Before we begin, I have a few housekeeping announcements to make. If men wish to take off their jackets, they may. Will everyone please ensure that mobile phones are silenced? I remind the Committee that there is a Ways and Means resolution in relation to the Bill, of which copies are available in the Room, and that adequate notice should be given of amendments, because it is not my general intention to call starred amendments.
The process of taking oral evidence in Public Bill Committees is still quite new, so it may help if I briefly explain what we are going to do. Having said that, it is as new to me as it probably is to many of you, so please bear with us. The Committee first considers the programme motion on the amendment paper. Debate on that, if it is necessary, is limited to half an hour. We shall then proceed to a motion to report written evidence and afterward to a motion to permit the Committee to deliberate in private in advance of the oral evidence session. I hope that we can take those latter motions formally. The purpose of the private session is to consider the brief that we have been given, and to allow questions to be dealt with.
Assuming that the second motion is agreed, the Committee will then move into public session for the oral evidence. If the Committee completes its questioning of witnesses in good time, we will move on to clause-by-clause consideration. If we manage that before 1 pm, we shall have to move to Committee Room 12, for reasons that I shall not bore you with. We shall adjourn for 15 minutes while that happens. Finally, will speakers please remain seated when they speak? The reason is that the microphones in this Room do not work.
(1) the Committee shall (in addition to its first meeting at 10.30 a.m. on Tuesday 4th December) meet—
(a) at 4.00 p.m. on Tuesday 4th December;
(b) at 9.00 a.m. and 1.00 p.m. on Thursday 6th December;
(c) at 10.30 a.m. and 4.00 p.m. on Tuesday 11th December;
(2) the Committee shall hear oral evidence in accordance with the following table:
Mr. Harris: It may seem unusual to begin a piece of legislation with the phrase “for the avoidance of doubt”. I am not sure whether any other piece of legislation starts in that way. The problem is that if two pieces of legislation speak to the same subject, there can be confusion as to what Parliament intended. The Department for Transport and London and Continental Railways feel that a potential purchaser of the infrastructure may not be sufficiently clear about how the Secretary of State’s powers might be used. It is nothing more than a clarifying clause and does not give any additional powers to the Secretary of State.
Mr. Harris: I will bring in David Lunn, who may be able to talk more about that aspect. I do not think that an actual calculation was made in empirical terms about the 50 or 60 per cent. chance of some kind of misinterpretation of the law. Obviously, if we are introducing new primary legislation, we want to ensure that, at some point in the future, we do not have to bring forward further legislation to clarify what we have already done. This was a real belt-and-braces approach. With your permission, Mr. Atkinson, I would like to bring in David to clarify the matter.
David Lunn: In the Channel Tunnel Rail Link Act 1996, the power to fund mentions construction, and not operation. The 2005 Act states that the Secretary of State can fund railways for whatever reason they might want to do so. We took legal advice, which said that in most circumstances, a reasonable view of a court would be, “Fine, you can fund,” but there might be doubt at the back of a potential purchaser’s mind, and that would hit value. All we seek to do here is put the measure beyond any doubt at all.
The support that was provided by the Government for construction financing for this project was presumably to reduce the risk associated with the construction period, which was obviously a highly uncertain time. That risk has now fallen away, but the same guarantees remain in place. Do you envisage a refinancing that removes all or part of those guarantees, or are you anticipating that those guarantees will remain in place over the foreseeable future?
David Lunn: Basically, existing guarantees are there for the period of the debt and will not change. However, what might change is if there is a new purchaser of the railway. In that case, it would be for the purchaser of HS1 to raise its finance on its own account. We would not be looking to guarantee that, and that is the policy intention.
Is this avoidance of doubt solely related to a possible sale of the operation, or is it also a factor that you think that there might be some re-financing of existing debt in the future, with the ownership remaining the same?
What I am trying to get clear is whether this saves the taxpayer money and reduces the cost to the Department, even if the ownership remains the same in the event of any re-financing. Does the Bill make it easier to re-finance?
I understand why there were exclusions from the normal regulatory regime during the construction phase. However, clause 2 is supposed to normalise arrangements and put all access on the same basis. I do not understand why it is therefore appropriate for the Secretary of State, rather than the Office of the Rail Regulator, to exercise those powers? That would be different from normal arrangements.
Mr. Harris: It is different from the rest of the rail network. We look on High Speed 1 as an exception to the rest of the network. Unlike for the rest of the network, which is essentially a Victorian legacy, we know exactly what HS1’s cost base is; it is not an unknown quantity. For the rest of the network, there is a provision in existing legislation for five-yearly reviews of access charges. That would not be necessary with HS1 simply because it is a new asset.
As far as the regulation of the rest of the network goes, the Office of the Rail Regulator’s primary role is to determine those five-yearly access charge reviews. That is not something that we want to apply to HS1, simply because it is a brand new asset. In that respect, we can justifiably say that it is a separate case. The ORR will retain some regulatory functions as far as HS1 goes, but the arrangements are different from those covering the rest of the network.
I am grateful for that answer, but there are two points that I would like to return to. First, my understanding of clause 2 was that it was supposed to ensure that arrangements across the network were as one. That clearly is not what is going to happen. Secondly, on a five-yearly view, assets will depreciate and move in value. Is it not appropriate for there to be a review of the cost of an asset base, even after five years?
Mr. Harris: It is my view that there should not be a review of an asset base over a short period of time like that—not for a brand-new railway. As I say, the rest of the railway is a different beast, given its age. We believe that HS1, because it is a brand-new asset, should be treated completely differently. We do not anticipate a need for access charge review every five years.
Mr. Harris: There is the development agreement. It would be up to whoever was the owner of HS1 and the train operators to agree on the terms of any access contracts. Under the terms of the development agreement that I have just mentioned between the Secretary of State and London and Continental Railways, those access contracts would be subject to oversight by the Secretary of State.
Returning to Mr. Hammond’s question, the ORR would have an important role to play in determining any dispute that might arise between the owner of HS1 and any operator. If they could not come to an agreement under the Secretary of State’s guidance, the ORR would sit in appeal on any disagreement, so it would have an important function in that respect.
Mr. Harris: The Secretary of State has a duty to arbitrate and to ensure that under any access contract between an operator and the owner of HS1, they abide by the development agreement, which is a historical agreement. It is the Secretary of State’s responsibility to ensure that contractors remain within those terms.
Moving on to conditions of access, what conditions will be imposed on operators that are granted access to High Speed 1? For instance, will it be possible to require services to stop at particular stations?
Mr. Harris: I do not see it as being the job of the Secretary of State to tell international services to stop at particular stations. However, when it comes to domestic services using HS1, that will be part of the franchise agreement. There will be a service level commitment providing for a minimum level of service at stations.
As the Minister will know, there is a great deal of concern in the industry that the legislation as it stands, and as changed by this Bill, will still make it exceedingly difficult for new operators to provide international services. I think that we can say that the taxpayer has contributed very substantially to the creation of this asset. Obviously, the Secretary of State wants an environment that means that the asset can be sold fairly attractively to get a good return to the Treasury on the money that has been put in, but can I suggest that the taxpayer at large also wants to see the maximum opportunity for running new services to continental Europe? Can the Minister give us some comfort that the changes that he is proposing, combined with the existing regime, will create an environment in which it is realistically reasonable for new operators to be able to come in and provide those services, and that we are going to see the maximum and optimal use of the asset? That uncertainty remains, despite the language on the page.
Mr. Harris: I think that those are valid concerns. Let us look at the picture of open access, first as it relates to the domestic network. Open access operators—those that are not provided for through a domestic franchise—are provided for in EU regulations, not through this Bill or our own domestic railway legislation. When we have had successful applications for open access operators, most recently for the Wrexham-Marylebone service that has been given the go-ahead by the ORR, that is provided for on the basis of, first, EU legislation and, secondly, ORR’s assessment of whether there is enough capacity on a particular route. In the case of the Wrexham line, it concluded that there was enough capacity. There are many other main lines on which there is not an awful lot of spare capacity.
There is a lot of spare capacity on HS1. Some 40 per cent. of the paths on HS1 are being reserved for domestic services and, as I said, that will be taken care of by a domestic franchise agreement. Eurostar is not using the full quota of available paths for international services. I very much hope that international operators will apply for open access to HS1 at an early stage. We cannot provide for that because open access is a matter for Europe—as it should be, given that these are international services. However, I would be very surprised if international operators did not take advantage of the fact that HS1 is there, and that train paths are available.
The Minister is saying that market forces will deal with this, but as I and others have pointed out to him, the way in which the assets are to be sold would allow for cross-ownership between the owner of the track and the owner of Eurostar, creating, some might believe, a disincentive for open access for certain kinds of services that would be highly competitive in various ways to the Eurostar service. The body that has always held the ring, if you like, in disputes of this kind has been the Office of the Rail Regulator, which has now essentially moved to a position of last resort in terms of regulating access. I am looking for him to give us some comfort. Because cross-ownership of both the track and Eurostar is very likely—SNCF currently has such cross-ownership—I am extremely concerned that we do not put an institutional arrangement in place that leaves everybody helpless in the face of that kind of economic pressure. The answer that market forces will deal with the matter leaves me with some concern.
Mr. Harris: I have some faith in market forces, but I have more faith in the fact that European regulations insist on a separation of track and operator. I see that David is desperate to come in on that point. If the Secretary of State is the overseer, or regulator, of the access agreement, I do not foresee any circumstances in which any Secretary of State would want to restrict international access to HS1. I just cannot see how that would, politically, be a reasonable position for any Secretary of State to take.
David Lunn: The regulations require the separation of management and accounts, and transparency in how the process works. We would expect that to be taken forward. We do not necessarily think that there will be cross-ownership; we think that separate ownership is much more likely than joint ownership.
One last question. I still have my reservations, and while there is hope that there will not be cross-ownership, that is not the word on the street. Obviously there is the potential for HS2 and there have been discussions about that. For example, people are putting together project notions for spurs to Heathrow. There is a whole variety of potential linking routes to HS1. How does the regulatory scheme that the clause puts in place either enable or create issues for linkage into further extensions at high speed?
Mr. Harris: To be honest, I am unaware of any negative or positive implications that the Bill will have for any future Government who decide to progress HS2. I am happy for David or Graham to clarify that.
On how access might be regulated in the event of a conflict between owner and operator, although she expresses some scepticism about how the free market will operate in that respect, since it is not predicted that Eurostar will use all the pathways available, it would be a profoundly uncommercial stance for any owner of HS1 to cut off their nose to spite their face—as they say in Scotland—and prevent more revenue coming to their coffers by denying other international operators access to HS1. There would be no commercial sense in doing so unless Eurostar wanted to take those paths, and at the moment there is no prospect of that happening.
Graham Dalton: They are part of the franchise that has been let to Govia, which is running the south-eastern services now. It is commissioning the trains, which are starting to be delivered, and it is obliged to start services by December 2009. Govia may start earlier, should it wish to do so and should it have a commercial case for doing so.
If the Eurostar plus the new domestic services operate, that will presumably take a small part only of the capacity of the new line. Will there be a lot of capacity left for other new services?
Mr. Harris: If a train operator wanted to start running competing international services on the domestic network—not the High Speed 1—to rival HS1 services, that would have a commercial impact on international services running on HS1. However, the ORR would have responsibility for that access agreement because the service would be running on the Network Rail network, not HS1. That is a hypothetical example.
Mr. Harris: We think that the ORR should have regard to the commercial viability of HS1. In that specific circumstance, the domestic network is there not to provide international services but for the purpose of securing the long-term economic stability, growth and prosperity of HS1. I do not want to see the ORR using its powers in any way that might undermine that stability in the long term. If you like, I accept that HS1 is being given preferential treatment over the rest of the network in that respect.
Mr. Harris: The arrangements that currently exist between, for example, the ORR and Network Rail with regard to its regulatory functions on the rest of the network are predictable. They are set out in regulations and are accumulated to the ORR over a five-year control period. The expectations of what the ORR does in those circumstances are set in stone. They are agreed by the industry and the Government.
The ORR’s responsibilities for High Speed 1 would be on an ad hoc basis. I am referring to matters that are separate from safety regulation. We are talking about when the ORR may have a role to play in deciding an appeal from an operator who has a disagreement with the High Speed 1 owner about access charges. The reason why that cannot be done in the same way as ORR deals with Network Rail is that the circumstances may never arise with High Speed 1. If they do, there is no prediction when they will arise, which is why any payments have to be made on an ad hoc basis rather than on a systematic predictable basis. I do not know whether Mr. Hammond was looking for an actual figure. That is slightly more problematic.
I have two things to say. We discussed previously in Committee the use of “reasonable”. I was really looking for an explanation of how you intend to define “reasonably” this time round.
I hear what you have just said about the position not being similar to the position under Network Rail and therefore on an ad hoc basis, but the explanatory notes say something entirely different. They say that it is proposed to be in a similar position to Network Rail. Why is there a contradiction?
Mr. Harris: It is a similar position, but only in respect of the amount that would be charged. It is completely different in respect of when the charges would be levied because the ORR is providing an ad hoc service. It is not a constant or regular service that will be provided on that occasion. It would arise only in the event of a conflict. As for the structure of the fees, I am sure that my officials will clarify the position, but that is the only resemblance to the fees of Network Rail.
I am sorry, but what was your first point?
I did not want an actual figure from you. I was looking for a definition, given that we have discussed the matter several times. What should we take “reasonably” to mean in this context?
David Lunn: I do not know whether there is much more to add. I think that the impact assessment quotes a figure of £600,000. That figure would have come from a case of an appeal held on the Network Rail network, which is an equivalent situation to what might happen on CTRL. That is probably the reason for the reference to Network Rail. Obviously, it is only a small part of the regulator’s role on the mainline railway.
Do you not concede that the clause is very widely drawn? My hon. Friend the Member for Wimbledon was being generous when he said that it allows costs that are reasonably incurred to be charged. The clause does not actually say that. It is not an objective test; it is a subjective test. It deals with costs that the Office of Rail Regulation considers to be “reasonably incurred”, not necessarily what a reasonable man considers to be reasonably incurred. Do you think that that is far too wide?
Mr. Harris: May I correct the hon. Gentleman? He is right to say that proposed subsection (2)(b) refers to what
“the Office of Rail Regulation considers it reasonable for the rail link undertaker to pay”
but subsection (2)(a) refers to what
“the Office of Rail Regulation considers to represent the costs reasonably incurred”.
Yes, but my point is that the wording of subsection (2) (a), which is what I alluded to, does not say, “such amount must be costs which are only reasonably incurred.” It states that the amount of a fee shall be
“such amount as the Office of Rail Regulation considers to represent the costs reasonably incurred by it”.
The Office of Rail Regulation may run a very slack ship with high costs.
Mr. Harris: A lot of these costs are already prestated in existing rail structures. As I have said, it would be entirely open for any party to a dispute to raise concerns about any level of fee that the ORR was charging and ask for that to be judicially reviewed if the wording remains as it is. I am not aware of similar wording in any other piece of legislation being particularly too widely drawn or too controversial. I do not anticipate that this will be a cause of concern among operators or infrastructure owners.
May I move on to subsection (6) of this clause? There are no limits on the scope of the ORR. Could not the following scenario arise? A notice is issued and the amount stated in the notice is not paid, so the ORR then decides under subsection (6) to issue a second notice, adding interest on to the fee, which was mentioned in the first notice. That is not paid, so the ORR issues a third notice, adding the lawyers’ fees as well on the basis that these are costs that the ORR feels are reasonably incurred. Could we not get a succession of notices bumping up the price for those who pay late?
Could you confirm that the definition of rail services includes the rail infrastructure, which means the track, the stations, the depot, the rolling stock and any railway services such as passenger and freight services and maintenance? Is the term “rail services” that widely drawn?
Do you not concede that if you look at section 6 of the 2005 Act, it provides the definition that I have just given you, which is more widely drawn than you have stated to us.
Mr. Harris: I wonder whether we are arguing at cross-purposes here. The development agreement originally covered the period of construction of HS1. It will now cover the period of operation. It is really about which time period we are talking about, rather than what is happening on HS1. Those are the two differences; one that we were building it and now we are actually running it.
I understand that point, and this is exactly the same point as the interim latest period that we discussed in another Committee last week. However, it is not only the time period, it is also what you run during that period. That is what I want to be clear about.
Any further questions?
In that case, can I thank you, Minister, for coming here today, and also Mr. Lunn and Mr. Dalton for giving evidence. We will now suspend the Committee for 15 minutes until 11.30 to enable us to move to Committee Room 12, where we will resume. I ask hon. Members to take their papers with them.