Utilities Policy 11 (2003) 39–42www.elsevier.com/locate/utilpol

Allocation of capacity in the rail industry

Stephen Gibson∗

Head of Economics, Railtrack Plc, Railtrack House, Euston Square, London NW1 2EE, UK

Abstract

This article examines the nature of capacity on a railway network and identifies the key features of rail timetables and trackaccess rights that need to be accommodated in any capacity allocation mechanism. It describes three basic allocation methodologies(administered/rule-based, cost-based and market-based) and how they have been applied on the UK rail network. It describes thecurrent allocation mechanism which is a mixture of rule-based industry decision criteria, supplemented by cost-based capacitycharges set at half the short-run congestion costs of operating additional trains. It does not anticipate a major role for auction-basedapproaches to allocating capacity in the near future due to their complexity and the role of the SRA in determining the demandfor infrastructure capacity to meet social objectives. 2003 Elsevier Science Ltd. All rights reserved.

Keywords: Railway; Capacity allocation; Timetable; Network

1. Introduction

This article explores the issues of capacity allocationon a railway network and examines the different mech-anisms that have been considered for allocating railcapacity in the UK, including the possible use of auc-tions.

2. The structure of the rail industry

The characteristics of the rail industry, and in the UKthe particular structure decided on by the government atprivatisation, determine the role that auctions or othermethods of capacity allocation can have in allocatingcapacity on the network. At privatisation, capacity onthe network was packaged up into groups of accessrights. These were allocated to the 24 franchised passen-ger train operators through the franchising processthrough competitive bidding for subsidy. Freight oper-ators also received allocated capacity through thisadministered process. The role of subsequent chargingand other mechanisms has been to seek to incentivisechanges from this initial allocation of rights and provide

∗ Tel.: +44-020-7557-8232; fax:+44-020-7557-9108.E-mail address: gibsons.railtrack@ems.rail.co.uk (S. Gibson).

0957-1787/03/$ - see front matter 2003 Elsevier Science Ltd. All rights reserved.doi: 10.1016/S0957-1787(02)00055-3

economic signals for open access passenger and freightoperators applying for new access rights. The periodsince privatisation has been characterised by relativelylimited changes to the initial capacity allocationdecisions due to the constraints in the franchise con-tracts.

The Strategic Rail Authority (SRA) published a for-mal consultation on the utilisation of capacity on the railnetwork in September 2002, which addresses some ofthe key issues relating to capacity allocation in the con-text of its plans for letting new franchises as the existingfranchises expire.

3. The nature of capacity in the rail industry

Many of the problems associated with developingmechanisms to allocate rail capacity arise from some ofthe particular features of capacity on the railway.Capacity is generally sold in the form of access rights.These are contractual rights (in track access agreementsbetween Railtrack and the relevant train operator) to runa certain number of trains on specific parts of the railnetwork at specified times. These access rights give theholder the right to bid into the multilateral timetable bid-

40 S. Gibson / Utilities Policy 11 (2003) 39–42

ding process for a set of train paths which define theprecise timings of trains in a given working timetable.1

The train-graph2 given in Fig. 1 illustrates the use ofcapacity on one section of the network from Oxford toLondon Paddington in a one hour time period for onedirection.

This illustration helps to highlight the key features ofrail capacity:

� Non-homogenous: train paths for slow or stoppingservices cannot be used for fast or express services(indeed some train paths are specific to the acceler-ation and deceleration characteristics of particularlocomotives/train formations);

� Interdependency and contingent valuation: the valueof any train path to an operator is dependent on theoverall pattern of services of that operator and thoseof connecting and competing operators;

Fig. 1. A train-graph for trains running to London Paddington from Oxford.

1 This is consistent with the European capacity allocation frame-work which allows medium term framework agreements, but restrictsdetailed path allocation to one timetable period.

2 A train-graph shows the progress of a train on the network overtime, with faster trains represented by steeper lines and conflicts avo-ided by maintaining a certain horizontal (headway) distance betweentrains.

� Network effects and complexity: unlike airport slotsor spectrum capacity, conflicts can occur simul-taneously at many points on the route, and even rela-tively minor reallocations of capacity can requiremultiple adjustments to pathing patterns which ‘ rip-ple’ across the network. Major retimetabling can onlybe achieved on busy routes with the simultaneousinvolvement of the infrastructure manager andmany operators;

� Franchise commitments require operators to run cer-tain services to meet social obligations, even if themarket value of those services may be very muchlower than the social value. The derived market forinfrastructure capacity is, accordingly, in large part afunction of the values that the SRA (as funder) placeson services during the franchising process;

� High transaction costs: given these complexities, it iscostly and difficult to produce even a few feasible

timetables (with computerisation of the timetablingprocess still at an early stage).

The costs of increasing capacity on the rail networkare generally very high, with most congestion occurringat points on the network where the costs of expandingcapacity are much higher than the value of the increased

41S. Gibson / Utilities Policy 11 (2003) 39–42

volumes or improved reliability. This means that therewould be, in principle, significant economic benefitsfrom a market-based reallocation of existing capacity onthe network — as it will often be more efficient to optim-ise this existing capacity than to expand it. However,with social requirements influencing market values, thereare huge practical difficulties involved in securing sig-nificant reallocation as indicated above.

4. Mechanisms for allocating capacity

There are three basic methodologies which have beenused or considered for allocating capacity on the rail net-work: administered (rule-based), cost-based andmarket/value-based.

4.1. Administered mechanisms

These mechanisms do not rely on explicit pricesand/or values for infrastructure capacity to assistdecision-making. Under British Rail before privatisation,rail capacity was allocated based on administered rules(such as ‘ InterCity first on the graph’ ) and public sectordiscretion. Following privatisation, BR custom and prac-tice was formalised into a set of ‘decision criteria’ forallocating capacity (see Table 1) which are a conditionof access for all train operators (and Railtrack). Thesecriteria were intentionally not prioritised and could con-flict with one another. Case-by-case decisions over theapplication of the criteria are taken by a multilateralindustry body subject to appeal to the independent RailRegulator in the event of dispute (which he would ruleupon by applying his public sector duties — which inturn involve the discretionary application of judgmentwhen they conflict).

The process for applying the decision criteria hasworked reasonably well for resolving conflicts betweenoperators’ incremental timetabling aspirations in anenvironment where fundamental capacity allocationswere effectively “grandfathered” to operators in their

Table 1The decision criteria

� Sharing capacity in the most efficient and economical manner� Enabling compliance with the Passenger Service Requirementsa (first/last trains, frequency, capacity etc.)� Maintaining and improving reliability� Carrying out necessary maintenance and renewals� Maintaining and improving connections� Avoiding deterioration of service patterns� Ensuring the pattern of rail services reflects the pattern of demand� Reserving capacity for short-term bidders� Enabling operators to utilise their assets efficiently� Facilitating new commercial opportunities� Avoiding frequent timetable changes

a Franchised operators’ contractual commitments to the SRA.

initial access rights at privatisation. However, it does notprovide any incentive to operators to take account of theimpacts that operating their trains might have on thelevel of reliability and performance of the network.Without SRA involvement, it is also not conducive tomajor reworking of the timetable while operators’ fran-chise commitments remain in place.

4.2. Cost-based mechanisms

These seek to signal to capacity users and providersthe costs of consuming or providing additional paths inpublished tariffs. The EU Rail Infrastructure package(due to be implemented in March 2003) envisages thesetariffs being produced by all infrastructure managers.

During the 2000 periodic review a new ‘capacity char-ge’ was introduced (with implementation from July2002) to provide some incentives for efficient allocationof scarce network capacity. This reflected half of the‘congestion costs’ arising from adding a new train onthe network (the other half of the congestion costs werepaid by the SRA, to reflect the social element in theperformance regimes3). The charges are based on themodelled effect of additional trains increasing conges-tion and therefore increasing the knock-on (orreactionary) effect of delays on the network. The chargesreflect the short run marginal costs incurred by Railtrackwhich must pay monetary compensation to train oper-ators under the performance regimes when networkdelays increase — as they will typically do whencapacity is more congested.

The capacity charges are disaggregated to 2500 route

3 Under the performance regimes, Railtrack is responsible for (andhas to compensate operators for the costs of), all delays not specificallycaused by that train operator (including where one operator’s trainsdelay another operator). The payment rates are made up of a ‘marginalrevenue effect’ to compensate operators for the loss of farebox revenueresulting from poor performance and a ‘social element’ (which ispassed back to the SRA through the franchise agreements) to reflectthe social value of good performance.

42 S. Gibson / Utilities Policy 11 (2003) 39–42

sections (in two directions) and 13 timebands (sevencovering a weekday, four for Saturday and two forSunday). The charges are banded into 10p/train-milebands with de minimis charges in the lowest band (0–10p/train-mile) set to zero (this covers 75% of chargingcells and significantly reduces the complexity of thecharge).4

These are cost-based, rather than market-basedcharges. In particular they do not reflect or signal tooperators the value (opportunity costs) of their consump-tion of paths. Therefore they do not ration demand tothe available capacity efficiently (particularly where thelong run costs of capacity enhancement are prohibitive),but increase the price of paths where capacity is con-gested (albeit at half the estimated increase in congestioncosts). In general, the capacity charges will be a fractionof the cost of expanding the network capacity, and there-fore while they may act as a signal of the existence ofcongestion on the network, they are unlikely to providea business case for funding that capacity expansion.Nevertheless, the charges introduce significant newlocational and time differentials — for example in a peakperiod on a congested section, they could increase vari-ables charges from around £0.75 per train mile to over£10 per train mile. Where operators have discretion ontimetabling, these could influence decisions at the mar-gin.

4.3. Market-based mechanisms

Both in the run-up to privatisation and during the 2000periodic review, market-based mechanisms such as trad-ing of access rights and auctions were considered (andrejected) as methods of allocating capacity.

During his first access charging review in 1994, theRegulator considered second-price sealed-bid Vickreyauctions. Under this mechanism, each operator makessealed bids for the paths he wishes to use in each time-table. The operators’ bids are summed and the timetablewith the highest overall value is chosen, with the winnerpaying the valuation of the second highest bidder. Thismechanism incentivises bidders to reveal their true valu-ation of the timetable in their bids.5

The problems with using auctions for allocating railnetwork capacity is the contingent nature of bids, withall bidders’ values of access being dependent on the bidsof other players and the exact nature of other operators’services. This is a particular problem for the UK rail

4 A more detailed description of capacity charges is available inGibson et al. (2002).

5 See ‘The Structure and Variability of Track Access Charges, AReport for the Rail Regulator, NERA, March 1997.

network given its complexity and scale compared withsay, Eurotunnel or even Swedish networks. The tech-nology necessary for managing multilateral simultaneousresource allocation (i.e. timetable conferences) is still inits infancy in rail (4 years experience compared to airportslot timetable conferences which have been occurring foraround 50 years). In addition, franchise operators’ mar-ket values for paths are determined by their franchisecommitments and subsidies — which had not beenestablished in 1994. It was therefore decided not to pro-ceed with an auction-based method.

The 2000 periodic review considered the use of path-trading as a value-based mechanism for allocatingcapacity. In theory, this can deliver the same efficientallocation of capacity as auction bidding (albeit with dif-ferent distributions of the economic rents and differenttransaction costs). Due to the non-homogeneity of trainpaths, bilateral trading between operators would not bepractical (and would be contrary to EU legislation).However, consideration was given to Railtrack acting asa market maker, repackaging rights and combining themin different ways to make more efficient use of networkcapacity. These proposals for an active market-makingrole for Railtrack were not developed due to lack of sup-port from train operators or the SRA ahead of therefranchising process.

5. Conclusions

Given the key features of rail capacity, it wouldrequire a hugely complex mechanism to introduce anauction-based approach to allocating capacity, and thereis very little appetite within the industry to do so whenthe SRA is taking many of the key decisions on widersocial and economic criteria. The introduction of thecapacity charge (even at half the congestion costs) willprovide an opportunity to observe the extent to whichoperators react to the Regulator’s new price signals andan indication of the scope for further use of cost- orvalue-based price-signals as a mechanism for allocatingrail capacity — possibly at the next periodic review.

Reference

Gibson, S., Cooper, G., Ball, B., 2002. The evolution of capacitycharges on the UK rail network. Journal of Transport Economicsand Policy 36, 341–354.