This is the latest in our series of articles on PR18, the periodic review of Network Rail, where the ORR (the rail regulator) sets the prices Network Rail can charge for use of the rail network during the next five-year Control Period (CP6) from 2019-2023; and also how it will measure Network Rail's performance.
Our last update, in February 2018, covered Network Rail's Strategic Business Plans. Since then, the ORR has consulted on how it will assess Network Rail's efficiency; they have issued an update on charges and contractual incentives and the Variable Use Charge; there has been a third consultation on the financial framework; and (separately but linked), the DfT has issued its response to the consultation on whether to impose a public service obligation (PSO) levy on open access operators. Finally, the ORR has responded to the consultation on revising the Schedule 4 notification factors.
Assessing Network Rail's efficiency
The ORR consulted in January 2018 on its approach for assessing Network Rail's efficiency and wider financial performance in CP6. They will publish their finalised approach in regulatory accounting guidelines before the start of CP6.
The proposed approach enhances the PR13 approach, which focused on the financial performance measure, to now measure efficiency as well. The ORR's priorities for their assessments in CP6 include: to enhance comparisons of the routes' performance; to move away from technically precise measurements to a more rounded assessment; and to make more informed forward-looking assessments of the efficiencies that Network Rail will likely deliver across CP6, to check that Network Rail's forecasts are not over-optimistic. It will mean that Network Rail has to provide more information to the ORR, but according to the ORR, it should be information that Network Rail should already have.
Charges, contractual incentives and the Variable Use Charge
We reported in our article, PR18 Charges and Incentives Consultation Conclusions on the ORR's response to the charges and contractual incentives consultation originally issued in December 2016.
As a reminder, the ORR concluded in June 2017 that:
- Fixed cost charges will be extended to all operators, including open access operators, subject to a "market can bear" test
- The capacity charge will no longer apply
- Variable use charges can be capped
In April 2018 they published an update letter on the variable use charge and infrastructure costs charges, along with supporting letters from the DfT and Transport Scotland. These can all be found here. The headline points are:
Variable Use Charge (VUC)
The ORR's draft determination (due to be published on 12 June 2018) will include a proposal to cap/phase in the VUC for freight and charter services on a time-limited basis (the DfT and Transport Scotland, as funders, were concerned about possible large increases in charter and freight VUC rates).
The ORR are considering whether this is also appropriate for open access operators.
Network Rail will now publish its draft CP6 price list after the ORR's draft determination, instead of in April 2018.
Infrastructure Cost Charges
The ORR will set out final proposals for consultation as part of their June draft determination, covering:
- how costs are allocated to services in CP6;
- which services (market segments) are potentially subject to an infrastructure cost charge (taking account of the market can bear test);
- the structure/design of that charge; and
- the level of the charge for each market segment.
The ORR have decided in principle to use the new Network Rail cost allocation methodology to set the fixed network costs in CP6 (also subject to a market can bear test); and that any fixed costs levied on open access services in CP6 will be levied as a rate per train mile. The Fixed Track Access Charges (FTACs) for franchised passenger operators in CP6 will vary with changes in timetabled traffic.
The passenger rail public service obligation levy was recommended by the Competition and Markets Authority (CMA). It would be a levy on open access operators requiring them to contribute towards the cost of unprofitable but socially valuable services. The DfT consulted in February 2017 on whether and how to introduce this. They proposed a levy based on a metric such as distance or passenger numbers, or a combination, administered (but not collected) by the ORR. Addleshaw Goddard were the only law firm to respond to the consultation and we agreed with this proposed approach.
The DfT's April 2018 response to the consultation concluded that a PSO levy is unlikely to be introduced in the short term (before the end of 2019) as it requires a new Act of Parliament and, with Brexit, there is no Parliamentary time available. In the meantime, the DfT has asked the ORR to work with them and the CMA to develop detailed proposals for the levy's implementation when Parliamentary time becomes available.
The ORR issued a second consultation on the PR18 financial framework in March 2018, following on from its January 2017 consultation and December 2017 update letter (these are on the ORR website here). The latest consultation closed on 24 April 2018 and the ORR will take all the responses into account for their PR18 draft determination, expected in June 2018. The key points they consulted on were:
- A 'minded to' proposal for access charges to be indexed by the consumer price index (CPI) rather than the retail price index (RPI). This would mean higher initial charges then lower increases each year.
- Budget flexibility for Network Rail, to move money between financial years and between resource and capital spending. This is needed because as an arms-length public sector body, Network Rail might be restricted on moving money between years and switching expenditure between operating (resource) and capital expenditure. This flexibility will allow managers to respond to changing circumstances (delays, limitations on access because of weather) and deliver outputs effectively. It also means they should not have to transfer money between routes, so route level settlements do not change.
But, the ORR stress, Network Rail will need to make sure there is an effective financial governance regime in place so that this flexibility is not just a buffer against inefficient management. Network Rail will need to improve its forecasting and control its expenditure requirements.
Schedule 4 notification factors
The ORR consulted in December 2017 on amending the Schedule 4 notification factors in line with the most recent evidence on passenger awareness of disruption. Our briefing explains the detail.
The ORR's decision, published on 3 May 2018, is to update the notification factors in line with the proposal. The new notification factors will be as set out in the table below (with the current factors in brackets for comparison). 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:
The consultation also proposed introducing a new intermediate notification threshold at 14 weeks before the timetabled week of the possession (T-14). Whilst most respondents liked the principle of having an intermediate threshold, they thought 14 weeks was not the right time. The Rail Delivery Group are working to identify an appropriate threshold and have to submit their proposals by 30 June so the ORR can decide before their Final Determination.
The next key steps in the PR18 process are:
- ORR's draft determination – 12 June 2018
- ORR's final determination – 31 October 2018
- Network Rail's draft delivery plan for CP6 – December 2018
- ORR's review notices (setting out the changes to track and station access contracts and Network Rail's network licence) and Network Rail's price lists (setting the rates for access charges) – 20 December 2018
- Notices of Agreement (train operators have 28 days to decide whether to terminate their contracts) – early February 2019
- Network Rail's delivery plan – March 2019
- Control Period 6 starts – 1 April 2019