1. CASE S/0511/14 RAIL FREIGHT TRANSPORT BY RENFE & DEUTSCHE BAHN
Juan José Ganuza Fernández
UPF and Barcelona GSE
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2. Road Map Summary of the case.
Description of the Spanish Rail Freight Transport Market
Key economics insights
Assessment of the case.
References

3. Summary of the Case
The CNMC fined RENFE (50 mill€) and DEUTSCHE BAHN (10,5 mill€), for a single and continuous infringement of Article 1 of the Spanish Competition Act and Article 101 of the Treaty on the Functioning of the European Union.
According to CNMC, RENFE and DEUTSCHE BAHN participated in a complex web of agreements and concerted practices that had the effect of restricting competition because they led to market sharing between both group of firms.
CNMC also fined RENFE for abuse of a dominant position in the Spanish market for traction used in rail freight transport (Article 2 LDC and Article 102 TFEU) by discriminating third operators with respect to the commercial conditions that RENFE offered to DEUTSCHE BAHN.

4. Summary of the Case
RENFE (70%) and TRANSFESA (15%) were the main competitors in the Spanish rail freight transport.
RENFE held 100% of the market for traction services at 2007 but TRANSFESA tried to develop its own rail traction capacity (ten locomotives leased for 10 years) in order to reduced the dependence with RENFE and potentially become a competitor
RENFE and DEUTSCHE BAHN signed some agreements just after the acquisition of TRANSFESA by DEUTSCHE BAHN, and TRANSFESA undid this strategy by renting these 10 locomotives (5 to RENFE and 5 to ). In addition…
RENFE became the preferential provider to DEUTSCHE BAHN in Spain and conversely DEUTSCHE BAHN the preferential customer of RENFE for a period of almost 6 years.

5. Summary of the Case
These agreements and concerted practices were in place from November 2008 to October 2014.
In the same period, RENFE may abuse of its dominant position by discriminating to third operators who demanded rail traction services with respect to the commercial conditions that RENFE offered DEUTSCHE BAHN.
As a result of this commercial discrimination, third operators were limited in their ability to compete in the Spanish rail freight market without an objective justification.

6. Rail Freight Transport Market Share

7. Rail Freight Transport Market Share

8. Rail Track versus Highways

9. Market Share of the Incumbent Operator

10. Number of Competitiors

11. Revenues and Profits of the Incumbent Operator

12. Features of the Spanish Rail Freight Transport Market
In Spain, Rail Freight Transport has one of the lowest market shares (5%) in Europe (18%).
The slight increase in the market share quota since 2009 coincides with the Expansion of private operators (since 2007).
The European target is 30% in 2030 (Directive 2012/34/EU).
Trains transporting cargo are only 14% of the km-trains, far from European average (19%) and of countries like Austria or Germany where it reaches 25

13. Features of the Spanish Rail Freight Transport Market
Most European countries benefit from a market of locomotives and wagons. There are more than 10 rental companies (ROSCOs) that compete providing material to european operators.
In Spain, the Iberian width of rail tracks limits this market, essentially there is only one producer and renting companies.
Renfe has overcapacity, Awad (2015) shows that Renfe has an excess of rolling stock about 300 locomotives and 1200 wagons, when he estimates that only 150 locomotives and 1600 wagons would be necessary to transport the cargo.
This makes very risky to ROSCOs companies to enter the market (they anticipate that some day RENFE locomotives and wagons will be put in rent and its price will be very low

14. Features of the Spanish Rail Freight Transport Market
RENFE controls key assets of the vertical chain, most of the locomotives, the only ROSCOs that may rent locomotives, the company in charge of the maintenance and certification of the locomotives, the training of the machinists, etc…
RENFE has negative profits in the rail freight market, mainly due to its overcapacity and very high labor costs.
600 machinists, around km year, half of the european average, truck driver
At the time of the agreement, TRANSFESA was the competitor with the largest market share (15%)

15. key Economic Insights
Interesting case for studens collusion with explict contract jointly with abuse of dominant possition.
In the surface, the agreement between RENFE and DEUTSCHE BAHN may look similar to other agreements for sharing networks in telecomunications and paying for delay between patent holders and generic firms.
However, while in these cases under some circunstances these agreements may enhance welfare (savings huge fixed costs or litigation costs), I do not find any efficient rationale to justify the agreement between RENFE- DEUTSCHE BAHN.
Remenbet that according to the agreement, RENFE depites the overcapacity in locomotives, hire 5 more!!

16. key Economic Insights
Upstream market (locomotives) dominated by an incumbent that controls key assets but also with cost inefficiencies.
Downstream market more competitive (providers of rail freight transport services). In 2007 the most aggressive competitor in this segment planed to acquire locomotives in order to reduce its cost dependence over RENFE and maybe to enter to into the upstream market.
This was an important threat for RENFE. Then RENFE had incentive to reach an agreement with DEUTSCHE BAHN and keeping the control of the market.

17. key Economic Insights
DEUTSCHE BAHN has also incentives to reach an agreement with RENFE, that controls key assets in the vertical chain.
With the agreement DEUTSCHE BAHN will have lower cost than its competitor in the downstream market, which jointly with the weak cost structure of RENFE, will give to DEUTSCHE BAHN an important competitive advantage, without incurring in a risky price war with the incumbent of the market.
Caveat of the analysis, similarly to the recent google case , the misconduct is clear, but the social damage may have not been as large as it is claimed. In particular, the market shares of TRANSFESA (less than 10%) and RENFE (less than 70%) have decreased.

18. key Economic Insights
There are two important new entrants, Comsa Rail Transport and Continental Rail with similar market share of TRANFESA
Very difficult to compute the losses in terms of consumer welfare, but the Spanish market remains very small despite the liberalization.
RENFE tries to reduce loses by closing non profitable activities, such market segments are in part covered by competitors.
New entrants were old consumers that decide to enter into the market to overcome the poor services and high prices.
The most important entry barrier seems to be the access to the upstream market.

19. References
Awad, S. (2015) “¿Podría ser eficiente el ferrocarril español de mercancías?,” Fundación Francisco Corell. 33
Llevat, M and G. Llobet (2016) “El Futuro del Ferrocarril de Mercancías en España”, Fedea Policy Papers /25.