Commercial Awareness Update – W/C 27th January 2020

The round-up of the stories that a budding Student Lawyer should be aware of this week. Sign up here to get these updates in your inbox every week.

UK Government Reaches Decision on Huawei Inclusion in 5G Network

On 28^th January, the UK’s National Security Council (NSC) finally reached a decision on whether Huawei should be permitted to supply equipment for its national 5G network, ruling that it could participate but only on a limited basis.

The debate surrounding Huawei has been ongoing for months.  On the one hand, the UK needs to upgrade its current 4G network in order to keep up with technological developments in the telecoms space.  Huawei is one of very few companies with the expertise to provide 5G equipment on a mass scale and can do so more cost-effectively than other companies.  On the other hand, the company’s Chinese ownership has led to fears that the Chinese state could manipulate the equipment in order to carry out espionage and cyber-attacks on the British network.  The USA has vehemently opposed the use of Huawei equipment on its domestic networks and President Trump has previously warned the UK that using Huawei equipment here could lead to the cessation of intelligence sharing between the two countries.

Boris Johnson and the NSC’s decision has sought to find a compromise between these two competing interests.  Huawei’s market share will be capped at 35% for each of the UK’s four mobile phone operators, and it will be banned from “core” parts of the telecoms network and from intelligence-sensitive sites, such as military bases.   This allows the UK to take advantage of the sophisticated and cost-effective technology, while ensuring that the UK does not become dependent on Huawei or compromises its security.

Despite the fears surrounding Huawei, the UK telecoms network already uses significant amounts of Huawei equipment. In fact, BT (one of the four companies subject to the 35% cap) has said it will cost them £500 million to remove all the Huawei equipment they are currently using in order to fall within the new cap.

The reaction from the US to the announcement has been mixed.  Secretary of State Mike Pompeo, who has been on in the UK over the last week stated that the US would try to find a way to continue intelligence sharing with the UK (as part of the “Five Eyes” alliance that also includes Canada, Australia, and New Zealand) but that “We will never permit American international security information to go across a network that we don’t have trust and confidence in.”  President Trump, no doubt distracted by the ongoing impeachment hearing, is yet to comment publicly on the announcement.

Find out more here and here.

Turbulence at Flybe

Article by Gina Asadi (recent BPP LLM Legal Practice (Solicitors) graduate)

Flybe, Britain’s biggest regional airline, has been considering a possible administration, with EY on standby. The airline operates about 200 routes in the UK and Europe. In the UK, Flybe’s operations are mainly domestic, linking England, Wales and Scotland. Flybe operates the highest number of flights in some of the regional airports such as, Manchester and Birmingham. Although, Flybe’s passenger numbers do not compare to other airlines’ such as, easyJet, it is still viewed as essential by both business and leisure passengers.

Regardless of being a vital business in the airline industry, Flybe has experienced tough times. In March 2019, the company risked collapse until it was rescued by Virgin Atlantic, Stobart Group and Cyrus Capital. This consortium injected Flybe with millions of pounds; with hopes of growing the company and connecting it with the Virgin Atlantic services.

Fast forward to the new year, Flybe kicked off 2020 with rescue talks as its debts continued to pile up. The airline has attributed many of its struggles to Brexit, as Flybe’s costs are paid in dollars and its earning are in pounds, the decrease of the pound value has had a big effect on the company. Also, the increasing competition in the market has had its toll on Flybe, with larger airlines moving into Flybe’s established markets. For instance, Flybe has been struggling in Bristol due to easyJet’s operations in the area. Further, with the improvement of rail links around the UK it appears that Flybe cannot catch a break.

The rescue talks included the government, as Flybe appears to be £100m in Air Passenger Duty (‘APD’) tax arrears. APD is paid by the passenger to the airline, which then gets passed on to the government, which is out in the Treasury. The rescue deal is said to consist of another cash injection of around £30m from Flybe’s consortium of owners. In addition, Flybe is to get a deferral on its APD tax and a possibility of a government loan is on the table. This comes as a surprise, after the government’s refusal to rescue Thomas Cook from collapse.

The government aided rescue deal has not been welcomed by other airlines. With the CEO of British Airways calling it a ‘blatant misuse of public funds’ and has filed a complaint with Brussels alleging that the funding was in ‘breach of state aid rules’. While Ryanair boss has threatened legal action against the government, maintaining that any APD tax break granted to Flybe should be extended to rival airlines.

You can read more here, here and here.

The Nationalisation of Northern Rail

Article written by Beth Zheng (second-year law student at Durham University)

1st March 2020 will mark the date that Northern Rail is stripped of its franchise and brought under government control. This decision was proposed by the current Transport Secretary Grant Shapps, who justified his decision claiming passengers had lost trust in the rail operator. Recently, the train operating company had come under fire for their delayed services, which has led to disgruntled customers. Moreover, it was held that Northern was not meeting its obligations under their current franchise contract which states the need for longer trains and Sunday services.

In December 2019, it was announced that only 56% of Northern trains arrived on time (within one minute), which is significantly worse than the average around the country of 65%. Similarly, whilst 4.7% of services are cancelled nationally, Northern itself cancelled 7.3% of their services. This has frustrated commuters who rely on the trains to get to work. Currently, the franchise operates on journeys between Staffordshire and Northumberland, serving approximately 108million passengers on its 2800 daily services. Therefore, the decision to nationalise Northern has received mixed reaction.

David Brown, Managing Director at Northern blamed the poor service on the lack of effective and suitable infrastructure upgrades, which Shapps himself agreed needed to change. Brown further criticised the decision through stressing how Northern themselves were not to blame and challenges faced were ‘outside their direct control’. However, consumers are less than sympathetic, especially given the continuous rising train fares which are making journeys less and less valuable.

In 2020, train fares increased from the previous year by 2.7%, yet services were getting worse. Whilst train companies seem to attempt to justify this by stating it is lower than the national rate of inflation per year, many commuters must fork out an extra £100 to pay for their annual passes. Meanwhile, train fares in Wales have actually decreased by 1%, putting additional pressure on operators to provide a valuable service.

Rather than focusing on the failure of Northern, perhaps it is more important to analyse the weaknesses of the rail franchising system in general. Originally set up to look after the tracks, tunnels and signalling whilst private companies competed to run the trains, it seems that this objective is no longer prioritised. Instead, a system that was meant to bring competition and encourage companies to innovate has failed to do so, at the expense of commuters.

Furthermore, the current state of HS2 also contributes to the debate. With estimates that the High Speed Project will in fact cost over double of its estimated budget of £56billion to culminate in a £100billion bill, there are debates whether HS2 will be finished or abandoned. Meanwhile, the growth of revolutionised trains in the form of Virgin Train’s 2016 Azuma Fleet as well as TransPennine Expresses’ new Nova fleet illustrate that innovation is happening in some places, even if it is slowly.

Whilst the Department themselves maintain the success of privatisation, quoting the success of the doubling of passenger numbers with an additional 4600 daily services, the former British Airways boss, Keith Williams, criticised government involvement. Williams said that in the future, rail franchises should be underpinned by punctuality and other performance-related targets rather than be left to the Department of Transport. The effects of such action through cases such as the stripping of Scotland’s rail operator Albellio Scotrail’s contract two years before its original term have reflected losses of £10million over 15 months, which has devasted the economy. The public need to be able to trust train operators to provide a reliable service before the inevitable collapse of the entire rail network.

You can read more here and here.

Britain’s Energy watchdog: customers overpaying for electricity while regulators fail the system.

Article written by Tofunmi Bello, LLM student at the University of Sheffield.

Under Ofgem; Britain’s energy watchdog, electricity network companies have provided a good service, but at a higher cost to consumers than it should have. It is now clear that targets were set too low, budgets too high, and the impact of these decisions was compounded by Ofgem extending the regulatory period from five years to eight years.

The National Audit Office (NAO) reported that this occurred because the regulator, Ofgem set targets too low for network companies and simultaneously overestimated returns to bring investment to the sector.  The NAO estimates that this occurred due to the fact that the network companies expect to make an inflation-adjusted return of 9 percent on average to shareholders which ends in March 2021 for companies such as National Grid and SSE. However, energy network investors have seen returns of 9%, compared with between 5% and 6% at other UK companies which if. properly weighted by Ofgem would have consumers paying 800m less.

These profits have been met with criticism by Citizens Advice who have proposed that £7.5 billion pounds be returned to British households. However, this was also met with rebuttal by the Energy Networks Association which claims that costs have fallen by 17 percent in real terms since privatisation.

This also asks a big question of how effectively Ofgem is using RIIO; an acronym for ‘Revenue = Incentives + Innovation + Outputs. Currently the rules of RIOO give electricity networks an allowance to run and invest in their systems. If they spend less, they can keep half of the savings and return half to customers. Akshay Kaul, Ofgem’s director of network price controls has indicated that their RIIO2 will essentially be stricter with the aim of saving consumer’s money.

While this criticism is sensitive for electricity network companies, Ofgem has proposed to limit investor returns from electricity network companies. This was following criticism from the Citizens Advice and would take place in 2023; when the next regulatory price control starts. Ofgem has reported “electricity distribution price controls will lower company returns and save consumers money.” They also reported that important changes such as demand for electric vehicle charging is met.