April 25, 2012
The main challenges emerging from Regulation 1370/2007/EC for the Railway Industry
Especially in the middle of the post-crisis period the importance of boosting the much-needed economic growth became the cornerstone of the recent European Public Affairs discussions even at the highest level. However, no sustainable growth can be guaranteed without having an excellent European infrastructure, which implies more than ever the need for creation of a truly integrated Single Market of railways. Obviously, a highly competitive, environmental friendly transport system is not imaginable without a viable European railway market. These ideas usually appear in the transport related activities of the Commission, and the railway sector is a crucial building-block of its trans-European transport network (TEN-T) program.
With regard to this overall context, we may consider the adoption of the new Regulation of 1370/2007/EC as a final compromise between the Member States having different economic and political circumstances, which might be an important step in the European Rail transport policy aiming at transforming the fragmented national railway markets to a competition based unified European railway-area.
After the step-by-step liberalisation process of the freight transport through the different Railway packages, this Regulation opens the railway market of public passengers while accepting that the passenger transport is not as economic viable as the freight transport. Based on that principle, it will be possible to provide the railway operators supplying passenger transport services with compensations after fulfilling certain criteria, avoiding in the meantime any kind of overcompensation. Thus, the whole regulation lays down special exemptions to the rule of the Treaties on state aids.
The new Regulation ensures the high level of legal certainty since there are important guaranties for both the competent authorities and the railway operators in the mandatory elements of the public service contracts. Thus, the financial counterpart of the provided social transport services and of the services for general interests may be covered accordingly. Since the calculation methods are formulated in a clear and transparent manner in the Regulation, it is highly probable, that depending on its effective implementation, the rail transport industry may become more profitable.
There are still relevant differences among the Member States, so the Regulation provides relevant transitional measures to make possible the preparation for a more opened competition. Nevertheless, the adoption of this regulation clearly shows that the European integration goes toward the direction of a further competition-based European market therefore the railway industry shall consider it as a unique opportunity to create a knowledge sensitive, low-carbon and well-connected railway network in Europe.
Legal analysis of the new Public Service Regulation 1370/2007/EC in a nutshell
Regulation 1370/2007/EC (hereinafter referred to as ‘the Regulation’) covers – among others – the aspects of the public passenger transport by rail, and it applies not only to the national but also to the international operation of public passenger transport. The Regulation replaces and repeals the earlier Regulation (EEC) No 1191/69. The scope of the Regulation does not cover the freight transport services as such since they are usually more rentable and have a completely different nature. For that purpose, after 3 December 2012, the organisation of freight transport services will be regulated directly by the rules on competition of the Treaty. 
The public passenger transport by rail raises specific issues of investment burden and infrastructure cost, therefore the aim of the Regulation is to establish a legal framework for compensation and/or exclusive rights for public service contracts and not the further opening of the market for railway services.
All competent authorities can choose their public service operators freely but they are obliged to conclude a public service contract the duration is limited to 15 years of, which provides the operator with an exclusive right and/or compensation. As from 3 December 2019, the list of the mandatory contents – including all compensations connected with a general rule or a public service contract – will be applied on those public service contracts.
The Regulation tries not only to align the secondary law of the Union with the binding rules of the primary law but also codifies as much as possible the case law of the Court of Justice. In its Altmark Case C-280/00, the Court of Justice laid down the four cumulative conditions to be fulfilled that a given compensation provided for an operator be exempted from the definition of state aid according to Article 93 of the TFUE, and the Regulation incorporates itself these conditions. As a legal consequence, if the compensations were afforded in line with the Regulation, they would be exempted from the so-called prior notification requirement either.
The Regulation put greater emphasis on the full transparency of the advertising and of the process prior to the conclusion of a public service contract, therefore the publication of an aggregated report by the competent authorities on the public service obligations is obligatory and the competent authorities shall publish at least one year before the launch of the invitation to tender procedure the most relevant pieces of information in the Official Journal of the EU.
Within six months after the half of the general ten years transitional period (3 December – 3 May 2014) for the incorporation of the mandatory elements into the public service contracts, the Commission may propose appropriate measures addressed to Member States based on their progress reports concerning the implementation of the Regulation.
 Articles 107-109 of the TFUE (Treaty on the Functioning of the European Union)
 Although the public passenger transport by road is also subject to the Regulation, we limit our findings to the rules on the rail transport.
 Regulation (EEC) No 1191/69 of the Council of 26 June 1969 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway
 Recitals (11), (36) and see also Articles 101-109 of the TFUE
 Recital (25) and Article 1
 Recitals (9) (26) and Articles 3, 4, 6 and 8
 These conditions are as follows:
1) the recipient undertaking discharges clearly defined public service obligations
2) the parameters of the calculation of compensations have been established beforehand in an objective and transparent manner;
3) the compensation covers only the costs incurred in discharging the public service obligations, taking into account the relevant receipts and a reasonable profit;
4) if the undertaking is chosen without a public procurement procedure, the level of compensation has been determined on the basis of a detailed analysis of the costs of a typical undertaking.
 Recitals (27), (28), (35), Article 6 (1) and Rules applicable to compensation in the cases referred to in Article 6(1) in the Annex
 Recitals (9), (29), (30) and Article 9
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(Cover photo © Dennis Skley)Author : Zoltán Massay-Kosubek