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ORR's inquiry has got of to a dodgy start
As explained in previous columns, DfT Rail's complaint to the Office of Rail Regulation, ostensibly over lease rentals on the inherited British Rail traction and rolling stock, is far from straightforward. Agendas, resentments, misunderstandings and ideological objections abound.
To kick off its three month ‘market study' ORR sent each ROSCO a couple of questionnaires, one covering general issues, the other posing detailed financial questions. The questionnaires were based on material provided by DfT Rail and included a number of case studies analysing lease rentals before and after franchise re-letting.
DfT Rail argues that if the leasing market was working rentals for the ex BR stock, known as the MOLA fleets, should have fallen when new leases were signed at the start of a replacement franchise. What actually happened was the subject of these case studies.
However, according to Informed Sources, errors in these case studies ranged from gross inaccuracies (‘way out') in the charges quoted, to incorrect fleet details. Overall, my ROSCO chums reckon that the level of analysis was superficial.
Those questionnaires were returned on 18 August and further requests for information are being processed as I write. But it is difficult to provide detailed answers if the questions are confused and the ROSCOs are wondering whether their responses will give ORR the data it needs if it is to publish its provisional findings for consultation in November.
I suspect that one reason for the confusion is that DfT Rail does not believ in the leasing model it, and the Tresury, created for the MOLA fleets and wants to reverse the last 10 years. Whether ORR could achieve this is debatable.
Thus, as a senior civil servant reportedly told ATOC in August, DfT's preference is for ORR to refer the ROSCOs to the Competition Commission for a full scrutiny under its market investigative powers. This would take 18months to two years.
Hence the concern over the quality of data with which ORR is working. But while the current Market Study has a three month time limit, ORR has the fall-back position of initiating a full scale Market Review which would take a further six to 12 months.
So, unless ORR rejects DfT's complaint, uncertainty is to continue for the foreseeable future. Lucky there are no new trains to fund.
Market forces work both ways
Among the fiercest critics of the rolling Stock Companies are the Passenger Transport Executives who resent the rentals they are having to pay for ageing kit. Take the case of nine 2-car Class 150 Diesel Multiple Units owned by Porterbrook.
These were leased by Anglia when it was a National Express franchise but were transferred to Central Trains in 2004 to enhance Centro (West Midlands PTE) services on the Snow Hill and Walsall lines, relieving capacity problems by a mixture of train lengthening and additional services. The £2million a year cost was shared by Centro (five units) and the Strategic Rail Authority
Leases on these DMUs were linked to the expected termination of the Central Trains franchise on April 1 2006 . But DfT Rail's plans to remap the Midlands and Cross Country services saw the franchise extended to November 2007.
When Central Trains began negotiating the extension of the leases on its train fleets, Porterbrook didn't want to play ball with the nine Class 150s. They obviously weren't paying attention at Derby , because without asking Centro or National Express about their plans, Porterbrook had already gone ahead and offered the nine units to Arriva Trains Wales and Northern Rail from the end of the original lease period. Keen to increase their capacity the two operators had signed letters of intent.
From Porterbrook's point of view this made sound financial sense. DMUS coming off lease would go to new operators, securing longer term rentals.
But for National Express and Centro it was a disaster. They had not offered to return the DMUs at the end of the original lease because withdrawal of the nine units would mean taking services out of the timetable and reducing train lengths from 1 April. West Midlands passengers would have been seen serious overcrowding and cancellations.
So DfT Rail stepped in. According to Informed Sources it was able to ‘persuade' Northern Rail to withdraw its letter of intent and accept Class 158 units being displaced from Trans Pennine Express.
But the ATW deal added devolution politics to the mix. ATW wanted the Class 150s to meet an agreement with the Welsh Assembly Government to provide additional capacity and was unwilling to cancel the deal with Porterbrook.
It gets worse. Up to 1 April this year, DfT was still responsible for approving rolling stock leases for ATW . Since 1 April the Welsh Assembly Government ( WAG ) has been responsible.
So DfT Rail could have blocked the deal. But if you were a minister would you want, as your final act before rail powers were transferred the WAG , to frustrate the transfer of more rolling stock to the Principality?
It took ministerial intervention to sort this one out. Porterbrook was told that if the agreement with ATW was not allowed to lapse, then DfT would block the deal anyway. Porterbrook, by now probably aware that it was in a deep political hole, stopped digging and complied.
Politically, Porterbrook's behaviour was about inept as you can get. But Centro is pretty clear that the ROSCO had chosen to ignore the fact that Central still needed the DMUs. Instead it chose to negotiate longer-term deals with greater commercial return. Central, Centro and DfT Rail were kept in the dark.
But, hang on a minute. DfT Rail's complaint to ORR was that market forces are not working in the leasing market. If they were rentals would have fallen as leases were renegotiated when franchises changed hands.
That's what you get from a career immersed in the civil service, a naïve belief that market forces work one way. A shortage of Class 150s meant that Porterbrook could earn more money from Northern and ATW than another year with Central. It's called supply and demand.
And here's another thought, if DfT Rail is successful in cutting MOLA fleet rentals it could price new trains out of the market. Take a re-engineered 2+8 IC125. Total annual lease rental is around £800,000-£900,000. This is the same as the capital rental alone for an equivalent new train.