Infrastructure Charging Policy Objectives and Implementation by Mr J. Sluijter

1. Infrastructure Charging Policy Objectives and Implementation by Mr J. Sluijter

2. EU Framework for IM The Infrastructure Package: • Directive 2001/12 (amended 91/440) onDevelopment of Community Railways; Separation Infra, Cargo, Passengers) • Directive 2001/13 (amended 95/18) on Licensing of Railway Undertakings • Directive 2001/14 (ex 95/19) on Infrastructure Charging,Allocation and Safety Certificates Focus on International Freight

3. Former 91/440-95/19: Required separation of accounts infra and operations Required separation RU and State 2001/14: Requires in addition separation of accounts of FREIGHT and PAX No cross-subsidy F/P Essential functions IM performed separately from RU’s; IM is independent from RU’s Main amendments on structure

4. Consequences structure changes • Open (freight) transport market: in principle no subsidy (but favouring measures possible, e.g. temporary subsidies, intermodal investments) • International passengers: no subsidy, but large investments in corridors are made. • Domestic long distance: in general no subsidy, but policy choices in charging, investments, etc. • Regional: always subsidisable; concessions in which charges influence subsidy.

5. Structure changes I F P-IC P-reg Concessions? Exclusivity? Concessions & Subsidies Open Access

6. Former 91/440-95/19: Member states lay down rules No discrimination in charging; provision of all fee information by IM 2001/14: IM proposes and collects charges; State may allow IM to balance accounts (if rail remains competitive, the State may even require to balance accounts without state funding). If IM is not independent, charging is performed by other independent body While maintaining safety IM’s shall be provided with incentives to cut costs and level of charges Main amendments related to charging

7. Why are charges needed? • EU: No (international) differentation between modes; all transport modes will have to pay charges to avoid false price signals to demanders that ignore the real economic value (Open Access), and thus to... • Optimise the utilisation, cost-effectiveness and quality of the complete transport network (i.e. with the right price signals) through economic mechanisms.

8. Intentions EC • Member states responsible for infrastructure • Imposing charges for all modes is obligatory, but EC sets principles, not the charging levels • The EC does not want to raise the general level of charges, but scale them differently • The EC does not penalise any mode in particular, but wants to increase efficiency in the transport sector

9. Main issues for Government • A principle choice needs to be made by the Government concerning the subsidy flows in rail market (cost coverage level, objective) • Cost backlog in maintenance: difficult/unfair to charge to (new) operators (EU subsidy?) • A Government has various options to organise the financial flows within railway market (IM, RU’s) Most EU countries opted for the subsidisation of the IM in combination with subsidisation of a specific part of the rail operations, particularly regional transport.

10. IM F P-IC P-reg TC S? I I T/S? I S? OC OC T OC I I T? T I C R C R C R C R Organising and balancing financial flows… …requires sector business plan with fair cost levels.

11. 2001/14 Scope: Infrastructure for domestic and international rail transport, but Member States may exclude: • Stand alone local/regional networks for pax (e.g. “isolated” tram, light rail, etc.) • Networks for (sub)urban pax transport only (e.g. metro, tram) • Regional freight networks used by one RU solely, until capacity requested by other RU • Privately owned infra for own use solely

12. Objectives charge system design Strategic: Improve position (internat. freight) rail transport • Cost recovery • Better utilisation of network • Guidance for investment choices • Increase market share of rail • Reduction of costs (funding)/increase of productivity • Improvement of quality of services

13. Charging system EU/ECMT: • Gradual harmonisation of charging principles applied in all forms of commercial transport • It should optimise network utilisation • Charges related to marginal social costs, which may include network operating cost, cost of worn-out infra, congestion (capacity expanding), accidents and environmental damage

14. Introduction user charge systems • Up to 2004: Introduction of (various) user charge systems in Member States • 2004: Review and further harmonisation

15. The Infrastructure Manager • 100% State-dependent • Is fully independent from transport undertakings • Proposes charges and rules to State • Collects the charges • Needs incentives (quality and cost reduction) • Will be monitored by the Regulator Body and/or competition authority • Has a difficult job!

16. Main conclusions on Directives • Comparison with other modes is crucial • Implementation requires sector and IM business plan • Government has to make principle choice on subsidy flows in the rail market (cost recovery level) and related financing options (to IM or RU) • The Directives do not offer one single methodology to define infra charges • Valuation of national and international interests and conditions will make it difficult to reach complete harmonisation of charging regimes. • Harmonisation of charging regimes is a complex and long-term process

17. Workshop 2001/14 Network Statement – Purpose: • Transparency for all RU’s and interested parties • Non-discrimination between RU’s • Based on consultation of all interested parties IM is responsible for Statement, Government, being shareholder, financer (subsidies, investments) and policy maker, approves.

18. 2001/14 Network Statement – Content (“Annex I”): • Describes functional and technical characteristics of infrastructure available to RU’s, and the access conditions (technical, policy priorities, existing concession contracts, etc.) • Charges: Principles, tariffs, methodology, rules, “Annex II-charges” and future changes • Capacity allocation: principles, criteria, procedures and deadlines

19. 27.6.2000 EN C 178/43 Official Journal of the European Communities Annex I • Contents of the Network Statement • The network statement referred to in Article 3 shall contain the following information. • 1. A section setting out the nature of the infrastructure which is available to railway undertakings and the conditions for access to it. • 2. A section on charging principles and tariffs. This shall contain appropriate details of the charging scheme as well as sufficient information on charges that apply to the services. • A section on the principles and criteria of capacity allocation. This shall set out the general capacity characteristics of the infrastructure which is available to railway undertakings and any restrictions relating to its use, including likely capacity requirements or maintenance. • the procedures according to which applicants may request capacity • the requirements governing applicants; • (c) the schedule of the application and allocation processes; • (d) the principles governing the co-ordination process; • (f ) details of restrictions on the use of infrastructure; • (g) any conditions by which account is taken of previous levels of utilisation of capacity, adequate treatment of freight services, international services and requests subject to the ad hoc procedure.

20. Basic charging principles (ECMT) • Short-run marginal (incremental) cost approach • Congestion charge to spread traffic or to finance additional capacity (i.e. long-run marginal costs; could be a fixed charge)

21. 2001/14 on charging principles: • Non-discriminatory charges, published in Network Statement • IM respects commercial confidentiality • RU is entitled to minimum access package • Marginal cost pricing • Charge may include a congestion fee • Taking account of environmental cost (in relation to charging other modes!)

22. Exceptions on principles: • Full cost recovery mark-ups may be used under efficient and transparent conditions, if market can bear. (e.g. Ramsey-Boiteux pricing) • Higher charges possible for specific investment projects, if they increase efficiency/cost-effectiveness(making >5-year framework contracts possible)

23. Other components charging regime • Time-limited discounts (e.g. off-peak paths) • Compensation schemes for unpaid (ext.) costs in competing modes • Methodology and calculation publicly available • Performance scheme for both RU’s and IM (bonus/penalty) • Reservation charges

24. Aims of charging system (1) Microeconomic • Fully or partly coverage of cost of maintaining and operating the network • Possibility to differentiate the charges to specific criteria to work with actual value of usage • Non-discrimination to allow access to third, new parties (competition)

25. Aims of charging system (2) Macroeconomic • To make the user cover the cost of using resources • To improve the market position of rail transport in general (in particular for freight) to promote the entry of new operators (competition) and hence to promote keener pricing, quality and innovation For pax service the concession tender is essential as well to reach these aims (ref. proposal 2000/0212 to replace 1191/69-1993/91)

26. Issues affecting charging regime (1) • A principle choice needs to be made by the Government concerning subsidy flows in rail market (cost coverage level, objective) • Cost backlog in maintenance: difficult/unfair to charge to (new) operators (EU subsidy?) • A Government has various options to organise the financial flows within railway market (IM, RU’s) • Most EU countries opted for the subsidisation of the IM in combination with subsidisation of a specific part of the rail operations, particularly regional transport.

27. Organising and balancing financial flows IM C P-IC P-reg TC S? I I T/S? I S OC OC T OC I I T? T I C R C R C R C R

28. Issues affecting charging regime (2) • IM needs to work within Government legal framework • Cost recovery level is set by Government • Minimum level = short-run marginal costs • If more costs have to be covered: Mostly charging according to ability to pay (market pricing); also recovery of capacity expansion (scarcity pricing) • Fixed costs charging is not advised, as it hinders the aimed economic mechanisms • Contract duration (5, possibly 10, for PS exceptionally 15 yrs)

29. Business Plan for IM The Infrastructure Company: • State is only shareholder • Owns tracks, yards, platforms, transfer facilities and access roads • Income: charges, state operational subsidies, state investments, EU subsidies • Costs of operating, maintaining and building • State investment = new shares for State or direct subsidy (new assets at “0”)

30. Main Issues Business Plan IM • Future markets and network size • Planning of work and staff • Financial plan • Definition subsidy flows and level of charging • What happens if State wants 100% cost coverage? • Formulas and rules for charging • Calculate budget forecasts • What to be achieved with charging system?

31. IM’s cost coverage

32. C 178/44 EN 27.6.2000 Official Journal o the European Communities ANNEX II SERVICES TO BE SUPPLIED TO THE RAILWAY UNDERTAKINGS 1. The minimum access package shall comprise: (a) handling of requests or infrastructure capacity; (b) the right to utilise capacity which is granted; (c) use of running-track points and junctions; (d) train control including signalling, regulation, dispatching and the communication and provision of information on train movement; (e) all other information required to implement or operate the service for which capacity has been granted. 2. Track access to services facilities and supply of services shall comprise: (a) use of electrical-supply equipment or traction current, where available; (b) refuelling facilities; (c) passenger stations, their buildings and other facilities; (d) freight terminals; (e) marshalling yards; (f ) train- formation facilities; (g) storage sidings; (h) maintenance and other technical facilities.

33. C 178/44 EN 27.6.2000 Official Journal o the European Communities ANNEX II SERVICES TO BE SUPPLIED TO THE RAILWAY UNDERTAKINGS 3. Additional services may comprise: (a) traction current; (b) pre-heating of passenger trains; (c) supply of fuel, shunting, and all other services provided at the access service facilities mentioned above; (d) tailor-made contracts for: - control of transport of dangerous goods; - assistance in running abnormal trains. 4. Ancillary services may comprise: (a) access to telecommunication network; (b) provision of supplementary information; (c) technical inspection of rolling stock. Note: Mandatory services as regards safety control

34. Determining charges Components (ref. “Annex II”): • Minimum access package: • Direct (incremental) costs • Congestion/scarcity fee • Environmental costs (?) • Mark-ups (?)

35. Determining charges • Basic track services(stations, terminals, maintenance, equipment, etc.) • Price related to competitive position rail • Access obligatory (non-discrimination), not necessarily provided by IM (depends on ownership)

36. Determining charges • Additional services(shunting, pre-heating, traction current, etc.) • Access is obligatory (non-discrimination),not necessarily provided by IM • Price = cost, if single supplier • Price = market price, if other suppliers

37. Determining charges 4. Ancillary services(technical inspection RS, suppl. information, etc.) • Optional, not necessarily provided by IM • Price = cost, if single supplier • Price = market Price, if other suppliers

38. Formula example Charge = Pkm * Z * Qkm * F + ∑(ASi * Qi) + (Pel * Qel) Pkm = price per train-km Z = parameter dependent of type of train and track Qkm = purchased no. of train-km F = factor for special demands of RU AS = additional and/or ancillary services Q = quantity of AS (e.g. no. of coaches pre-heated) Pel = price electricity (kWh) Qel = quantity electricity used Base package Add./anc. service Electricity

39. Applied approaches • Short-Run Marginal Cost (SRMC) • Comparison with other modes • Generally low variable and some low fixed costs • Difference rev/exp = state contribution • Applied by many European countries

40. Applied approaches • Adjusted Average Cost (AVC) • Tries to raise a total target amount • Mainly variable charges • In general no shortages on planned costs • State contribution firstly defined, based on wider policy objectives • Applied in a/o France, Germany, Netherlands and Austria

41. Cost-based charges • Short-run average costs • Long-run average cost • Short-run marginal costs • Long-run marginal cost • Average/marginal long-run would recover all costs, but difficult because of changes in demand and slow changes in supply

42. How to recover total cost? • Government subsidy • As short-term compensation of unpaid external cost in road sector • Non-transport objectives (e.g. environment) (also investments) • In general: Subsidy to operators instead of IM preferred to allow IM to balance accounts based on economic mechanisms

43. How to recover total costs? 2. Multi-part tariffs • Fixed mark-ups • May not deter operators • Government may subsidise on social grounds

44. P P Segment B Segment A Q Q How to recover total costs? 3. Ramsey-pricing • Mark-ups for least demand elastic segments (≈“What the market can bear” ; less social loss)

45. Problems high cost coverage • Railway undertakings have different abilities to pay (markets/segments) • To achieve (almost) 100% cost coverage, one need to use the differentiation factor (the modulating parameter) in an optimal way (e.g. Ramsey-pricing) • Requires in-depth knowledge about what the different rail markets can bear (ability to pay) and demand elasticities (based on ‘fair’ oper. cost prices!) • This kind of knowledge is probably not available • A low ability to pay in all markets (?); subsidy directly to IM instead of TOC’s?

46. Conclusions charging options • Different approaches distort competition between Member States, between modes and within modes • Many exceptions, not much is obligatory • Complex charging systems confuse the operation of the market; • Common charging principles would create a level playing field (between modes and countries) • Marginal cost approach results in deficit

47. Incentives good IM behaviour • The RU expects to receive a train path which complies with the quality required for a specific service. The IM should have a financial incentive to deliver the required quality and/or to improve this quality: • Introduce an improvement plan for the IM which includes targets with regard to e.g. the number of speed restrictions. If the targets are not achieved, those operators which are harmed obtain a reduction on the total amount of infra charges to be paid.

48. What has to be done? (1) • Establish working-group (Finance, Infra, MoT) • Prepare mid-/long-term BUSINESS PLAN for IM: • Realistic forecast development of rail markets (O/D) • Network size • Maintenance (backlog?) and renewal demand plan • Long term timetable planning (no. of trains/day/line) • Planning new investments • Work plan • Government policy (funding, objectives, etc.) • Cost, budget/subsidy forecast

49. What has to be done? (2) • Define approach on cost coverage policy • Demand groups to estimate willingness to pay • Define consequences and aims of policy on state subsidy and external costs (harmonisation in relation to other modes!) • Establish (remaining) cost recovery system (mark-ups, state funding?) • Define incentives, not only for RU, but also for IM! (bonus/penalty system)

50. What has to be done? (3) • Define basic line and train categorisation, a/o: • rail installations attributed to the track • congested stretches to fix peak-charges • Determine (incremental) infrastructure costs per line category and per train type • Determine additional charges for higher/lower speeds based on stretch-specific optimal train speeds • Take specific user (capacity) demands into account (type of traffic, timetable requirements)