Informed Source e-Preview August 2006
First of all, thanks for all the feedback e-Preview generates. With over 700 subscribers, and still growing, it is taking on a role of its own, in addition to promoting the column and recording developments since it went to press. The fourth Monday in the month now brings a surge of e-mails from readers, for which many thanks. DfT nukes the ROSCOs
FCC – Elaine stands by her ban
DfT outlines the HLOS
Signalling - more preferred but no firm orders
EC4T – beware the MLUI
No prizes for guessing the lead item for August. After the series of fruitless ‘deadlines’ for the Rolling Stock Companies (ROSCO) to cut rentals by £100 million a year, DfT Rail finally asked the Office of Rail Regulation (ORR) to consider a referral to the Competition commission for a market investigation. This complaint is limited (for the present) to the capital rentals for the traction and rolling stock the ROSCOs inherited from British Rail – the so-called MOLA fleets. DfT Rail’s complaint is that when the first 10 year leases expired in 2004, it expected market forces to take over and MOLA fleet rentals to drop. I have made several circuits pf the mulberry bush with DfT Rail officials trying to get them to relate their concerns to examples of current capital rentals. However they have steadfastly refused to play, repeating only that a ‘fundamental’ lack of transparency about the way rentals are set means that they are not satisfied that the MOLA fleet capital rentals are ‘fair and competitive’.My uncharitable view is that DfT Rail doesn’t understand how operating leases work and that the £100 million a year rebate being demanded bears no relationship to individual MOLA fleet rentals. Take, for example, to similar DMUs.A Class 158 has a capital rental of around £5,000 per vehicle per months. A Class 170 Turbostar, bought by the ROSCOs and leased at commercial rates, costs £7,200 per vehicle per month. That sounds pretty ‘fair’ to me. The older vehicle has a realistically lower rental. More numbersI have also tried to work out how the £100 million relates to the total capital rentals of the MOLA fleets. The back of the envelope calculations in the column suggest it equates to a about one third. ‘We might as well chuck the vehicles in the sea at that price’ commented a senior ROSCO Informed Source. ORR’s initial market study will take three months. But already the timescale is slipping.ORR was scheduled to start talks with the ROSCOs in ‘mid July’. On July 21 ORR was writing to the ROSCOs with a copy of the DfT complaint. So allowing time for each ROSCO to analyse DfT Rail’s view of its MOLA fleet rentals and then prepare its response, talks are unlikely to start until the first week in August. There is a strong body of opinion that ORR will reject the complaint. This would get whoever in DfT Rail promised a £100 million saving from the ROSCOs off the hook.But they are nothing if not rigorous at ORR and if a more detailed analysis is felt to be necessary a full market review could follow taking a further six to twelve months. If the DfT% Rail case is upheld then ORR will make a reference to the Competition Commission for full scrutiny under the Competition Commission's market investigation powers. That could take anything up to 18-24 months.So just when so knotty and urgent rolling stock funding decisions are emerging – lengthening Virgin West Coast’s Class 390 Pendolinos for example - massive uncertainty has been injected into the leasing market. And one thing the money men don’t appreciate is uncertainty. If rail in the UK is seen as a dodgy market, there is no shortage of mature sectors, like aviation and shipping, to invest your funds.FCC
Having reported on first Capital Connect’s restriction on discounted tickets in the evening peak as a passenger last month, in this month’s column I am in professional mode. And the only conclusion is that FCC made a total hash of implementing its ban.Apart from annoying their customers, FCC succeeded in rousing Transport for London and I quote some juicy excerpts from letters sent to FCC by rail supreme Ian Brown and Mayor Ken.In more serious vein I explain how the National Conditions of Carriage made the ban unenforceable on stopping trains. This was reflected in the easing of the restrictions from 10 July which exempts all stations served by ‘stoppers’.
While FCC claimed that the restrictions were aimed at managing overcrowding, the cold numbers suggest that, really, it is all about money. The FCC premium profile says it all. In the first year of the new franchise the premium goes up by £8.3 million. But in 2007-08 an additional £29.8 million has to be paid to Government– a total premium of £43.9 million on revenue of around £350 million.No surprise, therefore that FCC is reported to be seeking to close the Break of Journey loophole for its Cheap Day Returns.HLOS
While the column has been banging on about the High Level Output Specification (HLOS), which will tell ORR how much rail the Government wants to buy for the five years from 2009, nothing has been said officially about what it will contain. My view was that it would have to be very detailed. I was wrong.
DfT Rail has now published a Briefing Note on its role in 2008 Periodic Review, which says that the HLOS will not go into more geographical or other detail ‘than is absolutely necessary to make the Secretary of State's requirements clear and unambiguous’. And when they say High Level, they mean really High Level. Safety is expected to be specified as a single national measure. Reliability will be specified in terms of the Public Performance Measures to be achieved by each of the sectors - Inter-city, Regional and London & South East. Capacity is a bit more complex. It is likely to be based on the the 23 individual Network Rail routes since ‘both the demand forecasts and the options for accommodating demand will vary significantly from route to route’.What about freight? I quote ‘the HLOS will not cover the reliability of services provided by freight, or other open access operators, or the capacity which they require’.
With a specification this High Level, it looks as though DfT Rail has ducked the serious issues and simply expects the existing railway to carry on as before, with improving performance and some capacity tweaks. This is suspiciously like the 1974 Railways Act which required BR ‘to provide a public service which is comparable generally with that provided by the Board at present’.
Not a recipe for an improving modern railway
Signalling
Back in the November 2005 column I had some fun trying out the new control centre technology from GE Transportation Systems and Westinghouse. But while I was impressed I reckoned both would have their work cut out beating AEA Technology Rail in the bidding for Network Rail’s five Type E control centre contracts.
Well, I called that one wrong. According to Informed Sources GETS is preferred bidder for three of the Type E’s and Westinghouse for the other two. While preferred bidders are being selected, these are not being converted into signed contracts. As for the ETCS Early Deployment Scheme (EDS) on the Cambrian Line, even selection of the preferred bidders is some way off.
EC4T shock
If you have bothered to read my attempts to explain how operators are charged for electric traction current, take a pat on the back. What was an obscure process when I started writing about it is now a potential franchise-wrecker.
Network Rail has just warned train operators that the cost of EC4T (Electric Current for Traction – geddit?) is expected to rise by 65% in 2007-08. If, you are running a franchise on a return of around 4% and are a heavy user of electricity, a 65% increase could blow a nasty hole in your business plan.
Remember that after the first year of a control period TOC charges are based not on the actual cost of electricity, but against the Moderately Large Users Index (MLUI) of wholesale prices. This little table shows how the MLUI has been moving. Table 1
MLUI recent history
| Date |
MLUI |
2004 Q2
|
2.791 |
| 2005 Q2 |
3.522 |
| 2005 Q3 |
3.740 |
| 2005 Q4 |
5.100 |
But the cost of EC4T is based on the MLUI for the second quarter of the preceding year. So it wont be until October this year that the Q2 figures for 2006 is known.There will be some nervous TOCs waiting the outcome Investec Securities recently made Go-Ahead a ‘sell’ recommendation, partly because of the Network Rail warning.
Roger’s Ramblings
What a busy month since the last e-Preview, with multiple escapes from the office.
At the end of June we had the new style Modern Railways/Railway forum Innovation Awards. Out went black ties and a gala dinner, in came stands for short-listed contenders to display their entirs, a brief ceremony, still compered by yours truly, then more time to network and discuss the entries.
Next day it was off to DfT in Marsham Street for a briefing on Franchise Procurement Policy. It helped explain why franchise bidders are unhappy.
On July 4 I was in a studio at the BBC in Portland Place recording a programme in the Reunion series with Sue MacGregor. This brings together people who were involved in a project or some event to look back with hindsight. You can hear the result on Radio 4 on Sunday 27 August at 11.15 am (repeated the following Saturday at 09.00) when the topic is rail privatisation. Those reliving the period 1992-1996 are Lord MacGregor, Sir Patrick Brown, Roger Salmon, John Welsby and me.
Enjoy!
In the same week I had a trip to Loughborough to see Brush hand over the first series production re-engined IC125 power car. I hope to write about this in the next column.
The following week was even more exciting because the Parliamentary Select Committee on Transport had invited me to give evidence for their latest investigation into franchising. It was decidedly odd sitting in front of Chairman Gwynneth Dunwoody and her colleagues instead of taking notes from the press bench, but I think it went off OK.
Finally, I went to Farnborough for one of the Airshow trade days. This was offered as a jolly, but I didn’t switch off and found out some interesting information for future columns.
This week I am off to Portsmouth to see Siemens resignalling work there and the following week I’m spending a day with consultants Mott MacDonald, interviewing Virgin Trains Chief Executive Tony Collins and getting up to speed with the railways confidential reporting system CIRAS.
So lots of material for next month’s column.
As always, feedback is welcome to roger@alycidon.com.