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15 November 2002
ORR/20/02
The Rail Regulator, Tom Winsor, has today published an initial consultation document on the interim review of Network Rails track access charges.
Commenting on the interim review today, Tom Winsor said:
This interim review is an important step towards the stabilisation of Network Rails financial position, ensuring that the company has the necessary resources on a long-term sustainable basis to carry on the essential core task of operation, maintenance and renewal of the railway infrastructure of which it is the custodian. The decisions to be taken in this review go to the heart of the true cost of the competent and efficient stewardship of the national network and will have a significant effect on the future not only of Network Rail but also its customers and those who use or depend on the railway. Getting a grip on the soaring costs of the railway is essential if public confidence is to be maintained.
In the last two years, Railtrack has been spending considerably more than I allowed the company in revenues in the October 2000 periodic review. Since October 2001, the companys additional expenditure has been supported by Government. However, it is not sustainable for the company to be dependent on short-term credit facilities provided by the SRA. It needs a sound financial basis for the job of properly discharging its obligations under its network licence and its contracts with its train operator customers.
This review will tackle important questions about engineering policies, activity levels, unit costs and long-term asset strategies. My objective is to put in place a framework and a financial settlement which will promote efficiency and economy on the part of Network Rail by improving the level of control over expenditure and delivery of the required outputs. It will then be for Network Rail to meet the challenges which the settlement will present so as to deliver sustained improvements over time.
I have always believed that, as far as possible, economic regulation should be based on creating an appropriate incentive framework designed to deliver maximum improvements in the performance of the company in question. The existing incentive framework only came into effect in April 2001 and the new possessions regime began as late as September 2002. Given the intervention of the administration of Railtrack, these reforms have not had time to produce their intended benefits. The work I am doing on incentives must now concentrate on whether the existing incentive framework remains appropriate for Network Rail as a company limited by guarantee as opposed to an equity-financed entity, and strikes an appropriate balance in future between risk and reward. These decisions must be made having regard to Network Rails financial structure and the SRAs budget.
Meeting the objectives of the interim review is a challenging task. Doing so within the proposed timetable intensifies that challenge. I intend to conduct this review in an open and transparent manner. Its success requires substantial and competent input from all concerned, including high quality information and timely responses, especially from Network Rail and the SRA. I believe that there is a strong will to ensure that this review meets these challenges and that the monopoly provider of essential railway infrastructure is put on a sound and sustainable financial footing for the future.
The Regulator intends to complete his interim review of Network Rails track access charges by December 2003.
Notes for editors: - The purpose of the document is to provide the railway industry with an update of the work that the Regulator has been doing since announcing the review in September 2002, to put forward a timetable for the remaining 13 months of the review, and to consult on the issues that he intends to address in his work on the incentive framework.
- The consultation paper covers all three of the workstreams that the Regulator established as part of the review: expenditure assessment, incentives and financing. It contains a detailed discussion of the appropriate incentives to set for Network Rail as a company limited by guarantee, and raises the following issues:
- how far should conventional price cap regulation be modified when dealing with a company without equity shareholders?
- what is the appropriate level for financial incentives to improve performance, deliver stewardship obligations, and accommodate volume growth?
- is the industry content to retain existing contractual incentives on operational performance and possessions without making significant changes in this review?
- how will Network Rails management incentive plan align with the regulatory incentives at the conclusion of the review?
- The consultation document The interim review of track access charges: Initial consultation paper is available from the ORR website.
- The statement Network Rail: Interim review of access charges, published on 25 September 2002, is available from the ORR website.
Each of these documents is also available 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.
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