Memorandum submitted by Network Rail
REGULATORY REFORM COMMITTEE INQUIRY INTO
THEMES AND TRENDS IN REGULATORY REFORM
GENERAL INTRODUCTION
1. Network Rail welcomes the announcement
of an inquiry into Themes and Trends in Regulatory Reform and
the invitation to provide a written submission. We regret that
this submission has been provided after your deadline and we hope
that this will still be of use to your committee.
2. Network Rail runs, maintains and develops
Britain's tracks, signalling system, rail bridges, tunnels, level
crossings, viaducts and 18 key stations. Our Mission is to
provide a safe, reliable and efficient railway fit for the 21st
century. In addition to being subject to general business regulations,
Network Rail is also subject to sectoral regulation by the Office
of Rail Regulation (ORR), which is the independent safety and
economic regulator for Britain's railways.
3. The rationale for economic regulation
of the rail sector is threefold: (1) to avoid the potential for
monopoly abuses; (2) to govern competition ex-post; and (3) to
impose obligations on service and delivery. Such regulation minimises
the need for government intervention.
4. Our key points which we outline below
include the continuation of the principles of good regulation;
opportunities to improve ex-ante and ex-post the evaluation of
regulatory controls; the need to encourage greater co-regulation
and the alignment of industry incentives.
MAINTAIN PRINCIPLES
OF GOOD
REGULATION
5. We have benefited from independent sectoral
regulation based on the principles of good regulation as developed
by the Better Regulation Taskforce. We believe that it is important
that those principles should continue to apply during times of
economic turbulence. Any knee-jerk reaction that would lead to
a move away from these principles could create risks for Network
Rail and lead to increased financing costs.
BALANCE BETWEEN
SECTORAL REGULATION
AND INDEPENDENT
REGULATION
6. Network Rail believes that there is a
clear need for sectoral regulators in industries such as ours,
where the regulator brings a more detailed practical knowledge
of the issues and processes they are regulating. ORR's independence
serves to give stability to Britain's railway industry, facilitates
longer-term business planning, and with it brings greater economic
efficiencies.
NEED TO
IMPROVE EX-ANTE
AND EX-POST
SECTORAL ECONOMIC
REGULATION
7. We are generally satisfied that the regulatory
regime works well and has delivered real benefits to the industry.
However, we have some concerns about how regulatory policy is
translated into practice.
8. We believe that it is important that
ORR justifies the rationale for its decisions in more detail.
An understanding of the reasoning behind its decisions would enable
the industry to better regulate itself, minimising the need for
intervention. Regulatory Impact Assessments (RIAs) and cost-benefit
analysis should be part of the standard toolkit used by ORR when
considering changes to regulatory controls. Currently these tools
are used to a very limited extent.
9. In particular, we also consider it important
that there should be retrospective assessment of regulatory controls,
by ORR, to assess their effectiveness. This would enable the ORR
to design optimal regulatory controls.
10. In October 2008 ORR published its
determination of Network Rail's income and outputs for the five
year period from 1 April 2009. The determination placed particular
emphasis on the delivery of outputs rather than inputs. This was
an approach which we welcomed. If ORR were to focus on the monitoring
of inputs, this would restrict our ability to manage the delivery
of the outputs in an optimal way. Although ORR has clarified that
we are free to manage our business efficiently provided we deliver
the outputs, it is important that this principle is applied in
a consistent manner. Just as we recognise the need for change
within Network Rail, a genuine focus on outputs would require
real changes in the approach of some sectoral regulators.
THE DESIGN
OF NEW
REGULATIONS
11. In the design of regulatory controls,
ORR should consider on a case-by-case basis whether a co-regulation
approach to regulation would be more appropriate. We believe that
the regulatory framework should encourage the industry to work
together. To that end, ORR should not be reluctant to "roll
back" regulation where the industry has demonstrated a degree
of self-regulation or regulation is ineffective.
HOW GOVERNMENT
SHOULD REGULATE
IN A
PROPORTIONATE AND
EFFECTIVE MANNER
12. Although Network Rail is independently
regulated, the franchised operating companies (TOCs), who are
our customers, are effectively regulated in most respects by the
Department for Transport and Transport Scotland. When designing
regulatory controls for the TOCs, it is important to consider
the synergies between Network Rail and the operating companies.
In particular it is desirable that incentives are aligned throughout
the industry to make them as effective as possible and avoid any
perverse behaviour. We believe that any regulatory controls contained
in the franchise agreements, in so far as possible, should encourage
collaboration between Network Rail and the operating companies,
avoiding adversarial behaviour. We also believe that there is
merit in considering whether more of the regulation of operators
could be carried out by ORR to help achieve a more joined-up approach.
This would build upon the integration of safety and economic regulation
and, more generally, we believe that a single sectoral regulator
for all parts of an industry is likely to be preferable in most
cases.
AVOIDING REGULATORY
OVERLAP
13. We believe that the work of the National
Audit Office (NAO) is important in making sure that the sectoral
regulators offer value for money. Nevertheless, it is important
to avoid any overlaps between the work of the NAO and the ORR,
so as to minimise the regulatory burden. For example in 2008 NAO
evaluated train performance, which was an area already monitored
by ORR.
14. We trust that the above submission will
prove of value to the committee in its deliberations. We will
be happy to support any further enquiries you may have through
written or verbal evidence.
March 2009
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