PR18 consultation on amending schedule 4 notification factors

This is the latest article in our series on PR18, the five-yearly periodic review of Network Rail. It focuses on a fairly niche area, but one which overlaps with charging as a whole.

Background and context

Each train operator has a track access contract with Network Rail that allows them to run trains on the rail network. Where operators cannot access the rail network because Network Rail is carrying out planned engineering work ('possessions'), there is a regime to compensate them for the financial impact of such planned disruption.

The compensation is set out in Schedule 4 of the franchised passenger operator track access contract, so is imaginatively known as the Schedule 4 regime. It compensates the train operator for farebox revenue losses plus associated costs e.g. of running a replacement bus service.

The Schedule 4 regime is based on the regime for compensation for unplanned disruption (the Schedule 8 regime; you can probably guess that it is in Schedule 8 of the track access contract) but because the possessions are planned in advance, there is a discount in the amount of compensation paid. This is on the basis that if passengers are aware of the disruption in advance, they will not plan to travel at that time. The greater the notice, the greater the discount.

With the advent of the smartphone, the way we plan journeys has changed. We do not need as much advance notice to plan journeys. Also, there was concern in the industry that the current notification factors encouraged Network Rail to book possessions too early, before it had planned them in sufficient detail, then cancel them and reschedule the work nearer the time, causing even more disruption. On that basis the ORR is reviewing the current system to see if it can be overhauled to better reflect current passenger requirements.

Current thresholds

There are currently three notification thresholds that result in different discounts (the longer the notification, the greater the discount on the compensation payable):

Early (D-26) – 26 weeks before the new working timetable comes into effect, which can be up to one year in advance (as the timetable is changed twice a year) – so for example a possession scheduled for February would appear in the working timetable that started in the previous December, so to meet the early threshold it would need to be notified 26 weeks before December, so in June of the previous year, 8 months in advance.
Informed traveller (T-22) – 22 weeks before the possession, giving operators time to reschedule services before the 'informed traveller timetable' (the timetable published 12 weeks before the services operate) is published
Late (applicable timetable) – the 'applicable timetable' is the timetable Network Rail must produce for train operators by 10pm on the day before the services operate. Any possession notified less than 22 weeks in advance but before the applicable timetable, i.e. 10pm on the day before the possession, is classed as late. Any possession notified after 10pm on the day before is treated as an unplanned disruption under Schedule 8.

Proposals

The consultation is proposing two options:

Option 1 is to update the notification factors, i.e. the proportion of the compensation amount that is payable. Research shows that very few passengers plan or book rail journeys more than 12 weeks in advance so in practice there is little difference between the early and informed traveller thresholds from the passenger perspective. The notification factors should reflect this – see the table below.

Option 2 is Option 1 plus a new notification threshold, T-14 (14 weeks before the timetabled week of the possession). The ORR have chosen T-14 because there is significant interaction between Network Rail and operators between T-22 and T-12, i.e. between 22 and 12 weeks before the possession takes place. Over this period, Network Rail advises operators about capacity and upcoming possessions, and operators may bid for services. At T-14, Network Rail offers operators services that can be run before it publishes its timetable at T-12. At this point, operators generally open bookings and start selling tickets. The ORR have assumed that this would result in passengers being notified of the disruption from two weeks before they travel.

This table summarises the existing and proposed notification factors. They are expressed as the proportion of the maximum amount of revenue loss compensation that Network Rail has to pay operators, so the higher the notification factor, the more Network Rail pay.

Click here to view the table

Impact on Network Rail

The ORR analysed data for Schedule 4 compensation that Network Rail paid in 2016-17 and found that around 75% was for possessions that had been notified early (D-26) and around 12% was for late possessions (the applicable timetable).

Under the new notification factors, Network Rail would pay:

For early notification (D-26), slightly higher compensation for short distance passengers and slightly lower compensation for long distance and airport passengers
For notification by the informed traveller threshold (T-22), lower compensation in all cases
For late notification, higher compensation in all cases.

More accurate notification factors should incentivise Network Rail to plan possessions on time (to meet the informed traveller threshold) and reduce the incentive to book possessions prematurely to meet the early threshold.

Impact on operators

The ORR estimate that revenue compensation would reduce by around £12m a year and the Schedule 4 access charge supplement that franchised operators would pay Network Rail would also fall. However, each franchised operator's net financial impact would be zero as this would be a treated as a Change under the franchise agreement.

The ORR do not have a preferred option. There is a helpful table on page 24 of the consultation setting out their assessment of each option. Impacts on operators include:

Operators have fewer late and cancelled possessions to manage
Adding a new T-14 threshold could incentivise Network Rail to book more 'late' possessions in time to meet the T-14 threshold, but it could also mean more possessions are notified after T-22.
Operators may be more likely to dispute possessions notified after T-22 but before T-14 because their compensation would be less