Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Supplementary memorandum by Tom Winsor, Rail Regulator (RI 21B)

Accountability of Railtrack


  1.  This paper summarises the accountability of Railtrack to the public interest.

  2.  There has been a considerable amount of debate about the sufficiency of Railtrack's accountability to the public interest and to its customers.

  3.  The present Regulator has stated publicly[23] that the existing regulatory regime is deficient in a number of important respects, and has therefore been pursuing a programme of reform using the mechanisms for change already built into the regime, so as markedly to strengthen and improve it. In addition, the Transport Act 2000 has enhanced the regulatory system with effect from 1 February 2000.

  4.  Railtrack is a monopoly supplier of an essential service. Accordingly it is subject to public interest regulation, established under the authority of Parliament[24]. Railtrack also faces accountability under contracts[25].

  5.  The Regulator's programme of reform of the accountability of Railtrack began in 1999. It covers substantially all of Railtrack's core business, and has three main limbs—

    (a)  reform of the financial structure of the industry through the periodic review of Railtrack's access charges;

    (b)  modifications of Railtrack's network licence to strengthen the conditions on which Railtrack is authorised to operate its network; and

    (c)  strengthening and streamlining Railtrack's contracts with its dependent customers, namely the train operators (passenger and freight).

  6.  That programme of reform is nearing completion.


  7.  Railtrack's accountability can be divided into five general areas—

    (a)  accountability for the operation, maintenance and renewal of the network, including in matters of the allocation of capacity, timetabling and management of operational disruption;

    (b)  accountability for the enhancement of the network;

    (c)  accountability for the closure or disposal of parts of the network and the company's landholdings;

    (d)  accountability for the approval of rolling stock for use on the network; and

    (e)  accountability for safety.



  8.  The principal legal sources and instruments of Railtrack's accountability are—

    (a)  the economic regulatory regime, established under the Railways Act 1993, the Competition Act 1998 and the Transport Act 2000, and the licences and other instruments made under them;

    (b)  contracts with its customers and funders, including train operators (passenger and freight) and the Strategic Rail Authority;

    (c)  the process of the periodic review of Railtrack's access charges, under which the Regulator may adjust the amount of money which Railtrack may charge for use of its network taking into account the company's past performance;

    (d)  industry-wide codes which establish operational and technical rules and procedures which need to be common for all industry participants;

    (e)  the general rules of administrative law which apply to Railtrack when it is carrying out duties of importance to the public, such as the type approval of new rolling stock; and

    (f)  the safety regulatory regime, established under the Health and Safety at Work etc. Act 1974 and regulations made under it (principally the Railways (Safety Case) Regulations 2000).


Types of enforcement

  9.  The methods of enforcement of these instruments differ. In general terms—

    (a)  enforcement of economic regulatory instruments, such as the conditions of Railtrack's licences and the statutory prohibitions on anti-competitive practices and abuse of a dominant position, is in the hands of the Rail Regulator;

    (b)  enforcement of contracts and industry-wide codes is in the hands of the parties to the contracts in question. In the case of access contracts—which allow train operators to use Railtrack's network—it is the passenger and freight train operators themselves which are able to take the necessary action, and public authorities have no locus in their enforcement. In the case of contracts between Railtrack and funders (such as the SRA), enforcement is in the hands of the funder;

    (c)  the periodic review process is conducted by the Regulator, with a right of appeal of the Competition Commission[26];

    (d)  the rules of administrative law permit any person with a sufficient interest in the matter to take action by applying for appropriate public law remedies such as judicial review; and

    (e)  enforcement of safety requirements is in the hands of the Health and Safety Executive, using enforcement and prohibition notices under the Health and Safety at Work etc. Act 1974 and regulations made under it; violation of these rules generally carry criminal sanctions.

Statutory basis for enforcement of licence conditions

  10.  Enforcement of licence conditions by the Regulator takes place under section 55, Railways Act 1993, as amended and supplemented by the Transport Act 2000. Those powers of enforcement are considerable.

Scope of enforcement orders

  11.  The enforcement regime enables the Regulator to take action to require Railtrack to comply with its licence obligations if it is in breach, or where the Regulator is satisfied that a breach is likely.

  12.  An enforcement order may contain such provisions as the Regulator determines are appropriate to ensure that Railtrack complies with its licence obligations. Therefore, it may specify the result which Railtrack must achieve, leaving it to the company to determine how best to secure that result.

Consequences of breach of enforcement order

  13.  Breach of an enforcement order has the following consequences—

    (a)  it is a breach of statutory duty, and so can be the subject of civil legal proceedings against Railtrack by any person adversely affected; for example, this could involve a freight customer suing for damages for loss of business;

    (b)  the Regulator may obtain an injunction, ordering performance of the order; breach of an injunction is a contempt of court, and punishable as such;

    (c)  the Regulator may impose monetary penalties; in 1999, he did so, at the rate of £4 million for every one percentage point by which Railtrack fell short of its passenger train performance target;

    (d)  the Secretary of State may revoke the network licence if—

    (i)  Railtrack continues to fail to comply with an enforcement order after receiving three months' notice of the Secretary of State's intention to revoke the licence on that ground; and

    (ii)  the revocation of the licence is a proportionate step for the Secretary of State to take; this means that the licence could not be revoked for a trivial breach.

  14.  In addition, the Transport Act 2000 strengthens the enforcement regime in several respects, including empowering the Regulator to impose a monetary penalty for a past breach of the licence[27].

Enforcement of Competition Act 1998

  15.  The Competition Act 1998 makes provision for a special regime of enforcement, with rights of appeal to the Competition Commission Appeal Tribunal.

  16.  Under the Act, the Regulator has the power to impose financial penalties of up to 10 per cent of an offending company's turnover.



  17.  The operation, maintenance and renewal of the network is Railtrack's core business. In general terms, it involves—

    (a)  timetabling and signalling trains over the network in real time, including dealing with operational disruption;

    (b)  inspection of the state of its assets, collecting and maintaining data about them, and carrying out preventative and unscheduled maintenance;

    (c)  renewal of its assets in a timely fashion; and

    (d)  the sale to train operators (and others) of the capacity of its network, by means of access agreements which confer rights to use the network to an extent specified in the agreement; this will usually specify the numbers of trains which the beneficiary is entitled to run over a given period, their journey times, stopping patterns and other characteristics.

Condition 7—general requirements

  18.  Railtrack's network licence was granted on 31 March 1994 by the Secretary of State.

  19.  That network licence contains conditions with which Railtrack must comply. The most important of these is Condition 7 (network stewardship), which requires the company to—

    (a)  maintain, renew, replace, improve, enhance and develop the network;

    (b)  in accordance with best practice and in a timely, efficient and economical manner;

    (c)  so as to meet the reasonable requirements of train operators and funders in respect of the quality and capability of the network;

    (d)  all this to the greatest extent reasonably practicable having regard to all relevant circumstances including matters of finance.

Condition 7—network management statement

  20.  Condition 7 also requires Railtrack annually to publish a statement—called the network management statement—stating how it expects to comply with that obligation for the next 10 years. The statement must be provided in sufficient detail to enable providers and potential providers of railway services to plan their businesses and to enable funders of railway services to plan their future financial and service requirements, in each case with a reasonable degree of assurance. The network management statement must contain—

    (a)  projections of future network quality and capability requirements;

    (b)  planned modifications to the network;

    (c)  the expected effect of such modifications on the quality and capability of the network, the quality of network services and the ability of users to provide improved services to their customers;

    (d)  the estimated costs of, and the method proposed for financing, such requirements and improvements within Railtrack's overall financial framework; and

    (e)  a progress report on the matters referred to in the last published statement.

  21.  This is a wide-ranging and significant condition. It goes to the heart of Railtrack's responsibilities for the maintenance and improvement of the network, including the expansion of its capacity. Under Condition 7, Railtrack may not be required to undertake work without appropriate financial arrangements. The decision on the adequacy of the work and of the associated financial arrangements is a matter for the Regulator, not the company.



  22.  The Regulator has the power, every five years, to revise the financial structure and the levels of Railtrack's charges, in a process known as the periodic review of Railtrack's access charges. Each five year period is known as a "control period". The Regulator may, if there is an appropriately strong case, carry out one or more interim reviews during a control period. Regulators of the other privatised network industries have the same powers. The Regulator's decision on a periodic review (including an interim one) can be appealed by Railtrack to the Competition Commission, whose decision is final[28].

  23.  The first control period was from 1995-2001. The second begins on 1 April 2001 and lasts until 31 March 2006.

  24.  The financial framework for the first control period, established in 1995, was not fit for purpose and the Regulator has, for the second control period, determined that substantial improvements are required.

  25.  The recent periodic review has defined, in far greater detail than the one in 1995, what Railtrack has to deliver for the money it receives in the second control period. These things are usually referred to as the relevant "outputs". This definition includes—

    (a)  specific incremental outputs, such as annual performance improvements and reductions in the numbers of broken rails;

    (b)  investments which the company must make in order to comply with new obligations, such as the installation of TPWS[29];

    (c)  other enhancement schemes which the SRA has stated it wants to buy as part of the periodic review (these are known as "incremental output statement schemes" or simply "IOS schemes"); and

    (d)  greater specification of the condition which specified classes of Railtrack's assets must meet, for example in terms of track geometry and the number and severity of temporary speed restrictions.

  26.  Railtrack is accountable for the delivery of these outputs in several different ways.

Performance regime

  27.  The first is through the performance regime established in each of the access contracts with passenger and freight train operators. The periodic review has strengthened and simplified the contractual economic incentives on Railtrack to reduce delays. To the extent that delays increase because of a deterioration in the condition of the network, this will have an immediate adverse financial impact on the company. However, improving the performance regime on its own is not enough, since the condition of the network can deteriorate significantly before there is any impact on performance. Accordingly the Regulator has determined that additional measures are necessary, described below.

Adjustments to charges

  28.  In the recent periodic review, the Regulator has set out the approach he would expect to take in the 2006 periodic review if Railtrack fails to deliver the required outputs.

  29.  This includes the ability of the Regulator to make adjustments to the company's regulatory asset base (or "RAB")[30], and hence access charges, if Railtrack fails to deliver the required outputs. For example, there is an automatic adjustment mechanism if the actual incidence of broken rails is different to the incidence assumed in the periodic review. This too provides a direct financial incentive for good stewardship of the network, and, the more it secures that the company performs to expectations, or outperforms them, the better the condition of the network.

  30.  In short, it is a system of considerable scope and flexibility which allows the Regulator to—

    (a)  clawback money paid (by adjusting future charges) if the company has failed to deliver in some respect[31]; and

    (b)  ensure that the company is appropriately financed for the efficient and competent delivery of additional outputs, such as the installation of new safety systems.

Enforcement by Regulator

  31.  If, despite the above measures, the company is still seen to be falling well short of the relevant targets, this may be an incidence of a serious failure of stewardship. As such, immediate enforcement action by the Regulator may be the most appropriate course of action. If so, this could[32] result in monetary penalties. The Regulator has published, in the periodic review, general guidelines on the basis for establishing such penalties. The basic principle is that the penalty should be set at a level which is sufficient to incentivise the company to comply with the relevant obligation without imposing unnecessary risk on the company.

Local output statements

  32.  Although the periodic review has focussed primarily on aggregate national output measures, the Regulator will also require these national outputs to be translated into local output statements which can be enforced by train operators through their access contracts.[33]

Enforcement action taken under Condition 7

  33.  The present Regulator has taken enforcement action against Railtrack for breach of Condition 7 on three occasions since July 1999, in relation to—

    (a)  failure to meet passenger train performance targets in 1998-2000 (August 1999)[34];

    (b)  lack of progress on the West Coast route modernisation (November 1999-May 2000)[35]; and

    (c)  the national rail recovery plan following the Hatfield derailment (January 2001)[36].

West Coast—special case

  34.  The West Coast route modernisation is a project of considerable national importance. The Regulator has taken action to compel Railtrack to produce credible and robust plans in relation to the upgrade, and options which the SRA needs to make its decisions on the particular outputs which it wishes to finance in the public interest.

  35.  The Regulator, in conjunction with the SRA, is establishing detailed milestones for the progress of the project, and will use his reporters[37] to monitor progress. If problems occur, the Regulator will require Railtrack to produce and carry out an appropriate remedial plan. He may back up delivery of remedial action with enforcement of Railtrack's network licence.

Other action re stewardship issues

  36.  In addition, the Regulator has used his powers under Condition 7 to apply pressure on Railtrack, without the necessity of formal enforcement action against the company at this stage, in relation to—

    (a)   Broken rails  The Regulator has taken continual action in this respect since 1999, when it became evident that the number of broken rails was significantly rising. He has required Railtrack to produce a plan to reduce the number of broken rails, and the Regulator and HSE commissioned independent consultants[38] to review both the adequacy of this plan and the quality of Railtrack's rail management strategies. The Regulator is now considering Railtrack's response to the report, and will continue to ensure that it takes action to improve performance in this area;

    (b)   Track quality  The Regulator has identified significant decline in track quality since the formation of Railtrack, and has required Railtrack to improve the standards of its track maintenance by producing and delivering a track quality improvement programme. This programme is continuing, and the Regulator will be reviewing its achievements during 2001;

    (c)   Possessions strategies  Following concern expressed by train operators and others about planning and management of possessions, the Regulator required Railtrack to produce plans to improve the arrangements. He is now considering further action in the light of recent failings at Willesden and Leeds.



  37.  Railtrack's network licence was granted in March 1994 when the company was in the public sector. Although the then Government stated that, if and when a decision to privatise the company was taken, the licence would be strengthened to make it fit for a private sector Railtrack, when the company was privatised in May 1996 no appreciable change to the licence was made[39].

  38.  Accordingly, the Regulator has embarked on a programme for the reform of Railtrack's network licence, to improve Railtrack's accountability in a number of important respects.

  39.  The licence can be amended in one of two ways—

    (a)  by acceptance of Railtrack[40]; or

    (b)  by compulsory means, without Railtrack's agreement, after the matter has been referred by the Regulator to the Competition Commission and the Commission has agreed with the Regulator that the public interest requires the change to be made[41].

  40.  Naturally, the Regulator would prefer to modify Railtrack's network licence by acceptance, but he has stated that he is prepared to send the matter to the Competition Commission using the compulsory amendment procedure if necessary[42].

Changes to be made

  41.  The changes which the Regulator intends to make to Railtrack's network licence are described below.

Asset register

  42.  Railtrack (and its maintenance and renewal contractors) needs to have comprehensive and reliable information about the condition, capacity and capability of its network. Information of that kind is also needed by others, including train operators, rolling stock manufacturers, developers of new railway facilities (such as freight terminals), local authorities and PTEs.

  43.  The Regulator's proposed new licence condition requires Railtrack to establish and maintain such a register, to a high standard of accuracy and completeness.

  44.  The Regulator's consultation on the terms of the appropriate new licence condition asked how third party access to the data on the register should best be secured. The general consensus was that third parties should have a contractual right to the information, rather than a right enforceable only by the Regulator. Accordingly the Regulator will consult further on the terms on which that access may be secured.

Reporters on Railtrack's stewardship of the network

  45.  The monitoring of Railtrack's stewardship of the network cannot and should not involve regulatory shadowing of everything Railtrack does. However, it is necessary, on an auditing and occasionally closer basis, to make an assessment of the adequacy of Railtrack's work.

  46.  The Regulator's new licence condition provides for independent experts to be appointed by Railtrack, with the approval of the Regulator, to carry out assessments and investigations in relation to the extent and nature of Railtrack's work. An example will be the sufficiency of its maintenance and renewal of the network. The experts—called "reporters"—will be paid for by Railtrack but will report direct to the Regulator, and be accountable to him.

  47.  The Regulator will be able to determine what depth and level of investigation is carried out, and with what frequency. A core task for the reporters will be to verify the information provided by Railtrack in the annual return (see below). At the very least, this will involve audit of the processes used to collect the data and/or the data itself. In some cases, however, specific issues may be examined in more detail and the reporters may be required by the Regulator to provide an independent review of recovery plans where particular stewardship problems have arisen. The reporters would also be expected to provide a report on progress against the milestones established (in conjunction with the SRA) in relation to the West Coast route modernisation.

Dealings with dependent persons

  48.  Railtrack's relationships with its customers—mainly (but not exclusively) train operators, rolling stock manufacturers and other railway industry players—have often been criticised as unresponsive, inefficient and in other respects unsatisfactory.

  49.  The proposed new licence condition requires Railtrack, in its dealings with third parties of a stated class—that is, including the persons mentioned—to behave with due efficiency and economy and in a timely manner, including in all respects with that degree of skill, diligence, prudence and foresight which should be exercised by a skilled and experienced network owner and operator.

Annual return on performance and condition of network

  50.  The outputs which Railtrack was expected to deliver in the first control period (1995-2001) were never clearly defined. It is not therefore surprising that the way in which Railtrack reports on these outputs has tended to be rather ad hoc and inconsistent. However, the recent periodic review has started the process of defining much more precisely what Railtrack is required to deliver for the money it receives.

  51.  The Regulator's proposed licence modification will require Railtrack to provide an annual return to the Regulator. That annual return will report on the performance and condition of Railtrack's network over the previous year. It will therefore consolidate the existing and new information in more consistent and useful format and will include an explanation of any significant variances. The annual return will operate in addition to the Regulator's existing powers to obtain information from the company, and the verification and monitoring arrangements to be established by means of reporters.

Asset disposal

  52.  The Regulator intends to modify Railtrack's network licence so as to include a new condition which enables him to prevent Railtrack disposing of assets if to do so would be contrary to the public interest. This matter is dealt with in paragraphs 94-96 of this paper.


  53.  It is important that Railtrack's ability to finance its core activities is not prejudiced by other ventures which the company may, in its commercial judgement, decide to undertake. Accordingly, the Regulator has decided that it is necessary for Railtrack to be required to preserve, protect and defend its core assets for railway purposes, and ensure that they cannot be pledged for the purpose of non-core activities. It is also necessary to ensure that Railtrack maintains an appropriate capital structure and that transactions between the core business and other (unregulated) parts of the group are on an arm's length basis.

  54.  The licences of other regulated network businesses have been modified to introduce stronger controls on financial ring-fencing and the Regulator's proposed modification of Railtrack's network licence is consistent with the approach in other regulated industries. Although this is not currently a major issue with Railtrack, the Regulator considers it appropriate to introduce best practice in this area before rather than after potential problems materialise.

Regulatory accounts

  55.  Railtrack's current regulatory accounts are of very limited use to either the Regulator or investors. In particular, the level of information was clearly inadequate to inform the recent periodic review and the accounts provide investors with very little information on how the company is performing against the assumptions which were made at the time of privatisation.

  56.  The Regulator's proposed new licence modification will therefore require Railtrack to provide more detailed and disaggregated information in a way which is consistent with the approach and assumptions adopted in the recent periodic review. Railtrack will also be required to provide an explanation of material variances between the periodic review assumptions and what actually happens in terms of expenditure and revenues in particular areas. This will help to establish whether these variances are due to differences in the company's efficiency, prices or outputs.


Contracts of public importance—requirement for regulatory approval

  57.  With the increase in the numbers of trains being run, the capacity of some parts of the network is fast running out. It is a matter of considerable public importance—as well as commercial significance to the companies concerned—that the capacity of the network is used efficiently and on the right types of services.

  58.  Accordingly, the Railways Act 1993 provides that the Regulator should oversee and control the consumption of the capacity of railway assets (track, stations and light maintenance depots). The capacity is consumed under contracts—called "access contracts"—between the facility owner (in the case of track, this is Railtrack) and the beneficiary (the train operator).

  59.  Because of the importance of these contracts, the legislation requires that, unless exempted or subject to special rules[43], each access contract must be approved by the Regulator. In doing so, the Regulator operates according to public interest criteria[44].

Compulsory access to railway facilities

  60.  In the case of its network, if Railtrack demands from a train operator unreasonable terms—for example, too high a price—or unreasonably refuses access altogether, the train operator can obtain access using compulsory means under section 17 of the Railways Act 1993. This means that any abuse of Railtrack's monopoly power in granting access to its network can be checked and, if necessary, overcome.

  61.  If a section 17 application is made to him, after following due process the Regulator is empowered to direct Railtrack to enter into an access contract with the train operator in question on terms which the Regulator, not Railtrack, decides. These terms will include the price to be paid, the capacity to be provided, a specification of the other services which Railtrack must provide and the standard they must reach, and the remedies available to the train operator if Railtrack fails to honour its obligations under the contract.

Approval of agreed access contracts

  62.  If Railtrack and the train operator have agreed the terms on which capacity is to be sold to the train operator, that contract still needs to be approved by the Regulator[45]. The Regulator can require the contract to be changed before he approves it, and this power is used in many cases.

  63.  Once approved by the Regulator, the contract is enforceable only by the parties to it.

Strengthening of contracts

  64.  The Regulator is in the process of exercising his powers to produce standard contracts[46] for access to railway facilities, starting with access to Railtrack's network. His policy is that the present generation of access contracts are too weak to ensure that Railtrack is held properly to account inasmuch as they do not have adequate specifications of the outputs Railtrack is required to deliver or adequate remedies if it fails. This matter has been thrown into sharp focus by the aftermath of the Hatfield derailment.

  65.  Accordingly the Regulator will ensure that the next generation of access contracts—which will run alongside the new franchise agreements which the SRA are devising as part of the franchise replacement programme—will be stronger, using these improved standard terms. His policy is also to simplify and streamline them in a number of respects.

Local output statements

  66.  Part of the process of reform of access contracts involves the introduction of a mechanism under which the train operator is entitled to production by Railtrack of a statement of the outputs in respect of its network which it is required to deliver to that train operator. This is the general obligation to maintain and improve the network[47] made specific and local.

  67.  Once established (whether by agreement with the train operator or after a process to resolve differences), the train operator will be entitled to enforce the local output statement, and will have remedies for non-delivery by Railtrack.

Amendment of existing access rights

  68.  In certain circumstances, a train operator is entitled to secure a change to his existing access contract—whether as to the numbers of trains he runs or some other aspect of his contractual rights—against the will of Railtrack[48].

  69.  This procedure requires the assistance of the Regulator in providing criteria for an arbitration of the issue between the train operator and Railtrack, and secondly in approving the outcome of the arbitration. Once made, the change is binding on Railtrack and the train operator.

Timetabling and other disputes

  70.  Under the industry-wide network code[49], the Regulator acts as appeal body for certain disputes in relation to the establishment of the working timetable (which is usually put in place twice a year) and the codes of practice for dealing with operational disruption.

  71.  Appeals are made to him after the parties (Railtrack and the train operator) have failed to agree on the relevant matter. The Regulator's decision is final and binding.


  72.  The same principles apply to contracts with funders, except that they may invoke the compulsory access provisions only if they wish to buy capacity for the purpose of the operation of trains.

  73.  In relation to enhancements of capacity, see paragraphs 79-91 of this paper.



  74.  Under Condition 3 of its network licence, Railtrack is obliged to supervise the system of technical and operating standards with which it and other operators of networks, trains, stations and depots must comply. These are known as Railway Group Standards.

  75.  By supervising the system of Railway Group Standards, Railtrack must ensure that they are fit for purpose. This involves a system of continuous review and an obligation, in appropriate cases, to amend or abolish existing Railway Group Standards and to devise new ones. An example is the case of tilting trains for the West Coast main line, where completely new standards are required for new technology.

  76.  These standards could be operated as a barrier to entry to the railway industry. They can also involve significant costs for the persons whose equipment or organisations are obliged to comply with them. Accordingly Railtrack must be seen to be operating the system of standards-setting and reform in an impartial and open way[50]. If any person is dissatisfied with a decision by Railtrack in this respect (whether a decision to act or a decision not to take action), that decision can be appealed to the Regulator.

  77.  A large number of Railway Group Standards are ones which require compliance by Railtrack itself. Accordingly it is a further term of Condition 3 that Railtrack itself abides by those Railway Group Standards. If it fails to do so, the Regulator can take enforcement action for breach of that part of the network licence.

Rolling stock approvals

  78.  The Regulator has received a complaint against Railtrack for breach of Railway Group Standards. This concerned the provision to rolling stock manufacturers of appropriate information about the condition and gauge of its network. The Regulator has considered the complaint and expects to announce his decision in Spring 2001[51].


Condition 7

  79.  Railtrack's network licence (Condition 7) also requires the company to improve, enhance and develop its network in accordance with best practice, to meet the reasonable requirements of its customers and funders[52].

  80.  Condition 7 is an important instrument in ensuring that Railtrack expands the capacity and capability of its network wisely and well, at the right times and at the right prices.

Network change

  81.  The railway industry has a number of industry-wide codes which establish common rules for the improvement of railway assets. The most significant of these is the network code which contains a procedure for changes to the network. That procedure contemplates agreed or compulsory network changes.

  82.  If the compulsory procedure is used, it is for the parties to the code to enforce it. However, if there is dispute, an application can be made to the Regulator for a determination and his decision is final and binding.

Powers to change industry-wide codes

  83.  The industry-wide codes also have procedures under which the codes themselves can be changed. This is necessary to ensure that they can be improved over time and can be adapted to meet changing circumstances, including the requirements of the public interest.

  84.  There are two change procedures—

    (a)  a democratic one, in which Railtrack and train operators have voting rights, but where the final approval of the Regulator to the change is still required; and

    (b)  a public interest one in the hands of the Regulator, under which he can make changes, if necessary without the agreement of the affected parties, if the public interest would be served by them.

  85.  The Regulator is in the process of reviewing the network code with a view to its reform, and has published a number proposals in this respect[53].

Project delivery

  86.  The Regulator's powers to monitor and enforce delivery of specific as well as national outputs in relation to the steady state network apply with equal force to enhancements. Thus, the Regulator is in the process of establishing, in conjunction with the SRA, a programme of works and milestones to ensure efficient and competent delivery of the West Coast route modernisation project[54].

  87.  These powers can and will, as necessary, be applied to other enhancements, for example the upgrade of the East Coast main line.

Section 16A-I—compulsory enhancement of network with SRA support

  88.  If Railtrack demands unreasonable terms for an enhancement, or unreasonably refuses to carry one out, section 16A-I of the Railways Act 1993[55] established a mechanism under which the Regulator can direct Railtrack to carry out a specified enhancement on terms which the Regulator, not Railtrack, determines.

  89.  The application for section 16A-I directions may be made either by the SRA or by another person—for example a train operator or a developer of a new rail freight facility or station—with the consent of the SRA.

  90.  It is the duty of the Regulator, under this new statutory procedure, to give a determination which ensures that Railtrack is adequately rewarded for carrying out the enhancement. This means that the price and other terms must be fair.

  91.  Once the Regulator has directed Railtrack to carry out the enhancement, Railtrack has a statutory duty to do so.


Statutory closure procedure

  92.  Closure of railway facilities—including parts of Railtrack's network—is subject to a statutory closure procedure.

  93.  Closure proposals must be made to the SRA. If it believes the closure should be allowed, it must publish a notice to that effect. After receiving representations, the Secretary of State decides whether the closure should have effect. Conditions may be attached to a closure consent by the Secretary of State. Failure to comply with this procedure, or with the conditions of a closure consent, may lead to enforcement action.

Disposal of assets

  94.  Railtrack's assets are complex. They include virtually all of the national network of track and signalling, stations and depots[56]. They also include substantial land assets beside or near the railway which, if disposed of for non-railway purposes, would in most cases be lost to the railway for good.

  95.  The Regulator intends to modify Railtrack's network licence so as to include a new condition which enables him to prevent Railtrack disposing of assets—including land—if to do so would be contrary to the public interest. His proposed new licence condition is substantially the same as the corresponding conditions in the licences held by electricity network businesses.

  96.  It requires the company to obtain the approval of the Regulator to material disposals of land and other assets, whilst allowing the company freedom to deal with its land assets in non-material cases without the need for regulatory intervention.



  97.  Railtrack has an important role in approving new rolling stock for use on its network. Without that approval, new rolling stock may not be brought into service.

  98.  There are two types of approval—

    (a)  vehicle acceptance, which is essentially concerned with the safety of the railway vehicle; and

    (b)  route acceptance, which deals with whether a particular vehicle or type of vehicle is safe to be operated on particular parts of the network (for example, in matters of gauge).

Railway Group Standards

  99.  Railtrack is required by relevant Railway Group Standards[57] to operate a competent and appropriate system of vehicle and route acceptance. Failure to comply with those requirements would be a breach of Condition 3 of its network licence, enforceable by the Regulator[58].

Vehicle and route acceptance contracts

  100.  The Regulator is considering publishing standard terms[59] for contracts between Railtrack and applicants for vehicle and route acceptance.

  101.  Such contracts would specify clearly the responsibilities of Railtrack and the applicant in relation to the process, and require Railtrack to provide timely, complete and accurate information which applicants—such as rolling stock manufacturers—need to design, build and commission new rolling stock. They would also require Railtrack to carry out its part in the vehicle and route acceptance process in a timely, efficient and competent manner, with skill, diligence, prudence and foresight. The contracts would also specify appropriate remedies in case of breach.

  102.  As a track access contract, if Railtrack were to demand unreasonable terms or unreasonably refuse to offer a vehicle and route acceptance contract, the Regulator would be able to direct Railtrack to do so under section 17, Railways Act 1993[60].

  103.  Enforcement of the contract, once entered into, would be in the hands of the applicant.


  104.  The safety regime for the railways is under the supervision and control of Her Majesty's Railway Inspectorate, part of the Health and Safety Executive. It is not within the scope of this paper to deal with that regime, which is largely self-contained.

Office of the Rail Regulator

26 January 2001



  1.  This paper is a brief update on the information contained in my written evidence dated 26 January 2001 in relation to the accountability of Railtrack.

Programme of reform--general

  2.  The programme of reform of the accountability of Railtrack to the public interest is nearer completion, with the making of modifications of Railtrack's network licence in several important respects. The process of establishing stronger and simplified access contracts is also further advanced and I expect it to be completed, after appropriate industry and public consultation, in autumn 2001.

Asset register (paragraphs 42-44 of 26 January 2001 evidence)

  3.  The licence modification requiring Railtrack to establish a comprehensive and reliable register of the condition, capacity and capability of its assets was made on 18 April 2001.

Reporters on network stewardship (paragraphs 45-47)

  4.  The licence modification establishing a system of reporters on Railtrack's stewardship of its network was made on 11 April 2001. The process of appointing the first reporters is under way.

Annual return on network performance and condition (paragraphs 50-51)

  5.  The licence modification requiring Railtrack to provide an annual return on the performance and condition of its network was made on 11 April 2001.

Regulatory accounts (paragraphs 55-56)

  5.  The licence modification requiring Railtrack to provide detailed and disaggregated information for use in measuring actual expenditure against the assumptions in the periodic review was made on 11 April 2001.

Office of the Rail Regulator

25 April 2001

23   See, for example, the Regulator's publications on the periodic review of Railtrack's access charges; Railtrack's Stewardship of the Network, Office of the Rail Regulator, London, November 1999; House of Commons Committee of Public Accounts, 35th report, The Office of the Rail Regulator: Ensuring that Railtrack Maintain and Renew the Railway Network, The Stationery Office Limited, London, July 2000 Back

24   Railways Act 1993 and licences issued under it; Health and Safety at Work etc. Act 1974 and regulations made under it; Competition Act 1998 Back

25   The terms of certain key contracts - namely contracts for the use of the capacity of Railtrack's network - are subject to the Regulator's control under sections 17-22, Railways Act 1993; see paragraphs 57-67 of this paper. Back

26   Under Schedule 4A, Railways Act 1993, as inserted by the Transport Act 2000 Back

27   Before the enactment of the Transport Act 2000, the Regulator could only impose penalties for breach of an enforcement order, and could not do so if the breach had been remedied by the time he took enforcement action. Back

28   Schedule 4A, Railways Act 1993 (as inserted by the Transport Act 2000) Back

29   Train Protection and Warning System Back

30   The regulatory asset base is the value of the assets on which the company is entitled to earn a reasonable rate of return (determined by the Regulator). The lower the RAB, the less money the company can make in this way. The Regulator sets the RAB at each periodic review, and can, at any time during a control period, make a statement of an adjustment to the RAB which he will or intends to make if the company falls short in some respects, or exceeds its obligations Back

31   In order to reduce uncertainty for investors, the Regulator has published the circumstances in which he would expect to make such adjustments. Back

32   As explained in paragraphs 13-14 of this paper. Back

33   See paragraphs 66-67 of this paper. Back

34   See Railtrack's performance targets: Statement by the Rail Regulator, Office of the Rail Regulator, London, August 1999. Back

35   See West Coast Main Line: Statement by the Rail Regulator, Office of the Rail Regulator, London, November 1999; West Coast Main Line: Modified Final Order against Railtrack PLC, Office of the Rail Regulator, London, March 2000; and West Coast Main Line: Final Order against Railtrack PLC, Office of the Rail Regulator, London, May 2000. Back

36   Regulator's statement of reasons for provisional enforcement order in the case of the national rail recovery plan, Office of the Rail Regulator, London, January 2001. Back

37   See paragraphs 45-47 of this paper. Back

38   Transportation Technology Center, Inc, Pueblo, Colorado; their report is published on the ORR website Back

39   See Railtrack's Stewardship of the Network, Office of the Rail Regulator, London, November 1999. Back

40   Under section 12, Railways Act 1993. Back

41   See sections 13-15, Railways Act 1993. Back

42   See minutes of evidence, part of House of Commons Committee of Public Accounts, 35th report, The Office of the Rail Regulator: Ensuring that Railtrack Maintain and Renew the Railway Network, The Stationery Office Limited, London, July 2000. Back

43   Exemptions under section 20, Railways Act 1993 and general approvals under section 22, Railways Act 1993. Back

44   His duties under section 4, Railways Act 1993. The Regulator has also published criteria for the approval of access contracts, and will shortly be revising those criteria after public consultation. Back

45   Section 18, Railways Act 1993. Back

46   Section 21, Railways Act 1993. Back

47   Condition 7 of Railtrack's network licence. Back

48   Under Part 9 of Schedule 7 of each passenger track access agreement. If the change results in Railtrack having to do more work, it may require an adjustment of charges. The Part 9 mechanism is not present in freight track access agreements. Back

49   Presently called the Track Access Conditions. Back

50   Condition 3 of Railtrack's network licence was amended with effect from 31 December 2000 so as to require the standard-setting and reform system to be carried out by a separate Railtrack company, namely Railway Safety. Back

51   See also paragraphs 97-103 of this paper. Back

52   See paragraphs 18-21 and 32-36 of this paper. Back

53   As part of the use of his powers to establish standard access contracts under section 21, Railways Act 1993. Back

54   See also paragraphs 34-35 of this paper. Back

55   As inserted by section 223 of the Transport Act 2000. Back

56   Most of Railtrack's stations and all its depots are leased to train operators and others. Railtrack operates only 14 of its stations. Back

57   See paragraphs 74-78 of this paper. Back

58   In this respect, the Regulator has received a complaint of breach of Condition 3 of Railtrack's network licence. He expects to announce his decision shortly. Back

59   Under section 21, Railways Act 1993. Back

60   At present, Railtrack has two such contracts. Each was entered into on 1 May 1998. The first is with West Coast Trains Limited. The second is with CrossCountry Trains Limited. Back

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