Grand Union disappointed

Regulator rejects Great Western Main Line open access services

application by Grand Union Trains Ltd to operate new open access services between South Wales and London, supported by Welsh Ministers, has been rejected by the Office of Rail and Road despite meeting the published criteria for approval.

There is a long history of antipathy towards market entry by new passenger operators, and up to now the ORR has demonstrated skill in determining that overall economic benefits outweigh any potential loss of income for franchised operators.

The calculation of any franchise revenue loss is based on one of those dreaded algorithms where outcomes are not infrequently shown to be unreliable.

There is market experience from the East Coast open access operations, where their presence has led to overall income growth so that although an incumbent operator might have a lower revenue share, the pot is bigger - meaning there is no income loss compared with the status quo.

The ORR is the independent economic regulator with responsibility to ensure that the rail market functions in the most effective way for passengers and freight customers. It has specific duties to encourage network use and promote competition, although this is tempered by a caveat to protect the taxpayer interest in maintaining the funds available to the Government.

At the time of privatisation, there were concerns that franchise value would be reduced if new entrants ran duplicate services to ‘cherry pick’ revenue. As a result, a protectionist policy was adopted - described as the Moderation of Competition - to protect the validity of revenue forecasts made by franchise bidders.

It was realised quite quickly that the policy was preventing proposals for new open access services where economic benefit was demonstrated. In the background was the past BR policy to remove through trains from population centres such as Barrow, Blackpool, Bradford, Hull, Shrewsbury and Sunderland.

The BR proposition was that InterCity operations would be restricted to core routes with parkway stations provided with large car parks, to encourage what is described as ‘rail heading’ by car owners rather than using a throughout rail service.

To respond to the evident economic disadvantage that was created, a relaxation of the initial protections took place and what was described as Moderation of Competition Stage 2 restricted revenue protection to 80% of franchise earnings, enabling new services to be promoted to restore the network gaps that existed.

This was later refined by ORR to the current maxim that an applicant must demonstrate that 30% of the income generated will be from new customers. Put another way - if this new revenue was generated, it would also increase the income of existing operators who (in accordance with the algorithm) would benefit from greater system use.

So, well and good. Or not, as the refused Grand Union application had demonstrated that the level of new income would account for 45% of its forecast revenue.

ORR is required to publish a decision letter in respect of approved or rejected track access applications, and this was duly made available on February 10 2021.

The proposed service offered seven limitedstop return trips per day between Cardiff Central and London Paddington, using displaced trainsets from the East Coast Main Line comprising Class 91 locomotives, Mk 4 coaches, and a DVT. This was an interim timetable until Hitachi Class 802 bi-mode rolling stock was procured, when the trains would be extended back to Carmarthen.

The application process was reviewed in the decision letter and acknowledged support from the Welsh Government, as well as being consistent with the South East Wales Transport Commissioners Report, which recommended greater use of the Great Western Main Line to improve connectivity.

Network Rail did not support the original application, and the reasons for this were evaluated. It transpired that NR identified capacity for six of the seven return paths, including platform capacity at terminals, and it was therefore agreed that the option of six return paths would be taken forward.

The impact on performance was assessed as causing a 0.46% drop in punctuality based on the T-10 measure (arrival within 10 minutes of booked time). It was noted that the approved

December 2019 Great Western Railway timetable was forecast to lead to a 2.5% drop in punctuality using the same T-10 measure. As a result, ORR concluded that the performance impact should not preclude approval of the application.

The NPA (not primarily abstractive) test provides data on the new revenue to be expected, which is deemed a proxy for consumer benefit, and that this is sufficient to compensate any impact on Government funds. The bar has previously been set at a level of 30%, but ORR has moved the goal posts by saying that while this is a necessity it is not sufficient criteria on its own for approval.

To be fair to the regulator, there has been prior notice of this, as it has previously concluded that there may be grounds to decline an application if the absolute level of revenue abstraction is deemed to be too great.

The Grand Union train service proposal brought about a forecast that the level of abstraction would amount to £34.2 million annually, less the money received from the newly introduced supplementary infrastructure cost charge, calculated at £3.4m per annum. This left a net £30.8m reduction in revenue allocated to the franchised train operators, primarily GWR.

So, while the application passed the NPA test (which many past proposals have not), ORR considered that in the light of the reduced national network income likely to be faced by the Secretary of State as a result of the effect of COVID-19 travel restrictions, the duty to have regard to the funds available to the Government outweighed the acknowledged benefits of the application.

The scale of the new services proposed is quite different from past open access applications that were successful. These started on a smaller scale and services were built up as the overall market grew, with the result that there was less immediate impact on the franchised operators and over time the overall network revenue growth could be demonstrated.

This approach may have appealed more to decision-makers. It would have reduced the short-term impact while recovery took place from the network revenue loss caused by COVID-19, while protecting the accepted long-term benefits offered by the Grand Union proposal.

“ORR considered that … the duty to have regard to the funds available to the Government outweighed the acknowledged benefits of the application.”