UK - Train companies prepare to sue government

[John Ashworth]

Train companies prepare to sue government

• Price cap adds to pressure on struggling operators
• Government could be held liable for lost revenue

* Dan Milmo, transport correspondent
* The Guardian, Saturday 4 April 2009

A government drive for cheaper season tickets could rebound on the taxpayer as train operators consider launching multimillion-pound compensation claims.

In the latest indication of the strain on the franchise system, rail companies are examining a loophole in their contracts that could allow them to claw back lost revenues from the government. Ministers are refusing to help train operators, which are struggling to meet payments during the recession, and a determination to hold down ticket prices is turning the screw on franchise owners.

A leading rail industry lawyer told the Guardian that the recession is increasing the pressure to renegotiate franchise contracts that were struck before the credit crunch took hold.

"If the current downturn is prolonged, the pressure to renegotiate to avoid the disruption of multiple simultaneous franchise failures will become intense," said Nick Olley, a partner at the law firm Burges Salmon.

Under the previous regulatory regime, maximum price increases for season tickets - a major earner for some of Britain's biggest franchises - were averaged out across a basket of fares. The guidelines allowed train operators to charge much higher increases on some routes, so long as they evened them out with decreases of a similar proportion on other routes.

However, the rail minister, Lord Adonis, has ruled that the price increases - which are capped at the rate of inflation plus 1% - must be applied to each fare individually. According to informal estimates within the rail industry, the move could cost train operators exposed to the London commuter market tens of millions of pounds a year each in lost revenues.

Although no train operator groups have made formal approaches for compensation, informal discussions have taken place between industry executives and Department for Transport (DfT) officials.

The rail industry is focusing on a clause in all rail contracts headed "Changes to fares regulation". This says that the secretary of state has the power to alter the regulation of fare basket values, but "the exercise by the secretary of state of his powers under this paragraph ... shall be a change". According to a further clause, if the change is deemed to cost the franchisee more than 0.1% of its annual turnover, the DfT could be required to pay compensation.

Three franchises - National Express East Coast, FirstGroup's First Great Western and Stagecoach's South West Trains - have pledged a combined £3.6bn to the government over the course of their contracts, and other train operators must cope with a concerted reduction in taxpayer subsidies over the next few years. Furthermore, rail fares for at least 17 franchises are expected to fall next year because they are tied to the retail prices index in July, which most analysts expect to be negative. Under that scenario, rail fares could fall by more than 1%.

Yesterday, the DfT said it was confident that the fares basket change will not open the floodgates to a mass of rebate claims. A spokesman said: "The changes relate only to the new policy on fares regulation. We have no obligation or intention to reopen any elements of the franchise agreement in implementing this change of policy."

Nonetheless, if the bill runs into tens of millions of pounds per commuter franchise, the government could face requests for around £100m a year in compensation from the industry.

The DfT must alter 12 franchise contracts over the next few years as it adds 1,300 new carriages to the network. However, officials have already warned operators that the negotiations will not be a Trojan horse for more beneficial franchise terms. National Express, which has admitted its £1.4bn east coast contract is under considerable pressure, altered its East Anglia contract this week after receiving new carriages, but did not receive improved payment terms.