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Tom Winsor needs no introduction to Modern Railways readers. Between January 1996 until his appointment as Regulator his monthly column ‘Legal Lines' guided us through maze of contractual relationships in the privatised railway. No one was better qualified for this task because as Legal Advisor to the first Rail Regulator John Swift QC, Winsor was responsible for drafting much of the regulatory legislation.
At the end of his secondment to the Office of the Rail Regulator, Winsor returned to lawyers Denton Hall where he acted for a number of train operators. Virgin have him to thank for the Passenger Up Grade 2 contract with Railtrack.
Through his on-going involvement with the railway, Winsor became increasingly concerned that the powers built into the system to curb any tendency for Railtrack to exploit its power as the monopoly infrastructure provider were not being used fully.
In private, he made his frustration and disappointment clear. And when Swift announced that he would not be seeking a second term as Regulator, Tom Winsor was a natural candidate, particularly following the change of Government. While Labour ministers made it clear that they had not created the mess, they took responsibility for making it work and clearly tougher regulation was vital to this process.
That said, Winsor was not a universally popular candidate. When I espoused his case to informed sources, they were not impressed. One ‘old railway' grandee declared his appointment would be ‘a disaster'. The rationale was that this young man in a hurry would go too far too fast, leading to judicial reviews leading to the diminution of the Regulator's office.
However, Winsor's enthusisam was exactly what the Government wanted and the appointment was announced on 23 March last year. The new Regulator was part of an all new triumvirate at the top of the railway, alongside Shadow Strategic Rail Authority Chairman Sir Alastair Morton and his Managing Director/Franchising Director Mike Grant.
But unlike Morton and Grant, who have had to play themselves in, Winsor was ready to go the moment he sat down in his new office on July 5. And when I joined him in that office for this interview, on the table, ready for me, was a 17 point list of the ORR's activity since then.
‘So', I asked to kick off the interview, ‘what have you achieved in your first seven months?'
Internally, the ORR has been reorganised and all but one of the top team replaced, ‘bringing in new talent and new energy'. Externally, it is ‘early days for tangible improvements', partly because transport investment has such a long lead time.
There was also the hiatus in the year before his appointment which generated a degree of uncertainly but made him determined to set off at a ‘cracking pace'. Nor is this likely to slacken, as the current ‘tougher and pro-active' stance covers a ‘bigger agenda'.
‘So much needs to be done', says Winsor. But he is also anxious not be seen as ‘trigger happy'. While the Regulator has a range of powers, and Winsor knows them intimately, his policy is not to ‘open the box and let all the fireworks off at once'.
That said, he was determined to show a very different style, approach and determination as early as possible. The opportunity came with his speech to the Railway Forum conference the week he took office. ‘People thought it was am ambitious five year plan until I told them it was a one year plan' he comments, only slightly tongue in cheek.
As Regulator, his policy is to apply power in a ‘measured, fair and proportionate way'. ‘It's not just the formal powers, he adds. ‘It's not a case of what can I do, but what is it wise or appropriate to do in individual cases'. And railway companies showing the willingness to make the effort to improve will be encouraged, although this aspect of the Regulator has yet to be seen in action.
At which stage I have to point out that although he talks of railway companies plural, it is Railtrack, singular, that has borne the brunt of his activity. Out comes the briefing sheet, and he points to Scottish coal users complaining about EWS, action on complaints handling by Train Operating Companies , the accuracy of National Rail Enquiry Service statistics and work with the Association of Train Operating Companies on the revision of codes of practice on consumer protection matters, as examples of his pan-industry responsibilities.
And, under the new Transport Bill, other than station and depot licenses, most of the ORR's consumer protection responsibilities will be transferred to the SRA.
So when I challenge him on the fact that he is penalising Railtrack heavily for not reducing its delay minutes fast enough. While the TOCs who are getting worse are let off much more lightly, Winsor says that this is down to the weak first generation franchise agreements. The new generation will be much tougher.
In parallel with these new franchise agreements, the ORR is developing a set of Model Clauses (Legal Lines February) for track access agreements.
To date the privatised railway has been reluctant to litigate. As the Model Clauses consultation document points out, the new railway companies have been slow to come to terms with operating in the contract based regulated environment which replaced the former British Rail ‘management command culture'. Management is accused of ‘reverting to the old ways of doing things with imperfect appreciation of the legal and regulatory consequences'.
This has been reflected in a matching reluctance to bring disputes before the Regulator, which I find understandable, given the disparity in power between Railtrack and its customers.
Model clauses are intended to give TOCs real power, but it is still up to them to use it. ‘The fundamental point about being empowered, well advised and well informed', says Winsor, ‘is that when you have that strength nine times out of ten you will not have to invoke these remedies because you possess them, have the time available to use them and the will to use them. The other guy will take you seriously'.
But, he warns, ‘what we are not going to do is create a complaints culture where every time you've got some kind of a problem with a regulated railway company the first thing you do is ring the Regulator saying “we want you to be a free legal one stop advice bureau2 or, even worse, a free enforcement mechanism'. ‘We are trying to create a culture where these guys are as empowered as possible under the contracts'. That said, there will always be some matters enforceable only by the Regulator
| ‘Some people characterise me as unalloyed anti-Railtrack. That's not true. I'm looking to all the railway companies to behave well'. |
While Winsor admits, that his jurisdiction is not only the greatest but ‘the most intense' in the case of Railtrack, he points out that contracts are two-way streets. If TOCs let down Railtrack, then the infrastructure provider needs appropriate remedies as well.
Which leads us onto freight. English Welsh & Scottish Railway has famously forecast that it will double freight tonne miles in five years and triple them in ten years. It isn't happening: but Railtrack is still being pressed to provide the capacity to meet this forecast.
Licence condition 7 requires Railtrack to meet the ‘reasonable requirements' of its customers'. But what if the reasonable requirements are not realistic, as in this case?
‘Then they wouldn't be reasonable', Winsor replies. So who interrupts this circular argument? ‘I do', is the short answer.
Amplifying this, he explains that he has what European law calls a ‘margin of appreciation'. In plain English this translates as a bit of discretion. ‘what I can't do is go right off the scale but there is a scale within which I can make an assessment of what is reasonable'.
To calibrate this scale in the case of freight, ORR has commissioned a detailed study of the economics of the rail freight market. This will be used to create credible forecasts of freight demand which can be translated into track capacity. Railtrack has a parallel study going on which analyses the rail freight market by commodity and traffic flow.
Acting as devil's advocate, I posit that if the Regulator determines what freight traffic levels are reasonable, isn‘t he double guessing the entrepreneurs at EWS and Freightliner? He agrees, but adds that the Regulator has to determine what is reasonable because the entrepreneurial businessman can't force Railtrack to meet his requirements and Railtrack is a dominant monopoly provider.
| ‘People say that Licence Condition 7 is a one way valve for Railtrack's customers. It's not, it's a two way control that protects Railtrack'. |
This is not the case on West Coast Route Modernisation project where Railtrack is committed to providing an additional 42 oaths for freight from 2005 under PUG2. It is now seeking to push back the date to 2007 since the extra capacity will require a further £1billion of upgrading work.
But here the Regulator has no discretion. Railtrack signed up to provide and extra 42 paths in 2005 under a regulated contract and the Regulator cannot require parties to give up regulated contracts.
| The fact of the matter is that I can't allow Railtrack to go bust. I have to ensure that is has enough money so that if it is efficient and competent it can finance its licensed activities' |
Under the Railways Bill the powers of the Regulator will be diminished, something emphasised in the Department of Environment, Transport and the Regions' press release. Was this a reaction to Winsor putting himself about a bit. Hardly, as the Bill was published around the time he was appointed.
And, while he loses consumer protection responsibilities and is required to take guidance again from the Secretary of State, we should also note Section 16 (a) of the Railways Bill which will give the Regulator powers, on the direction of the SRA, to direct the owner of a facility to improve it or build a new facility. ‘Facility' is defined as network, station or depot which makes this a powerful new tool at a time of railway expansion. Separately the Regulator's powers will be enhanced by the new Competitions Act.
Thus we elide into the subject of ORR's involvement in future upgrades, such as the East Coast Main Line already begun and, in the longer term the Great Western Upgrade.
‘We will facilitate the upgrades in partnership with the SRA, who, of course, have to decide what they want to buy' says Winsor. Yes, but facilitate how?
‘Well we are working in various groups to contribute to the thinking on how structures can be devised to lever into the railway industry strong and competent investment by Railtrack, the TOCs, the SRA, the PTEs, local authorities and other interested parties'.
That sounds a bit nebulous by Winsor standards. So I seek clarification. ‘Railtrack has a very, very substantial role (in upgrades). It owns the network and operates the network under a licence containing public interest obligations enforced according to public interest criteria by an independent Rail Regulator who is operating according to public interest rules'.
I'm still finding it hard to pin down ORR's role. Winsor tries again. ‘What we are doing is creating conditions, including in the periodic review (of track access charges), for sound competent, efficient, investment coming in the right quantities at the right time.'
Probably reading my body language Winsor adds ‘That's not a catch phrase – I believe that'. And he believes that the reaction to the announcement of the periodic review conditions (albeit some of it ‘incredibly ill judged') confirms that ORR is achieving this aim.
What was this ill judged comment, I wonder? ‘Oh some people said it (the Periodic Review) was too soft on Railtrack'. And indeed they did. ‘Some people thought it was so soft that you must have been leant on' I say.
‘Nonsense, absolute nonsense' Winsor replies, mildly. After a pause he adds, ‘it would be inappropriate for me to do anything that diminishes not only the reality but the perception of my independence, because independent regulation, especially in setting prices, is the absolute cornerstone of the British Regulatory model across a spread of industries.'
Anyway, Winsor gave the Government, Railtrack and the SSRA details of the periodic review proposals the day before they were released. ‘I did not change them' he says.
One of the ORR's key roles in franchise replacement is to give Railtrack a more precise definition of what constitutes enhancements to the infrastructure. There is universal agreement that the present track access charge regime created a grey area renewal in ‘Modern Equivalent Asset' form, blends into a definite enhancement of the infrastructure.
With the Periodic Review will come a Code of Practice on enhancements which will ‘draw the dividing line much more clearly' and will also tell Railtrack in advance the way in which the financing of a scheme will be treated'. Winsor is clear that if Railtrack is to invest, the company needs both stability and predictability in its financial regime. This also leads to financial confidence.
Unprompted Winsor refers to claims that he has taken ‘an unusually hard line' with Railtrack. He quotes back some of my ‘colourful language', including ‘regulator in punishment mode'.
He refutes such talk on two grounds. First, perception: he is being judged against the record of his predecessor. Second, in six months, he has made one enforcement order (on passenger performance) and has started enforcement action on the West Coast Route Modernisation project, but is still ‘contemplating' whether to make an order.
Not tough? No. Had the ORR really wanted to give Railtrack a hard time there could have been enforcement action on broken rails, the Booz-Allen & Hamilton report, the 1999 Network Management Statement could have been rejected, and the ORR would not be supporting Railtrack's right of appeal to the Competition Commission against the final conclusions on track access charges.
‘Nor', he adds, ‘would we have come up with a demonstrably fair set of provisional conclusions under the periodic review of access charges'. Well, they may be fair in Holborn, but Railtrack is already arguing that if it is to raise the money it needs, the settlement must be improved.
Anyway, picking up a bon mot I unleashed at an ORR press conference, Winsor avers that all these facts ‘give the lie' to allegations that ORR stands for ‘Office of Railtrack Regulation'
Also under the Regulatory eye are the other monopolies created by rail privatisation, the Rolling Stock Companies. They will also be expected to invest very large sums of money to bring Sir Alastair Morton's vision into being, and that means stable and predictable regulatory behaviour. You can't force banks to invest.
There is a three way control on the ROSCOs. The SSRA has already acquired a three year call option – the right to renew leases on existing terms for the inherited traction and rolling stock fleet. The Regulator will have new powers under the Competitions Act. And the ROSCOs, knowing what is good for them, have already agreed a voluntary Code of Practice which each firm should have published by the time you read this.
Certainly, I see no reluctance in the city to invest in new traction and rolling stock and Winsor believes that formal regulation of the ROSCOs, including the need for approval of contracts, would have been harmful to investor confidence and the entry into the market of new players. And there is no distinction between the three original ROSCOs who took over the BR passenger fleets and GL Railease, which is building a portfolio from scratch. ‘If they lease rolling stock, they are a ROSCO' is Winsor's unambiguous view.
| If the ROSCOs behave like a competitive market and don't abuse their dominant positions, I won't have a role, I don't want a role. My role is the protector of the public interest when the competitive market does not work efficiently'. |
But dominating the railway at present is the relationship between Railtrack and its Regulator. And there is no doubt that in Winsor's first seven months, he has had a major influence on the collapse of Railtrack's share price.
On the day Winsor took over the share price was £12.92. As this article was being written it had dived through £7.50 and was still heading downward.
Significantly, before we started the interview Winsor gave me two pieces of background material. One was an enthusiastic ‘buy' recommendation for Railtrack shares from a major United States finance house. The other was an article by the ORR's Chief Economist Paul Plummer in the Utilities Journal (a sort of regulatory equivalent of ‘Modern Railways') arguing that the perceived regulatory risks facing Railtrack under Winsors's new regime ‘have always been overstated'. And when I read through the banker's report, I noticed that it followed an exclusive interview with … Paul Plummer.
A key indicator of the evolving relationship with Railtrack will come with the 2000 NMS. Winsor would have rejected the 1999 NMS which many saw as an amorphous ‘wish list'. But it is clear, from talking to him and Gerald Corbett ,that there is now unanimity of the format of the 2000 version. Indeed, the two men use the same ‘will do/like to do/won't do unless paid' mantra to categorise projects.
But won't a project-focused NMS create the new problem of prioritising investment, since finance is finite. ‘Why do you say investment is finite?' Winsor asks quietly? He goes on ‘Railtrack's borrowing capacity is considerable and its ability to raise finance from other sources is considerable and we are discussing with Railtrack now how it will finance its activities'. Winsor emphasises that these discussions are ‘very constructive'.
So look for an outbreak of sweetness and light in March. But it may be short lived because more tough decisions loom. Winsor has to decide whether to impose the enforcement order on Railtrack over the WCRM which now includes a massive cost over run. This means deciding what the additional cost would be if the work were carried out efficiently and who should pay for the extra £3.6 billion or so.
On top of that, Winsor also has to determine whether the extra work is needed in the first place and whether the SSRA wants to buy the additional capacity over and above what Railtrack needs to supply to meet its contractual commitments to Virgin under PUG2.
All this will take place against the background of a perceived change in the political climate. John Prescott, very much Winsor's original patron, has handed over transport responsibilities to Lord MacDonald who, with his business background is likely to be more sympathetic, to Railtrack. Equally, Sir Alastair Morton, who has to drum up tens of billions, must be concerned by Railtrack's share price. Some of those billions depend on a rights issue by Railtrack which will need a share price well to the north of £10.
So after an action packed seven months, Winsor is entering a difficult period when he will need to temper regulation with encouragement. For example, suppose last year he had told Railtrack ‘You failed to meet your performance improvement target in 1998/99. That was a target. For 1999/00 I want you to make the same 7.5% improvement a firm commitment and its £10million for every percentage point by which you under-perform.
Today with Railtrack running at a 10% improvement ORR would have a win/win on its hands. Winsor could say ‘I told you so, regulation is a spur to efficiency, the boy Corbett done good'. Gerald Corbett could say, ‘This shows that Railtrack responds to firm but fair regulation. I am over the moon at this achievement of thousands of my team'. Cue men in red braces shouting ‘buy'.
Back to reality. Nagging at the back of my mind while writing this article was a phrase from one of those speeches that Roman historians put into the mouths of barbarian leaders in exhortations before their tribes engaged the legions in battle. ‘The Romans', the phase went, ‘create a desert and callit civilisation'. Looking at Railtrack's current financial state, that is the epitaph that Winsor now has to avoid.
| Let nobody think that Railtrack is a weak company with a weak capacity to raise money. |
| Our policy is not knocking Railtrack down, it's knocking them into shape and the results are beginning to show. |
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