Periodic review 2018: charges and incentives decisions

Access charges and incentives are important as they affect the decisions that Network Rail, train operators and funders make. They play an important role in improving outcomes for passengers, freight customers and taxpayers.

As part of our 2018 Periodic Review (PR18), we reviewed how to improve access charges and incentives for control period 6 (CP6, which runs from 1 April 2019 to 31 March 2024). A document summarising our decisions on charges and incentives for CP6 is available.

This webpage consolidates all the decisions we have made during PR18 on each charge and incentive:

Infrastructure cost charges (ICCs)

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

Our decisionDocument
To merge CP5 freight mark-ups (freight specific charge (FSC) and freight only line (FOL) charge) into a single ICC for freight market segments. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).
For freight services, we decided to:
- continue to levy ICCs on freight services carrying ESI coal, iron ore and spent nuclear fuel; and
- levy an ICC on freight services carrying ESI biomass, with a phase-in period.
Charges and incentives: Infrastructure cost charges conclusions pdf icon PDF, 616 Kb (October 2018).
For open access services, we decided to:
- define two market segments for open access services in CP6, interurban and other;
- levy ICCs on new open access services in the interurban market segment, with a phase-in period;
- provide relief from increases in charges to existing open access services in the interurban market segment, unless an existing OAO proposes substantial modification to its service; and
- not define further market segmentation for franchised services.
Charges and incentives: Infrastructure cost charges conclusions pdf icon PDF, 616 Kb (October 2018).
On the implementation details for levying ICCs on open access services, we decided to:
- amend the NPA test to take into account ICC by subtracting it from revenue abstracted;
- define the following amendments as substantial modifications to a service: increasing the number of services; increasing the number of calls at stations where the operator currently has the right to stop; or calling at new stations; and
- define the interurban market segment according to station usages and straight-line distance (without discretion).
Open access infrastructure cost charge implementation – conclusions document pdf icon PDF, 749 Kb (March 2019).
To annually adjust franchised passenger operators’ ICCs for changes in timetabled traffic. Charges and incentives: Infrastructure cost charges conclusions pdf icon PDF, 616 Kb (October 2018).

On the design of franchised passenger operators’ ICCs we decided to:
- use timetabled train miles as the traffic metric for the annual adjustment;
- apply the annual adjustment at the operator level;
- annually adjust franchised passenger operators’ ICCs by the percentage change in their annual timetabled traffic; and
- set a floor of 1% per annum for the percentage decrease in a franchised passenger operator’s timetabled traffic that is reflected in its ICC adjustment.

Charges and incentives: Infrastructure cost charges conclusions pdf icon PDF, 616 Kb (October 2018).

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.

Our decisionDocument
To use Network Rail’s new cost allocation methodology to allocate fixed costs to services, except those elements of the methodology that allocate non-avoidable costs. Charges and incentives: Infrastructure cost charges conclusions pdf icon PDF, 616 Kb (October 2018).
To approve the recalibrated FTAC price list for use in CP6. Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.

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.

Station charges

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.

Our decisionDocument
LTC: To approve the recalibrated LTC price lists for managed and franchised stations for use in CP6. Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.
QX management fee: TBC We will publish our decision letter on this document at a later date.

Variable usage charge (VUC)

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

Our decisionDocument
Not to geographically disaggregate the VUC. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).
To cap and phase-in increases in the variable usage charges levied on freight and charter services. The Variable Usage Charge in control period 6: conclusions pdf icon PDF, 354 Kb (October 2018).

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.

Our decisionDocument
There would not be a fundamental review of the methodology for calculating the VUC – in particular, we would continue to use the Vehicle Track Interaction Strategic Model (VTISM) in calculating the charge to be levied on different vehicles. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).
To approve the VUC price list for use in CP6. Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.

Capacity charge

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

Our decisionDocument
To remove the capacity charge. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

Coal Spillage charge

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

Our decisionDocument
To remove the coal spillage charge. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

Electrification asset usage charge (EAUC)

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

Policy

Our decisionDocument
To continue to base the design and the calculation of the EAUC on the same principles and methodology as in CP5. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

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.

Our decisionDocument
To approve the EAUC price list for use in CP6. Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.

Traction electricity charge (EC4T)

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

Our decisionDocument
To keep the loss incentive mechanism. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

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.

Our decisionDocument
To approve:
- the recalibrated DSLFs and regenerative breaking discount rate;
- the Traction Electricity Modelled Consumption Rates List including the default modelled consumption rates; and
- the removal of both the power factor correction and the meter tolerance factor from the Traction Electricity Rules.
Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.

Performance-related payments due to planned disruption (Schedule 4)

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

Our decisionDocument
Not to pursue the following issues in PR18:
- liquidated damages passenger train operator cost compensation;
- liquidated damages freight compensation;
- cancelled possessions;
- scope of incentives; and
- joint working on timetabling.
Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).
Not to amend the principles behind the Access Charge Supplement (ACS), which is the payment made by franchised train operators for certain Schedule 4 compensation arrangements. PR18 consultation on amending Schedule 4 notification factors pdf icon PDF, 443 Kb (December 2017).
Not to amend the Schedule 4 negotiated compensation arrangements. PR18 consultation on amending Schedule 4 notification factors pdf icon PDF, 443 Kb (December 2017).

Recalibration of the passenger operator regime

Network Rail receives a discount on the Schedule 4 payments, the earlier it notifies franchised passenger operators of possessions. This is set out according to notification thresholds, which are aligned with the industry’s timetable planning process to support the orderly production of the revised timetable. ORR led the recalibration of notification factors in Schedule 4. In particular, we recalculated notification factors based on our research on the current level of passenger awareness of forthcoming possessions.

Our decisionDocument
To amend the notification factors in Schedule 4. Decision on Schedule 4 notification factors pdf icon PDF, 329 Kb (May 2018).
Not to amend the existing notification thresholds, recommending RDG to continue its work in this area over CP6 to develop a proposal in time to be introduced as part of 2023 periodic review. Final Decision: Proposal for an additional Schedule 4 notification discount factor threshold and review of London and South East notification factors pdf icon PDF, 1,556 Kb (October 2018).
To accept the revised notification factors for London and South East services submitted by RDG. Final Decision: Proposal for an additional Schedule 4 notification discount factor threshold and review of London and South East notification factors pdf icon PDF, 1,556 Kb (October 2018).

Network Rail led the recalibration of Schedule 4 Access Charge Supplement (ACS) for passenger operators. ORR engaged with Network Rail and passenger train operators 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.

Our decisionDocument
To determine:
-whether emergency timetable possessions forecasts should be included in the ACS;
-the level of granularity at which the ACS should be allocated between passenger operators; and
-the notification assumptions that should be used in the ACS recalibration.
Final Decision on disputed aspects of Network Rail’s Schedule 4 Access Charge Supplement calculation methodology pdf icon PDF, 175 Kb (October 2018).
To approve the recalibrated Schedule 4 ACS for use in CP6. Approval of the recalibration of track access charges for CP6 pdf icon PDF, 228 Kb (November 2018). Network Rail published the CP6 Price lists consistent with our Final Determination on its website.

The Rail Delivery Group (RDG) led the recalibration of the following Schedule 4 parameters for passenger operators. ORR engaged with RDG 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.

Our decisionDocument
To determine the most appropriate methodology for calculating a representative diesel vehicle fuel consumption rate as part of its recalibration of train mileage payment rates. Final Decision: Methodology for estimating a representative fuel cost figure in the Schedule 4 compensation regime pdf icon PDF, 167 Kb (October 2018).
To determine the recalibration of:
-sustained planned disruption revenue thresholds; and
-cost thresholds.
Final Decision: Schedule 4 sustained planned disruption revenue and cost thresholds recalibration pdf icon PDF, 183 Kb (October 2018).
To approve the:
- train mileage payment rates;
- estimated bus cost miles payment rates; and
- sustained planned disruption – defined service group revenues.
Schedule 4 & 8 Recalibration: Approval of CP6 Schedule 4 parameters in the passenger regime pdf icon PDF, 121 Kb (November 2018).

Recalibration of the freight and charter operator regimes

A working group consisting of Network Rail and freight and charter operators led the recalibration of the Schedule 4 regime for freight and charter operators. ORR engaged with Network Rail and operators 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.

Our decisionDocument
To approve the:
- normal planned disruption sum;
- enhanced planned disruption sum;
- disruption sum;
- service variation sum; and
- late notice cancellation sum.
Schedule 4 & 8 Recalibration: Approval of CP6 Schedule 4 & 8
parameters in the freight and charter regimes pdf icon PDF, 134 Kb
(October 2018).

Performance regime for unplanned disruption (Schedule 8)

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

  • Providing Network Rail with financial incentives to improve performance on the railway.
  • Providing operators with financial incentives to limit the delay they cause to other operators.
  • Reducing operators’ exposure to losses that arise from delay and cancellations caused by Network Rail or other operators, by compensating operators for some of the losses incurred as a result of delay. This reduces the risk to train operators of operating and investing in the industry, reducing the cost to taxpayers.

Policy

Our decisionDocument
To keep the measure of passenger operators’ performance as in CP5. Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).
Not to restrict the losses eligible for compensation under Sustained Poor Performance provisions to cost only.

Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

Not to incorporate passenger compensation arising from Network Rail caused delays into the formulaic Schedule 8 payments.

Charges and contractual incentives – consultation conclusions pdf icon PDF, 180 Kb (June 2017).

To remove the annual traffic adjustment to FOC benchmarks. Final Decision: Proposal to remove the annual adjustment to the freight and charter operator Schedule 8 benchmarks pdf icon PDF, 242 Kb (March 2018).

Recalibration of the passenger operator regime

The Rail Delivery Group (RDG) led the recalibration of the Schedule 8 regime for passenger operators. 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.

Our decisionDocument
To determine which delay multipliers should be used in CP6. Final decision on the Delay Multipliers to be used in the recalibration of the Schedule 8 Network Rail payment rates in the passenger operator regime pdf icon PDF, 242 Kb (May 2018).
To determine the methodology used to re-calibrate the Network Rail payment rates for C2C service groups and one Chiltern service group (HO02). Schedule 8 recalibration: Approval of Network Rail payment rates pdf icon PDF, 179 Kb (October 2018).
To determine the level of the sustained poor performance (SPP) threshold. Final decision: Approach to recalibrating the SPP thresholds in the franchised passenger Schedule 8 regime pdf icon PDF, 370 Kb (October 2018).
To approve Monitoring Point Weightings and Cancellation Minutes.

Schedule 8 Recalibration: Approval of Phase 1 parameters pdf icon PDF, 270 Kb (June 2018).

To approve Network Rail payment rates. Schedule 8 recalibration: Approval of Network Rail payment rates pdf icon PDF, 179 Kb (October 2018).
To approve the:
-SPP thresholds;
-Network Rail benchmarks;
-passenger operator payment rates; and
-passenger operator benchmarks.
Schedule 8 Recalibration: Approval of CP6 Schedule 8 parameters in the passenger operator regime pdf icon PDF, 218 Kb (November 2018).

Recalibration of the freight and charter operator regimes

A working group consisting of Network Rail and freight and charter operators led the recalibration of the Schedule 8 regimes for freight and charter operators. 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.

Our decisionDocument
To determine what the risk premium (included in the access charge supplement for  incident caps in the freight regime) should be. Final decision on the level of the risk premium in the incident cap access charge supplement pdf icon PDF, 187 Kb (May 2018).
To determine the approach to be used in the recalibration of the freight and charter operator benchmarks. Final decision on the approach to recalibrating the freight and charter operator benchmarks for CP6 pdf icon PDF, 199 Kb (October 2018).
To determine freight and charter operators’ exposure to Schedule 8 costs resulting from disruption caused above the incident caps purchased.

Final decision: The level of freight operator exposure above the incident caps pdf icon PDF, 233 Kb (October 2018).

To determine the approach for recalibrating the Class 0 trains element of the Network Rail benchmark in the freight regime. Final decision: Approach to recalibrating the Class 0 trains element of the Network Rail benchmark in the freight regime pdf icon PDF, 240 Kb (October 2018).
To approve the following recalibrated parameters for use in CP6:
-the Network Rail payment rate for the freight and charter operator regimes;
- the freight operator benchmark;
- the charter operator benchmark;
- the Network Rail benchmark in the charter regime;
- the cancellation sum in the freight regime (above and below threshold);
- the cancellation sum in the charter regime;
- the joint cancellation sum in the charter regime;
- the small and new entrant annual caps in the freight regime (Network Rail and train operator); and
- the annual caps in the charter regime (Network Rail and train operator).
Schedule 4 & 8 Recalibration: Approval of CP6 Schedule 4 & 8 parameters in the freight and charter regimes pdf icon PDF, 134 Kb (October 2018).
To approve the following recalibrated parameters for use in CP6:
-Network Rail benchmark in the freight regime;
-the freight operator payment rate;
-the charter operator payment rate;
-the cancellation threshold in the freight regime; and
-incident cap ACS.
Schedule 8 Recalibration: Approval of CP6 Schedule 8 parameters in the freight and charter regimes pdf icon PDF, 117 Kb (November 2018).

Route-level efficiency benefit sharing (REBS) mechanism

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

Our decisionDocument
To remove the REBS mechanism.

Overview of charges and incentives decisions pdf icon PDF, 438 Kb (October 2018).

The volume incentive

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).

Policy

Our decisionDocument

To remove the financial payment elements of the volume incentive in CP6 (but continue reporting on volume metrics).

Volume incentive – conclusions to working paper pdf icon PDF, 130 Kb (May 2018).