El final de la campaña y la segunda época de la Independencia

The adequate control of the infrastructure provider requires the implementation of regulatory schemes able to influence directly or indirectly the prices applied in the market, bringing them closer to the equilibrium resulting from competitive conditions and guaranteeing fair access to the railway network. Nevertheless, other considerations intervene in the formation of prices.

In fact, apart from looking for static and dynamic efficiency¹⁹ in the infrastructure market, the setting of prices must also allow the infrastructure manager to reach the financial equilibrium and avoid imposing excessive regulatory compliance costs. As well, pricing should ensure fair access to bottleneck facilities at the same time that it provides adequate resources and incentives for capacity improvement. Finally, it may also be subject to other governmental requirements in terms of equity or distribution effects.

To give an answer to these requisites, regulators have a number of options to influence the prices in the infrastructure market and drive the behaviour of the monopolistic agent.

3.4.1 Approaches to price regulation

Once the decision to regulate the infrastructure railway market has been taken, there is a substantial menu of options from which to choose²⁰. Next, they are briefly described and discussed.

Direct price setting – the regulator directly sets the price of the capacity rights in the railway infrastructure market. The main criticisms to this approach come from the inefficiencies likely to arise as a result of political pressures and information asymmetry.

19 Several definitions of efficiency are provided by the economical science. Allocative efficiency refers to the allocation of resources to the production of the goods and services most valued by society; Productive efficiency refers to the use of the minimum quantity of inputs to produce goods and services; Static efficiency is referred to the conditions prevailing in the present situation; Dynamic efficiency takes into account the evolution of the system, delivering adequate signals to the market for investment and disinvestment decisions.

20 This section mainly builds on Campos et al. (2000, pp. 24-28), De Rus et al. (2003, pp.270-285) and King (1997, p.47).

Rate of return regulation (ROR) – under this scheme the regulator fixes the return on investment allowed to the infrastructure company in addition to its operational costs.

As the financial equilibrium condition stands, in doing so, the regulator fixes indirectly the prices (calculated as a residual figure). The regulator has to define the asset base over which the return is allowed (regulatory asset base), the operational expenditures and the rate of return applied. Though it limits indirectly the revenues of the infrastructure company, this approach does not provide incentives for efficiency. On the contrary, it incentivates overinvestment and overvaluation of assets and frees the company from demand risk (which is passed directly to users). It poses strong information requirements on the regulator.

Cost plus regulation – under this scheme, the regulator constrains the revenues of the infrastructure company not to be more than actual costs plus a mark-up. Prices are then derived from the total revenue requirement. The regulator needs to define the cost basis applied to set the regulation and the extra revenue allowed. This approach can also be applied on an efficient cost basis, though it can be very demanding in information. Like in the previous case, the action on the revenue side of the financial equilibrium does not provide any efficiency incentives (in fact it fosters increases in those costs included in the regulatory asset base).

Revenue cap regulation – under this scheme, the infrastructure company is allowed to keep the difference between the total revenues, up to a permitted maximum, and the actual costs. The company is not guaranteed full cost recovery, but through efficiency and cost reductions will be able to increase its profit. Prices are indirectly limited by the cap on the revenue. The regulator fixes the period over which the incentives will be maintained and frequently allows adjustments to the revenue level with regard to efficiency improvement, inflation and the cost of essential supplies/energy. The independence of the cap from costs provides strong incentives to the infrastructure company for efficient management. However, the regulator needs to control the costs of the company in order to ensure its financial viability, especially when future investments are foreseen.

Price cap regulation – the regulator allows the infrastructure company to increase its prices with inflation, less a “discount” reflecting all or part of the average increase in productivity in the sector. In this case the regulator sets a maximum average of the tariffs, below which the company has full pricing freedom. The price level is updated according to the RPI-X formula, where RPI is an inflation factor and X is meant to reflect potential cost savings by the firm due to either increased efficiency or technological progress. Prices are directly limited by the cap.

The regulator fixes the period over which the cap will be maintained (normally 3-5 years) and, as in the previous case, normally allows adjustments to the revenue level with regard to efficiency, inflation and delivered supply / energy. This approach requires low information requirements: an estimation of the appropriate level of prices at the beginning of the first regulatory period, the estimation of the X factor and the time between reviews.

When the regulated firm produces multiple services, the price cap is frequently set for the bundle of services provided (generally averaged after weighting services with their volume of sales). This approach provides incentives to efficiency and cost reduction because profit remains with the regulated company. As in the previous case, the regulator must ensure the financial viability of the company.

With independence of the final election made by the regulator, the implementation of the mentioned schemes faces specific information requirements and decisions that may condition their outcomes to a large extend: 1) They must define the asset base or the cost base to be adopted for the calculation; 2) They must select valuation criteria and depreciation rules in order to calculate capital expenditures; 3) They must assess the level of operational costs of the network; and 4) They must ensure the financial viability of the infrastructure company. None of these requirements is simple when it is applied on a railway infrastructure network.

3.4.2 Price regulation in the EU

The regulation of prices in the European railway infrastructure markets is strongly conditioned by the EU legislative framework, that sets conditions on the financial equilibrium of the infrastructure business and on the basic pricing principles that must drive the determination of track access charges.

According to this framework, most of the Member States have adopted direct price setting rules either based on costs or taking into account the willingness to pay of the demand. In this case, given the fact that charges are usually below the full cost level, the national administrations regulate the behaviour of the infrastructure managers through the signature of framework agreements linking the payment of public funds to the achievement of specific levels of performance.

However, some Member States report price-setting procedures that place efficiency incentives within the definition of track access charges. One of these states is the UK, which establishes the value of the fixed charge to be paid by operators according to a price cap mechanism. The regulator defines the financial needs of the infrastructure manager for the five-year control period on the basis of efficient costs and then sets the

fixed charge accordingly (see section 6.4.3 for further details). Another case can be found in Portugal, which allocates a bundle of costs to prices taking into account an efficiency curve modulated for a seven year period (see section 6.4.5).