Memorandum by Tom Winsor, Rail Regulator
1. This submission forms my written evidence
in response to the letter from the Clerk of the Transport Sub-committee
dated 19 May 2000. It addresses the record to date of the privatised
Railtrack and it looks ahead to the work that my office and the
Shadow Strategic Rail Authority are doing to create a new and
more effective framework for the railway industry. Together we
must ensure the delivery of a better railway which will meet the
challenge of growth in rail use.
2. The letter from the Clerk did not explicitly
mention safety. Although I am not the regulator of safety in the
industry, I regard safety as a fundamental consideration for all
who work in or regulate the railway. Thus, my office works closely
with the Health and Safety Executive. We have co-operated on issues
such as broken rails and the creation of Rail Safety Limited to
replace Railtrack's Safety and Standards Directorate.
3. Since I took office my approach has been
(a) to ensure Railtrack delivers on its commitments
in a competent and effective way, and to take action when it does
not. My intention is not to penalise Railtrack but to ensure it
performs better; and
(b) to set up a new financial and contractual
framework for Railtrack to ensure it responds positively to the
4. This document uses the same structure
as the Clerk's letter:
(a) Railtrack's past performance and the
likely impact of its plans for the future;
(b) the adequacy of the oversight exercised
in the past by the Office of the Rail Regulator and how it intends
to ensure that Railtrack in future honours its commitments; and
(c) the role of the Strategic Rail Authority
and the franchise replacement programme.
Railtrack's performance to date
5. In January 1995, the then Rail Regulator,
John Swift QC, set Railtrack's track access charges for the price
control period 1995-2001. He allowed £8.6 billion for the
maintenance and renewal of the infrastructure, plus £570
million over the control period to tackle a backlog of expenditure.
6. These charges were set before the privatisation
of Railtrack (May 1996). At the time of flotation, Railtrack increased
its estimate of the expenditure necessary for maintenance and
renewal of the network by £1 billion.
7. In its most recent submission Railtrack
says it has spent an average of £2.25 billion per annum on
maintaining and renewing the network since privatisation. Thus
its expenditure has significantly exceeded the amounts allowed
for in the 1995 charging review (by £2.2 billion) and expected
at the time of flotation (by £0.9 billion).
8. The charges set in 1995 were based on
the amount of money the then Regulator considered necessary for
maintenance and renewal of the network, and its timely renewal
in the appropriate modern equivalent form. Beyond this, however,
the Regulator did not specify outputs for the network in terms
of performance or quality. My understanding is that this reflected
the limited information available to him at the time. However,
he did require Railtrack to publish key performance indicators
on the capability and reliability of the network. In September
1998 he commissioned a report from Booz Allen and Hamilton on
Railtrack's stewardship of the network and this was published
in April 1999.
9. Between 1995-96 and 1996-97, Railtrack
reduced total delays attributed to it (for all trains, passenger
and freight) by just over a third (12.8 million minutes down to
8.5 million). Over the next two years this level was broadly held.
In 1999-2000 there was again a significant improvement of just
under 10 per cent (taking the improvement since 1996 to 40 per
cent despite major traffic growthsee paragraph 13).
10. Track quality worsened in the years
before privatisation and showed little sign of improvement before
the then Regulator took action in 1998. In July 1998 Railtrack
gave undertakings to my predecessor to ensure that by April 2000
the proportion of very good and satisfactory track would at least
equal that existing in 1994. Over the same period the number of
broken rails had been broadly level, but rose sharply in 1998-99.
Railtrack has now contained the rise, but I am pressing them to
achieve a material reduction as fast as possible.
11. Railtrack inherited a number of BR resignalling
projects which typically involved large scale resignalling of
entire control areas of the network. While continuing to implement
some of these projects, Railtrack has adopted a targeted policy
of replacing signal components on the basis of their condition.
This strategy is intended to extend the life of the current system
until radically different train control systems are adopted.
12. My advisors, Booz Allen and Hamilton,
concluded that Railtrack had not put in place a database of reliable
asset information to inform a long-term asset management strategy,
and that remedying this should be a high priority for Railtrack.
13. Over the period 1995-2000, there was
significant growth in the use of the network. From 1995-96 to
1999-2000 passenger train miles grew from 231.3 million to 256.0
million (a 10.7 per cent increase) and freight train miles from
24.5 million to 29.3 million (a 19.6 per cent increase). Railtrack
also entered into a number of commitments to enhance the network,
(a) Thameslink 2000 agreement with the Franchising
Director. In 1995, Railtrack agreed to expand the Thameslink network
to link more stations north and south of London using the central
London Thameslink route. The Franchising Director underwrote
the access charges needed to pay for this. The commencement of
the works is dependent on a successful application under the Transport
and Works Act 1992 and construction of a new station at St Pancras
as part of the Channel Tunnel Rail Link. The work is expected
to be completed in 2007.
(b) West Coast Route Modernisation (WCRM).
The arrangements for this upgrade were established in two stages.
In 1996 the Franchising Director negotiated an upgrade agreement
(known as "PUG 1") between Railtrack and InterCity West
Coast Limited (then a subsidiary of the British Railways Board
and therefore in public ownership). In 1997 the West Coast franchise
was awarded to Virgin Rail Group Limited. Virgin immediately renegotiated
the upgrade with Railtrack, leading to the signing of a new contract
("PUG 2") which replaced PUG 1. PUG 2 provides for the
upgrade to be completed in two phases. Phase 1 contemplates trains
running at 125 mph by May 2002. Phase 2 provides for 140 mph operation
by May 2005. The PUG 2 contract was approved by the then Regulator
in June 1998.
(c) Chiltern Line track doubling. In 1997,
Railtrack agreed with Chiltern Railway Company Limited to double
the track between Princes Risborough and Bicester North, thereby
enabling more frequent services. The work was completed in July
(d) Tyne and Wear Metro Extension. In 1999,
Railtrack agreed with the Tyne & Wear Passenger Transport
Executive (Nexus) on work to extend the Metro to Sunderland. Work
on this started in January 2000, and is due to be completed in
14. In November 1999 I began enforcement
action in relation to the WCRM because I considered that Railtrack
was likely to breach its obligation under its network licence
which requires it to enhance and develop its network, including
the WCML, to certain standards. The enforcement action requires
Railtrack to show clearly that it can deliver on its existing
obligations to provide additional capacity for operators other
than Virgin, and to complete and deliver reviews of capacity of
the WCML to establish how it can be enhanced and developed.
15. In the course of the periodic review
of Railtrack's access charges, I am assessing the extent to which
these and other enhancements should be reflected in the Regulatory
Asset Base (RAB).
16. In my view, the relatively small number
of committed enhancements reflects weaknesses in the strategic
framework for the industry, and in the clarity of the arrangements
and the role of government. I plan to address these concerns with
the Shadow Strategic Rail Authority (SSRA) (see paragraph 48 below).
Railtrack's plans for the future
17. Railtrack's 2000 Network Management
Statement (NMS), published in March 2000, contains the company's
plans to maintain and renew the network over the next two price
control periods, and also a series of options to enhance the network.
Publication of the NMS is a requirement of Railtrack's network
licence. The formbut not the contentof the NMS is
agreed with me and the statement must demonstrate compliance with
Railtrack's network licence.
18. In the 2000 NMS Railtrack states that
it will need to spend an average of £2.1 billion per annum
over the next price control period (2001 to 2006) simply in order
to maintain and renew the network. This is considerably higher
than the average of £1.7 billion projected by Railtrack in
the 1999 NMS. Railtrack says in the 2000 NMS that its plans for
the next control period reflect increased maintenance and renewal
to cope with the growth in traffic, improved track quality, annual
reductions of 2.5 per cent in delays attributable to Railtrack
and gradual improvement in the condition of stations.
19. I am considering, as part of my periodic
review of access charges, the expenditure which I should allow
to be recovered in access charges and the outputs it will deliver.
20. The 2000 NMS also sets out committed
and optional network enhancements:
(a) The principal committed enhancements
are those summarised in paragraph 13 above. Other schemes include
the installation of the Train Protection Warning System on parts
of the network, and the upgrade of stations to comply with the
Disability Discrimination Act 1995. The upgrade of the WCML involves
both renewal and enhancement work. I am considering revised estimates
submitted by Railtrack for this work to establish the efficient
level of costs, and the appropriate split between maintenance
(b) Railtrack has also costed options (known
as "incremental outputs") at the behest of the SSRA
and train operators and other funding bodies. The SSRA may decide
to purchase some of the incremental outputs through the access
charges paid to Railtrack. I am therefore considering, as part
of my periodic review of Railtrack's access charges, whether the
costs estimated by Railtrack are the efficient costs. In addition,
Railtrack has costed a series of options to deal with different
scenarios for traffic growth on the rail network. I expect that
train operators will consider a number of these as part of the
franchise replacement programme.
21. The 2000 NMS also contains an analysis
of the rail freight market and its economics, including current
trends and the prospects for further growth under a variety of
different economic and public policy assumptions. It shows that
there has been a 41 per cent growth in rail freight between 1996
and 1999, from 32 to 43 billion gross tonne kilometres moved,
and that it could further increase to between 56 and 140 billion
gross tonne kilometres by 2010. The 2000 NMS contains a set of
"options" for the development of key routes used by
rail freight, including a proposal to develop a third Anglo-Scottish
route, to meet the increased capacity requirements.
22. I am currently consulting a range of
railway industry parties on the NMS before deciding whether it
demonstrates compliance with Railtrack's network licence. I will
update the Committee at the hearing on the current position.
23. The Committee will be aware that the
adequacy of ORR's regulation of Railtrack's maintenance and renewal
of the rail network was the subject of a report by the Comptroller
and Auditor General published on 12 April 2000. On 24 May 2000
I gave evidence to the Committee of Public Accounts in relation
to those matters and the report of that Committee is awaited.
24. At the time of privatisation Railtrack's
network licence (issued by the Secretary of State in March 1994)
had no substantive obligations in respect of the maintenance and
renewal of the rail network. Nor did the track access contracts
with the train operators contain substantive obligations on these
25. The then Regulator advised the Department
of Transport in 1995 that Railtrack's network licence obligations
should be strengthened before the company was privatised in 1996,
but the Department indicated that it would not be prepared to
support this. Following privatisation, in 1997 the then Regulator
sought and obtained Railtrack's agreement to a new licence obligation
in respect of the maintenance, renewal and enhancement of the
network. In 1998 he concluded that Railtrack would be in breach
of this obligation unless it took specific action.
26. Following publication in the 1998 NMS
of targets for reducing train delays, which the then Regulator
concluded were inadequate, Railtrack undertook to reduce delays
to passenger and freight trains by 7.5 per cent by 31 March 1999.
While Railtrack met the freight target, delays to passenger train
movements were down by just 2.2 per cent. In the meantime, Railtrack
set a target in the 1999 NMS for further reductions of 7.5 per
cent. I told Railtrack last year that I considered that it was
a reasonable requirement of train operators and funders that it
both make up the 1998-99 shortfall and achieve its 7.5 per cent
passenger train target by 31 March 2000 (a cumulative passenger
train target of 12.7 per cent). When Railtrack refused to commit
to this, I made an enforcement order requiring Railtrack to achieve
the target, on pain of a penalty of £4 million for each percentage
point by which it failed to meet the target. Final figures for
the year to 31 March 2000 will not be available before mid-August
2000, but Railtrack estimates that reduced delays to passenger
trains by about 10 per cent. This is substantially more that the
1999 NMS target which Railtrack had set for itself. I will review
the final figures in the light of any further information submitted
by Railtrack in accordance with the enforcement order. Railtrack
has appealed against the order, in particular the level of penalty,
and the matter is before the High Court.
27. Notwithstanding the above actions I
accept the following points made in the Comptroller and Auditor
(a) the ORR should set out more clearly than
before what they expect Railtrack to deliver as a result of maintenance
(b) the ORR should secure a better picture
of the condition of the network's assets;
(c) the key elements of the monitoring information
that the ORR should receive from Railtrack should be independently
verified to ensure that it is robust and commands public confidence;
(d) the ORR should continue to develop appropriate
targets and clearly predictable incentives for Railtrack to improve
their performance on punctuality, cancellations and track conditions.
28. Between July 1999 and April 2000 I announced
the steps I intend to take in these and other areas.
29. I consider that Railtrack's performance
to date, the experience of the regulation of Railtrack and the
points made by the Comptroller and Auditor General, highlight
the need for fundamental improvements in Railtrack's regulatory
framework. Specifically, I believe it is necessary to:
(a) provide much better definition and monitoring
of what Railtrack is expected to achieve;
(b) improve Railtrack's accountability to
the Regulator and to its customers;
(c) improve the incentives on Railtrack to
deliver a better railway; and
(d) ensure transparency and stability in
the regulatory framework.
30. I plan to implement these improvements
in two ways. The first is by means of the periodic review of access
charges (where I will be announcing draft conclusions in July
2000 and final conclusions in September 2000). The second is by
making important changes to the licence and contractual framework.
Definition and monitoring
31. As part of the periodic review, I plan
both to define what is expected of Railtrack to sustain the network
over the next five years and how I will measure and monitor delivery.
In my provisional conclusions (December 1999) I said I expected
to see targets for performance and track quality, and a range
of asset condition measures.
32. This will need to be accompanied by
improved measurement and monitoring including:
(a) the creation of a proper asset database;
(b) a system of independent reporters, owing
a duty of care to me, to report on the accuracy of information
supplied to me, and on the adequacy of Railtrack's progress; and
(c) improvements in Railtrack's regulatory
accounts and the ring-fencing of items not covered in charges.
33. I have published proposed modifications
to Railtrack's network licence covering the second and third of
these points. I will publish my proposed licence condition on
the asset database shortly.
34. Condition 7 of Railtrack's network licence,
as amended in September 1997, requires Railtrack to maintain,
renew and develop the network to meet the reasonable requirements
of train operators and funders as to the capability and quality
of the network, in a timely efficient and economic manner in
accordance with best practice. Railtrack is required to do this
to the greatest extent reasonably practicable, having regard to
all relevant circumstances, including Railtrack's ability to finance
35. I consider this is a very strong obligation.
The actions I took on performance targets and on West Coast Main
Line route modernisation were carried out under Condition 7.
36. I also consider it is important to strengthen
Railtrack's direct accountability to train operators through the
access contracts under which operators use Railtrack's network.
The Regulator has powers to issue model clauses for access agreements,
and I am well into the process of issuing such standard clauses
to clarify and strengthen Railtrack's accountability to train
operators. This process has involved considerable discussion and
consultation with train operators, funders and others. I believe
it is very important to give train operators the means as well
as the encouragement to use the powers in their access agreements
to secure delivery of Railtrack's commitments.
37. The standard clauses for access contracts
will provide for a clear and detailed specification of what Railtrack
is required to deliver in terms of network capacity and capability.
These specifications will be on an operator-by-operator basis
and will be revised every year, so that both Railtrack and the
train operator know what has to be done, by when, and what happens
if something goes wrong. This is an improvement of the relationship
between Railtrack and train operators and is much needed. The
first generation of access contracts were seriously deficient
in this (and other) respects.
38. In my view Railtrack has been rightly
criticised for the way in which it deals with its dependent customers.
These include train operators and funders, but also a wider group
of stakeholders, such as rolling stock owners and manufacturers.
I plan to propose a new licence condition requiring Railtrack
to produce an effective code of practice governing its relationships
with dependent train operators and funders. For the wider group
of stakeholders, I believe that the actions I am proposing on
the asset register, combined with customers having more effective
contractual relationships with Railtrack, should create significant
improvement, particularly for rolling stock acceptance.
39. In relation to rolling stock acceptance,
the rules and the ways in which they have been applied in the
past have attracted considerable criticism. Delays in the introduction
of new rolling stock have been blamed on their complexity, difficulties
in their interpretation and the ways in which they have been applied.
There have also been severe criticisms of Railtrack's knowledge
of the gauge of the railway, causing rolling stock manufacturers
and other difficulties in relation to the design of new rolling
stock. I am dealing with a complaint by two rolling stock manufacturers
that in these respects Railtrack is in breach of its network licence.
I expect to publish conclusions on that matter very shortly, and
then to consult the industry on improvements to the system.
40. In April 2000, as part of the periodic
review I published my provisional conclusions on Railtrack's track
access charges for the next price control period. The approach
(a) ensuring that charges for additional
services cover the cost of running those services;
(b) stronger and clearer incentives on Railtrack
to improve performance across the range of its activities; and
(c) a volume incentive linking parts of Railtrack's
income to growth in train miles on the network.
41. These proposals were designed better
to align the incentives on Railtrack with the need to encourage
the use and development of the network, and to improve services
to passengers and freight customers. They would also reduce the
cost of individual negotiation of charges. I am currently considering
consultation responses to the provisional conclusions.
Transparency and stability
42. As noted above, a key challenge for
Railtrack and the railway industry over the next few years is
meeting the challenge of growth in rail traffic. If this investment
is to be financed efficiently and delivered effectively there
is a need for transparency and stability in the regulatory framework.
I aim to provide that as part of the periodic review.
43. Thus I propose to set out clearly what
will happen if, despite the new incentive structure, Railtrack
fails, in a material way, to deliver on the expectations embodied
in these changes. This could ultimately involve penalties and,
where possible, I will set out the scale in advance. However,
this will not always be possible and I have already published
draft guidelines on the basis for establishing penalties which
are sufficient to incentivise compliance without introducing unnecessary
risks. One of the key requirements is for a common understanding
of the allocation of risk at the outset (eg the way in which the
RAB will be adjusted) so that investors can invest with confidence.
44. I consider that much more clarity is
needed in the arrangements under which Railtrack invests in enhancing
the network and how it can expect to be remunerated for that investment.
I have already proposed some very significant steps on this as
part of the periodic review and model clauses processes.
45. In addition, I have initiated a fundamental
review of track access charges for freight services. Given the
changes in the industry since privatisation and our improved understanding
of Railtrack's costs, the review will be an important element
in helping to encourage the future growth of rail freight.
46. I am reviewing the costs associated
with the WCRM. On 20 June 2000 I published my views on the amounts
which Railtrack will need for maintenance and renewal of the West
Coast in the next control period. I will publish my conclusions
on the costs of enhancements in July 2000.
47. I consider that the agenda set out above
will create a much more robust framework for the regulation of
Railtrack than has hitherto existed, and will address the points
made by the Comptroller and Auditor General. The plans can be
introduced under the existing legislative framework. However,
although I began work on them as soon as I took office, several
of the improvements which the NAO recommended cannot be implemented
earlier than the effective date of the periodic review1
April 2001. They will be implemented from that date. Others will
be implemented before then, if possible.
48. In addition, under the Transport Bill
currently before Parliament, further improvements to the framework
(a) I am to have an explicit power to direct
Railtrack to make improvements to the network and to amend access
agreements to allow more extensive use of the network;
(b) Railtrack is effectively to have a right
of appeal to the Competition Commission on matters of access charging.
I believe this is important in creating consistency of treatment
with other utilities, and in promoting transparency and stability;
(c) existing constraints on my ability to
deal in licences with matters covered by my jurisdiction concerning
access are to be lifted.
49. I am also taking the steps necessary
to secure controls on Railtrack's disposal of its assets (including
land) if those assets are or can reasonably be expected to be
needed for railway purposes in the future. Examples are land beside
the railway which is needed for station car parks, enlarged stations,
new sidings or passing loops, rail freight terminals the like.
This will be by way of licence modification. I have gone out to
consultation with a wide range of organisationspublic and
privateand have asked them to tell me about land in their
areas which may be at risk.
50. I welcome the proposal in the Transport
Bill to create the Strategic Rail Authority to take over the functions
of the Franchising Director and to provide strategic leadership
to the industry.
51. My role and that of the SRA will be
complementary. The SRA will be the key public sector funder of
the railway, both in terms of paying subsidy for the operation
of services, and in terms of financing investment. My role as
independent regulator will be to ensure that the monopoly and
dominant elements of the industry (including Railtrack) play their
full part in improving the railway. The SRA's role is as a player;
mine is as the referee.
52. The Transport Bill, if enacted, would
change the framework under which I operate, and in particular
would establish the SRA with a strategic role in relation to the
funding of railway enhancement. It would also move certain consumer
protection functions from my office to the SRA. This will simplify
the existing overlapping responsibilities and is to be welcomed.
53. I consider that under this new framework
it will be possible for the independent regulator and the SRA
to work together constructively to generate improvement. In particular
I believe that independent regulation remains necessary to secure
private sector investment in the improvement of the railway because:
(a) it enables a balance to be achieved between
responsiveness to events and stability in the overall framework
which will be essential for the railway to progress. Too much
responsiveness will make it difficult to finance investment; too
much stability will lead to ossification; and
(b) it is a model widely understood by the
capital markets from experience in other regulated industries.
54. I am already working closely with the
SSRA. The Chairman of the SSRA and I both recognise the key need
to ensure the network can accommodate growth. I welcome his proposals
for longer-term franchises their holders will be in a better position
to fund investment in the railway. Our offices are working closely
together to facilitate this programme. My plans, set out above,
to improve transparency and stability, entirely complement and
will facilitate the franchise replacement programme.
55. Thus far the assumption has been that
train operators and ultimately funders of the railway through
access charges will pay for investment in the railway infrastructure,
but financed and implemented by Railtrack. Given the scale of
the investment programme that may be necessary to accommodate
growth in usage, it has been suggested that Railtrack may not
be able to finance or deliver the entire enhancement which is
required, and that the franchise replacement programme will require
changes in the assumptions about Railtrack's role.
56. I set out my provisional views on this
point in the April 2000 periodic review document. The safety of
those using or working on the railway must be a fundamental consideration,
and I consider that both the integrity of the timetabling and
day-to-day operation of the network must be retained. Provided
these requirements can be met, I consider it possible for bodies
other than Railtrack to take on the financing of or delivery of
enhancements. Such an approach is likely to overcome any constraints
on Railtrack's ability to do by itself what is needed; but it
is also likely to put pressure on Railtrack to deliver more efficiently,
more competitively and more effectively. This approach is more
likely to be suitable for new connections, new or significantly
upgraded lines or stations than for the existing network, but
it is for the proponents to demonstrate the benefits.