Jan. 10, 2015

Sectorial Analysis

January 6, 2015, the French Competition Authority expresses its concern about the effectiveness of the independence of the operator of the rail transport network, now integratednow integrated into the public group that also included public operator faced with competition

by Marie-Anne Frison-Roche

As soon as Regulation assumes independence of the operator who manages the essential infrastructure, ex ante conditions of such independence must be met.
Europe doesn't require legal autonomy of the essential infrastructure manager, probably because such autonomy, it would be both too ask the Policy, which may want more integrated organizations as soon as public transportation is a mix of public policies and that to public funds are used. But it would also be too little to ask the Policy because no matter the legal autonomy, the key is the real independence of the manager, that is under the control of the Regulator.
The Loi portant réforme ferroviaire (Railway Reform Act) of August 4, 2014 has made the integration of the company that manages the rail network, which the new name is SNCF Réseau (SNCF Network) in a public group, which also includes the SNCF, public transportation operator, in competition with new entrants in a newly opened sector to competition.
The Competition Authority in its opinion of 4 October 2013 had expressed reluctance towards the bill, to the influence that such corporate organization offers to the public operator, to the detriment of its competitors and the opening of the railway sector to competition.
The critical tone increases with the Opinion of 6 January 2015 relatif à des projets de décrets pris pour l'application de la loi portant réforme ferroviaire (on draft orders made for the purposes of Railwayl Reform Law).
The Competition Authority issues its opinion as a real essay on what should be the Regulation of the railway sector through the "governance" of the network manager. Indeed, the first part of the opinion relates to "the independent management of railway infrastructure" while the second focuses on the integration of railway network in the public group built par the law. The third part of this Opinion draws conclusions to measure whether we can consider that the Autorité de Régulation des Activités Ferroviaires (French Regulatory Authority of Railways Activities) shall have the capacity to ensure this independence by governance or not.
This review, in its construction itself, demonstrates the dialectic between Regulation and Governance (I), which is an observation and stresses the role of the regulator in the effectiveness of governance (II), which is more a question .


It is necessary to explain in general how works this dialectic between Regulation and Governance, when a crucial operator is involved (A), before finding in the Opinion of 6 January about SNCF Réseau (SNCF network) (B) .


A. The dialectic between Regulation and Governance in the presence of a critical operator

It is usual and justified to emphasize the difference between Regulation of a sector and Governance of operators !footnote-9 Footnote-9 which operate on it.

But it may happen that the proper functioning of a sector depends on good governance of operators. This may be good governance of all operators, or certain. Thus, the mere fact that a sector is regulated doesn't warrant that the governance of all operators should be under control, and even less that supervision of that governance is assigned to the sector regulator.

Regulation and Governance yet operate in dialectical when the inner workings of an operator has a decisive impact on the sector. This is the case when the operator is "crucial"!footnote-10

However, the operator of a transmission network, which is the essential infrastructure of the sector, is a "crucial operator." It is therefore logical that the sectorial regulator, because the proper regulation of this particular assumes independence of it, cares who directly controls this critical operator. In fact, if it turns out that the transmission network is controlled by an operator, even though this operator is in competition with others, sector regulation is affected.

Therefore the company law must allow the independence of the operator of the transmission network. At first glance, the affiliate status of SNCF Réseau presents a difficulty.


B. The case study "SNCF Réseaux (SNCF Network"

In general, "governance" and "independence" are first and foremost the problem of conflicts of interest. Conflicts of interest are either avoided or managed. Ex ante, conflicts of interest are avoided, for example by the fact that the same person doesn't provide two functions or by giving a structure legal, accounting and capitalistic autonomy vis à vis operators.

Ex post, conflicts of interest are "managed" by ethics, controls, supervision, reporting behavior and statements.

Regarding the new corporate organization resulting from the Act of 4 August 2014 regarding railway reform, the Competition Authority has expressed skepticism principle in its opinion of October 4, 2013.

Indeed, the corporate organization is based on the establishment of "Etablissements Publics Industriels et Commerciaux - EPIC" (Industrial and Commercial Public Bodies), which together constitute the "Groupe Public Ferroviaire -GPF" (Public Railway Group). SNCF is itself  the "EPIC de tête" 'head body), which exerts its power over the other EPIC in the group, the EPIC SNCF Mobilité (SNCF Mobilities, which manages transportation and stations) and the EPIC SNCF Réseau (SNCF Network), the network manager.

One of the decrees on which the opinion of the Authority is requested by the Government specifically aims to guarantee the independence of the EPIC SNCF Réseau.

However, the Competition Authority takes the opportunity to present a stock of the recommendations it made about the law, congratulates the Government when followed them, sorry if the bill has not been amended according to the wishes of Authority and incorporates all of the demonstration at the stage of implementing decrees.

Is this really the subject of the requested opinions? The opinions of the Authority aren't assent and Parliament isn't Government. Parliament remains free to draw as it wants the public operators, as long as it doesn't hit the law of the European Union, protected by the hierarchy of norms. But it is by design that, about the decrees, the Competition Authority assumes the principles and structure of the opinions given about the law: the Authority doesn't issue an opinion, but gives a lesson.

Teacher position or Master position?

Since Parliament hasn't wanted to preserve the independence of the system operator by the ex ante, the Groupe Public Ferroviaire -GPF (Public Railway) Group being a form of vertical integration, the Competition Authority will offer ex post multiple techniques. First, that of depriving the operator of its most natural and clear legal authority: the right to vote.

It is true that the draft decrees provide for the presence of persons designated by the head EPIC (SNCF) on the board of directors of SNCF network, even though it is the latter which distributes the capacity and access tariffied to the network. The Competition Authority considers that there is a conflict of interest. The Authority would therefore like administrators from the head EPIC, including the President of the network manager himself, swerve when these critical functions are performed and that a decretal provision provides it. Secondly, the Authority is concerned about how sensitive information will be effectively conserved in order to not disturb equal competition between operators.

Then, as it should in terms of managing conflicts of interest, the Competition Authority attaches importance to the Commission de déontologie du système ferroviaire (Ethics Commission of the railway system) and it wants a bigger role or input regarding leaders of SNCF Réseau, just as it regrets the reception by the draft decree of the concept of "avis favorable implicite (implicit favorable opinion), opening too much room for discretion of the Commission or even connivance.

As a result, the Competition Authority made a series of complaints about the fact that French law hasn't given sufficient autonomy in the management of stations and hasn't sufficiently ensure the fairness of access to stations, the Authority being probably obliged to wait more binding development of European law. The Authority admits that in any case the insufficiency of the Code de déontologie (Code of Ethics) applied for "Stations & connection", preferring to stronger measures. It is sure that the soft law has its limits.

It was predictable that the critics of the Authority focuses on the structure of the Public Railway Group, but the fact that Parliament didn't want to follow in every aspect its opinion lies in the fact that the Parliament expresses a policy, here a transport policy. Indeed, the Competition Authority considered that SNCF, as an EPIC head, should have the power to set an inside overall strategy for the Public Group without any "external" role,  is -to say having an effect on business operators, which are their competitors.

This is entirely consistent and we understand very well that opinion. But this is only an opinion. Facing the Parliament, in a closer design ordo-liberalism for example, Parliament may decide to amend certain points the bill while not fully following the advice, what it did. But this, the Competition Authority was unhappy and the opinion of the January 6, 2014 is full of dissatisfaction.

But the adviser of the author of a bill is not the political judge of the national parliament. It is not through simple decrees implementing the Government might question the fundamental role of the head of EPIC, not only internal but external role. Therefore, it is Parliament that the Competition Authority gives a "lesson". Is this the proper distribution of roles?

The Competition Authority considers that this head EPIC should have fewer financial resources and finds that its role is too general and too vague. It is certain that if its had have only as an internal control, a holding structure would have sufficed. But if it comes to expressing a public policy, an industrial economy, long-term choices, what the legislator seems to have done in "resistant" with the Competition Authority opinion of October 4, 2013,  giving "external missions" to the head EPIC, such ressources given become more consistent and less deserving of criticism.

The Authority insists on the need to list what in the Public Group is shared at the head EPIC , not through an open list, but a closed list. This is a very important question of writing method. In fact, if - as is the case in the state of the draft decree - the list remains open, the system will have the advantage of being flexible and scalable but, as rightly stresses the Authority, would be slipped out of sight wery important tasks to the detriment of competitors and introduction of competition. In this case, only the pure ex post, that is to say the litigation and settlement in each case, with the probationary cumbersome, slow and the cost involved in the trial, bring the hotfix. But the system will have the advantage of not being frozen For now, the political decision remains that of the Regulation (industrial policy and transport policy) rather than Competition (safety in a transparent and non-discriminatory access to the network and stations).

Then the solution proposed by the Competition Authority is interesting and is already much in financial regulation: it is that of a trusted third party. For the Competition Authority, it must be the regulator itself here ARAF, which must be conferred assent power in the matter. This actually seems a good idea, showing that the regulator must enter sub-group relations.



The Competition Authority likes dissertations and explains the regulator what it should be. Thus, the Competition Authority believes that a residual regulatory power would be fine complexion of regulator and that the legislature would do well if it were granted, with the proposal that in fact the competition authority, power to control the management of confidential information to the network. Furthermore, according to the Competition Authority, if the regulator was a bit more clever, since it seems not to have thought of itself, the Authority has the benevolence of thinking for it, the regulator would be inspired to create an observatory on the matter.

The Competition Authority has certainly model the European Commission, one of whose powers is to establish pivot sectoral regulators to help them work together and develop their doctrine. This is probably why the Authority gives the example of other sectoral regulators.

But the Authority goes much further. Noting that the head EPIC will therefore perform numerous tasks pooled at the request and for the benefit of others EPIC of the Public Railway Group, by contract, the Authority considers it necessary that the ARAF would be in charge to  "supervise cross missions and functions pooled from the train"!footnote-11.

The Authority recognizes nonetheless that such vesting can only be at the legislative level, and it speaks only in view of the coming Order. But it speaks in detail and firmly. Thus, it states that "the need for tariff regulation and transparency regime is no doubt."!footnote-12

But do these agreements within a group  belong to a "price regulation"? If the Competition Authority may fear a transfer of costs to network access prices, doesn't this situation fall under power ex post dispute resolution, given to the regulator?

The Authority recommends granting such power to the Regulator on the occasion of the coming Order. Why not? But freedom of contract, since it is not a regulatory power for which the contract is only a realization of a subjective right of access, should be preserved and an ex post legal tool seems to be  sufficient.

In any case, without ever Competition Authority will put it this way, it wants that the sectorial regulator become the Supervisor of Public Group. This may be justified, but only Parliament can make such a junction betweenRegulation and Supervision.

Thus, when the Competition Authority requested that the minutes of decision making bodies and boards of directors of the three EPIC of the Public Group be transmitted to the ARAF, Regulatory body, it transforms it into Supervision Authority.


Thus, and in conclusion, we can measure that beyond the sectoral specificities, since the rail sector seems far removed from the banking sector ..., Regulation and Supervision continue to get closer.




Il convient en effet de partir de cette summa division, si l'on veut par la suite montrer les rapprochements qui sont en train de s'opérer entre les deux. Le secteur où cela est le plus net est le secteur bancaire. Voir Frison-Roche, M.-A., Concevoir une régulation prudentielle, 2014.


d'encadrer les missions transversales et les fonctions mutualisées de la SNCF


"la nécessité d'un régime de régulation tarifaire et de transparence ne fait pas de doute"

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