ORR'S conclusions on PR18 initial consultation

We reported in June 2016 on the Office of Rail and Road (ORR)'s initial consultation on the 2018 periodic review of Network Rail, also known as PR18. The ORR have now published their conclusions and a summary of responses that goes into more detail.

The 59 responses to the consultation confirmed the ORR's proposed aim (to support "a more efficient, safer and better-used railway, delivering value for passengers, freight customers and taxpayers in CP6 and beyond"), objectives and approach.

The key areas of focus for the review will continue to be those set out in the initial consultation:

Focusing on regulating at a route-level
Improving the regulation of system operation
Refining the framework for outputs and how these are monitored
Increasing transparency around costs and improve incentives
Supporting new ways to treat enhancements.

The particular priorities will be the first two: route level regulation of Network Rail and improving regulation of Network Rail's system operation. The overriding theme from the consultation responses was how vital it was for the ORR to prioritise, given the substantial amount of work required to implement route-level and system operation regulation. As a result, the charging reforms that the ORR consulted on in December 2015 have been scaled back and there will not be a fundamental reform of the charging framework.

Route level regulation and system operation

Network Rail is now organised around eight route businesses, supported by a system operator function and centrally-based business units providing services (HR, major projects and procurement) to the routes. This gives the ORR the opportunity to regulate Network Rail at a route level, allowing them to put greater reliance on comparison between the route businesses. The ORR looked at this in more detail in a working paper on route level regulation; see our article on this for the detail. The ORR now needs to focus on the detailed implementation of route-level regulation but some specific risks that stakeholders identified include:

devolution to route level could lead to eight different commercial models for suppliers to contract with routes
each route's programme of engineering work should be coherent across the network
how will routes treat cross-route traffic appropriately?

The most common concern arising from the working paper on route-level regulation was that freight services might be disadvantaged. Network Rail are establishing a separate freight and national passenger operator (FNPO) route which will have a similar relationship with its customers (train operators) as the geographic routes.

Most stakeholders supported the ORR's proposal for a tailored and more focused approach to the system operator activities that Network Rail undertakes centrally. Alongside these conclusions, the ORR have issued draft guidance to Network Rail on its strategic business plans (SBPs) including for the routes and the national system operator; and a consultation on the development of the regulatory settlement for Network Rail's national system operator. We will be reporting on these in more detail over the coming weeks. Both consultations close on 11 January 2017.

Outputs framework

The ORR will review the outputs framework and change it to reflect the greater focus on Network Rail's routes and system operator role. There will be much more involvement of train operators and other stakeholders in setting and monitoring outputs. There was broad support for using scorecards. Network Rail's outputs should be based on measures it (and its respective routes/system operator) can control and should take better account of passenger experience. There has been a working paper on outputs and the ORR will issue its conclusions on this in December 2016/January 2017. We will report on this in more detail once we have seen the conclusions.

Costs transparency and incentives

This covers access charges and the incentives around performance and possessions. As the ORR are giving priority to route-level and system operator regulation, it will limit changes to charges and incentives to those areas where there is a clear and pressing need for reform, or where there are opportunities for incremental improvement and simplification. They will not continue work on options for the geographic disaggregation of the variable use charge (VUC), to the relief of freight operators, but will continue to prioritise reform of fixed track access charges so that open access operators make an appropriate contribution to fixed costs.

There will be a consultation on charges and incentives in December 2016 which will set out the options in more detail.

New ways to treat enhancements

Most of the stakeholders (other than the RMT and Campaign for Better Transport) broadly supported a flexible approach for funding enhancements. Freight operators were concerned that taking enhancements out of the periodic process and aligning them more with franchising processes could mean that potential improvements for freight are overlooked, but did not suggest any specific solutions.

There were calls for increased third-party funding of enhancements during the next control period and the ORR recognised the importance of attracting third party investment.

The ORR will publish a response to their working paper on enhancements (WP5), along with comments on these and next steps (including how the ORR plan to support third party investment), in December 2016/January 2017.

Ongoing engagement and next steps

The theme coming out of this periodic review is the open and collaborative engagement with stakeholders in the process. The ORR have found it helpful to use the Rail Delivery Group's working groups as a way of engagement, but recognise that these do not include all relevant stakeholders. Each of Network Rail's routes is setting up their own stakeholder sessions in February 2017 and there will be a system operator session following this.

There is a PR18 timetable on the ORR website which they will keep updated as the review progresses (it has already been updated in September and November 2016 to add extra milestones and more detail). Key dates coming up are:

December 2016

Consultation on financial issues (deadline March 2017)
Consultation on structure of charges and incentives (deadline March 2017)
Department for Transport consultation on introducing a public service obligation (PSO) levy for open access passenger operators