Tackling regulation at its routes
Source: RTM Dec/Jan 17
John Larkinson, the ORR’s director of railway markets and economics, speaks to RTM about the move to regulating Network Rail at a route level and the next major milestones ahead of CP6.
Following on from last year’s Shaw Review which, much like Sir Roy McNulty’s 2011 report, recommended an enhanced customer focus through deeper decentralisation, Network Rail has now decided to extend and accelerate its devolution approach. In November 2016, it established eight devolved routes, each captained by a managing director, in order to ensure routes have greater authority and capacity to deliver on local needs.
In order to align itself with this transformation, the ORR ran a consultation process from May to August 2016 seeking views on route-level regulation proposals. It argued this would allow the regulator to “put greater reliance on comparison between the route businesses, rather than having to rely on comparisons with other overseas networks” – as well as “improve understanding of key cost drivers and enable the most effective approaches across the company to be highlighted and used more widely”.
In November, John Larkinson, the ORR’s director of railway markets and economics, published a letter confirming that the regulator would push ahead with these changes to both build on Network Rail’s devolution and encourage closer working and local funding.
Speaking to RTM shortly after, Larkinson said: “This originally came from the company [Network Rail], and if you look at its rationales, some of them were things like it would get the routes closer to their customers, potentially improve efficiency, and improve responsiveness to local needs. And we actually agree with that – we support all of it.”
From the ORR’s perspective, route-based devolution is indeed likely to bring routes closer to their customers. But aside from these broad positives for the infrastructure owner, Larkinson argued there are also very specific benefits for the ORR itself.
“There’s only one Network Rail, so in terms of having points of comparison and knowing who’s doing better, who’s doing not so well – we only have one Network Rail,” he explained. “What we’ve already seen, with all the data split out at route level, is that it gives us those points of comparison, allows us to ask questions – why is it done like that here and like that over there? How do you know this way is better than that one? It gives us a point of challenge, and we think that will help drive improvement in itself.”
Early signs of efficiencies
But how would these changes spur greater efficiencies? “When Network Rail has done its efficiency forecast in the past,” said Larkinson, “you tend to get a lot of central forecast of efficiencies, including the Network Rail centre making assumptions about the efficiencies that the routes can deliver in certain areas.
“What we’ve seen with route devolution is that there’s a much stronger thinking at the route level, where the route takes more ownership of the efficiencies that it thinks it can achieve, and that it believes it has a plan to achieve. We’ve already seen some benefits in terms of what we might call some ‘tension’ between the routes and the centre around where efficiencies could come from and how much efficiency could be delivered.
“And then once that’s agreed, you have an ownership around that efficiency at a route level. It’s likely to deliver more causable and deliverable efficiency plans in the future, and we’ve already seen some signs of that.”
Ultimately, the changes would mean each route has someone whose sole responsibility is to deal with third-party funding and finance – a single point of contact for customers. It will also then affect how the ORR writes its Network Rail Monitors – in fact, the regulator has already been experimenting with different ways of presenting route-level data in recent monitors, although Larkinson would “expect to see a lot more of that in the future”.
Incremental changes to charges
Despite the largely positive feedback to proposals, these changes will unavoidably result in a major reform to charges. The regulator admitted in its consultation that it would need to consider the degree to which route-level regulation has implications for the structures of charges, as it “might affect the case for disaggregating charges to reflect any significant variation in costs in different locations”.
“For example, in order to provide effective incentives on route teams to collaborate with customers to reduce costs, and/or to identify opportunities for new services, we may need to ensure that there is a sufficiently strong link between costs within a route and the resulting income from charges at that route level,” said the document.
In his letter, Larkinson wrote that the ORR thought charges reform “could be an important way of supporting improved efficiency over time” – but that it would explore incremental, rather than fundamental, improvements to variable charges.
Questioned on the reasons behind this, he told RTM that there were some concerns raised about the charges approach. “I suppose there’s a general one around if the routes are all doing their own thing, how is it being held together across the whole Network Rail business, particularly in things like planning and timetabling?
“That’s why, when we talk about route devolution, we’re also talking about the system operator function as well. There has to be some glue that binds all this together. We think that the system operator function is crucial in addressing that particular criticism.”
Overall, the ORR has been doing “quite a bit of thinking” around concerns such as financial risks, potential cost shocks, what happens if something goes wrong at route level, and how exposed routes would be. “We are clear that the routes have to have some financial reserves; they can’t effectively be so close to the margins that they have no room for manoeuvre whatsoever,” added Larkinson.
“There probably also needs to be some system of the centre being able to potentially step in if the routes get really large, unexpected cost shocks. So if something happens that really only affects one route, and it’s not something the route could possibly have foreseen, what then happens? We think a lot of this is about how you manage financial risk at the end of the day, and what allowances are made for financial risk and what the rules are.”
Asked about the next steps in this journey, Larkinson said the ORR was approaching a “big stage now” where routes have to come up with their first plan for the next control period – what they intend to do in 2019-24 and how much money would be needed to deliver that.
“The routes have got to the stage now where they have the first cut of their plans,” he explained. “What we want to do is, during February, ensure each of the routes has a discussion with TOCs and local stakeholders like LEPs about their emerging plans, what people think are the biggest priorities, and what needs to happen next. That will be a new stage – this is not something that’s been done before – but we think that would really help build this idea that it’s the routes that have to do the planning. They have this conversation with their customers and stakeholders, and then after that a further period of engagement.
“That also allows them to have a conversation about what Network Rail calls the scorecards: what is it that the route has to deliver? How do you decide what the route has to deliver? This development of the scorecards is fundamental. That’s part of the business planning process and that’s happening now.
“It’ll go on during the course of the year, because Network Rail doesn’t have to come up with these final business plans until next October, but February is quite a big stage in all of this for us.”
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