Modelling Fares Competition on the UK Railways



Modelling Fares Competition on the UK Railways

Authors

ASH N A, Gibb Transport Planning and WARDMAN M, Leeds University, UK

Description

The current regulatory system in the UK rail industry confers a large measure of territoriai exclusivity in favour of each of the 25 franchised train operators. The Office of the Rail Regulator (ORR) limits competition between passenger train operating co

Abstract

The current regulatory system in the UK rail industry confers a large measure of territoriai exclusivity in favour of each of the 25 franchised train operators. The Office of the Rail Regulator (ORR) limits competition between passenger train operating companies, through the franchise a~eements, by preventing train operators providing new services between stations already served by other operators. Competition between operators has been deliberately restricted in the early years of the initial franchise in order to ensure stability and to make the franchises sufficiently attractive to bidders.

However, competition between operators is seen as having the potential to provide significant benefits; to passengers through lower fares and higher quality services; and potentially to the Office of Passenger Rail Franchising (OPRAF) through lower subsidy requli-ements. In July 1996, the Regulator issued the last of the Notices setting out the flows that would be protected from competition during Stage 1 of his Moderation of Competkion policy. Until the commencement of Stage II in 1999, no new competitive entry is allowed on protected flows except where specifically provided for in the Rail Regulator's Notice (ORR 1994). Protected flows are generally those where the operator serves both stations by a direct ser~ce, and which reach the matenahty threshold . To qualify for protection, in the majority of cases, the revenue earned by the operator on the flow in question must be at least 20% of its total revenue.

Nevertheless, it is also recognised that increased competition could give rise to disbenefits. These disbenefits could stem from higher fares and lower service quality for passengers with the loss of fiexibility of through-ticketing and "turn up and go" fares. In addition some routes could be 'cherry picked' resulting in lower revenues to the incumbent operator, which in turn could result in a requirement for a higher operating subsidy when the Franchise is re-bid. The Rail Regulator therefore wishes to manage the relaxation of the rules governing competition in a way that maximises the net benefits.

Understanding and predicting the nature of the competition that might materialise, its impact on demand and revenue and whether competition is sustainable, is fundamental to successfully managing the process of relaxing the rules governing competition. OPRAF and ORR therefore recognised that a suitable modelling framework, which deals explicitly with fares competition between rail operators, could be useful to assist them in identifying the potential impacts of increased on-track competition between passenger train operating companies. Indeed, one of the objectives of the study reported here was to identify a preferred theoretical approach to modelling fares competition as well as a means of implementing this in practice.

This paper presents the findings of a study undertaken jointly by GIBB Transport Planning and the Institute for Transport Studies (ITS) at the University of Leeds which examined the feasibility of modelling fares competition in the passenger railway. OPRAF and ORR commissioned the study in July 1997 following competitive tendering. However, the views expressed in this paper are the authors alone and do not necessarily represent the views of either OPRAF or ORR.

Publisher

Association for European Transport