All attention in the industry is on the ORR’s draft determination for Network Rail, but look out for its draft Long Term Regulatory Statement (LTRS), due out for consultation in June. It will set out the ORR’s vision for the development of our sector and the regulation of it, placing the current periodic review in a longer-term context.
This is a potentially sensitive development for train companies. Growing activism by the ORR over the last couple of years in areas relating to Toc operations – such as passenger information, customer service and transparency – has strained its relationship with operators.
It is not that Toc’s have a concern with being held to account. In a sector where government, Passenger Focus and the media regularly shine a spotlight on their activities, they are well used to that.
The problem is that the piecemeal development of ORR activity in this space to date has threatened to confuse a situation where operators are already regulated through franchise agreements managed by DfT and other clients. That prospect of double jeopardy merely increases risk, which ultimately creates extra cost to taxpayers and passengers.
Thankfully, the DfT/ORR consultation on a greater role for ORR in regulating passenger franchises recently reached a sensible outcome. The conclusions, published in March, said that government will at this stage not proceed beyond a limited extension of the ORR’s role, and focus on better joint working between DfT and ORR.
The LTRS offers an opportunity to build on these conclusions. If it replaces recent ad-hoc developments with a coherent description of what future regulation in rail might look like and how we move towards that, it could help reduce regulatory and political risk.
The biggest opportunity is to signal how rail moves towards behaving more like a normal sector, where market forces are more prominent in driving innovation, investment and improvement by all players. Success should be measured not just by how responsibilities get moved from one regulator to another, but also by identifying how we can reduce the need for regulation in the first place.
My sense is that the executive and non-executive members of the ORR board broadly share this high-level outlook. The challenge is to convert vision into a tangible prospectus for action, and there are some important elements we will be looking for in the draft LTRS.
Going beyond devolution and alliancing, to increase further Network Rail’s responsiveness to Toc and Foc priorities in delivering for its customers, is key. Channelling Network Rail’s grant through operators is one potentially interesting way of doing this. Developing the initial work on incentivising greater Toc involvement in challenging and specifying the scope of enhancement projects is another.
In the meantime, the ORR must focus on its core job of holding Network Rail to account for its operational and efficiency commitments. In producing its recent business plan, the ORR has assured operators that it has heard this point loud and clear: the LTRS is a chance to consolidate that.
Thinking about how regulation might evolve over time in response to potential changes in the way passenger services are commissioned should also feature in the LTRS.
Understandably, much industry attention is focused now on restarting the stalled franchising process. But it is possible to conceive of a future where services might be provided through a mix of traditional franchises or management contracts, concessions for commercially-viable services, utility-style operations and more devolved commissioning of services. The LTRS needs to start anticipating how regulation might fit in such a context.
While some form of regulatory regime is always likely in rail given the features of our sector, it is equally important that the LTRS explicitly recognises that intervention, where needed, is based on clear evidence of market failure.
While this might seem obvious and merely consistent with the government’s Better Regulation Taskforce principles, it has not always been clear that this has shaped events – extraordinarily, the recent DfT/ORR joint consultation failed to include a Regulatory Impact Assessment.
The ORR’s current work to understand the ‘passenger experience’ and, as part of that, the extent to which there is any market failure before deciding whether it needs to intervene, hopefully will demonstrate an approach more in keeping with the principles of modern regulation.
Ultimately, given operators’ fears about double jeopardy, the final shape of the LTRS needs to involve full participation from government.
The Department may be tempted to think that it has done its work by having recently concluded on the joint consultation. Yet the DfT and ORR responses to the Select Committee’s Rail 2020 inquiry reveal important differences in emphasis – one talked of moving towards ‘a more unified regulatory structure’, the other of supporting ‘the principle of a single economic regulator’.
This suggests there is still work to do to align the positions of the two organisations. Engaging the DfT in production of the LTRS may seem uncontentious, but with the DfT very much focused on franchising and HS2, full involvement cannot be taken as read. Given the chance to bring greater clarity to the long-term development of rail regulation, it is vital that it happens.