We work hard with train operators to run a punctual and reliable train service for passengers.
To ensure that this happens, we need to continually maintain, renew and enhance the rail network. We aim to undertake this work in the most efficient way, whilst minimising disruption to passengers.
However, there are times when train services must be cancelled or redirected to allow this work to take place. When this happens, we take “possession” of the network, and make payments to train operators to reflect the financial impact on their businesses.
Why do we have a possessions regime?
Most passenger train services in Great Britain are delivered through long-term contracts between train operating companies and the government (Department for Transport in England and Wales and Transport Scotland in Scotland). These contracts are called franchises. Companies compete with each other to secure franchise contracts for the right to run services in different parts of the country. The competitive franchise process is designed to improve services and deliver the best deal for taxpayers and passengers.
Train operators make payments to, or receive payments from, the government for the right to run a franchise. These payments are called ‘franchise payments’. The size of franchise payments are based on factors such as the revenue that train operators expect to generate over the course of the franchise. To get the most value for the taxpayer, i.e. maximise franchise payments, franchise train operators are protected from some risks that they face but cannot control.
One risk to train operators is that they are unable to run services as often as assumed at the time when the terms of a franchise are agreed, due to our taking possession of the network to undertake work. This results in services being cancelled or disrupted in advance of the day of planned operation. There will be a direct loss of ticket sales result from a possession. In addition, evidence suggests that if passengers experience disrupted journeys, even if they are notified beforehand, they will be less likely to travel by train in the future. If fewer passengers travel, because they have experienced some form of disruption in the past, then fare revenues will be lower than expected, thus undermining the financial assumptions behind the contract between franchise operator and government.
In order to get the maximum value for the taxpayer from the franchise competitions (and to protect non-franchise operators from risk they cannot directly control), this risk is mitigated through an automatic system of payments which seeks to leave train operators in a financially-neutral position when their trains are unable to run as originally envisaged. This is the basis of the current possessions regime in the rail industry. This regime is called Schedule 4.
Schedule 4 pays train operators for the financial impact of planned service disruption where operators are given restricted access to the network, principally as a result of our undertaking engineering work. The payments are calculated to reflect the revenue loss from reduced ticket sales and the costs incurred from train operators, such as for running replacement buses.
How are the payments calculated?
The payments are made to train operators at the end of each four-week period. These payments are typically determined automatically by reference to formulae in each operator’s track access contracts with Network Rail. Bespoke payments can be made in respect of large possessions, to cover additional costs such as additional train planning resources or driver/conductor route knowledge training where the impact on passengers of an extended possession is mitigated by running services diverted onto new routes.
The revenue loss varies by operator and by the type of service that each train operator runs, and so the payment varies on this basis also. The revenue loss (and hence payment to operators) is less when we provide more notice to the train operator, as passengers can make alternative plans if sufficient notice of the disruption is provided.
How are the payments funded?
Not all train operators receive the formulaic payments described above. Passenger train operators must pay an ‘Access Charge Supplement’ to us in order to receive payments for possessions. The Access Charge Supplement is set at a level that will recover the costs of us providing these payments for an amount of work that is deemed to be efficient to maintain the railway. It can be thought of as an ‘insurance premium’ payable in exchange for financial protection from not being able to run trains. Passenger Franchises must pay the Access Charge Supplement and receive Schedule 4 payments, however, other passenger operators which do not choose to pay the Access Charge Supplement will not be eligible for Schedule 4 payments.
Non-franchise train operators
Freight operators also receive payments through their Schedule 4 regime. The freight payment rates are the same across all operators and network locations. This removes the potential for freight operators having a competitive advantage over each other in the Schedule 4 regime. We receive separate funding, through our Net Revenue Requirement, to provide freight train operators with payments for possessions.
Open Access operators have the same Schedule 4 regime as franchise passenger operators, however they must pay an Access Charge Supplement in order to receive payments for our possessions. If Open Access operators do not pay the Access Charge Supplement, they receive payments for very long lasting possessions only.
Charter operators do not have a Schedule 4 regime, because engineering possession plans are typically agreed before the majority of charter services are planned.
What is the thinking behind the design of the performance regime?
Schedule 8 is an automatic mechanism for ensuring that both we and train operators are held financially harmless for delays that they cause to each other. The ORR sets the targets and the rates. A formula drives the payments, based upon who caused the delay, how bad the delay was, and how much fare box revenue is estimated to have been lost (now and in the future) from the incident. If everyone achieves target level performance, no money changes hands. It is a no net gain, no net loss regime that means train operators and Network Rail do not take financial risk on the failings of another party, and therefore allows the industry to plan with a reasonable degree of assurance.
The rail industry’s performance regime simplifies what could otherwise be a lengthy and costly legal dispute for every incident into a consistent calculation done at the end of each four-week period. The Schedule 8 performance regime has a number of advantages:
- It greatly reduces the industry’s costs by reducing discussions about the impact of each incident.
- It gives train operators some financial comfort that if their business suffers as a result of events outside of their control then we will make a payment under the performance regime.
- It gives us clarity on how much it will gain from making train performance improvements in excess of industry targets.
- It helps companies bidding to become franchised train operators to forecast the potential financial impact of things outside of their own control – for instance in the event of us performing better than targets then it can calculate how much will be paid to us.
- It helps those bidding to become franchised train operators to calculate the potential financial impact of changes in their contribution to train performance.
- By being clear to bidders, governments can get the most value for taxpayers from each franchise when these are competitively tendered.
How are the payments calculated?
The payments made to train operators are worked out using data automatically collected at thousands of measurement points across the network all day and every day.
The regime is a pre-determined mechanism that rewards (or penalises) both us and train operators depending on our contribution to delays and cancellations, compared to industry targets.
Payments are made at the end of each four-week period, according to which party has been responsible for the lateness of train services. These payments are calculated to address the impact on train operators’ ability to honour their financial obligations to government arising from for reduced future ticket sales.
The long-term financial impact of disruption varies by operator and by the type of service that each train operator runs eg commuter or leisure services.
How are cancellations factored into the calculation?
Sometimes trains are unable to complete their journeys. These situations are referred to as cancellations. Cancellations are also factored in to the Schedule 8 payments. Payments for cancellations depend on their estimated impact on future ticket sales and on the type of journey that is cancelled.
Each cancellation is worth a certain amount of ‘delay minutes’, which reflects the disruption that passengers face as a result of having to wait for the next train.
Are details available about the payments made for disruption to a specific train journey?
Schedule 8 payments are made every four weeks and are aggregated, based on average lateness for the previous four-week period. This aggregation means that the regime works efficiently, and allows for the fact that all the costs arising from an individual incident can typically only be calculated some time – which can be weeks – after the incident has occurred.
The way the performance regime works means that we do not calculate the payments to operators for individual incidents. There are only two exceptions to this:
- For significant incidents of disruption, we sometimes estimate the performance payments relating to that incident. These estimates help us to make decisions on how to improve the railway.
- Where an identified third party has caused delay, for instance a vehicle has struck a bridge, and we consider there is a realistic prospect of recovering the cost, it will calculate the cost of that incident for the purposes of pursuing a claim against the third party.
How does this relate to the compensation that passengers receive on the day?
Payments to train operators, made through the performance regime, are not designed to cover the refund claims which passengers make. They are instead designed to hold train operators financially neutral to the long-term revenue impact as a result of disruption.
Do these arrangements apply to all train operators?
The performance regime applies to all freight and passenger operators (although the freight performance regime operates slightly differently to the passenger train regime, as described above). Some passenger operators do not take revenue risk, and the payments made by us are passed straight on to the government department that specified the contract with the train operator – the Department for Transport in England and Wales, or Transport Scotland in Scotland.
Compensation paid by train operators to passengers
As a passenger, you may have experienced a disrupted journey – this is deeply regrettable. We work hard with train operators to minimise delays. If you have experienced a delayed journey you might have subsequently made a claim to the train operator for financial compensation. However, payments between us and train operators for disruption are not designed to cover the refund claims which passengers make. Train operators pay for passenger refunds themselves. Payments between us and train operators are instead designed to hold train operators financially neutral to the long-term revenue impact through reduced ticket sales, which disruption will have on their future business. These payments are based on economic research which indicates that passengers are less likely to use trains in the future, after they experience disruption.
How is passenger compensation paid for?
All train operators have schemes in place to provide compensation to passengers for any significant delays they suffer on their journeys. Passenger compensation (called Delay Repay) is determined entirely by train operators according to their Passenger Charters, and is not related to any payments between Network Rail and train operators under the industry’s performance regime. The details of these schemes may vary from company to company, and may have been put in place as part of commitments made in winning a franchise. Any compensation paid to customers is paid for by the train operators themselves.
Want to know more?
For details about payment calculations and performance targets, read the technical overview:
Templates of the agreement between Network Rail and train companies are available at ORR’s website: