Developments in Transport Policy
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1 Journal of Transport Economics and Policy, Volume 36, Part 2, May 2002, pp. 341±354 Developments in Transport Policy The Evolution of Capacity Charges on the UK Rail Network Stephen Gibson, Grahame Cooper, and Brian Ball Address for correspondence: Stephen Gibson, Head of Economics, Railtrack Plc, Railtrack House, Euston Square, London, NW1 2EE, UK. Grahame Cooper is also at Railtrack Plc, and Brian Ball is at AEA Technology Rail. Abstract This policy note describes the research into the congestion costs that Railtrack (the owner and manager of the railway infrastructure in the UK) faces in operating additional trains on the rail network. This work was undertaken as part of the first periodic review of Railtrack s access charges. This is the first time that such a detailed analysis of the relationship between capacity utilisation and train performance has been undertaken on a rail network. The paper defines capacity utilisation and identifies the key drivers of congestion costs: geography, time/day of operation, relative speed and flex. The results of the congestion cost research has been reflected in the introduction of a new track access charge, known as the capacity charge. Date of receipt of nal manuscript: February
2 Journal of Transport Economics and Policy Volume 36, Part 2 Introduction This paper describes the cost research and policy development that underpin the introduction of a capacity charge to recover the congestion costs of track access on the UK rail network from June This was developed by Railtrack (the owner and operator of the UK rail infrastructure) in conjunction with AEA Technology, as part of the Rail Regulator s rst periodic review of access charges (which determined the level and structure of track access charges for franchise passenger services for the ve years from April 2001 until March 2006). It is the rst time that such a detailed analysis of the relationship between capacity utilisation and train performance has been undertaken on a rail network. The congestion costs faced by Railtrack on the UK railway arise as a result of performance payments Railtrack makes to train operators due to reactionary delay (when one operator s trains delay another operator) increasing with capacity utilisation. These performance regime payments are designed to re ect the economic costs of changes to network reliability. The charging regime for the rst regulatory control period 1 and the rst 15 months of the second control period 2 requires congestion costs for additional access rights (to run services beyond those allowed by the initial access agreements) to be calculated and negotiated on a case-by-case basis. This was capable of providing appropriate economic signals for additional rights, but at the expense of substantial transactions costs. However, the congestion costs for the quantum of rights that train operators receive in their initial access agreement are included in the xed charge that those operators pay, and therefore the approach overs no price signals of the congestion cost implications of changes to that initial set of access rights. With much of the Railtrack network at or near capacity, this absence of economic signals encouraging the e cient use of the network was a cause of signi cant concern. This paper sets out the analysis undertaken to develop a capacity charge to improve the incentive properties of the charging framework. The intention was to create a pre-set published tariv based on the marginal congestion costs of trains on the network. The tariv would then apply to all rights operating on the network in order to incentivise e cient use of scarce track capacity. Although there are some examples of other rail infrastructure managers introducing a broad mark-up on particular lines to re ect congestion levels (for example the German railway charging 1 Relevant to access rights exercised between 1 April 1995 and 30 March Introduction of the capacity charge was delayed to June 2002 to allow new billing systems to be developed. 342
3 Developments in Transport Policy Gibson, Cooper and Ball framework includes a 20 per cent surcharge on usage charges on lines that the infrastructure manager designates as congested), this is the rst time that an infrastructure manager has sought to introduce such a highly disaggregated congestion-related charge across a rail network. De ning Congestion Costs Railtrack has performance regimes with all train operators. In these performance regimes, Railtrack compensates train operators if Railtrackcaused delays are above a historic benchmark level, while the operators reward Railtrack if Railtrack-caused delay is below the benchmark. Railtrack is responsible for all delays to trains not directly caused by the train operator including reactionary delay (when one operator s trains delay another operator). The payment rates in the performance regimes are based on the value to the operator of improved performance plus an element to recognise the social value of improved performance (which is then passed back to the Strategic Rail Authority 3 through the performance regimes that operators have with the SRA in their franchise agreements). Figure 1 EVect of exogenous delay on reactionary delay 3 The Strategic Rail Authority is the non-departmental public body responsible for providing strategic direction for UK railways and administering and managing the franchising process for passenger operators. 343
4 Journal of Transport Economics and Policy Volume 36, Part 2 Figure 1 is a set of train graphs that compare the evect of exogenous delay on reactionary delay. The lines on a train graph indicate the progress (planned or actual) of a train between two points A and B on the rail network. Figure 1 shows a base timetable (upper graphs), and one with an additional train Ð and therefore increased network congestion (lower graphs). For any given level of exogenous delay to one train (shown in grey on the right-hand graphs), it is clear that increasing the congestion on the network increases the expected level of reactionary delay (the area between the grey line and the planned timetable shown as a dotted-line). Since Railtrack compensates train operators for this additional reactionary delay through the performance regimes, this is a marginal cost to Railtrack of the extra train on the network. It is the expected level of this marginal cost, (known as the congestion cost of the additional train), which has been estimated and is re ected in the capacity charge that is being introduced. Since the payment rates in the performance regime are designed to re ect the economic costs (the cost to passengers plus the social cost) of changes to network reliability, this congestion cost seeks to re ect the economic cost of the consequences of changes in tra c levels on congestion on the network. It should be emphasised that this research has not sought to identify a scarcity charge that is one that seeks to ration demand to the capacity available, which might provide Railtrack with an ability to capture monopoly rents where the network is congested. It has instead identi ed the marginal costs that Railtrack faces (through higher performance regime payments) as a result of the network becoming more congested. It therefore ensures that Railtrack is compensated for the higher costs of operating a more congested network and is consistent with Article 7 of the European Commission Infrastructure Package 2001, which requires that access charges should be set at the cost that is directly incurred as a result of operating the train service. 4 De ning Capacity Utilisation The sequence and mix of tra c on the network determines the amount of capacity consumed by an additional train (for example, adding a fast train onto a track section where all the other trains are slow trains consumes a 4 The infrastructure package also allows additional charges to re ect the environmental costs caused by operation of the train, and where the market can bear it, a mark-up, to allow full recovery of the costs incurred by the infrastructure manager. 344
5 Developments in Transport Policy Gibson, Cooper and Ball lot more capacity than adding a fast train to a track section where the other trains are also fast trains Ð since it can be timetabled to operate at the minimum headway behind an existing train for the length of its journey). Some measures of network capacity inherently favour existing operators, for example the approach of measuring capacity in terms of a standard train path, where the standard path is based on the operational characteristics of particular types of trains. It was therefore necessary to develop a consistent measure of capacity utilisation that does not unduly advantage one particular type of service to the disadvantage of operators of other types of service or potential new operators. Figure 2 is another train graph, with the thickness of the lines representing the minimum operational headway allowed between trains by the infrastructure and signalling capability. It illustrates the de nition of capacity utilisation adopted. This takes the actual timetable being operated over a set period A (say one hour) (left-hand graph) and squeezes the trains together (assuming current infrastructure/signalling capability) until they are at the minimum possible operational headway apart, while keeping the order of trains constant (right-hand graph). Capacity utilisation is de ned as the time taken to operate the squeezed timetable (B) as a proportion of the actual time taken to operate the actual timetable (A). In practice this value (B/A) ranges from about 20 to 80 per cent across the Railtrack network. Figure 2 De nition of capacity utilisation 345
6 Journal of Transport Economics and Policy Volume 36, Part 2 Identifying Drivers of Congestion Costs The congestion costs of an additional train path will vary across the network in relation to a number of key features of that path: geography, time/day of operation, relative speed, and the amount of ex (de ned below) in the access right. For the purposes of constructing a capacity charge to incentivise decisions over whether to operate particular train services, it was assumed that the level of infrastructure on the network was constant, as was the level and structure of the performance regimes. Geography The detailed interaction of the pattern of train services and the diverent capacities of the infrastructure across the network imply that capacity utilisation can vary at any point at which a train can enter or leave the section of track. The modelling operates at a level of 4,300 geographic sections on the network and distinguishes between the two directions that trains can travel over those sections. Time/day of operation The shortest period over which the capacity index can sensibly be calculated is one hour. The nature of service patterns in the national timetable is such that the pattern of trains is reasonably regular for weekdays, but diverent for Saturdays and Sundays. Therefore, there are fundamentally 72 hourly timebands over which congestion costs could be calculated. Relative speed As described above, the speed of a particular train relative to the speed of other trains already running on that section of track will determine the amount of capacity used by the train and the additional congestion costs that it causes. Flex The ex associated with an access right is the opportunity Railtrack has to move an operator s preferred timetable bid, to produce a workable timetable. Hence ex in access rights allows Railtrack to nd the most e cient path for a given train that minimises the congestion costs of that train. For the purposes of this research, ex is expressed as x minutes around a xed time. 346
7 Developments in Transport Policy Gibson, Cooper and Ball The Relationship between Capacity Utilisation and Delay The relationship between capacity utilisation and reactionary delay across the network was examined by AEA Technology using regression analysis. Delays are inherently highly variable, and therefore delay data corresponding to a whole year were analysed. DiVerent sections of route tend to have very diverent levels of delay per train mile (for example, junctions will incur more delay than plain running line). The analysis of delay data focused on the comparison of delays by route sections at diverent times of day. These diverent times of day have varying levels of capacity utilisation associated with them. A number of functional forms were tested (exponential, adjusted exponential, power, and linear). An exponential form of relationship was chosen since it best tted the observed data (based on T-tests of the route constant ) and was intuitively reasonable. The form of relationship chosen was: D it A i exp C it : where: D it is the reactionary delay on track section i in time period t; A i is a route section speci c constant; 5 is a route speci c constant; 6 and C it is the capacity utilisation index (as de ned above) on section i in time period t. Reactionary delay itself is not easy to measure. The analysis used the de nitions of delay from Railtrack s TRUST system, as input by signal operations stav. Analysis performed on the non-reactionary delays per train mile showed no signi cant relationship with capacity utilisation, con rming that the reactionary delays in TRUST constituted all the congestion related delays. The regression analysis was performed for each strategic route on Railtrack s network using 1998/9 nancial year data on reactionary delay per train over individual sections of the Railtrack network, and a measure of capacity utilisation based on the winter 1998 timetable. The impact of two additional dimensions of relative speed and ex on the congestion impact of a train were separately investigated using simulation techniques (see over). The results of the regression equations for each route are shown in Table 1. It was possible to derive positive and statistically signi cant relationships for 20 out of the 24 routes across the Railtrack network. Among 5 Calculated on the basis of 4,300 sections across the network. 6 Calculated on the basis of 24 routes across the network. 347
8 Journal of Transport Economics and Policy Volume 36, Part 2 Table 1 Results of regression TariV Route Beta Tprob West Coast Mainline Branches <0.001 West Coast Mainline <0.001 East Coast Mainline Branches <0.001 East Coast Mainline <0.001 Great Western Mainline Branches <0.001 Great Western Mainline <0.001 Midland <0.001 Kent Main <0.001 Birmingham <0.001 Chiltern Main <0.001 Northern Trans Pennine <0.001 Wales & Borders <0.001 NE Scotland Strathclyde & Glasgow ± Edinburgh <0.001 West Anglia <0.001 Great Eastern <0.001 London, Tilbury & Southend <0.001 Brighton & Kent Branches Brighton Main <0.001 South West <0.001 North London Lines G. Manchester, S & W Yorkshire <0.001 Cumbria NW & SW Scotland those routes that gave a negative relationship, three out of four cases are lightly used rural areas of the country. The other route with a negative beta is the North London Line, where there is no signi cant relationship. This is likely to be a result of there being little variation in capacity utilisation between the peak and ov-peak services on this route, making it di cult to estimate a relationship through regression techniques, rather than there being no relationship present. The fact that there are signi cant diverences between betas on diverent routes indicates some diverent characteristics of the routes; however, the precise reasons for these differences have not been determined. Re ecting the Cost Dimensions in the Capacity Charge In developing a capacity charge to recover the expected congestion costs of a new service, it was necessary to make a trade-ov between simplicity/ 348
9 Developments in Transport Policy Gibson, Cooper and Ball practicality and accuracy/complexity in the tariv. Given that the number of tariv cells is the product of the number of charge bands in each dimension, there was signi cant concern in the rail industry that the size of the tariv (in terms of the number of charging cells) was excessive, and that some simpli cation of the tariv was necessary. Geography The choice of geographic tariv sections was aimed at re ecting the operational use of the network. It was considered important to retain a high level of granularity in this dimension, both because of the wide variations in the costs by location, and to signal those costs appropriately to operators to in uence their timetabling decisions. This implied including all important stations and junctions as end points to tariv sections together with all junctions where over 25 per cent of trains turn ov at the junction. This resulted in a tariv with about 2,750 geographic cells (with diverent directions counting as diverent cells). Time/day of operation While diverent routes have more or less pronounced peaks, the timing of volume changes does not vary greatly between routes. It was therefore decided to use 13 timebands (seven for weekdays, four for Saturdays, and two for Sundays) that are identical across all the routes. Table 2 Capacity charge time bands Weekday Saturday Sunday 00:00±05:00 00:00±05:00 00:00±09:00 05:00±06:30 05:00±08:00 09:00±24:00 06:30±09:30 08:00±18:00 09:30±16:30 18:00±24:00 16:30±19:30 19:30±21:00 21:00±24:00 Speed For an individual train, relative speed has a considerable evect on the congestion costs of that train. However, detailed simulation of the average cost of all possible paths for a train provided results that did not vary signi cantly with speed for trains operating within or just outside the prevailing range of speed on a route. However, congestion costs did rise 349
10 Journal of Transport Economics and Policy Volume 36, Part 2 for trains that operated either signi cantly faster or slower than the prevailing speed mix. For example a train operating 20 per cent faster than the maximum speed on the East Coast Main Line was estimated to give rise to 20 per cent higher congestion costs that those predicted for an average train. Similarly, a train operating 20 per cent slower than the minimum speed on the ECML was estimated to give rise to costs 50 per cent higher than an average train. In order for the capacity charge tariv to apply to the vast majority of trains without introducing signi cant extra complexity, the tariv applies to all existing and additional access rights (which do not require network enhancement) except circumstances where: A train s timing is more than twice the average train timing; or A train s timing over the section is faster than the current fastest train plus 5 per cent. Trains operating outside this speed envelope would be priced individually, consistent with the basis used for the capacity charge tariv. Flex AEA Technology used simulation techniques to estimate the impact of ex on congestion costs. In developing the capacity charge, consideration was given to including a set of ex multipliers, which would adjust the capacity charge dependent on the level of ex associated with the access right. However, proposed changes to the contractual relationship (which would have changed the marginal costs associated with given levels of ex), together with practical implementation questions relating to the fact that the existing contracts do not contain a simple consistent de nition of ex (akin to x minutes), resulted in ex not being included as an explicit charging dimension. Instead the capacity charges are based on the current use of ex in access rights. Halving of the TariV to Operators The performance regime rates on which the congestion costs are based were roughly doubled in the periodic review to re ect a higher social value of delay. This would have implied that a cost-re ective capacity charge tariv was approximately twice the negotiated levels of congestion charge in the rst control period (since these were based on the original performance regime rates). At a late stage in the periodic review, the Rail Regulator 350
11 Developments in Transport Policy Gibson, Cooper and Ball decided that it would not be appropriate for train operators to face charges that re ected the full marginal costs of the services they operate. This was due to concerns that higher access charges would reduce the growth of rail services on the network and this would con ict with government growth targets. Therefore, the Regulator determined that capacity charges should be set at half the expected marginal costs, with Railtrack recovering the other half of the congestion costs of tra c growth from the Strategic Rail Authority through an adjustment to Railtrack s Regulatory Asset Base (RAB) in The consequence of this decision is that the value that Railtrack will receive from additional track access (the capacity charge plus the future RAB adjustment) will be greater than the marginal cost to the train operator (purely the capacity charge). In addition, where operators have a choice or trade-ov to make between reliability and tra c growth (for example in timetabling decisions), the value of reliability used (full performance regimes rates) will be greater than the value used in making decisions over the performance costs of extra growth (since the capacity charges are only based on half the performance regime rates). This adjustment was opposed by Railtrack since it results in misaligned incentives, but supported by operators, the SRA and the Regulator who concluded that the proposed adjustment provides an appropriate degree of transparency and cost re ectivity (ORR, October 2000). Other Simpli cations to the Capacity Charge Banding In order to simplify the presentation of the tariv and make it easier for operators to understand, the capacity charges are banded in 10p/train mile charging bands up to 2/train mile (with actual costs used for the 1 per cent of cells above 2/train mile). This reduces the total number of diverent tarivs, although it does not change the number of cells in the tariv matrix. De minimis A de minimis level has also been included in the tariv, such that where the cost estimates are below 10p/train mile for a particular route section and time band, the tariv is set to zero. This signi cantly reduces the complexity of the charge (77 per cent of charging cells are de minimis re ecting the low levels of 7 The 2006 RAB is used to determine Railtrack s revenue requirements in the third control period (2006±2011) and beyond. 351
12 Journal of Transport Economics and Policy Volume 36, Part 2 congestion at ov-peak times and on many parts of the rural network). It also adjusts for an anomaly in the exponential functional form that has been used, which implies that there would be some delay even if no trains were being run. Setting the capacity charge to zero ensures that where true congestion costs are overestimated by the exponential relationship at low levels of congestion, the charge is adjusted to be close to the true marginal costs. Access Quotation System In order to assist train operators with the task of estimating the cost of running an additional service, Railtrack has commissioned AEA to develop the Access Quotation System (AQS). The AQS utilises an on-screen network map to identify the exact route covered by the prospective trains, automates the calculations of the sum of the distances in each tariv cell multiplied by the tariv cell values, and provides both on-screen and printed reports. This system is now delivered and in use by Railtrack zones. The Capacity Charge The capacity charge has been calculated across the entire UK passenger rail network for each of the 13 timebands. It is due to come into evect in June 2002 at the start of the summer 2002 timetable Ð implementation was delayed from the start of the control period to allow the costs of diverent train paths to be understood at the timetabling conference (approximately one year before the timetable comes into evect, when operators bid for train paths) and to allow billing systems to be developed. Between April 2001 and June 2002, the negotiated charging regime from the rst control period was continued (but recognising the doubled performance regime rates). An example of the capacity charge tariv for three weekday time bands for the Midland Main Line between She eld and London St. Pancras is shown in Table 3. Conclusions The development of the capacity charge to recover the marginal congestion costs of track access has involved a substantial amount of cost research and signi cant consultation across the rail industry. This has 352
13 Developments in Transport Policy Gibson, Cooper and Ball Table 3 Capacity charges She eld to London St. Pancras ( /train mile) From To AM Peak OV-Peak PM Peak She eld Dore Station Jn Dore Station Jn Chester eld Chester eld Clay Cross South Jn Clay Cross South Jn Trowell Jn Trowell Jn Radford Jn Radford Jn Mans eld Jn Mans eld Jn Nottingham Nottingham Mans eld Jn Mans eld Jn Trent Trent Trent Jn Trent Jn Leicester Leicester Wigston North Jn Wigston North Jn Bedford Bedford Flitwick Flitwick Luton Luton St. Albans St. Albans W Hampstead Thameslink W Hampstead Thameslink Kentish Town Kentish Town London St. Pancras validated the intuitive view of the exponential relationship between adding trains onto a congested network, and the expected level of performance on that network, that many within the rail industry have held. It has also quanti ed, for the rst time, the elasticity between these two variables for each of 24 routes across the Railtrack network. The capacity charge has been set at a reasonably granular level to re ect the complexity of the underlying cost structure with around 2,750 geographic sections and 13 timebands, and will come into evect in June The charge has been set to half the expected marginal congestion costs of track access with an adjustment to Railtrack s RAB to ensure that it recovers its congestion costs in full. We believe that this will provide an appropriate incentive to Railtrack to make e cient decisions over use of the network in its timetabling decisions, and compensate it for the marginal congestion costs incurred. The halving of the tariv to operators will mean that there is some misalignment of incentives between industry parties. However, the capacity charge will still provide a signal to operators (albeit at half the correct level) over where and when the network is congested, and should therefore in uence operator decisions towards e cient requests for track access in timetable bids and signal where network investment is required. 353
14 Journal of Transport Economics and Policy Volume 36, Part 2 References AEA Technology (1999): Capacity Reservation Fee, Initial Research. London, AEA. AEA Technology (2000): Capacity Reservation Fee, Summary Report. London, AEA. Symonds (2000): Assessment of Capacity Charges, Final Report. London, ORR. O ce of the Rail Regulator (2000): The Periodic Review of Access Charges, Final Conclusions. London, ORR. European Parliament (2001): Directive of the European Parliament and of the Council on the allocation of railway infrastructure capacity and the levying of charges for the use of railway infrastructure and safety certi cation. Brussels, European Union. 354
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