Office of Rail Regulation PR08 Performance Regime Recalibration Final Report Black Office of Rail Regulation PR08 Performance Regime Recalibration Final Report November 2008 This report takes into account the particular instructions and requirements of our client. It is not intended for and should not be relied upon by any third party and no responsibility is undertaken to any third Ove Arup & Partners Ltd party 13 Fitzroy Street, London W1T 4BQ Tel +44 (0)20 7636 1531 Fax +44 (0)20 775 www.arup.com Job number 207267-00 Office of Rail Regulation PR08 Performance Regime Recalibration Final Report Contents Page 1 Introduction 1 2 Recalibration Brief 2 2.1 Project Brief 2 2.2 Schedule 8 – Background to Project 2 2.3 Key Assumptions and Issues 3 3 Methodology 4 3.1 Underlying Principles 4 3.2 Data Sources 4 3.3 Re-mapping of Data 6 3.4 Merged and Planned Delays 7 3.5 Excluded Days 7 4 Benchmarks 8 4.1 Reference Data 8 4.2 Methodologies 8 4.3 Recalibration Periods 8 4.4 Calculation Issues 8 5 Responsibility Matrix 10 5.1 Principles 10 5.2 Methodology 10 6 TOC Payment Rates 12 6.1 Methodology 12 6.2 Charter Liability 12 J:\207000\207267 ORR PERFORMANCE REGIME\4 INTERNAL PROJECT Page 1 Ove Arup & Partners Ltd DATA\4-05 ARUP REPORTS\0018PR08 S8 RECALIBRATION FINAL Issue 19 November 2008 REPORT.DOC Office of Rail Regulation PR08 Performance Regime Recalibration Final Report 1 Introduction Arup was appointed by the Office of Rail Regulation (ORR), in conjunction with Network Rail (NR) and the Association of Train Operating Companies (ATOC), in May 2008 to recalibrate the Network Rail and Train Operating Company (TOC) Schedule 8 Performance Benchmarks and the Schedule 8 TOC Payment Rates, as part of the 2008 Periodic Review of Performance payments within the railway industry. This report presents our findings. Following this introduction, the project brief is summarised. The underlying principles and general methodology of the recalibration process are then described, including sources of data, and issues relating to data re- mapping and cleansing. The Network Rail and TOC Benchmark recalibration process is then described in detail, including the data and methodologies employed, and calculation issues encountered. The Responsibility Matrix development methodology is then described, including the background to and origins of the approach, the data used, and the means adopted for dealing with TOC-on-TOC interactions not covered by the Responsibility Matrix. Finally, the TOC Payment Rate calculation process is described in detail, including the data used, the detailed methodology, and the calculation of Charter Liability. We would like to record our thanks for the assistance provided by all those involved in the process, including ORR, ATOC, individual TOCs, and in particular Network Rail, whose staff spent a significant amount of time assisting with data provision and interpretation issues. J:\207000\207267 ORR PERFORMANCE REGIME\4 INTERNAL PROJECT Page 1 Ove Arup & Partners Ltd DATA\4-05 ARUP REPORTS\0018PR08 S8 RECALIBRATION FINAL Issue 19 November 2008 REPORT.DOC Office of Rail Regulation PR08 Performance Regime Recalibration Final Report 2 Recalibration Brief 2.1 Project Brief The overall project brief was to conduct a review of certain parameters of the railway industry Schedule 8 passenger performance regime, and, on the basis of the review, to recommend appropriate changes to those parameters, and thus to assist with ORR’s Periodic Review 2008 (PR08). The specific objectives of the project were (i) to calculate and update the performance ‘benchmarks’ for Network Rail and the TOCs, based on the analysis of historic performance data, and (ii) to calculate and update the TOC Payment Rates, again based on analysis of historic data, but covering both performance and actual train running data. The calculation of Network Rail’s Payment Rates is a separate issue, and, although our original proposal for the project included the option of recalibrating the Network Rail Payment Rates, this option was not exercised, and this element was thus excluded from the final project brief. 2.2 Schedule 8 – Background to Project The Schedule 8 Performance Regime is a key element of Britain’s privatised railway industry, and the payments made and received under the regime are a significant element of the outgoings, revenues and profits of both the Train Operating Companies and Network Rail. The aim of the Schedule 8 Performance Regime is to provide TOCs and Network Rail with suitable incentives to maintain and improve their operational performance. The effects of changes in individual organisational performance levels, and changes to timetables, infrastructure, passenger and freight demand and the resulting changes in organisational interactions, mean that the performance regime must be periodically reviewed and updated to accurately reflect these changes. Performance includes both punctuality (measured in terms of lateness at specified Monitoring Points on the railway network) and cancellations. A single performance measure is facilitated by representing cancellations in terms of an equivalent number of minutes of lateness (referred to as ‘Deemed Minutes Lateness’, or DML), and combining these with the corresponding lateness values (referred to as ‘Actual Minutes Lateness’, or AML) 1. The regime is based on the benchmarking of both TOCs and Network Rail against their historic performance: when either party underperforms relative to its benchmark, it is then required to pay compensation to the party affected. Equivalently, when either party outperforms its benchmark, it receives an incentive payment from the beneficiary of this ‘over-performance’. The underlying idea is that if both parties perform to their respective benchmarks, the regime is then financially neutral. The structure of the payment levels reflects the effects on passenger revenue of train lateness, the principle being that where a TOC experiences delays attributable to another party (either Network Rail or another TOC), Schedule 8 compensates them for the resulting loss of revenue. There are two separate payment mechanisms within Schedule 8. The first deals with the effects of delays and cancellations caused by Network Rail, and the second with the effects of delays and cancellations caused by TOCs to other TOCs or to Freight Operating Companies, or FOCs (‘TOC-on-TOC, TOC-on-FOC delay’). 1 It is worth noting that the schedule 8 regime operates using lateness (i.e. the difference between the planned and actual times at which a train arrives at a specific point). This must be distinguished from delay, which relates to the specific effect of an incident. If a train is delayed this may or may not give rise to lateness, depending on whether the train is able to make up the time which has been lost. Thus a delay may not, in itself, affect passengers if they still arrive at their destination on time. J:\207000\207267 ORR PERFORMANCE REGIME\4 INTERNAL PROJECT Page 2 Ove Arup & Partners Ltd DATA\4-05 ARUP REPORTS\0018PR08 S8 RECALIBRATION FINAL Issue 19 November 2008 REPORT.DOC Office of Rail Regulation PR08 Performance Regime Recalibration Final Report TOC-on-TOC delay is handled by means of the ‘star model’, under which Network Rail essentially acts as a central clearing house for compensation payments, rather than payments being made directly between individual TOCs. Thus the two mechanisms are as follows: • Network Rail makes payments to (or receives payments from) TOCs, based on the degree to which it has under- (or over-) performed relative to its benchmark for Network Rail-attributable delays, including TOC-on-TOC and TOC-on-FOC delays ; and • Network Rail receives payments from (or makes payments to) each TOC, based on the degree to which the TOC has under- (or over-) performed relative to its benchmark for TOC-on-Self delays. The payment rates for this element take into account the historic relationship between TOC-on-Self and TOC-on-TOC delays, which means that Network Rail recovers the payments it has made in respect of TOC-on-TOC delays, and its financial position in respect of these remains neutral. To maximise the effectiveness of the regime, benchmarks should be realistic and the payment rates should be set at a level that appropriately rewards improved performance or penalises poor performance from either party. It is particularly important that the benchmarks are set at appropriate levels, and that the benchmark calculations are carried out on a consistent basis. In respect of the TOC payment rates, a key issue is the distribution of the payments between the Service Groups of the ‘perpetrating TOCs’, i.e. the TOCs responsible for delays and cancellations experienced by other operators; while delays and cancellations are recorded at the Service Group level (and, indeed, at the CAPRI/ Contract Group and individual train level) for the ‘victim TOC’, they are only recorded at the TOC level for the perpetrating TOC, and a means is required of distributing the attributed delays and cancellations between the perpetrating TOCs’ individual Service Groups. This issue is described in detail in the following sections of this report. 2.3 Key Assumptions and Issues The calibration period used was 11 December 2005 – 8 December 2007 (Periods 0610 to 0809 inclusive), with the exceptions of CrossCountry and Virgin West Coast, as explained in Section 4.3. The December 2007 timetable was used as the basis for the TOCs, Service Groups and service patterns employed in the recalibration. No changes to services beyond December 2007 were incorporated in the recalibration, with the exception of the amalgamation of Gatwick Express with Southern. Significant ‘re-mapping’ of TOCs and Service Groups was required in the recalibration process to take account of franchise changes that occurred during the recalibration period, including the creation of the ‘Greater Western’ franchise and the realignment of TOCs in the Midlands.