Further consultation on Network Rail financial issues

ORR consultation (28 pages, PDF) on cost of capital and financeability issues for the review of Network Rail's access charges from 2009.

The paper introduces a consultancy report (63 pages, PDF) on the financing structure and the costs of debt and equity for conventionally-financed utility companies, which proposes a benchmark gearing of 62.5 per cent, a cost of debt of around 3 per cent (pre-tax above RPI), and a cost of equity of 6.5-7.0 per cent (post-tax above RPI). The report suggests that a cost of debt above 3 per cent would only be appropriate if there is no interest rate pass-through mechanism in the price control regime. The same consultancy firm has been asked to consider how an interest rate indexation mechanism might work.

Earlier ORR proposals for a ring-fenced investment fund (money owned by Network Rail but whose use is prescribed by ORR) are maintained, without further development of the detailed rules that would apply.

Proposals for the treatment of tax (including the fact that Network Rail has been paying less tax than the amount implicitly included in the 2004-2009 price control) are promised for February 2008 (alongside proposals for interest rate indexation arrangements).

ORR accepts a Government argument that allowing some of Network Rail's income to be in the form of a direct Government grant is necessary to allow the money to be classified as Government capital expenditure under European Union accounting rules.

Responses by Friday 16 November 2007.

For further information or advice please contact Franck Latrémolière.

Filed under ORR, Price controls, Public transport.

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