Department for Transport

Rail regulation: Network Rail’s outputs and funding for 2019 to 2024
_______________________________________________________________

2015-02-16 2013-14 Rail Industry Financials (ORR, 2015)

date 4 August 2016
source Department for Transport
type Letter

note Document dated 27 July 2016: published 4 August 2016

Letter from DfT to ORR

[[excerpt]]

We strongly support the ORR’s overall objective for PR18, and particularly the focus on
user interests. The Government is at an early stage of the process which will lead to the
publication of the High Level Output Specification (HLOS) and Statement of Funds
Available (SoFA) during 2017.

Our objectives for PR18 naturally may develop as we continue our engagement with you
and the full range of interested stakeholders. Our initial view, which I think we
substantially share with the ORR, is the objectives are:

o to ensure the needs of users of the railway are placed at the heart of the
railway. This includes through the implementation of the key recommendations of
the Shaw Report, including a substantial devolution of power and responsibility to
NR’s routes (including maximum appropriate financial accountability), supported by
independent regulation. In particular, we support the principles underlying a move
towards a route-based regulatory regime which we consider could substantially
increase the ability of ORR to hold NR to account, e.g. allowing route-level
benchmarking to inform distinct outputs and efficiency targets, identifying best
practice across the network and using it to hold routes to account for performance.

o to preserve and enhance the improvements that have been made in the
safety of the railway, for passengers and the workforce, ensuring that we
continue to have one of the safest railways in the world;

o to ensure the railway’s performance, including in areas where it is not currently
delivering what users want, meets the reasonable expectations of its users;

o to ensure a funding environment that provides sufficient certainty to allow
investors to plan their decision making, with a particular focus on giving the supply
chain confidence to invest in people, innovation, facilities and equipment, while
also providing strong, sustainable efficiency incentives for NR and the wider
industry;

o to provide funders with sufficient flexibility in respect of the enhancements
programme so they can ensure their investments remain aligned to their priorities.
This means the regulatory process should support a robust, credible infrastructure
planning process which delivers what users need, aligned with the franchising
timetable. As the Bowe review recommended, this means some substantial
improvements - a more flexible process, where the Government only commits to
enhancements at the point when funds and supply chain capability are available to
deliver them and they make strategic sense; and,

o to improve the environmental sustainability of the railway so it makes a full
contribution to the Government’s environmental agenda, is resilient to climate
change and extreme weather conditions, and maintains its position as a
sustainable form of transport by responding to the rapid environmental
improvements being made by other modes.

How this may impact on the HLOS and SOFA?

This means the next HLOS and SoFA will look significantly different to those which were
published in 2012. PR18 is likely to see from DfT a much higher-level HLOS, and
accompanying SoFA, focussed on:

o the “steady state” costs of the railway (operations, maintenance and renewals);

o meeting the Government’s commitments to the projects in the Enhancements
Delivery Plan;

o delivering major projects (such as Crossrail); and

o projects that are deemed critical to prevent serious deterioration disruption to
passenger or freight services.

This will enable greater flexibility to take forward and fund additional new enhancements
on a rolling basis, as and when they reach sufficient design maturity, enable better
alignment with franchising and facilitate a broader range of funding models. The current
intention is to distinguish separately proposals that are considered by Ministers to be
worth developing, from those that have been developed to a stage worth designing in
detail, and from those that are worth delivering. There will then a further test as to
whether those worth delivering are also capable of being delivered and are timetabled to
have regard to other factors such as the state of the supply chain and the impact of
disruption on the network. We look forward to working with the ORR in the coming
months to further refine this process, including how it will impact on the determination.

Additionally, there are also likely to be changes to how DfT specifies outputs as part of
the PR18 process. At this stage, we are attracted by a model of specification which
emphasises broad outcomes for users (e.g. increased capacity or faster journey times)
rather than inputs (e.g. specific projects). We are also considering whether it might be
appropriate to specify performance trajectories rather than specific targets, particularly in
light of the progress on route-based devolution within NR. We also want to see a move
towards performance metrics which better reflect the needs and perceptions of
passengers, consistent with the preferred approach that is emerging from the work of the
National Task Force.

As you will appreciate, we are also considering other issues that will impact on PR18.
These include the overall availability of funding for Control Period 6, against the backdrop
of a continued need for restraint in public spending. It will also be important to fully reflect
the changes to the manner in which Government provides funding to the industry
following the reclassification of NR to the public sector.

The ORR’s proposed PR18 process

We have reviewed the proposed process for conducting the PR18 process outlined in the
Initial Consultation. We particularly welcome the open process the ORR is taking,
including the publication of working papers and stakeholder workshops to inform its
thinking. We also welcome the ORR’s ambitious agenda of taking full advantage of a
more devolved NR to significantly enhance the regulatory framework. We will be actively
engaging throughout these processes to support this important and ambitious agenda.

We fully recognise the time required to complete a robust carefully considered review,
and also consider that it remains important that the process preserves sufficient flexibility
in the timetables, including around the HLOS and SOFA, to ensure that the review can be
conducted in an effective manner. This is likely to involve more flexible and iterative
approaches than may have been the case in the past.

Areas for further focus

There are a number of additional strategic or policy areas which would benefit from a
particular focus as PR18 develops.

o First, it would be helpful if issues relating to HS2 could be given greater prominence
within future review material. Most of the construction programme for phase 1 of
HS2 will take place during CP6, and this is likely to have significant implications
across the duration of CP6. Furthermore, significant development and planning work
for the integration of future HS2 services with the rest of the rail network will take
place during CP6 and beyond.

o Second, and as suggested above, a greater emphasis on potential options for
private investment in rail infrastructure, in line with the recommendation in the
Shaw Report, so that the regulatory framework supports third party investment to
add real value alongside continuing Government investment.

o Third, a greater focus on encouraging innovation across the rail sector. This is a
vital counter-point to work on NR’s efficiency. If users are to see significant
advances in reducing the costs of the railway and encouraging NR’s route managers
to take a more flexible approach to tackling problems, then innovation has a key role
to play. Every possible step needs to be taken to ensure the regulatory framework
supports this.

o Fourth, the importance of closely working with stakeholders who can provide a
robust view of user preferences and behaviour. In particular, the passenger
perspective including that provided by Transport Focus, with whom you already work
closely, will be important in the PR18 process.

o Fifth, the PR18 process and outcome should support investment in skills. The rail
industry is facing a significant and growing skills gap as older workers retire and new
technology – such as digital signalling – is introduced. This poses a risk to the cost-
effective delivery of rail enhancement schemes and the continued operation of the
network. Rail will increasingly be competing for scarce resources with other industry
sectors so needs effective mechanisms for attracting, retaining and developing staff.

o Sixth, DfT is already discussing with ORR particular issues with regard to station
licensing and access charging, on which we welcome ORR’s continued
engagement as part of the PR18 process.

o Finally, while fully recognising the particular circumstances of rail, it is important to
build on the lessons learned in other utility sectors, to ensure effective route based
regulation and an effective system operator. We welcome ORR’s work on the
system operator and route-based regulation and we look forward to working with
you to further develop the approach in this area, including through the exploration of
the potential for route-based charging.

Additionally, it is crucial to focus on steps that can reasonably be taken to improve the
capacity and performance of the existing network, rather than unduly focus on steps
which require its expansion. This is particularly important to minimise disruption to
passengers, whilst maximising value for money.

Charges, incentives and open access

The work on charges and financial incentives is key. We recognise this is being taken
forward in a parallel process to the initial PR18 consultation document1. A regime which
provides strong incentives for NR and operators to work together to reduce costs and
drive improvements for passengers will be critical. This is why we particularly look forward
to working with the ORR and industry on potential means to significantly enhance this
collaboration, creating stronger, sustainable commercial incentives for efficiency.
However, changes should only be made where they lead to a significant better outcome
for users. We would be concerned at changes which increased complexity, and
potentially costs, without clear evidence these would lead to improvements for users and
taxpayers.

1 The DfT’s initial letter to the ORR on charges and incentives can be found at:
http://orr.gov.uk/__data/assets/pdf_file/0008/19853/DfTs-letter-on-improving-incentives-for-better-outcomes.pdf

Furthermore, for incentives to work effectively, there will need to be clarity and
transparency about where costs are incurred and what different sources of funding are
paying for. This should support better decision-making across Government and the rail
industry. We would encourage the ORR to fully consider the opportunities create by route
based regulation - while we recognise that route based charges pose certain challenges,
we support full consideration being given to the issue during the PR18 process.

As you know, we are also exploring how a levy could be introduced so that open access
operators make a fair contribution to unprofitable, but socially and economically important
services - as franchises do. We want to ensure any such levy enables more services for
passengers while protecting taxpayers, avoids creating perverse incentives, and can be
effectively administered. We currently plan to consult on the levy later in 2016, aiming to
coordinate the timing of our work with your consultation on changes to charging. We
intend the levy to be payable in relation to all open access applications granted from
Budget 2016.

Conclusion

We welcome the ORR’s ambitious agenda for PR18, which places users at the heart of
the approach and supports a more devolved, accountable NR. We recognise, however,
that there is a lot to be done to reach a determination that produces real benefits for
passengers and other users. We look forward to working with you to achieve this.

Richard Carter
Director Rail Strategy and Security

Railhub Archive ::: 2016-08-04 DfT-001