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1998-05-15 ORR-001
Office of the Rail Regulator


Regulator recommends programme of regulatory action for rolling stock companies

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Office of the Rail Regulator

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Office of the Rail Regulator

Regulator recommends programme of regulatory action for rolling stock companies

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15 May 1998
source Office of the Rail Regulator
type Press release

note ORR/98/16

The Rail Regulator, John Swift QC, today published his report to the Deputy Prime Minister on the operation of the rolling stock market with his conclusions and recommendations.

Mr Swift said: "The ROSCOs are not subject to any of the standard controls placed on operators of railway assets under the Railways Act 1993; thus the most important substantive issue, in my view, is whether the ROSCOs should be brought within a system of controls under railway-specific legislation or whether the new powers offered by the Competition Bill, exercisable by the Regulator, can be used in such a way as to prevent abuse.

"I entirely reject the proposition that the ROSCOs do not have, and may not be expected to have, market power. The overwhelming view from the evidence submitted to my Office is that it is not safe to proceed on that assumption.

"I conclude that it is not sufficient to wait and see how that market develops and seek remedies for market failure as problems emerge; it is necessary for rules to be developed in advance so as to ensure there is no risk of market failure."

The three areas of potential concern identified in the report are:

the way in which ROSCOs and train operators are managing their existing contracts for the leasing and maintenance of the trains;
the emerging market for the acquisition of new rolling stock, with current commitments involving acquisition of over 2,000 new vehicles, with a capital value of almost £2 billion.
what happens when the existing stock of 11,000 vehicles come off lease and are required, to a greater or lesser extent, by train operators in order to continue to run their services, whether commercially profitable or in need of state or local authority support?
On the first point the report concludes that relations between ROSCOs and TOCs (Train Operating Companies) are being managed on the whole in a mature and sensible manner. Issues when they arise are commercial not regulatory. The report concludes that the three ROSCOs hold no long-term position of power in the financing of new rolling stock: there is an international market in the manufacture of vehicles and a growing competitive market for their financing.

It recognises that the third aspect is the most difficult and sensitive and Mr Swift said: "The market within which the ROSCOs operate is changing fast and bringing great benefit to passengers: it is important not to lay down rigid controls that may be quite inappropriate to deal with possible abuse on contract renegotiation in the early part of the next century."

The report makes six detailed recommendations:

(i) regulation of the rolling stock market should be introduced only as a last resort, if problems of dominance and potential abuse cannot be successfully addressed through encouragement of further competition combined with continuing vigilance and speedy action against anti-competitive behaviour.

(ii) Rail Regulator should adopt a firm and proactive approach to the use of his powers under the Competition Bill, when available, in order to identify, monitor and police potential abuse of dominant positions. Moves towards further concentration in the leasing market for passenger rolling stock or further vertical integration between any of the ROSCOs and any train operator should be resisted.

(iii) ROSCOs should be asked to produce Codes of Practice, on the basis of a model drawn up by the Rail Regulator, setting out their approach to the rolling stock market and the terms on which they will do business with TOCs. These would cover in particular the marketing, refurbishment, disposal of rolling stock off-lease; policies of flexibility in the use of rolling stock; the approach to negotiation of changes to existing leases; and the approach to re-leasing and future franchise rounds. If such Codes are not published voluntarily, the Rail Regulator should publish guidance under the terms of the Competition Bill on the behaviour he would consider to be in breach of the prohibitions on anti-competitive or abusive behaviour.

(iv) the requirement for such a Code should also apply to any other undertaking which develops a sufficiently significant presence in the leasing market for rolling stock to raise potential issues over dominance or distortion of competition between itself and others working to such Codes;

(v) the Government, the proposed Strategic Rail Authority and OPRAF, as appropriate, should identify means of reducing current uncertainties over the future strategic direction of the passenger railway and the rolling stock requirements likely to be needed to support it, and over the approach to be adopted to the next franchise round, with the aim of facilitating planning of new investment in rolling stock and encouraging competition from new entrants; and

(vi) the Rail Regulator should monitor the rolling stock market to identify departures from the Codes or other matters which warrant further investigation as potential abuses of the prohibitions in the Competition Bill; he should monitor the development of the market more generally to identify and draw to the attention of Government the need for further action if it becomes clear that competition is failing to prove effective.

Mr Swift concluded: "My recommendations envisage rules of conduct, determined by principles of public accountability, designed to avoid market failure and aimed first at agreement by negotiation. If the Government were minded to accept these recommendations, I stand ready to negotiate those behavioural assurances."

The Regulator was asked to undertake the review by the Deputy Prime Minister in January 1998. He published an invitation to comment on 3 February, and received 57 representations. The review was undertaken by a multi-disciplinary team of ORR staff.

During the course of the review, a number of formal hearings were held with the ROSCOs and with other interested parties.

Railhub Archive ::: 1998-05-15 ORR-001


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