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«Valentina Licata. Office of Rail Regulation, 1 Kemble Street, London, WC2B 4AN 4th September 2013 Dear Ms. Licata, GB Railfreight Ltd. response to ...»

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A copy of this proposal is attached to this e-mail. GBRf believes this specific RFOA alternative mechanism should replace the current capacity charge moving into CP5 and that it should apply to both franchised & open-access passenger and also freight operators. The benefit of the RFOA proposal is that it’s far more cost-reflective for all concerned, with TOCs and FOCs actually paying what is due.

The proposal has been welcomed and endorsed by Network Rail and GBRf recommends the ORR adopts this mechanism into the Final Determination. GBRf will, obviously, engage in further debate of the review of this charge for CP6.

Coal Spillage Charge:

As noted in the Draft Determination, GB Railfreight is still of the opinion there has been far too little evidence-based information to support Network Rail’s cost estimates and assumptions on how the spillage of coal might affect the lifespan of both plain line and S&C on the network. There also appears to have been a lack of true understanding on the actual effects of coal spillage. Without this, and noting ORR’s concerns on missed opportunities for recording incidents of coal spillage, GBRf is disappointed that the coal spillage charge will be increased by 57% at the start of CP5.

GBRf is also disappointed that the mechanism, as proposed, contains no incentives for operators to reduce coal spillage although some, obviously, chose to do so.

Operators who actively ensure coal spillage from its wagons is kept to as low a level as possible should be rewarded for this behaviour and the coal spillage charge should be made against trains that actually cause the spillage and discounts provided for operators who can demonstrate that they reduce levels of contamination.

Freight Specific Charge (FSC):

GBRf welcomes the removal of Biomass from the application of the FSC. Biomass is a new emerging market to rail freight and investment from the generators will have been stifled if the additional charge had been applied. GBRf also welcomes the reduced FSC, when compared to the consultation document, for coal to £1.04/kgtm phased in over five years.

However GBRf does have reservations that Network Rail employs regulatory economists to decide what the markets can afford and how to charge markets captive to rail and still doesn’t believe that the introduction of a new CP5 Freight Specific Charge is the right way of obtaining a mark-up charge for those markets that are deemed to be able to bear it.

LEK Consulting Report – Estimating Freight Avoidable Costs:

GBRf believes that the LEK Consulting report does not give a true reflection of the transparency of freight avoidable costs and this particularly applies to the sections titled “Redundant Freight Asset Avoidable Costs” and “Consequential Cost Increases”.

GBRf does not believe that redundant leased freight asset costs should be included in any such exercise. The redundant lased freight sites would still incur costs to Network rail for security, maintenance and surveys which are all costs not currently incurred by Network Rail.

GBRf believes that consequential cost increases would be higher than the LEK Consulting report implies and that the benefit Network Rail enjoys from marginal rates for business purchased from the FOCs is understated. GBRf believes that the additional costs for engineering bulk supply trains, engineering possession trains, video survey and test trains and railhead treatment trains would be substantially more that the LEK Consulting report has implied.

The LEK Consulting report should also not be viewed in isolation. A balanced view should be taken, identifying the economic benefits of railfreight and identifying the additional costs that UK business would incur should freight that’s currently moved by rail switch to other means of transportation.

Treasury revenue generated by UK railfreight movement should also be identified to give a true balanced view on the true freight avoidable costs.

Schedule 4 Possessions Regime:

GB Railfreight is in favour of the continuation of the current Schedule 4 regime and believes that the Schedule 4 payment rate should be set to compensate freight operators, in full, for the financial impact of service disruption from Network Rail possessions.

The original CP4 Schedule 4 freight rates, some 30% higher than now, went quite some way in compensating FOCs for additional operating costs incurred as a result of planned Network Rail possessions. This has included compensation for items such as additional traincrew for running over a different route, consequentially altered and longer traincrew workings to cater for this change, increased track access charges for greater mileage and the downgrading of gauge for Intermodal traffic to name but some of the more important criteria.

GB Railfreight is clear that the current CP4 and new CP5 Schedule 4 rate (as per end of CP4 rate) does not, and will not, sufficiently compensate operators for increased costs during possessions. This is a particularly important issue as FOCs are likely to face a considerable increase in the quantum and severity of disruption in CP5 compared to CP4.

GB Railfreight has also noted the new Category 1 and 2 payment rates (per occasion) for Network Rail possessions and the proposal to increase the total Schedule 4 freight compensation fund to £12.2M.





The Network Rail to freight operator payment rate must also be at a high enough level to incentivise Network Rail not to automatically plan possessions during traditional freight hours of operation if it is the cheaper option.

The lowering of the Schedule 4 freight payment rates by 31%, in 2011, only weakened Network Rail’s incentive to not disrupt freight traffic ahead of passenger traffic. A set of rates that doesn’t, already, fully compensate freight operators will not encourage them to agree to more efficient possessions (for Network Rail) that would materially affect freight operators’ business. There is no recognition of the impact on customers when services are unable to run and the long impact this may have on future business.

The CP5 Schedule 4 payment rates should, at the very least, revert to the pre-adjustment levels, with additional funding, to take into account the increase in the number of major schemes and works that will be implemented in CP5 compared to CP4. This should also be done without an access charge supplement.

Schedule 8 Performance Regime:

Incentivising efficient behaviour is at the core of PR13. GBRf believes that increasing the rate payable from FOCs to Network Rail, whilst protecting Network Rail’s payment rate to FOCs, is unjust and sends completely the wrong signals regarding past and future performance.

Network Rail will not have reached its regulated performance targets by the end of CP4 and the proposed rates do not incentivise Network Rail to improve its performance from the start of CP5.

Throughout CP4, freight operating companies have shown greater improvements in performance than Network Rail and would thus be penalised at the start of CP5 with the proposed disparity of rates.

This would then force further performances improvements on the FOCs, while Network Rail would be held harmless with no incentive to improve.

The RFOA has commissioned LEK Consulting and Professor David P. Myatt to analyse key ORR and Network Rail assumptions in the calculation of the Network Rail payment rate.

Professor David P. Myatt also adds that Network Rail’s assumption of a 50% pass-back to the customer, in the form of a lower price, is incorrect. Professor Myatt’s report demonstrates the value should be 80% pass-back in the form of a lower price. Using this methodology the Network Rail to FOC rate should be adjusted to £24.24 per minute.

The LEK Consulting report analysed how longer, heavier trains have already increased the value of a freight train and what the increased impact of delay is to these services. The LEK Consulting report indicates that the Network Rail to FOC payment rate is undervalued by £5.60 per minute.

The two factors, combined, result in a revised Network Rail to FOC payment rate of £25.86 per minute.

These two report demonstrate that keeping the Network Rail to FOC payment rate at the same level as in CP4 is unjustified. GBRf would like the ORR to consider this information and revise the Network Rail to FOC payment rate in line with the research the FOC community has commissioned.

CHAPTER 19 – FINANCIAL INCENTIVES:

Route-Level Efficiency Benefit Sharing (REBS):

As an open-access freight operator, GB Railfreight is receptive to the incentive element of REBS

however there are some specific points where far more clarity is needed:

Paragraph 19.19 states that, for CP5, additional adjustments that ORR will consider making to the

measure of REBS performance are where:

a) Network Rail makes a significant (my italics) change to its spend profile……….

b) Network Rail makes material (my italics) changes to the methodology for allocating costs between operating routes GBRf needs to be clear what “significant” and “material” actually mean in terms of quantum and also how these two types of change are to be measured. Without clarity on these two points, GBRf won’t have any certainty of the parameters and rules of engagement of REBS.

There also doesn’t appear to be any protection to REBS-participating TOCs & FOCs in the form of a dispute and resolution process, as we move through CP5, in the event that either party is not performing and responding in the way that’s expected.

Yours sincerely, Ian Kapur.

National Access Manager.

CAPACITY CHARGE – RFOA PROPOSAL

Executive Summary  The Capacity Charge was introduced in 2003 to recognise the increased performance penalty risk that could arise for Network Rail from increased freight and passenger services on the Network  Due to billing systems limitations at Network Rail, the actual basis for charging was simplified down to a charge per train mile for all services rather than just incremental services.

 Since 2005/6, freight train miles have actually reduced by 34.7% as the FOCs have become more efficient in aggregating loads and making best use of the network. Passenger train miles meanwhile have increased 13.6% in this period.

 It could therefore be argued that based on the original policy, the freight sector should not be paying any capacity charge until their usage of the network measured in train miles has returned to 2001/02 levels as we have reduced performance risks rather than increased them.

 Network Rail is keen to secure a much higher unit rate per mile for capacity charges to reflect the increased financial risk accruing from the uplift in Schedule 8 delay minute rates.

 As a compromise, the RFOA proposed a zero charging base on CP4 Schedule 8 benchmark levels (2010-12) and pay a capacity charge on incremental traffic on an aggregated FOC basis for each at the new higher rate. This could be calculated and paid at the end of each financial year in CP5.

Principle

The Capacity Charge is designed to neutralise the increased Schedule 8 payments made by Network Rail associated with the increased difficulty of recovering from incidents as the network becomes more crowded. The purpose of the Capacity Charge is therefore to ensure that Network Rail are not disincentivised to accommodate additional trains on the rail network which may bring wider economic and social benefits.

Current Charge

Since its inception in 2001 the Capacity Charge has been charged on the basis that the same rate applies to all train miles, whether it is existing trains or additional trains. This methodology results in fundamental overcharging as the calculated marginal rate for additional trains is applied to all trains. This methodology does not take into account the fact that the Schedule 8 performance regimes are benchmarked or that the marginal rate for additional trains on a busy network is higher than the cost of trains already on the network as congestion results in increased secondary delay.

This has resulted in approximately £400 million over-recovery by Network Rail in the first 4 years of Control Period 4 (CP4). This level of over recovery is despite the fact that the Capacity Charge rates have not been recalculated since 2001 whereas Schedule 8 payment rates were updated from the beginning of Control Period 4 (2009); if the Capacity Charge had been increased in line with Schedule 8 rates the over-recovery would have been considerably higher. This also means that during CP4 there has been a de-linkage between Schedule 8 payment rates and the Capacity Charge at the margin.

The below graph shows Network Rail’s income from the Capacity Charge net of Schedule 8 payments for

the first 3 years of CP4 (Regulatory accounts for 2012/13 still awaited):

It is noted that in the case of franchised passenger operators (who pay around 97% of the total value of the Capacity Charge) Network Rail does not benefit financially from this over recovery as the Capacity Charge income is offset against the Fixed Charge income.

However freight operators only pay an equivalent to a fixed charge (the Freight Specific Charge) on those market segments that are deemed by the ORR to be able to afford a “mark-up”. Therefore there is no equivalent off-set for freight operators and the Capacity Charge is an actual cost to freight operators.

Track access charges are required to conform to the principles set out in the Railways Infrastructure (Access and Management) Regulations 2005 (“the Regulations”). As the part of Capacity Charge already within Network Rail benchmarks is in effect in lieu of fixed charges then the charge is in effect a “mark-up” which must then conform to the principles set out in paragraph 2 of Schedule 3 of the Regulations. In essence this states that a mark-up can only be levied on those market segments that are deemed to be able to bear one. The current methodology for calculating the Capacity Charge does not seem to be compliant with the Regulations and therefore RFOA have proposed an alternative methodology that is compliant with the Regulations.

Updating the Capacity Charge



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