Select Committee on Constitution Minutes of Evidence


Examination of Witness (Questions 620-636)

WEDNESDAY 11 JUNE 2003

MR TOM WINSOR, RAIL REGULATOR

  620. At the moment, however, then, so far as access charges are concerned, it is you and you alone, is it, who decides what those ought to be?

   (Mr Winsor) Yes.

  621. So that in effect means that the government simply has to pay up under the indemnity of the franchise holders when the access charges presumably exceed the amount stated in the indemnity? Is that the position?

   (Mr Winsor) Essentially. If I may add a little, I do stress that I have a statutory duty to have regard to the financial position of the Strategic Rail Authority and therefore the government's financial position, but "have regard to" is not the same as "do what you are told". I also have to exercise my functions in the way that I consider best calculated to ensure that the network operator is not unduly impeded and it is not unduly difficult for it to finance its relevant activities, so that is pulling me in the other direction, although both are pulling me towards the efficiency and competency of the operation of the network. Other statutory duties also pull me in the direction of having a sound, competent network, as I have said. The Secretary of State issued me with guidance, as he is entitled to do under section 4(5) of the Railways Act 1993, and I have published that as part of my annual report. What that guidance says, and it is meticulous in respect of the independence and jurisdiction of the regulator—which I welcome, is: "When you are doing your access charges review, if you are likely to come up with a figure which is higher than the Strategic Rail Authority's established budget, will you please tell us as early as possible and give the Strategic Rail Authority an opportunity either to re-negotiate existing contracts so as to throttle back on the outputs of the things they are buying, not enter into new contracts which might be more expensive than they would wish, or to get more money from the government", and the statutory guidance expressly asked me to give early warning if I think that the figure I am going to come up with is going to be higher than the established budget. What it does not say is, and could not say, "You shall not go higher than that particular figure".

  622. And their budget is purely what they get from the Treasury?

   (Mr Winsor) Yes.

  623. So far as appeals are concerned, do I understand that in taking a particular decision as to access charges against, say, one rail operator, if Network Rail think that the access charges which you have fixed are inadequate, they can go to the Competition Commission?

   (Mr Winsor) Yes.

  624. But conversely, if the franchise holders think that they are too large, they can do nothing but go to judicial review, is that right?

   (Mr Winsor) Yes.

  625. Have they no locus before the Competition Commission in that situation?

   (Mr Winsor) No. They are rather less engaged in the process of the access charges review than I would wish them to be because with the benefit of a full indemnity from the state, at least the last time we did an access charges review they sat back and displayed a rather considerable lack of interest in the whole process because they knew that the indemnity would bite on any increase in access charges. What they did not realise was the decision I was making was not only in relation to the level of charges but also the structure, and the economic incentives that work to encourage good performance and to penalise poor performance, and that made a big difference to them. This time round I am happy to say they are taking it a lot more seriously, but in terms of right of appeal to the Competition Commission the answer is they do not have one.

  626. So it could be that in that particular situation, which is rather anomalous, they have no chance of making their point in an appeal which is already before the Competition Commission?

   (Mr Winsor) They will be listened to in the Competition Commission—I am sorry if I was too brief. They do not have the right themselves to force the case to the Competition Commission. However, when the Competition Commission is dealing with the matter I am certain that they will ask the train operators, the franchise holders, what they think so they have a locus in the sense that they have a right to be heard, or an expectation that they will be heard, but they cannot compel the case to go. The more natural position as things stand at the moment will be for the government to want to have a right of appeal to the Competition Commission because they are the ones who are paying.

  627. But supposing there was really no issue, either so far as the government or the franchise operator were concerned, about the level of charges but the structure of the charges alone was an issue which the franchise holders did not like, then there is nothing they can do about that except go to judicial review?

   (Mr Winsor) Correct.

  628. Which they may, or more likely may not, succeed in?

   (Mr Winsor) I have been trying very hard to encourage the train operators to understand the checks and balances in the system to get them to enforce their contracts one with the other. The idea that we should get them to take a further step and be very grown up and go for judicial review is well after my time in office.

  629. Do you think there are advantages in giving to the franchise holders a right of appeal to the  Competition Commission, for example on restructuring of fares?

   (Mr Winsor) Yes, there are advantages, because it is a simpler matter than the old regulatory model where you had millions of consumers and you did not want anyone, or a collection of them, making an appeal. Here we have a very much smaller class of customers, of network operator, namely 25 or 30 train operating companies, so it is a simpler matter to confer the right of appeal in those circumstances. As I say, however, the real person who would want to exercise it is the person who stands behind me with the cheque book.

  630. But on a restructuring basis the government might have no interest?

   (Mr Winsor) The prospect of the government being able to sell franchises in the future without the benefit of the contractual indemnity to which I have referred is pretty low.

  631. Finally, you as regulator hear appeals on fairly complex matters, is that not right?

   (Mr Winsor) Yes.

  632. Perhaps you would just briefly explain in what circumstance that occurs?

   (Mr Winsor) There are two kinds of appeal that come to me and they are both under the industry-wide central commercial code for the operation of the railway industry called the Network Code, and they can be classed as regulatory appeals and legal appeals. Regulatory appeals would deal with matters such as whether Network Rail has within the scope of their existing contractual discretions properly allocated capacity in a particular timetable period, and that is very properly a matter for the regulator because under sections 17-22 of the Railways Act he is in charge of the fair and efficient allocation of capacity. The other class of appeals that come to me are appeals on pure questions of law where I must sit as an appeal tribunal from one of the industry-specific dispute resolution tribunals, and effectively I am expected to act as a judge. It is a full appeal on the merits. Because of the unsatisfactory nature of the tribunal below I have to rehear the whole case, and it is extraordinarily time-consuming for me to do this. It is perhaps more by luck than design that the two Rail Regulators who have ever heard these appeals have both been practising lawyers, but I have no idea how an economist or administrator would deal with leading counsel, junior counsel, firms of solicitors, packed into a hearing (with clients at the back paying the bill), listening to complex questions of law being argued before him.

  633. Are you final on that? Is there any appeal from you?

   (Mr Winsor) Judicial review on the grounds of illegality. If it is a pure question of law there will be a full appeal on the merits by virtue of that challenge. It does mean that the railway industry has five levels of dispute resolution, unlike most industries which only have three. You go to the industry tribunal; if you do not like that you come on appeal to me; if you do not like that, it is the High Court on judicial review, the Court of Appeal, and maybe the House of Lords. There have only been a handful of appeals so far and, as I have said, they are extraordinarily complex, very high value matters. Both appeals I have heard in the last year have been worth over £100 million each and have raised very complex questions of law, and I believe that the industry and investors in it need to have confidence in the system of appeals, including on questions of law, if they are to invest and continue to invest, and therefore the way in which the government and the regulatory board will handle this matter when the regulatory board comes along and takes my place is yet to be understood.

Chairman

  634. I am conscious of time; so quickly, if I may, I want to explore the danger of the regulator going mad which is something you touched on earlier, to use your terminology, which is another way of saying a regulator is acting in essentially an unpredictable way. Ideally you want to prevent that happening in the first place. Would I be right in inferring from one of your earlier comments that that is one of the advantages of having a board structure, whether it is statutorily provided for or not?

   (Mr Winsor) It is a bit of an advantage but given the way we act at the moment, and I can only speak for my own authority, the existing board operates very well. We have created deliberately both procedural and substantive legitimate expectations enforceable in public law in relation to our procedures and policies. We go well beyond the requirements of common law or statute in terms of our due process, hearings giving full written reasons for decisions, hearing the other side, draft conclusions, provisional conclusions and final conclusions, and the idea that suddenly, at the end of all that, the regulator will then intervene and change direction in some radical way and come up with a ludicrous outcome seems to me to be rather remote.

  635. Picking up on the point you made about transparency in the processes you go through, because they may as you say help prevent unpredictability in the first place, but also stressing the importance of accountability, because the principles of better regulation include transparency and accountability, it strikes me you could argue that  transparency is a necessary condition for accountability. As you just mention and you stress in your paper the Railways Act 1993 and the rules of public law do not require you to commit to such a high degree of due process and transparency in decision-making. Arising from that, do you think there should be a requirement on regulators to be that transparent? Should that be an imposition on regulators?

   (Mr Winsor) I doubt it is necessary, certainly not in the case of my organisation because we have done everything we can to give people enforceable legal rights in terms of having that degree of due process. As far as other regulators are concerned, their processes are very good insofar as I understand them, and I think the intervention of Parliament to require this level of due process is probably unnecessary because the judges are doing a pretty good job compelling public authorities to go that bit further. My objective has been to keep one step ahead of the judges.

  636. Finally, tying in with other regulators, what degree of contact do you have with other regulators, and how useful do you find it?

   (Mr Winsor) We are now eight sectoral economic regulators and every two months we get together. One commentator said that it is a regulators' cartel, and if the companies within our jurisdiction were to do the things that we do amongst ourselves we would hammer them under the Competition Act! We are not subject to that jurisdiction, so we are all right. It is a very useful forum. Unless somebody really cannot make it we all turn up in person, and there are subgroups under that for our establishment officers, our economists, the lawyers, and so on, so it is not just the regulators meeting once every two months. We share best practice; we tell each other what is going on in our fields of activity; and I have found it  enormously useful to swap notes with my  opposite  numbers, particularly in energy, telecommunications, water and the OFT.

  Chairman: Thank you. We are very grateful to you and for your paper, and very much appreciate you being with us this morning. It has been very valuable for the purpose of our inquiry. Thank you very much indeed.





 
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