| 
Railhub Archive 2000-04-14 ORR-001 Office of the Rail Regulator0
Rail Regulator tackles Railtrack's incentive framework
keywords: click to search
 Railtrack
 
Phrases in [single square brackets] are hyperlinks in the original document
Phrases in [[double square brackets]] are editorial additions or corrections
Phrases in [[[triple square brackets]]] indicate embedded images or graphics in the original document. (These are not usually archived unless they contain significant additional information.) | | 
         Rail Regulator tackles Railtrack's incentive framework _______________________________________________________________

 related documents
type Press release note ORR/00/11
n a week when it was revealed that Railtrack earned huge bonuses despite rail passengers suffering ever more delays, the Rail Regulator has taken another step towards sweeping away the existing financial framework replacing it with stronger and clearer incentives for delivery.
Tom Winsor said today 'Since I was appointed in July 1999, I have made it plain publicly that incentive regulation is and always has been preferable to enforcement action and that the incentive regime established in 1995 was fundamentally flawed. I want Railtrack to become more imaginative, more creative and more responsive to its customers' needs, giving the railway industry its own vision for growth and implementing worthwhile plans for sorely needed investment and improvement. That is what the public and the industry want and expect of the company.'
He said the present structure had been rightly criticised but he now had the opportunity to put right the shortcomings of the past and that is what he intended to do. He said: 'Good performance will be rewarded and bad performance will be penalised.' In particular, he proposes to strengthen and simplify the contractual incentive for Railtrack to reduce delays.
'However, no regulator should discard enforcement action if commercial incentives fail for any reason. But I will inject greater clarity and transparency about the circumstances in which enforcement action may be taken and the basis on which penalties will be established,' he said.
Mr Winsor said that information about Railtrack, its financial performance and the nature and condition of its assets was the oxygen of regulation. Having already announced his intention to modify the company's network licence he said his plans included draft licence modifications relating to the provision of information and the appointment of independent reporters to verify the information.
The plans also include an explanation of how enhancements to the network will fit into a new financial framework. 'The new enhancement regime will be important in facilitating the franchise replacement programme, in which train operators are to be encouraged and may be required to invest considerable sums themselves in exchange for much longer contracts,' he said.
On the question of third party enhancements, Mr Winsor stressed that it was essential that neither the safety nor operational integrity of the railway was prejudiced, and no such risks would be contemplated. 'However, the railway industry should not be afraid of new ideas which could bring real and sound improvements earlier than the traditional methods', Mr Winsor added.
The Regulator also announced his intention to publish draft final conclusions on the review in July 2000 allowing interested parties time to make representations on the conclusions before he publishes his final review notice in September 2000. This will allow more time for the Regulator to assess new information in relation to the West Coast modernisation and the cost of enhancements included in the Shadow Strategic Rail Authority's Incremental Output Statement.
'The periodic review of Railtrack's access charges: Provisional conclusions on the incentive framework' is available from Sue MacSwan, ORR Library, 1 Waterhouse Square, 138-142 Holborn, London EC1N 2TQ. (Tel: 020 7282 2001; fax: 020 7282 2045; e-mail : orr@dial.pipex.com. The document can also be found on the ORR web site at http://www.rail-reg.gov.uk.
Notes to Editors 1. The Regulator's approach to the periodic review including the incentive framework was first set out in August 1999 - 'Incentive regulation central to the Regulator's periodic review of Railtrack' (p/n ORR/99/37). 2. In October 1999 the Regulator consulted further on detailed proposals for the incentive framework, including the incentive to improve delays - 'Rail Regulator publishes consultation document on incentives' (p/n ORR/99/45). 3. The December 1999 periodic review document consulted on further aspects of the incentive framework, including the treatment of enhancements 'Regulator sets out future financial framework (p/n ORR/99/53).
PRESS INVITATION
To: Transport, City and Business Correspondents
You are invited to send a representative to a press briefing to be hosted by Tom Winsor, the Rail Regulator, when he will explain his proposals to incentivise Railtrack to expand the capacity of the railway and improve its own performance.
The briefing, starting at 11am, will be held today, Friday 14 April, at the Office of the Rail Regulator, 1 Waterhouse Square, 138-141 Holborn, London EC1N 2TQ.
Stills photographers are asked to conclude their business in the opening ten minutes. There will be an opportunity for tv and radio interviews at the end of the briefing.
Copies of the material are now available for collection from ORR Reception.
Please ring Ian Cooke on 020 7282 2002 or David Davies on 020 7282 2007 to confirm your attendance.
PRESS ENQUIRIES : ORR Press Office : 020 7282 2002/2007/2089 Out of office hours : pager number 07659 127303
Regulator's foreword
1. This document contains my provisional conclusions on the framework of incentives which I believe should be established as part of the periodic review of Railtrack's access charges. I believe that incentive regulation is and always has been preferable to enforcement action. If Railtrack is allowed to share in the benefits of the growth of the railway it will be far more inclined, on its own initiative, to expand its capacity and improve its performance. That is what the public and the industry want and expect of the company. This document is about equipping it to do so.
2. I want Railtrack to become more imaginative, more creative and more responsive to its customers' needs, giving the railway industry its own vision for growth and implementing worthwhile plans for sorely needed investment and improvement. Railtrack has the enviable position of being at the heart of an industry whose customers want more and more of its product. It can and should meet those demands with enthusiasm, skill and energy.
3. The lack of an adequate incentive structure for Railtrack has been criticised, and the decisions made in 1995, when the present financial regime was established, have not served the industry well. The periodic review provides me with the opportunity to put right this shortcoming of the past, and that is what I intend to do. However, no regulator should discard or disregard his right - indeed, in appropriate cases, his obligation - to consider and take enforcement action if commercial incentives fail for any reason. I will not do so. But I believe it is far better that there is greater clarity and transparency about the circumstances in which enforcement action may be taken and the basis on which any penalties will be established. The better the company understands these things in advance, the better able it will be to minimise or eliminate the circumstances in which they may materialise. And if the company is performing well, it will have no need to be concerned about penalties and enforcement.
4. Information about the company, its financial performance and the nature and condition of its assets is the oxygen of regulation. In November 1999 I announced my intention to modify Railtrack's network licence to provide much better systems for the provision of this information. Today's document takes that process to the next stage, with draft licence modifications relating to the provision of information and the appointment of independent reporters to verify this information.
5. It is right that Railtrack, its customers and funders understand in advance how enhancements to the network will be treated in its financial framework. This document explains the development of the enhancement framework. Once established, it will reduce the uncertainties which Railtrack has faced in the past, incentivise the company to improve and enlarge the network and so better serve the public interest. The new enhancement regime will be important in facilitating the franchise replacement programme, in which train operators are to be encouraged and may be required to invest considerable sums themselves in exchange for much longer contracts.
6. This document also considers the issue of parties other than Railtrack carrying out work on the network. The SSRA has encouraged those bidding for new franchises to come forward with different ways of financing and ensuring delivery of network enhancements. Ensuring that the limits on Railtrack's resources and capacity - whether of project management or financing - do not unnecessarily hinder the development of the network is important. It is also of course essential that neither the safety nor operational integrity of the railway is prejudiced, and no such risks will be contemplated. The railway industry should not be afraid of new ideas which could bring real and sound improvements earlier than the traditional methods.
7. These provisional conclusions take the periodic review of Railtrack's access charges another important step closer to the establishment of a far better system of financing and rewarding the railway. The shortcomings of the past will be swept away as soon as the existing framework will allow.
TOM WINSOR Rail Regulator 14 April 2000
1. Introduction and summary
1.1 The October 1999 periodic review document set out the key aspects of the incentive framework which are covered by this review:
- incentives to use and develop the network, arising from the structure of charges and the form of control;
- longer term incentives to develop the network including the regulatory treatment of enhancements in the next control period and beyond;
- incentives to enhance the performance of the network which are provided by the contractual performance and possessions regimes supported by regulatory targets and incentives;
- incentives to maintain and improve the underlying long-term health of the network through appropriate monitoring of the serviceability and condition of Railtrack's assets; and
- incentives to improve efficiency derived from the fixed price nature of RPI-X incentive-based regulation and the interaction with the periodic review process.
1.2 The key elements of this framework have already been discussed in the preceding periodic review documents. The October 1999 document invited comments on the main options relating to the structure of charges and the incentives relating to performance and possessions. Further aspects of charges for electric traction and usage were discussed in technical consultation documents in September 1999 and November 1999 respectively. The December 1999 document contained the Regulator's provisional conclusions on changes to the Property Allowance Scheme or PAS (Chapter 10). It also invited comments on options for changing the basis for station access charges (Chapter 11), the definition and measurement of baseline outputs (Chapter 12) and the framework for enhancement expenditure (Chapter 13).
1.3 A list of respondents to these consultations is contained in Appendix A and those responses which are not marked confidential have now been placed in the Office of the Rail Regulator's (ORR) library and will be placed on its website.
1.4 The Regulator also held an industry seminar on specific elements of the structure of charges on 28 February 2000. The transcript of this seminar has been placed on the ORR's website and in the ORR library.
Purpose
1.5 The purpose of this document is to invite views on the Regulator's provisional conclusions on the main elements of the incentive framework:
- Part I describes the proposed structure of charges, including usage charges, electric traction charges, capacity charges, volume incentive and fixed charges;
- Part II discusses the proposed arrangements for incentivising and monitoring delivery of the periodic review settlement. This includes the performance and possessions regimes, the incentives for delivery of other baseline outputs, general guidelines on penalties, the enhancement framework and information reporting arrangements (including regulatory accounts and the role of reporters); and
- Part III sets out the proposed timetable for the remainder of the review and the way in which the final conclusions will be implemented.
1.6 This document therefore relates primarily to services provided to franchised passenger train operators and excludes several aspects of the incentive framework which will be developed over the next few months. For example, it excludes the treatment of the Incremental Output Statement (IOS) enhancements and West Coast Route Modernisation (WCRM) costs, as well as the development of the Regulator's charging policy for freight, stations and depots.
1.7 It should be noted, however, that some elements of the proposed incentive framework for franchised passenger operators (e.g. the structure of charges) may also have implications for the Regulator's approach to freight charging. The Regulator will be consulting on his criteria for the approval of Railtrack's access charges for freight services during May 2000. In developing this policy he commissioned NERA to look at the effect of charging structure on freight revenues (the executive summary of their report can be found on the ORR website). More recently, he appointed Symonds and NERA to undertake a review of the efficient cost of providing a stand-alone freight network. Railtrack has also been asked to provide information on its avoidable costs.
1.8 The questions for consultation are summarised in Appendix B. Consultation responses should be sent to:
Paul Plummer Chief Economist Office of the Rail Regulator 1 Waterhouse Square 138-142 Holborn London EC1N 2TQ
by 26 May 2000. Respondents should indicate clearly whether they wish all or part of their responses to remain confidential to the ORR. Otherwise they may be published, placed in the ORR library and its website and quoted from by the Regulator. Where a response is made in confidence, it should be accompanied by a statement which can be published, placed in the ORR library and its website and quoted from by the Regulator, summarising the submission excluding the confidential information.
Summary of Part I: Structure of charges
1.9 The structure of Railtrack's access charges has already been subject to considerable discussion involving the Regulator, Railtrack, operators and funders. The Regulator's provisional conclusion is that the existing structure is no longer appropriate since:
- the existing charges are below the incremental cost of providing additional services and therefore penalise Railtrack for promoting growth on its network; and
- the case-by-case negotiation of congestion costs and the share of net benefit (as part of the fixed charge for additional access rights) reduces the transparency and predictability of Railtrack's charges.
1.10 Given this, the Regulator's present view is that the following changes should be made to the structure of charges:
- usage charges should be increased to reflect the estimated incremental maintenance and renewal cost for wear and tear caused by additional trains;
- electric traction charges should be refined to increase their cost reflectivity, to promote metering of consumption, and to allow the Regulator to introduce the possibility of competitive supplies of electricity after April 2002;
- the current negotiation over the additional congestion costs associated with supplemental access agreements should be replaced with a tariff-based capacity charge which would be a simplified version of Railtrack's proposed capacity reservation fee;
- the negotiated share of net benefit would be replaced with a simple volume incentive which would give rise to a transitory increase (or decrease) in profits as a result of additional (or less) growth - this incentive should be expressed as a percentage of the relevant usage and capacity charge for the year in question; and
- the fixed charge should allocate Railtrack's residual revenue requirement between operators (i.e. after deducting expected income from other single till items and variable charges) in proportion to their access rights (or proxies for those rights).
1.11 The Regulator's final conclusions on the structure of charges would be reflected in all existing agreements as part of the periodic review process. The Regulator would also expect this to be reflected in any supplemental access agreements which are submitted to him for approval over the following period. The scope for negotiation over supplementals would therefore be confined primarily to the specification and costing of any enhancements.
1.12 Figure 1.1 below illustrates the relationship between the current structure of charges and the Regulator's provisional conclusions on the future structure of charges. The main change is to replace existing negotiated charges with predetermined tariffs which should make it easier for Railtrack and operators to plan their businesses and ease the process of negotiating enhancements. This would also provide greater consistency between the treatment of new and existing rights. In addition, with higher, more cost reflective usage charges, the overall variability of charges would be increased.
Operational performance
1.13 The Regulator has reviewed the incentives on Railtrack to improve and maintain operational performance (i.e. the amount of delay). This includes both the contractual incentive regime in Schedule 8 of the franchised passenger track access agreements and the regulatory enforcement of operational performance targets under Condition 7 of its network licence. The Regulator's provisional conclusions as a result of this review include a number of changes to the template Schedule 8 regimes:
- removal of the higher and lower thresholds so that the same marginal incentive rate applies at all levels of performance;
- setting the benchmark based on SSRA's proposed benchmarks for train operators (although this does not have any impact on marginal incentives);
- increasing the incentive rates to reflect changes in both the marginal revenue effect and the societal elements of the current rates;
- retention of the star model so that Railtrack is incentivised to manage network delay; and
- removal of certain non-core elements of the existing regime and simplification of the drafting to provide clearer incentives for Railtrack and train operators.
1.14 The Regulator would expect the template regime to be adopted by most operators. In some cases, however, they may wish to retain or negotiate bespoke arrangements and the Regulator has clarified his view of the criteria which he would expect to use in assessing these arrangements.
1.15 In the light of the responses to the October 1999 periodic review document, the Regulator remains of the view that the contractual incentives discussed above should be supported by enforceable targets. He proposes to establish (non-enforceable) monitoring targets based on the expected level of performance and to define an enforceable target which permits a fixed percentage more delay minutes per train mile than the monitoring target. If Railtrack fails to meet this target in a single year it would be required to provide an explanation and a detailed recovery plan. Failure to meet the target in two consecutive years would be expected to result in financial penalties which would normally be established in advance as part of the periodic review.
Possessions
1.16 The Regulator has proposed a number of changes to the possessions regime to avoid unnecessary complexity and to achieve a more consistent approach to compensation regardless of the reason for the possession. His present view is that the free possessions allowance should be removed and that the Schedule 4 rates should be used to determine the level of compensation for disruptive enhancements under Part G of the Track Access Conditions. The Schedule 4 rates will of course rise as a result of the proposed increases in the Schedule 8 incentive rates.
Sustained network outputs
1.17 Considerable progress has been made with Railtrack in defining the relevant measures of asset condition and serviceability. Railtrack has also made progress towards establishing a baseline position for 31 March 2001. Although there are differences in emphasis, there is a large measure of agreement between the Regulator, Railtrack, operators and funders on the appropriate measures and the way in which they should be monitored and incentivised.
General guidelines on penalties
1.18 Where the Regulator takes enforcement action under section 55 of the Railways Act 1993, he may impose a monetary penalty on the relevant operator. Although the Regulator hopes that it will not prove necessary for him to use these powers, he considers that the process should be as transparent as possible.
1.19 The Regulator therefore proposes to publish general guidelines on the factors to which he would expect to have regard when deciding whether to impose a monetary penalty and the amount of the penalty. Having regard to his section 4 duties, the Regulator's policy objective in setting these penalties would be to incentivise compliance with the relevant condition or requirement without introducing unnecessary risks for the relevant operator. Any further guidance on this policy would be designed to increase transparency by setting out the steps which the Regulator expects to follow when calculating the amount of the penalty. He proposes to develop the draft guidelines contained in this document in conjunction with the periodic review.
Enhancement framework
1.20 Since the December 1999 periodic review document, the Regulator has been developing the framework for enhancements in conjunction with Railtrack and the SSRA. The Regulator's current thinking in relation to his proposed policy statement on this issue is set out in this document. This describes in more detail the Regulator's proposed criteria for the approval of access charges relating to enhancements and the way in which he expects to treat enhancement expenditure at future periodic reviews. In particular:
- in the light of responses to the previous document, the Regulator confirms his view that the allowed rate of return on enhancements should be the same as for the sustained network (unless Railtrack takes genuine demand risk) but that any asymmetric cost or delivery risks should be reflected in the expected capital cost;
- the Regulator's views in relation to the role of third party enhancement projects (and Special Purpose Vehicles or SPVs) is discussed in more detail, including the contractual arrangements necessary to ensure responsibility for safety is clear and to avoid unnecessary complexity or risk leaving assets unregulated.
1.21 Although some further work is required, the key principles are now well established and the Regulator would expect to see these reflected in any enhancement projects which are currently under consideration. The Regulator is considering whether the arrangements in relation to enhancement should be incorporated into a single licence condition or included in a number of other relevant licence conditions which he plans to introduce in conjunction with the periodic review.
Information reporting requirements
1.22 The Regulator considers that the current information reporting arrangements, which have evolved over a period of years, are inadequate. Following discussion with Railtrack, he has therefore developed proposed modifications to Railtrack's network licence and associated guidelines which would require it to:
- prepare more detailed regulatory accounts which are consistent with the basis on which the price controls are established;
- ensure that enhancement expenditure is logged up on a basis which is consistent with the enhancement framework discussed above;
- appoint reporters (chosen by the Regulator in consultation with Railtrack) to provide an independent assessment of the robustness of Railtrack's information submissions; and
- provide an annual return (together with monthly returns for some information) which reports data for the previous year and compares this with both historical data and assumptions underlying the periodic review (this would consolidate and add to existing information submissions and would allow the NMS to be more focussed on the future requirements of operators and funders).
Part III: Timetable and implementation
The Regulator proposes to extend the date for publication of his review notice in accordance with the provisions in Part 8 of Schedule 7 of each franchised passenger track access agreement. His present intention is to publish draft conclusions in July 2000 and to allow interested parties to make representations on these conclusions before he publishes his final review notice in early September 2000. This will also allow more time for the Regulator to assess new information in relation to the West Coast Route Modernisation (WCRM) and the cost of the enhancements included in the SSRA's Incremental Output Statement (IOS).
Railhub Archive ::: 2000-04-14 ORR-001
 | | 

Tuesday 28



Not logged on Visitor









  357 stories

  4 documents

  2 collections


 
  2 documents

  8 documents

| |