Opinion
Delivering the goods Chris Welsh Closing the gap
ORR’s Periodic Review process needs to change how it deals with freight track access charges says Chris Welsh
T
he way that the Office of Rail Regulation deals with reviewing freight track access charges needs to change. Until this Periodic Review
the independent economic regulation delivered by ORR provided certainty for the rail industry and unlocked much needed investment. This time round, the ORR process has had the opposite effect, damaging confidence and, potentially, setting back the mode shift agenda as shippers question the long-term competiveness of rail freight and the investment commitment required in their supply chains to make rail freight viable. FTA makes these comments as ORR
has concluded its Final Determination for the Periodic Review covering Control Period 5 2014 – 2019. This included setting freight track access charges. Unlike previous periodic reviews that saw track access charges for freight come down (with accompanying growth in rail freight volumes), this time they have gone up. While FTA is concerned that these increases are likely to undermine freight growth (and could even lead to reverse modal shift), concern also focuses around the process itself that has led to this. Many in the industry, and crucially this includes shippers using rail freight – the ultimate customer of rail freight – argue that the process by which these increases have been consulted publicly upon has been just as damaging as the actual increases themselves.
Unsettled market The process of the Periodic Review (PR13) started its current phase in March 2012 with ORR signalling (in a public consultation) that it wanted to increase charges to reduce taxpayer support for rail overall and make freight ‘pay more of its shared network costs’, termed ‘freight avoidable costs’, i.e. the costs that would not exist if there were no freight on the network. So at the start of the process a fundamental change of policy was publicly heralded that caused significant unsettling in the market.
A cautious welcome While FTA welcomed the publication of the Draft Determination on 13th
June While a significant concern to
operators that access charges could increase, (and any presumptions that these could at least initially be passed on by them if they happened is not accurate as cost increases will end up being shared inevitably along the supply chain adding cost to the whole industry), for shippers and logistics service providers such concern translated into fear of increased costs casting doubt on proceeding with facility investment or commitment to new services, and inability to enter into accurate and meaningful customer contractual negotiations. Overall this has led to a significant denting of confidence in rail freight due to the uncertainty and drawn out nature of the process. Damage such as this is difficult to easily rectify. And ORR’s conclusions on track access charges in January this year indicated the likelihood that charges would indeed increase. With facilities investment decisions based on a minimum of ten year pay-back periods, and locomotive and freight rolling stock investment based on asset lives of up to thirty years, change of access charging policy of this nature, and on a five-year basis, casts doubt over the viability of these decisions. Concern earlier in the year focused
on the fact that the variable track access charge (paid by all Foc’s) could increase by up to 23 per cent on current levels as per the ORR’s public consultation. The additional charges on electricity supply industry (ESI) coal and iron ore (the ‘freight specific charge’), could have seen these sectors’ costs rise by an additional 15 per cent and 9 per cent respectively as well.
as giving a degree of re-assurance and certainty for this control period, this is a cautious welcome in that the proposed increases now to be implemented through the Final Determination are not as bad as could have been. It remains the case though that total freight charges will increase by 21 per cent over the control period, four per cent per year. While road freight prices are unlikely to increase in real terms, operators are under constant intense pressure to reduce costs in a highly competitive road freight market. In short, many shippers may doubt the wisdom of committing to rail freight, and for those contemplating making a switch the recent change in charging policy is likely to be a critical factor in their evaluation. It is to be welcomed that intermodal
freight (now the biggest sector on rail and with the largest growth profile) charges will be kept in line with earlier Determinations, but the process of targeting certain sectors with increases (even if only in principle and with the implementation delayed and back-ended toward end CP5) represents a fundamental shift away from promoting rail freight and is worrying for market segments that may fear they would become deemed ‘captive’ and have higher charges applied. The decision not to proceed with a new freight specific charge for biomass (at this review) is welcome, but is, in fact, recognition by the ORR, that its policy change is not only a high risk strategy, but if the charge was applied to biomass could kill the business off for rail freight. It is therefore hardly surprising that continued concerns over the pursuit of the principles set out in this Access Charges Review of targeting ‘inelastic’ markets and increasing freight costs at the next Periodic Review remain.
A ten year Control Period? The process clearly needs to change. There is an argument perhaps for a ten year Control Period rather than a five-yearly one. While the regulatory independence
February 2014 Page 45
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