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Regulation of Network Rail - ORR publishes its final determination for CP6

  • United Kingdom
  • Transport - Rail

14-11-2018

Background

The Office of Rail and Road (the “ORR”) has issued its final determination (“Final Determination”) on the regulatory review of Network Rail (“NR”), known as the 2018 Periodic Review (“PR18”). PR18 determines what NR must deliver in Control Period 6 (“CP6”) which runs from 1 April 2019 to 31 March 2024.

The Final Determination sets out a summary of how ORR will regulate NR over CP6, the allocation of funding to NR, and the overall aims of CP6. The Final Determination has been prepared with reference to the plans submitted by NR and the consultation procedure which followed the publication of ORR’s draft determination in June 2018.

The aim of PR18 is to improve Britain’s railway in terms of reliability, timetabling and passenger needs and is the first periodic review to be conducted by ORR following NR’s re-classification as a public sector body in September 2014. As a result of the re-classification, NR is now more closely regulated and ORR has therefore sought through the Final Determination to implement a greater degree of control and monitoring over NR’s spending, with a renewed focus on driving greater efficiencies over CP6.

In making the Final Determination, ORR was guided by four broad principles:

1. reinforcing relationships between NR and its customers;

2. increasing devolution to NR routes and the development of the System Operator (“SO”)* to create a more localised management system;

3. movement towards a long-term sustainable railway; and

4. achieving improvement by reference to the previous control period (CP5) through the establishment of more realistic efficiency plans.

* The SO is a separate business unit within NR’s group function which coordinates capacity requests for the purposes of making the best use of the rail network. It is involved in capacity planning, timetabling and coordinating cross-boundary services.

We have summarised below the headline points to note in respect of the Final Determination by reference to these four principles. The full text of the Final Determination (and other supporting documentation) can be found on the ORR’s website here.

Reinforcing relationships between Network Rail (“NR”) and customers

The ORR will set out performance levels expected on each NR route which work towards delivering the CP6 baseline targets for each route’s contribution to passenger and freight train performance. The baselines are used for the Consistent Route Measure for Passengers (“CRM-P”) which captures a route’s contribution to the delays experienced by passengers and freight services and can be used to compare performance across the NR routes.

ORR have accepted that in considering NR’s performance targets, certain circumstances will affect NR’s performance. For example the timetabling changes in May 2018 and the exceptional changes in weather over the last year have had wide-reaching and longer lasting effects on the network which as a result will affect performance into the first year of CP6. However, the Final Determination does make clear that ORR still wants to make this contribution to delays a performance target for NR, and ORR will still increase monitoring and reporting on NR to ensure it delivers against this performance commitment. To further this, ORR will make changes to NR’s licence to impose new conditions on NR to address the interests of customers and end users. These additional conditions are yet to be finalised.

Scorecards are currently used to capture what each NR route plans to deliver in relation to different measures such as safety, performance and asset condition. ORR wants to make greater use of scorecards in how it holds NR to account and wants to encourage NR to agree with its customers (e.g. rail passenger and freight operators) the relevant measures on the scorecard as far as possible. Where agreed, these will be used by ORR to assess NR’s performance. Scorecards are to be updated to include changes to performance goals to ensure that any performance goals remain realistic and reflect changes taking place as new contracts are agreed with customers.

These changes are aimed at NR improving engagement with its supply chain. ORR views supply chain engagement as a key issue, particularly given the current uncertainties around the potential impact of Brexit.

Increased devolution and accountability

ORR intends to increase ownership of business plans by NR routes and the SO.

The final determination accordingly puts a much greater emphasis on localised accountability and management. For example, eight geographic routes have their own budget, delivery plans and scorecards, and there is a greater emphasis on routes buying goods and services locally to improve value for money, the idea being that local routes are better informed as to the needs of their users. This localisation is being supported through the routes’ railway boards which will provide a forum for collaboration between routes to help identify issues and improvements.

ORR has also approved NR’s proposal of a substantial increase in SO expenditure, which will be increased to £270m to support investment in timetabling systems and to increase staffing levels, coupled with increased governance requirements in respect of the SO, to be implemented through the medium of a new advisory board.

Long-term sustainability

ORR have demonstrated in the Final Determination a renewed focus on ensuring that the rail network provides long-term sustainability, in particular through:

• an increase in NR’s maintenance and renewals spend to £24.3bn to help facilitate longer-term improvements and long term asset sustainability – ORR hopes this will have a knock on effect in improving reliability of the services provided to passengers and freight customers and in improving safety as well as helping to cut delays caused by infrastructure failures for example those caused by track defects

• a commitment of £245m in respect of research and development expenditure (subject to governance arrangements and approval of expenditure by ORR - to ensure that the fund is being used effectively to reflect the interests of NR’s passengers, customers, funders and train operators); and

• a performance innovation fund of £40m to support new innovations to improve long-term passenger and freight performance - with the expectation that innovations developed through the fund will eventually be rolled out across the network.

More realistic efficiency planning

The Final Determination notes that there will be a greater stretch on efficiency and improved governance around NR’s proposals, especially in light of its re-classification as a public sector body. ORR have accepted the £2.6bn efficiencies target proposed by NR, which ORR considered allowed a degree of flexibility whilst also preserving NR’s accountability in respect of any failure to deliver against the efficiency target which it has set for itself.

ORR envisages that increasing efficiencies will allow for more expenditure to be made on renewal of the network and ensuring sustainability of assets. ORR have made clear that NR must continue to improve efficiency by managing risks throughout the whole CP6 period.

NR’s management of risk will be supported by a central fund referred to as the ‘contingent asset management spend’, which will be allocated to routes as a risk fund to meet delay or cancellation costs from planned projects. This will help to manage the risk of projects not meeting milestone targets and help protect against uncertainties.

Lastly, ORR has indicated that it is keen to update how it monitors and enforces CP6 policies, including the potential for hearings between NR routes, the SO and affected parties, to improve accountability of the management teams of the routes, the SO and other business units for their actions.

Other key points to note

Safety

ORR has confirmed that it is committed to improved safety and ensuring that NR routes understand what the legal duty of reducing safety risks “so far as is reasonably practicable” means in terms of investment decision-making. Provision has been made for additional safety-related expenditure to increase spending on level crossings and in relation to driver and worker safety initiatives.

Charges and incentives

The Final Determination also seeks to streamline relevant charges and incentives with the removal of four charges, including the coal spillage charge, and the capacity charge. ORR have made clear that there needs to be a balance between the need to protect operators from unexpected charges and the importance of charges in reducing costs to the network. Further improvements noted by ORR included its intention to cap and phase in variable charges to improve the current system. For example, ORR confirmed the following changes to charges:

• variable network access charges for freight and charter operators will be capped;

• charges that recover fixed costs of the network will be reformed to support competition in passenger services. This includes new open access passenger operators becoming subject to higher charges where their services operate in the interurban market segment. This is because these locations will have demand strong enough to allow the costs to be met and supports them having greater access to these parts of the network;

• the introduction of infrastructure cost charges for biomass for electricity generation will be subject to a 5 year phasing-in period; and

• financial performance incentives will be updated to reflect more recent data collected by ORR on how passengers plan journeys and the impact of delays. The incentives on punctuality will therefore be calculated to reflect this most recent data.

Next steps

NR will now need to consider whether it accepts the Final Determination. If NR objects, the ORR will either issue a revised Final Determination or seek a review by the Competition & Markets Authority. If NR accepts the Final Determination, it will then need to put together a delivery plan for CP6. This is to be published before 31 March 2019. The delivery plan will set out what NR will deliver for customers and funders over the CP6 period. This will allow stakeholders to effectively plan their businesses and will also provide a baseline for ORR to monitor NR against to ensure it delivers on commitments comprised in the Final Determination.

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