This is the seventh article in our series on PR18, the five-year periodic review of Network Rail.

It summarises the consultation on the overall framework for regulating Network Rail and the supporting documents on route requirements and scorecards; and possible measures of the System Operator's performance.

Overview

The Office of Rail and Road (ORR) is taking a different approach from the last periodic review (PR13, covering Control Period 5, CP5, 2014-19). For Control Period 6 (CP6, covering 2019-24) it will be regulating Network Rail at route level and taking a targeted approach to regulating the overall System Operator function. The ORR wants to involve customers and stakeholders more in the regulation.

The ORR will use scorecards as the main way of regulating Network Rail and wants to encourage competition and rivalry between routes, giving them incentives to outperform (although each route's settlement, other than Scotland's, will not be ring-fenced).

The consultation specifically deals with operations, maintenance and renewals activity only. Enhancements (improvements/additions to the rail network) are not covered and will be dealt with outside the periodic review process. Also, the consultation only extends to England and Wales, as Scotland has its own settlement.

How the ORR regulate Network Rail

For CP6, the legislative framework remains the same and the ORR's powers are the same. What has changed from CP5 is that the ORR want to target regulation at the right areas, as Network Rail has been reclassified as a public sector body and has reorganised itself internally.

The ORR will continue to regulate Network Rail as a single company with a single licence, but with a greater focus at route and system operator level. Network Rail has reorganised itself internally into nine routes: six in England, radiating from London, and one each for Scotland and Wales. These are the 'geographic routes'. There is also a Freight and National Passenger Operator (FNPO) route, which covers the whole of Great Britain and is like a 'super customer' to the geographic routes. Every train operating company and freight operating company has a lead route, which is its primary point of contact with Network Rail.

Each route will have its own settlement (i.e. will get its own pot of money based on the outcomes it needs to achieve).

In addition to the nine routes, the ORR will be regulating Network Rail's system operator function, which includes timetabling and co-ordinating the network, making sure all operators are treated fairly. For more detail and background see our article Regulating Network Rail's system operator function. The system operator function will get a separate settlement.

But the routes and system operator functions do not cover everything that Network Rail does. There are also central functions – service providers to the routes and the system operator (primarily within the central Route Services Directive); and other central functions that set policies and/or provide assurances to the board that Network Rail is satisfying its legal obligations. Technical authority, which specifies asset policies and ensures that safety critical standards are consistent across the network, is an example of this. The costs of these central functions will be re-charged to the routes/system operator on a cost reflective basis.

So, Network Rail will get ten settlements: one for each route (the eight geographic routes plus the FNPO route, and one for the system operator function). With the exception of the Scotland route, the settlements will not be ring-fenced, so Network Rail will be able to move money between routes (see further on this below).

As Network Rail is still regulated as a single body with a single licence, this means that if during the periodic review process Network Rail rejects one of the ten settlements but agrees with the other nine, its only option is to reject the determination as a whole and force the ORR to start again, causing a gap in funding whilst a new determination is agreed. 

Scorecards

Network Rail started to use scorecards to measure its own performance in CP5 and the ORR wants to use them as a way of regulating Network Rail's performance, as they are aligned with Network Rail's customers and can be a way of incentivising routes through comparison and competition between them.

The ORR thinks that scorecards should:

• Be balanced – reflecting current end-user interests but also those of the taxpayer and the longer-term interests of future customers
• Support comparison and competition between routes (and the system operator where appropriate)
• Capture requirements specified in an HLOS (High Level Output Specification) where appropriate.

The ORR is intending to leave it to Network Rail's routes and system operator to develop their scorecards, working with their customers and key stakeholders. The ORR's role will be to fill in any gaps (e.g. making sure future customers' interests are represented where a franchise is coming to an end).

The ORR does have some suggestions for what a balanced scorecard should contain. Route scorecards should reflect, to varying degrees: health and safety, financial performance, asset management (in terms of network sustainability), train performance (passenger and freight) and investment delivery milestones. The route requirements and scorecards consultation goes into more detail on what these measures might look like.

The ORR sees two of these measures as particularly important and is proposing setting a regulatory minimum floor for them. These means that the minimum floor (target) will form part of Network Rail's 'reasonable requirements' that it must meet under Condition 1 of its network licence, so a breach will lead to enforcement action.

The two measures are: 

• Route performance (i.e. each geographic route's contribution to passenger and freight train punctuality and reliability) – a consistent measure of train performance is needed so that the ORR can compare between routes
• Network sustainability – a consistent measure of how well each geographic route is delivering a sustainable network, i.e. sufficient renewals to counter the on-going deterioration of network assets through ageing and wear-out in order to protect the interests of future users and funders. 

The ORR will use the minimum floor levels to compare the routes' performance and will assess each route and the system operator's performance against the scorecards and the quality of stakeholder engagement around them, to determine whether Network Rail is meeting its licence conditions.

The system operator scorecard is not as advanced as the routes', as the system operator function has not had a scorecard up to now. Also, many of the functions it performs are not quantifiable so are hard to measure using quantitative matrices. The ORR is leaving it to Network Rail to produce a balanced scorecard for the system operator and will only impose its own measures if Network Rail's scorecard does not take account of reasonable customer, funder and stakeholder requirements.

Network Rail will set out its view on the targets and ranges for each scorecard in its business plan in December. If these are agreed with its customers, the ORR will just adopt those. If they are not agreed, the ORR will set the levels for the scorecards.

Monitoring and enforcement

As mentioned earlier, the legislative framework for regulating Network Rail is unchanged for CP6 and Network Rail remains a single company regulated against a single network licence. The ORR has the same enforcement powers.

What has changed is that during CP5 Network Rail was reclassified as a public sector body. This means that fines are no longer an effective deterrent as they are being paid from public money. The ORR intends to impose fines as a last resort and prefers using reputational, procedural and management incentives.

The ORR will use comparisons across routes to recognise and incentivise good performance and use the sense of rivalry to drive improvements. It will target its monitoring and enforcement activity at route/system operator level. It expects Network Rail and its stakeholders to resolve issues at a route/system operator level and will only intervene where Network Rail is not engaging effectively with its stakeholders, or in high risk areas – such as renewals efficiency (which is the subject of a separate consultation).

There are a range of enforcement powers that the ORR can use and it will reserve the most serious ones for when performance has become unacceptable. Potential actions it could take in such circumstances include sanctions (where a monetary value is put on the impact and reflected in that route's financial results) and reparations instead of fines, although there is a question about where Network Rail will get the money from to do this.

Managing change to PR18 settlements

The overall determination for CP6 needs to take into account that there may be changes to the ten settlements during the period. The ORR is looking at large changes only: changes to route boundaries, budget allowances, operational structures, and output requirements – i.e. changes to what a route has to deliver or the resources available to deliver them. These are changes that could affect the ability to plan, accountability of the routes/system operator to their stakeholders for delivery commitments, and the ability to compare across routes.

The process will be that Network Rail decides whether to make a change, engaging with the ORR and stakeholders. The ORR will then decide whether it needs to change its monitoring. Crucial to this process is for Network Rail to report all changes to the ORR transparently.

There is a tension in this, given that the route settlements are not ring-fenced. There is a risk that Network Rail could end up taking money from well-performing routes to deal with any unforeseen disasters, e.g. Dawlish. This could mean that routes are not incentivised to perform as well as they might, in case money gets taken away from them. According to those in the industry, this happens now but is not transparent. A possible solution is to have a central pot to deal with risk. 

Next steps

This consultation closed on 21 September and the ORR's decision and response will be in January 2018.

The final High Level Output Specification (HLOS) and Statement of Funds Available (SOFA) is expected on 13 October.

In the autumn (so probably next month) the ORR will consult further on charges and incentives including the 'market can bear' test, possible changes to Schedule 4 and Schedule 8 of the track access contracts, the volume incentive, and on how to align incentives between Network Rail and operators, e.g. a route level efficiency benefit sharing mechanism. See our article PR18 Charges and Incentives Consultation Conclusions for more background.

We can also expect an update on the financial framework in the autumn.

Network Rail's Strategic Business Plans, setting out its view on the targets and ranges for each scorecard, are due in December 2017.

We will continue to report on developments as the PR18 process goes on.