Select Committee on Transport Written Evidence


Supplementary memorandum by the Office of the Rail Regulator (FOR 99A)

LEADERSHIP AND REGULATION IN THE RAIL INDUSTRY

  1.  Thank you for your letter of 3 July 2003 requesting information further to the oral evidence given to the Committee on 25 June 2003.

  2.  I enclose a note on each of the following points:

    (a)  the impact and cost of European legislation being applied to the railway in the United Kingdom, in particular, the infrastructure directives known as the "First Infrastructure Package" (Annex A);

    (b)  how the railway in the United Kingdom compares in terms of cost and performance with that of other countries (Annex B); and

    (c)  the relationship between Network Rail's asset register and the regulated asset base of the company, and the effect the quality of the asset register has on the process of reaching conclusions in the current access charges review (Annex C).

  3.  Please do not hesitate to contact me if I can be of further assistance to the Committee.

Tom Winsor

Rail Regulator

Annex A

THE IMPACT AND COST OF EUROPEAN LEGISLATION

THE EFFECT OF EUROPE ON RAIL

  1.  European law now covers many of the areas which fall within the remit of ORR, including rail regulation, capacity allocation, charging, train operator licensing, and standards setting. This means that many of the Regulator's activities—and those of others in the industry—are governed by European law, which takes precedence over UK law. While the existing position in Great Britain is largely consistent with the European framework, any new policy or institutional changes must be consistent with European law. The impact is discussed in detail below. This note does not cover Northern Ireland or the Channel Tunnel, which have separate arrangements for which ORR has no current responsibility.

RAIL REGULATION, CAPACITY ALLOCATION, CHARGING, TRAIN OPERATOR LICENSING

The International Rail Regulator

  2.  Directives 91/440/EEC, 95/18/EC, and 95/19/EC established requirements across the EU for "international services". These are defined as international combined transport freight services and services provided by international groupings. There is open access for these services and those operating them must have a train operator licence. There must be an appeal body for capacity allocation and charging.

  3.  The Government established a separate regulator—the International Rail Regulator (IRR)—to issue licences and to serve as the appeal body. The IRR is a separate legal entity from the Rail Regulator. The current IRR is Tom Winsor and he borrows staff from the Office of the Rail Regulator to support him in the exercise of his functions.

  4.  There has not been a great call on the IRR since the current international regime was introduced in 1998. He has issued two international licences—to Eurostar (U.K.) Limited and to English Welsh and Scottish International Limited—and has been notified of access agreements for both of these companies. He has determined one appeal—on the length of access rights for the Eurostar "ski train". The cost of exercising IRR functions is borne by the two international licence holders. The cost of IRR activities in the financial year ending 31 March 2003 was £57,800. The future of the IRR is being considered by the Department for Transport in the light of the removal in the first infrastructure package of the distinction between provisions for international services and those for domestic services.

The first Infrastructure Package

  5.  The first Infrastructure Package[10], adopted in 2001, significantly expands the scope of European legislation for the railways and therefore the effect on the work of ORR. Most significantly, there are detailed requirements on capacity allocation, charging and licensing for services on the main domestic networks—not just for international services. Open access in the EU is extended to a greater range of international freight services and includes access to ports and terminals. Open access is likely to be extended to domestic freight services if, as expected, the second infrastructure package is adopted later this year.

  6.  A key feature of the Infrastructure Package is the requirement for each Member State to have a regulatory body. The regulatory body acts as an appeal body, and monitors the development of the rail market. The regulatory bodies are expected to communicate with each other and exchange ideas. The requirement for a regulatory body applies to the whole network in Great Britain, including the Channel Tunnel Rail Link, but with some minor permissible exclusions.

  7.  The Department for Transport is considering what changes are necessary to give effect to the first Infrastructure Package. ORR is working with the Department, HSE, SRA, the European Commission and the rail industry to implement the Infrastructure Package effectively.

  8.  ORR already satisfies the requirements of the Infrastructure Package in most respects and there are unlikely to be significant cost implications for ORR. The scope of ORR's powers may be broadened—by looking at developments in the market or in dealing in disputes over access to facilities not covered by the Railways Act 1993. ORR considers that access to these facilities may help the development of the rail freight market.

  9.  There may be some costs for Network Rail and Union Railways (the operator of the Channel Tunnel Rail Link) as they will have to produce a network statement describing the infrastructure and the conditions for access to it, an analysis of the reasons for congestion on parts of the infrastructure and a cost benefit analysis of options to increase capacity. There is however no obligation on Network Rail or Union Railways to commit funds to increase capacity. Network Rail has also had to make the necessary administrative arrangements to comply with a requirement for a common European timetable change date of mid-December each year. The first December change in Great Britain will be in December 2004.

STANDARDS

  10.  Following the adoption of the two interoperability Directives (96/48/EC and 2001/16/EC), European standards are now being developed for both high speed and conventional rail infrastructure and rolling stock. Where these apply, they will take precedence over national standards—Railway Group Standards and company or line standards. All existing national standards which fall within the scope of interoperability must be notified to the European Commission and any changes to existing standards must not impede interoperability.

  11.  For ORR, this means that in approving amendments to the code by which the industry (through the Rail Safety and Standards Board) operates, it must ensure that the standards process reflects the requirements in European law. In considering appeals under the code, ORR will also have to take into account the move towards interoperability in Europe.

  12.  For the rail industry, there are implications for investment decisions. Interoperability may increase the cost of renewing and upgrading infrastructure in the short term because of the nature of the European standard or because of the knock-on effect of upgrading rolling stock or individual aspects of the infrastructure. The industry is, however, actively involved in the development of European standards, and it is also possible to seek derogations or exclusions for specific schemes. In the longer term, interoperability may bring savings through common standards and processes and increased competition in the supply market. ORR participates in the Standards Strategy Group, an industry wide group chaired by the SRA, which looks at the implications of the standards process and the priorities for Great Britain.

  13.  There may also be some costs for the rail industry in complying with administrative arrangements associated with interoperability. These include documenting the technical specification of the network.

ORR PARTICIPATION IN DISCUSSIONS AT EUROPEAN LEVEL

  14.  In view of the increased scope of European law and its effect on the railway in Great Britain, ORR participates constructively in discussions with the Department for Transport, SRA, HSE, European Commission, other Member States and the industry. It has played a leading role in discussions with the Commission and other Member States on regulation, licensing, capacity allocation and access charging. The EU Competition Regulation (1/03) will also give ORR concurrent powers to deal with competition cases affecting trade within the EU. ORR will participate in the network of competition authorities being established by the European Commission to discuss case handling.

Annex B

INTERNATIONAL BENCHMARKING

  1.  As part of the current interim review of Network Rail's track access charges, the Regulator has undertaken a number of studies into unit costs and efficiency in conjunction with various consultancies. In total, the Regulator has undertaken the following four separate studies:

    (a)  regional benchmarking;

    (b)  analysis of Network Rail's procurement strategy;

    (c)  international benchmarking; and

    (d)  process benchmarking.

PURPOSE OF INTERNATIONAL BENCHMARKING

  2.  In carrying out international benchmarking, the Regulator aims to determine whether there is any scope for Network Rail to reduce its costs by adopting best practice from overseas. This is done by comparing the manner in which Network Rail maintains and renews its network with equivalent processes in railways in other countries. This kind of analysis can be helpful in assessing the extent to which alternative engineering strategies and/or alternative methods of undertaking specific work would improve efficiency and hence reduce costs.

METHODOLOGY ADOPTED

  3.  The Regulator appointed L.E.K. Consulting, Halcrow Group Ltd and Transportation Technology Centre Inc (TTCI) jointly to undertake the work on international benchmarking. The consultants were directed to concentrate on identifying international best practice in the following three main areas:

    (a)  policy—the criteria for renewals, track standards and output performance levels;

    (b)  process—for example, management practices such as planning, possessions, inspections and follow-up work; and

    (c)  working practices and methods—for example, relative levels of mechanisation.

  4.  Following an initial approach to twelve European, Australian and North American rail companies, four were chosen as a result of their ability to participate within the required timescale. These were RFF (infrastructure manager, France), RENFE (infrastructure manager, Spain), DB Netz (infrastructure manager, Germany) and BNSF (infrastructure manager, North America). Table 1 below sets out the practices that were benchmarked.

Table 1:

PRACTICES EXAMINED IN THE INTERNATIONAL BENCHMARKING STUDY

PracticesComparator
Optimisation of track specification for high costs and availability routes using slab track, asphalt track, wide sleeper track and high quality formation Germany
New practices in support of optimised intervention for planning and undertaking track maintenance and renewals Spain
Trend analysis of component behaviour accurately to predict degradation rates, performance and asset life US
Use of long term decision support tools for whole life cost analysis France
Investment in new track plant: ballast distribution US
Investment in new track plant: advanced tampers, ballast regulators and ballast distribution plant US
Use of extended track access possession windows through the "blitz" or "blockade" approach US
Use of flexible outsourcing practices for maintenance and renewals Spain

  5.  In order to assess any potential savings that Network Rail could make, the consultants adopted a three-step approach as follows. First, they identified and defined the practice adopted in the relevant country. Secondly, they identified the comparable practices within Network Rail and identified the costs and perceived benefits associated. Finally, they assessed how Network Rail could adopt the identified practices.

THE REGULATOR'S CONCLUSIONS

  6.  On the whole, the international benchmarking exercise has turned out to be the least successful of the four studies outlined above in terms of identifying efficiency savings within Network Rail. In most areas, the consultants were able to find obvious differences in specific practices adopted overseas, but it was less clear that adoption of these practices would lead to cost savings in the short or medium term.

  7.  Overall, the net saving was predicted to be less than 1% per annum in relation to each of the practices in Table 1 above (compared with savings in the region of 20% identified by the other studies). It was also recognised that these small savings would only be achievable if Network Rail vastly improved its asset condition knowledge, the practices proposed met all industry acceptances and contractors could be encouraged to invest in new technologies.

  8.  The only significant exception to this conclusion was the way in which US railways take possession of the track when undertaking maintenance and renewals. It was found that closing long sections of track to undertake remedial work could reduce costs. Network Rail, the SRA and the Regulator are investigating this further.

  9.  This is, however, a potential area for future review. We consider it will help the industry as a whole to exchange best practice with international counterparts.

Annex C

THE RELATIONSHIP BETWEEN THE ASSET REGISTER AND THE REGULATED ASSET BASE (RAB)

  1.  The asset register is a collection of linked databases containing factual information on Network Rail's physical assets, such as the track, signalling equipment and stations. The company is required to establish and maintain the asset register under Condition 24 of the company's network licence. The information it contains about asset condition is used by the company as it assesses the need for future maintenance and renewal activities.

  2.  The regulatory asset base (RAB) is the Regulator's valuation of these assets. The Regulator is currently determining the value of the RAB as part of his interim review of access charges. His third interim review consultation paper stated that his current view is that the RAB as at 1 April 2004 would be approximately £16.5 billion. Other things being equal, the higher the RAB the more money Network Rail can borrow from the capital markets.



10   Directives 2001/12/EC (amending 91/440/EEC), 2001/13/EC (amending 95/18/EC), and 2001/14/EC (replacing 95/19/EC). Back


 
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