The Office of Rail and Road (ORR), who regulate Network Rail, have published their Final Determination on what Network Rail must deliver, what funding it needs, and the incentives to encourage effective performance and delivery, for Control Period 6 (2019-24).


This is the latest in a series of articles we have written on the periodic review process (PR18) and means most things (but not quite all) are now settled.

The Final Determination builds on the ORR's Draft Determination published in June and which we reported on in our last article. Much of the Final Determination is the same as the draft, but there are a few changes:

  • Network Rail have agreed a 10% (12% in Scotland) improvement in efficiency, instead of the 8% they had originally proposed
  • The ORR had wanted to reduce Network Rail's spending on research and development, but after further discussions has agreed a figure of £245 million, backed by new governance
  • An additional £80 million to be spent on safety improvements
  • More funding for the System Operator, enabling recruitment of 100 timetabling staff (on top of the existing 700), given the May timetabling issues
  • £608 million will be spent on renewals (£538 million in England and Wales, £70 million in Scotland)
  • The Crossrail scheme has been delayed since the Draft Determination, but Network Rail will still receive £274 million in Crossrail supplemental access charge income, which was not accounted for in the SoFA.  The ORR have discussed with the DfT how to treat this, and have decided not to include it in the England and Wales revenue requirement, as it would have overly complicated the risk funding process and there is uncertainty over how much of this income Network Rail will be able to spend.

Enhancements

Alongside the Draft Determination, the ORR published a draft document setting out what it sees as its roles and responsibilities for government-funded enhancements. The ORR is still consulting on this and will publish its final version in March 2019.

Collaborative working and Performance Innovation Fund

The ORR want to promote collaborative working between Network Rail and the industry, including through alliance agreements. The ORR is looking at ways to stop the regulatory regime being a barrier to performance improvements, including by 'relaxing' certain rules on a trial basis.

There will be a £40 million Performance Innovation Fund (PIF) for certain projects that could improve performance but may not otherwise proceed because of how the market is structured. This might be because a group cannot co-ordinate their activity, or there are 'free-riders' who can benefit from a good or service without paying for it; or the benefits of a project are uncertain or too distant. The ORR will work with Network Rail and wider industry over the coming months to develop the design of the PIF, including more detailed criteria for the types of projects it could fund.

Digital Railway in Scotland

Transport Scotland is keen to have a specific digital railway strategy for Scotland. This will feed in to the GB-wide digital rail strategy that Network Rail is developing. However, digital railway was not part of the Scottish HLOS, so Transport Scotland think they should not have to fund it. The ORR disagrees and wants Scotland to fund £22m of it, because the rail network has to work as a GB-wide system on a long-term basis.

Charges

The final charges on train operators (passenger, open access and freight) are as set out in our article, PR18 Charges and Incentives Consultation Conclusions. In summary:

  • Franchised passenger operators will continue to pay the FTAC (fixed track access charge) but this will vary annually to reflect changes in timetabled traffic.  The Variable Usage Charge will not change and the Capacity Charge is removed.
  • Open access operators will pay fixed charges if they are a new entrant in the 'interurban' market segment.  These charges will be phased in and there will be a consultation on exactly what 'interurban' means.  This has just been published – see under Next Steps below. Existing open access operators and new entrants not in the 'interurban' market segment will not pay fixed charges.  The Variable Usage Charge will not change and the Capacity Charge is removed.
  • Freight operators will pay fixed charges on electricity supply industry (ESI) coal, iron ore, spent nuclear fuel and (new – with a phasing-in period -) ESI biomass.  Freight will also now pay the Variable Usage Charge but with increases phased-in over CP6 and CP7.  The Capacity Charge and coal spillage charge is removed.
  • Charter and heritage operators will now pay the Variable Usage Charge, phased-in over CP6 and CP7, but no longer pay a capacity charge.

The ORR have produced a useful overview of this.

Holding Network Rail to account

Network Rail is now divided into eight geographic routes plus a FNPO (freight and national passenger operators) route and a System Operator function. Each of these has its own settlement in the Final Determination and its own requirements to deliver.

The ORR will be making greater use of comparisons between routes to understand how they are performing.

They are also proposing changes to Network Rail's licence to require Network Rail to address interests of freight customers and end users (this applies to all parts of Network Rail, not just the FNPO route); require transparency if route budgets are reduced; and increase the routes' ability to choose how they procure goods and services.

The ORR have published two follow-up consultations on holding Network Rail to account and assessing the quality of Network Rail's stakeholder engagement in CP6. The ORR is proposing a three stage approach to hold Network Rail to account:

  • Stage 1: Routine monitoring and assessment, including comparing and contrasting routes' performance through scorecards and assessing the strength of Network Rail's stakeholder engagement and collaborative working
  • Stage 2: Investigation and early resolution of concerns, including new regulatory tools such as ORR Hearings
  • Stage 3: Enforcement, including an option to impose fines on routes that can affect/come out of management bonuses

Next steps

The Final Determination is not the end of the process and over the coming months we will see:

  • November/early December 2018 – consultation on implementation of infrastructure cost charges (fixed charges) on new interurban open access services; consultation on ORR draft guidance on the Economic Equilibrium Test (the test for whether a new open access service would have a negative effect on a franchise); and a framework for monitoring open access competition
  • 20 December 2018 - Legal review notices setting out proposed changes to relevant access contracts; statutory consultation process to modify NR's network licence; Network Rail publish its CP6 price lists for track access and station use, setting out the specific amounts each train operator will pay
  • By 7 Feb 2019 – Network Rail decides whether to accept or object to the Final Determination.   If it accepts, train operators have 28 days to terminate their access contracts if they wish
  • March 2019 – Network Rail publishes its delivery plan; ORR publishes Network Rail's revised network licence and the final enforcement policy; ORR issues the final version of its Enhancements Roles and Responsibilities document; ORR issues collaborative working guidance
  • 1 April 2019 - CP6 begins

We will continue to report on key developments.

Key contacts

Paul Hirst

Paul Hirst

Partner, Head of Transport
United Kingdom

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Bruce Kilpatrick

Bruce Kilpatrick

Partner, Head of Competition
London

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