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INFORMED SOURCES August 2000

West Coast – just the same old crisis

After the Rail Regulator and his consultants have climbed all over the WCRM cost over-run. It looks as though its back to the taxpayer – as usual

Regular readers will know that the curse of Modern Railways makes the famed curse of Hello! Magazine seem like a Papal blessing in comparison. In one year we interviewed the heads of the big three multinational railway equipment groups: within months two had been fired and one had moved onward and upwards.

So we should have known. No sooner had we published the best ever survey of the West Coast Route Modernisation in the history of railway journalism in the June issue, than the project's future was thrown into turmoil. Well, Phase 2 of the project anyway; you know, the sexy bit with 140mile/h running and cab signalling.

When we last visited the WCRM in this column, Railtrack had just discovered that the collapse of its signalling strategy meant, among other things, that the cost of the project was going to double – give a hundred million or two. The full scheme, with extra capacity, would cost £5.85billion.

Now, we all assumed that since Railtrack had got it wrong, Railtrack would have to pay for its mistake. But no, at least not the full whack, according to a consultation document published by the Office of the Rail Regulator on June 20.

Under control

How does Indiana Corbett escape the approaching billion pound boulder? Well, it's all tied up with what are termed Control Periods (CP).

Remember that Railtrack is a regulated utility. So, every five years, the Regulator sits down and determines what Railtrack can earn and how efficient it should be in reducing its costs and sets its Track Access Charges accordingly. The first of these five year periods (CP1) started in 1996 so the next, CP2, is due to start in April 2001.

That seems quite straightforward, but as the Regulator explained in April, ‘the Office of the Rail Regulator is no longer the complete master of the timetable which was set in 1995'. Now I'll go into this in detail if you like. You don't? Right, the Janet & John version is in the box.

Original deal

Back in 1996, privatisation had to solve the long running non-modernisation of the WCML. Railtrack offered the £1.3billion Core Investment Programme (CIP) to bring the route's infrastructure up to modern standards. The track access charges for the InterCity West Coast franchise would have to pay for this work and a deal was done between Railtrack and the then Office of Passenger Rail Franchising (OPRAF).

Because OPRAF wanted more than a new 1970s railway, the track access charges also covered Passenger Up Grade 1 which included £150million to allow 125mile/h running with tilting trains.

Now, the CIP was a fixed price contract, but it also included that moveable feast called ‘radio transmission based moving block signalling' which would largely pay for the investment in CIP by eliminating the expensive long term maintenance of trackside signalling.

And as we know, on Black Diamond day last December Railtrack bit the bullet, abandoned moving block with radio and the cost of resignalling the WCML quadrupled.

Budget blown

So the CIP budget was blown. But now, we learn, that the CIP is not a fixed price deal, but is subject to the Regulator's Periodic reviews of track access charges.

This means that the current Periodic Review will have to set track access charges take into account the revised costs of the WCRM. In 2001, Virgin West Coast will simply pass these extra charges on to the Shadow Strategic Railway Authority who pass the bill onto the DETR.

That's the bad news for the taxpayer. The good news is that both PUGs, (PUG1, which subsequently became part of Railtrack's PUG2 contract with Virgin Trains, covering 140mile/h operation with tilting trains at increased frequencies) are outside the Periodic Review. The bad new is that, of Railtrack's revised total cost of the WCRM of £5.85billion, the CIP represents £3.9billion. The good news is that what's been spent so far won't count towards CP2. The bad news is the bulk of the CIP falls under CP2 .

Regulatory review

So, why has the Regulator just published a consultation document on the future of the WCRM? Well, one reason is that he published his provisional conclusions on Railtrack's financial regime under CP2 only days before the WCRM cost over run was quantified. Also, Railtrack is challenging some of the capacity related investments linked to PUG2, notably the extra 42 paths a day for freight.

Table 2

WCRM Costs Ancient & Modern

(a)  Includes undertakings provided to the Regulator additional to Virgin West Coast requirements including 42 additional paths per day on the slow lines and two and a half additional fast-line paths per hour.

(b) Total cost of enhancements

When Railtrack dropped it's £5.85billion bombshell it wasn't clear to the Regulator whether the new programme was ‘both necessary and sufficient' to deliver the required outputs which everyone was expecting from the WCRM. What the Regulator wanted, and what Railtrack couldn't provide, was a shopping list that added up to £5.85bn.

So in March 2000, his consultants Booz Allen & Hamilton and Railtrack began breaking down the incremental costs. This gave the regulator a base cost and the individual costs of various options. Table 3 lists the options and it upset a lot of people because it seemed to give the option of going back on what many people thought Railtrack had signed up to.

Take Chris Green of Virgin Trains, for example. Option 5 is not optional if Virgin West Coast is to meet its ambitious business plan based on doubling ridership by 2012. And if the Silverlink franchise is to provide a reasonable service for Northampton to London , those fast line paths are equally vital.

As for the Rail Freight Group. Well, they just went ballistic at seeing the 42 paths, which Railtrack had signed up to when the first Regulator approved PUG2, being described as an option at all.

Table 3

Bargaining time

So where does all this leave us? Most of the WCRM expenditure happens during CP2. But Railtrack claims to have spent £730m renewals in the current control period (CP1) which was not allowed for when the original access charges were set 1996.

It wants this sum added to the Regulatory Asset Base on which its return is calculated. Depending on the rate of return the Regulator allows in CP2 that would be worth about £30million a year in access charges.

But the Regulator will have none of this. He argues that the £730million over spend represents inefficiency or risks which investors were expected to bear when they bought Railtrack shares.

So during CP1, the CIP <itsl>is<ital> a fixed price contract, except for £170 m spent on safety, R&D and accelerated renewals which can go into the WCML share of the RAB.

Generous

But when it comes to CP2 the Regulator ‘does not believe that it would be appropriate to treat the CIP as a fixed price contract.' He claims ‘it was clear at privatisation' that the CIP would be subject to future periodic review.

So maintenance and renewal expenditure under the WCRM will be covered by Railtrack's overall revenue requirement under CP2 and CP3.

Railtrack puts the total WCRM renewal expenditure in CP2 and CP3 at £3,076m including various contingencies for risk and allowing for improved efficiency.

But the Regulator doesn't see why the taxpayer should pay a premium against further cock-ups. And he reckons that there are efficiency savings of 3-5% a year to be found during CP2.

So, with no contingency allowance plus efficiency savings the Regulator reckons that the costs of renewal on the WCRM are in the range £2,432-2,573m. And don't you admire that precision to the nearest million?

Table 4

The Regulators WCRM renewal estimates

(1) This represents the present value of savings in future renewals expenditure as a result of the proposed enhancements;

More uncertainty

That precision is even more suspect given that the ORR, quite rightly, believes that there is still ‘considerable uncertainty' on signalling renewal costs. Given that Railtrack doesn't know which of the 72 existing interlockings to be replaced will have SSI and which will have Computer Based Interlockings (CBI) and what the acceptance status of the various CBI will be, this is a prime example of Regulatory understatement.

So, the Regulator's solution to this financial uncertainty is that any under (ho ho) or overspend on signalling during CP2 should be included in the RAB for CP3 starting in 2006 Railtrack's estimate of signalling costs, equates to an extra £258-336 million on its RAB.

Whose round?

It looks as though the Regulator will allow Railtrack to charge for £2.1bn of West Coast Main Line renewals in CP2. Not bad when the original CIP figure was £1.3bn all up.

Virgin's PUG2, originally costed at £600m is a commercial deal, outside the Periodic Review. Railtrack will have to bear the estimated cost over run of £320m.

Thus, the main issue is likely to be the £810 million of ‘enhancement' for ‘other users' where the Regulator indicates that it will be up to the Shadow Strategic Rail Authority to decide what it wants to pay for. The fact that the ‘other users' thought this was all done and dusted when the first Regulator John Swift QC approved PUG2 guarantees contrasts with the following passage from the Railtrack Annual Report & Accounts. ‘The proposals for Phase 2 of the WCRM project are currently being reviewed by the Rail Regulator and the Shadow Strategic Rail Authority. We do not feel that this is necessarily the right project for the industry and will therefore be initiating a progress to develop options'.

Table 5

Who pays for what?

Continues.........