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Lord Berkeley: My Lords, I support the amendment. Perhaps I may build a little on what the noble Lord, Lord Bradshaw, said. This is the kind of situation envisaged at page 95, line 12, when there is a serious disagreement between the Secretary of State and the Office of Rail Regulation over how much
 
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money is necessary to maintain the railway to the standard required by the Secretary of State but which he is not prepared to fund, for whatever reason.

It has always seemed wrong to me that—as the Bill provides—the decision to close, for example, the West Coast Main Line or the East Coast Main Line, or to impose a 30 mile per hour speed limit because the track is in such bad condition, should rest with the regulator. The regulator could probably come up with many other options. However, that is the kind of decision that would have to be made to save a lot of money.

I think that that should be a political decision for the Secretary of State. It is not for the regulator to say, "Let us put a 50 mile an hour speed limit on the West Coast Main Line but leave the East Coast Main Line as it is". Such a decision would affect so many of the electorate of this country in one way or another that it should be taken by a Minister. I know that such decisions will be taken only in extremis, but that is what this whole section of the Bill is rightly about. It would be much more appropriate for Ministers to take these decisions rather than leaving them to a regulator.

Lord Davies of Oldham: My Lords, I am grateful to both noble Lords who have contributed to the short debate on this amendment. I am sure they will agree that it envisages an extreme situation which would arise only after two requests for provision of a revised specification of outputs.

The chairman of the Office of Rail Regulation has made it clear to the Secretary of State that in the event that the office finds it necessary to request a revised specification it will do so publicly and transparently. Similarly, the Secretary of State confirmed this commitment to transparency in the access charges review process in his letter to the chairman of 28 February in respect of access charges reviews and freight.

If in the extreme situation that the Office of Rail Regulation is not provided at the third attempt with a specification which is reconcilable with the available resources, it would be appropriate for the industry's independent economic regulator to arrive at a final determination of what can be delivered for the purposes of its access charges review.

In my letter to Members of the Grand Committee following its first sitting, I set out my view that where the Office of Rail Regulation had to reach such a determination, the Secretary of State could not avoid accountability for the consequences. It is not conceivable that we could arrive at a situation of such extreme difficulty and irreconcilability—which both noble Lords have indicated is their concern—without the Secretary of State being accountable and challenged on how such circumstances had arisen.

The operators have repeatedly stressed throughout the rail review and the passage of the Bill the importance of the safeguards arising from independent economic regulation. Independent determination is absolutely necessary in the extreme situations envisaged by these provisions. The Office of Rail Regulation will arrive at its determination publicly and transparently and, in doing
 
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so, will be bound by its duties under Section 4 of the Railways Act 1993. These include the duties to enable providers of railways services to plan their businesses with a reasonable degree of assurance and to protect the interests of users of railway services in respect of the price and quality of facilities.

The amendment moved by the noble Lord, Lord Bradshaw, and supported by my noble friend Lord Berkeley would have the—I am sure unintended—consequence of undermining the protections for operators which are guaranteed by the independent economic regulation of the railway industry that is so prized by the operators. The independence of the assessment meets the cardinal point of the thinking behind the Bill. I hope that the noble Lord will recognise that, even in such an extreme circumstance—in fact, particularly in such an extreme circumstance—an independent judgment should be made.

Lord Bradshaw: My Lords, I thank the Minister for that reply. I shall read it carefully. I fully accept that the regulator will make his judgments independently, and I am quite satisfied about the integrity of the holder of that office. However, should he come to the conclusion that, because of a lack of funds—an issue to which the noble Lord, Lord Berkeley, referred—it is not possible to maintain a railway service of a reasonable standard or at all, the decision about what should be done should be made by the Minister as a result of the facts laid before him, not by an official before the facts have been laid before the Minister.

I shall study what the noble Lord, Lord Davies of Oldham, has said and return to the issue if the Bill receives a Third Reading. In the light of what he said, and to the extent that it appears acceptable, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Viscount Astor moved Amendment No. 3A:


"(2A) The Office of Rail Regulation shall not be entitled to make a determination under paragraph 1G(2) which is likely to lead to the services provided with the use or in respect of any railway facility being curtailed or discontinued (whether as to quality, time or in any other respect) unless the requirements of paragraph 1(G)(2B) have been complied with and the conditions in paragraph 1G(2C) have been satisfied.
(2B) The requirements are that the Office of Rail Regulation has consulted—
(a) the facility owner and the beneficiaries of all access contracts in respect of the railway facility in question; and
(b) the franchisee under every franchise agreement which contemplates the franchisee, or any person on its behalf, using the railway facility in question,
and has taken into consideration all representations and objections made to it by those persons in respect of the proposed determination.
(2C) The Office of Rail Regulation may not make a determination under paragraph 1G(2) unless it is satisfied that—
(a) the value of the rights of such facility owner and the beneficiaries under or in respect of that railway facility or those access contracts shall not be adversely affected by the proposed determination, or that adequate
 
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financial compensation shall be payable to them out of public financial resources in respect of any such adverse effect; and
(b) in the case of a franchise agreement, the agreement shall be amended so as to relieve the franchisee from the obligation to comply with its terms to the extent that, if the agreement were not amended, compliance would be impossible or more onerous by reason of the proposed determination.
(2D) If the Office of Rail Regulation fails to make a determination under paragraph 1G(2) by reason of one or both of the considerations specified in paragraph 1G(2C), the Secretary of State shall ensure that public financial resources shall be increased accordingly."

The noble Viscount said: My Lords, Amendment No. 3A is grouped with Amendments Nos. 5 and 6. At this stage, I shall not speak to Amendments Nos. 5 and 6 and I shall not move Amendment No. 5. However, if they so wish, the noble Lords, Lord Bradshaw and Lord Berkeley, can move that amendment when we come to it.

I thought long and hard about whether to cover this important issue with a number of small amendments or one large one. I eventually decided that it would be easier to bring forward one large amendment. I am afraid that I shall not be brief in summarising it because of the complexity of the issue, and I apologise in advance for that.

This is a serious issue which concerns the outcome of access charges reviews by the Office of Rail Regulation. Perhaps I may give your Lordships a little of the background. On 9 February 2004, the Secretary of State assured Parliament, the industry, the public and the investment community about a number of matters in the rail review. I am sorry to say that the Bill breaks those assurances.

The noble Lord, Lord Davies, has been most helpful during the passage of the Bill and in correspondence. However, I regret to inform your Lordships that in the Minister's defence of the provisions of the Bill, in the statements that he has made to the House, and indeed in the letters that he has kindly provided to your Lordships, he has not satisfied noble Lords on this side of the House on this issue.

I remind your Lordships of what the Secretary of State said in a Written Answer to a Parliamentary Question on 9 February 2004:

I contend that the Bill does not, unfortunately, respect those principles.

5 p.m.

Under Schedule 4, the Secretary of State is to give notice to the Office of Rail Regulation of what he wants the industry to achieve and the funding that he will make available over a review period. It is,
 
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therefore, the Secretary of State who sets the outputs; we are told that it will be called the high level output statement. The Bill says that the information will cover the types and numbers of trains, the frequency of passenger services, journey times, reliability, overcrowding, the levels and types of fares, the quality of information provided to passengers, major projects and so on.

That is fine as far as the franchising outputs are concerned, but with regard to the work that Network Rail is to do—the network outputs—it is a change to the current situation. Until now, the ORR, not the Secretary of State, has set the network outputs, having been informed of the franchising and other strategies of the Strategic Rail Authority. The Bill changes that. It is a change to the rights and protections of third parties to have network outputs set by the ORR and not the Government. That is a diminution of their protection, something that the Secretary of State promised would not happen. I will try and explain why.

Freight and passenger operators are clear that, by taking from the ORR the role of setting network outputs, the Government are increasing the risks for those operators. They lose the stabilising role of the independent regulator, intervening to ensure that network outputs are protected and that the decisions are taken on a proper basis. What are the risks? Quite simply, the Government—that is, the Treasury, with its perpetual hostility to the railway industry—could, through this new power, require the industry to cut back on maintenance and renewal, so putting the network into a slow decline to save money for short-term reasons.

Under the Bill, the Secretary of State does not have the public interest duties of the ORR to promote efficiency and economy and the development and use of the railway system. The ORR does not work according to short-term or political criteria. In setting network outputs under the Bill, the Secretary of State does not have to take into account the medium- and long-term view of the interests and the health of the industry. The Secretary of State is, in effect, entirely in the hands of the Treasury.

The Treasury will probably do what it consistently did throughout the 50 years of the industry's nationalisation—slowly and inexorably starve it of funds. That is what the Bill allows. It puts in place a very effective mechanism by which the Government will remove the protection that the independent regulator provides against politically inspired cash starvation of the industry.

I have put down the amendment to rein back the worst excesses of Schedule 4 and restore the protections that the private sector investors in the railway industry need, while, importantly, maintaining the right of the Government to make public expenditure decisions that are consistent with the rights of private operators.

In many respects, my amendment would give substance to the assurances given in correspondence during the passage of the Bill through Committee. But
 
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assurances are one thing and legislation another. If there is to be a protection, the best place for it is in the Bill.

My proposed paragraph 1G(3) of Schedule 4 deals with the situation in which the Office of Rail Regulation faces a cash squeeze between the high level output specification that the Minister has said he wants under paragraph 1D and the public financial resources the Treasury has told him he has to use to buy those outputs. The two do not match, and one of them has to give way.

As Schedule 4 stands, it is always the outputs which have to give way. It can never be that the public financial resources have to be increased. Of course, the Minister will say that the Secretary of State can get more money from the Treasury. That is undoubtedly true, but what happens if he does not and the ORR has to decide where the cuts will fall? They could fall anywhere. What protections are there then for the freight and passenger operators? The answer is that there are none in the Bill.

We are told that the ORR would have to make sure that as far as possible, existing contractual rights would be honoured. That is not enough: the railway network code, which is part of those access contracts, contains provisions that allow the network outputs—the capacity or condition of the network—to be reduced without the contracts being broken. The contracts may well be intact but the freight and passenger operators would still face those reductions. So, the operators need better protection.

Under the franchise agreements, the franchisees have to deliver certain specified levels of services to their passengers. In doing so, they are dependent on the capacity and condition of the network, which enables them to produce their service. What happens if the network is deteriorating because the Government have embarked on a policy of cutbacks and if speed restrictions, for example, are higher than they would otherwise be or capacity has been reduced because the network's condition is getting worse? In such a situation, the franchisee is squeezed. Nothing in his franchise agreement allows him to turn to the department, as the successor to the Strategic Rail Authority, and say, "You can't penalise me for poor performance, which is in my contract, if the network is declining because the Treasury has decreed that it should. I need relief in this case, otherwise I am in the impossible situation of being committed to deliver high standards under my existing franchise agreement but being unable to do so because you are cutting back on Network Rail's funding". For those reasons, my amendment would provide freight and passenger operators with the necessary protections.

Paragraph (3) of the amendment says that the ORR cannot make a decision under paragraph 1G(2) to cut back on the network outputs unless it satisfies the requirements of paragraphs (4) and (5). Paragraph (4) provides that, before the Office of Rail Regulation can decide on network cutbacks under paragraph 1G(2), it must consult the affected operators. That must be right. They are decisions of considerable importance to the operators who use the network.
 
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Paragraph (5) says that having done that, the ORR may not make a cutback determination under paragraph 1G(2) unless two conditions have been met. The first concerns access contracts. The value of the rights of the operators must be maintained, or they have to receive adequate financial compensation out of public funds. So the Government can still cut the railway, but they must compensate operators if they sustain a loss as a result. That loss would be measured by the value of their existing contracts.

The second condition in paragraph (5) concerns franchisees. If there are to be network cutbacks, the franchisees must have amendments to their franchise agreements that relieve them of the obligation to meet impossible or more onerous targets or standards of performance as a result of the ORR's Treasury-inspired network cutbacks decision.

These protections should be uncontroversial. They require the Government to honour the assurances that the Secretary of State gave at the beginning of the rail review in 2004. They do what we are told in correspondence from the Minister ought to happen anyway, but they provide the protection in legislation.

The final paragraph of my amendment, paragraph (6), is important, providing the protection that the operators need. It follows from the previous two. It provides that if the ORR has been prevented from making a network cutback determination under paragraph 1G(2) because one of the conditions in proposed paragraph (5) has not been met—either access contract rights are being unjustifiably diminished in value or franchisees are not getting the relief they need—then, if the outputs cannot be turned down, the amount of public money to pay for them must be turned up. They have to be paid for, and in these limited but significant circumstances the Treasury will have to swallow the fact that the Government cannot ride roughshod over people's legitimate and valuable rights without having to pay for that. That fact must follow if the Government are to honour the assurances that they gave last year and if private sector operators in the railway industry are not to be exposed to unjustifiable interference in their rights.

My amendment would give the Government the flexibility that they say they need in controlling public expenditure—an important point—but also balances that need in cases where private rights are threatened or may be trampled on. I beg to move.

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