Pricing



Infrastructure network access pricing
Infrastructure access charges differ by country, but systems are most well developed in the EU where charges are a legal requirement. There are some recurring components: (i) capacity-utilization based on train path use; (ii) gross-tonnage over the track to reflect infrastructure wear and tear; and (iii) ancillary charges for infrastructure company services such as power supply, stabling, or rescue. Charges usually differ by train type and route standards, generally reflecting cost and market considerations that are difficult to disaggregate.

In Germany, for example, passenger and freight train track access is subject to a common basic tariff framework; pricing ‘factors’ result in different tariff rates. DB Netz terms and conditions for network access are published in the German Federal gazette and on the Internet, and include a detailed list of tariffs for train paths and for the other facilities and installations.34

German track access charging policy aims to recover a high proportion of railway infrastructure costs from train operating companies. The train-path tariff system has a three-part modular design:

  1. Basic price for route category and utilization level: 12 route categories are grouped by infrastructure performance standard and transport importance. Basic prices are increased by a 20 percent premium on routes with very high utilization.

  2. Train path products (product factor): the ‘basic’ price may be multiplied by other factors that depend on whether the company is operating freight or passenger train service or seeking to purchase other service features or levels (that differ for passenger and freight services).

  3. Special factors: a series of multiplicative, additive, or regional factors such as those for steam trains, extra heavy freight trains, or tilting passenger train technology.

The tariff system imposed by DB Netz and approved by regulatory authorities is designed to reflect the costs of providing and maintaining infrastructure, train path standards for performance levels, degree of utilization, and market differences between passenger and freight trains’ ability to pay. Using the tariff tables above, tariff calculations are straightforward for any train operating company track access for a specific train type or service on a particular route.

Australia also has a free-standing publicly-owned Rail Infrastructure Company. The Australian Rail Track Corporation (ARTC) publishes a list of reference tariffs for track access on each of its routes. The reference tariffs are based on a fixed component (referred to as a ‘flagfall’) per train for each route, plus a variable element that depends on the gross ton-km of the train. Since the fixed element reflects route length, it is distance-related rather than a true ‘flagfall’. As in Germany, this distance-based component is affected by train speed. The fixed component is for a reserved train path and is payable by the customer regardless of whether they use the train path.

The reference tariffs relate to a specified service performance standard. Individual customers can negotiate for specific needs or service characteristics that vary from the reference assumptions on axle loads, speed, train length, origin/destination, stops, and operating timetables. However, ARTC has committed to the Australian Competition and Consumer Commission that it will not charge different prices to different clients for similar service characteristics; or if applicants operate within the same end-market. ARTC agrees not to discriminate pricing between privately owned or government owned train operators. All negotiated tariffs are published.

While there are many models to choose from, this toolkit generally supports the simplest system that is compatible with a country’s aims and circumstances. Some fundamental questions are: how much to collect from railway users and how much from budgetary support; how much of the fixed infrastructure cost burden should be borne by the freight sector as opposed to the passenger sector without creating an effective tax on one sector to support the other; whether the parts of the network being priced are operating at or near capacity; how far to impose ‘take-or-pay’ on train paths that are reserved but not used; and how to design charges for international train movements so that each country involved obtains a fair share of the overall access charge and avoid creating incentives for each country to maximize its position and so collectively to discourage international traffic. 35

Where the national objective is to maximize utilization of the railway while recovering a proportion of the fixed infrastructure costs, t appling Ramsey principles in infrastructure access charges would be appropriate. The economic benefits of this form of market pricing apply to a separated rail infrastructure company as much as to a vertically integrated railway. But if the railway network owner is separate from the train operator, the railway-pricing challenge alters somewhat in practical terms, especially if competition exists among freight train operators. On-track competition curtails the train operating company’s freedom to charge any shipper more than the actual network access charge that it has itself paid for that shipper’s train, because shippers can choose between competing train operating companies, or pay the access charge themselves and run their own trains. Therefore, the economic challenge of pricing shippers differentially to recover railway infrastructure fixed costs rests entirely, though only indirectly, on the infrastructure company through its network access prices. 36

Unfortunately, the practical applicability of Ramsey pricing appears to be more constrained for a separate infrastructure company. Most separated railway infrastructure companies do not appear to have tried to any great extent to reflect differential abilities to pay of different shipper markets. In other words, freight trains hauling the same gross tons of coal or of containers on a given train path would often pay exactly the same for the path, even though demand elasticity with regard to rail access price is likely to be much lower for coal trains than for container trains.

This failure to differentiate between freight market segments may be partly explained by the fact that infrastructure companies only deal with train operating companies not freight customers. The infrastructure company usually does not know the margin being earned by the train operating company and it is even further removed from the ultimate shippers.

Another reason may be the amplification of the degree of price differentiation which would be evident if the full burden of Ramsey were to fall on network access prices. The range of price-to-cost ratios that would reflect Ramsey principles would be much greater for the network access charges of a rail infrastructure company than for the overall freight charges of an integrated railway, because the proportion of fixed costs to be distributed over different markets is much higher in the latter. Regulators who may have been prepared to accept moderate differentials in the overall rail freight tariffs of an integrated railway may be reluctant to allow the strikingly large differences in the prices charged for train paths by an infrastructure company that would achieve the same outcome.37 What economists may justify as welfare maximizing price differentiation, regulators may view as gross price discrimination.

The venerable railway industry practice of Ramsey-type market pricing may therefore be weakened by vertical separation of infrastructure and train operations. Vertical separation may have made it more difficult to maximize railway network utilization recovering the fixed costs of the network. Countries that have pursued vertical separation are hoping nevertheless that the policy of separation, allied to greater competition in rail service, will itself generate greater use of and revenue for the railway network. Will potential economic benefits from competition in services outweigh the dilution of market pricing of infrastructure and the transaction costs of separation? This remains to be seen.

    


34 http://fahrweg.dbnetze.com/site/dbnetz/en/product/train__path/prices/train__path__prices.html
35 These issues are explored more fully in Louis S Thompson, Railway Access Charges in the EU: Current Status and Development since 2004. http://www.internationaltransportforum.org/Pub/pdf/08RailCharges.pdf
36 So-called ‘network access price’ is a misnomer if the network and train operations are separated but under common public ownership without real competition in train operations. The ‘price’ is often simply a politically determined budgetary allocation of the infrastructure company’s costs between freight and passenger sectors; the level and pattern of services provided bears no relation to the ‘price’ of access; and if the sectors cannot afford to pay their allocation, it is paid by the government to the companies, or picked up as an infrastructure company deficit by the government.
37 In the UK, track access charges for freight reflect cost differentials by axle-load, wagon type etc but the variations are not that large, except for coal, and in any case are cost-based not market-based variations.
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