Renfe/Deutsche Bahn An outsiders’ view Privileged and Confidential Nuno Alvim 16 November 2017

The (un)usual disclosure RBB Economics not involved in the case. Opinions are my own and do not represent the views of RBB Economics nor of any of the companies involved in this case. Based on no information other than what is publicly available. <Insert date> Privileged and Confidential

CNMC’s understanding <Insert date> Privileged and Confidential

Coordination + Abuse of dominance Coordination – market sharing: Transfesa committed not to enter upstream market for traction Transfesa did not expand self-supplying of traction capacity; Long-term agreement with RENFE for traction services. Renfe committed not to expand in downstream market for transportation of goods, specifically in automobile segment Renfe (re)awarded automobile depots in Madrid and Barcelona to Transfesa. Reduced competitive pressure in: Upstream market for traction services; Downstream market for transportation of goods in automobile segment. Abuse of dominant position – discrimination: Renfe discriminating against customers demanding traction, as compared to Transfesa’s conditions <Insert date> Privileged and Confidential

The parties’ incentives Renfe: Benefits: Increased profits in upstream market – reduced potential competition from Transfesa; Maintained important customer – Transfesa continued purchasing traction services from Renfe. Costs – lost margins in downstream market for transportation of goods, specifically in automobile segment. Transfesa: Increased profits in downstream market for transportation of goods in automobile segment – competitor (Renfe) with reduced capacity; Reduced costs in automobile depot renting – no bidding war with other firms. Costs – higher cost for traction, as contracting traction with Renfe worst than vertically integrated traction services. <Insert date> Privileged and Confidential

First order questions Why would Transfesa do it? <Insert date> Privileged and Confidential

Question about cars – where do we stand on capacity? Renfe capacity constrained? Renting out depots is binding commitment not to compete “because of the agreements, specifically the extension of the car depots renting, (…) Renfe would become limited in developing [the market]” [loose self-translation – page 62] Would Transfesa become capacity constrained if no access to depots? Renfe not capacity constrained? Renting out depots does not change incentive to compete “the continuation of the renting of these strategic depots had anti-competitive effects in the market because it prevented Renfe from establishing an open bidding process that other possible operators could access” [loose self-translation – page 62] Transfesa has reduced costs because more favourable conditions on car depots; but also increased costs because less favourable condition on traction services; Transfesa signs agreement if efficiency increases – aligned with customers. <Insert date> Privileged and Confidential

Question about other goods – is discrimination enough? In the counterfactual Transfesa would have lower costs: the real loss – traction vertical integrated vs. contracting traction from Renfe; Other competitors would also have lower costs: the potential loss – upstream market for traction with potential entry from Transfesa. Discrimination sufficient to make Transfesa better off compared to counterfactual? (especially because extent of potential competition would be defined by Transfesa) Transfesa (unclear?) gains from coordinating on cars must outweigh the loss from coordination on other goods. <Insert date> Privileged and Confidential

Second order questions Alternative explanations? <Insert date> Privileged and Confidential

Demand downturn? Timeline: Transfesa’s decision to invest in locomotives – contract on 3 August 2007; 9 August 2007 financial crisis starts; Automobile demand in Spain falls by 30% from 2007 to 2008; Autumn 2008 Renfe/Transfesa agreements are signed. Transfesa would end up with unused capacity? CNMC claims 2008 demand would be sufficient for Transfesa to operate traction: “Entrant could be able to increase its activity, even in a recessive context, thanks to the loss of market share of the incumbent” [loose self-translation – page 64]; “When Transfesa re-incorporated part of the rented locomotives, in 2011, transportation for goods was still 15% below the 2008 levels (…) thus, given this logic, it should have rented them out again.” [loose self-translation – page 64]. Anti-competitive concern in this case? Why would Renfe do it? <Insert date> Privileged and Confidential

Investing in negotiation? Transfesa’s investment could be efficiency enhancing, even if locomotives unused: Investment in locomotives improved bargaining position vis-à-vis Renfe; Transfesa built a credible threat to stop purchasing traction services to Renfe; Transfesa recouped (partially?) the cost of investment by renting out their locomotives; Using own locomotives more costly than outsourcing traction to Renfe? Agreements would increase Transfesa’s efficiency in downstream market when compared to counterfactual of vertical integration. Upstream market would still have had reduced (potential) competition. Anti-competitive concern in this case? <Insert date> Privileged and Confidential

Possible effect of CNMC’s intervention Abuse of dominance finding in the investment in bargaining position would produce bad signal: dominant firms can only accept improving conditions for a client if conditions are improved for all; lower incentive to accept improving conditions to individual customers (finding of abuse worsens the outside option for dominant firm); decreases incentive for customers of dominant firms to invest in improving their bargaining position: Likelihood of good outcome from investment is smaller; Gain from investment is also smaller, as would not create competitive edge over competitors. Warning does not depend on coordination finding. <Insert date> Privileged and Confidential