Periodic review 2018: charges and incentives decisions

Infrastructure cost charges (ICCs) is the term we have used in PR18 to describe charges that recover Network Rail’s fixed costs, i.e. those costs that do not vary in the short-term. In CP5, the charges recovering fixed costs were:

• the Freight Specific Charge (FSC);
• the Freight Only Line (FOL) charge; and
• the fixed track access charge (FTAC) paid by franchised passenger operators.

Policy

Recalibration

Network Rail led the recalibration of the fixed track access charge (FTAC). ORR engaged with Network Rail throughout the recalibration process. ORR’s role was to assess whether the evidence and methodology used were consistent with the principles of the policy, and that the independent audit Network Rail carried out was sufficient. ORR then approved or rejected the recalibration accordingly.

ORR led the recalibration of ICCs for freight and open access market segments. These prices are set out in our Charges and incentives: Infrastructure cost charges conclusions (October 2018). Network Rail published the CP6 Track Usage Price List and Open Access ICC Rates List consistent with our Final Determination on its website.

Network Rail owns the majority of stations on the network, and at most of these stations is responsible for the maintenance, repairs and renewals (MRR). However, Network Rail is not necessarily the station facility owner (SFO) at each station, meaning the party responsible for the operation and management of each station.

If Network Rail is the SFO at a station, it is known as a managed station. There are currently 20 managed stations and they are all large stations.

Alternatively, a franchised train operator could be the SFO at the station and, if this is the case, it is known as a franchised station. Franchised stations account for the majority of stations on the network.

The two station charges regulated by ORR and reviewed as part of PR18 were:

1. Station long term charge (LTC)The LTC allows Network Rail to recover its efficient maintenance, renewal and repair (MRR) costs at the stations it owns.  This includes both managed and franchised stations.
2. Qualifying expenditure (QX) management fee The QX charge is recover the SFO’s day-to-day running costs of providing services and amenities. The QX charge at each station is agreed between the SFO and other train operators that use the stations.
   At managed stations, Network Rail can charge a QX management fee to recover its central support costs and includes a profit element. The QX management fee is levied as a percentage of the fixed QX charge at the station.

Policy

In PR18, we did not take any policy decisions that affected the station long-term charge (LTC) or the qualifying expenditure (QX) management fee.

Recalibration

Network Rail led the recalibration of the LTC and QX management fee. ORR engaged with Network Rail throughout the recalibration process. ORR’s role was to assess whether the evidence and methodology used were consistent with the principles of the policy, and that the independent audit Network Rail carried out was sufficient. ORR then approved or rejected the recalibration accordingly.

The VUC is a charge designed to recover the operating, maintenance and renewal costs that vary with marginal changes in traffic. It does not reflect the costs of providing or changing the capability or capacity of the network.

Policy

Recalibration

Network Rail led the recalibration of the VUC. ORR engaged with Network Rail throughout the recalibration process. ORR’s role was to assess whether the evidence and methodology used were consistent with the principles of the policy, and to approve or reject the recalibrated results accordingly.

The capacity charge, which was a part of Network Rail’s structure of charges in CP5, had two main purposes:

oto provide Network Rail with additional revenue to cover the increase in the cost of performance related payments to operators (set out in Schedule 8 of track access agreements) that typically results from adding traffic to the network; and
oto provide operators and funders with an incentive to take account of the financial impact on other operators of the change in performance that typically results from increased use of the network, thereby sending price signals to train operators and funders to promote better use of network capacity.

In PR18, we considered whether the capacity charge should be retained or replaced.

Policy

In CP5, the coal spillage charge has provided an incentive on freight operators to reduce spillage and to reflect the cost to Network Rail of dealing with coal spilt on the network. In PR18, we considered whether it remained appropriate to retain the charge.

Policy

The electrification asset usage charge (EAUC) recovers maintenance and renewal costs of electrification assets that vary with traffic.

Policy

Recalibration

Network Rail led the recalibration of the EAUC. ORR engaged with Network Rail throughout the recalibration process. ORR’s role was to assess whether the evidence and methodology used were consistent with the principles of the policy, and to approve or reject the recalibrated results accordingly.

The traction electricity charge (EC4T) recovers the costs of electricity supplied by Network Rail to power electric trains. All operators who run electrified trains pay this charge, which can be calculated based on either a metered or a non-metered (modelled) approach.
In PR13, we introduced the loss incentive mechanism to incentivise Network Rail to minimise transmission losses and  to ensure that the risk of forecasting errors in the Distribution System Loss Factor (DSLF) is shared between Network Rail and those train operators with modelled (i.e. non-metered) consumption.  As part of PR18, we assessed whether to keep or remove this mechanism having considered how effective it has been in achieving its intended objectives.

Policy

Recalibration

Network Rail led the recalibration of the EC4T. This included the recalibration of the Distribution System Loss Factors (DSLFs) in each Electricity Supply Tariff Area (ESTA) as well as the recalibration of the regenerative braking discount rates for non-metered electrified services. These are parameters used in estimating the electricity transmission losses and the discounts that modelled train operators receive for applying regenerative breaking, respectively.   ORR engaged with Network Rail throughout the recalibration process. ORR’s role was to assess whether the evidence and methodology used were consistent with the principles of the policy, and to approve or reject the recalibrated results accordingly.

Network Rail makes payments to operators when their services are subject to disruption due to planned possessions on the network to undertake maintenance, renewals and enhancements. These are defined in Schedule 4 of track access agreements.  Such payments have two main functions:

oreducing operators’ exposure to financial risks associated with possessions, which are outside of their direct control; and
oincentivising Network Rail to limit the level of service disruption as a result of possessions.

Policy

Recalibration of the passenger operator regime

The performance regime for unplanned disruption (set out in Schedule 8 of track access agreements) has three main functions:

The route-level efficiency benefit sharing (REBS) mechanism was established in PR13 with the aim of strengthening the alignment of incentives between Network Rail and operators in order to support greater co-operation and drive down industry costs. The mechanism allowed operators which chose to participate in it (or which were required to do so) to share in Network Rail’s efficiency gains or losses.
We reviewed REBS as part of PR18. We considered whether to retain REBS, to amend it/replace it with a similar mechanism, or to remove it entirely. The evidence we reviewed suggested that REBS was not achieving its goals and that it represented an administrative burden. We decided to remove REBS entirely, an option which had received strong stakeholder support.

Policy

The volume incentive, which was in force during CP5, was a payment mechanism between Network Rail and governments intended to encourage Network Rail to be more responsive to unexpected demand for network capacity. In PR18, we reviewed whether the volume incentive remained relevant given the changes to Network Rail’s funding arrangements.
After careful consideration, we determined that Network Rail’s reporting ‘use of the network’ measures on route comparability scorecards was an appropriate mechanism to report on volume measures. From CP6, we will no longer require Network Rail to report on the volume incentive in its annual Regulatory Financial Statements. This will be reflected in our CP6 Regulatory accounting guidelines (expected to be published in 2019).