Rail 725: the bewildering world of compensation

One of the key criticisms of the current structure of the railways is that it is complex and unfathomable. Not only do ordinary passengers not understand who does what, and how each organisation relates to the other, but even people inside the industry are sometimes at a loss to comprehend why things are done in certain ways.

Nowhere is that truer than the arrangements that have been created to allocate compensation between the different parties in the industry. In fact, the scheme that determines payments between Network Rail and the train operators, bears no relation to the one that covers the reimbursement of passengers for delays. For the latter,  passengers are able to obtain vouchers for future travel if their train is more than an hour late and season ticket holders can get a discount on future purchases if their operator has not met its targets on punctuality and reliability (even though the passengers themselves may not have been affected).

But there is no connection with the level of payments made by Network Rail. Therefore, train operators may well make a profit out of delays caused by Network Rail because the payment will be higher than the combination of loss of revenue and payments made to passengers. Indeed, nowhere was the ridiculous nature of the franchising process more exposed than when Sea Containers threw the towel in on its East Coast franchise partly because Network Rail was paying less than expected compensation because it was performing better than predicted.

In an ideal world, the train operators would get back the actual amount of money that an unexpected delay or planned line closures costs them. However, instead the level is determined by an economic model that only very vaguely reflects the impact of delays felt by passengers. So vaguely, in fact, as to be meaningless.

Thanks to a very helpful inside source and some study of the Office of Rail Regulation website, I can piece together the broad aspects of the scheme and nothing has dissuaded me that this is a crazy money go round that does the railways no credit and creates the perverse incentives that plague the industry, highlighted in the McNulty report.

The model is not drawn up by Network Rail, even though that is the main the responsibility of the Office of Rail Regulation, clever economists try to create a world where the neat rules of economic models apply and, crucially, determine the behaviour of the various players. Economists love models just like football managers love formations like 4 3 3 or 4 4 2.

There are two types of delays, planned and unplanned, governed respectively by Schedules 4 and 8 of the track access agreement. While there is perhaps a modicum of sense to the idea of penalising the various parties for causing unplanned delays as set out in Schedule 8, the rules for Schedule 4 are complex, arbitrary and pretty incomprehensible.

The process for determining Schedule 4 payments starts with the Network Rail national access plan published around 18 months before the start of the relevant year – which runs from December to December, since the summer timetable is supposed to only have minor adjustments. The operators then put in bids for what services they would like to run and after negotiation with Network Rail, that becomes the ‘clean timetable’. Then, as it were, the closures for line work ‘dirty’ it up as Network Rail then says access it needs to carry out work. Any move away from the perfect timetable means they that the operators have to be compensated for the loss. The timetable then goes through a series of iterations to become the amended timetable.

Then we get to the difficult bit – how is that compensation calculated? It is paid according to a Byzantine formula that takes into account extra mileage they may have to run, missed stations and monitoring points (usual places on the route that are omitted because of diversions), the number of cancellation minutes and extended journey times. This is set out in an equation based on minutes which are then multiplied by three factors: a ‘busyness’ factor – assessed on the number of trains that passes the particular monitoring point and not on the number of passengers; a marginal revenue effect (which turns the amount into pounds and is based, again, on a model, not reality); and the notification factor. The latter means that the earlier Network Rail tells the operator about the closure, then the less it has to pay – 55 per cent of the total compensation if it is a year, 70 per cent at six months and oddly 85 per cent, rather than 100 per cent, even if it misses the 12 week deadline for notification.

Since 2009, two other components have been added. First, the compensation payment is reduced for trains not run to cover the energy costs that have been saved as a result, which is set at a level of £2.1566 per mile (it is a source of wonder that they came to such a precise amount….) and alternatively if the train has to go further, then extra energy costs are added.

Secondly, train operator were feeling cheated because the regime did not recognise the cost of bus replacement. So, consultants were sent in and drew up a formula which means that for every mile of railway there was a payment of £9 19 – and that is multiplied not by the number of buses but by the number of trains cancelled, irrespective of whether it is 11 car Pendolinos or a Pacer. In London and the south east, it goes up to £13. So, again, the compensation level is determined by a model, rather than the reality – surely it would be much better if Network Rail simply paid for the buses, but in this Kafkaesque world that would be considered too simple.

Just as a final absurdity, the compensation payments are merely Network Rail returning the train operators’ own money. Each year the amount of compensation they are expected to make is taken into account in setting their franchise payment or premium levels. This amounts to £113m this financial year (at 2006/7 prices because it was part of the current Network Rail Control Period which ends in April) a reduction since 2009/10 from £169m, which is supposed to give Network Rail an incentive to reduce closures.

Some operators may get more than they put in, others less. So it really is an absurd money go round based on economic models drawn up by, I’m sure, people who are far cleverer than the rest of us, but also far more stupid because they believe that the real world of the railways can be adequately set out in nice neat models and that these will influence, and even determine, the behaviour of the various players involved.

Schedule 8 covers unplanned delays and there is an army of delay attribution clerks working out who is responsible for each delay. The default position is that Network Rail pays up unless it can prove some other organisation is responsible. Freight operators, incidentally are paid through a separate but much simpler formula based on the level of disruption.

I don’t expect, dear reader, that you will have followed the detail of all this but I feel this exercise is instructive in exposing the complexity of interactions between companies in today’s railway. In the days of British Rail, all this was undertaken by people working for the same organisation and was finalised three months in advance rather than, as now, a year. Yes, of course there had to be negotiations – and indeed arguments – between the various parties, but it was a much simpler  and more flexible arrangement. And crucially, far cheaper. There are more than 20 people working in Network Rail on these compensation schemes, and perhaps the same number for the various operators. The scheme is an inherent part of having a franchised out railway. When McNulty argued that fragmentation was one of the causes of the increase in costs in the industry, he was indirectly referring to this type of complexity but oddly did not recommend the obvious solution.


ATOC should not get a free ride


It’s a bit of cheek for the Association of Train Operators to send out a press release suggesting that fare dodging is costing £240m  per year and that people give the daftest excuses. Yes, it is quite funny that some people say the ticket is with their mother being buried that afternoon or that they fell onto the train by mistake,

But it is not surprising that some people think it is a free railway on Sunday, for example. The implication that the train operators are doing everything in their power to clamp down on fare dodging is hardly borne out my experience. The operators may, as they say, have spent £21m on putting up gates – although the press release did not specify the time scale – but clearly much of that is wasted. Since mentioning the fact that the barriers at Kings Cross are open for much of the day a few weeks ago, several readers have confirmed this, reporting long periods of checks not being made. Moreover, fraudsters will know they can be opened with a cheap ticket or Oyster card.

Yet, on the other hand, having travelled round various parts of south London for evening meetings recently, much of the old Network SouthEast network becomes a free railway after around 7 30pm. All barriers are opened, and there are never any ticket checks. That policy is presumably the result of a calculation that the wages of the staff would not be worthwhile in terms of extra revenue, especially as much would be part of the Oyster system which goes into a big pool from which the TOCs barely benefit. This means that the London suburban railway is not always a very safe and secure environment at night time, to put it mildly.

The solution, therefore, is for the Southern TOCs to have staff levels and timings drawn into their contracts so that they match the provision on the London Overground network. But I somewhat suspect the TOCs would not like that much. In their terms a few barriers are fine but as for extra staff…


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