28 May 2012

Rail Freight Operators Gird Their Loins for a Fight with Government  

RFG Answers ORR Consultation in Diplomatic Fashion

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UK – Last week the Freight Transport Association (FTA) was fast out of the blocks to broadly support the consultation document launched by the Office of Rail Regulation (ORR) on the 17th May with regard to the proposed ‘track access charge’ for cargo travelling by rail stating that an early resolution was essential to its members interests. The Rail Freight Group (RFG) has today formally made its own response which is somewhat more concerned in tone, as one would expect from an organisation whose membership reads like a who’s who of rail track dependent companies.

The letter from RFG Chairman Tony Berkeley to Richard Price Chief Executive of the ORR, whilst admitting it will take time to consult all members, covers both points of the consultation, namely the variable usage charge and a proposed freight specific charge saying:

‘We understand the context in which this consultation is issued, and the need to improve the finances of the rail industry. We do not, in principle, have a problem with ORR reviewing the structure or level of charges to see whether better industry outcomes can be achieved without detriment to the rail freight operators and their current and potential customers. However we presently have significant concerns that the proposals as set out could have major repercussions for the stability of rail freight, for investor confidence, and for the prospects of continued growth.’

Lord Berkeley continues on to criticise the proposal to levy the additional charge on operators moving power station coal, iron ore and spent nuclear fuel, which could amount to an additional £60 million per annum and states that ORR’s own figures admit this could lead in a drop in traffic of at least 10% in these sectors, He questions how enforced traffic reduction complies with the purpose of the ORR and points out the complexities when the ORR proposals include making the charges different for each geographic area, as well as for each locomotive and wagon type, and introducing scarcity or capacity charges.

The RFG Chairman continues on to question whether the ORR has confused its responsibilities with undue emphasis given to the funds to be made available to the Secretary of State perhaps at the expense of the duty to promote the use of the railway for the carriage of passenger and freight, and the responsibility it has to enable companies to plan their businesses with a reasonable degree of assurance.

The RFG obviously feels, whilst trying to remain diplomatic, that an ‘acceptable’ reduction in rail freight as a result of the proposed reforms is in fact very far from acceptable. Berkeley continues to point out that the MDS Transmodal analysis (a group previously commissioned by both the RFG and FTA but in this case by the Government) which indicates a likely 12% fall in intermodal traffic is ‘not so far’ from the ‘acceptable’ 10% is surely not the message which the industry needs to be giving its customer base which it wishes to invest in rail whilst saying an increase in intermodal movements is supposedly a Government target.

The RFG is also concerned at the assertion that the increase in variable charge arises from the introduction of newer wagon types, which are themselves incentivised through the charging framework established at CP4 and that for wagon manufacturers and suppliers, it is imperative that consistent messages are provided on the desired requirements. Frequent changes in direction are not acceptable for those building equipment with 30 year asset lives.

With industry figures suggesting that the rail freight operators made a combined profit after tax of 0.8% on a turnover of £839 million, a loss of 0.5% if asset sales are excluded. The impact of a £50-60 million risk (as suggested in the analysis) on those businesses is therefore considerable, and certainly, the existing profit margins are not likely to be able to absorb downside events. Even if the charge is passed on in full, there are cash flow risks to be managed which are sizeable.

Much of the proposed change is centred around energy supply which is volatile in every sense at present as price fluctuations in the principal fuel sources and variations in demand make for an uncertain market. These and the other points of concern for the rail operators will be discussed at a workshop with the ORR in July by which time both sides will have honed their arguments and doubtless the ORR can expect some enthusiastic opposition when that particular event comes around.

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