Select Committee on Constitution Minutes of Evidence


Examination of Witness (Questions 600-619)

WEDNESDAY 11 JUNE 2003

MR TOM WINSOR, RAIL REGULATOR

  600. You have gone into great detail to try to explain and publish the way in which your office works and where it fits into the system, but I feel it is the system itself that makes it almost inexplicable. You have told me one or two things that cannot be done but what I would like to hear, and what I asked, is what is your opinion of what should be done to the structure—not to explain it but to make the changes?

   (Mr Winsor) I do not believe the structure does need to be changed. This matter has been aired on three occasions in my four years in office—the Transport Bill, which became the Transport Act 2000; the present Bill before Parliament; and then the Bill which was never introduced into Parliament which was designed to take my office under direct political control, a Bill which was not published because of the protests of the railway industry at the time that the suggestion was made on 5 October 2001. The government has very carefully reviewed the structure of the public authorities, the regulatory institutions in the railway industry, and found it to be fit for purpose; and I am supported in this by a letter which the entire railway industry, all the train operators—passenger and freight and others—wrote to the Secretary of State for Transport in October 2001 when the idea that a Bill would be introduced to take my office under political control was being mooted and they resisted it very strongly. Effectively what they said was, "If you want private investment in the railway industry to continue and increase, as you do, then the independence and jurisdiction of the regulator must be kept separate from the Strategic Rail Authority and direct political control", and effectively their message to the government was "Don't touch it". I think they were right, and the government has not touched it.

Lord Acton

  601. I wanted to ask about something the Lord Chairman mentioned in opening. In paragraph 33 you speak of how the Rail Regulator may be called before Committees of Parliament, and you instanced the frequent occasions this happens in front of the House of Commons Select Committee on Transport and the Committee on Public Accounts, and then in paragraph 34 you mention the Transport and Environment Committee in the Scottish Parliament, but the key paragraph is paragraph 35 where you say, "The Rail Regulator has made it clear that he would welcome more regular and systematic scrutiny of his work by Parliament." I wondered if you could expand on this? Do you have any thoughts of how or what method should be adopted? Perhaps you have written a learned paper on the subject.

   (Mr Winsor) My time for writing learned papers will come after I leave office! There is much to be said for there to be a Select Committee on regulation and regulators. There is a lot of merit in that because I think the way in which regulation works, and we have had regulation in its current format now for twenty years since the Telecommunications Act 1984, and the forces at work within the regulatory field, and how regulators are accountable in so many other respects, is not well understood either in the wide world or, indeed, in many respects in Parliament. I get some extraordinary letters from members of Parliament in relation to my jurisdiction and how we work and they make the most elementary errors—and I do not criticise them for that—in relation to how regulation works and what it is there for. So I think a Committee of that kind would be of enormous benefit, especially since Parliament has now created so many regulatory authorities with such enormous jurisdiction—far more than ministers used to have with nationalised industries, as I mentioned in my opening statement, that a colossal part of the economic affairs of this country are under the direct and close jurisdiction of regulators; and it seems to me that we should be asked more questions in public at meetings like this than we are. As far as the existing Select Committee structure is concerned, one of the complaints I have heard, and I think it is right, is that members of the House of Commons are so busy, there are so many pressures on their time, that they really do not have very much opportunity to keep sufficiently closely in touch with what is going on with the regulators and the regulated in their fields of activity, and I think that could be greatly improved. I think Members of Parliament are extraordinarily under-resourced—but that is another matter.

  Lord Acton: Thank you. I find that a very helpful statement, if I may say so.

Baroness Gould of Potternewton

  602. I have two quite distinct questions to ask and I will take them separately but before I do, just picking up the last point you made about Select Committees and particularly how busy members of Parliament are reputed to be, there was a suggestion made by somebody we interviewed that there should be a Select Committee but it should be a Select Committee of the House of Lords rather than the Commons. I just pass that as a comment. My specific questions are these: firstly, in paragraphs 12-16 you talk about the fact that there has to be a regulatory body under European law and then in paragraph 16 you refer to the fact that there may, however, be other changes in the scope of the Regulator's powers, which I assume is something to do with the laws of competition laid down in Articles 81 and 82 of the Treaty. Could you expand on how you see the powers being changed or supplemented, or even reduced?

   (Mr Winsor) On your first point, I think it is remarkable that in four years in office this is my first time in front of a Lords Committee of any kind. As far as changes to the regulator's powers are concerned, when I wrote the memorandum in April we were expecting the Department for Transport to conclude that there might be some changes required as a result of various EU directives. In fact, after anxious consideration, the Department has concluded that there is no necessity for any changes in order to comply with European rules.

  603. Secondly, and this relates to something you also referred to yourself under the Railways and Transport Safety Bill about replacing the single statutory office, ie yourself, with a board, in paragraph 21 you make the point that the government has indicated that it wishes to build on the existing board structure and retain the existing permanent executive board directors. Now, that obviously is going to make your position in a sense more continuous than perhaps if they had said they were going to appoint a completely different board of directors. How do you see your relationship with people that you are already working with changing if there are changes made in that board? Do you think your relationship might well differ with a new board?

  A. I will be gone when the new board comes in.

  604. A future regulator, then?

   (Mr Winsor) Yes. Although the Railways and Transport Safety Bill is, the government hopes, going to get Royal Assent before the summer recess 2003, the Secretary of State has indicated that he will not commence the provisions for the establishment of a regulatory board until the end of my term of office in July 2004. The principal reason for that, I believe, is so as not to disrupt the access charges review which I am presently engaged upon in relation to the structure, level and profile of Network Rail's income which has raised so many vexed questions in relation to the efficiency and economy of the railway. The proposition that there should be a statutory board is not, it seems to me, a very radical one and is not going to make a colossal difference to the way in which the organisation operates and the relationship between the chairman, who I think is the natural successor to the office I hold, and the rest of the board. The office I hold at the moment is, of course, a joint chairman and chief executive as well as all the other board places. The government intends to provide a statutory underpinning to my existing board structure. I think it is often misunderstood, not in this Committee but elsewhere, that single person regulators sit in splendid isolation making decisions according to what criteria I do not know without really listening to any internal advice or external experts and so on. Nothing could be further from the truth. Our processes are extraordinarily thorough. They go well beyond the requirements of the statute and the rules of public law in terms of consultation and so on, but as far as internally is concerned I have a board which once comprised seven members—slightly less now—and I have never taken a decision against the wishes of the majority of that board. In fact, I have one member of my board whose powers of argument are so great that he has been able on frequent occasions to turn a 6-1 majority against him into a 7-nil majority in his favour, and I was one of the six. What is going to happen is basically putting on a statutory basis what already happens now and it is not such is a big deal. I think splitting the chairmanship and the chief executive posts is desirable. The burden on the individual regulator of acting both as chairman and chief executive is very considerable and I make no complaint about it; I have greatly enjoyed my four years in office but nevertheless I think the efficiency of decision-making will be improved in that way.

Lord Holme of Cheltenham

  605. Mr Winsor, looking back on the events of last spring, shortly before you gave the evidence which we read, to the Transport, Local Government and The Regions Sub Committee, what conclusions can you draw for us about the independence of the regulator in the face of direct political pressure to procure a certain outcome? In many ways this is now the locus classicus of regulatory independence from governmental and political pressure, and it would be very interesting now, a year or so on, to know what conclusions you draw from that that could be of general use to this Committee as opposed to the specific ups and downs of the incident itself.

   (Mr Winsor) Paradoxically the events of October 2001 to which you refer—

  606. Sorry, yes. Two and a half years ago. Time goes quickly!

   (Mr Winsor) —have strengthened independent economic regulation. It was an extraordinary episode. I had no expectation that the Minister would ever take the steps that were taken in relation to me. If it was expected that I should be intimidated, I was not: it was very clear to me that if my independence, my jurisdiction or my job was to be taken away or changed then it could and should only be done with the authority of Parliament, and my message to the Secretary of State at the time, although not in these words, was, "If you intend to make that change, then go and get the authority of Parliament, and until then I am sitting tight". I believe that for an independent regulator to give in to that political pressure, apart from being an irrelevant consideration as a matter of public law, or to resign would have been a very serious and adverse step for the constitutional position of regulators and the relationship between the state and the private sector, in areas and in respects going far, far wider than the railway industry. So I think it has made things stronger. The railway industry did make the representations to which I have referred; it was very clear that if private investment in the railway was to continue then independent economic regulation needed to be protected, and the government drew back from that. Having carried out a review of regulation (which was what was publicly announced in October 2001), in April 2002 the Secretary of State in my opinion very properly said that independence in economic regulation was an essential continuing requirement of private investment in the railway in many respects and it must be protected. Indeed, my jurisdiction when Network Rail was created, far from being diminished, was increased and my regulatory powers in relation to this new body, Network Rail, which is a company limited by guarantee rather than by shares, was made the greater. I think it is notable, and I claim no credit for this, that in the Bill which is to be brought before Parliament in relation to foundation hospitals, the title of the regulator is the "the Independent Regulator".

  607. Of course it is noteworthy for this Committee that at that moment of great pressure on you, and I have to say as one member of the Committee I very much admired the way you handled a very difficult time, both for the industry and for the office of regulator, it was Parliament that was your shield and you, as it were, called on Parliament as your defence against the direct pressure of the executive. That makes me all the more interested in your thoughts on how Parliament itself can be a more effective source of accountability. You partly answered this when you answered Lord Acton but what should we be doing to make ourselves better at assisting the regulator to be accountable for these important responsibilities?

   (Mr Winsor) In summary I should say that if Parliament were able to establish a body or a Committee of experts who really thoroughly understood the regulatory regimes and the forces at work and the ways of regulation and also the operation of capital markets and the needs of the investment community to have predictability and stability in regulation, that would be a very great advantage, and I think it would be a great advantage for the executive, for the regulators, of course for Parliament, but also most crucially for the people who are being asked to put or keep money in the industry in question. The essence of establishing independent economic regulators was to take away  from political considerations the questions concerning the size, the quality and the price of networks and the other services which the regulators are regulating. It is essential that those being asked to put money into an industry do not face the prospect that the government, for political considerations—maybe entirely laudable—will just turn off the money tap. If I may just give one single example: Virgin Trains and a number of very nervous banks standing behind that company have invested well over a billion pounds in two new fleets of very high-tech tilting trains for use on their parts of the network. The most sophisticated trains in the world are useless if the network on which they must run is being allowed to rot. Who would buy a Ferrari if he had to run it at twenty miles an hour down a pot-holed country road? You would not; you would buy an old Land Rover. Therefore the investors need to know that not only is their investment in the physical vehicles protected but also in the network on which they must run, and independent economic regulation gives them that assurance that the network will be maintained on a long-term sustainable basis and will not be subject to a minister arbitrarily turning off the money tap whenever it suits him.

Lord Fellowes

  608. In your opening statement, in your matrix of accountability, you mentioned that you considered yourself accountable to "people who use the railways". In paragraph 3 of your memorandum you say, ". . . the Rail Regulator is not directly concerned with consumer protection . . . ", and I wonder if there is a bit of a disconnect there?

   (Mr Winsor) Not directly concerned with consumer protection because consumer protection functions were taken from my jurisdiction and transferred under the Transport Act 2000 to the Strategic Rail Authority. I would have preferred it to be the other way and for consumer protection functions of the Strategic Rail Authority be transferred to my office, but that was the decision of Parliament and I make no complaint about it. That is not to say that I can disregard the matter of the interests of users for two reasons: firstly, because the network only exists for the benefit of the end-user who is paying for it either through his taxes or fares and, secondly, my first statutory duty is to protect the interests of users. So whilst I have no specific consumer protection functions I still have to have a very strong eye out for the interests of the consumer because after all, as I have said, he is the person for whom this network exists.

Lord MacGregor of Pulham Market

  609. I wanted to follow up the questions of Lord Lang and Lord Holme but firstly, a straightforward one: in paragraph 60 you talk about the Secretary of State having the right not to reappoint an incumbent Rail Regulator. In order to ensure the independence of the regulator, do you not think there are advantages in having a fixed term?

   (Mr Winsor) We do have a fixed term.

  610. Without reappointment?

   (Mr Winsor) With no hope of reappointment?

  611. Yes. I have seen this being argued and have accepted the argument in another case.

   (Mr Winsor) I think it can make you stronger if you have no expectation of reappointment, and if there is a statutory bar on being reappointed then that is the end of it. It may mean that regulators as they approach the end of their term of office, if they want another one, might be a little bit more amenable to pressure—perhaps imperceptible and certainly evidence could not be gained of it. That may be undesirable and I think it would be. In making my statement before the Select Committee on Transport on 7 November 2001 that I would not seek a second term of office, I think that sorted the problem out as far as I am concerned. Fixed terms of office I think would be desirable if there were to be no hope of reappointment and if the term of office were to be longer than five years, perhaps seven. There is an advantage, of course, in the regulatory boards if they have staggered terms of office of the various members so they do not all come up for reappointment at the same time, and that the chairman and chief executive should be appointed according to different procedures and perhaps different criteria. That may diminish the perceived problem.

  612. Turning to follow up the points of Lord Lang and Lord Holme, you made the point that you think that as a result of all the aftermath of the demise of Railtrack your position as an independent regulator was made stronger, and you have also emphasised the importance of your role in relation to the size, quality and price of the network, as you put it, in paragraphs 3(b) and 46 of your paper. Pursuing one aspect of this to see where we are going, I read in the newspapers that Network Rail are likely to overspend their budget by £12 billion by 2006. You are going to have to take a view on that. What exactly is going to happen in the context of that if Network Rail, not now subject to the pressure of shareholders and the markets and apparently with a council of 116 to govern its decisions and as its form of governance, just gets out of control and goes on overspending in this way? What sanctions do you have in that context?

   (Mr Winsor) The projection in Network Rail's business plan, if they carry on the way they are going and there are no improvements in efficiency or in the activity levels which they have projected—in other words they carry on doing or they do to the network what they have already planned to do—is that they will spend £27.8 billion instead of £16 billion which is the amount I allowed them in my 2000 access charges review. That is, as I said last week in public, an unsustainable position but it is not going to be like that. Network Rail are the first to protest I think, and rightly, that the activity levels will not be as great as projected, and the efficiency will not stay as it is now. The efficiency opportunities in that company are very considerable but I have to make a decision, and I will publish preliminary conclusions in October this year and a final conclusion in December this year with implementation from 1 April 2004 assuming no appeal to the Competition Commission, as to the size, quality and price of the network, and there are a number of options that I will face and the government will also face if it is found that the amount of money which should properly be put into this company for the competent and efficient— and I do stress those qualifications—operation, maintenance and renewal of the network is higher than the existing £16 billion settlement over five years. There are five options. One is to rein back on the activity levels and do less work: another is to do less work now but do more when the efficiency and competence of the organisation is under control—better: the third option is to do the work now but to be paid for it later and to bridge the gap through financing: the fourth option is for the Secretary of State to get some more money from Parliament: and the fifth option is a mixture of two or more of the previous four options. That is a decision which is being considered by my office in conjunction with the Strategic Rail Authority, the Department for Transport and the Treasury now because there is a risk that the amount of money which this network takes for the competent and efficient operation, maintenance and renewal of it will be higher than the £16 billion settlement, even though the Treasury and others would like it to be less. The reality is that my decision in October 2000 was made two or three days before the Hatfield crash, and Railtrack's panic and overreaction as a result of that accident, putting over 1200 emergency speed restrictions all over the network because they did not understand the condition of the network, and not knowing the condition and performance of the network and the cost drivers, has shown that the network needs more money. The Secretary of State has said that the decades of under investment—those chickens—have come home to roost. They have, and it is also true that the position was made worse by the incompetence of the years of Railtrack when the company had a policy of neglecting its assets and being hostile to its customers. It made the BR inheritance, which was not a rich one, very much poorer.

  613. But you can understand why there is some confusion as to all those respective roles when you, quite rightly, put an emphasis on ensuring you were not hostile to private investment in the railway industry, and I was glad to hear the emphasis you put on that, but looking at the five options it is not clear who is going to have the independent decision-making. The Strategic Rail Authority is clearly going to be playing quite a big role, the government may or may not decide to put more money in. Do you not think your position is not as independent as you try to make it out?

   (Mr Winsor) No, I think my independence is clear and my jurisdiction is clear too. The final decision is mine. I have an obligation to set access charges—the amounts, as you know, that train operators pay to the infrastructure provider, Network Rail, for the competent and efficient operation, maintenance and renewal of the network on a long-term sustainable basis having regard to the existence of the contracts already in place between the private sector train operators and the private sector infrastructure provider. Allied to that, there are contracts of indemnity between the state and the private sector train operators. Those contracts are nothing to do with me. I have regard to them but I am not a party to them; I do not approve them or establish them; and they are called franchise agreements. Under clause 18 of the franchise agreement effectively what the state has said to the private sector train operators is, "If the independent regulator at one of his access charges reviews—usually every five years but it can be more frequent—decides that access charges have to go up because that is what the network needs, we, the state, will indemnify you, the private sector operator, pound for pound for the full amount of the increase", and that is how I get the jurisdiction, by the back door if you like, in relation to the amount of money which the Treasury must put into the network. But I am not free to go mad; I have to have regard to the financial position of the Strategic Rail Authority. I also have to have regard to the long-term sustainable interests of the network and a number of other things, and I have to balance these statutory duties and come to a decision which I will do in December. The views of the funders of the railway—and that is not just the Strategic Rail Authority with the Treasury standing behind it but also the passenger transport executives established under the Transport Act 1968—and the views of the users of the network are extremely important and I must give full, due weight to those in making my decision which has a very heavy element of judgment in it. If the state is dissatisfied with the jurisdiction of the regulator, as indeed the Secretary of State for Transport told me he was on 5 October 2001, then the remedy, if remedy it be, is one of two: take the regulator under direct political control so he will decide this arbitration, if you like, in favour of the government because the government has an interest in it—and that is the Bill that they might have introduced but did not—or the state could just disregard the private law contracts that they have made with the private sector. Neither option is really tenable for a democratic government in a first world economy.

  614. But if you decided to accept Network Rail's current plans in full, that would mean a very substantial increase in access charges which could mean, in terms of the franchise agreements, that the Treasury simply had to cough up a great deal of money?

   (Mr Winsor) Correct.

  615. So you have an enormous amount of power in that respect?

   (Mr Winsor) Correct.

  616. Are you satisfied with all the appeal processes, which we are all familiar with, that are available to other players in the game in relation to any decision you might take?

   (Mr Winsor) I think Network Rail have all the appeal rights they need. It was one of the anomalies of the original privatisation matrix established in 1993-97 that, unlike any other network operator, Railtrack did not have a right of appeal to the Competition Commission against the decision of an independent regulator in the case of a price review. When the Transport Act was a Bill, I successfully—but I had to do it quite hard—pressed the government to confer that right of appeal on Railtrack and I was very anxious that Railtrack should have that right of appeal so it would apply to the access charges review I was then doing; we just squeaked in but we got it done in time. Therefore they had that right of appeal and they will have it for good. So they are fine, and if they do not like my decision in December this year they will have 42 days in which to decide whether or not to go to the Competition Commission, and the Competition Commission, if they get the case, may or may not agree with me—that is fine; I make no complaint about that. As far as the others are concerned, their only redress is by way of judicial review and that is in common with the position of consumers in other industries. For example, water consumers do not have a right of appeal to the Competition Commission if they do not like the decision of the water regulator in putting their prices up. The position of the railways is a bit different because the largest single contributor of money is the state through the indemnities in the franchise agreements, but it is not the largest consumer and it is not the largest funder. Broadly, two thirds of the income going into the railways comes from the travelling public and the freight customers, so the idea that the Treasury is the only person putting money into the railway is simply not right. Should either the government or individual organisations affected by my decisions have a direct right of appeal to the Competition Commission? On a practical basis I am glad they do not because I am sure that one of them would exercise it; there would be a consumer group that would exercise it and that would hold up the implementation of the review so on balance I think they should not, but I can see the force of argument, particularly for the government, in wanting to challenge my decision. But then it just moves from me to the Competition Commission and no further, unless the Competition Commission itself commits some public law misdemeanour and is successfully judicial reviewed.

  617. You referred earlier when we were talking about the Strategic Rail Authority and the balance of responsibilities that, to your regret, consumer areas were transferred to the Strategic Rail Authority and not you. If it was still part of the Rail Regulator, do you think that would have strengthened your hand in looking at the position of the consumer and the ultimate impact on fares when you are making your decisions?

   (Mr Winsor) I do not think so because the decisions I make must be for the long term health of the railway industry. A healthy, strong, competent, efficiently operating industry is in the interests of the consumers and that is what my objectives point me to anyway.

  618. You could argue that; it might not always work out that way in practice, in fact. You are not quite so susceptible as consumers to the pressures of rising fares, for example, so you might be tempted to have a much larger programme for Network Rail which will ultimately come through into higher fares—which is not necessarily wrong—for the travelling public?

   (Mr Winsor) I doubt whether it would make much difference to me—I do not know. Fares have always been a very hot political topic—political with a small "p" and a big "P"—and the Strategic Rail Authority is at the moment carrying out a review of fare structures and deciding the future of the regulation of fares. I think if that were in my jurisdiction it would assist me in making my decisions because I would have a closer connection to fares policy, but I do not think it would make a material difference to the decision which I ultimately make.

Lord Jauncey of Tullichettle

  619. May I further pursue a point Lord MacGregor made a moment ago, and then take another one after that. First of all, is Network Rail funded entirely by the access charges paid by the train operators?

   (Mr Winsor) No. It could be but it is not. Railtrack was. When I took my decision in October 2000 as to the income that Railtrack should have, I  was asked by the government to allow a proportion—approximately £4 billion out of a £15 billion settlement—to go direct from the Strategic Rail Authority, what were called network grants, to Railtrack and I considered that to be unobjectionable as long as the income which Railtrack was to receive, the £15 billion I decided upon, was going to be received by the company on exactly the same conditions. There should be no additional conditionality applying to the network grants as applied to the access charges, and I made sure that that was so. So as things stand at the moment in 2000 prices, Railtrack got £15 billion—£11 billion from access charges and £4 billion direct from the Strategic Rail Authority.


 
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