Select Committee on Transport Written Evidence


Further memorandum by the Office of the Rail Regulator (FOR 99B)

FUTURE OF THE RAILWAYS

  1.  I should like to propose that I be recalled to give oral evidence to the Committee in relation to my decision in the access charges review, announced on 12 December 2003.

  2.  I believe the Committee may find it useful to question me on the essentials of the decision which I have made, given its determinative effect in relation to the future size, quality and cost of the national network, and the magnitude of the amounts of public money involved.

  3.  I enclose a copy of my final conclusions and of the public statements which I made on 12 and 23 December 2003.[11] You will see that the latter dealt in particular with the West Coast route modernisation, a matter in which I know the Committee has shown an especial interest. As you will see from my 23 December 2003 statement, I have now signed the legal instrument which begins implementation of my decision.

  4.  I also enclose copies of the statement to Parliament made by the Secretary of State[12] and of a letter dated 16 December 2003 from the Permanent Secretary at the Department for Transport in relation to the jurisdiction of the Regulator in an access charges review. You will appreciate that this material supports the evidence which I gave to the Committee on 29 October 2003 in relation to the position of the SRA—and therefore the Government—in meeting by way of indemnity the higher access charges established in an access charges review by the Rail Regulator, without limit in amount and lasting for the life of the relevant franchise contracts. It contradicts other evidence which the Committee received in this respect.

  5.  I am available to give evidence to the Committee at any time except in the week commencing 12 January 2004.

Tom Winsor

Rail Regulator

9 January 2004

Annex A

Letter from the Permanent Secretary, Department for Transport to Tom Winsor, Rail Regulator

  1.  This letter is being provided in the context of the Rail Regulator's final conclusions in the access charges review under Schedule 4A of the Railways Act 1993 which he announced in September 2002 and completed on 12 December 2003. It confirms the Government's position on the importance of independent economic regulation for the rail network and also the requirement for the SRA to meet its contractual obligations of indemnity in respect of increases in Network Rail's income as a result of this and future access charges reviews.

  2.  A principal function of the Rail Regulator is the regulation of Network Rail's stewardship of the national rail network, using the various powers conferred upon him. The jurisdiction of the Rail Regulator covers the carrying out of access charges reviews under the provisions of passenger track access agreements; the issue, modification and enforcement (other than for consumer protection provisions) of operating licences for networks, trains, stations and certain maintenance facilities; the determination of the allocation of capacity of railway facilities (other than exempt facilities), including the direction of compulsory third-party access; supervision of the development of industry-wide codes; and the determination of certain classes of appeal under track access agreements. The Rail Regulator is also a competition authority for the railway industry.

  3.  The jurisdiction of the SRA is separate from that of the Rail Regulator. It neither overlaps nor competes with that of the Rail Regulator. The two authorities have common statutory purposes. They have separate and complementary jurisdictions. Apart from the accountability of its Board to its members, Network Rail's principal accountabilities are to its train operator customers under access contracts and the network code, and to the Rail Regulator under statute and the company's network and station licences. The SRA monitors and enforces the consumer protection conditions of Network Rail's licences. The Rail Regulator is independent of Government, whereas the SRA is a non-departmental public body.

  4.  In June 2002, the Secretary of State set out the key overarching principles for the regulatory framework for the railways. In his statement to Parliament the Secretary of State said that independent economic regulation was one such overarching principle for which there was an "essential continuing requirement". Independent regulation is important for private sector confidence in the industry. Confirmation that this remains the Government's position is provided in a statement made to Parliament on 15 December 2003.

  5.  In July 2004. by virtue of the Railways and Transport Safety Act 2003, the powers and duties of the Rail Regulator will transfer to a regulatory board, in line with reforms to the regulatory authorities in the fields of energy, water, broadcasting and telecommunications and competition. The checks and balances in decision-making by a suitably structured board should reinforce the independence of regulation. The powers and duties of the Rail Regulator are not being changed in any way by the transfer to a regulatory board, which will remain independent of Government. The Government recognises the need for integrity and consistency in regulatory decisions. The Board's exercise of its powers in the light of any existing policy statement by the Rail Regulator will be exactly the same as would be the case if this were merely a change in the statutory office-holder. The new Regulatory Board would need to consult before changing existing policies or formulating new ones.

  6.  Under the Railways Act 1993 and the licences issued and contracts approved by virtue of that Act, it is the role of the Rail Regulator alone to determine and establish the income requirement of Network Rail, and to set access charges accordingly. That decision, together with enhancements specified and funded by the SRA, determines the size, quality and cost of the network because it establishes how much income Network Rail will have to operate, maintain and renew the infrastructure. In particular, it sets the outputs which Network Rail is required to deliver for the income it receives, including its performance obligations and the appropriate targets for the capacity, condition and capability of the network. In making these judgements, the Rail Regulator must establish the reasonable requirements of Network Rail's train operator customers (having regard to the contracts between them and Network Rail) and those of its funders, and his statutory duties under the Railways Act 1993 and other relevant legislation.

  7.  In an access charges review the Rail Regulator determines Network Rail's total income requirement and how it is to be met, including the profile of charges and other income over time. Historically the company's principal source of income has been in the form of access charges paid by train operators. If the Strategic Rail Authority wishes to pay to Network Rail network grants under section 211 of the Transport Act 2000, the Rail Regulator may net off the amount of the grants from access charges. This is a mailer for the Rail Regulator's discretion, subject to his various public law duties, including his duty to have regard to the SRA's budget.

  8.  The Government's fiscal rules prohibit Government borrowing for current expenditure over the economic cycle. The distinction between current spend and capital (for which sustainable borrowing is allowed) is determined by the Office of National Statistics using international standards (ESA 95) set and monitored by Eurostat. In order to reflect accurately the nature of Government support for capital expenditure by Network Rail, Network Rail will receive an appropriate portion of its income entitlement through grants rather than access charges. As far as Network Rail is concerned, income from grant or access charges income is indistinguishable. This is because these grants are unconditional obligations of the SRA to pay money to Network Rail; the company's right to receive them is not hedged by additional obligations owed separately to the Strategic Rail Authority. The total income requirement determined by the Rail Regulator is therefore unaffected by the split between grants and access charges.

  9.  The Secretary of State attaches considerable importance to the independence of Network Rail, as a private sector company limited by guarantee, which is accountable to its members and subject to independent economic regulation. He views as essential the commercial relationship between Network Rail and its customers, who are the operators of freight and passenger services. The fact that income is received in the form of grant will not affect in any way the independence of Network Rail or disturb the company's contractual and commercial relationships. The payment of grant does not create any obligation on the part of Network Rail to the Strategic Rail Authority or any right on the part of the SRA to seek to direct or influence Network Rail.

  10.  Para 3 above summarises the separate, but complementary jurisdictions of the Office of the Rail Regulator and Strategic Rail Authority. The Secretary of State endorses the concordat which the Office of the Rail Regulator and Strategic Rail Authority entered into on 25 February 2002. He believes that it is important that the boundary lines between the roles and duties of the two bodies should be understood and respected, and that there is good communication and effective consultation between them.

  11.  Clause 18 of each passenger franchise agreement between the SRA and a train operator contains an obligation on the SRA to fund in full increases in access charges established by the Rail Regulator in the current access charges review and all future access charges reviews. This is done on a "no net loss no net gain" basis. It means that the franchised passenger train operators are indemnified against increases determined by the Rail Regulator. These indemnities are not limited in amount and last for the life of the franchise agreement. The SRA's obligation to pay grants to Network Rail is constituted by deed. A provision in track access agreements ensures that any reduction in grants will be fully compensated by an automatic increase in access charges.

  12.  On 3 March 2003 I sent a letter of comfort to the SRA setting out the status of the SRA, the Department's role in funding the SRA and the implications of this for the SRA's ability to meet its financial obligations. This letter confirmed that the Secretary of State would act in a timely manner, seeking the approval of Parliament as appropriate, to ensure adequate funds were made available to SRA to meet any financial obligation correctly entered into above its agreed budget. It also confirmed that the Secretary of State would act to ensure the SRA, or any body to which the SRA's liabilities were properly transferred, would be in a position to meet its liabilities on time and in full. Letters of comfort cannot and must not fetter the Secretary of State's discretion, but the letter to the SRA is a correct representation of the Secretary of State's current intentions in these matters. A copy is attached to this letter.

David Rowlands

16 December 2003

Annex B

Letter to Mr Richard Bowker, the Strategic Rail Authority from the Department for Transport

STRATEGIC RAIL AUTHORITY

  1.  The Secretary of State is aware that the Strategic Rail Authority is seeking a public credit rating and has sought an explanatory letter from the Department for use in that context.

  2.  I am therefore writing to set out the status of the SRA, the Secretary of State's role in SRA's funding and the implications for SRA's ability to meet its financial obligations.

  3.  The SRA is a corporate body, incorporated under Part IV of the Transport Act 2000 (the "Act"). The purposes of the SRA are set out in section 205 of the Act. It has powers under section 211 of the Act to enter into agreements for the purposes of securing the provision, improvement or development by others of any railway services or railway assets or for any other purpose relating to any railway or railway assets. Such agreements may provide for the SRA (on such terms or conditions as it considers appropriate) to make grants or other payments or loans, to give guarantees or to invest in bodies corporate.

  4.  The SRA is classified for the purposes of government accounting practice as an executive Non-Departmental Public Body ("NDPB"). This means that it is a body which carries out public functions but is not a government department. Under section 201 (2) of the Act the SRA is not to be regarded as a servant or agent of the Crown and its property shall not be regarded as the property of or held on behalf of the Crown.

  5.  The SRA provides strategic direction for Britain's railways. It sets priorities for the successful operation and development of the railway. It works with other industry parties to secure continuing private investment in the railway, and to deploy public funding to best effect. On 14 January 2002 the SRA published its Strategic Plan, setting out the strategic priorities for Britain's railways over the next ten years having regard in particular to the Government's Ten Year Plan key targets of 50% growth in passenger kilometres, up to 80% growth in freight moved and a reduction in overcrowding in London area rail services. It has been required by the Secretary of State for Transport to publish a revised and updated version of the Strategic Plan in January each year. Accordingly, on 30 January 2003, the SRA published its second Strategic Plan. This reaffirms that the SRA's goals remain those set out above, together with an additional objective, set by the Secretary of State during 2002, that it should work with the rail industry to achieve substantial lasting improvements in punctuality and reliability of train services.

  6.  The Secretary of State's powers in relation to the financing of the SRA are set out in Part II of Schedule 14 to the Act.

  7.  The Secretary of State has:

    —    power under paragraph 7 of Schedule 14 to the Act to make to the SRA grants of such amounts, on such terms, as he may determine;

    —    power under paragraph 8 of Schedule 14 to the Act, to be exercised with the consent of HM Treasury, to lend to the SRA such sums in Sterling as the SRA may require for meeting its obligations and carrying out its functions;

    —    power under paragraph 10 of Schedule 14 to the Act, to be exercised with the consent of HM Treasury, to guarantee any sums which the SRA borrows temporarily from any person other than the Secretary of State; and

    —    in his opinion no power outside Schedule 14 to the Act to make grants or loans to the SRA or to guarantee the performance of the SRA's obligations.

  As indicated above the SRA may also borrow temporarily from persons other than the Secretary of State, subject to obtaining his consent, the approval of HM Treasury and its statutory borrowing limits. The SRA's borrowing limit is £3 billion or such greater sum as the Secretary of State may, with the approval of HM Treasury, specify by order made by statutory instrument. Any such order shall not be made unless a draft of the statutory instrument has been laid before, and approved by resolution of, the House of Commons.

  8.  The provision of any funds necessary to meet the financial obligations of the SRA would be made by way of grant under paragraph 7 of Schedule 14 to the Act or by permitting the SRA to borrow in accordance with paragraph 8 of that Schedule. This would be subject to Parliament's voting the necessary funds to the Secretary of State and the consent of the Treasury, as necessary. In this respect this letter was minuted to Parliament on 3 February 2003 and objections raised by Members within the 14 days of it being so minuted have been answered. A reference to financial obligations of the SRA in this letter is to its existing and/or future financial obligations.

  9.  The SRA agrees an annual budget with DfT (referred to later as the agreed budget). The agreed budget is financed from the SRA's own resources and grant paid by the Secretary of State to the SRA from resources allocated to DfT through the Parliamentary supply process which takes place at the beginning of each financial year. Accordingly within its agreed budget, resources are available to the SRA to meet its budgeted obligations on time and in full.

  10.  The agreed budget may be adjusted in year. If the provision of additional funds by the Secretary of State to the SRA becomes necessary (whether as a result of an adjustment or otherwise) to meet the financial obligations of the SRA, the Secretary of State would, when necessary, take the matter before Parliament and seek the necessary approvals to ensure the provision of such funds.

  11.  In the event that there was a call over and above the SRA's agreed budget, arising from financial obligations entered into by the SRA (either within the financial framework or with the agreement of the Secretary of State if outside it and provided that such obligations have not been incurred in contravention of a specific published direction of the Secretary of State under section 207(5)(b) of the Act not to incur such liabilities), the Secretary of State confirms that he would act in a timely manner, seeking the approval of Parliament, as appropriate, to ensure that adequate funds would be made available to meet such financial obligations on time and in full. The Secretary of State would also act to ensure that the SRA, or any body to which the SRA's liabilities are transferred in accordance with any legislation permitting such a transfer, is in a position to meet such liabilities on time and in full. In this context, the Secretary of State regards it as untenable that he would stand by and allow the SRA to default on its financial obligations.

  12.  You must take your own advice on the matters referred to in this letter. You will appreciate that as a matter of public law the Secretary of State cannot and must not fetter his discretion and this letter is not intended to do that. It does not create binding obligations and must not be relied upon as doing so. In particular, nothing in this letter should be construed as a guarantee by the Secretary of State of the obligations of the SRA, nor any undertaking as to the way in which the Secretary of State would exercise his discretionary powers in any particular case. However the letter can be relied upon as a correct representation of the Secretary of State's current intention as regards the matters referred to herein.

David Rowlands

Railways, Aviation, Logistics, Maritime and Security Group

3 March 2003




11   See www.rail-reg.gov.uk Back

12   See HC Deb 15 December 2003, col 121WS. Back


 
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