The benefits of open access
Challenger entrants bring new ideas that keep established operators on their toes.
THERE is a continuing debate about the benefit of open access services, with a belief in some quarters that the monopolistic nature of most franchised operations is being justified on the grounds of simplicity, with passenger choice not seen as important.
This is in contrast to decisions taken at the time of Privatisation in the 1990s, when policy makers held the opinion that the decline in passenger and freight markets at the time could be reversed if competition was introduced to stimulate new services and reduce fares as a result of lower operating costs.
Freight comparison
This has certainly been evident in the freight market where, after significant cutbacks made by British Rail with the closure of private sidings and removal of network services, the use of privately-owned locomotives by Foster Yeoman and ARC in the 1980s for the movement of construction materials had shown that lower costs could be achieved to make rail more competitive.
This showed other rail freight customers that operating their own trains was also a way forward, and so the electricity generator National Power duly obtained the necessary assets. British Nuclear Fuels also decided to set up a new operating entity, Direct Rail Services, using the open access procedure.
A competitive market has since developed, with the formation of a number of new operators such as GB Railfreight, who represent challenger entrants competing successfully with the companies established at Privatisation.
There were expectations that the passenger market would develop in a similar way, particularly on longer-distance routes, but an immediate issue arose about the value of holding a franchise if there could be competition on profitable routes. As a result, the then Office of
Rail Regulation decided it would restrict access to the network for new open access services to protect the revenue of franchised operators.
Initial approvals
Elaborate rules were created under a process described as the Moderation of Competition. The new franchised train operating companies could nominate flows for protection from competition, either from other franchised operators or new entrants, but after an initial period the rules were eased to restrict the protection to flows that made up 80% of franchise revenue. At this point, Hull Trains applied for track access rights to run services between Hull and London because the minimal revenue earned by the franchised operator on the route, then GNER, did not amount to 20% of its income. The main argument about the application was about capacity, but after much haggling three 100mph paths were identified that allowed the services to begin in September 2000 using Class 170 rolling stock provided by Anglia Railways. This also became problematic because, in an attempt to thwart the development of services, the newly-created Strategic Rail Authority ruled that assets held by a franchised operator could not be used by other parties. This decision resulted in Hull Trains acquiring its own Class 170 units, which were delivered in 2004 as an interim measure until Class 222 125mph vehicles were delivered in 2005. Fortunately, there was a general shortage of DMUs as a result of traffic growth, so HT’s displaced Class 170s were acquired by ScotRail for use on its longer distance express services. Another open access operator Grand Central secured regulatory approval to provide trains between Sunderland and King’s Cross from December 2007, with a route to Bradford added in 2010.
Rolling stock was a constraint, but six HST power cars became available that were the nonstandard with buffers added as part of the switch to electric haulage on the East Coast
Main Line in the late 1980s.
The Bradford route used Class 180 units displaced from their original use on Great Western services.
The justification for the GC services was similar to the Hull Trains example, where the lack of trains provided by the franchised operator meant revenue was below the threshold that would dilute the earnings of GNER.
Legal challenge
GNER launched legal proceedings to prevent the operation of the Sunderland trains and the expansion of Hull Trains’ timetable. It was claimed that the regulatory decision was discriminatory and unlawful, and gave the open access operators an unfair advantage as they only paid a variable charge for track access. After a four-day hearing, the judge Mr Justice Sullivan declined to grant an order quashing the regulator’s decision, and additionally found the regulator’s charging regime was not unlawful. The fact that franchised operators pay a fixed charge before a variable tariff is added is in reality a charge-through paid to the infrastructure owner, which is reflected by the Department for Transport in the cost base for operating the franchise – so it is therefore included in any need for revenue support payments or to reduce a premium. Franchised operators are also allowed to run at peak times, whereas open access services have to fit into available space, which in reality is usually at off-peak times. The Government white paper issued following the WilliamsShapps review of the future industry structure maintains a place for open access operators in each of the passenger, freight and charter markets, and confirms that existing track access contracts will be honoured. This is an acknowledgement that eliminating challenger entrants would not result in the better delivery of services by incumbent operators, as studies have shown the beneficial effects of East Coast open access competition compared with routes such as the West Coast and Great Western main lines. In the case of the former, the ORR approved a service between Blackpool and Euston, but subsequently Arriva decided not to go ahead.
Welsh proposal
A different attitude was taken for an application to operate services between West Wales, Cardiff and Paddington, which was declined. The issue was that, although there was agreement that 45% of the revenue would be new, the franchised operator would lose £34 million per annum in abstraction. The intention was to provide seven daily return services, initially as far as Cardiff using Class 91 and Mk.4 rolling stock, with an extension to Carmarthen after bi-mode trainsets had been acquired. But the ORR concluded that the absolute level of abstraction from existing services was too great, even though the proposal was backed by Transport for Wales. It can be anticipated that this application will be revived in due course, which prompts a view that – as there is likely to be greater devolution of transport decision making – the Welsh Government should have greater control over decisions about the provision of main line services. In economic terms, market entry by challenger firms (such as open access operators in the case of rail) bring customer benefits that can be clearly seen in the rail freight sector, and are evident in many other markets such as low-cost airlines, supermarkets, mobile phone and internet service providers.
“The Williams-Shapps review maintains a place for open access operators in the passenger, freight and charter markets”