INFORMED SOURCES e-Preview July 2012 http://ezezine.com
INFORMED SOURCES e-Preview July 2012
After last month’s traction and rolling stock extravaganza, it’s back
to the heavy-duty politico-economic stuff for July. That said there is
a rolling stock round-up.
Railway costs – a different point of view
Freight charges – is ORR over-enthusiastic?
Captain Deltic’s rolling stock round-up
Let us praise famous men
During a radio discussion on the Queen’s Speech, Transport Secretary
Justine Greening was challenged on rail fares. ‘The reason fares have
gone up’ she responded, ‘is because we have a really inefficient
railway system and I have brought in a strategy to tackle that’.
This struck me as a gratuitous slur on the industry and a similarly
miffed senior chum suggested that Ms Greening was confusing price –
what we pay for a ticket, and cost - the subsidy we pay as taxpayers to
have a railway. Ms Greening had implied that fares (price) were
excessive because the ‘cost’ of subsidising a ‘really inefficient’
railway was too high.
So off I went on another spread-sheeting exercise to explore this
concept. As a surrogate for ‘price’ I divided total annual passenger
revenue by passenger miles to get average revenue per passenger mile.
Since the job of the railway is to run trains my unit of ‘cost’ was
subsidy per train mile. All the figures were adjusted for inflation
To get a representative set of data I decided to go back 30 years,
starting in 1982, the year Sir Robert Reid launched the business led
railway. When these data were graphed some interesting conclusions
emerged.
First of all, while the graph of cost per train mile looks like the
profile of an approach march to Mount Everest, revenue per passenger
mile has crept relentless upward since 1982. You can overlay a pretty
convincing straight line between 1983 and 2010-11.
Average revenue per passenger mile has risen by just under 30% over the
three decades. You could argue that in terms of amenity, comfort,
journey time and frequency, today’s passengers get 30% more for their
average fare than those in 1983.
Cost
This is more interesting. As Bob Reid’s railway rode the
Thatcher-Lawson economic boom, cost per train mile fell from around
£12, bottoming out at just below £5. It then rose with the recession
and the subsequent impact of privatisation. But with Railtrack in the
private sector, and the first franchised trains running, cost began to
come down again.
By 2000 it was £5.40 per train mile matching BR at its best. But than
Railtrack lost control and was forced into administration in October
2001. A year later Network Rail brought Railtrack out of administration
and promptly requested an interim review. While all this was going on
the cost per train mile soared.
When the new Control Period came into effect on 1 April 2004 subsidy
per train mile continued to rise, peaking at £24 in 2006-07. But
remember that subsidy was inflated by the need to pay for the massive
cost over-run on the West Coast Route Modernisation,
Since then Network Rail, has brought the cost per train mile down year
on year. In 2010-11 it was within 10p of the £12.42 per train mile
when Bob Reid took over in 1982 and the same as the newly privatised
railway achieved in 1996-97.
Credit Card
Digging some of the data out of Regulatory documents exposed one
difference between Network Rail and its predecessors – the Regulatory
Asset Base (RAB), at each Periodic Review, the Regulator decides the
percentage return Network Rail can make on the RAB and this return pays
the interest on the Company’s debt.
Not for nothing is the RAB known as the Network Rail credit card. When
the Government authorises investment in some new scheme, such as
electrification, it does so on the understanding that Network Rail will
borrow to fund the work. In each Periodic Review the Regulator sets the
rate of return on the RAB, which forms part of Network Rail’s income
For the year to March 31 2011, Network Rail’s closing RAB was £38.6bn
and the return was £1.9 billion. Railtrack’s RAB, at the time of its
demise was around £7 billion.
So, and this may well give accountants in the readership conniptions –
I have re-plotted the cost per train mile less the return on the RAB.
On this basis today’s ‘cost’ is £6.80 per timetabled train mile with an
improving trend.
Freight charges
One of my self-appointed tasks is to go through all the bumph emerging
from the Office of Rail Regulation. As at present, the five yearly
Periodic Reviews to set Network Rail’s income are the documentary
equivalent of a carpet-bombing raid. The final determination for the
last Periodic Review occupied 447 pages! But in among the mundane you
do get the odd excitement.
Most of Network Rail’s revenue comes from the direct grant from DfT and
the fixed track access charges paid by franchised passenger operators.
But the Variable Usage Charge, paid per vehicle mile for passenger
trains or per 1000 gross tonne kilometres by freight operators, is
also an income stream and so has to be ‘determined’ by the Regulator.
And, on 17 May the Office of Rail Regulation published ‘Consultation on
the variable usage charge and on a freight-specific charge’.
Now this would normally be a ho-hum document, but note the second half
of the title. It revealed that ORR is proposing to introduce a new
track access charge for freight users aimed at recovering at least some
of the costs which Network Rail would otherwise avoid if freight trains
were not running. ORR’s stated aim is to ensure that freight operators
make a greater contribution to these ‘avoidable costs’.
We knew this was coming, because in the recent Command Paper DfT
commented ‘ORR is considering the scope for mark-ups on Network Rail
track access charges for freight trains … which could help to cover a
greater share of the costs associated with their use of the network’.
ORR’s proposal is that, in line with European Regulations, those
freight traffics that can afford to contribute to their ‘avoidable
costs’ will do so. Rather than jam-spreading the avoidable costs over
all freight operators, the extra charges apply only to the most
inelastic ‘market segments’ where rail hauliers face little competition
from road and the customer has no choice but to pay up. These are power
station coal, spent nuclear fuel and iron ore.
As an example of likely costs, power station coal represents about 30%
of freight traffic. So on a pro-rata basis coal hauliers would be
expected to pay an additional £60-75m a year since freight avoidable
costs estimated at £190-£240 million a year. But, of course it is not
as simple as that.
For example, what happens on routes shared by more than one freight
market segment? While ORR admits that it does not have a ‘good
understanding’ of the scale of such potential shared avoidable costs,
it offers two possibilities.
One would be to allocate the freight avoidable costs for a route
pro-rata, on the basis of each market segment’s gross tonne miles
generated. Only hauliers of commodities whose customers had no option
but to use rail would pay up. The rest would be exempted.
Alternatively the total avoidable costs for a route would be shared
among only those market segments considered able to bear the charge. I
honestly can’t see how ORR can put forward this proposal with a
straight face given its objective to reduce cross subsidy.
Impact
ORR’s consultants produced a helpful table forecasting the impact of
doubling Variable Usage Charges for each freight sector. This is pretty
scary when you consider that ORR reckons that a 10% fall in traffic as
the result of higher freight charges would be acceptable.
Naturally, the Rail Freight Group got its retaliation in first. A
letter to ORR Chief Executive Richard Price, highlighted ‘significant
concerns’ that the proposals could have ‘major repercussions for the
stability of rail freight, for investor confidence, and for the
prospects of continued growth’.
RFG also questioned whether ORR was giving ‘undue weight’ to the duty
to have regard to the funds available to the Secretary of State,
perhaps at the expense of its other duties to promote the use of the
railway for the carriage of passenger and freight, and to enable
companies to plan their businesses ‘with a reasonable degree of
assurance’.
As for ORR’s interpretation of ‘what the market can bear’, RFG Chairman
Tony Berkeley was ‘surprised’ that a 10% drop in traffic has been
deemed to be acceptable. He pointed out the ORR forecast that doubling
Intermodal access charges would raise £20 million while cutting traffic
by 12.9% - which is ‘not so far from the “acceptable” 10% threshold’.
At the subsequent annual Rail Freight Group conference, ORR Chair Anna
Walker was already back pedalling furiously, being keen to explain
where the policy came from. ORR is ‘working within the EU framework
which says that the rail sector will only pay what they can afford to
pay’. No mention of the statutory duty to have regard to the funds
available to Government which is the main justification given in the
consultation document. Perish the thought!
Meanwhile, Anna Walker stresses that ‘now it is consultation and we
will listen to the views we get back’. You bet!
Rolling stock latest
The likelihood that the Great Western electrification will be extended
from Cardiff to Swansea has had DfT, reportedly, running round in
circles revising the mix of train types in the Intercity Express
Programme. But informed sources suggest that even if DfT misses its
target of financial close for the Great Western IEP fleet by the end of
June, the deal should be signed off early in July.
Last month’s analysis of the shrinking number of IEP vehicles needed
was picked up by the Financial Times. A DfT spokesman told the FT ‘we
will commit to around 600 vehicles initially, and will retain options
to purchase additional vehicles, subject to a detailed value-for-money
evaluation’. This confirmed the commitment I quoted, but when I asked
DfT whether I should take this as an official statement or an extract
from a longer response I was told ‘It is an extract – negotiations are
ongoing’.
Meanwhile, despite the hammering in these columns, DfT retains its
misguided faith in the power of distributed traction to transcend the
laws of physic. Readers have been sending me DfT’s replies to their
correspondence expressing concern about IEP. One reader was told that
bi-mode would be more efficient than diesel loco haulage on the unwired
section ‘as distributed traction offers better fuel consumption’.
By happy chance I have a late item in this month’s News section on
Chiltern seeking new diesel locomotives to haul its fleet of
re-engineered Mk 3 coaches. One reason for the move is that when you
get above five or six vehicles locomotive haulage makes the better
business case.
To prove it, here are some numbers based on measured fuel consumption.
A 9-car Class 222 Meridian DEMU gave an average fuel consumption 0.98
litres/100 seat km. An IC125 with eight coaches achieved 0.89 litres
per 100 seat km.
Misinformation on coupling times continues. And questions on the GW
fleet are met with answers based on Anglo-Scots services. Just as Rail
Express Systems has loco names starting with ‘Res’, perhaps IEP naming
policy should be based on ‘Mis’, Misinformation, Misconception etc.
Thameslink
More confusion from that most confused of Transport Ministers Theresa
Villiers over the prolonged delay to signing the Thameslink deal.
According to Theresa DfT expects to conclude the ‘core project
agreements’ with Siemens and the Cross London Trains consortium
‘shortly’. After that Cross London Trains and their lending banks will
‘need to conclude the financing documentation required to secure the
necessary equity and debt funding for the project’.
Could this mean that train and depot provision was now a separate
process from arranging the associated funding?
I checked with DfT who told me ‘the Thameslink bidders were required to
provide proposals to finance the trains in accordance with the
instructions contained in Section 6 of the Invitation to Tender (ITT)
documents and the associated Supplementary Instructions. These
instructions have not changed. As envisaged in the ITT, the Preferred
Bidder is now working to secure final credit committee approval from
their funders in order that the project can reach financial close and
construction of the trains can begin’.
So when is ‘shortly’? According to informed sources, bidders for the
Thameslink ‘Franchise of Death’ are being told that the deal is now
unlikely to be concluded before October. That’s October 2012 – I
think.
A hero passes
Around this time last year, I blogged about meeting one of my heroes
Sir William Barlow. He and I had one thing in common, our first job
after qualifying as engineers was with The English Electric Company’s
Traction Division.
After that our career paths diverged somewhat. He went on to become
one of Britain’s greatest industrialists of the second half of the 20th
Century. And you all know where I ended up.
Bill Barlow died on 19 May, so I was privileged to have met him when I
did. He was still keeping up with his first industry through Modern
Railways and told me ‘I’ve been cheering on your attempts to slaughter
IEP – a ridiculous project’. But it looks as even his support wasn’t
enough.
Roger’s Blog
Last Friday I had an update from new Alstom UK Chief Executive Terence
Watson on the Group’s plans. More of that next month. This coming
Tuesday the Transport Select Committee is starting an inquiry into Rail
2020, with evidence from Sir Roy McNulty, Tim O’Toole and Sir David
Higgins. I’m hoping for a chat with Committee Chair Louise Ellman and
other members of the Committee beforehand.
At the end of the week it’s the Fourth Friday Club – another of our
extended meeting which incorporates the annual Innovation Awards.
Guest speaker is Richard Price, the ORR Chief Executive. Lively
discussions over lunch expected.
In the following week there is the Stagecoach summer reception – which
should fill a fair few pages of the notebook. Next day it’s an early
start for a trip to Manchester to catch up on the Pendolino lengthening
programme at Longsight. More for the notebook.
July starts with a joint SWT- Siemens morning function at Waterloo, but
apart from a session with Eversholt to catch up on developments in the
middle of the month, the diary is pretty clear. But, what with IEP and
the Periodic Review I don’t think I will be short of things to do.
Roger