HS1 Ltd periodic review 2019 (PR19): draft determination

This consultation is now closed and we have published our final determination on HS1 Ltd.

The 2019 periodic review (PR19) is the process through which HS1 Ltd concludes its Five Year Asset Management Statement (5YAMS) for the next control period (CP3), which runs from 1 April 2020 until 31 March 2025. It is a requirement of the concession that HS1 Ltd holds to operate, maintain and renew the route.

As well as establishing outputs and costs, the final 5YAMS determines HS1 Ltd’s regulatory framework, its charging structure and the level of regulated access charges that its customers must pay.

Our role in the process is to scrutinise the final 5YAMS and provide independent challenge. We have examined HS1 Ltd’s proposals to make sure that they are in accordance with the obligations set out in the company’s Concession Agreement with the Secretary of State, who owns the infrastructure.

An important factor in our analysis was the views of both HS1 Ltd and stakeholders in response to our specific challenges. We thank HS1 Ltd for being open and constructive throughout the process and would also like to thank other stakeholders for engaging constructively.

This document summarises our draft conclusions on the final 5YAMS that was submitted to us on 31 May 2019. It is the culmination of the first phase of our examination and draws from detailed analysis that is explained in a number of supplementary documents published alongside it. Together these form the draft determination.

We propose to accept the majority of the company’s proposals, subject to some further evidence being provided. However, there are a number of aspects to the plan that we do not accept at this stage, which are:

• deficiencies in the approach to asset management – such as how further sensitivity analysis could be done and how costs could be benchmarked;
• the proposed classification of the planned implementation of a new signalling system as a renewal;
• assumptions for efficiency and productivity;
• interest rate assumptions; and
• how to address underfunding of the escrow account in Control Period 1 (CP1, which ran from 1 April 2010 to 31 March 2015) and Control Period 2 (CP2, which runs from 1 April 2015 to 31 March 2020).

We estimate that addressing these would reduce HS1 Ltd’s proposed annual renewals annuity charge from £38.2m to £26.1m, which in turn would reduce the proposed increase in the charges paid by train operators.

We have also identified one aspect of the charging structure that may not be compliant with relevant legislation – the levying of direct costs on a per train minute basis rather than on a train km basis. We are inviting views on this but we understand that changing from train minute to train km does not affect either the overall level of charges or how charges are apportioned to individual operators.

We sought comments from stakeholders on our draft conclusions, which we will take into account as we conclude our scrutiny and publish our final determination in early 2020.