Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Supplementary memorandum by Railtrack (RI 20C)

WILL THE REVISED TRACK ACCESS CHARGE STRUCTURE PROPOSED IN THE RAIL REGULATOR'S PERIODIC REVIEW OFFER RAILTRACK SUFFICIENT INCENTIVES TO PROVIDE ADDITIONAL CAPACITY OR WILL PATHS FOR EXTRA TRAIN HAVE TO BE FOUND ON THE EXISTING NETWORK?

  The periodic review provides revenue for the maintenance and renewal of the network. It does not in itself provide for additional capacity and we are still examining the extent to which it will allow Railtrack to finance enhancements and additional capacity. Equally, the details of which capacity improvements will be pursued will also be informed by the SRA's strategic plan which is not now due until January 2001.

WHAT CHANGES SHOULD BE MADE TO THE TRAIN DELAY BENCHMARKS PROPOSED IN THE PERIODIC REVIEW TO ACHIEVE AN APPROPRIATE BALANCE OF INCENTIVES AND PRIORITIES AS REFERRED TO IN RAILTRACK'S MEMORANDUM?

  Railtrack believes that the regime should provide a realistic startpoint from which future performance improvements should then be achieved. It is not sensible for the new regime to be based on a benchmark which assumes a 7.8 per cent performance improvement this year which is simply not going to be achieved.

  Railtrack would like to discuss these issues with the Regulator and has suggested undertaking joint work to examine train performance and the causes of delay in order to set sustainable future rates of improvement. We have also suggested that the implementation of the new performance regime be deferred for one year i.e. until this analysis has been carried out and the issue has been properly considered by the SRA working group set up after the Hatfield accident.

DOES RAILTRACK REMAIN CONCERNED THAT THE PERIODIC REVIEW MAY NOT HAVE PROVIDED IT WITH THE CAPACITY TO FUND £8 BILLION OF INVESTMENT OVER THE NEXT FIVE YEARS?

  Yes, we are concerned that the periodic review settlement does not provide the financial framework to raise the necessary capital for £8 billion enhancement investment. Our analysis suggests that the key financial ratios will not be sufficient to allow us to raise that level of funds on the markets. We are particularly concerned about the most recent deferral of £500 million of income, agreed by ORR as necessary to spend on the network, to the end of the control period which significantly weakens our financing capability. We believe that without some modifications to the Regulator's final conclusions we would have to defer a significant proportion of the enhancement programme.

DOES RAILTRACK ACCEPT THAT ITS REGULATORY ASSET BASE SHOULD HAVE BEEN REDUCED BY £120 MILLION IN THE PERIODIC REVIEW BECAUSE THE COMPANY HAS NOT DONE AS MUCH RENEWAL WORK AS COULD HAVE REASONABLY BEEN EXPECTED ?

  No. Railtrack has repeatedly demonstrated to the Regulator that we have carried out significantly more renewals than were allowed for when access charges were initially set. We do not understand the basis for this penalty which appears arbitrary and unjustified and believe that the Regulator has not established that Railtrack has under delivered.

IN ITS MEMORANDUM RAILTRACK SAYS THAT IT IS WORKING WITH THE INDUSTRY TO DEVELOP MECHANISMS THAT CAN RECONCILE THE SOMETIMES CONFLICTING PRESSURES FOR NETWORK SAFETY, PERFORMANCE AND GROWTH. HAS THE PERIODIC REVIEW EASED THE PRESSURES. WHAT IMPLICATIONS DO THEY HAVE FOR THE FUTURE EXPANSION OF THE NETWORK ?

  These issues are being considered as part of the SRA's post Hatfield working groups. It is too soon to comment on the outcome of this work. However, we are concerned at the scale of the agenda we face and need to resolve this at industry level. We believe that there is a need to ensure that all our regulators act in a more cohesive way ensuring that the demands they make on Railtrack do not conflict.

WILL RAILTRACK APPEAL TO THE COMPETITION COMMISSION UNDER THE NEW ARRANGEMENTS IN THE TRANSPORT BILL, ABOUT ANY ASPECT OF THE REGULATOR'S PERIODIC REVIEW?

  The Board will consider whether to appeal to the Competition Commission in due course.

WHAT PROPORTION OF RAILTRACK'S CURRENT AND FUTURE INCOME WILL COME FROM GOVERNMENT?

  No Railtrack income currently comes directly from Government although Government does subsidise train operators by about £1 billion a year.

  In the next control period, 34 per cent of Railtrack's income will come from SRA grants, the remainder will come from track access charges and other single till income.

ARE ANY ASPECTS OF THE PERFORMANCE OF RAILTRACK'S ZONES BENCHMARKED TO ALLOW COMPARISONS TO BE MADE BETWEEN THEM? IF NOT COULD THIS BE DONE?

  In the current financial year, a new company-wide reporting system was implemented as part of a process to provide increased consistency and enable performance to be benchmarked throughout the company.

  This process is called "Winning is Green" (WIG) and uses red / amber / green light symbols to indicate the current status of four key aspects of the business: Service, Safety, People and Pounds (SSPP). All zones are measured consistently using a WIG report called a "Business Summary Scorecard" An example of the summary report is included below as Figure 1

Figure 1 BUSINESS SUMMARY SCORECARD


  The overall indicators for Service, Safety, People and Pounds (SSPP) are derived from the company's actual performance measured against targets set for 15 Key Performance Indicators (KPIs). For example, Service is measured against the annual targets for the following KPIs:

    —  Delay minutes for Passenger and Freight,

    —  Track Quality index,

    —  Broken Rails

    —  Repeat signal failures.

  All zones report on a common set of measures aggregated from the company's existing functional reports. They are derived from these common measures, which form the Business Summary Scorecard. These are included in Table 1 below:

Table 1 ZONAL SUMMARY SCORE CARD


  Data from all seven zones on these 15 KPIs, together with a performance commentary, are brought together in an Operations Committee report. This describes the company's overall performance and provides the opportunity for zonal benchmarking and sharing of best practice.

  The company's performance related pay scheme for all employees is based on the data from Business Summary Scorecard. This is calculated taking both local zonal and collective company performance into account. This rewards zones for their individual performance and encourages them to outperform their targets.

  All Zonal objectives are also grouped under the WIG framework of SSPP and aligned to the Summary scorecard. This further enables consistency as well as comparisons between Zones whilst ensuring alignment between corporate and individual objectives. The WIG framework therefore measures, reports and rewards all zones in the same way.

HAS THE PROVISION OF ADDITIONAL GOVERNMENT SUPPORT FOR THE WEST COAST ROUTE MODERNISATION PROJECT NOT REMOVED RAILTRACK'S INCENTIVE TO COMPLETE FUTURE MAJOR PROJECTS WITHIN BUDGET?

  Not at all. Even allowing for Government support, Railtack's shareholders will bear a very significant penalty on the West Coast Route Modernisation project.

  All of the current major investment programmes receive a significant element of financial support from the Government. With the exception of the Channel Tunnel Rail Link this support is provided within the structure of the Regulatory determination.

  The final Regulatory determination for control Period 2 contains a detailed framework for agreeing the cost of enhancement projects and for remunerating Railtrack for the investment. This framework incorporates Railtrack's revised process for achieving a high level of engineering design and project planning before committing to a construction cost. The framework also incorporates the Regulator's proposals for setting an efficient target cost which Railtrack is incentivised to out-perform.

  Railtrack sees the delivery of investment programmes as part of the total process of managing the business within the Regulatory determination. There is a clear incentive for Railtrack to out-perform the Regulator's targets by completing our major programmes within the agreed budgets. Underperformance on such a huge programme would have significant detrimental impacts on Railtrack's shareholders.

  Over the last three years Railtrack has taken steps to improve its capability to manage the delivery of major investment programmes. In 1998 Railtrack appointed a main board director with specific responsibilities for major projects and investment. Since then a number of senior project management specialists have been recruited to Railtrack and appointed from other parts of the business. Three of the world's leading firms of programme managers—Bechtel, Fluor Daniel and Parsons Brinckerhoff—have been awarded contracts to support Railtrack and integrated management teams have been established for all of the major programmes.

  The results of this investment in people are already visible. The £185 million re-development of Leeds station is 58 per cent complete, on time and within budget. Section I of the Channel Tunnel Rail Link is 52 per cent complete and is also on time and within budget. Following the complete review and re-structuring of the West Coast Route Modernisation programme, more than £900 million has been spent on Phase I and we are on schedule to deliver improved train services to Manchester in 2002.

  Railtrack is not only incentivised to deliver major investment programmes within budget but now also has the capability to do so.

HOW HAS RAILTRACK BALANCED THE NEEDS OF PASSENGERS AND FREIGHT USERS?

Part A—Current Freight Related Activity.

  The Government's transport 10-year Plan sets the target for an 80 per cent growth in freight during the next 10 years. Railtrack assisted the sSRA on their submission for the 10 year transport plan.

  We are currently working with the sSRA on their strategy. This will be published in January. Railtrack will also publish details of possible network enhancements for rail freight in the Network Management Statement.

  Current activity, for which details are already published, includes:

    —  Developing with the sSRA projects designed to increase the size of loads trains can carry on the Network, with a focus on increasing the size of container that can be carried by from ports.

    —  Providing additional capacity from major ports (Southampton, Felixstowe and North Thameside) to major inland destinations (West Midlands, the North West and Scotland)

    —  Developing proposals to upgrade capacity and capability for freight on routes across London

    —  Separately Railtrack is investing in and promoting a national network of inter-modal freight terminals. Sites include London International Freight Exchange (LIFE), near Heathrow and the former Parkside Colliery near Warrington. There are further plans to develop at key rail / motorway intersections.

    —  In addition we are working with the sSRA to ensure that network enhancements connected with passenger re-franchising preserve, and where necessary expand the capacity needed to accommodate the envisaged growth in freight services.

    —  Freight will benefit equally with passenger services from the increasing expenditure on maintenance and renewal activity which improves the quality and reliability of the network. (Most freight services travel on a shared network)

Part B—Mechanisms that Ensure Railtrack fulfils its obligations to freight users

  Railtrack has an ongoing obligation to balance the needs of passenger and freight users. The company fulfils this obligation through compliance with the following mechanisms:

1.   The granting of access rights

  In negotiating with operators for access rights, Railtrack has a regulatory duty to ensure that capacity requested by them is available and therefore that train paths are not "oversold". In making decisions about what access rights can be granted, Railtrack shows no favour to either passenger or freight operators—rights are granted on a first come, first serve basis. If the Regulator considers that rights in an access agreement have been oversold or that other operators have been treated unfairly, then he can refuse to approve the agreement when it is submitted to him.

2.  The acceptance of "spot bids"

  In accepting spot bids made by an operator in accordance with their access rights, Railtrack has a duty under the Access Conditions to ensure that the train paths requested do not interfere with the operations of other operators. Railtrack shows no favour to either passenger or freight operators—bids are accepted on a first come, first serve basis. In the event of any dispute, there are arbitration procedures laid down in the Access Conditions as a cross-check to ensure that Railtrack acts fairly.

3.  Dealing with capacity issues

  There will be occasions where the requesting of access rights occur in an area of congestion or where there are capacity issues which will need to be addressed. If the operators along the route, whether they be freight or passenger, cannot agree amongst themselves, or through the operation of their access contracts to flex their services to accommodate the new service, then an infrastructure solution may need to be put in place. The funding of that enhancement is via either of a number of sources:

    —  the operator in question, who may be a passenger or freight operator;

    —  the sSRA; or

    —  Railtrack (if the incentives are appropriate).

  Currently, cases for capacity enhancement have been negotiated on the basis of an the operators' ability to pay—this process is the same for passenger and freight operators. If operators are unable to afford enhancements, then an external funding solution may be sought (eg via a Freight Facilities Grant). However, the Regulator has proposed that, from 1 April 2001, enhancements will be dealt with in accordance with a "Framework for Enhancements" which will be approved by him. This Framework should also ensure that the needs of freight and passenger operators are balanced.

4.  Operating the Railway

  On a day-to-day basis, in addition to the timetable there are regulating statements which are prepared in accordance with the Access Conditions. Through these statements, signalling staff are made aware of the priorities to address when allowing trains onto the Network. Statements are agreed with both freight and passenger operators who have an opportunity to influence the priorities they are given. Any disputes regarding the statements are resolved in accordance with the Access Conditions.

5.  Dealing with perturbation

  In the normal course of events, the timetable will determine the operation of the trains on the Network. However, there are occasions when the timetable fails due to unplanned incidents. Each Zone has contingency plans which are implemented on such occasions. Passenger and freight operators affected by these plans are consulted during the planning process and have the opportunity to influence their details. Any dispute regarding either the preparation or implementation of these plans is dealt with in accordance with the Access Conditions.

6.  Role of the sSRA and ORR

  Both the sSRA and ORR ensure that the needs of freight and passenger operators are balanced by Railtrack. Railtrack has incentives, both financial and regulatory, to ensure that all operators are treated in an equitable manner

    —  Role of the sSRA—sSRA has a role in the granting of new passenger franchises, they also have a role in promoting freight and to that end have published their growth aspiration for freight. In granting new passenger franchises, the sSRA therefore has an obligation to ensure that freight is not disadvantaged.

    —  Role of ORR—ORR has a number of section 4 duties which relate to the use of the network by passenger and freight operators. He has no explicit duty to ensure that Railtrack balances the needs of all operators, however he does so implicitly through a number of regulatory functions including:

    1.  Determination of the frameworks for both freight and passenger charges;

    2.  Approval of freight and passenger track access agreements; and

    3.  Section 17 powers to require Railtrack to enter into agreements with operators.

  In summary, Railtrack balances the need of passenger and freight operators through a number of industry and regulatory processes, comprising industry guidelines (eg. Access Conditions) and a cross system of both industry and regulatory checks and balances (eg. regulatory review).

Greg Selkirk

Railtrack Freight Commercial

6 December 2000


 
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