10040. But, to answer my question, if G9 were amended so that compensation were payable if it was utilised, that would meet EWS's concerns in this matter, would it not?

   (Mr Oatway) If the discussions are concluded along the lines that they are being discussed at the moment, and I have to say that compensation is only likely to be repaid in G9 if Network Rail receive it from the third party who are doing the promoting, then it will be paid out to the train operators. If Network Rail does not receive that compensation, then it will not be paid out to the train operators. That is the way the discussions are going at the moment. I have got no certainty that Network Rail are going to receive any compensation from the Promoter for Crossrail, all I have to go on is what my contract says at the moment. My contract says at the moment G9 does not have compensation attached to it.

  10041. We have got in front of us on the screen a letter dated 26 February 2008 to Mr Smith, who we have just heard from, from Paul Lancaster at the Department for Transport. He discusses the issues relating to G9. He identifies three options at the very bottom of the first page of the letter. If we could go to the next page of the letter, please, which is at 05A-020. There are three options. The first is to invite the ORR to impose the change to the Network Code detailed in the previous paragraph, notwithstanding objection. The second is to explore the use of G9 but with compensation payable—this was, in fact, prompted by the current discussions in the rail industry at this stage in relation to passenger train operating companies about developing compensation provisions—or, three, to rely on Bill powers. He goes on to say this: "We say in H2 that we will use industry mechanisms as far as possible and so rather than resorting to 3, in other words the Bill powers, we feel bound to explore 2 first, that is the use of G9, but with compensation payable. In doing so the principles of H2 will continue to apply on paying compensation, i.e. the principle of no net benefit and no net loss will be applied". He goes on to say: "We would not use G9 to avoid the payment of compensation in accordance with H2 and would not seek to use as a precedent the non-payment of compensation for other projects and works undertaken in G9. I hope this clarifies the position".

  10042. The Department's position could not be clearer, could it, if G9 is to be used, it will be used on the basis that compensation will be attached to it applying the principle of no net benefit, no net loss?
  (Mr Oatway) But G9 does not have compensation attached it, as we saw from my earlier exhibit. It may have compensation attached to it in the future; those discussions are still ongoing. If you look in (i) that you just read out, those discussions are ongoing for changes to the Network Code which, at the end of the day, did not go through. I have got no certainty that G9 is going to have compensation attached to it. What certainty have I got. I am just looking for certainty that I am going to get compensation on a no net loss, no net gain basis. That is all I am looking for.

  10043. Mr Lancaster, writing on behalf of the Department, has written a letter to you saying that we will use industry mechanisms as far as possible. If we use G9, we will apply compensation on the basis of the principle of no net benefit and no net loss. That meets your point, does it not?
  (Mr Oatway) But Mr Vadgama wrote to us only a month previous to that saying that the Promoter has agreed an undertaking that they will not invoke the Network Code condition G5, that was unqualified. It did not say Network Code G5 if compensation is not attached to it. We had an unqualified undertaking in the other place that G5, now G9, would not be used. When I saw the letter of 26 February when G9 starts to be looked at again, that caused me some concern, which is why I am here today on that point.

  10044. CHAIRMAN: Mr Taylor, as I have said before, this whole matter is new to us. As I understand it, if you look at G9 it refers, amongst other things, to network change and Mr Oatway has been telling us, and this is in 31, that network change does not include works that last for less than six months. Are you going to come to this?

  10045. MR TAYLOR: I am coming on to that. My Lord, my understanding is that the point about G9 and the point about network change are two separate points. The G9 point relates to the ability for somebody to argue that because there has been a change in the law certain changes have to be made to the network and where those changes occur, no compensation is currently payable under G9. So what the concern that EWS has, and I hope I summarise this correctly, no doubt I will be corrected if I get it wrong, is that some bright spark might stand up and say, "Well, the Crossrail Act has changed the law. We've got to introduce all these changes to the network, but no compensation is payable for your loss as a result because we invoked G9", that is the concern. What Mr Lancaster has explained in his letter is that that concern is groundless because if G9 is invoked compensation will be payable applying the principle of no net benefit and no net loss. That deals with that.

  10046. CHAIRMAN: I do not understand this. We are not talking about changes of the law, we are talking about the limitation to works that last for more than six months, which is in the definition of network change.

  10047. MR GEORGE: Can I interpose to make this clear. Mr Taylor has got it right, we are seeking two quite different matters through this particular witness. One of them concerns G9, which is in Exhibit EWS-27, and that is the point which Mr Taylor is cross-examining on at present where we have an undertaking at present that G5, which was the predecessor of G9, will not be used.[21] We are simply concerned that the Department appeared to be saying, "Well, we might use it but it would be in rewritten terms". That is a quite separate issue from the issue to which your Lordship has just referred, which is the six month provision under network change—that is an entirely separate point which we are taking, but we do take two points and Mr Taylor is perfectly fairly, if I may say so, exploring the first point, which is the G9 point, which does not have anything to do with the six month period.

  10048. CHAIRMAN: The trouble is we have not been warned about this.

  10049. LORD YOUNG OF NORWOOD GREEN: Mr Oatway, what I cannot understand is you expressed concern about a February letter invoking the unqualified use of G9 and you said that gave you cause for concern and I can understand that, but now you have an unqualified commitment that if that G9 is used you will be compensated on a no net gain, no net loss and somehow you seem to discount that. Is there no legal standing in that letter of 26 February signed by Mr Lancaster on behalf of the Crossrail Bill team?
  (Mr Oatway) My Lord, I believe that the Department for Transport are not a party to the Network Code, it is part of a contractual relationship between EWS and Network Rail and, indeed, all other train operators and Network Rail. It is part of our legally binding access agreements. Therefore G9 at the moment does not provide for compensation, so I do not believe it is in the gift of the Department to say it can use G9 with compensation because I do not believe the Department can change G9 to be able to pay compensation.

  10050. That letter of 26 February you regard as not a satisfactory guarantee?
  (Mr Oatway) That is where my concerns were first alerted to that point because I thought it had been addressed in the other place when we had the unqualified undertaking that G5, now G9, would not be used.

  10051. Mr Oatway said why did you not use G1 rather than G9 where apparently this problem would not occur. I wonder if you could address both those points.

  10052. MR TAYLOR: Let me see if I can cut through it in this way. Mr Oatway, I am instructed to give an undertaking to the following effect that the Promoter, if it invokes the G9 mechanism, will pay compensation on the basis of the application of the principle of no net benefit and no net loss. Does that meet your point?
  (Mr Oatway) To EWS?

  10053. Yes.
  (Mr Oatway) Yes, that would.

  10054. Thank you. Let us move on to the second aspect of the compensation matters that you raise, which is this point about network change. Can we turn to Exhibit EWS-31 and it is on page 05A-021.[22] Let us turn to the next page first, page two of the document, to paragraph 1.4. In 1.4 you set out the provision that triggers the payment of compensation under this part of the Network Code. It explains that: "The amount of compensation payable shall be an amount equal to the amount of the costs, direct losses and expenses, including loss of revenue which can reasonably be expected to be incurred by the train operator as a consequence of the implementation of the proposed change". It is costs that could be reasonably expected to be incurred as a consequence of the implementation of the network change. Is that right?

  (Mr Oatway) Yes, subject to benefits, yes, which is the G2.3 bit.

  10055. If we turn back to the first page then, we need to understand what a network change actually is. You have helpfully set out the definition on this page. I think it is probably only (a) and (b) of the three sub-paragraphs that we need to concern ourselves with. Let us start with paragraph (a) of the definition of network change: "A network change includes any change in or to any part of the network including its layout, configuration or condition which is likely materially to affect the operation of the network or trains operated by a train operator on the network". Changes to the track layout will fall within (a), yes?
  (Mr Oatway) Permanent changes, yes.

  10056. All of the sort of infrastructure changes that we have been talking about, the various sidings, the junctions, the dive-unders, all of those would be network changes?
  (Mr Oatway) If they are built, yes.

  10057. Any losses resulting from speed restrictions associated with the introduction of that infrastructure or any other aspect of the operation of the network which results from the introduction of those new infrastructure items would be compensatable under the Network Code as it currently exists, yes?
  (Mr Oatway) If they are ongoing and continue for longer than six months, yes, and they are permanent.

  10058. No, that is not right, is it?
  (Mr Oatway) No, I think it is right, yes.

  10059. Under the definition in (a), a network change includes any change in or to any part of the network including its layout, configuration and condition. If I am building, let us say, the Acton dive-under and the introduction of that dive-under results in speed restrictions and the like, any losses that EWS incurs as a result of the introduction of the dive-under will be compensatable whether or not the work goes on for six months or more, whether or not the temporary speed restrictions are for six months or more because it is associated with a change in or to any part of the network, that is right, is it not?
  (Mr Oatway) Yes, you have to have the change in the network which affects the operation, yes.

22   Committee Ref: A57, Non-compensatable disruption (LINEWD-103_05A-021) Back