Opinion of Advocate General Campos Sánchez-Bordona delivered on 25 March 2021

Data

Court: Court of Justice

Case date: 25 maart 2021

Opinion of Advocate General

Campos Sánchez-Bordona

delivered on 25 March 2021^(*)

Case C‑144/20

AS LatRailNet,

Latvijas dzelzceļš VAS

v

Valsts dzelzceļa administrācija

(Request for a preliminary ruling from the Administratīvā rajona tiesa (District Administrative Court, Latvia))

"(Reference for a preliminary ruling - Rail transport - Single European railway area - Railway infrastructure charging - Directive 2012/34/EU - Article 32(1) - Charge for the minimum access package - Mark-ups - Conditions for levying the mark-up - Competitiveness - Ability of the market to bear the mark-up)"

This reference for a preliminary ruling has its origin in a dispute between AS LatRailNet (the body responsible for performing the essential functions of railway infrastructure manager in Latvia)^(*) and the Valsts dzelzceļa administrācija (the regulatory body for the railway sector in that country).^(*) The dispute concerns the mark-ups on charges for use of railway infrastructure which are levied in the rail passenger transport segment. Directive 2012/34/EU^(*) makes it possible, under certain conditions, to apply to those charges (which must be calculated in such a way as to meet direct costs only) a mark-up for each market segment.^(*) The dispute arose when the regulatory body ordered LatRailNet to make certain changes to the formula for calculating the mark-up applicable to undertakings providing passenger transport services by rail ‘within the framework of a public service contract’, to the exclusion of other operators.^(*) By its reference for a preliminary ruling, the national court seeks an interpretation of Directive 2012/34 as regards: (i) the powers of the regulatory body (first and second questions); and (ii) the mark-up on charges provided for in Article 32(1) thereof (third question). In accordance with the Court’s direction, this Opinion will deal only with the third question referred.

Legal framework

EU law

Directive 2012/34

Article 31 (‘Principles of charging’) provides:

‘…
3.
Without prejudice to paragraph 4 or 5 of this Article or to Article 32, the charges for the minimum access package and for access to infrastructure connecting service facilities shall be set at the cost that is directly incurred as a result of operating the train service.
…’

In accordance with Article 32 (‘Exceptions to charging principles’):

‘1.
In order to obtain full recovery of the costs incurred by the infrastructure manager a Member State may, if the market can bear this, levy mark-ups on the basis of efficient, transparent and non-discriminatory principles, while guaranteeing optimal competitiveness of rail market segments. The charging system shall respect the productivity increases achieved by railway undertakings.
The level of charges shall not, however, exclude the use of infrastructure by market segments which can pay at least the cost that is directly incurred as a result of operating the railway service, plus a rate of return which the market can bear.
Before approving the levy of such mark-ups, Member States shall ensure that the infrastructure managers evaluate their relevance for specific market segments, considering at least the pairs listed in point 1 of Annex VI and retaining the relevant ones. The list of market segments defined by infrastructure managers shall contain at least the three following segments: freight services, passenger services within the framework of a public service contract and other passenger services.
…’

Regulation No 1370/2007

Article 2 (‘Definitions’) states:

‘For the purposes of this Regulation:
…

“public service obligation” means a requirement defined or determined by a competent authority in order to ensure public passenger transport services in the general interest that an operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions without reward;

“exclusive right” means a right entitling a public service operator to operate certain public passenger transport services on a particular route or network or in a particular area, to the exclusion of any other such operator;

“public service compensation” means any benefit, particularly financial, granted directly or indirectly by a competent authority from public funds during the period of implementation of a public service obligation or in connection with that period;

…’

Article 3 (‘Public service contracts and general rules’) provides:

‘1.
Where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obligations, it shall do so within the framework of a public service contract.
…’

Latvian law. Dzelzceļa likums (Law on Railways)

Article 11 provides:

‘(1) After consulting applicants and the public-use railway infrastructure manager, the person responsible for performing the essential functions of the public-use railway infrastructure manager shall develop and approve a charging system in relation to the minimum access package referred to in Article 12¹(1) of that Law and in relation to access to infrastructure connecting service facilities and forward it to the public-use infrastructure manager for inclusion in the network statement. Other than in the specific cases provided for in Article 11¹(10) of that Law, the person responsible for performing the essential functions of public-use infrastructure manager shall ensure that the aforementioned charging system is based on the same principles throughout the network and that that scheme operates in such a way that different transport undertakings providing services of a similar nature in a similar part of the market pay equivalent and non-discriminatory charges.
(2) The charges for the minimum access package … and for access to infrastructure connecting service facilities shall be determined on the basis of the direct costs of operating the rail service …’

Article 11¹ states:

‘(1)
In order to obtain full recovery of the costs incurred by the public-use railway infrastructure manager, the person responsible for performing the essential functions of public-use railway infrastructure manager may, if the market can bear this, levy mark-ups on the charges for the minimum access package referred to in Article 12¹(1) of that Law and for access to infrastructure connecting services.
(2)
Before applying the mark-ups, the person responsible for performing the essential functions of public-use railway infrastructure manager shall evaluate their relevance in at least the following market segments and choose the most important of them:

passenger and freight services.

…
(7)
The mark-ups shall be applied on the basis of efficient, transparent and non-discriminatory principles, while guaranteeing optimal competitiveness of the railways and taking into account the productivity increases achieved by railway undertakings. The level of charges shall not exclude the use of public-use railway infrastructure by market segments which can pay at least the direct costs, plus a rate of return which the market can bear.’

Facts and questions referred for a preliminary ruling

On 30 June 2017, LatRailNet, exercising the essential functions of railway infrastructure manager,^(*) adopted the charging system at issue. The amount of the mark-up in each market segment was determined in accordance with a formula the components of which include the market weighting coefficient ‘mcbs’. That coefficient can vary between a value of 0 (in which case, no mark-up is applied to the market segment in question) and a value of 1 (which triggers the addition of the maximum mark-up). The coefficient ‘mcbs’ is fixed on the basis of three factors or assessment criteria known as Cs, Vs and Ss. The highest value will determine the value of the coefficient ‘mcbs’. According to the model adopted by LatRailNet for the market segment comprised of passenger transport services within the framework of a public service contract,^(*) the value of the criterion Ss was equal to 1. Conversely, in other market segments, that value would be established on the basis of an evaluation carried out by an expert. As a result of that model, the Cs and Vs criteria are no longer relevant, even if their value is 0. For, once the value of Ss for the market segment comprised of passenger transport within the framework of a public service contract is set at 1, the weighting coefficient ‘mcbs’ automatically rises to 1, without the need for any evaluation of the market situation. On 27 June 2018, the regulatory body cancelled the charging system introduced by LatRailNet, and ordered LatRailNet to adjust it in relation to the mark-up applicable to the market segment comprised of passenger transport services within the framework of a public service contract. On 26 July 2018, LatRailNet brought before the Administratīvā rajona tiesa (District Administrative Court, Latvia) an action challenging the regulatory body’s decision, which it considered to be invalid on the following grounds:

In so far as Pasažieru vilciens exercises the exclusive right to provide public transport services on regional intercity rail routes, there is no competition in the provision of those services.
It is not possible for the regulatory body to monitor competition on the market in railway services when a segment of that market (that comprised the provision of public passenger transport services within the framework of an exclusive public service contract) is not open to competition.
As a result of that very lack of competition, the infrastructure manager is unable to ‘assess the competitiveness and viability of the market segment in question before applying the mark-up and determining its amount’.^(*)

Latvijas Dzelzceļš, in its capacity as Latvian railway infrastructure manager, intervened in the main proceedings in two ways:

First, on 5 December 2018, it brought an action for the annulment of the regulatory body’s decision of 7 November 2018 finding that it did not have standing to challenge the charging system.
Second, it was invited by the referring court (by decision of 13 November 2018) to participate as an interested third party in the proceedings brought by LatRailNet.

On 5 February 2019, the referring court joined the two sets of administrative-law proceedings. In its pleadings, Latvijas dzelzceļš ‘considers that it is possible to set a maximum value for criterion Ss, since Pasažieru vilciens, the sole representative of the passenger transport segment, which pays … an infrastructure charge (including a mark-up), was also protected against any harm that might arise from the determination of that charge’.^(*) It was in those circumstances that the Administratīvā rajona tiesa (District Administrative Court) referred to the Court of Justice for a preliminary ruling, inter alia, the following question:^(*)

Must Article 32(1) of Directive [2012/34] be interpreted as meaning that the obligation imposed on Member States in that paragraph to guarantee optimal competitiveness of rail market segments, by establishing mark-ups on infrastructure charges, also applies to the determination of infrastructure charges in market segments where there is no competition because, for example, in the market segment concerned, transport is delivered exclusively by a single rail operator which has been given the exclusive right under Article 2(f) of Regulation No 1370/2007 to provide transport in that market segment?’

Procedure before the Court of Justice

The order for reference was received at the Court on 27 March 2020. Written observations were lodged by Latvijas dzelzceļš, the regulatory body, the Italian Government and the European Commission. The Court did not consider it necessary to hold a hearing.

Assessment

By its third question, the referring court wishes to ascertain whether the possibility for Member States to levy ‘mark-ups …while guaranteeing optimal competitiveness of rail market segments’ (Article 32(1) of Directive 2012/34) is available in the case where, in a particular market segment, passenger transport is delivered exclusively by a single rail operator.

Charges and mark-ups in the financing of the railway infrastructure manager

In order to define the matter at issue, it is important to recall that the services to be supplied to railway undertakings, as set out in Annex II to Directive 2012/34, include:

those forming part of the minimum access package referred to in point 1;
those set out in points 2, 3 and 4, which relate to service facilities, additional services and ancillary services respectively.

Article 13 of Directive 2012/34 deals with the conditions under which railway undertakings may access the various services:

the minimum access package is to be supplied by infrastructure managers in a non-discriminatory manner (paragraph 1);
in the case of service facilities, it falls to their operators to supply to railway undertakings ‘access, including track access, to the facilities referred to in point 2 of Annex II, and to the services supplied in these facilities’ (paragraph 2).

Directive 2012/34 provides for the payment of charges for using both railway infrastructure and service facilities. Those charges are paid to the infrastructure manager and to the service facility operator respectively and are used to fund their business (Article 31(1)), in accordance with these criteria:

The charge for the minimum access package ‘shall be set at the cost that is directly incurred as a result of operating the train service’ (first subparagraph of Article 31(3) of Directive 2012/34).
The charge for service facilities is not to exceed the cost of providing the service plus a reasonable profit (Article 31(7) of the same directive).

Thus, the railway infrastructure manager is financed^(*) from, among other sources,^(*) the revenue obtained from the infrastructure charge, which it collects from infrastructure users. There is nothing to stop it also benefiting from State funding.^(*) The rules governing that source of revenue, from charges and mark-ups, are contained in Articles 31 and 32 of Directive 2012/34,^(*) and are, in essence, as follows:

The general rule (Article 31(3) is that the charge for the minimum access package and for access to infrastructure connecting service facilities must be set at the cost that is directly incurred as a result of operating the train service (direct costs).^(*)
By way of exception (Article 32(1)), Member States may add mark-ups in order to ‘obtain full recovery of the costs incurred by the infrastructure manager’ (in addition to direct costs). They may do so only if ‘the market can bear this …, while guaranteeing optimal competitiveness of rail market segments’. Mark-ups must be introduced on the basis of ‘efficient, transparent and non-discriminatory principles’.

Under that scheme, the railway infrastructure manager may use the railway [infrastructure] charges to meet direct costs. Conversely, it is authorised to introduce mark-ups to recover other costs only if the market can bear this and optimal competitiveness of the rail market segments concerned is guaranteed. The third question referred is specifically concerned with the conditions applicable to the establishment of a mark-up.

Conditions governing the introduction of a mark-up

Directive 2012/34 requires the infrastructure manager, when establishing mark-ups, to take into account the features specific to the market segment in question. The principal condition for introducing them is, as I have said, that ‘the market can bear this’.^(*) The referring court focuses its attention, however, on the notion of competitiveness as referred to in Article 32(1) of Directive 2012/34. It notes in this connection that:

the market segment in respect of which the mark-up at issue is levied is passenger transport within the framework of a public service contract that is exclusively delivered by a single railway undertaking;
it could be argued that, as there is no competition in that market segment, Article 32(1) of Directive 2012/34 does not apply, since there is no need to ensure ‘optimal competitiveness’ in that segment.

This approach coincides in part with that taken by the Latvian infrastructure manager. Latvijas dzelzceļš thus argues that Article 32 of Directive 2012/34 is to be interpreted as meaning that the absence of competition in the passenger transport segment ipso facto precludes any assessment of the competitiveness and profitability of that segment.^(*) To focus on the factor of competitiveness is to lose sight of the fact that the key element (the true centre of gravity) of the rules governing the exceptions to the principles of charging, as provided for in Article 32 of Directive 2012/34, is not this but the requirement that mark-ups must be bearable by the market on which they are levied. It is nonetheless important to consider what bearing competitiveness as referred to in Article 32(1) of Directive 2012/34 has in this context. More specifically, it will fall to be ascertained whether that notion is synonymous with competition between railway undertakings. The second subparagraph of Article 31(5) and the fourth subparagraph of Article 32(4) of Directive 2012/34 provide that the ‘implementing acts [that may be adopted by the Commission] shall not result in the undue distortion of competition between railway undertakings or affect the overall competitiveness of the railway sector’. By the same token, Article 8(4) of Directive 2012/34, as I have already commented, also calls for ‘rail transport [to be] able to compete with other modes of transport’. Recital 5 of that directive uses a similar expression when stating that rail transport should be ‘competitive with other modes of transport’. In my opinion, those provisions represent the benchmark for distinguishing, in the context of Directive 2012/34, between ‘competition’ as the playing field on which railway undertakings have to operate, on the one hand, and the ‘competitiveness’ of the railway sector or of any of its segments, on the other:

When Directive 2012/34 refers to competition, it does so as an expression of the competition that must prevail between railway undertakings in the provision of rail services or on rail transport markets.
Conversely, when Directive 2012/34 refers to competitiveness, it uses that term to describe a feature or characteristic of the railway sector (or of the railway market segments), but it does not equate it to the competition between railway undertakings.

An examination of the various language versions of Article 32(1) of Directive 2012/34^(*) confirms that assessment. The competitiveness which infrastructure managers must guarantee is that which the rail transport segment (on which the mark-up is levied) must exhibit in relation to alternative modes of transport. This was also the approach that informed Directive 2001/14, recital 39 of which referred to a ‘rate of return which the market can bear’.^(*) The competitiveness which the mark-up must respect is not therefore a concept synonymous with that of the competition between railway undertakings. What the mark-up must not do is cause a particular market segment to lose its ability to compete with different modes of transport (that is to say, its competitiveness). In the case of rail passenger transport, that ability to compete will enable it to hold its own against transport by air, road or other means. Viewed in that light, the mark-up would entail an evaluation of the profitability of the segment in question as compared with other non-rail modes of transport. Railway undertakings would thus be able to pay the charge and the mark-up provided that the latter is not so high as to compel them to increase fares to such an extent as to deter users, who would then choose to use those other modes of transport. The fact that there is no competition between railway operators themselves does not preclude an assessment of the competitiveness of a rail passenger transport segment. Such a segment can be competitive (in relation to other modes of transport) even if it is operated by a single railway undertaking.^(*) It is true that the charging system could have an adverse impact on competition between railway undertakings. It is for this reason that one of the regulatory body’s functions is to prevent potentially anticompetitive charges (cross-subsidies, predatory pricing and excessive pricing), which may include mark-ups.^(*) This, however, is an aspect of the issue which is absent from the order for reference, focused as it is on the conditions governing the imposition of mark-ups. In short, if, in principle, the intention of obtaining full recovery of the costs incurred by the infrastructure manager, in addition to recovery of the direct costs, authorises Member States to introduce mark-ups, that possibility is available to them ‘if the market can bear this’. That the market can bear this itself presupposes, inter alia, that the mark-up does not impair the competitiveness of the railway segment in question.^(*) In particular, if rail passenger transport undertakings were unable to pay the mark-up because its impact on final prices to users would dissuade them from availing themselves of their services, this might jeopardise the ‘optimal competitiveness’ of that segment. Contrary to what Latvijas dzelzceļš contends, that position does not disregard the objectives of Directive 2012/34, since the recovery, by way of mark-ups, of the costs (other than direct costs) incurred by the infrastructure manager is not unconditional, but subject to the criteria, as analysed above, set out in Article 32(1) of that directive. The argument put forward by Latvijas dzelzceļš (that anything less than the maximum mark-up would prevent the infrastructure manager from recovering all costs)^(*) rides roughshod over the conditions which Directive 2012/34 lays down in this regard.

Mark-ups and provision of the service within the framework of a public service contract

The third subparagraph of Article 32(1) of Directive 2012/34 provides that, ‘before approving the levy of such mark-ups, Member States shall ensure that the infrastructure managers evaluate their relevance for specific market segments’. One of the segments in which such an evaluation is required to be carried out is that comprised of ‘passenger services within the framework of a public service contract’. A reading of that article therefore shows that there is nothing, in principle, to stop Member States from introducing mark-ups on the charges levied on railway undertakings where the latter manage passenger transport within the framework of a public service contract. Regulation No 1370/2007 makes it possible for Member States and local authorities to award public service contracts which may contain exclusive rights to operate certain services. A reference to that possibility – and to the provision providing for it – can also be found in recital 19 of Directive 2012/34, which calls for the option so envisaged to be interpreted in a manner consistent with that regulation. Regulation No 1370/2007 defines public service contracts as a tool for ensuring the provision of inland passenger transport services ‘which are required in the general interest’ in circumstances not amenable to ‘operat[ion] on a commercial basis’.^(*) The mechanisms by which the competent authority rewards the public service operator are, in accordance with Article 3(1) of Regulation No 1370/2007, the award of ‘an exclusive right and/or compensation’^(*) Article 2(f) of that regulation defines an exclusive right as a ‘right entitling a public service operator to operate certain public passenger transport services on a particular route or network or in a particular area, to the exclusion of any other such operator’. Public service obligations usually take effect in a context characterised by a lack of economic profitability coupled with the existence of general interest grounds justifying those obligations. An operator would not take on such obligations (or would not take them on to the same extent or under the same conditions) if it were to take into account only its own commercial interests in doing so.^(*) Under that model, a railway undertaking operates a public passenger transport service and pays charges to the [railway infrastructure] manager and the service facility operator respectively. In return, that undertaking receives revenue from operating the public service (i.e. from ticket sales) and, where appropriate, compensation for providing it. I therefore concur with the Commission^(*) that Article 32(1) of Directive 2012/34 does not cease to apply where a railway undertaking has entered into a contract conferring on it the exclusive right to operate public passenger transport services to the exclusion of other operators. In theory, there is nothing to stop railway undertakings managing passenger transport within the framework of a public service contract from making a return. In such circumstances, the infrastructure manager, after evaluating the rate of that return, may levy a mark-up on the charges payable by those undertakings if the other circumstances provided for in Article 32(1) of Directive 2012/34 are present. In any event, as I have already said, the profitability of the segment requires careful evaluation. This explains why the agreement concluded by LatRailNet on 21 August 2018, pursuant to the regulatory body’s decision, stated that ‘the value of criterion Ss shall be determined for all market segments on the basis of an evaluation carried out by an expert’.^(*) In this way, the rules governing the market segment comprised of passenger transport within the framework of a public service contract are in keeping with those governing other sectors for which that measure was already in place.^(*)

Calculation of the mark-up and financing from public funds

Those who have lodged observations in the course of this reference for a preliminary ruling have commented in one way or another on the content of the regulatory body’s decision^(*) on the items of public financing that were to be excluded form the basis for calculating mark-ups.^(*) While I do not dispute that this issue is of interest to the parties to the dispute, the fact is that the referring court does not refer to it in the third question it has referred for a preliminary ruling. Neither in the wording of that question nor in the grounds of the reference^(*) does that court express any doubts in this regard, and there is therefore no reason for the Court to engage in that debate.

Conclusion

In the light of the foregoing, I suggest that the answer to the third question referred for a preliminary ruling by the Administratīvā rajona tiesa (District Administrative Court, Latvia) should be as follows:

Article 32(1) of Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area must be interpreted as meaning that, provided that the conditions laid down in that provision are fulfilled, there is nothing to stop Member States from introducing mark-ups on the infrastructure charges payable by a railway undertaking which, having been awarded the exclusive right to do so, manages passenger transport within the framework of a public service contract.