[Mr. Peter Atkinson in the Chair]

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.

On a point of order. If we are to remain seated, Mr. Chairman, will you indicate the method by which you would prefer us to catch your eye?

I suggest that hon. Members do as you have just done.

Ordered,

That—

(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:

TABLE

Date

Time

Witness

Tuesday 4th December

Until no later than 1.00 p.m.

Department for Transport

(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 7.00 p.m. on Tuesday 11th December.

Ordered,

That, subject to the discretion of the Chairman, any written evidence received by the Committee shall be reported to the House for publication.—[Mr. Tom Harris.]

Ordered,

That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—[Mr. Tom Harris.]

The Committee deliberated in private.

On resuming—

We will now hear oral evidence from representatives of the Department for Transport and I welcome the witnesses here today. Minister, will you introduce your colleagues to the Committee?

Mr. Harris: I have here David Lunn, divisional manager for the financing of major projects at the Department for Transport and Graham Dalton, director of rail projects. They will be answering with me this morning.

Q 1

May I ask the Minister, in relation to clause 1, what exactly in the provisions of the Channel Tunnel Rail Link Act 1996 and the Railways Act 2005 led him to believe that there was any uncertainty with regard to High Speed 1?

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.

Q 2

I understand that point, and I am grateful for the Minister’s briefing to the two Opposition Front-Bench teams. However, having read the Act, I found it difficult to understand why the ambiguity arose. Did the Minister assess the likelihood of that ambiguity occurring?

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.

Q 3

Was there an incident that led you to take this legal advice?

David Lunn: The matter was brought to our attention by LCR in the first instance, so we took our own view. Our legal advisers agreed that there was room for doubt there, so we thought it best to clarify.

Q 4

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?

Mr. Harris: The purpose of clarifying the Government’s intention in clause 1 is

“for the avoidance of doubt”.

The Secretary of State retains powers to offer subsidies and financing to train services running on HS1. In terms of any re-financing package, may I be permitted to bring in David Lunn again?

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.

Q 5

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?

Mr. Harris: The intention of the Bill is to clarify the law in such a way that a restructuring is feasible.

Q 6

Even with existing ownership?

Mr. Harris: Yes, obviously. Once the Bill becomes an Act, it will clarify the Secretary of State’s role even before a restructuring or possible sell-off of HS1.

Q 7

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?

David Lunn: All things being equal, if we need to raise new debt, clarity is a good thing. That would remain the case whether there was a new buyer or potential buyer.

Q 8

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.

Q 9

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.

Q 10

You have explained why you think that it is preferable for you carry out the function rather than the regulator, in terms of managing access contracts. How will you, or the Secretary of State, determine the access rights of those operators that want to run services on HS1?

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.

Q 11

Does that really tell me exactly what the Secretary of State’s role is, rather than the role of the ORR? Or are you saying that the ORR will provide a supporting role to the Secretary of State by arbitrating on those sorts of disputes?

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.

Q 12

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.

Q 13

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.

Q 14

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.

Q 15

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.

Q 16

Can the Government trade stakeholders’ shares, and what would be the rough value of that?

Mr. Harris: If the Committee will forgive me, for obvious reasons I will not speculate in advance on the values of a sale. We do not want to pre-empt any decision of the open market about exactly what the share value would be. I do not know whether David wants to come in on the Government’s side.

David Lunn: Could you repeat the question?

Q 17

Can the stakeholders’ share be sold by the Government at some time in the future, or is it just a share of the cash flow after 2020?

David Lunn: The Government share in future revenues? The special shareholding in LCR?

If that is what it is called, yes.

David Lunn: That special shareholding does not itself retain economic value, although it does give rights to certain cash flows going forward.

Q 18

It is not tradable?

David Lunn: It is not of that kind. I think that the wider issue is that the debt is guaranteed. The Government underpin the company, so it would be expected that the Government would receive value from any sale. That is certainly the way that we are going forward.

Q 19

There are no domestic services at the moment on the line. What is the timetable for franchising domestic services on the line?

Mr. Harris: Domestic services will begin in December 2009.

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.

Q 20

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?

Graham Dalton: There is capacity left. As the Minister said, about 40 per cent. of capacity is used by the domestic services, so there is capacity left, but not huge amounts.

That 40 per cent. will not be immediately hit, I imagine.

Graham Dalton: It is Govia’s intention to run pretty well up to its full amount, from the early stages. We must remember that it bid in competition to win the franchise and it is now incentivised to go and sell seats and tickets on those trains.

Are there any more questions on access? In that case, we move on to clause 3, on the duties of the Office of the Rail Regulator.

Q 21

What is said in section 21(1) of the 1996 Act about the development agreement?

Mr. Harris: Section 21 is entitled:

“Duties as to exercise of regulatory functions”.

Would you like me to read out two short paragraphs?

It is subsection 1 that I am interested in, in relation to the development agreement.

Mr. Harris: Section 21(1) states:

“The Rail Regulator shall have an overriding duty to exercise his regulatory functions in such a manner as not to impede the performance of any development agreement.”

Q 22

So how might the Office of the Rail Regulator’s regulatory functions have an adverse impact on the development agreement, in relation to the national railway?

Mr. Harris: Well, for example, if a train operator wanted to start running competing international services to those on High Speed 1 using the main domestic rail network, that raises an issue about the ORR’s role.

David Lunn: That is something that the ORR would then need to take into account.

Q 23

Sorry, could you clarify?

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.

Q 24

So why should the rail regulator give overriding precedence to the development agreement in this situation?

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.

Any further questions on clause 3? If not, we shall move to clause 4.

Q 25

The clause, as I understand it, allows the ORR to charge CTRL a fee. The phrase that it uses makes reference to “costs reasonably incurred”. Will you provide some explanation or guidance as to what “costs reasonably incurred” might be, in terms of comparison to other arrangements that might exist?

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.

Q 26

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?

Q 27

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?

Mr. Harris: Whatever the legislation, my understanding is that, if we express an expectation under the Bill that the fees charged are reasonably incurred, that is something that can be challenged in court and judicially reviewed. It would be quite robust in terms of the ORR’s role.

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.

Q 28

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.

Q 29

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?

Mr. Harris: Well, we are all used to having to pay extra for bills that are paid late. In this particular circumstance, any extra cost would have to be reasonably incurred and may have to be defended at judicial review.

Q 30

So you are happy with this wording?

Mr. Harris: Yes.

We move on to clause 5 and the meaning of “development agreement”.

Q 31

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?

Mr. Harris: It is about the operation of the railway infrastructure of HS1 itself and not the actual operation of passenger or freight services.

Q 32

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 am sure that you are right, but for the purposes of this particular piece of legislation, it is intended to refer only to HS1.

Q 33

Can we be clear, therefore, how we need to amend this clause to ensure that that actually happens because that is not what it says at the moment?

Mr. Harris: I wonder whether I could ask my officials for further information for the Committee stage, and then I will come back to the hon. Gentleman.

Graham Dalton: The development agreement was specifically about the design and construction of the railway.

Mr. Harris: Yes, but as I understand it, this clause extends the definition of the development agreement to the operational phase as well.

David Lunn: I think that the existing development agreement covers the operational phase of the railway. I think that this is just about clarifying what the development agreement covers.

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.

Q 34

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.

Mr. Harris: OK. I might have to get clarification on that.

Q 35

Chairman, may I ask that that clarification goes to all members of the Committee?

Yes.

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.

Sitting suspended.

On resuming—

We are now back on more familiar territory and we begin clause by clause scrutiny of the Bill.