Ring-fencing

Network Rail's licence was modified in November 2002 to strengthen the existing ring-fencing licence condition. The modification was designed to provide as much confidence as possible about the robustness of the licensed business's finances and to ensure that funding intended for the regulated entity is spent on operation, maintenance, renewal and enhancement of the railway infrastructure, rather than diverted to support unregulated activities.

Some of the features of the new modified condition include a prohibition on the licence holder from:

• carrying on any non-permitted business beyond a de minimis limit without ORR's consent; or
• entering into any transaction with other companies within the same group except on an arm's-length basis.

The condition also includes requirements for the licence holder to:

• submit an annual certificate to ORR confirming it has sufficient resources to carry on its business for a period of 18 months;
• use all reasonable endeavours to maintain an investment-grade credit rating at all times;
• procure an undertaking from its parent company that no other company within the group will do anything to cause a breach of the licence, and that all other companies will provide information to the licence holder as becomes necessary to comply with a requirement of ORR; and
• not pay dividends to its parent unless pre-determined criteria are satisfied to ensure that the sustainability of the business is not compromised.

Network Rail's licence was further modified in July 2004 to ensure that Network Rail’s long-term debt issuance programme does not jeopardise the interests of customers and funders. Several of these modifications relate to the ring-fence provisions, including:

• an extension of the “restriction of activities” arrangements so that the relevant constraints apply to Network Rail’s proposed new financing company Network Rail Infrastructure Finance (NRIF) as well as to Network Rail;
• a change to the prohibition on cross-default obligations so that they apply also to NRIF (as a corollary, cross-default obligations between Network Rail, NRIF and the SRA are to be excluded from the prohibition); and
• an extension of the “undertaking to provide information” so that this provision also applies to NRIF.

In addition, we also made some miscellaneous technical modifications to the ring-fencing arrangements in Condition 12. These changes were required to deal with a number of anomalies and practical difficulties that had become apparent since the previous modifications to Network Rail’s network licence, in November 2002, including:

• changing the time period over which Network Rail must calculate the de minimis limit so that this coincides with Network Rail’s financial year;
• index-linking the de minimis limit so that it takes account of inflation; and
• moving the requirement to submit an annual certificate on the sufficiency of resources from Condition 12 to Condition 22 and to align the timing of this so that the statement will be delivered at the same time as the regulatory accounts.

The relevant consultation documents on all of these changes are available on this website.