The noble Lord asked me to explain why the Government want to retain a regulatory role that has worked well. The answer is that we believe that keeping the current structure will secure a higher sale price by enhancing the commercial stability of High Speed 1. We did not come to this decision lightly, and we will consider which parts of the Secretary of State’s current and future duties can be undertaken by the Office of Rail Regulation as soon as the sale of High Speed 1 is under way next year. Coming to a definitive view on what those duties might be, and
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The noble Lord, Lord Berkeley, raised the operation of the CTRL. There is a contract between LCR and Network Rail for the operation of High Speed 1 which lasts until 2086. The Department for Transport is in discussions with Network Rail. We will try to find a way to amend the current relationship so as to introduce more effective incentives to reduce costs. However, there is no possibility of it being transferred to the Office of Rail Regulation; it seems to us that the current arrangement works sensibly.
I return specifically to access charges. The noble Lord, Lord Hanningfield, mentioned them as did the noble Lords, Lords Berkeley and Bradshaw. The enterprise value of High Speed 1 is determined largely by the amount of income that the company will receive in future. The income stream is generated by the access charges paid by train operators. It makes commercial sense to assume that the more secure the income stream, the less risk that bidders and their lenders will associate with HS1’s business. For that reason, investors will see attraction in having a firm contract with the Secretary of State which defines precisely the parameters for them to set access charges in the long term. The Secretary of State will set the charging framework within that contract, because the level and structure of charges will directly affect the value that taxpayers receive in a sale. Our only concern is to protect value by providing potential bidders with certainty. Bidders will know that the maximum price that they will be permitted to charge train operators will not be reset at regular intervals, neither by the Secretary of State nor by the Office of Rail Regulation.
The rest of the rail network is subject to economic regulation by the Office of Rail Regulation, which allows it to review prices charged at regular intervals and to increase or reduce them if appropriate. That is necessary for Network Rail’s network given the historical uncertainty about the company’s cost base. In the case of Network Rail, it will provide comfort to investors in the same way as in the water industry, for example, where privately owned utilities also have complex, historical asset bases.
However, we do not see High Speed 1 in the same light. Furthermore, developments in EC legislation since the Railways Act 1993 and the Channel Tunnel Rail Link Act 1996 mean that charges for HS1 are subject to independent regulatory control by the ORR through the appeal mechanism in the Railways Infrastructure (Access and Management) Regulations 2005. Given these factors, subjecting HS1 to additional regulatory scrutiny through periodic reviews of access charges would introduce an unnecessary burden as well as unnecessary uncertainty for the business. The noble Lord, Lord Bradshaw, spoke about the necessity
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In the context of the future restructuring of LCR, the Government have considered carefully whether there are good reasons to augment the EC model of regulation for HS1. The department took professional advice on the options available and discussed the plans with the Office of Rail Regulation. It concluded that there was no overriding reason to do so. The department has not received feedback from any of the parties to which it has spoken that would suggest concern in the industry about the regulatory arrangements for HS1.
The Government have no desire to undertake the functions of an independent regulator in relation to HS1. In the context of the restructuring, we will consider which powers can be transferred to the Office of Rail Regulation, given its expertise and available resources. For example, the duty to ensure that the charges set by HS1 comply with the 2005 regulations could usefully be managed by the ORR in the future, once a long-term charging regime has been put in place.
Until the sale process begins, the Government—as well as potential purchasers—can only speculate on whether the market as a whole will see more value in either a railway subject to periodic charging reviews by the ORR or one for which there is a charging framework established in a long-term contract with the Government. The key choice is the type of regulation, not a choice between having the Secretary of State or the ORR acting as the regulator. The case is not clear cut, and the course that we have chosen to follow is the one that we think will deliver the greatest possible return. In our opinion, any arguments against it are not sufficiently compelling to merit changing the existing regulatory arrangements.
Lord Berkeley: My Lords, my noble friend said that the key to all this will be the long-term charging regime once it is in place. Is he aware that that is exactly what happened with the Channel Tunnel? A 50-year long charging regime was put in place when it was set up and financed 20 years ago. Because of changes to things outside, liberalisation and so forth, that more than anything else is now responsible for there being so little passenger and freight traffic through the tunnel. I suggest that that is not a good precedent.
Lord Bassam of Brighton: My Lords, I made that point earlier—I certainly made it in earlier debates. We continue to want to increase freight through the tunnel, particularly with pathways for freight. We know that we have to work with our partners to achieve that. I do not think that that is necessarily a killer argument.
To be clear, HS1 access charges will be regulated. The charging framework is likely to set a maximum cap on the investment recovery element of the HS1 access charges. The prices offered by HS1 must comply with that framework, and with the specific requirements in the 2005 regulations. These are intended to ensure that charges are fair, non-discriminatory and, subject to certain provisos, cost-reflective. Operators who are not happy with the access charges for HS1 or the terms and conditions on which access is offered can appeal directly to the Office of Rail Regulation which will review whether those requirements have been met. If not, it is able to direct the infrastructure operator to remedy the situation.
Our current thinking—on which we sought views from industry late last year—is that the maximum access charge for passenger charges will be just over £2,000 per train on top of operating costs. We expect freight charges to be lower than that and understand that HS1 will produce proposed access charges for freight services. Details of the proposals that we put to industry at the end of 2007 are publicly available and I will ensure that copies of them are placed in the Libraries of both Houses. We are considering the responses that we received and expect to consult industry in the next few months on a revised proposal.
I know that the noble Lord, Lord Berkeley, had a particular concern about one of the features of the proposals previously put to the industry—that charges levied on particular operators might be allowed to rise and fall proportionately depending on total usage of the line. A number of the parties who responded to the consultation provided strong arguments against that proposal, with which both we and LCR have some sympathy. Although we are yet to develop all of the detail of the revised proposal, we and LCR both expect to move away from that feature of the previous consultation. Although the work is ongoing, I hope that that will provide noble Lords with suitable comfort that the arguments have at least been listened to.
In Committee, I was also asked how the Government would ensure that the HS1 concessionaire would be incentivised to reduce costs without the involvement of the Office of Rail Regulation. We have identified that that element needs further attention as part of the restructuring arrangements. As a result, we are working on a number of proposals to ensure that the new owner of HS1 has the appropriate levers and incentives to reduce costs while operating and maintaining the railway to an acceptable standard. We are discussing that with Network Rail which, as noble Lords will be aware, has a long-term contract to operate and maintain HS1.
For the sake of completeness, I should also mention the other areas of HS1's business which were excluded by the 1996 Act from some aspects of ORR regulation. In contrast to Network Rail, the operator of HS1 does not require a licence and its access contracts are not subject to prior approval by the ORR. In addition to the regulatory controls under the 2005 regulations,
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Although the development agreement does not duplicate the conditions of Network Rail's licence, it has some similarities, including covenants in relation to maintenance, insurance and environmental issues, restrictions on cross subsidies and a non-compete obligation in relation to the provision of passenger or freight services on HS1. The agreement prescribes standard terms and conditions with which HS1 access agreements must comply. It also reserves to the Secretary of State rights to prescribe the terms of access agreements with domestic franchisees requiring access to the line. There is no equivalent of the good stewardship condition which exists in Network Rail's licence, but we will consider whether that should be included when the development agreement is revised post restructuring. In addition—to build on the point I made in my Written Answer to the Question asked by the noble Lord, Lord Berkeley, in February—a Network Statement covering both parts of the rail link is publicly available already.
I hope that that lengthy explanation satisfies the concerns raised in Grand Committee which prompted this amendment and I hope that the assurances that I have given will enable it to be withdrawn. However, before I sit down, I want to touch on a final point in connection with the amendment which relates to the questions asked by the noble Lord, Lord Berkeley, in Grand Committee about whether the current regulatory position is consistent with EU legislation. That point was also touched on by my noble friend Lord Jones in his general comment on the value of independent regulation.
Our understanding of this legislation is that it imposes independence requirements on the regulatory body responsible for handling appeals in relation to access and charging disputes. It also ensures that the access charges set by the infrastructure manager comply with EC requirements. The setting of the charging framework for HS1 is not a function of the regulatory body and therefore, as regards that role, the independence obligations under relevant EU legislation are not engaged. On the other hand, they do apply in relation to the Secretary of State's supervisory functions in relation to access charges for HS1 under the 2005 regulations, where she is acting as a regulatory body within the meaning of Directive 2001/14. I sought at the outset to give comfort that the transfer of these functions to the ORR will be given serious consideration once the charging framework has been determined. I hope that that also gives comfort as regards the compliance of the regulatory arrangements for HS1 with EU requirements.
Before the restructuring can be finalised, we expect to submit a state aid notification to the EU Commission, to ensure that any aid that is restructured or left in
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One final issue that is of concern to the noble Lord, Lord Berkeley, is that HS1 will set prohibitively high access charges for freight. That is obviously a concern, but HS1 has commissioned Intermodality to undertake a specific study to help identify commercially sustainable charges for freight service on the line to help identify what access charges might be affordable for freight services on HS1. Intermodality is analysing the freight market, particular segments within it and international comparators for pricing. We and HS1 expect the report to be completed by May. It will then feed into the subsequent consultation on access charges later this year. We recognise the importance of this issue. For that reason, we strongly support that study.
As I say, I do not apologise for the detail of my response, which I hope has been helpful to noble Lords. I am sorry that I have spoken for so long but I hope that the amendment can now be withdrawn.
Lord Bradshaw: My Lords, I thank the Minister for that reply but I am sorry to say that it does not satisfy me. He more or less put down my noble friend as regards the extension to the high-speed line elsewhere. I do not know whether I misunderstood but I took that to mean that it would be regulated separately from the rest of the network, which was the point he was making. However, it is quite wrong to have two railway lines regulated under different regimes which are interconnected with each other.
I do not think that the Minister has really grasped the point that this railway will operate in a competitive environment. In the end, the customer will decide what he will pay. The department can set whatever charges it wishes but if they are too high people will not come and people have got to make an effort to come. It is not as if there are lots of people out there who will swarm to the railway. There are people out there who are very sceptical about railways and need to be persuaded to use the service. Independent regulation will give confidence to investors in the new infrastructure, train operators and, more importantly, train operators’ customers that they are not dealing with the whimsical regulation that the Minister described, which is leading to the almost paralytic control now being exercised over rolling stock, and which has most train operators and rolling stock companies wringing their hands in despair.
I am dissatisfied. The Minister needs to discuss the matter with the noble Lord, Lord Jones of Birmingham, because we are getting inconsistent messages.
Lord Bassam of Brighton: My Lords, I do not think that what my noble friend Lord Jones said is inconsistent at all. He was talking about the system of
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Lord Bradshaw: My Lords, independent regulation means regulation based on assessment and study of the costs associated with the assets. The Minister referred to the water industry and the water regulator. However, there were horror stories about the amount of capital taken out of the water industry, which was privatised almost debt-free and now has mountains of debt because it was not properly regulated. As the noble Lord, Lord Berkeley, said, we have here a regulator who can and will set charges. I have no confidence in a charging regime that is cooked up between Network Rail and officials in the department. It has to be tested in the market independently.
I will read what the Minister said but I plead with him to discuss this within government because I believe that the whole speech he read out is totally inconsistent with what we have been told elsewhere. I have no doubt that we will return to the matter at Third Reading and we shall require change. With that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 1 [Powers of Secretary of State]:
Lord Hanningfield moved Amendment No. 2:
“( ) For the avoidance of doubt, in subsection (1) “railway services” refer only to those services that both originate and terminate in the United Kingdom, excepting any historical support provided to international service operators.”
The noble Lord said: My Lords, we are rather repeating ourselves but I have chosen to table this amendment once again to further the discussion that we had in Committee.
I hope noble Lords will forgive me for introducing an aside here. I visited Colbayns school in Clacton on Friday, where the Minister was a pupil. It is a very successful comprehensive which has recently developed an extremely interesting skills department. I urge the Minister to pay the school another visit. I wanted to record the name of the school in Hansard as it is such a good one.
To return to the amendment, views on this one, short clause are manifold. It appears that in Committee there was some confusion, mainly due to some of the comments that the Minister had made at Second Reading. The Minister sought to reassure us and maintained that the clause did not need to be amended. Having read Hansard and upon reflection, I still feel that this clause could be tightened to satisfy the views of several noble Lords.
I understand that it is the given intention of the Government to reduce long-term public support for international services. However, our view remains that Clause 1 does not reflect this intention. Of course, it is important to prevent funding of services on the
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The intention not to subsidise is all well and good, but can this not appear in the Bill for the avoidance of doubt? I foresee a situation where Eurostar, whoever it then belongs to, is treated more favourably in financial terms, which certainly would not be in the interest of open access competition. Even if this is not the intention, this clause would surely provide comfort to any operator thinking of starting a competing international service. Indeed, it must be said that Clause 1 in general is framed in such a way as to alleviate concerns of potential bidders, so the addition of this amendment would surely relieve potential operators.
I still maintain that the reasoning the Minister followed at Second Reading was a departure from that followed in another place and indeed from the stance adopted in Committee, where it was said:
“Clause 1 gives the Secretary of State the same commercial flexibility to support HS1 as she has for the national rail network, including flexibility to subsidise international operators in the same way as we currently support domestic franchise operators”.—[Official Report, 19/2/08; col. GC 146.]
Will the Minister confirm exactly what is meant by this?
The Minister argued last time that this amendment is unnecessary due to the 2005 Act's application to Great Britain only. However, the provision of historic support would imply that funding in other ways is possible. I argue that for the avoidance of doubt this amendment should appear in the Bill. Clause 1 is all about clarifying what already exists in legislation, and this wording follows in that vein.
Finally, the Minister argued last time that this amendment would not be acceptable as it would prevent the alteration of historical funding structures already in place for Eurostar during the restructuring period. Accepting the amendment would prevent, for example, the rationalisation of the rolling stock leases and so prevent the achievement of a higher sale price. Is this the intention of the Government? If they do not like the wording of this amendment yet know that they require sufficient flexibility in the short term for restructuring, can they come back with a form of wording that is more acceptable? I beg to move.