Ferries & Competition

Recently, the District Court in The Hague tackled an interesting case about competition between ferry companies. While some of the legal details make the Court’s decision quite obviously right, the economics of the case are worth digging into a little further.

Starting on 18 November 2008, a company called EVT – Eigen Veerdienst Terschelling – operated a ferry service between the Frisian mainland in Harlingen and the Frisian Wadden Island of Terschelling. It did so in competition with the incumbent operator TSM, the Terschellinger Stoomboot Maatschappij. Critically, TSM, and only TSM, also provided a service to the neighbouring island of Vlieland. (Although there is a separate service connecting both islands directly.)

Until the spring of 2012 this arrangement caused few problems for anyone. The docks in Harlingen and Terschellingen, which are the property of the State, had more than enough capacity for both companies. However, from that point onwards EVT rocked the proverbial boat by operating its service with a bigger ship. It had permission from the State to do that, but that didn’t change the fact that EVT’s rental agreement with the State for the docks in Harlingen were subject to the condition that it could be terminated by the State at any time for reasons related to the public interest. (Par. 2.13)

In October 2013, the State considered that the deteriorating profitability of TSM posed a considerable threat to the continued existence of the main ferry service to Terschelling and Vlieland, and for that reason it terminated EVT’s rental agreement effective 1 February 2014. Starting next month: no more competition.

Legally, the matter is quite straightforward. The relevant term in the rental contract is cast in quite general terms, and the construction proposed by EVT which would exclude a situation like this from “the public interest” seems unreasonably awkward. EVT’s arguments under the Competition Act and state aid law are likewise either incorrect or at least not suited for consideration in an expedited procedure (“kort geding”). So EVT lost before the District Court, and presumably it will lose before the Court of Appeals as well.

However, we can wonder whether this is really the result we should prefer from a policy point of view. Is a monopoly service by TSM – or a near-monopoly by TSM constrained by a limited service by EVT – really the economically optimal outcome? The Court’s judgement contains two little doors to arguments to the contrary.

Firstly, the studies quoted in the Court’s statement of facts provide significant evidence for the proposition that the real problem here is that the ferry service to Vlieland is loss-making, meaning that TSM needs to turn a profit on its service to Terschelling in order to stay afloat. (Sorry.)

If that is the case, literature from other transport modes – particularly railways – suggests that a cross-subsidy of this kind is an inappropriate tax on the inhabitants and visitors of Terschelling for the benefit of the inhabitants and visitors of Vlieland. If the Dutch government considers that the public interest requires that Vlieland should be reachable at a price lower than the cost of operating the service, it should subsidise that service from general taxation. There is no reason to place the burden only with the inhabitants and visitors of Terschelling. This is the whole logic behind taking different parts of the rail network away from the incumbent and tendering them.

The second little door is in par. 4.20, where the Court rejects EVT’s competition law argument. The Court does so by bypassing the question of whether the State acted as an undertaker in this case and holding instead that any arguable infringement of the ban on collusive practices was objectively justified by the public interest. However, it is unclear what the analysis behind this conclusion is.

Whether the State acts as an undertaker in renting out port facilities is an interesting legal question. Presumably, in EU law under Höfner, the answer is that it is. There is nothing inherently sovereign about renting out port facilities. Under Dutch competition law, the special section of the competition act that deals with public sector bodies and their behaviour as market participants does not apply to the State or to ministries. (Cf. art. 25h(3) Mw.) The general definition of an undertaking in art. 1, on the other hand, simply refers to art. 101 TFEU.

The Court bypasses that question and holds that there is no (tacit) collusion aimed at removing competition, because what collaboration existed (the commissie bootdiensten – ferry services committee) was aimed at achieving the best possible transport infrastructure for the islands instead.

This misses the point between collaboration that is anticompetitive by object – which arguably did not occur here – and collaboration that is anticompetitive by effect. Given that the ferry services for each island form a separate market, there is no question that the state’s collaboration with TSM in the ferry services committee and elsewhere had the effect of reducing competition on the Terschelling market.

(The only way the different ferry services could be considered a single market is if a change in the ticket price for one island would cause passengers to choose to go to another island in significant numbers. While this may be remotely plausible for the tourism sub-market – depending on the size of the ferry relative to the total cost of the trip – it is certainly unlikely for residents and other non-tourists.)

The twist at the end is that the alleged justification – making sure that a ferry service would continue to exist for every island – does not suffice under competition law, because the “beneficiaries” of the collusion are not the customers of TSM and the state on the market in question (Terschelling), but rather their customers on a market where no anti-competitive collusion has been alleged (Vlieland).

This is the same problem that the Dutch competition authority encountered recently in its opinion on the Energy Accord. Given that the relevant market in that case was defined as the Dutch market, benefits enjoyed by foreign customers could not be taken into account. Even worse, it is doubtful whether reductions in global warming could be taken into account at all, given that these benefits are enjoyed by energy customers in their capacity of home owners, tax payers, etc., but not in their capacity of energy customers. (For more details, see the discussion here.)

However broadly we define “technical and economic progress” under art. 101 TFEU, the customers on the Terschelling market are worse off as a result of the State’s decision to terminate its rental agreement with EVT. So under any rule of reason-adjacent test, the State’s plea for justification must fail. Unfortunately, the evidence needed to apply such a test cannot be considered by a court in an expedited procedure. So EVT still loses.