ORR Freight charges review threaten rail freight services - October 2006

The Office of Rail Regulation (ORR) is reviewing Freight access charges. These proposals for higher charges could force trainloads of existing rail traffic back onto the road network, let alone destroy the prospects for new rail freight traffic.

We have prepared the following brief to explain the issues in case you would like to write to the ORR setting our your views

• Any increase in freight charges will be detrimental to existing traffic levels and to traffic growth - customer will go back to road if rates rise, new customers are already being put off by the uncertainty this has created.
• The justification for re-opening freight charges now is not well made
• New complex charging structures do not help demystify the rail industry to potential users 
   

Briefing on Freight Access Charges Review

ORR are currently undertaking the Periodic Review of Charges for 2008. This includes a review of Freight Access Charges. Members of Freight on Rail are highly concerned about the impact on the rail freight business of any possible increase in charges, and other elements of the proposals.
 

What is the review?

The ORR undertakes a five yearly review of Network Rail’s income, costs and charges (Periodic Review of Charges).  They are now working on such a review to set the charges for the period 2009 – 2014 (so called Control Period 4).   This review is covering all charges, passenger and freight. 
 

Freight Charges Review

It is unclear to us why freight charges are being reviewed at this time.  Freight charges were last reviewed in 2001, and, at that time, the charges were set to apply ‘at least to 2007 and possibly to 2012 if there has been no material change in circumstances’.

Passenger charges were subsequently reviewed in an emergency review in 2003 (as a response to Railtrack’s administration) but this should not affect the freight charges as this mostly related to backlog renewals work, which are excluded from freight charges.  As such we do not consider that there has been a ‘material change in circumstances’ such that the freight charges should be reviewed.

 
What charges does Freight pay?

In line with the European 1st Railway package freight traffic pays only the variable costs of its operation – i.e. it pays enough to cover the efficient operation, maintenance and renewal cost it creates.  It does not cover any element of the fixed costs. 

At the last review, the charges were structured so that coal traffic pays more than other commodities, and also pays a supplement reflecting the costs to NR of dealing with coal spillage.  The charges also vary by wagon type so that those with the most track friendly bogies pay the most.

Fixed costs are paid to Network Rail by DfT, via their contracts with the passenger operators i.e. in bidding for franchises, companies take account of the fixed costs payable when determining the level of premia / subsidy.

In addition there are various other charges that freight operators pay;

• a congestion charge, nominally for running trains on electric infrastructure
  
• costs of electricity
  
• an additional charge for operating on electrified infrastructure.
   

What might happen to freight charges?

We have not yet seen any firm proposals for the level of charges.  However indicative numbers provided anecdotally suggest that it could rise in total from around £100m pa today to something up to £130m pa. 

It is now suggested that freight companies should also pay the fixed costs of freight only lines, which until now has been paid by DfT.  Again, we have not seen any numbers for the fixed costs of freight only lines, but early suggestions are that it could rise from £14m pa now (paid by DfT) to a number up to £120m pa.  There is also no indication how the charge would be paid (i.e. broken down between operators).

An increase from £100m to up to £250m for freight operators cannot be absorbed by companies whose total profits are around £30m per annum.  And whilst in some sectors operators may be able to charge more, in most cases it is not possible for rail freight customers to pay more, and for rail freight to continue to compete with road.

What else are ORR proposing?

ORR have been consulting on a number of other changes that they are considering.  These include;

• An environmental fee which would be applied to access charges to recognise the ‘environmental damage’ caused by rail services.  Their argument is that this would incentivise rail to become more environmentally friendly.  Our argument is that unless other, more environmentally damaging, modes pay this fee it is perverse.
  
  
• A scarcity or reservation fee which would be paid to reserve paths on the network.  It is unclear whether this would apply to (i) all paths (ii) all freight (not passenger) paths or (iii) only freight paths that are booked and unused.  Their argument is that this will encourage the efficient usage of paths.  Our argument is that it will be unduly complex, that other industry mechanisms already exist to  facilitate this, and that it is likely to penalise smaller operators and act as a barrier to entry.
  
  
• Geographical breakdown of charges.  This would mean that every route attracted its own specific charge relevant to the actually incurred costs of maintaining it.  They say that this would help inform choices about where additional services should run.  We say that it will be unduly complex, that operators have little choice of route given capacity and gauge (etc) constraints, and that it will promote inefficient use of capacity.

We are therefore opposing all these charges.
 

Process

ORR have consulted on the principles of the charges as above, and on some other areas around incentives to Network Rail.   These consultations have now closed but we have not yet seen any response from ORR.

Meanwhile, Network Rail have been asked to start work on calculating what the charges for freight (and in time passenger) should be.  There are questions about how this approach is incentivised and the level at which it is calibrated.  The new model (Infrastructure Cost Model ICM) is untested as  yet.

We expect to see the first results on freight charges by mid to end October.

Summary at Present

• Highly concerned at the possibility of an increase in freight charges and the impact on traffic.
  
  
• Increases in charges will cause traffic loss, and prevent growth.  This is particularly so in the intermodal and general freight flows – although bulk traffic is not immune to it.
  
  
• Additional charges will add significant complexity and are unlikely to have the desired incentive effect
   
• There is concern about the basis for calculation of charges.
  
  
• The cost of freight only lines needs to be driven down to the absolute minimum if the freight industry is to pay the fixed costs.