Network Rail responds to ORR charges review

Track access charges need greater transparency to make them more comprehensible to users, but too much complexity could be costly and would be difficult to implement .That’s the general verdict of responses to ORR’s recent consultation on network track access charges for CP6 (2019-24).

The consultation took place between 10 December 2015 and 4 March 2016; some of the findings will help formulate PR18 (ORR’s periodic review for setting charges in the next control period).The ORR has released over 20 non confidential responses from various contributors, including Network Rail, the Rail Delivery Group, TOCs, FOCs, academics and from other industry bodies.

The ORR floated three high level options (‘packages’) for consideration: (1) the infrastructure cost package (dealing with fixed costs) which will continue to be developed; (2) the current short-run variable charges package that will be developed to improve options, and ; (3) the value-based capacity charges package that will not be taken forward into CP6 (and which had little support).

The RDG has also drawn up its own review of track access charges and some of the work will be incorporated into ORR’s review.

Just to clarify: fixed costs normally refer to costs of structures over time; variable costs relate to wear and tear imposed by vehicles; and capacity values  -an untried notional concept of rationing track usage charges – to manage traffic levels according to scarcity/demand.

The fixed track access charges (FTAC) is paid only by franchised train operating companies; but the variable usage charge (VUC) is paid by all users (i.e. by freight and open access passenger operators as well).

“The current approach to allocating our ‘fixed’ costs to train services, through fixed track access charges (FTAC), is very simplistic,” admitted the Network Rail response: “Costs are generally allocated based on traffic metrics such as train miles and not disaggregated below operating route level. In addition, no (fixed track) costs are allocated to freight or open access operators.”

Even if the costs were fully known there was a case for not passing them on (in full) for social or other reasons: “Freight operators, for example, generate considerable societal/environmental benefits by carrying goods by train. These benefits could be lost if they were charged the full costs associated with their usage of our network because their services may no longer be financially viable,” it added.

And Network Rail was cautious about recovering long term fixed costs through short term variable charges: “Such an approach could price off valuable traffic, unduly increase Network Rail’s revenue risk and fail to reflect the fact that the railway is a fixed cost network.”

Charges mattered more to the freight operating and open access passenger companies than they do to the franchised TOCs: They pay more (or less) when charges go up (or down) whereas the TOCs are insulated from such changes due to the conditions of their franchise agreements.

NR said there was scope for combining and simplifying some of the freight charges but only if the FOCs consented. The variable usage (track access) charge (VUC) and the variable traction electricity charge (E4CT) should be retained as they were “broadly fit for purpose”.

Currently there is no incentive for NR to run more trains: “Network Rail does not ‘profit’  from the additional track access charge income that it receives when accommodating additional train services on the network, this income only aims to offset the incremental costs that Network Rail will incur.”

NR says that the ORR consultation incorrectly stated that the capacity charge (CC) currently levied provided an incentive to make greater use of the track: “This is incorrect. In fact, the capacity charge recovers Network Rail’s additional Schedule 8 costs (for unplanned delays) associated with incremental traffic on the network . . . it only recovers the additional costs incurred. It does not provide Network Rail with any incentive to increase traffic.”

The current charging structure was based on cost, not value. NR had no incentives to improve allocation/utilisation of the network. A balance had to be struck between complexity and cost reflectivity (i.e. aligning charges to costs), and the different charging types should not be treated in isolation from each other.

NR welcomed ORR’s decision not to proceed with value-based capacity charging in CP6: “This was not identified by the RDG Review of Charges as a priority for CP6 and we consider that the implementation challenges would be considerable with limited benefits.”

The value-base capacity charge had not been pursued, partly due to the difficulty in quantifying  and in defining value; geographical and time of the day considerations would have to be factored in. It would be difficult to administer; the NR billing system would be unable to cope and would need to be significantly upgraded.

NR is trying to improve FTAC transparency (an RDG CP6 priority): “We are currently working with Brockley Consulting to investigate the feasibility of establishing an improved attribution/allocation of our ‘fixed’ costs to train services. We hope that this work will provide useful information to inform ORR’s infrastructure costs package. The aim of the work is to attribute/allocate costs consistently across all train services (i.e. franchised passenger, freight and open access) and establish a closer link between these train services and cost causation.”

A pilot study was being undertaken in Wales to assess the feasibility of this approach.

Regarding the variable usage charge (VUC):  the general assumption is that it should be higher on parts of the network where capacity is scarce and lower on parts on the network where capacity is plentiful. However, this is not always so:

“Analysis carried out in PR13, in relation to geographically disaggregating the VUC, indicated that Network Rail’s ‘wear and tear’ costs per train mile were actually lower on busier routes than quieter routes. . .it is also possible that total infrastructure costs per train mile could also be lower on busier routes than quieter ones, due to higher traffic volumes.”

The VUC  varies for different types of rolling stock but it is levied uniformly across the network on a national basis and does not factor in any geographical variations.

NR cautions ORR that a geographically-disaggregated VUC might result in perverse incentives: “We consider that geographic disaggregation of VUC charges is likely to adversely impact upon the complexity and stability of the charging regime. . . We also consider that it is likely to provide perverse incentives in terms of capacity utilisation (analysis in PR13 indicated that it would make it cheaper to run trains on busier parts of the network and more expensive to run trains on quieter parts of the network) and could potentially price off valuable traffic.”

Costs are real but charges reflect value (and are subjective). Better cost allocation would have wider benefits: “An improved cost allocation, which is consistently applied across all operators, is likely to have benefits (e.g. supporting improved decision making) even if it is not reflected in operators’ charges.”

The next stages in the ORR process:

Late Spring 2016               Purpose & priorities document for Schedules 4 & 8;

May – July 2016                 Stakeholder events & working papers;

May – Autumn 2016        ORR assesses options & prepares IAs;

Q4 2016                                Industry consultation on charges & incentives;

Spring 2017                         Conclusions for charges & incentives.


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