This case update summarises the key facts and the decision made by the High Court in the case of Heathrow Airport Limited v ORR and others [2017] EWHC 1290 (Admin). It then examines the lessons to be learnt from the Office of Rail and Road (ORR) decision upheld by the court and identifies key areas of interest for airports and other potential promoters of rail links.

Summary of the facts

On 27 May 2016, the ORR published its decision that Heathrow Airport Limited (HAL) could only recover the direct additional costs caused by the train operations from operators following a challenge brought by the Secretary of State for Transport. This decision encompasses the proposed Crossrail operation to Heathrow as well as existing Heathrow Express services. Crucially, HAL could not charge on the basis of the historic higher costs of constructing the Heathrow Spur. HAL judicially reviewed the ORR's decision on two grounds:

  1. First, it argued that the ORR's decision to limit HAL's ability to charge no more than directly incurred costs was irrational.
  2. Secondly, HAL contended that the ORR had no power to reach any decision regarding access charges for the Spur at all.

Both Transport for London (TfL) and the Secretary of State for Transport participated as interested parties. The Civil Aviation Authority (CAA) intervened to provide evidence as to its role as aviation regulator.

Irrationality: the exception

Directive 2001/14/EC (the Directive) provides generally that rail operator charges shall be set at a cost that is directly incurred as a result of operating the relevant train services; i.e. essentially the marginal costs generated by the specific services. However, Article 8 contains an exception to this rule in respect of certain specific investment projects allowing an infrastructure manager to set higher charges on the basis of the actual long-term costs of such projects. This Directive exception was transposed into UK law through Schedule 3, paragraph 3 of the Railways Infrastructure (Access and Management) Regulations 2005 SI no 3049 (the Regulations) and provides that higher costs can be applied by the infrastructure manager where, amongst other criteria, the project could not otherwise "have been undertaken without the prospect of such higher charges". The same provision has been maintained unchanged within the updated 2016 Regulations.

The amount HAL could charge turned on the application (or not) of the above exception and the evidence around why the rail link was constructed and how it could have been funded. There was no UK or EU case law to assist on the issue of determining when a project could not otherwise be or have been undertaken but for higher access charges. Consequently, ORR acknowledged (as did the High Court) that it was being asked to ‘break new ground’ in its consideration of the issue.

ORR construed the Regulations as not requiring that the full project costs are actually recovered from project users. Partial recovery of long-term costs of the project was within the scope of the exemption if the other criteria were met. Nevertheless, while it found that the phrase "could not otherwise have been undertaken" did not require proof of an absolute impossibility, the infrastructure manager had the burden of proving that the spur project could not have gone ahead without the prospect of higher charges to rail users.

ORR applied a realistic commercial standard and considered that the relevant question was whether HAL had showed that, when the decision was taken to approve the project (under BAA, the predecessor of HAL), there was no realistic commercial possibility of the project going ahead without the prospect of levying charges on rail users that contributed to the “Historical Long-Term Costs”. On the evidence, ORR considered that HAL had failed to demonstrate this.

While it was likely that some level of contribution from revenue from rail users was a working assumption from the outset, the primary imperatives driving the rail link project related to the airport's own commercial objectives and expansion and the rail link project was not conceived as a freestanding rail project as such but an integral part of that. There was evidence from contemporaneous documents and the history of costs recoupment that the spur would still have been built by BAA even if no contribution from rail users to long-term costs would have been viable. Based on the evidence before it, ORR decided that the rail spur would have been incorporated into the airport's Regulated Asset Base (as indeed it was) and funded from other alternative sources.

The court was comfortably persuaded on the evidence that ORR was well within its rights to make the findings that it did. The Judge found that ORR had interpreted the law correctly, gathered relevant evidence appropriately and issued a well-reasoned decision. The decision could not, on any analysis, be characterised as irrational.

ORR: no power

HAL additionally argued that the Directive and Regulations did not apply to the Spur as it was a “network intended only for the operation of urban or suburban passenger services”. However, the Court declined to decide the issue as, even if the Court was minded to agree with HAL, it would have applied its discretion to refuse relief based on HAL's approach to date, including both delay in raising the point and having provided confirmations that it was subject to the Regulations. Consequently, deciding the issue would not have led to any different outcome.

Decision

The judicial review was therefore dismissed. Mr Justice Ouseley held that it was rational for ORR to conclude as it did and conclude that the exception did not apply. Therefore HAL must only charge a minimum access package charge/marginal cost and not the higher charges requested in HAL's proposed Fixed Track Access Charges. The Court added that even if it had found ORR to be irrational it would have refused relief to prevent HAL being unjustly enriched as HAL's financial contribution to the Crossrail project had been calculated assuming only direct costs would be recovered (a point successfully argued by TfL).

It is understood that HAL is considering whether or not to appeal the decision.

Analysis

Rail links are often an important consideration for existing private commercial enterprises and a growing one for promoters of new or expanded commercial services and facilities.

Airport operators and other private sector promoters of rail link projects should consider carefully the ORR decision of 27 May 2016 to understand ORR's approach to applying the legal framework around the "higher charges" exemption. While ORR has provided some additional clarity as to what the qualifying criteria for the exemption requires, it is clear that ORR will examine the contemporaneous factual evidence in detail to come to an overall view as to the commercial purpose and thinking underlying the creation and construction of a rail link.

Rail link projects and their financing and charging structures need to be considered separately as well as being a component of what may be a larger commercial development plan. Ultimately, there should be evidence that the issue of financing and charges has been considered in the decision-making process to approve the project. The question of whether or not the project would proceed in the absence of higher charges based on recovery of long-term costs (as opposed to directly incurred or marginal costs) needs to have been expressly answered upfront.