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1 – Scope: TOC costs (2 of 3): Including all VTAC related items in the sharing mechanism would give NR an incentive to help TOCs to reduce the cost impact of rolling stock on NR's infrastructure
misc · 2011 · scenario_analysis
1 – Scope: TOC costs (2 of 3): Including all VTAC related items in the sharing mechanism would give NR an incentive to help TOCs to reduce the cost impact of rolling stock on NR's infrastructure
 1 – Scope: TOC costs (3 of 3): Analysis of the drivers of TOC costs suggest that there is an economic case for NR to share in TOC costs. However, TOCs have highlighted that this could encourage gaming
misc · 2011 · diagnosis
1 – Scope: TOC costs (3 of 3): Analysis of the drivers of TOC costs suggest that there is an economic case for NR to share in TOC costs. However, TOCs have highlighted that this could encourage gaming
5.1 — TOC costs
 1 – Scope: Network Rail costs (1 of 6): L.E.K. would recommend a cash expenditure approach rather than a revenue requirement approach for Options 1,2 and 4. However this would require the baseline to be adjusted to reflect changes in renewals scope to the extent that these are not efficiency related
misc · 2011 · recommendation
1 – Scope: Network Rail costs (1 of 6): L.E.K. would recommend a cash expenditure approach rather than a revenue requirement approach for Options 1,2 and 4. However this would require the baseline to be adjusted to reflect changes in renewals scope to the extent that these are not efficiency related
 1 – Scope: Network Rail costs (4 of 6): TOCs can influence NR's costs and property revenue through three mechanisms
misc · 2011 · comparison_table
1 – Scope: Network Rail costs (4 of 6): TOCs can influence NR's costs and property revenue through three mechanisms
 1 – Scope: Network Rail costs (5 of 6): L.E.K. has identified four main options for the scope of NR's costs. There are pros and cons to each
misc · 2011 · comparison_table
1 – Scope: Network Rail costs (5 of 6): L.E.K. has identified four main options for the scope of NR's costs. There are pros and cons to each
 1 – Scope: NR costs (6 of 6): L.E.K.’s report on Alternative Railway Structures highlighted that there could be significant benefits in some regions from Vertical Integration due to improved alignment of incentives. A cost sharing mechanism could secure some of these benefits
misc · 2011 · comparison_table
1 – Scope: NR costs (6 of 6): L.E.K.’s report on Alternative Railway Structures highlighted that there could be significant benefits in some regions from Vertical Integration due to improved alignment of incentives. A cost sharing mechanism could secure some of these benefits
 1 – Scope: The relative attractiveness of an outperformance-only mechanism and a symmetrical mechanism depends on how TOCs price these two mechanisms, and this is uncertain
misc · 2011 · key_messages
1 – Scope: The relative attractiveness of an outperformance-only mechanism and a symmetrical mechanism depends on how TOCs price these two mechanisms, and this is uncertain
 2 – Geography: NR currently manages its business using a number of different geographical structures and does not produce integrated regional P&Ls as part of its standard reporting process
misc · 2011 · situation_overview
2 – Geography: NR currently manages its business using a number of different geographical structures and does not produce integrated regional P&Ls as part of its standard reporting process
 2 – Geography: The geographical structure used for the cost and revenue sharing mechanism must give TOCs confidence that there will be a strong link between their actions and the financial outcomes
misc · 2011 · diagnosis
2 – Geography: The geographical structure used for the cost and revenue sharing mechanism must give TOCs confidence that there will be a strong link between their actions and the financial outcomes
 2 – Geography: Five of NR’s existing nine operating routes already have a single dominant TOC. Mapping between TOCs and NR regions could be further improved by splitting Wales out of the Western operating route and by splitting a Northern route out from LNE and LNW
misc · 2011 · diagnosis
2 – Geography: Five of NR’s existing nine operating routes already have a single dominant TOC. Mapping between TOCs and NR regions could be further improved by splitting Wales out of the Western operating route and by splitting a Northern route out from LNE and LNW
 2 – Geography: Nine TOCs would have at least a 70 percent share of the train km of their primary NR operating route if NR implemented the four changes to its current route boundaries
misc · 2011 · market_landscape
2 – Geography: Nine TOCs would have at least a 70 percent share of the train km of their primary NR operating route if NR implemented the four changes to its current route boundaries
70% — Share of total train kms on primary route
 2 – Geography: The cost and revenue sharing mechanism could be reported using individual TOCs as the “regions” rather than any NR geography. However, this is unlikely to make a significant difference in practice
misc · 2011 · diagnosis
2 – Geography: The cost and revenue sharing mechanism could be reported using individual TOCs as the “regions” rather than any NR geography. However, this is unlikely to make a significant difference in practice
 3 – Baseline: There is a large range of uncertainty over the achievability of ORR’s assessment of NR’s efficient expenditure
misc · 2011 · diagnosis
3 – Baseline: There is a large range of uncertainty over the achievability of ORR’s assessment of NR’s efficient expenditure
30% to 50% — efficiency gap
 3 – Baseline: Using the ORR’s assessment of NR’s efficient expenditure as the baseline for a cost and revenue sharing mechanism would expose TOCs to potentially significant regulatory risk (1 of 2)
misc · 2011 · diagnosis
3 – Baseline: Using the ORR’s assessment of NR’s efficient expenditure as the baseline for a cost and revenue sharing mechanism would expose TOCs to potentially significant regulatory risk (1 of 2)
 3 – Baseline: Using the ORR’s assessment of NR’s efficient expenditure as the baseline for a cost and revenue sharing mechanism would expose TOCs to potentially significant regulatory risk (2 of 2)
misc · 2011 · problem_statement
3 – Baseline: Using the ORR’s assessment of NR’s efficient expenditure as the baseline for a cost and revenue sharing mechanism would expose TOCs to potentially significant regulatory risk (2 of 2)
 3 – Baseline: A mechanism may also be required to incentivise efficiency improvements across control periods. Furthermore, TOCs could be incentivised to side with NR during periodic reviews
misc · 2011 · diagnosis
3 – Baseline: A mechanism may also be required to incentivise efficiency improvements across control periods. Furthermore, TOCs could be incentivised to side with NR during periodic reviews
 3 – Baseline: The cost and revenue sharing mechanism could either use franchise bids or TOC business plans as the TOC baseline. If franchise bids are used then they would almost certainly require a number of adjustments at various stages during the franchise to take into account emerging developments
misc · 2011 · diagnosis
3 – Baseline: The cost and revenue sharing mechanism could either use franchise bids or TOC business plans as the TOC baseline. If franchise bids are used then they would almost certainly require a number of adjustments at various stages during the franchise to take into account emerging developments
 4 – Causes: Stakeholders generally favoured including all causes in the mechanism in order to avoid the cost of a Schedule 8 style cause attribution industry
misc · 2011 · diagnosis
4 – Causes: Stakeholders generally favoured including all causes in the mechanism in order to avoid the cost of a Schedule 8 style cause attribution industry
 L.E.K. has identified two key principles for determining the appropriate sharing percentages
misc · 2011 · framework_other
L.E.K. has identified two key principles for determining the appropriate sharing percentages
 5 – Percentages: There are precedents of train operators taking an interest in NR’s costs. These can be used to inform the setting of sharing percentages
misc · 2011 · precedent
5 – Percentages: There are precedents of train operators taking an interest in NR’s costs. These can be used to inform the setting of sharing percentages
6% — cost share percentage
 5 – Percentages: L.E.K. has carried out some high level quantitative analysis to help inform the setting of sharing percentages
misc · 2011 · data_table
5 – Percentages: L.E.K. has carried out some high level quantitative analysis to help inform the setting of sharing percentages
4.5% — Profit margin
 5 – Percentages: The PR08 EBS mechanism uses a 25% sharing rate. Whether or not this would give TOCs sufficient incentive would depend on TOCs' views on the degree to which they are able to influence NR's costs and the resources required to do so
misc · 2011 · financial_analysis
5 – Percentages: The PR08 EBS mechanism uses a 25% sharing rate. Whether or not this would give TOCs sufficient incentive would depend on TOCs' views on the degree to which they are able to influence NR's costs and the resources required to do so
25% — TOC profit
 6 – Caps: Caps should be used to limit the downside exposure of each organisation to its counterparty
misc · 2011 · recommendation
6 – Caps: Caps should be used to limit the downside exposure of each organisation to its counterparty
 6 – Caps: We would recommend that caps are used but that they are applied through a tapering down of the sharing percentage to create a soft cap
misc · 2011 · recommendation
6 – Caps: We would recommend that caps are used but that they are applied through a tapering down of the sharing percentage to create a soft cap
25% — sharing percentage
 7 – Secondary users: Stakeholders generally considered existing industry arrangements to be effective in protecting their rights. However, there was a concern that a cost and revenue sharing arrangement could disadvantage secondary users
misc · 2011 · key_messages
7 – Secondary users: Stakeholders generally considered existing industry arrangements to be effective in protecting their rights. However, there was a concern that a cost and revenue sharing arrangement could disadvantage secondary users
 7 – Secondary users: L.E.K. considers that it would be unreasonable to make financial participation mandatory for secondary users. However, they ought to have the option to participate, subject to a materiality threshold
misc · 2011 · strategic_options
7 – Secondary users: L.E.K. considers that it would be unreasonable to make financial participation mandatory for secondary users. However, they ought to have the option to participate, subject to a materiality threshold
 8 – Information: An open book approach would be required in order for a cost and revenue sharing mechanism to be fully effective. However, train operators are very sensitive about sharing financial information with other parties, particularly competitors
misc · 2011 · problem_statement
8 – Information: An open book approach would be required in order for a cost and revenue sharing mechanism to be fully effective. However, train operators are very sensitive about sharing financial information with other parties, particularly competitors
 8 – Information: ORR would have to provide separate price determinations at the level of each NR geography and the industry would need to prepare whole industry P&Ls for each NR geography
misc · 2011 · diagnosis
8 – Information: ORR would have to provide separate price determinations at the level of each NR geography and the industry would need to prepare whole industry P&Ls for each NR geography
 8 – Information: We would not recommend that TOCs be required to align any of their management practices with NR’s geographies. However, train operators should be required to split their P&Ls by NR geography
misc · 2011 · recommendation
8 – Information: We would not recommend that TOCs be required to align any of their management practices with NR’s geographies. However, train operators should be required to split their P&Ls by NR geography
 9 – Governance: We would recommend a two level approach to governance of the cost and revenue sharing mechanism - management level and supervisory level
misc · 2011 · recommendation
9 – Governance: We would recommend a two level approach to governance of the cost and revenue sharing mechanism - management level and supervisory level
 9 – Governance: Safeguarding economic benefits and preventing leakage of NR funding
misc · 2011 · diagnosis
9 – Governance: Safeguarding economic benefits and preventing leakage of NR funding
 10 – Implementation: Horizontal separation of Network Rail is an essential enabler of all of the cost and revenue sharing options (1 of 2)
misc · 2011 · implementation_plan
10 – Implementation: Horizontal separation of Network Rail is an essential enabler of all of the cost and revenue sharing options (1 of 2)
 10 – Implementation: Horizontal separation of Network Rail is an essential enabler of all of the cost and revenue sharing options (2 of 2)
misc · 2011 · implementation_plan
10 – Implementation: Horizontal separation of Network Rail is an essential enabler of all of the cost and revenue sharing options (2 of 2)
 10 – Implementation: There are three options for introducing a cost and revenue sharing mechanism into TOC franchise agreements
misc · 2011 · strategic_options
10 – Implementation: There are three options for introducing a cost and revenue sharing mechanism into TOC franchise agreements
 10 – Implementation: There is likely to be a fairly steady rate of re-franchising between 2012/13 and the end of CP5, by when new, long term franchises will account for c.95% of FTAC payments
misc · 2011 · implementation_plan
10 – Implementation: There is likely to be a fairly steady rate of re-franchising between 2012/13 and the end of CP5, by when new, long term franchises will account for c.95% of FTAC payments
95% — FTAC payments
 There are 27 potential options for the sharing of cost and revenue performance relative to a baseline trajectory. L.E.K. has analysed the building blocks necessary to evaluate all of these, but we have focussed our evaluation summaries on 4 of the options
misc · 2011 · strategic_options
There are 27 potential options for the sharing of cost and revenue performance relative to a baseline trajectory. L.E.K. has analysed the building blocks necessary to evaluate all of these, but we have focussed our evaluation summaries on 4 of the options
 Summary of the 4 options for sharing cost and revenue performance relative to a baseline trajectory that have been included in L.E.K.'s evaluation summary
misc · 2011 · strategic_options
Summary of the 4 options for sharing cost and revenue performance relative to a baseline trajectory that have been included in L.E.K.'s evaluation summary
 L.E.K. has taken into account 13 different criteria in its evaluation of the 8 options
misc · 2011 · framework_other
L.E.K. has taken into account 13 different criteria in its evaluation of the 8 options
 Assessment: Option 1: Symmetrical Regional EBS – based on implementation in the short term
misc · 2011 · comparison_table
Assessment: Option 1: Symmetrical Regional EBS – based on implementation in the short term
 Potential ways of addressing the Option 1 negative scores
misc · 2011 · strategic_options
Potential ways of addressing the Option 1 negative scores
 L.E.K. has concerns that a Symmetrical Regional EBS would not deliver VfM in the short term due to a number of factors such as TOCs’ limited ability to influence NR’s costs. If a Symmetrical Regional EBS mechanism were to be implemented then a phased approach aligned with horizontal separation of NR would be best
misc · 2011 · recommendation
L.E.K. has concerns that a Symmetrical Regional EBS would not deliver VfM in the short term due to a number of factors such as TOCs’ limited ability to influence NR’s costs. If a Symmetrical Regional EBS mechanism were to be implemented then a phased approach aligned with horizontal separation of NR would be best
 Horizontal separation of NR would improve the attractiveness of Option 1, Symmetrical Regional EBS, but some significant issues would remain
misc · 2011 · comparison_table
Horizontal separation of NR would improve the attractiveness of Option 1, Symmetrical Regional EBS, but some significant issues would remain
 Given the uncertainty over whether a Regional EBS would deliver VfM for taxpayers, in might be best to include it as a priced option during franchise bids rather than as the base case
misc · 2011 · recommendation
Given the uncertainty over whether a Regional EBS would deliver VfM for taxpayers, in might be best to include it as a priced option during franchise bids rather than as the base case
 One of the potential issues with an outperformance only Regional EBS mechanism is that TOCs could benefit from the underlying uncertainty over NR’s costs and efficiency target.
misc · 2011 · problem_statement
One of the potential issues with an outperformance only Regional EBS mechanism is that TOCs could benefit from the underlying uncertainty over NR’s costs and efficiency target.
 L.E.K. has used Oxera’s PR08 analysis of underlying cost volatility to evaluate the impact of this uncertainty on an outperformance only Regional EBS mechanism
misc · 2011 · diagnosis
L.E.K. has used Oxera’s PR08 analysis of underlying cost volatility to evaluate the impact of this uncertainty on an outperformance only Regional EBS mechanism
 The average under-spend of NR as a result of underlying cost volatility is expected to be £460m averaged across the under-spend outcomes, or £230m averaged across all outcomes
misc · 2011 · scenario_analysis
The average under-spend of NR as a result of underlying cost volatility is expected to be £460m averaged across the under-spend outcomes, or £230m averaged across all outcomes
£460m — Average under-spend
 In order for NR to breakeven from a national level outperformance-only EBS, train operators would have to help improve NR's performance by 1.8-3.7% – assuming that all NR under-spend is categorised by the ORR as outperformance
misc · 2011 · scenario_analysis
In order for NR to breakeven from a national level outperformance-only EBS, train operators would have to help improve NR's performance by 1.8-3.7% – assuming that all NR under-spend is categorised by the ORR as outperformance
1.8-3.7% — Net impact on NR
 Moving from a national level EBS mechanism to a regional level mechanism would increase the level of underlying cost volatility. However, the impact of this depends on the covariance between the costs in different regions
misc · 2011 · data_table
Moving from a national level EBS mechanism to a regional level mechanism would increase the level of underlying cost volatility. However, the impact of this depends on the covariance between the costs in different regions
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