1. Railway Days. Bucharest. October. October 8. Didier van de Velde (inno-V, Amsterdam) Prof. Chris Nash & Andrew Smith (ITS, University of Leeds) Prof. Fumitoshi Mizutani (Kobe University) & Shuji Uranishi (Fukuyama Heisei University)

2. 16 September 2013EVES-Rail Study 2

3.  EU Policy of introducing competition within mode for freight and passenger  Requires non discriminatory access to infrastructure for competitors  Current legislation requires separate accounts and separation of ‘key powers’, but holding company model permitted  Big issue in current EC proposals: should complete vertical separation be required? 16 September 2013EVES-Rail Study 3

5.  Effects of vertical separation on the rail sector’s economic performance in the EU context  How do costs vary between vertically integrated, holding company and vertically separated companies controlling for other factors (including competition) 16 September 2013EVES-Rail Study 5

6.  If vertical structure does influence performance, why is that?  Degree of competition?  Transaction costs?  Misalignment of incentives?  Can we identify and describe potential misalignments at various points in the value chain of the rail sector?  And if misalignments occur, how to overcome them? 16 September 2013EVES-Rail Study 6

7.  Cost Modelling 16 September 2013EVES-Rail Study 7

8.  US studies (e.g. Bitzan, 2003) – vertical separation raises costs  4 European studies. E.g. Growitsch and Wetzel (2009): vertical separation raises costs  Friebel et. al. (2010). Reforms improve efficiency but only where they are sequential and not in a package  Cantos et. al. (2010). Vertical separation with horizontal separation and new entry in freight improves efficiency. Cantos et. al. (2011). Vertical separation effect not statistically significant; passenger tendering found to improve efficiency  Merkert, Smith and Nash (2011). Transaction costs around 2-3% of total costs  Mizutani and Uranishi (2012). Impact of vertical separation depends on traffic density 16 September 2013EVES-Rail Study 8

9.  US studies  Technology differences  Based on VI firms only  European studies  Inputs physical only (employees; rolling stocks; network length)  Or, includes all costs (not stripping out access charges)  One European study relies on “virtual” VI firms  Density + load factors  In Cantos et. al. (2010) and Mizutani and Uranishi (2012)  Not in others  Data  Britain not included in most studies.  Most up-to-date data is to 2008.  General reliance on published UIC data 16 September 2013EVES-Rail Study 9

10.  Data  Adding the British data to the sample.  Updating in time from 2007 to 2010.  Uses UIC data but verified, improved and extended by CER members via questionnaire  Develop structural dummies to better answer the research questions  In particular: holding versus vertical separation  Improve modelling of market opening dummies  Actual rather than potential freight entry  Passenger competition index that reflects degree of entry  Improve accuracy of timing of structural and market opening reforms 16 September 2013EVES-Rail Study 10

11.  26 OECD countries – 1994-2010  Total rail industry cost = f (control variables, test variables) Control variables (cost drivers not related to policy) Test variables (policy variables that may affect costs)  Passenger output  Freight output  Route length  Technology index  Wage rate  Energy price  Materials price  Capital price  Vertical separation dummy variable  Vertical separation dummy variable * train density  Vertical separation dummy variable * freight revenue proportion  Holding company dummy variable  Holding company dummy variable * train density  Holding company dummy variable * freight revenue proportion  Horizontal separation dummy variable  Passenger competition measure  Freight competition dummy variable 16 September 2013EVES-Rail Study 11

12.  At higher traffic densities, vertical separation increases costs  At mean traffic densities, vertical separation does not significantly change costs  Whereas a holding company model reduces them, compared with complete vertical integration (weakly significant)  A higher share of freight in total revenues increases the costs of vertical separation  Freight traffic may cause more coordination problems in a separated environment than passenger traffic 16 September 2013EVES-Rail Study 12

14.  VS leads to the existence of a fully separated IM alongside RUs  Each subject to a set of incentives given by the market and/or by the regulatory context  Each actor makes choices that optimise its economic position  These choices may well be optimal for each individual actor… but not necessarily for the rail sector as a whole  Misalignment of incentives is when economic losses occur due to choices that are sub-optimal compared to what would occur in a more cooperative set-up (better aligned) 16 September 2013EVES-Rail Study 14

15.  Literature review:  Induced costs from misalignment (up to +20%)  Vertical separation also leads to additional transaction costs, but these are limited (+1%)  Misalignment issues increase in importance  In non steady-state railways (demand increase, investments, reconfigurations)  In systems with higher train densities 16 September 2013EVES-Rail Study 15

16.  How to solve misalignment issues?  Track access charges and performance regimes are important but cannot solve all misalignment issues  Regulators cannot either solve all misalignment issues (compared to holding or vertical integration steering)  Various hybrid arrangements have started to appear ▪ Joint ventures, sharing of surplus/loss from joint actions ▪ Non-financial cooperation, joint facilities ▪ Remark: Easier to reach where a single operator carries a large part of the traffic  Can re-alignment mechanisms solve all problems?  How do re-alignment mechanisms perform compared to alternative arrangements? 16 September 2013EVES-Rail Study 16

17.  System cost effects  Depend on train density and share of freight  Negative aggregate effect for the EU if all switch to VS (costs increase)  Alignment of incentives  Effects are important and require much more attention  New trend towards re-alignment (e.g. GB, NL) 16 September 2013EVES-Rail Study 17