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Freight on Rail response to the Office of Rail and Road (ORR) draft determination.


Freight on Rail thanks the ORR for the opportunity to comment on its draft determination. 

Freight on Rail, a partnership of the rail freight industry, the transport trade unions and Campaign for Better Transport, works to promote the economic, social and environmental benefits of rail freight to local, devolved and central Government.

  1. Why we believe ORR should not increase freight track access charges in CP6 in real terms

    The level of increase of variable usage charges for freight in CP6 and CP7 is significant and risks loss of traffic to road, and negatively affecting investment decisions made by customers and freight operators and other parts of the supply chain.

    The draft determination proposal covers the 10 years from 2019 to 2029, covering CP6+7,  would  work out at a 43% increase over the ten year period for certain commodities such as construction traffic, which cannot be absorbed by operators without detrimental impact on the market.
     
  2. ORR has stated  that the average increase for CP6 is around  11% plus inflation for the period but based on the draft price lists, the actual increase for different commodities and wagon types varies significantly with some bulk sectors including construction well in excess of the average figures so the average figure is misleading; some customers will be facing increases of circa 24% by the final year of CP5 and circa 48% by the end of CP6.
     
  3. The RDG is proposing CPI+1% for CP6 and CP7, which we believe is more equitable.
     
  4. We would like to highlight that the ORR does not appear to have fully assessed the impact of price increases on existing rail traffic, instead relying on work undertaken for PR13.  Changes in the rail freight market, and other exogenous factors, since 2013 are likely to make the degree of change greater, as around 1/3 of the market at that time was coal and relatively inelastic to price changes.  The rail freight operators have commissioned  MDS Transmodal to refresh this work for PR18, the results of which are expected shortly. The work undertaken by CEPA for ORR in the context of the ‘ability to pay’ test confirms that intermodal and construction traffic remain highly elastic and at risk of reverse modal shift with price increases, but this data does not appear to have been taken into account in the assessment of the variable charge.
     
  5. Network Rail has failed to meet its CP5 efficiency targets by a huge margin and this is directly impacting on the charges that are proposed to be paid by the freight sector.
     
  6. We suggest that the increase could be phased in over a longer term period to reduce the impact on customers and reduce modal shift to road, and to allow opportunity for Network Rail to achieve efficiencies. A capped annual increase of 1% above inflation would support future rail freight growth and certainty to support investment decisions 
     
  7. Our submission concentrates on the rationale for stable charges for CP6 in line with the DfT letter and the financial provision in the SOFA which allows for the cap; there will be a further and separate round of charges reviews for CP7.
    The  Statement of Funds Available, (SOFA), made financial provision for this capping for CP6. Network Rail anticipated that the freight charges would be capped so if the current level of charges proposed by ORR are retained, there will be additional income for NR.  
     
  8. Cross Departmental Government Policy supports rail freight
    This approach goes against Government policy which is to increase rail freight to reduce the adverse environmental and safety impacts of road freight and improve productivity, as recognised in the following Government policies.
     
    Shifting freight from road to rail can result in significant CHG emission savings as well as economic and safety co-benefitsDfT Freight Carbon Review February 2017. P43 Key messages
     
    DfT Rail Freight Strategy of September 2016. Paragraph 135 P42 - A significant increase in track access charges could result in some freight moving from rail to road, resulting in the associated economic and environmental benefits to the UK being lost.  
     
    Increasing freight access charges would result in reverse modal shift which would not only increase road congestion, road collisions, road infrastructure damage and pollution but also be counter to cross department government policy to shift more freight to rail. As most recently articulated in the latest Defra Clean Air Strategy of June 2018 ref and the DfT Ports Connectivity Study of April 2018. The DfT Rail Freight Strategy of September 2016 also makes a strong case for increasing rail freight volumes, not decreasing rail freight as this proposal would do.
     
  9. Relevant sections from DfT Rail Freight Strategy
     
    DFT Rail Freight Strategy of September 2016 said in relation to the ORR review of Track Access Charges, the following extracts P10 Paragraphs 26/27, P42 paragraph 135 in italics-
     
    26 At the same time, we recognise the positive benefits of rail freight for the UK- Including its environmental and air quality benefits relative to road freight and its impact on reducing road congestion. These benefits are not currently recognised in the track access charging regime.

     
    27 We will continue to support ORR’s work to develop appropriate track access charges for freight from CP6, including by understanding the overall impacts on the rail freight industry of any changes. Alongside this we are considering whether further support may be needed from Government in future in recognition of the benefits to the UK economy and society of modal shift to rail which incurs far lower congestion and pollution costs and helps to improve road safety. Any new support would be subject to the identification of future funding and would need to be designed in a way that would avoid distorting the market.

    P42 Paragraph 135 - At the same time, we recognise the positive benefits of rail freight for the UK- including its environmental and air quality benefits relative to road freight and its impact on reducing road congestion. These benefits are not currently recognised in the track access charging regime.
     
    A significant increase in track access charges could result in some freight moving from rail to road, resulting in the associated economic and environmental benefits to the UK being lost.

    paragraph 136 -As set out in the Secretary of State For Transport’s guidance to ORR in July 2012, in setting track access charges we would expect ORR to note the government’s rail freight policy, including the importance of sustaining efficient and commercially predictable network-wide freight operations. The guidance to ORR also notes that the Secretary of State wishes to be advised by ORR of, and to discuss with ORR, any changes to the charges which ORR proposes to pursue which would adversely affect the competitiveness of rail freight compared to other modes.
     
    Actions P43 paragraph 139 -DfT will continue to support ORR’s work to develop appropriate track access charges for freight from CP6, including the overall impacts on the rail freight industry of any changes. In particular, DfT is keen to support ORR’s work to ensure that decisions about track access charges levied on rail freight reflects the cumulative impacts of different charges on the rail freight industry and are joined up with Government decisions on wider support and funding to freight.

     
    Paragraph 140 – DfT will continue to co-ordinate the work of the Freight Investability and Sustainability Group (FISG) to develop thinking on the potential for wider changes to funding alongside more cost-reflective track access charges for rail freight, including whether further support may be needed from Government in future to retain the economic and environmental benefits of rail freight. Any new support would be subject to future funding being identified and would need to be designed in a way that would avoid distorting the market.

     
    Furthermore, the Committee on Climate Change report of June 2018 stated that more freight needs to be transferred to rail if the Climate Change targets are to be met.   It highlighted that transport, the only sector for which emissions increased, needs to reduce carbon dioxide emissions. 
     
  10. The ORR draft determination is not aligned with the DfT recent instructions
    Extract from DfT letter from Phil West to John Larkinson of ORR 8th March 2018
     
    We would therefore support capping charges in real terms, to the full extent consistent with the legal framework, at the current end of CP5 level (i.e. uncapped end CP5 rates) in order to provide rail freight operators and investors with certainty about the level of this charge for the next control period. As funder and shareholder, we are satisfied that this is consistent with the assumptions we made in the Statement of Funds Available.   DfT gave provision in the SOFA for a cap on charges, which means that funding could stay at CP5 levels for CP6 in real terms. Ie CPI but not the 3.6%.

     
    We welcome the fact that  there will be no increase in the new charges in the first two years starting April 2019; however we believe that this level of charging should be retained to provide stability for the rest of the CP6 period for the following reasons;-
    The ORR’s draft decision to increase freight access charges by 3.6% above CPI each year starting in April 2021 will have a detrimental impact on rail freight volumes which would result in increased emissions from freight, increased collisions and reduced productivity – all counter to government policy.

    Such a sharp increase risks undoing much of the positive work that the industry has been doing since the decline of coal in 2015.

    The competitive pressures between the modes mean that it is unlikely that such increases could be passed onto customers and the precarious financial position of freight operators means that they cannot absorb such increases.

    The Government, including the ORR, needs to take a holistic view of surface access charging otherwise there will be unforeseen consequence. Reverse modal shift would be very damaging in economic, environmental and safety terms.  These external and congestion costs will still have to be borne by the Government and the taxpayer if rail freight flows are forced back onto the roads; the costs will not disappear.
     
    The latest analysis by KPMG, showed that In 2016, rail freight generated economic benefits for UK Plc of £1.73bn, which included productivity benefits of £1.17bn for Britain’s businesses and externality benefits of £0.56bn, through lower road congestion and environmental gains.
     
    As acknowledged by Government, there is not a level playing field between HGVs and rail freight. See section 14 for details
     
    DfT Rail freight Strategy September 2016
    P43 paragraph 139 -DfT will continue to support ORR’s work to develop appropriate track access charges for freight from CP6, including the overall impacts on the rail freight industry of any changes. In particular, DfT is keen to support ORR’s work to ensure that decisions about track access charges levied on rail freight reflects the cumulative impacts of different charges on the rail freight industry and are joined up with Government decisions on wider support and funding to freight.
     
  11. The context for providing stable freight access charges is as follows:-
    Rail freight access charges have increased is 22 per cent while fuel duty has been frozen since 2011.

    While we understand that the legislation requires operators to pay the costs directly incurred, the ORR has options to apply the cap differently to minimise the impact of the charges increase in CP6.

    CP6 will be a crucial control period for the rail freight sectors as it continues to recover from the destabilising impact of the decline of coal. Applying a cap to see the Variable Usage Charge remain flat in real terms in CP6 would support the industry at this pivotal time. Such a cap would be entirely consistent with the funding in the SOFA and in-line with the assumptions Network Rail made in their February Strategic Business Plans. We urge the ORR to reconsider this.

    Instead the glide path proposed by ORR will see Variable Usage Charge increase significantly from Year 3 of CP6. This is much too steep given the competitive pressure and financial position of the sector. A more sustainable position would have been for the Variable Usage Charge to remain flat in real terms in CP6.

    Although charges would eventually need to recover the costs directly incurred the competitive position in future control periods may be influenced by wider policy decision, for instance road charging, that may make the glide path proposed by ORR more credible. This will not be the case in CP6 though.

  12. We urge the ORR to rethink the phasing in of the Variable Usage Charge cap in CP6 to avoid the real risk of modal shift from rail to road and all the negative externalities that will occur as a result.

    Prior to the ORR’s final decision we would expect an assessment to be made over how the increase in Variable Usage Charge collected by Network Rail is offset by the reduction in externality and productivity benefits caused by the reduction in rail freight volumes. Given the intense competition in the largest rail freight markets – i.e. intermodal and construction, it is highly likely that the reduction in benefits to UK plc will exceed the increase in Variable Usage Charge collected by Network Rail.

    As the sharp increase in variable charges that are proposed in CP6 are the result of Network Rail’s worsening efficiency trends, it is essential that Network Rail puts in place measures to turnaround their efficiency to avoid the rail freight industry bearing the impact of their missed efficiency targets in future.
     
  13. Environmental policy threat to rail freight from two Government announcements

    a) The halting of further rail electrification by the DfT  is a threat to rail freight. Electrification is the tried and proven low emissions rail freight option, which increases capacity and reduces maintenance costs. The Department is now focussing on bi-mode and stating that diesel only locomotives are banned from 2040. This is much harder on freight than passenger services, where there is more electric traction whereas rail freight, which is privatised, uses less than 10% of electric traction now.

    b) However, the DfT is not treating rail and HGVs equally – there is a rail freight diesel-only  ban from 2040 while diesel HGVs are not banned and all they have agreed to is a 15% voluntary, non-binding carbon dioxide O2 reduction by 2025 and further analysis of alternative fuels such as gas, as part of the Road to Zero policy.
     
  14. Rail freight and HGVs costs and charging are not aligned
    The ORR now has responsibility for roads as well as rail so it should treat the two modes fairly which is not happening at the moment.
     
    Rail freight has to compete with HGVs on price despite the fact that HGVs only internalise around 32% of the costs they impose on society. The latest MTRU research, commissioned by Campaign for Better Transport shows that heavy goods vehicles (HGVs) receive a £6 billion subsidy each year in terms of the congestion and road infrastructure damage, increased road crashes, air and CO2 emissions. HGVs are almost seven times more likely than cars to be involved in fatal accidents on local roads.
     
    The latest MTRU report of January 2018 and the Department for Transport (DfT) table below shows that two thirds of marginal costs of the large HGVs are not being met by the haulage operators. In 2016, 9 billion vehicle miles were run by articulated HGVs alone (this figure does not include rigid HGVs (source: TRA3105)) implying a marginal cost shortfall of about £6 billion. In 2014 the figure was £6.5 billion. These numbers vary a little from year to year according to traffic and the severity of impacts such as pollution or casualties. However, they remain substantial and completely unmet. The issue of all the congestion, road damage, collision and pollution costs is discussed fully in this Freight on Rail report, Read the original research here 

    DfT marginal external cost tables

     
    For articulated HGVs DfT produce Mode Shift Benefit (MSB) tables, most recently updated in 2015 with estimates for 2020 values at 2015 prices. These calculate the marginal costs so that investment in alternatives which reduce articulated vehicle miles can be tested for value for money. These showed a rise in costs from the original 2009 estimates, in particular those for road infrastructure and for carbon.  The tables below show the comparative values.

    i. These include a range of effects including for the MSB report: up and downstream processes; soil and Water Pollution; nature and Landscape; driver frustration / stress; fear of accidents; community severance (including restrictions on cycling and walking); visual intrusion
     
    These conclusions are in line with two other separate reports.  MDS Transmodal study in 2007 found a very similar amount of underpayment: £6billion. Transport & Environment research  issued in April 2016 found that HGVs were only paying 30% of their external costs.
    It is therefore crucial that the government recognises HGV costs in its discussions about rail freight costs because rail freight has to compete directly with road.
     
    DfT marginal external cost tables
     
    For articulated HGVs DfT produce Mode Shift Benefit (MSB) tables, most recently updated in 2015 with estimates for 2020 values at 2015 prices. These calculate the marginal costs so that investment in alternatives which reduce articulated vehicle miles can be tested for value for money. These showed a rise in costs from the original 2009 estimates, in particular those for road infrastructure and for carbon.  The tables below show the comparative values.

    Pence per articulated HGV mile
     
    Table 1            Mode Shift Benefits 2015 and 2009

    Pence per articulated HGV mile

     

    Motorways
    (by level of congestion)

    Roads

     

     

    High

    Low

    A

    Other

    Weighted Average 2015

    Weighted Average 2009 report

    Congestion

    99

    24

    72

    78

    57

    52.4

    Accidents

    0.5

    0.5

    5.6

    5.5

    2.7

    2.8

    Noise

    9

    7

    8

    14

    8

    7.0

    Pollution

    0

    0

    0.1

    0.2

    0.1

    2.5

    Greenhouse Gases

    6

    6

    7

    9

    7

    3.8

    Infrastructure

    7

    7

    24

    171

    18

    9.0

    Other (roads)1

    6

    6

    6

    6

    6

    6.4

    Gross Total

    127.5

    50.5

    122.7

    283.7

    98.8

    83.9

    Taxation

    -31

    -31

    -32

    -40

    -32

    -34.1

     

     

     

     

     

     

     

    Marginal cost gap

    96.5

    19.5

    90.7

    243.7

    66.8

    49.8

    Road Tax as % Gross marginal cost

    24%

    61%

    26%

    14%

    32%

    41%



    1. These include a range of effects including for the MSB report: up and downstream processes; soil and Water Pollution; nature and Landscape; driver frustration / stress; fear of accidents; community severance (including restrictions on cycling and walking); visual intrusion

    These conclusions are in line with two other separate reports.  MDS Transmodal study in 2007 found a very similar amount of underpayment: £6billion. Transport & Environment research  issued in April 2016 found that HGVs were only paying 30% of their external costs.
    It is therefore crucial that the government recognises HGV costs in its discussions about rail freight costs because rail freight has to compete directly with road. see Freight on Rail report,

    Government needs to reform HGV charging
    The revision of the existing time based road user levy (RUL) by the DfT and the Treasury is an  opportunity to start making HGVs pay more of the external and congestion costs they impose on the economy and society. 
     
    We support the Government’s aim in its recent call for evidence to reduce road congestion and pollution by incentivising more efficient HGV use of the road network with an effective lorry road charging system.
     
    Currently, the industry is competitive but not efficient. The existing time based system has neither led to efficiencies, nor reduction in emissions and collisions in the UK. Empty running is now at 30 per cent for the second year running,  the highest level for years and load utilisation has not improved either. DfT figures show that only 36 per cent of trucks were full in terms of volume for 2017. Thus to improve economic efficiencies there should be a direct relationship between the taxes per km travelled and the marginal costs which a distance based charging system can provide. It is the calculation of these marginal costs which is crucial during the HGV levy revision.
     
    By contrast, distance-based tolling HGVs has improved efficiency and resulted in better efficiency and lower empty running in Germany, Switzerland and Austria. Germany reduced its empty running figures, which had been at a similar level as the UK, by a third to around 18 per cent when the distance based charging was introduced. The introduction of the charge per km for trucks had reduced the percentage of empty vehicles in Austria from 21,1 per cent in 1999 to 15,7 per cent in 2004. At the same time the average load grew 0,6 Ton  to 14,7T. 2
     
    Furthermore the evidence shows that tolls can be beneficial to society without placing an unbearable financial burden on freight transport. For example, the German Government has been using revenue from tolls to provide discounts for hauliers to purchase less polluting trucks.
     
    The overwhelming conclusion from the various independent research reports cited in our submission is that distance based HGV charging systems can reduce lorry miles and therefore reduce congestion, pollution and crashes.
     
    Furthermore a distance charging system would make it fairer for rail freight to compete if HGVs were paying a large proportion of the costs they impose on the economy and society.  See our consultation response

    http://www.freightonrail.org.uk/ConsultationsDepartmentForTransportCallForEvidence.htm 

    2. VCÖ-Factsheet 2013-16 - Lkw-Maut in Österreich ausweiten (2016)

  15. HGVs Infrastructure track costs

    HGVs only pay 11 per cent of their road infrastructure costs. A 44 tonne standard 16.5 metre HGV is 136,000 times more damaging than a ford focus. 4th power law.
     
    Campaign for Better Transport has criticised a report, commissioned by the FTA,  which falsely claimed heavy good vehicles (HGVs) cover the costs of the damage they cause to roads, pavements and street furniture.
     
    This is also in sharp contrast to the way that the ORR measures and charges rail freight for its track costs compared with HGVs.
     
    Heavy Goods Vehicles: Do they pay their way? - impacts on road surfaces
    , produced by RepGraph for FTA (Freight Trade Association), found HGVs pay three times more than their estimated damage costs to infrastructure. But Campaign for Better Transport says the report is flawed, based on out-of-date figures and incorrect assumptions, and in fact HGVs only cover one tenth (11 per cent) of their road damage costs.

    Four fundamental flaws in the RepGraph report:

    • Using fuel duty from HGVs to offset HGV infrastructure costs when fuel duty income is not used in this way and there are no Government plans to do so
    • Halving HGV infrastructure per mile costs by using the  Government 2009 value of  nine pence per mile instead of the latest figure from 2015 of 18 pence per mile
    • Omitting any external costs other than infrastructure, such as congestion, collisions, carbon and air pollution  
    • Not distinguishing between different types and weights of HGVs. The largest and heaviest HGVs cause a great deal more damage to foundations and structures of roads than cars - the standard six-axle 44 tonne 16.5 metre truck is 136,000 times more damaging to road surfaces than a Ford Focus - therefore some of the heaviest road repair costs are almost exclusively attributable to the heaviest vehicles.

    RepGraph Heavy Goods Vehicles: Do they pay their way? - impacts on road surfaces, is available from the FTA website.
     
    So, rather than paying three times their costs as claimed in the RepGraph report, with the corrected damage figure of £3 billion, HGVs are in fact only paying 11 per cent (£340 million ) through Vehicle excise duty (VED) and the Road User Levy. This is calculated by adding £50 million from foreign vehicles paying the Road User Levy to the VED total for 2016.

    The RepGraph report conflates two different and recognised costing methods. The first is the marginal external cost, which includes additional congestion and road maintenance as costs, but assumes the road network has been built and does not include an allowance for this. This approach seeks to match the marginal cost per mile of the external impacts of HGVs to the perceived cost per mile of using a particular HGV. Obviously, the impacts of a 44 tonne articulated vehicle are much greater than a 7.5 tonne rigid HGV. The second is the fully allocated cost model, which similarly identifies costs according to HGV characteristics, but includes the capital cost of the road network. This can be either as a notional depreciation and/or cost of capital, or on the basis of the typical annual spend on road construction. In the fully allocated cost model case, congestion is often left out of the cost side since it is borne by road users as a group. However, it should be noted that strictly speaking a significant amount of the congestion costs are borne by cars and are not part of the road freight user group.

  16. Rail freight reduces road safety costs

    The relative safety costs of road and rail must be taken into account; the DfT values the prevention of each road fatality at £2 million 1.

    Government figures show HGVs are almost seven times more likely than cars to be involved in fatal crashes on minor roads 2.

    Driver’s fear of collisions involving HGVs also needs to be taken into account 3.

    A recent questionnaire, from Brake, the national road safety charity, showed that 79 per cent of car drivers want to see less freight on the roads on safety grounds; Furthermore, 79 per cent of drivers want the Government to fund the necessary rail network upgrades to transfer the freight to rail.



1. RAS60001 2016

2. Source: Traffic statistics table TRA0104, Accident statistics Table RAS 30017, both DfT

3. RAS60001 2016


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