More money, more activity and delivery, more accountability

27 July 2000
ORR/00/22

Regulator publishes his provisional conclusions following the review of Railtrack's track access charges

The Rail Regulator, Tom Winsor, has today announced his draft conclusions on the first periodic review of Railtrack's access charges for franchised passenger services since the company's privatization in 1996. This review ensures that Railtrack is properly financed to play its central role in maintaining and renewing the network, at the same time putting in place a new framework that will enable Railtrack to enhance significantly the railway and to meet its safety obligations over the next control period from April 2001 to 2006.

Commenting on this periodic review Tom Winsor said:

The railway needs a great deal more work to modernize and improve it. That work needs to be financed, and Railtrack's revenue requirements for the next five-year control period are therefore higher. Much of that money will go to the maintenance and renewal of Railtrack's network. There is rightly a very strong public and industry demand that the money will be spent wisely and well, and that the years of deterioration of the network must not be repeated.

As part of this review, I will ensure the public have from Railtrack very clear specifications of what it is required to deliver for the access charges it receives. In the 1995-2001 control period, that was missing. I am taking steps to give the company the clarity it needs. The current Network Management Statement (NMS) fails to provide sufficient clarity on maintenance and renewals for the next control period. I am therefore requiring the company to submit by 15 September 2000 a draft supplement to its 2000 NMS, stating the levels of activity over the next two control periods to sustain the network on an efficient whole life cost basis. It will be published.

Incentive regulation is better than an overbearing culture of intrusion and enforcement. Command and control of the railway is not the best way to make competent companies perform to their greatest potential. Aligning Railtrack's commercial incentives with those of its customers and the public interest is more likely to secure long term benefits for passengers and freight. My proposals give Railtrack powerful economic incentives to respond to the needs of its customers, and there is no reason for Railtrack not to invest significantly on the basis of this review."

The upgrade of the West Coast route warrants special attention and is a key element in the periodic review, which contains the Regulator's draft conclusions on the amount of money Railtrack should be paid to meet the non-fixed price elements of its obligations on West Coast route modernisation. It is for the Shadow Strategic Rail Authority (SSRA) to determine whether it is willing to fund this cost.

The Regulator intends to finalise his conclusions on the periodic review for publication around the end of September 2000.

Notes for editors:

1. The Regulators draft conclusions involve an increase in Railtracks revenues of over 40% over the next control period. This increase is met partly from increased access charges but mainly from grants.
2. Track access charges for franchised passenger train services would increase by 2.5% in 2001/02. Subject to growth in traffic and further enhancements, these charges would remain constant in real terms in each of the following four years. In addition, to this base level of charges, there would be a separate charge relating to the independent rail safety activity which is currently part of Railtrack.
3. The total level of operating, maintenance and renewals expenditure underlying these access charges is £14.2 billion over the next five years. This is based on assumed annual efficiency savings of 3% in the first year, increasing to 4% in the second year and 5% in the fourth year.
4. This level of expenditure is much higher than the level which was assumed when the current controls were set before privatisation (equivalent to around £10 billion). However, it is in line with Railtracks current rate of spending since the assumed efficiency savings result in greater outputs rather than reduced costs.
5. By contrast, this projected expenditure is £1.9 billion less than Railtracks latest projection. This difference is made up from £0.5 billion of expenditure which the Regulator has included in the RAB; £0.9 billion of additional efficiency savings assumed by the Regulator and £0.5 billion of other adjustments made to Railtracks projections.
6. Railtracks projected income from other sources (referred to as single till income) is deducted from this expenditure to derive a net revenue requirement. This includes income from stations and depots, freight, open access and property. Total single till income for the next period is expected to be £3.4 billion.
7. The Government and the SSRA have also said that they wish to finance part of Railtracks revenue requirements through grants rather than access charges. The Governments recent spending review assumed total grants for maintenance and renewal equal to £4 billion for the next control period. These grants are treated in the same way as access charges and are therefore deducted from Railtracks projected expenditure in the same way as other single till items.
8. The other key assumption underlying Railtracks revenue requirement concerns the return on the Regulatory Asset Base (RAB). The Regulator has set the RAB for March 2001 at £5.1 billion including a 15% uplift on the first day trading value. This compares with Railtracks proposed RAB of £6.9 billion including a 23% uplift. The Regulator proposes to add around £1.5 billion of enhancements over the next five years.
9. In December 1999, the Regulator concluded that Railtracks the allowed rate of return on the RAB should be between 7% and 7.5% pre-tax real. Given his proposed RAB, this implies an initial return of £0.36 to £0.38 billion a year. However, the Regulator intends to review this assumption in the light of the Competition Commission conclusions on the current water inquiries. He also intends to take account of the impact (if any) on Railtracks risk profile of the periodic review and his periodic conclusions on model clauses for track access agreement.

A copy of The Periodic Review of Railtrack's Access Charges: Draft conclusions volumes 1 and 2 are available from this website or from the ORR Librarian, Sue MacSwan, 1 Waterhouse Square, 138-142 Holborn, London EC1N 2TQ. Tel: 020 7282 2001. Fax: 020 7282 2045. E-mail: " rail.library@orr.gsi.gov.uk