ORR Office of Rail Regulation : Rail freight charges to better reflect costs and give industry clarity to plan for the future - ORR

11 January 2013

A new package of charges for freight operators to access the rail network, to be introduced from 2016, will better reflect costs and give businesses certainty to plan for the future, the Office of Rail Regulation (ORR) announced today.

Britain's freight sector is flourishing, carrying an increasing volume of goods across the country over the past decade, and, supported by the regulator, benefitting from excellent access to the railways, investment to help the freight industry improve its productivity, and improving punctuality. In May 2012, ORR launched a consultation seeking views on charges freight operators must pay to use Britain's rail network, as part the regulator's assessment of what Network Rail must achieve during the five years from 2014 to 2019 (Control Period 5), the money it needs to do so, and the incentives needed to encourage delivery and outperformance.

ORR's analysis highlighted the wider economic and social benefits of moving freight by rail rather than road. For example, without rail freight there would have been an additional 6.7 million road journeys in 2007-08. However, ORR's work also showed that rail freight traffic creates costs of £280-400 million each year through factors such as the wear and tear on the tracks. Under the current charging regime freight companies only pay a small proportion of those costs, around 21-28%, with passengers and taxpayers covering the shortfall. Freight train operators currently pay minimal fixed costs, whereas in 2011-12 passenger train operators paid £887 million in fixed charges to Network Rail.

Following extensive input from the rail industry and its customers, ORR will:

• set a maximum cap of £1.68 per 1000 gross tonne kilometre (kgtkm) on the average variable usage charge that freight operators will pay to access the rail network in Control Period 5 (CP5). ORR expects the final charge to be lower than the maximum cap as part of its final assessment for CP5;
• introduce a new freight specific charge, payable for the haulage of coal for the electricity supply industry (ESI), spent nuclear fuel, and iron ore - all commodities that cannot easily or economically switch to road. For ESI coal, the charge will be capped at a maximum of £4.04 per 1000 gross tonne mile (kgtm); for nuclear fuel the charge will be capped at £11.64 per kgtm; and for iron ore at £2.96 per kgtm; and
• implement the new charges gradually to enable a smooth transition and to enable businesses to plan accordingly. The freight specific charge will not be introduced at all until 2016-17 and will then be phased in gradually over three years so that the full charge will be payable in 2018-19, allowing businesses time to adjust. ORR estimates that on average the overall price increases a customer will pay for the affected products will be between 3% and 5%.

ORR's decision balances payments for freight costs more fairly between businesses, taxpayers and passengers, recognising the wider benefits that rail freight brings against the costs of subsidising rail freight that would not otherwise travel by road. ORR estimates that, on average over the period, the increased charges represent between 3% and 5% of the price of a trainload for each of the three affected products.

ORR's Director of Markets and Economics, Cathryn Ross, said:

Over the past decade the regulator has supported an almost 10% increase in freight traffic on Britain's rail network by allowing greater access for freight services and setting targets for Network Rail to deliver improved reliability. However, under the current regime, freight companies only pay a small proportion of the costs they create using the network - and we need to redress this balance. Today, we have confirmed new charges for freight operators, to be gradually introduced from 2016, which better reflect the costs created by running freight services on the rail network and provide early certainty for business to plan for the future. The new charges, capped at manageable levels, will mean freight operators paying, at most, a third of the costs their services create. This will help to ease some of the burden from taxpayers' and passengers' shoulders. In order to make a fair and balanced decision, we listened very carefully to what the freight industry and its customers had to say. We have accommodated their views as far as possible - in particular by taking a conservative view on the levels of the charges, phasing in the new charges from 2016 to give businesses a chance to adapt, and removing plans for regional charges to ensure the regime remains simple - while recognising that charges to operate on the railways must better reflect costs, to give our railways a sustainable future.

Notes to editors

1. Read ORR's freight charges consultation report in full.
2. Read ORR's freight charges decision report in full.
3. The current average variable usage charge that freight operators pay to access the rail network is £1.36 per kgtkm.
4. The freight specific charge will not be introduced at all until 2016-17 and will then be phased in gradually over three years. This will give the affected businesses time to adapt to the charge. In particular it will give the ESI coal industry greater scope to adapt at a time of particular change, for example, with the Industrial Emissions Directive coming into force in 2016.
5. Rail freight plays an important part of the rail sector and in helping the country achieve its sustainability objectives. The governments will continue to invest in rail freight infrastructure in the next control period. England and Wales will receive £200 million investment in infrastructure, while Scotland will receive £30 million investment over the same period.
6. As part of ORR's decision, the regulator will consult in January 2013 on levying the charge on biomass on an equivalent basis to that for ESI coal.
7. The Office of Rail Regulation is the independent safety and economic regulator for Britain's railways.