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Channel Tunnel Rail Link (Supplementary Provisions) Bill

My Lords, when we embarked on this piece of legislation, I remarked to friends and colleagues that I thought that it was an uncontroversial little Bill that might bring some light to the shade. It might help us further to develop the excellence of high-speed travel and help us with the disposal of the asset, which is the core of what the Bill is about—we may generate some useful and valuable funds for the continued investment and expansion of our rail system. However, I realised shortly after we embarked on the Bill that it would be a fraction more controversial than I imagined. Here we are at Third Reading and the controversy has continued apace. I think that all noble Lords who have spoken this afternoon and on other occasions have done so with the best interests of the rail network at heart. It is to the great credit of our House that so many noble Lords take such a profound interest in the growth, development and expansion of the rail network, which as we know is increasingly successful and doing extremely well. I hope that the comments that I make this afternoon will help. I am grateful to all those noble Lords who have spent time with me, reading correspondence that I have originated, who have seen the Minister, my honourable friend Tom Harris, or who have spent time with the diligent officials, who have put a lot of thought into how we approach this issue. It may be worth remarking at the outset that when in the mid-1990s—1996, I think—the original legislation went through relating to the development of the financial arrangements for the Channel Tunnel and the rail link in particular, the system of regulation that was put in place by, I think, Brian Mawhinney, now the noble Lord, Lord Mawhinney, was so uncontroversial as to provoke no comment from him and no debate at all on the issue. Clearly, things have moved on and noble Lords, and perhaps some Members in another place, take a slightly different view. Therefore, I was surprised that the question of who regulated in the early phase of the new arrangements was so controversial. There has been a lot of debate and it has been very welcome, but for the rest of this afternoon’s discussion on this matter I shall endeavour to keep my comments to points that have been raised. I shall try to provide more explanation than we may have done in the past and I shall deal with some of the issues that I know still concern some noble Lords. As I explained at the outset, this is an enabling Bill that clears the way for the restructuring of London and Continental Railways and the eventual sale of its component businesses, notably High Speed 1. The proceeds from that sale will be used to offset the investment made by taxpayers in underwriting the cost of constructing the new high-speed line. Despite the heat of the debate, I believe that more unites us than divides us in this House, particularly in relation to the objectives of this enterprise. Those objectives are summarised thus: to maximise value for money for the taxpayer from any sale; to encourage the greatest use of the line; to secure its efficiency of operation; and to do so in a way that provides a level playing field for all operators and not just the incumbents. That final point is important. The Government do not want to see artificial barriers to entry, whether they are barriers of price, access or safety. The Government agree that, as far as possible, the operation of this line should be subject to the normal regulatory supervision. They also agree that the best value for taxpayers is likely to be secured by maximising stability and certainty for bidders, commensurate with the transfer of risks and incentives that we wish to achieve. The amendments would do that by replicating on the new line the regulatory arrangements that apply to the national network. The Government well understand the thrust of the amendments but believe that they are unnecessary. In practice, the difference between us is as follows. The Government wish to retain the right to set the cap on the maximum access, price or investment recovery charge that can be levied for access to the High Speed 1 railway. They intend to set the cap prior to the sale of High Speed 1 and it would not then be changed without the express agreement of the owners of High Speed 1 and the Secretary of State. The amendments would transfer the whole responsibility for setting the charging framework to the Office of Rail Regulation. There are three reasons why the Government wish to retain the single element of control. First, the price of access to High Speed 1 is a critical element of the sale process—it is a significant determinant of the value of the railway. The Government carry the financial risk for this and they have a duty to taxpayers to maximise value from the asset that they have underwritten. The Office of Rail Regulation does not have such a duty and we would not wish to be drawn down the path of giving new duties to the ORR—that is what the amendment would achieve—to ensure that an independent regulator arrives at the answer that we all want. Secondly, in this context we do not believe that the ORR would offer additional certainty to bidders for High Speed 1. The timing is uncertain, the range of possible outcomes, all of which might be equally valid in regulatory terms, are similarly uncertain and any revisiting of the charges, such as by periodic review every five years, is entirely outwith the bidders’ control. Thirdly and finally, this railway is different from the national network. A traditional regulatory approach would seek to prejudge the value of the asset, fix prices against that and, consequently, determine volumes. In practice, the risk of each of these determinations would return to the Government. However, in the case of High Speed 1, the Government do not believe that such an approach is necessary; indeed, we believe that it would be unnecessarily constraining and produce an artificial expression of value. Instead, by establishing a cap on charges that is designed to be attractive to competition on the line, the market can then assess the value of the asset in the debt that it is prepared to raise against such future revenue and the operator can be given the incentives to chase business in order to maximise its returns against that value. Having said why we do not want to take that final step of handing price setting to the ORR, I shall explain what the Government want to do instead and how, within this, we nevertheless want to limit the boundaries of difference and maximise the normal regulatory approach. The Government will establish a charging framework. The principal purpose of such a framework is the standard one for all such documents: to ensure that the tariffs and procedures for determining access by the infrastructure owner are compliant with the relevant regulations. This charging framework will set a cap on the maximum charge that can be levied. There will be no minimum charge. The cap will also be contractualised within the concession agreement entered into with the successful bidder for High Speed 1. The purpose of the cap is to prevent artificial pricing barriers to entry—an issue that the noble Lord, Lord Hanningfield, was concerned about—and to protect the position of the domestic franchise operator, which is, after all, a largely captive customer. The purpose of doing this as a cap without a floor or fixed price is to enable the infrastructure owner to set rates that are level but competitive for different markets as it seeks to chase business and maximise usage and to enable it to respond positively to changes in the market, whether fluctuations in demand or fluctuations in operators’ cost bases. In other words, the infrastructure owner is able on risk to chase volume and price in an open and competitive market, while operators are protected by the cap itself. The purpose of also putting the price in the concession contract is to give bidders certainty and to obtain best value for the taxpayer, both at the point of initial sale and thereafter. That is the point that unifies us all. Thereafter, with the charging framework established and the cap set, the Government’s special interest ends. We will want normal regulatory processes to apply. What do I mean by that? I mean principally two things. The regulator should have the supervisory function, under the EU rail directives, to ensure that the infrastructure operator discharges its business in compliance with the network statement and the requirement of directives, particularly ensuring that the pricing of access is entirely fair and non-discriminatory for all operators that share similar markets. I know that the issue of non-discrimination is of particular concern to the noble Lords, Lord Bradshaw and Lord Berkeley. I think that we have answered that point. The regulator should also determine that the relevant documents and provisions—that is, the network statement arrangements for the allocation of access and supporting contracts—are compliant with the directives. The formal means of doing so is through its appellate functions. We do not see cause for delay in the introduction of these regulatory interests. They start and the Government bow out, if you will, at the moment when the new structures go live. I hope that we are largely there, but perhaps I may give a few more necessary safeguards and reassurances to the House. The noble Lord, Lord Berkeley, asked what reassurance could be given that the cap or charging framework would not be changed at the whim of the Government. That is a fair question. A principal assurance is to fix it also in the concession, providing contractual certainty for bidders. That is an important point. The Government would not then, in normal circumstances, expect to revisit this cap over the period of the concession. We must, however, allow for two possible exceptions. First, the charging framework may, from time to time, need updating to reflect any change in the governing directives. I am sure that all noble Lords will accept that point. Secondly, if the market for the line proves even more buoyant than we have forecast, as some analysts suggest, and therefore is able to make a greater contribution to the costs of construction, we should not artificially suppress that. In such circumstances, it will be open to the infrastructure operator to seek from the Government agreement to raising the cap—a not unreasonable position. The Government would seek in turn to see that a share of that additional value returned to the taxpayer. That would also take into account the approaches under the directive for responding to congested infrastructure—that is, when demand at the first established price outstrips supply. I emphasise again that the cap is a one-way constraint. If the infrastructure owner needs, as it is likely to, to set lower prices for some markets to attract business or to reduce prices should market conditions change, it is free to do so, provided that it does so on a fair and non-discriminatory basis in accordance with European regulations. Noble Lords will note that the regulator will have supervisory and appellate functions but will want reassurance that the key documents—the charging framework, the network statement and the access contracts—are compliant in the first instance. The Government want that, too. Without it, we introduce an immediate and unnecessary regulatory risk to the sale, which would undoubtedly reduce value. What is the point of publishing a network statement on Monday if it is only to be overturned by the regulator on appeal on Tuesday? We will of course subject those documents to the scrutiny of our professional advisers and—perhaps more reassuringly from a neutral standpoint—our approach will be subject to the scrutiny of the European Commission, whose approval of the necessary state aid is essential to the progress of the project; the Commission is unlikely to grant such approval until it is satisfied as to our compliance with the relevant directives. Thereafter, we will consult fully and publicly, including on the charging framework. That consultation process will include the Office of Rail Regulation. I must be careful. We could not, nor would we want to, have that consultation process fetter any discretion on the regulator in any subsequent appeals. Nevertheless, the Government want both the input and the advice of the Commission and the ORR to ensure that the charging framework is properly compliant. The regulator also has an interest in ensuring that the documents over which it will subsequently have an appellate duty, including the network statement and access arrangements, are not flawed in a way likely to precipitate unavoidable appeal. The process for consultation on the relevant documents is therefore a practical one whose effectiveness is formally underpinned by the independent scrutiny of the regulator, with its powers to overturn on appeal, and of the Commission. Finally, I need to say something about the efficiency of operating costs on the line. We have not fully touched on this, in part because the range of potential outcomes does not itself hang on primary legislation. At this stage, I can go no further than to provide a clear statement of the Government’s principles and intent and ask the House to accept these assurances, which may be given expression through secondary legislation, through the application of existing primary legislation, such as the 1993 Act, or by commercial and contractual agreement. In trying to maximise returns and in so far as the market is competitive, the infrastructure operator faces an incentive to reduce operating costs to make prices more attractive and to increase demand while maintaining its margin—an issue about which my noble friend Lord Berkeley was particularly exercised. In the Government’s view, such incentives are, to borrow an economic phrase, necessary but not sufficient. We have seen before how such incentives do not always work out in practice; we cannot rely entirely on the dynamics of the market for the whole period of the concession. Operators will be concerned at a risk that a future infrastructure owner regards these costs as a straight pass through to operators. In any case, there is also an efficiency requirement within the directives. The first statement is therefore one of clear principle. The Government believe that it is separately and additionally necessary to place incentives on the infrastructure owner continuously to improve the efficiency of operation and we want that to be reflected in the relevant subcontracts. The more open issue at this stage is how to deliver this. We must reflect that in the statement of principle that follows. The Government do not see themselves as the first and best regulatory option. The Government believe that the arbitration of what constitutes reasonable efficiency in the event of dispute is the natural territory of economic regulators. I cannot go further at this stage, as any such role is not currently or actively exercised by the Office of Rail Regulation. The route to future change may be administrative, regulatory or by contractual agreement. The objective of effective efficiency pressures is one that we share. It is the Government’s intention that the efficiency of operation of High Speed 1 and the contract supporting any third-party operation and maintenance of the line should be subject to independent scrutiny. Subject of course to further discussion with the Office of Rail Regulation and the need to recognise or agree change to any existing contractual rights, it is the Government’s preferred outcome that this scrutiny should be undertaken by the Office of Rail Regulation. Our intention with regard to the overriding duty given to the Office of Rail Regulation in relation to the development agreement under Section 21 of the 1996 Act is that this need not continue to apply to the new concession agreement under which the future owner of High Speed 1 will operate. I think that the noble Lord, Lord Bradshaw, understands my intent. We will explore in good faith how this might be achieved without recourse to primary legislation. I hope that noble Lords will forgive the length and the detail of this speech. I have no intention to bore the House much further, although I am sure that noble Lords will be interested. I hope that they will recognise the shared nature of our objectives, the reasons that the Government have given for the limited differences in approach—and they are limited—to this sale and operation and particularly the commitments given to tightly circumscribe the extent and the timing of the Government’s special interests here and to establish the operation of the railway thereafter on a normal regulatory footing subject to the supervision and the appellate scrutiny of the Office of Rail Regulation, as should happen. I hope that with that lengthy explanation noble Lords will feel confident not to press their amendments.