Unbundling of Non-Profitable Rail Infrastructures

So far the unbundling debate in the European railroad sector has concentrated on the vertical relationship between train services and rail infrastructures. This paper argues that besides this important vertical dimension there is also an important horizontal dimension of the unbundling topic in the railroad sector, namely the distinction between profitable and non-profitable rail infrastructures. The addition of the horizontal dimension is necessary to capture a special feature of the railroad sector (at least in Europe): its significant financing out of public budgets. The paper analyzes in which way unbundling of non-profitable rail infrastructures can contribute to the solution of the market power problem in the railroad sector. Two economic criteria for disaggregating the parts of a railroad system are presented: competitiveness and profitability. The two regulatory problems caused by market power are discussed. The discrimination problem exists for all rail infrastructures, irrespective of their profitability, whereas the price level problem is absent for non-profitable ones. To avoid excessive or insufficient price regulation, the implementation of horizontal accounting separation is recommended. Finally, it is argued that accounting separation to tackle the market power problem will also contribute to the solution of the procurement problem in case of subsidized rail infrastructures.