Rail 696: Regulator flexes muscles

Now here’s an interesting question. Does the rail industry want a dynamic rail regulator who is shaking up things and trying to innovate, or was it happy with a less interventionist and active one? Certainly, since Richard Price was appointed a year ago, the organisation has been far more active than under his predecessor, Bill Emery, and has issued a series of documents which suggest its desire for an expanded role, something that ministers have encouraged.

This is causing ructions within the industry, in particular with the train operators. The government’s suggestion that the ORR should have a regulatory role over franchises has created one of those rare open rows between different parts of the rail industry which are great spectator sport for us commentators but are not exactly helpful in making the industry look like it is pulling together in one direction.

The Association of Train Operating Companies, which often takes every suggestion from the govenment, however painful, on the chin, has adopted an openly hostile stance on the idea. The oversight of franchises has, in fact, been rather lost in the various upheavals to the industry since privatisation. Initially, there was an Office of Passenger Rail Franchising which had the task of ensuring the operators behaved themselves, and then the task was passed to the short-lived Strategic Rail Authority. This meant that until the demise of the SRA, there were in fact two regulators independent of government. The ministers who created the original privatised structure felt this was necessary as they did not want the government to both specify services and oversee their operation.

However, with the abolition of the SRA oversight of the franchises was taken over by the Department and this had two effects. The change created a ministry of railways although that was not recognised and consequently there was much less accountability as civil servants do not stand up in public and justify their decisions. Ever since there have been accusations of micromanagement, precisely for the reason that these two functions – specifying the contracts and policing them – had been kept separate in the first place.

Therefore, on the face of it, the change would be very much in line with the train operators’ thinking, given their perpetual complaints about micromanagement. Not so. There has already been a spat between the train operators and the regulator over his insistence on putting the provision of better passenger information into their contracts. Now writing in Transport Times, Michael Roberts, the chief executive of ATOC, says the proposal that the regulator oversees franchises as well as Network Rail ‘flies in the face of the drive for better value for money’.  He is worried that there will be further requirements imposed by the regulator, such as passenger information, without regard for the costs they might impose. His point is that whereas ministers imposing extra burdens on the franchisees will recognised the financial implications, the regulator ‘s ‘name would not ultimately be on the cheque when pushing for improvements for passengers, however laudable’.

In the same magazine, Price responded by arguing that ‘the days of looking at the industry performance, costs and efficiency in separate parts are gone’. Only by working together – the watchword of the moment – will the industry deliver better value for passengers and taxpayers.

I’m pretty sure that it will be Price who will win out on this issue. Ministers, rightly, are keen to get the regulation of the franchises out of Marsham Street. Roberts’ other point, that regulating the franchises means that the regulator will be distracted from the main task of keeping tabs on Network Rail does not really make sense. There will be a separate team on franchises, just as there is on rail safety following the regulator inheriting that function from the Health & Safety Executive.

The ORR is not only expanding its remit, but it is also taking a fresh look at other aspects of the industry. Price is an economist – a former chief economist at two government departments – and so not surprisingly the ORR is taking a purer economc line. Economists like numbers, clarity, transparency, precise allocation of costs and so on and you can see that approach coming through the ORR’s output. For example, the ORR favours more open access operators but that shows the limits of taking a pure economic approach in an industry that is as complex and as dependent on subsidy as the railways.

There are, in fact, very few profitable routes for open access operators and these would, for the most part, take revenue away from existing franchises operators. Open access, in other words, has hidden costs – as well as the huge amount of regulatory work which they create – and therefore if there were a substantial increase in the number of such operators, there might be a significant extra cost to the taxpayer. Open access appeals to the economic purists but not to the day to day railway operator.

As well as expanding its role, the ORR is focussing on the idea of making the railways more transparent and accountable. When the railways were first privatised, there was an assumption that the economics of the industry would become clear and that, for example, it would be possible to calculate precisely the cost of operating an extra train or of keeping a line open.

It has not turned out like that. Network Rail still does not have a clear outline of how it incurs costs, nor does it even have, despite demands from regulators stretching back to the days of Tom Winsor, a clear asset base on which it could calculate the way it incurs costs. Therefore the amounts paid by train operators are fairly arbitrary, based on assessments by Network Rail which are largely guesstimates.

The ORR under Price is clearly trying to remedy this, using a more overtly economic approach than before. In its recent pronouncement on how charges will be levied from 2014, ORR is suggesting that the access charges paid by trains should be based on their weight and the route they take, rather than simple mileage. This is supposed to make operators behave in a way that gives greater regard to the costs they impose on Network Rail.

For passenger operators, this would make no difference as they are protected from any change. The level of their access charges is irrelevant because the government guarantees to adjust their premiums or subsidy.  So only open access and freight operators – who pay ‘marginal’ costs, which means only the ones they cause directly – will be affected, and undoubtedly they will have to pay more. But would this be fair. Without a clear knowledge of its assets, or an accurate assessment of the cost of replacing assets, it is impossible for Network Rail to calculate precisely how much should be charged for each train passing over a certain set of tracks. That is another big task for ORR – finally getting Network Rail to be clear about its assets and the cost of them.

However, there is a problem here, too. It might simply not be possible to do that – or indeed reasonable to expect Network Rail to do so. One of the problems of the post-privatised industry is that the attempt to bear down on costs and allocate them precisely has not only been difficult, but also very expensive and led to the creation of all sorts of interfaces where, before, there was a unified structure. Sure, nobody quite knew what the precise costs of a particular task were, but since it was all being paid from the same pot, it didn’t matter.

Take the example of a stretch of line. It will be repaired and maintained as part of a larger area, or even as part of the whole route, and therefore calculating what precisely the costs of a particular section is mere guesswork

The ORR is undoubtedly right to pose these types of questions and to focus on a greater understanding of the way the industry operates. However, Price and his colleagues must know where to stop. They must ensure they are being a responsible regulator and not, as Roberts fears, imposing extra burdens on the industry which are not ultimately value for money. It’s a tough ask.


Railfest lecture


My new book, The Great American Railway Revolution, the epic tale of American railroads, has just been published by Atlantic Books and it has proved to be fantastic timing as it coincides with Railfest which has a great American flavour. In order to mark that, I will be giving my inaugural lecture on the book at Railfest at the National Railway Museum on the evening of Friday June 8, and doing a book signing earlier in the day. Details on the Railfest website.

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