Office of the Rail Regulator

Periodic Review and Hatfield
_______________________________________________________________

date 15 January 2001
source Office of the Rail Regulator
type Press release

note ORR/02/01

REGULATORY STATEMENT - PERIODIC REVIEW AND HATFIELD

The Rail Regulator, Tom Winsor, today acknowledged the decision of Railtrack to
accept the final conclusions of his periodic review of Railtrack's access
charges.

He publishes today the attached statement in relation to the regulatory review
and the implications for the company of the Hatfield derailment and its
aftermath.

Tom Winsor said:

'I believe Railtrack's acceptance of the regulatory review is a positive step
for the future of the railway industry and the maintenance, renewal and growth
of the national rail network-.'


PERIODIC REVIEW

STATEMENT ON THE IMPLICATIONS OF HATFIELD

Introduction

1 . The final conclusions on the periodic review of Railtrack's financial
framework for the next five years were published in October 2000. These
conclusions represented the outcome of an extensive 2 1/2 year process to
review Railtrack's expenditure requirements, the outputs it would be required to
deliver, the structure of charges and incentives and the framework for
enhancements. The process involved extensive industry consultation. However, the
review was completed before the tragic Hatfield derailment occurred.

2. Chapter 16 of the periodic review final conclusions recognised that while
the new charging arrangements should generally be expected to apply for a
period of five years, there was a need for some flexibility to deal with
exceptional circumstances. The Regulator therefore proposed a new provision for
interim reviews if there has been a material change of circumstances and that in
consequence there are compelling reasons for doing so having regard to his
statutory duties including in particular the duty not to make it unduly
difficult for Railtrack to finance its relevant activities. The purpose of this
statement is to explain the way in which the Regulator expects to apply this
general approach to deal with the consequences of the Hatfield derailment which
represents a material change of circumstances for Railtrack since the Regulator
finalised his conclusions.

3. The immediate financial consequences of Hatfield are occurring under the
existing contractual and regulatory framework which was established before
privatisation. Railtrack has rightly acknowledged that these consequences
are for the company and its shareholders to bear. Neither customers nor
taxpayers will pick up the bill for this.

4. Railtrack has announced that the immediate consequences of Hatfield when
combined with other factors will leave it in a materially worse financial
position from the start of the second control period to that which I assumed
in reaching my final conclusions. This may therefore have implications for
the appropriate timing of Railtrack's revenues over the next ten years to
ensure that the company is able to finance its relevant activities. In
particular, it may be appropriate to change the timing of network grants
which the SRA has agreed to pay over the second control period or to bring
forward grants which would have been paid in subsequent periods. But there
is no question in this respect of there being any increase in the overall value
of revenues including grants.

5. Once the immediate recovery from the aftermath of Hatfield has been
completed, it is likely that there will be ongoing implications for the rail
network, both direct and indirect, which may influence the efficient levels
of activity or outputs and hence expenditure during the second control
period. These ongoing implications may constitute a material change to
Railtrack's financial and operational circumstances which could bring
forward the need for an interim review, once the full implications have been
properly assessed. However, the Regulator considers that it would not be
possible to begin to access these implications or the need for an interim
review in this respect at least until the immediate issues have been dealt with
and the implications of the TTCI report into broken and defective rails have
been assessed.

6. In these circumstances, the Regulator would consider sympathetically an
application by Railtrack for an early interim review to examine the appropriate
timing of Railtrack's revenue requirements. He would also consider
sympathetically an application by Railtrack for a subsequent interim review
during the second control period to consider the ongoing impact of Hatfield on
its efficient expenditures and outputs in the second control period. In either
case, however, Railtrack would need to demonstrate that:


- the effects in terms of additional expenditure requirements or financing costs
were material; and

- the impact on Railtrack's financial position would, without further
regulatory action in the second control period, make it unduly difficult for
the company to finance its relevant activities.


Coverage of interim reviews

7. An early interim review would ensure that the immediate consequences of
Hatfield on the company's financial position were appropriately addressed in
the timing of Railtrack's revenues, particularly in relation to the first part
of the second control period, having regard to the Regulator's statutory
duties. Such a review would not reassess the appropriate level of Railtrack's
revenue requirements (including the March 2001 RAB, the expected level of
expenditure over the second control period or the cost of capital). It would
therefore be confined to the two questions of (a) whether and how Railtrack
receives funding spread over the second control period or must wait until
after 2006 (i.e. a question of cashflow only) and (b) the mix between access
charges and grants. It would not concern any question of any alteration of
the level of funding. As indicated in the periodic review documents, the
Regulator would expect to assess his proposals against the relevant financial
indicators that would be required to maintain a flat A credit rating.

8. Any interim review of the longer term implications of Hatfield would
consider the impact of changes, both direct and indirect, to efficient
expenditure and revenue requirements over the entire five year control
period, including the costs of additional obligations incurred up to the
time of the review. It would, however, principally focus on examining
the impact of those aspects of the company's operations which were affected
by changes in circumstances arising from the ongoing implications of Hatfield.
The areas which might be covered would include:


- changes to maintenance and renewal activity and therefore efficient capital
and operating expenditure requirements, particularly on track;

- any implications for the achievable rates of improvement in operational
performance, efficiency, and possession costs;

- any other effects such as necessary and appropriate changes to wider asset
management policies triggered in whole or in part by the events of Hatfield; and

- any implications for Railtrack's revenue requirements for the associated level
of track access charges over the second control period and for the value of the
Regulatory Asset Base (RAB) at the end of that period.

9. Such an interim review would therefore be limited in scope and would be
incremental to the Regulator's final conclusions on the periodic review. The
Regulator would need to exercise judgement as to the extent to which any
increases in cost were the result of the relevant changes in circumstances
or had been anticipated at the time of the periodic review (and therefore
reflected within the expenditures on which the Regulator has already expressed
his views in the final conclusions).

10. Chapter 16 of the periodic review final conclusions contains provisions for
interim review of narrowly defined elements of the periodic review settlement
where further work is needed to finalise long term arrangements. It would be for
consideration whether any such review would be combined with that for the longer
term implications of Hatfield.

Timing and process

11. As indicated in the final conclusions on the periodic review, the Regulator
would expect Railtrack to submit any application for an interim review with
representations setting out why it believed the case for such a review to be
compelling. In making these representations, he would expect Railtrack to
have regard to the terms of the interim review provisions, the wider policy
considerations referred to in Chapter 16 of the final conclusions to the
periodic review and the further considerations referred to in this statement.

12. Following an application for an interim review into the long term
implications of Hatfield, the Regulator would undertake an initial consultation
with relevant industry parties including funders. Subject to consideration of
the responses to this consultation, the Regulator would expect to initiate the
interim review process set out in Part 7, Schedule 7 of the template track
access agreements. The Regulator would expect provisional conclusions of this
interim review to be completed within six months of the application. These
conclusions would be subject to consultation before finalisation.

13. A similar process would apply to an early interim review into the
appropriate timing of Railtrack's revenue requirements. In this
case, however, the Regulator would expect to complete the review and to
seek views from consultees within a shorter period of time. Provided that
Railtrack makes an application for interim review in good time, he would
expect to be able to implement his conclusions before the first grants
are due to be paid in October 2001.

14. It would be for Railtrack to provide relevant documentation to
support its case through appropriate submissions and supporting quantification,
which demonstrated the basis for the purported changes in costs and revenues
in question.

15. The implementation of any proposed modifications arising from any
interim review would, under the provisions of the Transport Act 2000, be
subject to Railtrack's right to object to the Regulator's conclusions, and the
Regulator's ability to refer the issues to the Competition Commission.

Railhub Archive ::: 2001-01-15 ORR-001