Effect on franchises
117. One of the most crucial issues about open access
is the way in which it affects franchises operating on the same
part of the network. Whilst franchised operators were not generally
opposed to open access operators per se, many of them expressed
deep concerns about the way in which open access rights were awarded
and what they perceived to be anything but a level playing field.[220]
There are several aspects to the argument that open access operators
have unfair advantages over franchised operators, but two of the
more important are financial. First, it is alleged to be unfair
that, like freight operators, passenger open access operators
pay only marginal costs to Network Rail whereas franchise operators
pay both fixed and marginal costs. Second, the distribution of
fare revenue among train operators through the ORCATS[221]
system may lead an open access operator effectively to extract
revenue from franchised operators stopping at some of the same
stations.[222]
118. The costs of rail infrastructure are charged
to train operators in several different ways, marginal and fixed
costs. All train operators pay a share of marginal costs, but
only franchise operators pay a share of the fixed costs. Marginal
costs largely reflect direct running costs such as electricity
and wear and tear of track and other infrastructure. They consist
of: variable usage charges, traction electricity charges, electrification
asset usage charges, and capacity charges. Fixed costs effectively
cover the difference between Network Rail's costs and its income
from marginal charges and direct grants from Government bodies.
In other words, fixed charges help to pay for investment.[223]
In the recent High Court Judicial Review, GNER said that "the
fixed track charge amounts to approximately 60% of its overall
track access charges. In 2005/2006 it amounted to £60.5 million,
and this will increase to £127.5 million (equating to £10.81
per train mile) in 2006/2007."[224]
Many witnesses believed that this involuntary difference in cost
base created a playing field which is anything but level.[225]
119. The majority of rail tickets are 'inter-available'
which means that they are valid for use on the trains of more
than one operator. For example, on the Leicester to Leeds route,
passengers might choose to travel on any combination of services
provided by three different operators.[226]
There is no record of the passenger's actual choice of service
operator, so unless a very restrictive fare was chosen, there
is no way of knowing which operator actually carried the passenger.
As a consequence, a central industry model, ORCATS,[227]
is used to compute the allocation of fare box receipts to the
different operators on a route. To do this, assumptions are made
about the most likely choices of passengers. It is assumed, for
example, that passengers are more likely to choose a faster, more
frequent service than a slower, less frequent one if their ticket
allows.[228] This system
is vital in facilitating passenger choice, but it also potentially
enables a new operator on a route to extract revenue from existing
operators, thereby significantly altering the financial circumstances
of the franchise. In the case of Grand Central operating on the
East Coast Main Line, much of the argument hinged on the extent
to which the Grand Central services would be predatory in extracting
revenue from GNER.[229]
The Grand Central route is due to call at York, and as a result
London to York revenue will be divided between GNER and Grand
Central on the basis of timetable frequencies, The current ORCATS
model means that irrespective of which operator carries the passengers,
the revenue will be divided between them on the basis of the timetable.
120. The current system places the risk that a successful
open access operator will extract premium and growth potential
from an existing franchise squarely with the franchise operator.[230]
This is surprising given the limitations on risk transfer to franchise
companies in other areas discussed in paragraphs 17 to 25. The
Chartered Institute of Logistics and Transport argued that "since
the risk [of a successful open access bid] is not easily quantifiable
this risk allocation is likely to result in a risk premium (i.e.
increased subsidy or reduced premium). This would be avoided if
DfT agreed to take the specific risk of revenue abstraction separately."[231]
121. Unlike many other and more predictable risks,
the risk that a successful open access bid will reduce the 'fare
box' and limit track access of an incumbent franchise falls entirely
with the franchise operator. This makes little sense given the
probable size of the risk premium that will be priced into franchise
bids as a result. The risk of new open access operations should
be shared between the Government and the franchise operator. We
recommend such an arrangement because it would create an incentive
for the Department to coordinate policy in this area more closely
with the Office of Rail Regulation which grants open access rights,
and to be more explicit about the open access potential in the
course of the re-franchising process.
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