ORR publishes initial assessment of Network Rail’s future revenue requirement and consults on the future financial framework
15 December 2005
ORR/46/05
The Office of Rail Regulation today published its initial assessment of the prospects for Network Rail’s funding for the five years starting in April 2009 (Control Period 4), and also consulted on the future financial framework for setting Network Rail’s allowed revenue.
The assessment suggests, on the basis of Network Rail’s current business plan assumptions of future levels of rail traffic, that Network Rail’s revenue requirement could be in the range £17 – 20 billion for the five years 2009 – 2014 (£3.4 - £4.0 billion a year), compared with £22.7 billion allowed in the current control period (2004-2009).
Underpinning this assessment is an analysis by ORR of the work that Network Rail will need to undertake to maintain the serviceability and performance of the rail network, possible trends in the costs of that work, and assumptions about the required return on Network Rail’s capital. The expenditure assessment take account of advice from ORR’s consultants that there is scope for continued unit cost reductions of between 2 and 8% a year over CP4.
Chris Bolt, ORR Chairman, said:
“The Railways Act 2005 set out a new framework for the industry. Ministers, including for Scotland the Scottish Ministers, are now required to give ORR a clear specification of the high level outputs they expect the railway to deliver and the funding they are prepared to make available. The purpose of this document is to provide an input to decisions by Ministers on their output specification and the scale of public funding for rail.
“Given the expected growth in demand, it will be particularly challenging for Network Rail and its partners to develop plans which both maintain and improve safety and operational performance and accommodate the increase in the costs of financing Network Rail’s balance sheet, without adding to pressures on funding. This will require relentless pursuit of improved efficiency, while not compromising long-term sustainability of the network. So we are also seeking views on the issues which will need to be further developed by Network Rail before it publishes its medium term plan in June 2006.”
Issues which ORR expects Network Rail to address in developing this plan include:
- its understanding of asset knowledge and cost causation;
- passenger and freight demand growth;
- further disaggregation of information on activity and expenditure; and
- its own view of possible future efficiency improvements.
Analysis of these issues will continue through 2006, leading to publication by Ministers of their specification of outputs and funding in mid-2007. As today’s document makes clear, final decisions on Network Rail’s allowed revenue for CP4, which ORR expects to reach in Autumn 2008, could be outside the range illustrated if the output specification differs significantly from the assumptions in Network Rail’s current business plan.
The document also consults on key strategic issues concerning the financial framework for Network Rail in CP4, in particular to provide effective incentives for Network Rail to continue to deliver efficiency savings and improvements in performance, including safety performance.
Chris Bolt continued:
“Significant further efficiency gains by Network Rail may only be achievable if, working with its customers and suppliers, it is encouraged to take up more demanding challenges and adopt innovative approaches, and is rewarded for doing so. The alternative is likely to be a company which is less able to respond to the pressures of increased demand and to succeed in the relentless pursuit of improved efficiency while not compromising long-term sustainability of the network.”
Notes for editors:
- ORR’s Initial Assessment of Network Rail’s CP4 Revenue Requirement and Consultation on the Financial Framework is published today, and is available from the ORR website (Related links) Responses to the consultation are requested by 31 March 2006.
- Assessing Network Rail's scope for efficiency gains over CP4 and beyond: a preliminary study, LEK Consulting (International) Ltd and Oxera Consulting Ltd, December 2005. This report is available on the ORR website (Related links)
- The 2008 Periodic Review started in August 2005 with the publication of the first consultation document “Periodic Review 2008: First Consultation Document” (please see Related links) Final Conclusions are planned for publication in October 2008.
- The current control period (Control Period 3), runs from April 2004 until March 2009.
- To set Network Rail’s access charges, ORR must establish the efficient level of expenditure to deliver the required network outputs and the return it is permitted to earn on its regulatory asset base. From these ORR derives Network Rail’s gross revenue requirement and nets off stations charges, property income and freight and open access passenger charges. This net revenue requirement forms the basis of access charges to franchised passenger train operators. Generally these operators benefit from an indemnity from Government, so ultimately any reduction or increase in charges flows back to Government’s budget.
- Following Network Rail’s 2006 submission to the review, ORR will review it and publish a further assessment, prior to issuing a formal commencement notice for the review. The Railways Act 2005 then requires the Secretary of State for Transport (for England and Wales) and Scottish Ministers (for Scotland) to present to ORR information on the high level outputs (HLOS) they want the railway to provide, and a statement of funds available. ORR must then determine the outputs that Network Rail must deliver to achieve the HLOS, the cost of delivering them in the most efficient way, and the implications for the charges payable by train operators to Network Rail for using the railway network. If, at the end of ORR’s review, there is a mismatch between the outputs the Secretary of State or Scottish Ministers are seeking and the funding available, the Act gives to ORR the task of determining which rail outputs should be delivered.
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