Select Committee on Transport Written Evidence

Further memorandum by the Department for Transport (FOR 77A)


  Many thanks for your letter of 30 October about the Regulator's oral evidence to the Transport Committee on 29 October.

  The Regulator, through the interim review process is responsible for setting Network Rail's income for the next five years. He does this using the powers and constraints vested in him under the Railways Act 1993 and the Transport Act 2000. These Acts require the Regulator to have regard to any general guidance given to him by the Secretary of State about railway services or other matters relating to the railways. The latest guidance was issued by the Secretary of State on 26 September 2002. I attach a copy along with a copy of Annex A of the Regulator's draft conclusions which set out the full list of his duties.

  As you will see from the Guidance, the Regulator must have regard to the SRA's budget and take care to ensure that his actions as Regulator do not cause the SRA, amongst other things, to exceed that budget. The Guidance also provides a framework for discussion if the Regulator believes that in exercising his duties, he will cause the SRA to exceed its budget. This system of checks and balances ensures that our rail system operates holistically and within its budget.

  Turning now to the franchise arrangements. The Regulator was quite correct when he told you that the franchise agreements between the train operators (TOC's) and the SRA indemnify the TOC's from the effects of any increases in Track Access Charges. The SRA and the Government agree to giving such indemnities in order to give the TOC's comfort that they will not be required to pick up costs over which they have no control. If such indemnities were not given, the TOC's would, through the franchise process, price this un-quantified risk into their bids. The consequence would be a much higher franchise bill across the piece.

  Finally, on the wider issue of rail finances, I know that on his current assumptions the Regulator has concluded that Track Access Charges would need to rise by about £1.5 billion per year. However, he does recognise that there is more work being done, particularly on borrowing, and that his final conclusions may set a lower level. Whilst I recognise that Network Rail's income will need to rise in the longer term, I believe that the right solution for Network Rail's short term spending hump, is to see what contribution can be made by the maximum prudent use of borrowing. The Government, the Regulator, the SRA and Network Rail are discussing this in advance of the Regulator's final conclusions in December.

  I hope that this is helpful and I look forward to seeing you on Wednesday.

Kim Howells

Minister of State

3 November 2004



  Section 4(5)(a) of the Railways Act 1993 ("the 1993 Act"), as amended by section 224 of the Transport Act 2000 ("the 2000 Act"), imposes on the Rail Regulator a duty to have regard to any general guidance given to him by the Secretary of State about railway services or other matters relating to railways. This document sets out such guidance in relation to working with the other railways regulatory bodies—the Strategic Rail Authority (SRA) and the Health and Safety Executive (HSE)—to a common agenda.


  The Rail Regulator, the SRA and the HSE are the three pillars of railway regulation in Great Britain. The Secretary of State looks to these three regulators to work together to ensure that the railways are run safely in the public interest, through effective and accountable regulation.

  The Rail Regulator provides economic regulation of the monopoly and dominant elements of the rail industry, including determining the level of charges levied by the infrastructure manager (currently Railtrack) and regulating its stewardship of the national rail network. He is independent of Government.

  The SRA is the strategic, planning, and co-ordinating body for the rail industry and the guardian of the interests of rail passengers. It acts as purchaser of train services and railway infrastructure. It also has various legal agreements with Network Rail, including the provision of standby credit facilities and the funding of certain additional costs, which will become effective if that company successfully completes the acquisition of Railtrack. The SRA's task is to provide a clear strategic direction for rail transport in Britain; promote rail passenger and freight transport; and encourage private investment in the rail industry.

  The Health and Safety Commission (HSC) is the single, independent safety regulator for railways in Great Britain and the HSE is its operational arm. In carrying out his functions the Rail Regulator should ensure that the HSE is fully consulted whenever railway safety may be an issue, and he should be guided by the advice of HSC/HSE on all health and safety issues.


Working to a common agenda

  It is particularly important that the Rail Regulator works closely with the SRA and HSE to strengthen and support the railway. He and they will need to maintain close working relationships, while recognising the boundaries among their respective responsibilities. He should freely share information with them except where statutory protections or commercial confidentiality require otherwise. In particular he should share information at an early stage on anything that may be material to forward financial planning by the SRA.

  The Rail Regulator should be mindful that Directions and Guidance issued to the SRA on 11 April 2002 and subsequently updated on 26 September 2002 by the Secretary of State require it, among other things, to publish an overall strategy in January of each year. The purpose of this strategy is to address the objectives set for the SRA in those Directions and Guidance, which relate to the operation of the railway and are intended to contribute to the achievement of the targets set out in the 10 Year Plan. The SRA may also publish separate strategies which relate to individual issues and which contribute to the overall strategy. The Rail Regulator should seek to ensure that, so far as possible, in exercising his functions he does not prejudice the achievement of these strategies, and particularly the overall strategy, published by the SRA.

  If in facilitating the furtherance of the SRA's strategies the Regulator considers that clarification or a further strategic statement is desirable to properly discharge his functions, he should make a request to the SRA. Where the Authority agrees to such a request, the Rail Regulator should allow the Authority a reasonable opportunity to produce the guidance in time for him to take it into account in reaching his final decision.

  The Rail Regulator should also be mindful that the Secretary of State's Directions and Guidance require the SRA to summarise, as part of its overall strategy, the resources which are available to it and the basis on which priorities for the use of these resources are determined. In addition, they suggest that the Authority should describe in the overall strategy how it intends to maximise net benefits from the funds available to the Authority. The SRA is also required by virtue of its financial framework to obtain the consent of the Secretary of State before entering into any commitment or publishing any strategy that requires additional resources beyond those which have been allocated to it.

  The Regulator should also be mindful that by virtue of its financial framework and of section 207(4) of the Transport Act 2000, the SRA is required to secure value for money from its expenditure. The financial framework also includes detailed provisions relating to the SRA's finances which the Regulator should have regard to in his exercising of his functions. The SRA is required to adhere to the terms on which standby credit facilities may be called upon by Network Rail and to undertake detailed monitoring to ensure continued compliance.

  The Rail Regulator should take care to ensure that he does not cause the SRA as a result of the costs passed through from operators or otherwise to:

    (i)  incur additional expenditure beyond its allocated budget;

    (ii)  incur expenditure which does not secure value for money; or

    (iii)  incur expenditure which impairs its ability to maximise net benefits from the funds available to it.

  If, in recognition of his statutory duties, the Rail Regulator considers that it is necessary to exercise his functions in a particular way which he believes might result in any of those eventualities, he should first discuss this with the SRA and allow it to make representations on the matter. In doing so, he should also allow the SRA the opportunity to consider whether it would wish to amend its strategies or seek consent from the Secretary of State for additional expenditure.

  It is particularly important that the Rail Regulator should be mindful of SRA strategies and financial position in the context of any review of access charges under Schedule 4A of the 1993 Act. The Directions and Guidance require the SRA to consider at the start of any access charge review whether the elements of its overall strategy that address the resources available and the basis for the prioritisation of the use of those resources are fully up to date and, if not, inform the Regulator of any changes that it considers are necessary. The Rail Regulator should have particular regard to the relevant section of the overall strategy or, if relevant, to the changes notified to him by the SRA in carrying out his review.

  Furthermore, if, in recognition of his statutory duties (eg his duty under section 4(5)(b) of the 1993 Act to act in a manner which he considers will not render it unduly difficult for persons who are holders of network licences to finance any activities or proposed activities of theirs in relation to which he has functions by virtue of Part I of the Act), the Rail Regulator is aware that the conclusions of the review might cause the SRA to incur (regardless of any potential savings elsewhere in the Authority's budget) expenditure which is not provided for in its strategy, expenditure beyond the resources allocated to it, or expenditure which either does not secure value for money or risks impairing its ability to maximise net benefits from available resources, he should inform the SRA of this and allow it to make representations on the matter in advance of the publication of those conclusions. The Rail Regulator should then consider in the light of those representations whether changes are needed to his conclusions prior to their publication. In doing so, he should also allow the SRA the opportunity to consider whether it would wish to amend its strategies or seek consent from the Secretary of State for additional expenditure.

  In order to facilitate discussions with the SRA in relation to all of the financial matters set out above (and access charge review related matters generally) the Rail Regulator should seek to agree with the SRA a framework for assessing the impact of his decisions on the value for money and net benefits generated from SRA funds.

  The Rail Regulator should also bear in mind that railway assets, especially rolling stock and infrastructure, typically take time to deliver and have a life span measured in decades. Equally, the strategic development of the railway will be affected by demographic, social and other changes taking place over the longer term. The Rail Regulator should always have regard to these long term factors.

September 2002

Annex A


  1.  The Regulator has a duty to exercise the functions assigned or transferred to him by the Railways Act 1993 in the manner which he considers best calculated:

    (a)  to facilitate the furtherance by the SRA of any strategies which it has formulated with respect to its purposes;

    (b)  to protect the interests of users of railway services;

    (c)  to promote the use of the railway network in Great Britain for the carriage of passengers and goods, and the development of that railway network, to the greatest extent that he considers economically practicable;

    (d)  to contribute to the development of an integrated system of transport of passengers and goods;

    (e)  to contribute to the achievement of sustainable development;

    (f)  to promote efficiency and economy on the part of persons providing railway services;

    (g)  to promote competition in the provision of railway services for the benefit of users of railway services;

    (h)  to promote measures designed to facilitate the making by passengers of journeys which involve use of the services of more than one passenger service operator;

    (i)  to impose on operators of railway services the minimum restrictions which are consistent with the performance of his relevant functions; and

    (j)  to enable persons providing railway services to plan the future of their businesses with a reasonable degree of assurance.

  2.  The Regulator's statutory duties also include obligations to:

    (a)  take into account safety considerations, in particular, any advice given to him in that behalf by the Health and Safety Executive;

    (b)  have regard to the effect on the environment of activities connected with the provision of railway services;

    (c)  to have regard to any general guidance given to him by the Secretary of State about railway services or other matters relating to railways;

    (d)  to act in a manner which he considers will not render it unduly difficult for holders of network licences (of which the principal one is Network Rail) to finance their relevant activities;

    (e)  to have regard to the financial position of the SRA in discharging its functions;

    (f)  to have regard to the ability of the Mayor of London, London Regional Transport and Transport for London to carry out their relevant functions; and

    (g)  relevant functions.

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