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1997-06-04 ORR-002
Office of the Rail Regulator

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Speech to the Rail Freight Conference ’97


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Office of the Rail Regulator
ORR



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Office of the Rail Regulator

Speech to the Rail Freight Conference ’97
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1997-06-04 Rail Regulator sets out his agenda for rail freight growth (Office of the Rail Regulator)

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date
4 June 1997
source Office of the Rail Regulator
type Speech (full)

note Delivered by Martin Brennan, Freight Director, ORR on 4 June 1997. Location: London Marriott Hotel Time: 12.25.


Introduction

Chairman, Ladies and Gentlemen. Thank you for inviting me to speak to this Conference. I very much welcome the opportunity.

A lot has changed since I last spoke to the Waterfront Conference 3 years ago.

new players have entered the market
notably Ed Burkhardt and EWS
names such as DRS, National Power
also new owners of Freightliner
new investment in freight
locomotives and wagons
major terminals such as Hams Hall, Daventry, Doncaster etc
new spirit of optimism
there for all to feel - must not be wasted
new business
both EWS and Freightliner, week by week adding to the total rail portfolio
RFDs development of European trade
Add that up and we have perhaps the biggest opportunity for many years to arrest and reverse the decline of rail freight.

Other changes include:

new Government
which will want to see more freight on rail
the concentration of 80-90% of freight operations in one company
the finalisation of the initial phase of industry reconstruction, sales, rules setting and contract making. The sale of RFD subject to EC clearance and the approval of the EWS/Railtrack access agreement, scheduled for July, should complete this.
moves towards expansion in both the freight and passenger markets
attention back where it should be - on the customer.
I believe that to meet the needs of customers, and to grow the business of freight on rail, the industry needs to work together, and Phase 2 should be all about how to do that.

So in setting out here the Regulators "Agenda" I want to make clear four things:

1) What the Regulator is seeking to achieve

2) What he expects of Railtrack

3) What he expects of EWS and other operators

4) What he himself will contribute.

What the Regulator is seeking to achieve

This is really quite straightforward, and based on two duties taken from section 4 of the Act.

(a) Promoting the use of the network for freight, "to the greatest extent economically practicable".

This means actively not passively. About making things happen, not merely letting them happen.

Also what is economically practicable today and tomorrow may be different from yesterday. It should be a tough test, not a get-out clause.

(b) Protecting the interests of users (when or where they need it).

Who are the users? - Well, perhaps many in this room. The Act surely implies final customers, who pay the bills and decide whether to use rail or not. The accent of regulation in Phase 2 will focus more on how the system is delivering to final users.

But operators are also users, customers of Railtrack and rightly demand the Regulators protection in dealing with that monopoly.

By taking these duties, setting out clearly to Railtrack and operators what he expects, and putting in place the means by which to review their performance and to intervene only where necessary, the Regulator is seeking to develop an agenda fit for Phase 2, an agenda for growth.

The Regulator's expectations of Railtrack

Railtrack has a key role at the centre of the railway industry. As steward and monopoly provider of the track and infrastructure, it has a special responsibility towards all those who need to use it. It owns an essential facility, and must manage it for the benefit of users, not simply its shareholders. This is at the heart of the "regulatory contract".

The Regulator expects Railtrack to demonstrate, in its actions as well as in its words, a firm commitment by its Board of Directors and accountability by its senior management to deliver the development of freight on its network. Some have suggested that such a commitment does not exist. Certainly this year's Network Management Statement failed to convey any sense of an organisation gearing itself up to meet the challenges of a resurgent freight market. The Regulator has told Railtrack this in his formal response. More positively, though, the Railtrack 10 point plan for the development of freight is a step in the right direction, setting out some of the areas, with initial targets, where Railtrack can make real progress. Turning the words into deeds - and delivering - is the test, and the Regulator has asked Railtrack to report progress to him by the end of July.

Let us look at some of the principal areas where the Regulator expects Railtrack to perform better for freight:

Investment: Railtrack must be willing to invest in that maintenance, renewal and enhancement of the network which is necessary to permit the healthy development of the infrastructure relevant to freight, and the business of its freight customers. This includes specific schemes such as the alleviation of bottlenecks, additional loops, signalling and other facilities, and connections to and from its network. In return, Railtrack is entitled to expect a reasonable return on enhancement investment through access charges.

Sharing Risk: The Regulator expects Railtrack to be willing, to join with industry partners in sensible freight enhancement projects and to take a balanced view on risk sharing. An unduly conservative approach to risk which denies freight the opportunity to expand would not be consistent with the public interest.

The Regulator expects Railtrack to ensure that there is enough capacity on the network for freight - not only for current needs, but also to allow it to grow. Reconciling the initial needs of the 24 passenger TOCs and the freight companies has been achieved - reconciling their expansion plans is more challenging. Particularly given the capacity hungry nature of the faster speeds, interval services and increased frequencies which characterise some of these aspirations. This cannot be left to chance, or first come first served, or even that the Regulator should decide it all. Railtrack must take the lead responsibility to devise routeing and network development strategies which deliver successful growing freight and passenger businesses on its network.

One of the messages the freight community has consistently delivered to the Regulator over the last two years is that it is dissatisfied with the way Railtrack conducts its business with them in terms of communication and responsiveness. Words like 'uncommunicative', 'dismissive', 'high handed', 'have been used. How can this be? Could any company except a monopolist get away with it?

There is no reason why Railtrack reputation for responsiveness should not be up there with the best in industry. A commitment to consultation appears in the 10 point plan. This must be for real. Some measure of it should appear in the forthcoming Code of Practice. The Regulator intends to ensure that it is taken seriously.

One of the more interesting features of the last three years has been "open access." The market chose to have a large relatively strong freight operator rather than several smaller ones as envisaged by the last Government. The container market kept its own separate operator, dominant in that niche, and the coal and nuclear industries used liberalisation to develop in-house operations.

One of Railtrack's 10 points relates increasing open access. The Regulator's objective is to maintain contestability in the market and that there should be no artificial barriers to entry. He looks forward to hearing Railtrack's views on what measures it intends to take to achieve its target.

Railtrack's stewardship covers all its assets, including its land assets. Much has been said about 'strategic' land for freight development. The formally designated "strategic sites" are at least contractually protected against non-freight development. Railtrack must not renege on those commitments, or stronger protection may be necessary.

However, there still is unease about whether, through sales or its approach to development opportunities, Railtrack is maximising freight's potential. The Regulator expects Railtrack to consider the needs of freight in reaching it decisions on property. This requires a clear strategy, and effective procedures, including appropriate consultation. It does not mean a freight veto on sales or development, or always doing sub-optimal deals. But it does mean looking at the total picture and making decisions which are sensible both for shareholders and for the development of freight.

I intend to talk about track access charges later. But the Regulator does expect Railtrack to strive hard to achieve increasing efficiency and economy in its cost base, and to share these benefits with customers. Track costs are a substantial portion of final costs to freight users and need to move in a downward direction as far and as fast as possible. The Regulator welcomes the new work Railtrack is doing to identify freight specific costs more accurately.

The Regulator's expectation of Operators

Rail freight operators have the key role of delivery of the rail product to users. They are often the only interface customers have with the rail industry, and as such are its ambassadors. What they say about the industry, and their partners, Railtrack, their competitors, the Regulator even, needs to be well judged and responsible.

EW&S has a particular responsibility given its position of market leadership within rail freight, with 80% and soon we expect 90% of rail freight market. This is more than a merely technical monopoly. The Regulator accepts that rail has only 6% (or so) of the total freight transport market; he accepts also that many of EWS customers could choose road (with lesser or greater degree of transitional difficulty). But he is also very aware of what its customers and its competitors are telling him, that they are concerned that such dominance as exists could be misused, and they look to the Regulator for protection.

Let me address the positive side. What the market chose in EWS were the benefits of scale and scope a large operator could bring. EWS has brought a new sense of vitality and growth to rail freight. Palpable commitment transcends the company. Leadership and a serve of purpose is evident. Investment, so long the bane of rail freight plans, is being made in locomotives, wagons, facilities. The intention to re-enter lost markets and develop new markets though significant cost - reduction, innovation and strong marketing all point to a determination to harness the new enthusiasm for rail. So a key message from the Regulator has to be one of welcome for these positive developments.

So the Regulator's expectations of EWS are:

Recognise the responsibilities of market leadership. Development of rail freight is largely in your hands. Realise it to the full. And tell the world - publish the information on flows which will demonstrate success and act as powerful incentives to those who would buy into a growth market.
Deal fairly in final customer markets, particularly with those customers who whether by reason of planning constraints, sunk investment, or cost of transition, may not have ready alternatives.
Deal fairly with competitors, who share the track and sometimes other facilities. Win business on efficiency and quality, not by unfair pricing or influence. Do not act to frustrate the development of open access.
These are areas in which the Regulator will be vigilant, and prepared to act if needed to ensure the benefits are obtained and the dangers avoided.

Recognise also responsibilities in respect of the rail supply industry, such as wagon providers and terminal operators, some of whom may be reliant on EWS, yet needed by others in the industry. They have expressed fears for their vulnerable positions. EWS has to be allowed to make its own strategic choices - the Regulator does not suggest EWS owes any supplier a living. But it should compete fairly where it does compete, and also should be sensitive to the needs of the wider industry, by for instance, sharing strategic thinking to allow them to forward plan.
An expectation of all freight operators is to play a full part in industry multilateral arrangements (such as the dispute procedures, claims handling, etc). Making sure freight holds is own in the disaggregated railway means being there when decisions are made, not complaining about it later.

Finally, the Regulator expects operators to give highest priority to their safety and environmental obligations. In particular to give practical effect to the environmental policy statements, and to maintain effective working relationships with Railtrack's Safety and Standards Directorate and the HSE.

Specific Issues

I would like to address two specific issues on the regulatory agenda: Track access charges for rail freight and the development of international rail freight.

Track access charges

The Regulator set out his policy in respect of track access charges for freight in 1995. The structure of rail freight is now very different to the one envisaged at that time. Also being considered are the propositions in respect of charging between EWS and Railtrack, on which the Regulator has consulted widely particularly on the balance between promoting rail freight and protecting users eg through competition. Following his decision on that agreement it would be timely to issue a statement setting out how he expects to apply the charging principles in the new industry structure.

International rail freight

The growth of international rail freight represents one of big opportunities for the industry and its customers. RFD has worked hard to develop the business to where it is now, and the development of automotive and Anglo-Italian business has been impressive. Much remains to be done in breaking significantly into other less developed markets.

The Regulator's actions have focused on two areas. Firstly, in his approval of specific access agreements, particularly those involving routes to the Tunnel, the Regulator has attempted to retain enough flexibility as is consistent with the needs of the applicants, to allow future entry and business development for rail freight.

Secondly, ensuring the structures for access and licensing being developed for Europe work well for the UK and help develop our business. The Regulator has therefore been helping the Government represent the UK position in Brussels as Directives are developed, and its transposition of them to UK legislation.

The Regulator very much welcomes Neil Kinnock's White Paper on the liberalisation of railways in Europe, [taking forward EC 91/440], and the voluntary Freight Freeways initiative aimed at getting something going more quickly. Let us not leave this to our European partners, but work together on projects, such as to Sopron, which link into the UK.

How can the Regulator Contribute?

The industry should expect of its Regulator

clarity and predictability of policy
vigilance in monitoring industry behaviour
a friendly proactive approach to those who seek his help.
efficiency in delivery
In other words, minimising regulatory burdens and risks consistent with achieving the public interest objectives of the Act.

I have tried to set out today a thumb-nail sketch of the Regulator's freight policy and behavioural expectations for principal regulatees. One of the difficulties over the last year or two has been the gulf between the prognosis made by different industry parties about what rail freight can really achieve. Setting regulatory policy is made more difficult when regulatees appear to inhabit different worlds from each other. As an attempt to remedy this, I recently commissioned consultancy work to see if it were possible to create some consensus about what could be done (by all parties, not just the Regulator) to foster rail freight in the UK. Some of you have contributed to this study. The report is due next week, I intend to make public its findings, and to host a seminar next month to which industry parties and customer representatives (including RFG) will be invited with a view to establishing common ground on which to base the ongoing regulatory programme, and how we can work together for the development of rail freight.

Efficiency includes concentrating on those actions which will deliver the public interest policy objectives I have set out. As the Regulator's Freight Director, I will therefore be concentrating in this next phase in establishing and maintaining systems which fully keep the industry in general and Railtrack, EWS and other operators in particular under continuous review, both in terms of specific licence obligations, and the broader aspects of delivery of the better railway for freight. The Regulator has, as you may know, already modified EWS licence to take account of its market position. He is also in discussion with Railtrack about licence modifications following this year's Network Management Statement and specifically in respect of an obligation on Railtrack to deliver investment. And we are discussing with Railtrack the further development of its freight strategy.

You can expect the Regulator, in addition to exercising his formal functions of licence issuing monitoring and enforcement, access agreement approval, and competition law, to look more closely at provision of information (either by the Regulator or by others).

You can expect continuing input by the Regulator to the broader debate about rail freight and key issues affecting its development. This includes the role of Government and the policies it intends to adopt. For instance, there has been limited take up of freight facility and track access grants. And other than these grants, there is no public subsidy for rail freight, unlike for passenger services. There is no short term plan to legislate for more use of rail (or less of road) for freight. It is therefore all the more important that the Government sets out its own clear strategy to the industry.

Remember also that the Regulator is no "defender of the status quo". If the system is not delivering, he will support change. So do not be afraid to let him know. We try to be welcoming and helpful.

To finish, I would like to respond to those who say we need less regulation, not more. My challenge is, prove it! Prove it in your actions as infrastructure provider, or service provider, in the way you delight your customers, in the absence of any well founded criticism. the Regulator will regulate accordingly to how the industry performs. As John Swift said recently to ATOC, and it is as relevant here "You step forward - I'll step back".

Thank you.


Railhub Archive ::: 1997-06-04 ORR-002





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