In the ‘different’ category is HS1’s recovery of the costs of future renewals. Train operators pay up front for renewals, with the money going into an escrow account as annuity payments. This allows the costs of those renewals to be smoothed over years, with escrow funds rising or falling depending on the level of renewals spending.
Crowther adds some detail: “The main objective of it is that you start paying on ‘year one’, and then that gets smoothed over and you build up money in the escrow accounts to pay for the big chunky renewals when they come.
“There are some exceptions to that in terms of definition of renewals, so (for example) some of the things that are excluded are the renewal of St Pancras roof because that would just skew the escrow payments, and it’s quite difficult to comprehend that from an economic modelling perspective. The other element that’s excluded is the replacement of the signalling system.”
So, when HS1 replaces its TVM430 signalling with ETCS, this will count as a specified upgrade rather than a renewal.
Having to pay now for future spending prompted HS1 to examine whether these payments could be deferred, to help Eurostar through the current crisis.
Once again, the detail comes from Crowther: “On the renewal costs, we led a big piece of work in the last ten months where we were working with the Department for Transport, the Regulator and the train operators to get agreement to suspend the renewal payments, which is the annuity payments. That makes up a third of the track access charge.
“Clearly, as you can appreciate, these things aren’t easy. Everybody has their red line. And what we weren’t able to do, despite giving it a good go, was get ourselves into a position where everybody was comfortable with suspending the annuity payments.
“That was a big disappointment that we weren’t able to get that across the line, because it would have provided some short-term relief, which could have enabled more trains to be run more quickly and effect that faster recovery.”
To the obvious question of what blocked this deal, Crowther replies: “There were a number of things really. At the start of the process, all stakeholders said ‘let’s get our red lines on the table’. Clearly, from the ORR perspective, it’s ‘is there a legal framework for this?’
“So, where does that fall? I think when you start trying to do these innovative, radical things, you then start unpicking contractual matrices, competition elements, and you start coming up against things that in the first place you kind of think, ‘I wasn’t really expecting that, where did that come from?’. So, there were a couple of regulatory aspects that the regulator said just weren’t in its powers to grant.
“There were then some of the elements on the DfT where it was like, well, we need to make sure that there is a value-for-money proposition in here that we’re not leaving the escrow funds short so a future operator would have to pay.”
At which point, RailReview suggests that what the DfT really means is the bill landing with taxpayers.
“Yeah. So, as you can imagine, what I’m trying to explain here is that it was quite difficult to herd all the cats. It’s not because they didn’t want herding, it’s because there’s quite a lot of policy stuff that needed to be got across the line. It wasn’t for a lack of effort. If it was easy, we’d have done it.”
There’s a balance in any risk, but it seems to RailReview that the risk of higher annuity payments in the future must be balanced against the risk of pricing trains off HS1 today, and then having an expensive asset generating bills to be spread across fewer trains.
Crowther notes: “Yes, so the overall costs don’t go up, what happens is the cost per train goes up. What you end up with if the cost per train goes up, you then have Steve White on Southeastern going, ‘Well, I can run a train on High Speed or I can run a train on domestic - flipping heck, that cost has doubled! So, to relieve capacity, I’m going to run a train on domestic.’
“Do the maths. If he has the Treasury and DfT breathing down his neck saying ‘you’ve got to take 10% out of your cost base, do it quickly. Not interested in revenue generation, only interested in you as a cost centre for the next 12 months’, what’s he going to do?”
At this point, it’s worth noting that DfT is shouldering some of HS1’s costs through an underpin arrangement that was included in HS1’s concession agreement when government sold it to private investors on a long-term lease.
This underpin agreed to pay for a minimum of 55,000 paths per year for Southeastern. Before the pandemic, Southeastern was using 57,000 paths per year. It’s now using 47,000 paths per year, which means that DfT is paying the paths of services that don’t run.
