Rail Freight Traffic

Sandra Osborne Excerpts

Wednesday 24th October 2012 Westminster Hall

[Sandra Osborne (Ayr, Carrick and Cumnock) (Lab)]

I apologise in advance, Sir Alan, because, as you can probably tell, I picked up a rotten cold over the weekend, so my accent is probably even less understandable to hon. Members than it normally is. I will do my best.

It is not possible for me to overemphasise the threat that the proposed swingeing increase in charges for access to the rail network poses to the coal industry. I appreciate that the Office of Rail Regulation is obliged to consult on track access charges ahead of the next contractual period, as has happened twice before, but the last time a rise was proposed—for 2009 to 2014—the ORR subsequently listened to responses from the coal and power industries and ended up cutting charges. It is all the more surprising then that it should now seek to raise charges to the coal industry by a massive 64%. It has proposed introducing an additional freight-specific track access charge to apply to electrical supply industry coal and spent nuclear only, which could increase the cost of Scottish coal delivered to English power stations by £4.50 a tonne.

Apart from causing a further switch from coal to gas and encouraging a modal switch from rail to road, the impact would be catastrophic for Scottish producers, who are already in a precarious position.

[Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op)]

Does my hon. Friend agree that it seems bizarre when the Government are talking about energy security that the effect of the charge is that we will be more likely to import coal, rather than using coal from our shores?

[Sandra Osborne]

I certainly do agree, and I intend to raise that point later in my speech.

The charge would exclude Scottish-produced coal from the English market, resulting in a reduction in output of up to £3 million tonnes a year and, as my hon. Friend said, its replacement by imports. More than 1,000 direct jobs will be lost in an area of already high unemployment, particularly in the west of Scotland. Even the threat of the proposal is constraining investment, and it is imperative that it is withdrawn immediately.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I assure my hon. Friend that I can understand her Ayrshire accent perfectly well this morning, even though she has a cold. Does she agree that it is concerning that the ORR seems to be suggesting that the electricity coal industry can afford to pay the increases, when there are problems in the industry in Ayrshire and jobs are under threat?

[Sandra Osborne]

Yes, totally. I intend to cover that topic later in my speech.

We are only too aware that the charge is proposed in a context of revenue-raising efforts and cuts across the board. The Government seek to end what they regard as a subsidy to the power industry. I argue that the proposal is ill thought out, counter-productive, at odds with existing Government policy and amounts to a possibly fatal attack on the coal industry, especially in Scotland and my constituency.

I will provide some background to the current position of the coal industry in Scotland. It is well publicised that coal mining in the UK is struggling. Contrary to the statements in the consultation documents about high international coal prices, the reality is that coal prices have fallen by some 30% so far this year. The recent trading announcements from a number of coal industry companies, which show an industry under severe financial pressures, reflect that. Margins are wafer thin and there have already been redundancies in Scotland, including in my constituency. Scottish Coal, for example, is consulting on 100 redundancies on top of a 10% cut in wages for the whole work force—hardly a thriving industry.

An increase of £4.50 a tonne in freight charges for supplies to England will lead to an immediate reduction in output, as high-ratio coals within existing sites are abandoned, with the possibility of some sites closing altogether. The suggested track charge increase could double the cost of coal transport from east Ayrshire to customers in England. That increase will impact heavily on the viability of coal operations in Scotland, with the very real prospect of mine closures. If operations involving the three companies in my constituency close, it will have a devastating impact on employment—direct and indirect.

We, of course, have already experienced the devastation of mine closures in our communities, so we know the results only too well. The area has never really recovered from the closure of deep mining in the ’80s, but open-cast mining has thrown us a lifeline, with well-paid jobs and community benefit. History has shown that local people are prepared to tolerate inconvenience and blight on their landscape, because they know how important the jobs are for every generation.

[Cathy Jamieson]

My hon. Friend has rightly identified that people have been prepared to accept the surface mining open-cast industry in many of our communities. Does she agree that that will be put at risk if coal is transferred back to the roads, rather than transported by rail?

[Sandra Osborne]

Yes, and some of the companies are not in a position to do that, even if they wanted to.

In 2012, 1,196 people are directly employed in open-cast mining in Scotland and 704 in east Ayrshire, which has the greatest number of coal sites in Scotland and the highest number employed in the industry. It produces more coal than any other area in Scotland and that is worth some £9.4 million to the local community. Following the decline of the deep mining sector and the devastation that followed, decline has set in and has been difficult to shift. The area has had consistently higher than average unemployment rates, population decline and trends of low economic activity and a high percentage of jobs in the public and retail sectors and areas of high relative deprivation. I am sure that the Minister gets the picture, but, if not, he is welcome to come to see for himself. The bottom line is that under no circumstances can we afford to lose the relatively secure, well-paid, private sector employment and input to the local community that the open-cast mines bring.

The consultation includes a range of suggested charge increases, but an increase of £4.50 a tonne is forecast. The consultation states that coal producers could absorb that increase in track charges, but no evidence base is presented to support the assertion and it appears to be just an arbitrary statement. Furthermore, the consultation proposes that the coal and the nuclear industries be singled out to be burdened with the increased track charges. A cynical view would be that the ORR sees those industries as a captive market without the ability to revert to road transport.

[Mrs Anne McGuire (Stirling) (Lab)]

Does my hon. Friend accept that there has been an element of price stability in rail freight charges and that organisations and companies, such as Fergusson Group—one of the major suppliers of coal—in my constituency could not have factored in the massive price hike suggested in the consultation?

[Sandra Osborne]

Yes. The regulator has a duty to ensure that companies can anticipate what the price regime will be, so that they can plan.

Figures from the Department of Energy and Climate Change show that coal production in the UK was 17.9 million tonnes in 2011, and Scotland contributed 33% of that, as a part of supplying the UK’s coal-fed electricity generation needs. There are concerns that the consultation proposals are contrary to certain Government policies and, if implemented, could pose a serious threat to not only the coal industry, but the rail freight industry and, in particular, the viability of Scottish coal mines, as I said. Only a few minutes ago, the Freight Transport Association contacted me with its concerns about the potentially devastating impact on rail freight in Scotland.

Coal is a significant and essential component to electricity generation in the UK. It regularly contributes more than 50% of the electricity produced on a winter day and, quite commonly, 40% on a summer day. Against that background, requirements are also imposed by the large plant combustion directive, the industrial emissions directive and electricity market reform. Notwithstanding that, the key electricity market reform drivers are security of supply, affordability of electricity and decarbonisation.

The proposed increase in track charges will threaten the security of indigenous coal production if we accept that the result of such charges will be to shrink the coal market by 5% to 10%, as identified in the consultation. That would damage the secure industry base of coal-generated electricity capacity, which has been consistent at 40% to 50% of the total generation. Given the much longer haul from the mines in Scotland to the English power stations, the adverse consequences of the track charges will be disproportionately felt in Scotland compared with elsewhere in the UK.

On the affordability of electricity, the consultation assumes that the Scottish coal producers will absorb the increased costs. As previously stated, there is no evidence base for such an assumption, and the coal industry is currently under financial pressure. The additional costs will threaten mine viability, given the inevitable switch to gas by generators, and that will impact on price and the security of supply.

In the conclusion to the report “The impact of changes in access charges on the demand for coal”, the ORR consultants acknowledge the threat to Scottish-produced coal by the long-term impact of increased track charges on the development of future open-cast mines in Scotland. However, those concerns do not appear to have made it to the conclusions of the main consultation report. I can only assume that they believe that the Scottish coal industry and more than 1,000 Scottish jobs are expendable. What form of consultation was carried out by NERA—the ORR consultants—to allow the suggestion that the Scottish coal producers can bear the cost of any changes? The fact is that they cannot and will not absorb those extra costs.

The ORR charging regime could detrimentally affect employment and investment in Scotland’s mining sector and typically in economically deprived areas. Have the Scottish Government and relevant local authorities engaged with ORR to assess the potential effect, and will mitigation plans be drawn up should the proposals be implemented?

Would a 10% reduction—the reduction proposed by ORR for freight traffic—in passenger traffic be considered an acceptable result of increased track charges? If not, has ORR discriminated against the coal industry on the basis that it seems to be content to see a decline in real freight traffic?

Assuming a 5% to 10% reduction in UK coal production, there will be a requirement to increase the amount of coal that is imported, which will increase the carbon footprint in transport and probably increase carbon emissions. The transfer of environmental and social impacts overseas is of concern to the UK Government. The report “Securing the future—UK Government sustainable development strategy” states that environmental policy should encompass impacts outside the UK. It says that

“there would be little value in reducing environmental impacts within the UK if the result were merely to displace those impacts overseas.”

Those impacts would include the transport of raw materials into the UK. It is important that the UK makes the most of its indigenous coal assets and recognises that, apart from the important security of supply issue, a domestic minerals industry is the most sustainable way to supply the market.

In the market analysis section of the consultation, there is an acknowledgement that there could be a substantial reduction—up to 25%—in the demand for rail-hauled coal because

“there is scope for reductions in length of haul”.

As coal can only be mined where it exists, it appears to be a clear policy of the ORR to direct electricity generators to import coal via ports to achieve the shorter haul on rail that it alludes to in its analysis, rather than take indigenous UK coal. Owing to the substantially longer haul distances for Scottish mined coal to the English power stations, the track charge proposal can only be seen as a direct attack on the Scottish coal mines.

Furthermore, generators sourcing their coal from overseas will not be able to pass on any increased track charges to international coal producers. Despite all the crocodile tears that we have heard in the past couple of weeks, the only way in which those extra costs can be recovered is through increasing the price of electricity to the consumer. If there is a need substantially to increase coal imports, there is concern over whether there is enough rail-served deep port capacity to cope with the increase.

Carbon capture and storage projects are due to start in 2014. The proposed increase in track charges could seriously damage the prospects of such projects before they start. That would threaten the ability of the UK to build up its indigenous capacity and to be self-sufficient with respect to energy supply. We all know that carbon capture and storage is the way forward for the coal industry in the longer term.

It is clear from the ORR-commissioned reports that a distance-related charge creates significant market distortion. How is that acceptable in competition terms? The Scottish industry has invested tens of millions over recent years. How could this fundamental change in charging policy by the ORR have been reasonably anticipated, and hence the risk of stranded investments avoided?

Has the ORR constructed an economic impact assessment on how the increase in charge would affect the Scottish mining industry, and how will such a charge affect the rural communities in my constitueny? We have already been thrown to the wolves once before.

The coal industry is heavily dependent on a healthy rail freight sector, and any potential threat to it is also a direct threat to the coal industry. The Rail Freight Group issued its initial response to the consultation in a letter to the chief executive of the ORR on 28 May 2012. I note the RFG’s comment about how the ORR chose to balance its duties and whether undue weight was given to the duty to have regard to the funds available to the Secretary of State, perhaps at the expense of the duty to promote the use of the railway for rail traffic, and the duty to enable companies to plan their businesses with reasonable assurance. That concern seems to be backed up with the apparent acceptance by the ORR within the consultation document that a 10% drop in coal-rail traffic as a result of increased track charges is acceptable, without any analysis of the potential impact on the rail freight industry or on the coal industry as an end user.

In a letter to me on 1 October, the Minister stated:

“the Government wishes to facilitate the continuing development of a competitive, efficient and dynamic private sector rail freight industry. We are committed to ensuring that policies and regulations should work to this end and should not create unnecessary transactional costs or other obstacles to the achievement of these objectives and future growth. In an industry where planning and operational decision-making are increasingly devolved, we would wish ORR to have regard to the importance of sustaining efficient and commercially predictable network-wide freight operations when they take decisions about access rights and charging structure.”

Although that may not have been the unequivocal response that I would have liked, it did raise my hopes that the Minister understood what the impact of these proposals would be if they were put into practice.

All my comments show that the consultation has been blinkered. It has not considered the wider strategic effect if the suggested track charges are implemented. The proposed track charge increase appears arbitrary and not supported by any evidence base, as is the comment that the coal industry would be able to absorb such costs. That leads on to the unacceptable conclusion that there will be a reduction of 5% to 10% in coal transport by rail, which is an odd position for the ORR to support, bearing in mind that it has a duty to promote rail use.

If those charges are implemented, they will affect the viability of the UK coal industry, especially in Scotland, with the resultant increase in imports and carbon footprint and loss of employment. The practical effect of the proposals is a direct attack on the coal industry in Scotland and the likely withholding of further investment in the industry. The proposal would also seem to be contrary to other Government policies of indigenous energy generation, security and affordability of supply, employment and sustainable development.

I hope that the Government will agree that the most appropriate way forward is the maintenance of the status quo in respect of the current charging regime. I look forward to the Minister’s response, and I apologise again for my slightly difficult throat.

[The Minister of State, Department for Transport (Mr Simon Burns)]

Thank you, Sir Alan, for calling me to speak. It is a pleasure to serve under your chairmanship and I congratulate the hon. Member for Ayr, Carrick and Cumnock (Sandra Osborne) on securing this debate. I think that all hon. Members taking part in it will join me in wishing her a speedy recovery from her affliction, although it did not seem to impinge in any way on her ability to make her case.

I also give the hon. Lady a commitment. I have just over 10 minutes in which to speak; if I do not deal with all the points she raised in her speech, I will write to her about them.

I will start by making two points that need to be made clear at the outset. First, the framework of charges for both freight and passenger operators is set independently of Government by the Office of Rail Regulation, which, as the hon. Lady knows, is the independent economic regulator for the railways in Great Britain. The ORR establishes the charging framework by means of a periodic review, which also establishes Network Rail’s outputs and funding.

Secondly, the proposals in the ORR’s consultation document are just that—proposals. The ORR has received a number of responses to those proposals, which it is now considering. I understand from the ORR that it intends to publish its decision on whether to introduce a freight-specific charge in its consultation conclusions document, which is to be published next month. I should reiterate that no decisions have been taken yet and that the ORR is aware of the concerns that have been raised by the hon. Lady, other hon. Members and other interested parties.

Given the fact that these are matters for the ORR, it follows that there is a limit to the extent to which it would be appropriate for me to make any comment on them. However, I can explain the steps the Government are taking to promote continuing growth in the rail freight industry.

We support the ORR’s plans to give the freight industry early assurance over the level of access charges by setting a cap on them. It is crucial to any industry’s forward planning that it has a clear indication of what its likely costs will be. The Government wish to facilitate the continuing development of a competitive, efficient and dynamic private sector rail freight industry. We are committed to ensuring that policies and regulations should work to that end and not create unnecessary transactional costs or other obstacles to the achievement of those objectives and future growth.

Although the Department for Transport cannot direct the ORR, we can and do provide guidance on the overall approach that we see as the framework for the ORR’s activities, and we expect the ORR to take that guidance into account in its decision making. For example, in an industry where planning and operational decision making are increasingly devolved, we want the ORR to have regard for the importance of sustaining efficient and commercially predictable network-wide freight operations when it takes decisions about access rights and charging structures.

Of course, as the hon. Lady will realise, it is not only the Westminster Government who provide guidance to the ORR; the Scottish Government provide guidance too. Scottish Ministers have stated that they expect the ORR, in developing the track access charges arrangements for freight operators, to use a mechanism that recognises the impact that freight operators have on the network but maintains the attractiveness of rail to freight customers and is sufficiently adaptable to prevent the outputs of businesses in Scotland from becoming uncompetitive in their key markets.

The Government’s strategy for the railways was set out in the March 2012 Command Paper.

[Sandra Osborne]

Given all that the Minister has said about the position of the Government and of the Scottish Government, is he surprised that the ORR could even think of coming up with this proposal, which is so obviously going to be damaging?

[Mr Burns]

The hon. Lady makes a pertinent point, but I think that she is trying to tempt me. What I said at the beginning of my comments—and this is perfectly valid—is that the ORR has made a number of suggestions and proposals that have been put out to consultation and it will reach conclusions on the right way forward when it makes its announcement in November.

As always in consultation documents, there is a range of options to be considered, some of which will be adopted while others will be discarded. That is part of the consultation process and it is perfectly valid, provided that the ORR considers the responses to the consultation and any guidance and advice that the British Government, the Scottish Government or others give them.

I was referring to the March 2012 Command Paper before the hon. Lady’s intervention. It set out how our passenger and freight railways support the Government’s overall transport vision: by supporting economic growth; by facilitating business, commuting and leisure journeys; by providing a greener transport option than road and aviation; and by relieving congestion on our road network. Among other things, the Command Paper states that there is a strong case for Government to continue providing support for the rail freight industry, to create a level playing field.

The rail network transports approximately 90 million tonnes of goods per year. It is of strategic importance—rail freight delivers more than a quarter of the containerised food, clothes and white goods we use and delivers nearly all the coal for the nation’s electricity generation. It also invests heavily in the provision of its services; there has been about £1.5 billion of private sector investment in rail freight since 1995.

The role of the rail network in the delivery of coal to the electricity supply industry should not be underestimated. In winter, coal-fired electricity generation regularly contributes more than half the country’s daily electricity needs, and even in summer it can commonly provide 40% of the supply.

I know that the Scottish coal producers play an important part in providing coal to power stations in England; more than 60% of their rail deliveries to the electricity supply industry are to English power stations. Clearly, the Scottish coal industry has a keen interest in the ORR consultation and in any determinations that could have an impact on its market, especially when about 78% of the UK power industry’s demand for coal burned by power stations is already met by imports rather than by domestic production—a point that the hon. Lady made very clearly in her speech.

There is a very delicate balancing act to be managed here, between trying on the one hand to ensure that Network Rail can recoup an appropriate share of the infrastructure management costs from the rail operators—the ORR’s proposals would be worth around £50 million a year in additional track access charges—and on the other hand trying to ensure that the charges on individual market sectors are not more than they can realistically absorb.

There are a number of elements to the charges that freight railway operators pay for access to the network: a capacity charge; a traction electricity charge; a fixed charge designed to recover the cost of freight-only lines; and the variable track usage charge that is the subject of this debate.

For the next funding control period starting in 2014, the ORR is proposing to replace the current freight fixed charge with a new charge designed to ensure that freight operators pay a contribution towards Network Rail’s fixed costs that are associated with rail freight. That charge would be levied on rail freight market sectors that have the ability to bear the charge.

The level of the charge, and the different sectors’ ability to pay it, is, as the hon. Lady knows, the basis for the ORR’s initial conclusions, which are at the heart of the consultation launched in May. Those initial conclusions suggest that the charges should be levied not only on electricity supply industry coal and the movement of spent nuclear fuels—as they are now—but on iron ore and other coal movements, and that these charges should be based on rail tonnage and possibly on distance travelled.

There is fierce competition in the logistics market, not only between the various freight operating companies but between the rail freight operators and the road haulage sector. It is also important to remember that whereas the rail sector is expected to pay all the external costs for its mode of transport—the cost of wear and tear on the infrastructure, and the cost of measures to mitigate environmental impacts—that is not currently the case for road transport.

That is one of the reasons why rail freight operators pay only a proportion of the track charges paid by franchised passenger operators. It is also one of the ways in which the Government have been seeking to level the playing field between road and rail. Moreover, it is worth bearing in mind that in control period 4, which covers the period from 2009 to 2014, rail freight benefited from a 29% reduction in its access charges.

As I am now running out of time, I say again that I will write to the hon. Lady on the other points that I had wished to make in response to this debate. However, in conclusion I will just come back to the point that I made at the beginning. The ORR has made its proposals as part of a consultation exercise and it has received a large number of representations. As is the case with any consultation, the ORR will now consider the arguments that have been made in the representations that it has received, in order to review its proposals before it takes further steps.

I assure the hon. Lady that the ORR will give full consideration to all the representations it receives from a wide group of people—from hon. Members, the British Government, the Scottish Government and others—before it publishes its recommendations later this year.