This briefing note examines the changes to the definition of “special and exclusive rights” in the Utilities Contracts Regulations 2016 which may affect the classification of Train Operating Companies (TOCs) as utilities subject to the EU procurement regime. The note examines the potential difference between those TOCs operating franchises awarded in competition and those operating direct award franchises.

The Utilities Contracts Regulations 2016 (UCR16) came into force on 18 April 2016 and improve clarity in the debate about the application of the EU procurement rules to TOCs.

General position under the old 2006 regulations under the old 2006 regulations

The Utilities Contracts Regulations 2006 (UCR06) apply to commercial bodies undertaking specified activities on the basis of special or exclusive rights relating to the provision of particular services. It is this provision which has encompassed many private sector organisations within the scope of the rules.

The UCR06 applies to ‘utilities’. ’Utilities’ are “relevant persons” that both carry out specific activities, as set out in UCR06 and do so on the basis of a “special or exclusive right” (regulation 3).

Special and exclusive rights?

The UCR06 defines special or exclusive rights as rights granted by a competent legislative, regulatory or administrative authority, with the effect of limiting the exercise of activities specified in the second column of Schedule 1 to one or more entities, which substantially affects the ability of other entities carrying out such activities. (Regulation 3(2)). This seems to include TOCs, granted rights by the Department for Transport (DfT), the effect of which is to limit the exercise of operating a network providing public rail services (an activity specified in Schedule 1) to one or more entities. Furthermore by utilising much of the network capacity this substantially affects the ability of other entities (e.g. open access operators) to carry out such activities. Presumably, it is on this basis that TOCs have generally assumed that the UCR06 applies to them, conducting themselves accordingly.

The EU Commission also issued an Explanatory Note on “Definition of Exclusive or Special Rights” which, although it did not have direct legal effect, it could assist the court on the interpretation of any legal definition. Of particular interest is the explanation for the definition of special and exclusive rights and the information in Recital 25: It is no longer possible to conclude the existence of exclusive or special rights based solely on the pursued activity itself. Analysing each on a case by case basis is now necessary to determine whether undertakings possess rights “which substantially affect[s] the ability of other undertakings to carry out such activity on the same territory under substantially equivalent conditions”. Effectively therefore, if the entity has obtained rights – even exclusive rights – to carry on one of the activities referred to in the Directive on the basis of “objective, proportional and non-discriminatory criteria”, such rights do not constitute exclusive or special rights within the meaning of the Directive. However, debate remains over whether TOC’s carry out Schedule 1 services.

Do franchised TOCSs provide Schedule 1 services?

The only activity listed in Schedule 1 of the UCR06 relevant to TOCs is the “provision or operation of a network providing a service to the public in the field of transport by railway.”

Network Rail operates the railway infrastructure. It is therefore arguable that TOCs, which merely operate on the network, do not undertake activities set out in Schedule 1.

However, this only applies because of the absence of ‘vertical’ integration in the UK rail industry and, therefore, arguing that TOCs do not provide Schedule 1 services is weaker than the argument that TOCs do not have ‘special and exclusive’ rights.

Conclusion under the 2006 regulations

Under the UCR06, there was a case that TOCs were not ‘utilities’ and therefore outside of the scope primarily due to the fact that TOCs no longer enjoy special or exclusive rights, but also due to the possibility that they do not provide Schedule 1 services.

However, this position was not clear cut because of the reliance on Recital 25 and the Explanatory Note, which did not have direct legal effect and would only be considered in cases of ambiguity.

Impact of Directive 2014/23/ec (Directive14) and the Utilities Contracts Regulations 2016 (ucr16)

UCR16, which came into force on 18 April 2016, provides significant changes to the structure of the regulations in that there are no longer any schedules setting out the activities and sectors. Therefore (as the consultation document made clear) it is even more important that an entity considers its classification as a utility under the UCR16.

Regulation 5(4) now specifically provides that: “special or exclusive rights” mean rights granted by a competent authority, the effect of which is to limit the exercise of activities referred to in regulations 9 to 15 to one or more utilities, and which substantially affects the ability of other entities to carry out such activity.

Regulation 5(5) then provides: “for the purposes of regulation 5(4), rights which have been granted by means of a procedure in which: (a) adequate publicity has been ensured; and (b) where the granting of those rights was based on objective criteria shall not constitute “special or exclusive rights””.

The procedures referred in paragraph 5(5) include procedures run under the following regulations:

  • the utilities regulations;
  • the public sector regulations;
  • the new concessions regulations;
  • the defence and security regulations; or
  • other EU procedures listed in Annex II of Directive14.
  • This change represents substantial clarification of the matter as there is no longer any reliance upon the wording in recitals to the Directive or the Explanatory Note.

Annex II of Directive14 lists a number of procedures which are stated as not constituting “special or exclusive rights” when authorisations are granted under them. The list includes contracts falling within Regulation (EC) No 1370/2007 (Regulation07) for the provision of provision of public passenger transport services by bus, tramway, rail or metro which have been awarded under a competitive tendering procedure in accordance with Regulation07 and provided that the length of the contract conforms with the requirements in Regulation07.

The contract length in Regulation07 is limited to 15 years for passenger transport by rail or other track based modes. In addition and “if necessary” the duration can be extended by a maximum of up to 50% if the operator provides assets needed to carry out the services which are predominantly linked to the services covered by the contract. The maximum duration is therefore 22.5 years.

The DfT generally considers that franchises are public service concessions (though interestingly service concessions are not covered by the PCR06 – new concessions regulations – the Concession Contracts Regulations 2016 also came into force on 18 April 2016 which govern the award of both works and services concessions) and also that they qualify as services contracts under Regulation07 [1].

In this respect (assuming DfT maintains the view that franchises are service concessions) if franchises are awarded by DfT under the new Concession Contracts Regulations and/or Regulation07 they will not constitute arrangements which convey special or exclusive rights.

Status of franchises subject to a direct award?

A parliamentary note to MPs on franchising policy dated 18 August 2015[2] notes that “the current profusion of Direct Awards are a direct result of the failed 2012 West Coast re-let…The nature of these awards varies, but what they mean, in effect, is that the Government negotiates directly with the incumbent operator, there is no competition for the award […]”.

DfT gives guidance on the general principles of making Direct Awards, stating:

“The direct awards help to manage and sustain a realistic and properly resourced programme of Franchise Competitions and a healthy bidding market for those competitions. In entering into such direct awards, the Department is conscious that the commercial terms have not been tested through a procurement competition. Domestic and European law helps in this by setting out a specific legal framework for “public service contracts” which is intended to ensure that the terms are economically efficient so that the taxpayer (and fare-payer) is not over-paying for services. Should appropriate terms not be achievable, the Department will call upon contingency measures rather than enter into a Direct Award”.

The DfT’s Rail Franchising Direct Awards Process Guide of 31 October 2014[3] makes reference to Regulation07 which does allow direct awards to be made in two circumstances:

  • Where there is a need for emergency measures because of disruption (or a risk of disruption) to rail services and a contract of up to 24 months can be awarded; and
  • Direct awards of up to ten years can be made provided a notice has appeared in the Official Journal at least one year before the direct award has been entered into.

However, such direct awards may not comply with the special or exclusive rights requirements because, even though awarded under Regulation07, it is questionable whether they comply with the ‘objective criteria’ requirement. However, even if special and exclusive rights are deemed granted by way of a direct award, the TOC would still need to consider whether it was carrying out the relevant activity – in the UCR16 this is set out in regulation 12 but replicates the UCR06 Schedule 1 wording (see 3 above) and clarifies that a network exists where the service is provided under operating conditions laid down by a competent authority, such as (a) conditions on the routes to be served, (b) the capacity to be made available or (c) the frequency of the service.

As noted in section 3 above TOCs do not operate or provide the network – but simply operate on the relevant network. If a TOC does not therefore meet the activity condition it is suggested that it is still not covered by the procurement regime even if it is operating under a special or exclusive right as a result of a direct award.

The position for TOCs operating a franchise which was the subject of a direct award is not abundantly clear – guidance from DfT or CCS would be welcomed on this point.

Next steps

Our view is that franchises awarded under competition are unlikely to convey special or exclusive rights and such TOCS operating under a competitive franchise are therefore not caught by the UCR16. The position on direct award franchises is less clear cut and arguably TOCs operating under a direct award franchise are caught by the UCR16. The UCR16 came into force on 18 April 2016 and in our view the EU has clearly set out the position on special and exclusive rights. TOCs are advised to lobby for clear guidance on the position, particularly in respect of direct award franchises.