ministerial decision to award a franchise can be examined and in principle thwarted by the competition authorities. In practice, however, this is less of a problem that at first appears. For a start, we would expect the Department for Transport itself to have been alert to concerns about reductions in competition between rail companies, and to have designed the franchises so that such concerns were minimised. Whether or not this happens, the fact is that the CC has not yet identified a rail-only substantial lessening of competition. It should also be noted that, even if we did identify such a rail-only competition problem, in choosing and designing remedies we could take account of the benefits likely to flow from the award of the franchise. It might be possible for the operator (and the Department for Transport) to persuade us that no action should be taken that would jeopardise these benefits.

  We do, however, frequently encounter concerns that a proposed franchisee will in effect monopolise public transportation in certain areas because they already run local bus and/or coach services. Such concerns clearly need to be investigated and, if necessary, remedied by, for instance, obtaining undertakings that fares will not be increased above certain levels, or service frequencies reduced etc It is clearly desirable that such investigations take place. But it is equally desirable that any regulatory intervention takes place only when absolutely necessary. Indeed, as noted above, all franchise awards since 2002 but one have proceeded without our imposing any conditions. The only exception followed the award of the Scotrail franchise to Firstgroup plc which the CC expected to result in a substantial lessening of competition, particularly in the Glasgow area. We accordingly imposed certain controls, including over fare increases, in the affected areas.

  The second concern is that the rail companies have had to endure examination by the competition authorities even if they were not the successful bidders. They have thus incurred apparently unnecessary cost. We and the OFT have discussed this problem with the Department for Transport and the companies, and are implementing a number of changes which will help minimise the burden on potential franchisees. In particular, we have agreed that the Department will encourage operators to notify their acquisition of a franchise to the OFT only after they have been awarded the franchise. This will avoid situations in which operators undergo investigation only to find that they have not won the franchise. We have also agreed a standard set of information requests to go to the new franchisee, which avoids the need for the franchisee to prepare different submissions for the OFT and the CC. This new approach is being piloted in the current South West Trains franchise process.

30 June 2006

Commission, gave evidence.