Themes and Trends in Regulatory Reform - Regulatory Reform Committee Contents


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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