Competition Act 1998
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Competition Act 1998 Decision of the Office of Rail Regulation* English Welsh and Scottish Railway Limited Relating to a finding by the Office of Rail Regulation (ORR) of an infringement of the prohibition imposed by section 18 of the Competition Act 1998 (the Act) and Article 82 of the EC Treaty in respect of conduct by English Welsh and Scottish Railway Limited. Introduction 1. This decision relates to conduct by English Welsh and Scottish Railway Limited (EWS) in the carriage of coal by rail in Great Britain. 2. The case results from two complaints. 3. On 1 February 2001 Enron Coal Services Limited (ECSL)1 submitted a complaint to the Director of Fair Trading2. Jointly with ECSL, Freightliner Limited (Freightliner) also, within the same complaint, alleged an infringement of the Chapter II prohibition in respect of a locomotive supply agreement between EWS and General Motors Corporation of the United States (General Motors). Together these are referred to as the Complaint. The Complaint alleges: “[…] that English, Welsh and Scottish Railways Limited (‘EWS’), the dominant supplier of rail freight services in England, Wales and Scotland, has systematically and persistently acted to foreclose, deter or limit Enron Coal Services Limited’s (‘ECSL’) participation in the market for the supply of coal to UK industrial users, particularly in the power sector, to the serious detriment of competition in that market. The complaint concerns abusive conduct on the part of EWS as follows. • Discriminatory pricing as between purchasers of coal rail freight services so as to disadvantage ECSL. *Certain information has been excluded from this document in order to comply with the provisions of section 56 of the Competition Act 1998 (confidentiality and disclosure of information) and the general restrictions on disclosure contained at Part 9 of the Enterprise Act 2002. Excisions are denoted by […]. Where possible, following such excisions, wording has been added and this has been placed in square brackets and is in italics. 1 Referred to within this document as ECSL or Enron. 2 On 14 February 2001 and in accordance with SI 2000 No. 260 The Competition Act 1998 (Concurrency) Regulations 2000, the Regulator informed the Director that he wished to exercise his concurrent jurisdiction to investigate the complaint. Agreement by the Director to the transfer of the complaint to the Office of the Rail Regulator was given in a letter from the Director dated 20 February 2001. 1 Doc # 259371.01 • Operation of exclusive long-term supply contracts with power stations so as to foreclose ECSL’s competitive prospects. • Effective refusal to deal with ECSL in particular, in effect, refusing to agree a performance- based contract and effectively refusing to supply long-haul freight for coal. • Attempt unfairly to influence the pricing policy of a key trading partner of Freightliner Limited (‘Freightliner’) and GB Railways Group Plc (‘GB Railways’), namely General Motors3. 4. On 11 May 2001, the Regulator issued a notice to EWS requesting information and documents under section 26 of the Act, followed by a meeting with EWS in the offices of the Regulator on 24 May 2001. Further section 26 notices were sent to EWS on 24 May 2001, 10 August 2001 and 19 March 2002 together with a number of letters requesting information and clarification. Further meetings were held with EWS on 12 July 2001, 26 March 2002 and 16 October 2002. On 10 August 2001, the Regulator required information and documents of Freightliner Heavy Haul (FHH)4 and ECSL, by means of a section 26 notice. This was followed by further letters requiring clarification and information and a second section 26 notice sent to FHH on 20 March 2002. The Regulator also met with both parties. Section 26 notices were sent to third parties including the generators and other freight train operators on 20 March 2002, followed by meetings with TXU, Powergen (now E.ON and referred to as such within the remainder of this document, unless the context demands otherwise) and British Energy (BE) taking place in April 2002, and further letters dated 20 September and 20 December 2002, requiring clarification and further information. 5. On 19 August 2002, a further complaint was made by FHH, alleging anti- competitive conduct by way, in particular, of rates offered to London Electricity Group plc (LEG) for rail freight haulage of coal to LEG’s power stations at Cottam and West Burton. The Regulator considered that he had reasonable grounds to suspect that an infringement had occurred and that this conduct was part of a pattern of continuing anti-competitive conduct by EWS in the carriage of coal by rail. 6. Following FHH’s complaint on 19 August 2002, the Regulator using his powers under section 27 of the Act, gave notice to EWS that his officers would be entering its premises at Doncaster and London5. A site visit at the Doncaster 3 The Regulator rejected this part of the complaint. The case closure summary can be found on the ORR website. 4 In April 2001, Freightliner split into two separate operating companies, Freightliner Limited (Freightliner) and Freightliner Heavy Haul (FHH). Freightliner Heavy Haul was established to compete in the bulk rail freight business, which included the carriage of coal by rail. For ease of reading this Decision refers to FHH as the competitor to EWS in the carriage of coal by rail in the UK rather than Freightliner, unless the context requires otherwise. 5 The notice of intention to visit the EWS premises in London was withdrawn by letter of 22 October 2002. 2 Doc # 259371.01 premises took place on 22 October 2002. The Regulator required information arising out of documents provided at the site visit by means of a further section 26 notice dated 27 November 2002. 7. The Regulator issued a Notice stating that he was proposing to make an infringement decision in accordance with rule 14 of the Director’s procedural Rules (the Director’s rules)6, on 6 May 2004 (the Notice). In accordance with the Director’s rules7, EWS was given the opportunity to make written and oral representations. EWS made written representations on 2 November 2004 (the Response) but declined its right to make oral representations. 8. E.ON and RWE npower (RWE8), the co-parties to coal carriage agreements to which the Regulator had found objection were also provided with an opportunity to make representations, by way of non-confidential copies of the Notice. Both RWE and E.ON submitted their representations on 2 November 2004. RWE also attended the offices of ORR on 5 October 2004. FHH was both provided with a non- confidential copy of the Notice and a non-confidential copy of the Response. FHH submitted its representations to both the Notice and the Response on 16 May 2005. Mr David Israel (an ex-employee of EWS) was invited to respond to extracts of a non-confidential copy of the Response, where EWS had commented on the accuracy and context of evidence provided by him. David Israel responded on 18 August 2005 and attended a meeting at ORR’s offices on 2 September 2005. 9. A further section 26 notice was issued to EWS on 27 May 2005, with particular regard to EWS’s cost model (the Frontier Model) and ORR’s request to see internal exchanges relating to that. Further exchanges about that matter ensued over the period June to September 2005. Annex G1 provides detail regarding ORR’s attempts to understand EWS’s pricing generally and the nature of the EWS response. 10. ORR issued a Supplemental Statement of Objections (SO) on 14 March 20069. EWS was provided with the opportunity to make written and oral representations10. Non-confidential versions of the SO were also provided to FHH, E.ON, RWE, Corus, British Energy (BE) and Drax Power Limited11 (Drax). EWS responded to the SO on 20 June 2006 (the Supplementary Response). FHH responded on 5 June 2006. 6 The Competition Act 1998 (Director’s Rules) Order 2000 SI 2000 No 293. 7 Rule 14(7) and rule 14(8) of the Director’s Rules. 8 RWE, previously Innogy and previous to that, National Power are referred to as RWE throughout the Decision unless the context demands otherwise. 9 Issued pursuant to rule 4 of SI 2004 No.2751 The Competition Act 1998 (Office of Fair Trading’s Rules) Order 2004, which came into force on 17 November 2004. 10 Rule 5 of the Office of Fair Trading’s Rules. 11 Until August 2003 AES Drax, referred to as Drax throughout the Decision unless the context demands otherwise. 3 Doc # 259371.01 11. Subsequent to the Supplementary Response, ORR entered into discussions with EWS aimed at expediting the conclusion of ORR’s investigation. EWS agreed that as a result of the significant reduction in the fine that it would otherwise have received (prompted by its co-operation in accepting that it had infringed the Act) and given that ORR did not, having considered EWS’s representations12, reach any finding in relation to an EWS Board strategy to exclude any third party from the market or as to the amount of damage that may have been suffered by ECSL or FHH, EWS would accept the three findings of infringement now set out in this Decision. 12. A more complete chronology of the investigation can be found at Annex A. A summary of the structure of the EWS coal team and its chain of management from the period July 1999 to January 2003 can be found at Annex J, this includes a list of key EWS coal team employees during that period. 13. In this Decision, ORR concentrates on three particular allegations of abusive behaviour brought to its attention by the above complaints and extending over various time periods13.