Select Committee on Constitution Minutes of Evidence


Memorandum by the Rail Regulator

What are the legal bases for regulators; what is the nature of their powers and how do they exercise them; how could their powers be revoked; from where do they obtain their financial and administrative support?

  1.  The Rail Regulator is a creature of statute, namely the Railways Act 1993. He also has functions as a competition authority for the railway industry under the Competition Act 1998. His functions and duties were amended by the Channel Tunnel Rail Link Act 1996, the Greater London Authority Act 1999 and the Transport Act 2000.

  2.  The Railways and Transport Safety Bill currently before Parliament will, when enacted and brought into force, abolish the statutory office of Rail Regulator and in its place establish a board consisting of a chairman and at least four other members, all appointed by the Secretary of State. The new organisation is to be called the Office of Rail Regulation.

  3.  Unlike most other sectoral regulators, the Rail Regulator is not directly concerned with consumer protection, including fares. Rather, the statute concentrates the Rail Regulator on the monopoly and dominant elements of the railway industry. His most important functions are:

    (a)  the issue and enforcement of licences and licence exemptions for the operation of railway assets—this includes enforcement of the network licence held by Network Rail, and thereby oversight of Network Rail's efficient stewardship of the national railway network as the monopoly infrastructure provider;

    (b)  establishing the level and structure of charges payable for access to railway facilities—this encompasses establishing the level of income Network Rail should recoup through track access charges to finance the stewardship of the network, and ensuring that the charges regime promotes efficient use, operation, maintenance and renewal of the network;

    (c)  approval of access agreements and subsequent amendments, and access exemptions, and the enforcement of rights to compulsory third party access to railway facilities—this covers the responsibility for ensuring the fair and efficient consumption of rail network capacity by train operators, including the contractual terms under which capacity is sold;

    (d)  concurrent jurisdiction with the Office of Fair Trading for the enforcement of domestic competition law in cases of services relating to railways under the Competition Act 1998;

    (e)  supervision of the industry-wide network code which contains common provisions for the efficient use of capacity and the development of the network; and

    (f)  determining certain classes of appeal (including appeals on points of law) arising from disputes in the railway industry.

  4.  The Strategic Rail Authority (SRA) is a non-departmental public body (NDPB) which exercises certain other regulatory functions in respect of railway services, mainly concerned with consumer protection. This function is discrete from, but complementary to, the Rail Regulator's functions. The SRA also awards passenger rail franchises and administers the system of grants for passenger and rail freight facilities and services. The SRA is not independent of Government and the Secretary of State can give it directions. The distinction between the two bodies is frequently misunderstood.

  5.  In exercising his powers, the Rail Regulator must discharge the statutory duties conferred on him by section 4, Railways Act 1993. The Regulator must also act in accordance with European law relating to competition, the provision of railway services, licensing, capacity allocation, charging and technical standards. The decisions of the Rail Regulator are also susceptible to judicial review.

  6.  The Rail Regulator has frequently stated his firm commitment to a policy of openness and transparency in all he does (as to which please see later).

  7.  The powers of the Rail Regulator can be revoked by amendment or repeal of the relevant statute. In some cases, in particular his appeal functions, amendment of the industry-wide network code could revoke his powers.

  8.  The Rail Regulator is supported by the staff of the Office of the Rail Regulator (ORR). The ORR is a non-ministerial government department, staffed by civil servants, which currently employs 140 staff. The projected budget for the ORR for 2003-04 is £14.8 million. ORR's budget is agreed with HM Treasury, and is recouped through licence fees payable by the holders of railway operating licences.

By whom and how is the continuing need for regulators measured; how is their role changed or ended?

  9.  It is for Parliament to decide on the need for regulation in the railway industry and on the nature of that regulation.

  10.  The regulation of railways is not new. It goes back to the beginnings of the railways, and the Railway Regulation Acts 1840 and 1842 are, in some respects, still in force. The modern domestic law of rail regulation is contained principally in the Railways Act 1993.

  11.  Parliament has traditionally concluded that monopoly and dominant players is an industry—especially where there is monopoly control of essential facilities such as a network—must be subject to regulation to prevent or penalise abuses.

  12.  There is also a requirement in European law[1] for each Member State to have a regulatory body for the railways.

  13.  Any alteration to (or removal of) the Rail Regulator's functions would require primary legislation or regulations under the European Communities Act 1972.

  14.  Following the placing of Railtrack PLC in railway administration in October 2001, the Government reviewed the regulation of the railways to ensure that it was appropriate for the new industry structure which was intended—a company limited by guarantee rather than the traditional equity model.

  15.  Following that review, on12 June 2002 the Secretary of State made an announcement to Parliament (Annex 2 to this memorandum) in relation to its conclusions. Only one change was and is to be made: the creation of the regulatory board (see paragraph two above). This is in accordance with current Government policy for all regulatory authorities[2]. In his statement, the Secretary of State said that there are a number of "key overarching principles" which guided the review of rail regulation and which would inform any further changes which might be made. It described the first of these as "an essential continuing requirement". The Government's first principle is:

    "providing sufficient comfort and protection to operators and lenders through independent economic regulation and in order to regulate monopoly/monopsony elements and to secure private investment in the railways at efficient cost".

  16.  There may, however, be other changes in the scope of the Regulator's powers as a result of the implementation of the EU Directives forming the EU Infrastructure Package or the implementation of the EU Regulation on competition modernisation[3].

Who are the members of regulatory bodies; how are they appointed; are they adequately representative; do Nolan principles operate?

  17.  As a single statutory officer, there is only one Rail Regulator. There are therefore no members.

  18.  That position is shortly to change. The Railways and Transport Safety Bill will replace the single statutory officer—the Rail Regulator—with a statutory board of executive and non-executive directors. The Government has stated that it expects to introduce the new board structure at the end of the present Rail Regulator's term of office in July 2004. It is not known what criteria the Government will apply to the representative nature (if any) of the members of the regulatory board.

  19.  The Rail Regulator is appointed by the Secretary of State after an open public competition. Nolan principles apply in full.

  20.  The Secretary of State may remove any person from office as Rail Regulator on the grounds of incapacity or misbehaviour[4] (ie the same grounds of removal as apply to High Court judges).

  21.  It may be noted that, although the powers and responsibilities of the Rail Regulator are vested in the single statutory officer, successive holders of that office have established and maintained an advisory board comprising permanent executive directors and non-executives selected for their expertise. The appointments are made by the Rail Regulator. In announcing its intention to legislate in this respect, the Government said that it wishes to build on the existing ORR board structure, and retain the existing permanent executive board directors.

What are regulators set up to achieve; to what extent do regulators achieve their purposes without adverse consequences; how is their effectiveness assessed?

  22.  The Rail Regulator was set up to achieve the independent regulation of the monopoly and dominant elements of the railway industry in accordance with public interest criteria (section 4, Railways Act 1993) and the principles of fairness.

  23.  The Rail Regulator's achievement of his purposes would normally be measured by the performance of the railway companies which are affected by his jurisdiction. For example, when the Rail Regulator took enforcement action Railtrack in 1999 in a case of poor infrastructure performance adversely affecting passenger trains, the company took remedial action which led to its catching up almost all the shortfall in its performance in the following year.

  24.  However, the perturbations which have affected the railway industry in the relatively short time since privatisation was completed with the flotation of Railtrack in 1996, and particularly in the last three years, make it difficult to assess what beneficial effects regulation has had. The picture has been clouded by five serious rail crashes, the disintegration of the integrity of the network following the Hatfield derailment, the financial collapse of Railtrack and the restructuring of the industry on quite unforeseeable grounds after the year-long administration of that company. The Rail Regulator did not contribute to the occurrence of these events, but he had to deal with their consequences, for example by the action he took in relation to network performance after the Hatfield derailment.

  25.  However, it is clear from the railway industry's responses to the Government's consultation on the structure of the industry that the role of the Rail Regulator is seen as vital, as a safeguard of fair and objective treatment, and as a basis, thereby, for ongoing private investment in the railway network, underpinning Network Rail's ability to borrow in the capital markets.

To what extent are regulators both prosecutors and juries on an issue; what rights of appeal are there against decisions made by regulators?

  26.  The Rail Regulator has many powers whose exercise or non-exercise may affect railway industry players and those who use or depend on the railway.

  27.  In several instances, the Rail Regulator is responsible both for deciding whether to exercise his statutory powers to tackle a perceived problem and then for determining what powers to use to achieve his statutory objectives in section 4, Railways Act 1993. This is not different from the position of other regulatory authorities.

  28.  In the case of an access charges review under Schedule 4A, Railways Act 1993, the Rail Regulator must decide what the structure, level and profile of access charges are to be for (usually) the next five years. If the infrastructure provider (Network Rail) dislikes the Rail Regulator's decision, it has a right to reject it, in which case the Rail Regulator may refer the matter to the Competition Commission for final determination. The decision of the Competition Commission is susceptible to judicial review.

  29.  In the case of a decision to modify an operating licence, if the licence holder dislikes the Rail Regulator's proposed modification it can refuse to agree to it. If the Rail Regulator wishes to persist with his proposal, he can refer the matter to the Competition Commission for determination. If the Competition Commission agrees that the licence should be modified, the licence will be changed in the way determined by the Competition Commission despite the licence holder's objections. Again, the decision of the Competition Commission is susceptible to judicial review.

  30.  Appeals in relation to certain decisions of the Rail Regulator under the Competition Act 1998 are also made to the Competition Commission.

  31.  If the Rail Regulator takes enforcement action for breach or apprehended breach of an operating licence under sections 55-57F, Railways Act 1993, that enforcement action may include the imposition of financial penalties. If the operator in question is aggrieved at the Rail Regulator's decision in this respect, he has a statutory right of appeal to the High Court (in Scotland, the Court of Session).

  32.  In all cases, as a public authority exercising statutory functions, the Rail Regulator's decisions are susceptible to judicial review.

How are regulators held to account by Parliament; what other accountability do regulators have to auditors, Government departments or other public bodies?

Parliament and other public bodies

  33.  The Rail Regulator may be called before committees of Parliament. This has happened on numerous occasions, most frequently the House of Commons Select Committee on Transport, but also the Committee on Public Accounts.

  34.  ORR staff have given evidence to the Transport and Environment Committee of the Scottish Parliament.

  35.  The Rail Regulator has made it clear that he would welcome more regular and systematic scrutiny of his work by Parliament.

  36.  The Rail Regulator is subject to the jurisdiction of the following bodies:

    (a)  the parliamentary Commissioner for Administration in respect of complaints of maladministration;

    (b)  the Comptroller and Auditor General in respect of financial management; and

    (c)  the Information Commissioner in respect of the Rail Regulator's obligations under the Data Protection Act 1998, and the Freedom of Information Act 2000[5].

  37.  Although independent of Government, the Rail Regulator is required to make an annual report to the Secretary of State who lays a copy before Parliament[6]. The Rail Regulator also provides advice on relevant written Parliamentary Questions referred to him by the Secretary of State. The Rail Regulator also replies personally to letter from Members of Parliament.

Government departments

  38.  The Rail Regulator's authority to issue licences comes from a general authority in that respect given to him by the Secretary of State. That general authority can be amended or revoked at any time.

  39.  Under section 4(5)(a), Railways Act 1993, the Rail Regulator is required to have regard to any general guidance issued to him by the Secretary of State about railway services or other matters relating to railways[7]. The obligation to have regard to general guidance is not inconsistent with the Rail Regulator's independence because the Rail Regulator may conclude, in the light of his other statutory duties, that a different course or action is warranted. "Have regard" is not the same as "do as you are told".

  40.  Under section 69(2), Railways Act 1993, the Rail Regulator is required to have particular regard to considerations specified by the Secretary of State in prioritising his review of the provision of railway services, and considerations to which he should have particular regard in determining whether to exercise his statutory functions.

  41.  Under section 69(3), Railways Act 1993, the Rail Regulator is required to give information, advice and assistance to the Secretary of State.

  42.  The Secretary of State has no power to direct the Rail Regulator to exercise his functions in any particular way.

  43.  Scottish Ministers do not have rights or powers corresponding to those outlined above in the hands of the Secretary of State.

How are regulators accountable to those whom they regulate; what is the impact of regulation on the economy; how transparent are their methods of working?

  44.  The Rail Regulator is accountable to the bodies he regulates in three principal ways.

  45.  In the cases of decisions in individual cases and in matters with industry-wide implications, the Rail Regulator consults extensively before reaching his decision. He publishes full reasons for his decisions which are premised on a thorough assessment of submissions and evidence. In major cases, the Rail Regulator also holds hearings which enable all affected and interested parties to make oral statements and representations in relation to their positions on a particular issue, to hear and respond to what is said by others, and if necessary to criticise the line which they believe might be taken by the Rail Regulator. Neither the Railways Act 1993 nor the rules of public law require the Rail Regulator to commit to such a high degree of due process and transparency of decision-making. However, the current Rail Regulator has chosen to proceed in this way in the interests of accountability to stakeholders, to ensure regulatory decisions are consistent with stakeholders' legitimate interests, and to give confidence to industry players, investors and the public in the regulatory process and the quality of decision-making. As explained above, the Rail Regulator's decisions are susceptible to judicial review and, in certain material instances, the Rail Regulator must make a successful reference to the Competition Commission before he may proceed with disputed proposals.

  46.  In the case of his overall regulatory work programme for each year, the Rail Regulator publishes and consults widely on a draft business plan. He does this to ensure that the industry, investors, other stakeholders and the public are aware of what the Rail Regulator plans to do and not to do. This gives people an opportunity to comment on the regulatory work programme and the Rail Regulator's planned expenditure, and to influence them before a decision is made. The business plan is published, made available to Parliament, and (as with all regulatory documents), placed on the Rail Regulator's website.

  47.  Regulated bodies and other people are of course free to make representations to the Government or, through their elected representatives, to Parliament if they believe the Rail Regulator is failing in some aspect of his statutory responsibilities. This could result in Parliament making legislative changes to the Rail Regulator's functions and duties.

  48.  The Rail Regulator is also mindful that industry and public confidence in what he does is highly important. Capital markets are very sensitive to unpredictability in regulatory policy, and the Rail Regulator has always tried hard to ensure that his approach is consistent, soundly based and provides no surprises. Regulatory risk is not the risk that the regulator will act or fail to act. It is the risk that the regulator will act in an unpredictable way.

  49.  The impact on the economy of the Rail Regulator's decisions can be material. The efficiency and economy of the provision of railway services are highly important factors in national transport affairs. Many people and businesses rely on the efficient operation of the railways to a considerable extent, even if they themselves do not use them. It is therefore very important that regulation of the railway industry is aimed at the right things and is pitched at the right level, dealing effectively with possible abuse of monopoly or dominant market power but not stifling commercial innovation or investor confidence.

How are regulators accountable to the public other than through Parliament; what opportunities do the public have to express particular concerns to regulators; how do regulatory bodies relate to their associated consumer watchdogs?

  50.  Although the Rail Regulator works primarily within the railway industry, ensuring the equity and efficiency of relationships between the companies that provide services relating to railways as opposed to the provision of services to the end user (the travelling public and the freight customer), the Rail Regulator always has regard to the quality of that end-user service. His statutory duties are all about the effect on the person who uses or relies on railway on railway services.

  51.  Prices (fares) to the public are primarily a matter for the SRA in accordance with section 28, Railways Act 1993.

  52.  The Rail Regulator's consultation documents, responses to consultations, and provisional and final conclusions (with reasons) are available in the public domain (through the ORR library and on the Rail Regulator's website—www.rail-reg.gov.uk). The ORR's website has recently been considerably improved to provide users with a comprehensive guide to rail regulation, explaining the necessary rules and processes and the criteria and policies which inform regulatory decisions. This allows any person to submit comments and to taken part in consultation exercises if they wish. Last year, it is estimated that the ORR website received a quarter of a million hits and ORR handled a total of 1,166 letters and e-mails from the public.

  53.  The Rail Regulator meets regularly with the Chairman and National Director of the Rail Passengers' Council and ORR staff often attend relevant meetings of the regional Rail Passengers' Committees.

How effective is public consultation by regulators; what opportunities do the public have to contribute; to what extent do the public make use of those opportunities?

  54.  The Rail Regulator consults on all significant areas of regulatory policy before reaching a decision. In almost every case he publishes provisional and final conclusions. All documents, including responses to consultations, are put in the public domain. The Rail Regulator does not consult members of the public directly, because the issues being consulted on require a largely technical and financial expertise and are specific to the railway and wider commercial sectors. But the (albeit rare) submissions which come in from members of the public are taken just as seriously as those from the industry and investors. He does consult passenger and freight representative bodies such as the Rail passengers' Committee network and the Rail Freight Group, as well as public authorities such as Passenger Transport Executives and local authorities.

  55.  The ORR will send specific consultation documents, press releases and other information made public by the ORR in response to any reasonable request from a member of the public. The ORR's website is the principal getaway to the work of the office, and provides a comprehensive explanation of the work we do and plan to do.

To what extent do the needs or concerns of the public guide the work of regulators; are regulators instruments of Government or representatives of the public?

  56.  The protection and promotion of the public interest is the Rail Regulator's primary concern. His statutory duties all point in that direction.

  57.  The Rail Regulator is not the instrument of government. He is independent and, if there is to be private investment in the railway industry, he must remain so.

  58.  The Rail Regulator's public interest objectives and criteria are given to him by Parliament and they may only be removed or changed by Parliament.

How independent are regulators of Government; what factors do or might compromise their independence?

  59.  Subject to the factors mentioned above (such as the obligation to have regard to statutory guidance and the right of the Secretary of State to amend or revoke the authority of the Rail Regulator to grant operating licences), during his term of office the Rail Regulator is completely independent of the Government.

  60.  The Secretary of State of course has the right not to reappoint an incumbent Rail Regulator, which may make a difference if the incumbent wished to be reappointed.

  61.  In legal terms, the Rail Regulator's independence can only be compromised by Parliament passing primary legislation (or by the use of implementing regulations under the European Communities Act 1972).

  62.  The effectiveness of a regulator depends to a very considerable degree on his willingness to protect his independence and jurisdiction. The Rail Regulator's independence may de facto be compromised if, facing inappropriate political or other pressure, whether public or private, he gives in to it. Investors, industry players and the public will not be slow to recognise a regulator who has wrongly given up his independence through his behaviour. The adverse effect of any such compromise on industry and investor confidence may be very considerable.

Office of the Rail Regulator

29 April 2003


1   Article 30 of Directive 2001/14/EC of the European Parliament and of the Council on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certification. Back

2   During the debate on the Railways and Transport Safety Bill, the Secretary of State said, "Part 2 provides that the Office of the Rail Regulator should be restructured. The Rail Regulator is working well, but we want to take this opportunity to bring the railways into line with other regulated industries, replacing the individual regulator with a regulatory board, which is consistent with the recommendations of the Better Regulation Task Force. The Bill restructures the existing Office of the Rail Regulator, creates a statutory regulatory board in place of the regulator, building on the existing advisory board that he already has, and enables a wide range of experience and views to be brought to decision-making. We will not make the change before mid-2004, which will enable the regulator to complete the useful work that he is doing in reviewing access charges." Official Report (Commons), Col 772, 28 January 2003. Back

3   Council Regulation (EC) No 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty. Back

4   Section 1(3), Railways Act 1993. Back

5   The Rail Regulator has a power under section 71, Railways Act 1993, to publish information and advice in relation to railway services in such manner as he may consider appropriate. He also has a duty under section 72 of the Act, to maintain a public register containing the material specified in section 72(2). The Rail Regulator must however have regard to the need for excluding, so far as practicable, matters relating to the affairs of an individual or body if publication or registration of those matters would in his opinion seriously and prejudicially affect the interests of that individual or body. Having regard to the categories of exempt information provided for in the Freedom of Information Act 2000, it is not thought that the entry into force of that Act will oblige the Rail Regulator to make wider disclosure of information in his possession than he does at present. Back

6   Section 74, Railways Act 1993. Back

7   A copy of the current statutory guidance is at Annex 1. Back


 
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