Examination of Witness (Questions 620-636)|
WEDNESDAY 11 JUNE 2003
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 regulatorwhich 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
(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
(Mr Winsor) They will be listened to
in the Competition CommissionI 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
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
(Mr Winsor) Correct.
628. Which they may, or more likely may not,
(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
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
(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.
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.