ECONOMIC RESEARCH CENTRE

REPORT OF THE
HUNDRED AND SEVENTH ROUND TABLE
ON TRANSPORT ECONOMICS
held in Paris on 26th-27th march 1998
on the following topic:

USER CHARGES FOR RAILWAY INFRASTRUCTURE

EUROPEAN CONFERENCE OF MINISTERS OF TRANSPORT

1

2

TABLE OF CONTENTSINTRODUCTORY REPORTS
GERMANYABERLE, G.......................................................................................... 5

FRANCEBAUMSTARK, L. and BONNAFOUS, A......................................... 47

UNITED KINGDOMDODGSON, J. .................................................................................. 101

SWEDENJANSSON, J.O. ................................................................................ 131

NOTE BY THE CHAIRMANMARTINAND, C. .............................................................................183

3

SUMMARY OF DISCUSSIONS(Round Table debate on reports)...................................................................... 195

LIST OF PARTICIPANTS ........................................................................... 209

4

GERMANY

Gerd ABERLE
Professor of Transport Economics
University of Giessen
Germany5

6

SUMMARY1.

WHY ARE USER CHARGES FOR RAILWAYINFRASTRUCTURE NECESSARY? ........................................................ 92.

REQUIREMENTS OF A PRICING SYSTEM FOR THE USE OF
RAILWAY INFRASTRUCTURE............................................................. 14
2.1. Micro- and macroeconomic aims of pricing systems ......................... 14
2.2. Reference parameters for an infrastructure use pricing system .......... 15

3.

RAILWAY INFRASTRUCTURE PRICING............................................ 16
3.1. General introduction ........................................................................... 16
3.2. Analysis of alternative pricing systems .............................................. 18
3.3. The problem of infrastructure cost responsibility............................... 21
3.4. Efficiency assessment......................................................................... 22
3.5. The problem of the duration of track-use contracts............................ 23
3.6. Some implementation problems for a route pricing system ............... 25

4.

THE DEUTSCHE BAHN AG (DB AG) ROUTE PRICING SYSTEM ... 26
4.1. Introduction ........................................................................................ 26
4.2. Structure of the route price system ..................................................... 27
4.3. Remarks on the DB AG route price system........................................ 29
4.4. The new DB AG route price system in 1998...................................... 32

7

5.

SUMMARY............................................................................................... 34

APPENDIX........................................................................................................ 37

BIBLIOGRAPHY.............................................................................................. 44

Giessen, November 19978

1. WHY ARE USER CHARGES FORRAILWAY INFRASTRUCTURE NECESSARY?

Until the end of the 80s, there were only state-owned railway undertakings
in western Europe, and they owned both the railway networks and the rollingstock (= vertically integrated railway). Other railway undertakings wereoperated only as works or regional railways with a feeder function. The
state-owned railways had a monopoly of supply in transregional passenger andfreight rail transport.
As from the beginning of the 60s, there was a continual and serious
deterioration in the economic situation of all state railways. The reasons were,in particular:−−−−

Strong and sometimes cut-throat competition from road haulage;
The dominant influence of politics on the strategic and operational
decisions of the railway undertakings;
Inadequate technical and economic adaptation to market needs;
Inadequate capital endowment by the state owner, resulting in an
economically insupportable level of indebtedness (despite very highannual state subsidies to the railways).

The thorough-going structural reforms of the railways implemented since
the beginning of the 90s in several western European countries are intended to:−−

Enable rail transport to achieve economic equilibrium and hence easethe financial burden on the state budget;
Create the preconditions for maintaining or increasing the railtransport market share.

Significant support for this was given by the Railway Directive 91/440
issued by the EC Council of Ministers in 1991, which were supposed to be
implemented in the EC Member States by 1 January 1993 (though this was not9the case even by the end of 1997 in all EU countries). Directive EG 95/19 of
19 July 1995 is important for the levying of charges for track use.
One of the main components of the structural reforms was (and is) the
separation of rail infrastructure from operations, i.e. vertical disintegration.
This separation means that a distinction is to be made between track or network
companies on the one hand, and passenger and freight train operators on
the other.
Although EC Directive 91/440 required only separate accounts and gave apositive opinion on organisational separation, certain countries have already
implemented institutional (actual) separation (e.g. Sweden, the United
Kingdom) or have taken preparatory steps towards this (e.g. Germany).
Largely independent of the question of the separation of track andoperating companies is that of the privatisation of state railways. In the verticaldisintegration process, a distinction must be made in this connection between
the privatisation of the train operating companies and that of the railway
infrastructure companies. This is also of importance for the discussion of
charges for the use of rail infrastructure.
The main reason for the need to develop special pricing for the use of therail infrastructure lies in the opening of the network to other railway
undertakings. This possibility of permitting competition in the field of railtransport, opened up only to a very limited extent by EC Directive 91/440, hasalready been implemented in a very much more liberal fashion in some countries.
This opening of the networks to third parties is forcing the railways to do a
lot of rethinking. Whereas intermodal competition, in particular with the roads
and to some extent with the waterways and air transport (market competition),
was often a difficult challenge for the former vertically-integrated railways, a
new market dimension for railways is now appearing. With the separation of
track and train operations, routes now have to be marketed. The supplier is theinstitution with ownership rights to the network (the railway infrastructurecompany); the demand comes from train operating companies, the number ofwhich is increasing with the opening of the network to third parties. In addition
to the so far mainly state-owned operating companies that have emerged fromthe earlier vertically integrated railways, foreign and private national operatingcompanies are now appearing as demanders of routes. The new market
situation brought about by vertical disintegration and the opening of networks
to third parties is shown in Figure 1.

10Figure 1. Structure of the rail transport market
Train operating company
DemandersTrain operating company
ofTrain operating company
Railfreight

infrastructure

Train operating company
companyand passenger

Train operating company
transport services

Train operating company

Train operating company

Market for railtransport services

Route market

The market for the right to use railway infrastructure becomes all the moresignificant:−−the more intensive the use of the network by third-party domestic train
operators, andthe stronger the demand for infrastructure services by foreign railway
companies.

The proposal made by an international group of experts (“Wise men’sreport”, June 1996) included in the Commission of the European Union White
Paper (Com 96/421, July 1996), A strategy for revitalising the Communities’

11railways, to establish Cargo Freeways in EU Member countries, also includes
the requirement to develop pricing systems for the use of the corresponding
rail routes.
In some European countries, no charge is made for the use of the track,even though at least an accounting and organisational separation of
infrastructure from operations has been implemented. This temporary or
durable renunciation of charging for the use of parts of the railway
infrastructure is not economically justified. It is more a case of politicaldecisions which distort competition. The reasons for not charging for track use
are, in particular:−−−

The intermodal competition faced by train operators, in particular withroad and waterway transport, does not permit the imputation of track
costs;
There is no institutional (actual) separation of infrastructure fromoperations yet, but only an accounting and organisational separation.
Opening the network to other rail transport companies is notenvisaged, or only in a few exceptional cases, so that there is nonecessity for a pricing system for the use of railway infrastructure;
The design and practical implementation of a pricing system for
railway infrastructure use is extraordinarily difficult. In the case of
mixed networks, used for local and mainline passenger traffic as well
as freight traffic, the track costs are mainly common costs resulting
from shared use of the track. The imputation of track costs to theindividual track user in the sense of “true costs” is not possible.

These three main arguments against charging for the use of railway
infrastructure are not convincing however:1.

The railway track represents a very substantial capital investment.
A general renunciation of any imputation of the costs of using thisresource precludes any possibility of economic mechanisms forcontrolling the use of part of the nation’s productive capital. The
associated subsidising of train operators sends out false price signals
to the demanders of transport services. Since the economic worth of arail route is determined by the characteristics of its use (for example:
time frame, different quality requirements of high-speed and regional
passenger trains and freight trains), this should also be reflected inuser charges.

12

2.

The argument that imputing the network costs to operators is notpossible because of intermodal competition, so that a pricing systemdoes not make sense, simply does not stand up. This calls into
question the marketability of railway transport services.
Only if the competing modes did not have to pay for the use of theirtransport infrastructure might the taking over (by the State) of the rail
infrastructure costs be envisaged. However, such global financing of
infrastructure by the taxpayer offends against the basic economic
principle already mentioned under (1) above, and therefore cannot bejustified.
Furthermore, because of the differing infrastructure costs of thecompeting transport modes, if the State were to take over all
infrastructure costs it would be subsidising transport services todiffering extents, and hence again sending out false signals for themodal split.
Problems arise, however, when differing levels of infrastructure costcoverage are demanded for the intermodal competitors. In practice,
this applies in particular to the very low infrastructure cost coverage inwaterway transport and parts of the road haulage sector. In suchsituations, it should be considered whether the financial goals of theinfrastructure supplier should be formulated accordingly. The
Directives for the overall degree of cost coverage to be achieved in thecase of railway infrastructure could be set somewhere below 100 per centto correspond with the degree of coverage of the intermodal competitors.

3.

The mention of the difficulties involved in preparing andimplementing a pricing system for track use is, in principle, correct
but much theoretical preparatory work has been done even for thecomplex situation of mixed networks. Chapter 3 goes into thesestudies in detail. Since this is largely new territory for transport policy
and there is very little empirical experience, further research anddiscussion is required on this question. Round Table 107 can make asignificant contribution here.

13

2. REQUIREMENTS OF A PRICING SYSTEM FOR THE USE
OF RAILWAY INFRASTRUCTURE

2.1. Micro- and macroeconomic aims of pricing systems
On the market for railway infrastructure services, the supply and demand
appears at route level. As a rule, it is a case of a network supplier which waspart of the unified railway undertaking that existed before verticaldisintegration. Here, there is a monopoly supplier of railway infrastructure. On
the demand side are the passenger and freight train operating companies, madeup of the state railway companies and, in the case of the opening of the network
to third parties, other domestic and foreign train operating companies. In thiscase, there is intramodal competition (competition in the field).
The microeconomic goal of the supplier of network services is then to fullyor partly cover the costs of maintaining and operating the rail network by meansof user charges and appropriate marketing. Here another question arises: thatof whether full cost coverage, or possibly even a profit, is at all realistic. This
question is not discussed in this paper. The financial goals may, in any event,be very different depending on the political goals, the intensity of theintermodal competition and the absolute level of network costs.
On the microeconomic level, the network supplier must be given thepossibility of differentiating the rail infrastructure use charges (the route prices)
according to specific criteria. Details are given in Chapter 3. This means that
there is no uniform route price per reference unit (e.g. train-kilometre), butrather prices which depend on the cost and demand conditions (price elasticities,
specific requirements for the routes used, time frames, etc.). An importantfeature of price formation must be non-discrimination. The danger of
discrimination is always relatively great when there are legal interconnections
between the network company and certain train operating companies. This is
the case, when:−−

there is no complete vertical disintegration of the railway undertaking,but only accounting and organisational separation of infrastructurefrom operations; orthe legally independent infrastructure and train operators are run andco-ordinated by a single holding company.

In both cases, the interests of the enterprise as a whole are dominant. The
competition of third parties on the network, i.e. their demand for network slots

14

as a rule means competition for the train operating companies of the group.
Here, preventing market access for third parties on the network, or making it
difficult, leads to protection for these operating companies. The prices charged
to third parties can play an important role if they differ from those asked of the
train operators associated with the network company without there being any
special requirements to justify it.
In concrete terms: there is price discrimination if the operating companiesof the group are charged lower route prices for otherwise equal conditions than
third-party train operating companies. This can be done through:− the use of unpublished settlement prices for organisationallyassociated companies or− subsequent refunds on the route prices to the associated train operators
by the infrastructure company.
In addition to price policy discrimination against third-party train operatingcompanies, the (route) allocation practices of network companies have a highdiscrimination potential. This is not discussed any further here.
The macroeconomic goals of pricing systems for infrastructure use are:−−to make the user of railway infrastructure cover the cost of using
resources; andto improve the market position of rail transport in general and not onlyof the already established train-operating companies. Through giving
access to the network to third parties, intramodal competition is
expected to promote keener pricing, better quality and moreinnovation.

2.2. Reference parameters for an infrastructure use pricing system
There are three aspects to be taken into account here.
−

First, there is the service to be priced.
account are:•••

The factors taken into

Train operation over a section of route;
Coach or axle-kilometres over a section of route;
Train-kilometres over a section of route.

15

The parts of the network or sections of route differ in their capital andoperating costs and in their economic worth (such as: capacity
utilisation, quality, geographical location, etc.). It is necessary to
break down the network into sections of route (links between nodal
points). The use of the section of route may be best expressed interms of train-kilometres. As a basis for charges, this unit promotes:••

Loading trains to full capacity with a given number of wagons;
Formation of the longest possible trains.

Both effects enhance the efficiency of utilisation of the section.
−

Second, charges are to be made for the use of stations (passenger
stations, freight depots, marshalling yards) and sidings. Thesefacilities must also be accessible for third-party train operators without
discrimination, since without this possibility of use there can be no
intramodal competition in the rail sector.

−

Third, the cost categories relevant for price setting and the method ofdetermining them on the basis of the services used by the rail
infrastructure user have to be decided. This requires, in the first place,an analysis of the problem, taking into account the alternative
procedures available according to price theory. This is the subject of
the following chapter.

3. RAILWAY INFRASTRUCTURE PRICING

3.1. General introduction
A pricing system for the use of railway infrastructure has to satisfy several
conditions.
− As already mentioned, it must be non-discriminatory, i.e. the network
supplier must charge all demanders of network services the same pricefor the same things. Here there should be the greatest possible
transparency of all conditions for present and potential users ofrailway infrastructure. Special settlement prices in the case of only
accounting or organisationally, but not actually (institutionally)
separated track and train operating companies, which differ from the16

published prices for otherwise identical conditions, are inadmissible.
This also violates Article 8 of EC Directive 91/440 and possibly also
Article 6.1 of this Directive.
− It should help to increase the capacity utilisation of railway
infrastructure, and hence to make rail transport more attractive andincrease rail transport service output;− The pricing system should also help network companies to achieve
their financial goals. These financial goals can been seen as:
•
•

•
•

−

Total cost coverage, including the notional rate of return on the
fixed capital;
Total cost coverage excluding the notional rate of return on the
fixed capital in the case of state investment decisions (Feldstein
Thesis; M.S. Feldstein, 1964);
Coverage of a percentage of the total costs; here the “state share”(public interest) can be taken into account;
Coverage of the total network costs including external social
costs resulting from the construction and maintenance of railway
infrastructure (e.g. separation effects, land use). Noise andpollutant emissions are social (external) costs to be imputed not
to the infrastructure, but to train operation.

The construction of a pricing system for the use of railway
infrastructure must also take account of which parameters aremeasurable and usable in practice. There are considerable differences
between price theory modelling and practical implementation in thereal world. They stem in particular from problems with theavailability of data on the required parameters. The transaction costs
arising in each case are also of importance.

173.2. Analysis of alternative pricing systems
The train operating companies express demand for timetable slots.
A timetable slot is the right to run a specific train (weight, length, speed) over a
specific route (between two nodes) at a specific time (day of the week, time).
Because of the generally limited number of companies requiring slots, it is acase of demand oligopoly. The train operator’s willingness to pay is determinedin particular by the intermodal competition (road, waterway and, in some cases,
air transport).
If we consider a given stretch of the rail network with only one rail
infrastructure supplier, this is generally agreed to be a case of natural monopoly.
It is defined by the subadditivity of the cost function.
In considering the short-term costs, i.e. within a given network, a striking
feature is the very low marginal costs (or rather, incremental costs). As directuse-dependent costs, they only amount to 3-8 per cent of the total costs. They
depend on train weights and speeds and on the condition of the track. Total
average costs fall (economies of density).
Various route pricing systems can be used:a)Monopoly prices
Assessment: In the case of both monopolistic unit prices andmonopolistic price differentiation, the macroeconomic goal ofachieving the greatest possible intensity of use of the track is lacking.

b)

Average cost prices
Assessment: The advantage of simple calculation is offset by thedisadvantage that no special account is taken of train operators whoare prepared to bear the incremental costs directly associated with use.
There is thus less than optimal allocation of network resources.
Furthermore, the costs relevant to decisionmaking are incorrectlyreflected by average cost calculation.

18

c)

Incremental cost prices (in the sense of empirically determinablemarginal costs)
Assessment: Total average costs cannot be covered by means of pureincremental cost pricing. The macroeconomically optimal pricing ruleleads to microeconomically undesirable deficits.
The deficit problem can be eliminated, however, if a system ofadditional charges on top of the incremental costs is introduced. Thiscan be achieved through single or multi-part pricing.
c.1)In a single-part pricing system, based on incremental costs withthe condition that total costs must be covered, an additionalcharge is incorporated into the price. This additional charge tocover the costs which are not dependent on use may be linear,
degressive or progressive for the user (“fully distributed
costs”) or be based on the operator’s willingness to pay.
Additional charges according to willingness to pay takeaccount of the different willingness and ability to pay of thedifferent train operators. These charges can be differentiatedaccording to the type of traffic: suburban passenger, mainline
passenger, freight traffic. Furthermore, a difference can bemade according to the time slot, the route and punctuality
requirements. The least loss of macroeconomic welfare, ascompared with pure incremental cost pricing, is achieved byusing Ramsey prices.
c.2)A two- or multi-part pricing system shows separately theadditional charges to the incremental costs. These additionalcharges can take account of:-- Particular capacity shortage situations on heavily-trafficked
stretches and at certain times (peak load pricing);-- Departures from stretch-specific normal speeds (definedaccording to optimal capacity utilisation). These departures
are relevant for trains with both higher and lower speeds,
because faster trains too have a negative effect on capacity
utilisation;-- A basic contribution to cover the deficit arising withincremental cost pricing. This additional charge (also19known as the system charge) can be a fixed time-dependent
contribution or can be graded according to demand
characteristics (e.g. high-speed traffic, regional traffic,
combined traffic, etc.). Differentiation according to spatial
parts of the network is also possible.
The system charge represents an option price and works like aquantity rebate, since it does not depend on the number ofslots demanded per unit of time (year, for example) or part of
the network (and may be related to the whole network). Thisencourages the use of the network. The extent to which a
differentiation of the system charge is actually made will
depend on the associated transaction costs and its practicality.
The relatively most suitable pricing rule for railway slots is the use ofmulti-part tariffs, which on top of the incremental costs of each train passage
have an additional system charge and, if appropriate, further additional charges
in the case of peak periods and interference to traffic flow caused byspeed differentials.
Since train operating companies with relatively low demand for slots are
greatly penalised by the fixed system charge, there should be a possibility ofchoosing between different price structures. This is also necessary in order toavoid discrimination against train operators with a relatively weakmarket position.
The possibility of choice is given by having alternative tariffs withdifferent levels of system charges and correspondingly different use-dependent
prices. Relatively low system charges are then associated with higher
use-dependent price components. The train operator can then decide on thetariff which gives it the lowest route costs.

20

Figure 2. Differentiated system charges with the possibility of choice
Let the expenditure function of a train operating company demanding slots be

A = f ( E , p ) where :i
i i
pi is the price per slot, pdk the average cost price, pik the incremental cost price
Ei is the system charge andAi is the total route expenditure for train operator i.

Ai

pdk(E1,p1)(E2,p2)Ai= expenditure of operator i
E1, E2 = differentiated system chargespi= variable pricepdk > p1> p2> pikx= planned quantity of slots
demanded by operator i

E2
E1

X0

X2

X

With a very low level of demand x0 (in train-kilometres/year, for example)
train operating companies may choose system charge E1 and relatively higher
use-dependent price (p1); with higher demand x2 , on the other hand, a higher
system charge E2 with relatively low use-dependent price components (p2) may
be chosen. The average cost price is represented by a constant increase withgrowing demand for slots (pdk).
3.3. The problem of infrastructure cost responsibility
Rail infrastructure costs are very much influenced by the technicalcharacteristics of the track (high-speed stretches, for example). As a rule,
however, stretches are also used by trains that use only part of their technicalpossibilities. This applies above all to mixed traffic stretches. The question
therefore arises of which trains have to bear which costs.
There are two concepts here:−

According to the prime user concept, trains, or train types, are ranked
according to the technical and organisational demands on theinfrastructure. The trains with the highest demands (high-speed trains,21

for example) bear all the total costs of the stretch except for theincremental costs caused by other users.
−

According to the sole user concept, there is again a hierarchy, but inthis case the type of train which is highest in the hierarchy pays, inaddition to the incremental costs caused by it, only the direct,
use-independent costs (fixed costs, overheads) which it actually needs
for its supply. Unlike under the prime user concept, the sole user does
not have to bear cost components which arise through investment, butwhich are not actually required by users. This increases the cost
responsibility of the network company.

The prime user concept is the basis for route pricing in Japan (prime users
are the passenger services; freight traffic pays only its incremental network
costs) and in the USA (AMTRAK pays only the incremental costs for the use of
freight traffic stretches). The sole user concept is used in the United Kingdom(sole users are the individual passenger transport companies).
The central problem with the use of both concepts lies in establishing thehierarchy. The sole/prime user may be, for example:−−

passenger traffic, orfreight traffic.

Further differentiation is both possible and necessary. Thus high-performance,
fast traffic requires the most sophisticated track equipment and very often also
expensive engineering structures such as tunnels and bridges. It is also possible
to divide the network into subnetworks according to function: for example, afast passenger traffic network, regional passenger traffic networks and a freighttraffic network. A hierarchy can also be established within these functional
subnetworks.

3.4. Efficiency assessment
The pricing systems described above, with additional charges on top of theincremental costs, do not automatically lead to pressure to improve productive
efficiency (favourable cost situation). The network company endeavours tocover its total costs through the additional charges, which means that a profit in
the sense of a rate of return on capital is possible. Falling costs can be reflectedin falling route prices; rising costs result in an increase in the additional charges.

22Incentives to increase productive efficiency, on the other hand, always
exist if the network company is organised as a profit centre and the profits
realised do not have to be paid out to an associate undertaking or a holding
company. It can be deduced from this that true incentives to reduce costs exist
only if the network company is privatised and there is an appropriate pricing
system. This appropriate pricing system from the standpoint of productive
efficiency is that of multi-part tariffs. It is particularly well-suited in the case of
progressive additional charges on top of incremental costs, where theprogressive additional charges (the higher the demand for the slots, the higher
the additional charge) are particularly effective in promoting competition andhence have a cost-reducing effect. With such a pricing system, new demanders
appearing on the market (private regional train operators, for example) withrelatively low additional charges receive the same consideration as state
railways with a strong market position. Also positive is the differentiation of
the additional charges according to willingness to pay, as this gives thepossibility of setting the slot prices flexibly in the case of low willingness topay. It would thus be possible, in the case of low willingness to pay and very
underutilised sections of route, to reduce the price to the level of the incremental
costs or to impute only a small proportion of the system charge. In this way,
not only can rail traffic be retained or even won, but also there can be somerelief of sections of the rail network where the capacity limits have be reachedor where there is already congestion.
On the other hand, relatively high system charges and special peak charges
and, where appropriate, speed-dependent charges (in the sense of opportunity
costs) if train speeds disturb operations, can be levied if certain stretches orparts of the network have very high capacity utilisation with congestion effects.
Here, the nodal points (above all stations) in particular are to be taken into
account. The node performance is much more difficult to improve than stretch
performance. In the latter case, “driving by electronic sight” by means ofComputer Integrated Railroading (CIR) can bring significant capacity increases(up to 30 per cent) even on already existing stretches, while in the case of nodal
points such improvement requires substantial additional construction investment.

3.5. The problem of the duration of track-use contracts
Basically, the market for railway routes is no spot market. Instead there
must, as a general rule, be relatively long contracts. Both the suppliers of routes(the infrastructure companies) and the train operating companies have a directinterest in this.

23

Of considerable importance for the length of track use contracts are thetransaction costs, in particular, the following components:− Factor specificity or irreversibility;− Transaction frequency;− Uncertainty.
Factor specificity or irreversibilities are of considerable importance for theroute market, since special track equipment (superstructure, electronic train
control, signalling, etc.) is frequently necessary only for certain potential users.
On the other hand, the train operators are very interested in it so as to be able toprepare timetables for relatively long periods and offer specific time slots fortrains. A reduced transaction frequency reduces total transaction costs. Longer
contract periods also reduce the uncertainties for actors on the route market.
Longer-term contracts can also have negative effects on the efficiency of
the route market, however, insofar as they cause:−−

obstacles to market access for third parties; orirreversibilities with sunk cost effects for train operating companies.

Market obstacles for third parties can appear in the case of routes which
are heavily-trafficked and of strategic importance for timetables. In the case oflong-term contracts, these can be used very little if at all by intramodal
competitors. The purchase of route use rights to block intramodal competition
is to be seen as abuse of market power with highly discriminatory effects.
The following rules can be applied to reduce the risks resulting fromlong-term contracts:−−

For the network operator, price escalator clauses can protect against
significant cost increases or sharp increases in demand. The train
operator’s contract would then ensure route availability, but not theright to a fixed route price for the whole period;
For the train operator, the possibility of trading the right to use theroute would make it possible to withdraw from a contract little or no
sunk cost losses. The risk of loss is not eliminated by this, but only
reduced.

24

3.6. Some implementation problems for a route pricing system
The introduction of a route pricing system for railway infrastructure
involves finding solutions to a number of problems. Some important aspects
are summarised in what follows.
−
−
−
−
−
−
−
−
−

Determining the incremental costs for each train category andsection of route;
Determining the stretch-specific optimal train speeds in order to fix
additional charges for higher and lower speeds;
Delimitation of congested stretches in order to fix peak charges;
Taking into account of what is known as system traffics, which
regularly (often according to regular-interval timetables) occupy
routes for relatively long periods of time;
Delimitation of the rail installations to be attributed to the track;
Development of a pricing system for the use of stations, marshallingyards and sidings;
Establishing the differentiation in the system charges (e.g. passenger
traffic/freight traffic; high-performance versus regional traffic);
Establishing demand groups to estimate the willingness to pay;
Price policy treatment of empty trains.

Considerable progress has been made towards solving the problem ofdelimiting the railway equipment to be attributed to the track. Here we refer toRegulation (EEC) 2598/70 of 18 December 1970 Annex 1, Part A, andRegulation (EEC) 1108/70 of 4 June 1970, Annex 1. According to the latter,
the railway infrastructure consists of: ground area, track and track bed;
engineering structures (bridges, tunnels, etc.); passenger and goods platforms;
level crossings; superstructure, accesses for passengers and goods, including
access by road; safety, signalling and telecommunications installations;lighting installations; plant for transforming and carrying electric power for
train haulage; buildings used by the infrastructure department, including
installations for the collection of transport charges.

25

4. THE DEUTSCHE BAHN AG (DB AG)
ROUTE PRICING SYSTEM

4.1. Introduction
The comprehensive structural reform of the railways in Germany was
prepared, to a large extent, through the concrete recommendations of an
independent government commission. This commission of eleven members was
set up by the Federal Government in September 1989 and presented its final
report in December 1991. In addition to the proposals for cancelling the debt,
conversion to a joint-stock company and restructuring the staff, central
considerations were the organisational and legal separation of railway
infrastructure from train operations and the substantial opening of the network
to third parties.
Already on 1 January 1994, after the necessary amendment of certain
articles of the German constitution and a considerable number of specialised
Acts, the structural reform of the railways was implemented. The legal openingof the network to other train operating companies (in addition to the traffic
divisions of DB AG) made it necessary to set up a pricing system for the use ofrailway infrastructure. This was a difficult task, since:−−

the DB AG network, with some 42 000 km of track, was run mainly asa mixed network for both passenger and freight traffic, with very
different speeds and axle loadings;
there was no model for the preparation of a pricing system suitable fora mixed use complex, so that new ground had to be broken.

Another factor to be taken into account is the tight deadline; the firstversion of a pricing system for the use of the DB AG network was published as
early as 1 August 1994. In 1995, there was a minor revision, concerned above
all with the level of the quantity discounts. In the first version of the route
pricing system quantity discounts (based on train-kilometres) up to a maximumof 20 per cent were provided for in both passenger and freight traffic. This led
to discrimination against third-party train operators, however, since in practicalterms only DB AG was able to take advantage of these discounts. Criticism of
this original arrangement led to modifications and a maximum discount of 5 per
cent.

26

To complement this route pricing system, DB AG produced price lists forthe use of stations and sidings. The price to be paid for the use of railway
infrastructure is therefore generally made up of three components:− The route price as payment for the use of sections of route;− The station price as payment for the use of stations;− Payment for the use of sidings.
What follows is concerned solely with route prices.

4.2. Structure of the route price system
The annual costs of the DB AG infrastructure amount to between
9-11 billion DM; precise figures are not available, because the company does
not present network cost and earnings information in its annual reports.
Furthermore, the legal provisions for the reform of the railways contain no
stipulations concerning whether the prices paid for the use of routes are to aim
at full cost coverage, partial cost coverage or a profit.
The DB AG route price system is based on the pricing of basic routes
between nodes. The unit for price setting is the train-kilometre. For a train
working over several nodes, the corresponding route prices are added together
to give the total price for the entire route. A quantity or time discount may be
deducted from this total, in order to obtain the actual price to be paid for the useof the railway infrastructure.
The route price is subject to the legal value-added tax. The differentiations
between route prices result from the two parameters determining the prices ofthe sections of route concerned:−−

Characteristics of the section of route, expressed in the route category;
Characteristics of the train working over this section of route,expressed in the train price class.

The DB network is divided into ten route categories. Each route categoryreflects the network function of the section concerned in the sense of its
transport importance and the quality (possible high-speed operation).
The train price classes take account of the wear and tear effects on the
track and the superstructure and the required timetable quality (tolerance fordepartures from the desired journey time). Both characteristics of the train price27

class (wear and tear, timetable quality) are taken into account through weighting
factors. The basic price (which depends on the route category) is multiplied bythese in order to obtain the route price. These prices are published in the
DB AG route price book for each section of route. There are seven train priceclasses in passenger and five classes in freight traffic.
The weighting factors for wear and tear lie between 0.9 for light and 1.1
for very heavy trains. The different timetable quality requirements haveweighting factors between 0.8 and 1.2.
Each of the basic routes (links between nodes) appearing in the DB route
price book thus takes into account:−−−−the importance of the stretch in the overall network;
the operating speed;
the train weight and speed, andthe desired timetable quality.

Figure 3 illustrates these parameters.

Figure 3. Route price determinantsTraffic potential
Route quality

Routecategory

Basic priceLoad(consumption)
Speed

Train price class

Train dependent
differentiation
factors

Route price(catalogue)

Timetable
quality

Price reduction(quantity rebate,time rebate,
additional traffic)

Route price(actual)28

The Annex to this report presents examples of route prices for passenger
and freight traffic over selected transport links. Examples are given for
high-speed and regional passenger trains and for various types of freight train.
The quantity discounts that can be obtained are intended to reflect thequantity-dependent cost savings. They have different graduations for passenger
and freight traffic. In passenger traffic, the quantity discounts begin at
18 million train-kilometres/year, in freight traffic at 15 million train-kilometres/year(0.5 per cent discount in each case). The maximum discount rate of 5 per cent isreached at 180 million train-kilometres/year in mainline passenger traffic and150 million train-kilometres/year in freight traffic. In suburban passenger traffic,
there is a special discount which begins already at 100 000 train-kilometres/year(0.5 per cent) and rises to a maximum of 5 per cent.
The time discount for longer-term route contracts begins at two years(2 per cent) and rises with contract periods from five years to a maximum of
6 per cent.
Before taking the discounts into account, the average route prices per trainkilometre in suburban passenger traffic are between DM 8.54 and DM 10.43; inmainline passenger traffic between DM 18.75 and 22.49, and in freight traffic
between DM 11.12 and DM 15.28.
In 1995, a special discount system for suburban passenger traffic wasintroduced. The explanation for this is as follows.
In Germany, a regionalisation of local public passenger traffic wasintroduced in connection with the structural reform of the railways. Local railtransport services were contracted out by regional authorities to DB AG (local
passenger traffic division) or to other train operators. Insofar as theseauthorities demand additional local rail passenger services and routes ascompared with the past, the train-kilometre price is only DM 5.

4.3. Remarks on the DB AG route price system
This route price system for a European railway, produced in a relatively
short time, certainly takes into account important cost determinants, but is only
to be seen as a first step towards an efficient rail infrastructure pricing system.

29

Important problem areas are:1)

The present DB AG route price system is a case of an average cost
system modified by various influencing parameters (total route costs,
divided by the total train-kilometres operated by the railway).

2)

The route price system is based on a single-part tariff. The necessary
differentiations in route prices cannot be sufficiently achieved withthis pricing system. The system is inflexible with respect to peak periodloadings of stretches on certain days of the week and at certain times.

3)

As a result, this means that the prices for low-traffic stretches are toohigh and those for heavily-trafficked and congested stretches too low.
The promotion of rail transport in intermodal competition requires, forexample, prices approaching the (very low) incremental costs for theuse of low-utilisation stretches. Conversely, on high-utilisation
congested stretches, the opportunity costs should be taken into
account; they require higher usage prices than provided for in thepresent route price system.

4)

The route price system applies for all demanders of rail infrastructureservices. Furthermore, it is not possible to check whether the traffic
divisions of DB AG have to pay the same route prices (taking quantity
and time discounts into account) in all cases as other train operators.
It at least cannot be excluded that the train operators associated with
the network company pay more favourable prices than the publishedroute prices. Herein lies a discrimination potential to the disadvantageof third parties.

5)

There is a further discrimination problem in local rail passenger traffic
insofar as all of the routes operated in Germany qualify for thequantity discount, regardless of the regional distribution. Local train
operating companies other than DB AG are generally active only incertain regions and therefore have a relatively low number oftrain-kilometres. It is questionable whether the cost savings relevant
for the quantity discount can be demonstrated even if all thetrain-kilometres of all the regional operators were added together.
Local rail passenger transport always has a regional dimension in boththe service provision and costs arising. In Germany, there is a draft
Railway Infrastructure Use Regulation (EIBV). It is expected that thisstatutory instrument will come into force at the beginning of 1998.
Regarding route prices (user charges), § 6 states that they can be madeup of general basic prices for all types of transport or special basic
30

prices for certain types of transport plus or minus supplements anddiscounts. In the calculation of the additional charges, the route
category, time slot, journey time and infrastructure wear and tear are
to be taken into account. This formulation points to a split tariff.
In § 8 of this Regulation, quantity discounts are specifically defined as
stretch-related reductions. They must not exceed the demonstrable
cost savings.
6)

Discrimination can arise not only through route pricing, but also
through the way in which routes are allocated. So long as there is nocomplete institutional separation of network and train operator, thetraffic divisions of the railway undertaking dominant on the market
will try to keep competitors out by means of route availability. Thiscan be done by the infrastructure division passing on information
about the routes sought by third-party operators to the traffic division.
The latter can then claim the same spatial and temporal requirements
or buy route usage rights to block others.
The potential combination of price and route availability
discrimination substantially reduces allocative efficiency in the railtransport sector.

7)

A substantial competition problem also arises from the fact thatdifferent countries deal with the route pricing problem in different
ways. If in certain European countries there are expressly no route
prices calculated, this leads to allocative inefficiencies. Not only is
the domestic train operator made artificially cheaper by being
subsidised, but intramodal competition between alternative routes is
distorted to the disadvantage of those train operating companies thathave to pay user charges. Such a situation is developing in European
north-south traffic, since the Netherlands and now also Sweden do not
impose user charges. Furthermore, the competition at seaports is
distorted by artificially changed hinterland transport costs, since, forexample, DB AG has to pay route prices for Hamburg, Bremen and31other North Sea and Baltic port hinterland transport, but Netherlands
Railways (NS) do not have to pay user charges for Rotterdam andAmsterdam hinterland traffic.
8)

Intermodal competition means that the need to impute user charges
leads to the necessity to reduce infrastructure costs. This activates theefficiency potential that helps strengthen the position of rail transport.
The high network costs of all railways represent a system problem forrail transport, all the more so as they can amount to up to 40 per centof the total costs of rail transport. It is therefore necessary not only tomake the network costs transparent, but also to create a pressure to
durably reduce the network costs, through rationalisation investments,
in order to be able to stand up to the intermodal competition. A route
pricing system is a particularly well-suited indicator here.
Lastly, it should be pointed out that agreement on a unified method of
establishing user charges for European railway infrastructure is an
important requirement. The still very different approaches to thecalculation of user charges by the different European railways distortcompetition. From this standpoint all efforts to reach a scientificconsensus on the method of calculating route prices are of
considerable value for railway policy.

4.4. The new DB AG route price system in 1998
DB AG’s first route price system, dating from 1994, will be replaced by a
new system around mid-1998. The main reasons for this replacement are theproblem areas previously mentioned in section 4.3. Further reasons are to be
seen in the experience acquired so far with the present route price system, as
well as additional organisational or institutional changes at DB AG.
On 1 January 1999, DB AG will thus be converted into a holding company(the new DB AG) responsible for the following management companies:
DB Personennahverkehr AG (local passenger traffic), DB Personenfernverkehr
und Touristik AG (long-distance passenger traffic), DB Cargo AG (freighttraffic), DB Netz AG (network system) and DB Bahnhöfe AG (station system).
DB Netz AG must, in the future, therefore publish route system revenues in theannual accounts. These revenues are from the route prices paid by the DB AG’s
three transport undertakings and by other route users.

32

Since 1994, important streamlining measures have made it possible toreduce network costs to about DM 7 billion a year. The current requirement inGermany to cover total network costs by route prices will therefore be
somewhat easier to meet.
The new route price system is structured according to various parameters:
--

--

--

--

--

It defines six line categories into which the entire DB AG network is
subdivided (K1 to K6). The categories reflect the varying technicaland economic quality standards (maximum speeds, location of thelines classified, importance of the lines in terms of traffic). K1 is themost and K6 the least attractive. The prices are graded accordingly;
Three traffic categories are defined (long-distance passenger traffic,
local passenger traffic and freight traffic). The route prices differ ineach case and also take into account the relative ability to pay inaddition to costs (prime user principle);
Apart from the line categories and types of traffic, the line load factor
is also included in each network category. There are three load factor
levels (BI to BIII);The new route price system is designed as a two-part tariff system.
The route prices to be paid by the rail transport undertakings consist of
two basic amounts:• A price for the purchase of a network card for network categories
K1 to K6 for the particular type of traffic. On each available
network, minimum line lengths are applicable. The network card
price is based on the number of line kilometres. The card permits
the use of the network in the network category purchased and on
the lines contained within it. The network card price is therefore
an exercise price for use of the network;• In addition to the user right, obtained at a flat rate for a year bypurchasing the network card, a second transport price component
must also be paid for the train kilometres actually performed.
Since the network card has already been purchased, these variable
price components are set very low compared with the earlier DB
AG route price system. The intention is thus also to create an
incentive to perform more train kilometres and thereby make themost of the sliding scale effect for network card costs.
In addition to this two-part tariff, each route user who performs only
relatively few train kilometres a year, must pay a so-called variablecharge. This is a through charge which depends only on the train
kilometres, the respective network category and the load factor of thelines on which these train kilometres are performed. In the case of the

33

--

variable charge, the train kilometre prices in each network category
are considerably higher than the variable price component in the split
charge applicable to a network card;
Network card purchasers can obtain a time discount if they undertaketo acquire a card every year for a period of ten years. This time
discount reflects the savings on transaction costs as well as the greater
investment planning security for Netz AG.
Quantity discounts are not planned. The split charge, however, works
as an implicit quantity discount for applications for a large numberof routes.

The new route price system must comply with the non-discrimination
principle, which is laid down in Section 15 of the General Railway Act (AEG),
as well as in the Railway Infrastructure User Rules which came into force inGermany on 1 January 1998. In addition, consistency with the EU Council
Directive 95/19 of 19 June 1995 (allocation of railway infrastructure capacity
and the charging of infrastructure fees) is to be assumed.
The observance of this principle is particularly important, since in the second
stage of German rail reform there is still no full legal separation between the DB
AG’s network system and transport undertakings. On the contrary, Netz AG will
also be strategically positioned by Management Holding DB AG, as Netz AG’s
nominal capital will be fully held by DB AG.

5. SUMMARY

1)

The deregulation of European railway markets has led to the legal
separation and, in several cases, to the organisational separation of
track and train operators. In some countries, institutional separation
has already been completed or is being prepared.

2)

One of the basic ideas of this vertical disintegration is to enhance theperformance of rail transport by opening the networks to third-party train
operators (intramodal competition). This requires a non-discriminatory
charging system for infrastructure use. The creation of Cargo Freeways
also calls for such a system.

34

3)

User charges have a twofold task. On the one hand, they are required
to promote the macroeconomically optimal use of the resources tied
up in railway infrastructure; on the other, they are supposed to makeit possible to have the user cover the network costs. Given theintensive intermodal competition on transport markets, there arepotential contradictions here.

4)

Relatively favourable preconditions for fulfilling these two objectives
are given by a charging system in the form of a multi-part tariff basedon train-kilometres. The basis is formed by the incremental costs of a
train working over a given route. This is completed by additionalcharges which may depend on the train category (passenger/freight,
special requirements regarding the technical characteristics of the
track, train control, engineering structures, etc.), the degree of capacity
utilisation of the stretch (peak load pricing), the willingness to pay ofthe demanders and the opportunity costs arising because of departuresfrom the optimum operating speeds specific to the stretch.

5)

The route pricing system introduced in Germany in 1994 is to be seen
as a modified average cost pricing system. Important parameters forthe route prices are the train axle loadings, train speeds, punctuality
requirements and the importance of the stretch in the operation of the
network as a whole. Since it is a single-part tariff, the system is as yet
unsatisfactory from the standpoint of market-oriented price flexibility.
A reform of the present route pricing system is envisaged for 1998.

6)

In order to pursue an efficient European railway policy, agreement on
a common method of determining user charges is required. In view ofthe still outstanding theoretical problems and the specific complexities
of implementation, this requirement will be difficult to fulfil.

35

36

ANNEX
EXAMPLES OF DEUTSCHE BAHN AG
ROUTE PRICE CALCULATIONS

37

Example 1: Passenger traffic
Maschen-Munich-Pasing
Train price class: P1, High-speed traffic
Load:
Maximum 1 000 t
Speed:
200 kph and overPlanning quality: Maximum: 105 per centTrain category:ICE and similar
Train price class: P3, Mainline express traffic with regional connections
Load:
Maximum 550 t
Speed:Up to 160 kph
Planning quality: Maximum: 110 per centTrain category:Inter Regio and similar
Route section

SectionNumberHamburg hbf

Route price in DM

54

Inter Regio
148

ICE
177

56

627

752

68

578

693

75

1 551

1 861

109

2 189

2 627

136

963

1 156

184

1 970

2 364

250

2 014

2 417

269

1 371

1 645

294

825

990

311

1 121

1 345

338

908

1 089

14 265

17 116

Hamburg-Harburg
Lüneburg
UelzenHanover Hbf
GöttingenKassel-Wilhelmshöhe
Fulda
Würzburg
Nürnberg Hbf
Treuchtlingen
Augsburg
Munich-Pasing

38

Example 2: Freight traffic
Maschen-Munich
Train price class: G1, Fast and high-value freight traffic
Load:
Maximum 1 500 t
Speed:
120 kph and overPlanning quality: Maximum: 125 per centTrain category:
Express freight trains
Route section
Maschen

Section Number

Route price in DM

23

476

42

2 174

121

2 090

153

235

164

706

189

670

205

1 923

258

1 047

286

600

293

659

303

932

313

118

Lüneburg
Hanover (SFS)
GöttingenEichenberg
Bebra
Fulda
Würzburg
AnsbachTreuchtlingen
Ingolstadt
MunichMunich-East
11 630According to the DEGT, Maschen-Munich East is 761 km.
Cost per train-kilometre: DM 11 630/761 = DM 15.28.

39

Example 3: Passenger traffic
Giessen-Frankfurt South

Train price class: P5, Regional passenger traffic
Load:
Maximum 400 t
Planning quality: Maximum: 120 per centTrain category: Regional express, semi-fast and similar

Route section

Section Number

Route price in
DM

46

282

58

40

72

181

83

161

92

45

GiessenBad NauheimFriedberg
Bad Vilbel
Frankfurt Hbf
Frankfurt South
709

According to the DEGT, Giessen-Frankfurt South is 68 km.
Cost per train-kilometre: DM 709/68 = DM 10.43.

40

Example 4: Passenger traffic
Karlsruhe-Bretten

Train price class: P6, Local passenger traffic
Load:
Maximum 400 t
Planning quality: Maximum: 120 per centTrain category: Regional, CityBahn, local trains
There are no differences between P5 and P6 concerning the pricing criteria loadand planning quality. Only the train categories differ.

Route section
Karlsruhe

Section Number

Route price in DM

76

49

73

20

74

136

Karlsruhe-Durlach
Grötzingen
Bretten205

According to the DEGT, Karlsruhe-Bretten is 24 km.
Cost per train-kilometre: DM 205/24 = DM 8.54.

41

Example 5: Regional freight traffic
Giessen-Hanau Hbf

Train price class: G3, Heavy freight traffic
Load:
Maximum 2 500 t
Speed: Up to 100 kph
Planning quality: Maximum: 150 per centTrain category: Freight trains handed over complete or in wagon strings by theshipper and accepted by the consignee without any
marshalling operations

Route section
Giessen

Section Number

Route price in DM

91

203

95

158

106

55

116

241

153

55

ButzbachFriedberg
Assenheim
Hanau Nord
Hanau Hbf
712

According to the DEGT, Giessen-Hanau Hbf is 64 km.
Cost per train-kilometre:
G3: DM 712/64 = DM 11.13
G2: DM 704/64 = DM 11.00
G4: DM 690/64 = DM 10.78.

42

Example 6: Regional freight traffic
Giessen-Frankfurt South

Train price class: G3, Heavy freight traffic
Load:
Maximum 2 500 t
Speed: Up to 100 kph
Planning quality: Maximum: 150 per centTrain category: Freight trains handed over complete or in wagon strings by theshipper and accepted by the consignee without any
marshalling operations

Route section
Giessen

Section Number

Route price in DM

91

203

95

158

115

203

133

158

148

58

ButzbachFriedberg
Bad Vilbel
Frankfurt hbf
Frankfurt South
780

According to the DEGT, Giessen-Frankfurt Süd is 68 km.
Cost per train-kilometre:
G3: DM 780/68 = DM 11.47
G2: DM 704/68 = DM 11.34
G4: DM 690/68 = DM 11.12.

43

BIBLIOGRAPHY

Aberle, G. and A. Brenner (1994), “Trassenpreissystem für die Deutsche Bahn
AG -- eine erste kartellrechtliche und ökonomische Beurteilung”,
Internationales Verkehrswesen, 46, pp. 704-712.
Aberle, G., A. Brenner, A. Hedderich (1995), “Trassenmärkte undNetzzugang”, Band 8 der Gießener Studien zur Transportwirtschaft und
Kommunikation, Hamburg.
Feldstein, M.S. (1964), “The Social Time Preference Discount Rate in
Cost-Benefit-Analysis”, Economic Journal, Vol. LXXIV.
Ferreira, L. (1997), “Rail track infrastructure ownership:
operational issues”, Transportation, 24, pp. 183-200.

Investment and

Häusler, U. (1995), “Bildung und Funktion von Trassenpreisen für die
Schieneninfrastruktur”, Zeitschrift für Verkehrswissenschaft, 66, pp. 77-86.
Hedderich, A. (1996), “Vertikale Desintegration im Schienenverkehr”, Band 11
der Gießener Studien zur Transportwirtschaft und Kommunikation, Hamburg.
Hylén, B. (1994), Access to Rail infrastructure -- Regulation and pricing.
A State-of-the-Art Report from Ten European Countries. Summary of a Reportto the Swedish National Rail Administration, Linköping.
Ilgmann, G. and M. Miethner (1992), “Netzstandardisierung und Preisbildung
für die Fahrwegnutzung der künftigen Bahn”, Zeitschrift fürVerkehrswissenschaft, 63, pp. 203-229.

44

Nash, C.A. and J. Preston (1993), “Privatisation of Railways: The policy debate
in Great Britain”, Round Table 90, Privatisation of Railways, ECMT, Paris,
pp. 85-119.
Regierungskommission Bundesbahn (1991), Endbericht der Kommission, Bonn.

45

FRANCE

Luc BAUMSTARK
Chargé de Mission
Commissariat Général du Plan
Paris
Alain BONNAFOUS
Professeur
Laboratoire d’Économie des Transports
Lyon
France12Economic rail infrastructure tolls

SUMMARY

1.

INTRODUCTION .........................................................................................

2.

INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION ...............................................................
2.1. Network opening, redistribution of roles and pricing system.................
2.2. Degree of vertical separation in the rail sector and thequestion of access charges and user fees ...............................................

3.

INFRASTRUCTURE PRICING AND MAXIMUMEXTRACTION OF THE AVAILABLE SURPLUS .....................................
3.1. The concept of marginal cost and the optimisationof investment .........................................................................................
3.2. The supply-demand equation or how to define an
optimal quality of service .......................................................................
3.3. Allowing for the budgetary constraint....................................................

4.

APPLICATION OF PRINCIPLES AND NETWORKCONSTRAINTS ............................................................................................
4.1. The British experience: making a surplus ............................................
4.2. The German experience: covering the costs .........................................
4.3. The French example: a transitional phase .............................................

5.

CONCLUSION..............................................................................................

NOTES...................................................................................................................
BIBLIOGRAPHY..................................................................................................

Paris/Lyons, January 1998

3

1. INTRODUCTION

The rail sector very quickly came to be regarded by economists as a typicalexample of a “natural monopoly”. In fact, like other networks, though often evenmore emphatically, it displays all the characteristics which tend to compromise thetheoretical pact between the mechanisms of the competitive market and the
optimum allocation of resources (in the Pareto sense). On the one hand, on such amarket the break-even prices lack the qualities necessary to induce the economic
agents to take optimal decisions. On the other hand, it is not possible to find asatisfactory price system that enables an optimum to be decentralised on the basisof the decisions of individuals.
The sector is, in fact, characterised by increasing returns resulting frommultiple indivisibilities: functional indivisibilities such as the co-ordination ofactivities between upstream and downstream of production, for example, between
infrastructure choices and commercial policy, but also technical indivisibilities suchas that determined by the continuity of the network. To this there should be added
various effects such as “economies of scope” which enable the operator, by
diversifying the services offered, to reduce unit costs or important network
externalities, both positive and negative, or, finally, investment irreversibilities.
Thus, the rail sector accumulates the conditions for the appearance of what arecommonly called market failures. This largely explains the sector's mode ofoperation in the early 80s and the major role played by government throughout
its history.
However, the efficiency of this monopolistic organisation and the frequent
public intervention in the sector have gradually been called into question on two
counts. Firstly, it has been noted that the theoretical justifications for such anorganisation apply only to part of the monopoly (mainly the infrastructure).
Secondly, the very real advantages afforded by such an integrated structure havebeen offset by its no less real disadvantages (mainly its inability to exert sufficientpressure on production costs). Thus, the policies applied in this sector have sought
to eliminate these weaknesses by reintroducing, wherever possible, various kinds ofcompetitive pressure. Infrastructure access charges have become a keystone of thereforms. This question forms the subject of the first part of our paper.

4

There have been many modern theoretical developments in this field and ourpresentation does not seek to be exhaustive in this respect. However, there are twotheoretical principles that deserve closer examination and these will be the focus of
our attention in the second part1.
The first principle states that infrastructure pricing cannot be separated from investment choices. The setting of“optimal” user fees presupposes the prior definition of a certain quality of service. For example, from the quality of service
required there follows an acceptable saturation level which, in its turn, determines a co-ordinated policy of investment anddemand management through infrastructure user fees. Hence the theoretical economic toll is a composite toll comprising a,,

cost toll relating to the costs which can be directly allocated to the users of the network and an adjustment, sometimes calleda pure toll, which enables the manager to produce the necessary quality of service by adjusting, as precisely as possible, theavailable capacity to the expressed demand (note that this second component only concerns the part of the network with nosurplus capacity).

The second principle involves relating pricing to the difficult question of covering the fixed and joint costs which
within the rail system, as in many other networks, represent a large proportion of total costs. The traditional theoreticalsolution based on marginal cost pricing, considered optimal, was to have these costs covered by the State budget. However,the perverse effects of systematic subsidisation, nowadays decried as public failures, mean that such a solution can no longer
reasonably be regarded as optimal. Nevertheless, imposing budgetary constraint on the enterprise responsible for the
infrastructure is not sufficient in itself to ensure the efficiency of the system. The pricing method and the formulas forallocating the fixed costs which by definition cannot rationally be allocated to any particular user, have definite,,

implications for the social surplus which the system can produce. One of the main difficulties encountered in connection
with pricing is that associated with the manager's technical and economic (but also political) ability to charge differential,
even discriminatory fees.

In the last part we compare these abstract principles with actual practice.

,5

2. INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION

2.1.

Network opening, redistribution of roles and pricing system

The idea of opening up the network is not a new one. Thus, networks have been identified in many different
industries: the high-tension lines in the power distribution sector, optical fibre systems in telecommunications and delivery
and collection in the postal sector, to which could be added numerous services such as the transport of electricity andinformation and the routing of mail.

Although, as far as the network is concerned, it seems preferable to retain amonopolistic structure because of the economic characteristics of the infrastructure, this is no longer true of the services forwhich, on the contrary, competition seems possible.

In order to solve the problem of opening up the network it is necessary to visualise how certain decisions which,were taken internally within a single institution can be made the subject of commercial negotiations. The analysis must
therefore focus on the types of relations that may exist between the decisionmakers, the private or public operators and theusers. The configuration of the system and the actors is illustrated by the diagram reproduced in Figure 1.

Figure 1.

A traditional organisation chart

Regulator

State

Vote-catching
Prestige

Satisfaction of demandat least cost

Infrastructure

Infrastructure
pricing
rules

Infrastructure
Operations

Disclosure of preferences

Opportunism

Customers
Electors
Tax payers

Users

6

It is thought that, under certain conditions, the intrusion of economic mechanisms into the integrated model will
introduce transparent processes, thus obliging the various actors to disclose their preferences. This then leads to the
explosion of an extreme situation in which the State produces the infrastructure regardless (or almost regardless) of thedemand, of which it has only a faint idea. In this situation the user benefits from a good without knowing its cost.

,This can be improved upon by identifying intermediate levels. It is possible to distinguish between the production of
the infrastructure and its management. Attention may also be focused on the behaviour of the agents and its determinants:
the efficiency of the system as a whole depends on the efficiency of the means deployed to encourage and promotepartnership between the economic actors and the authorities at various administrative levels. In short, it is a question oforganising effective modes of interaction between the public and the commercial spheres.

On the one hand, it is necessary to establish relations between the State or, more generally, the authorities responsible
for organising public transport and those directly concerned with the infrastructure so as to minimise infrastructure costs.
This is part of the new theory of regulation which seeks to define more precisely the contractual framework within whichthese relations are to fit.

On the other hand, it is necessary to make sure that all the transport operators have access to the infrastructure on fairterms. This poses a specific problem with respect to the relations to be established between the infrastructure operator,
public or private and the downstream service providers. Should or should not the monopoly be authorised to supply themarket downstream? Can the sole and final responsibility for the allocation of timetable slots be entrusted to a body whichitself also operates the infrastructure?

The determination of the prices at which the infrastructure manager opens up his network is one of the major
considerations for the sector as a whole. These access charges are important since they determine the terms of competition
between modes of transport. They must also ensure the overall efficiency of the system, that is, be sufficiently high for the
upstream monopoly to be able to offer a suitably maintained infrastructure where the rail system is pertinent, but not so highas to bar the arrival of new entrants. More generally, pricing policy make it possible, on the one hand, to encourage users tosprogramme their services better (in the sense of making the best possible use of capacities) and, on the other, to steer
investment towards ensuring that the system is developed and in particular the network expanded, so as to give the best,,

possible cost-benefit ratio.

When he wishes to formalise the importance of the pricing system in the resource allocation process, the economist
generally analyses the consequences of price distortion. Whatever the reasons, legitimate or not, for the distortion, theconsequent loss of global surplus needs to be estimated. Within this theoretical framework, assuming an initial situation inwhich the pricing system is optimal, any change in prices not justified by a change in the cost of the production factors or bya sudden imbalance between supply and demand would inevitably lead to the misallocation of resources, a poor investment
policy and, ultimately, less user satisfaction. In this case, the surplus available in the system would no longer be maximised.

This theoretical approach, even though it clearly relies on mechanisms less complex than they are in reality, provides
valuable benchmarks for the orientation of supply and ensures cohesion between different strategies capable of serving thesame purpose. The pricing system may then be understood as an information and co-ordination system, and if it offers a7certain number of minimum qualities, the regulation of the system, being based to a greater extent on the rationality of theeconomic agents, will gain in efficiency.

2.2.

Degree of vertical separation in the rail sector and the question of access charges and user fees

These theoretical analyses underlie many of the recent trends in the European rail sector. They form the context for
the adoption of European Directive 91/440 which first provided the impetus for the separation of infrastructure from,operations. The Council of Ministers took a further step by issuing two new Directives 95/18 and 95/19. Before the network
can be opened up, the conditions of network access must be established: licensing system, procedures for the allocation ofexisting capacities, coverage of infrastructure costs, network development, appeal procedures, etc.

However, thisCommunity drive is based on the reforms which many countries have already started to introduce. Although these reforms
may employ different means, they apply the same basic principles, namely the principles of decentralisation and the,organisation of competitive pressure.

In practice, these widely introduced vertical separation policies are very diverse. This diversity contrasts sharply
with a very homogeneous theoretical discussion of the question2. The main difference between all these systems appears to
relate to the role of the State. Sometimes, though this is not the most frequent case, the State more or less organises theservice, whereas the infrastructure is private3; in another configuration, the service may form the subject of a privatemonopoly, whereas the infrastructure remains in public hands (as in New Zealand).

Under a third scenario, privatecompanies operate a network in “partnership” with another private partner who owns the infrastructure (as in the United
Kingdom).

The infrastructure user fee structure and its possible impact on the markets cannot be understood without taking into
account the institutional configuration governing the management and operation of the network. A summary typology of thepossible configurations is proposed in Figure 2.

Figure 2.

Typology of institutional configurations

8

Separation of
infrastructure
and operations
Infrastructure

Network opened
Access for third parties

Infrastructure

Infrastructure

Infrastructure

User pricing

User pricing

User pricing

Network broken up
Infrastructure

Infrastructure

TenderTenderOperations

Operations

Operations

Operations

Operations

Operations

A

B

C

D

E

F

Situation (A) is the one that has been most frequently inherited from the past, namely an integrated network,

occupying a monopoly position. As we have seen, adaptation, which may go as far as radical reform, involves creating levelsof responsibility that give rise to commercial partnerships and to the introduction, with varying degrees of firmness ofresolve, of the machinery of competition. Depending on the extent to which the network is broken down, several options are
possible.

Assuming that the integrated monopoly is maintained, it is possible to imagine the introduction of competitive
mechanisms similar to those in effect for certain urban public transport systems: invitations to tender for the management of
the entire system lead to the appointment of a manager for a specified period. The integrated monopoly may be completely
preserved (E). However, the network may also be broken up and tenders invited for each segment (F). The network may be
divided up on a geographical or a sectoral basis, for example with a network specialising in freight. In these various cases,,

the question of access charges does not really arise since the integrated monopoly is preserved: the bargaining takes place
within the enterprise itself without involving any market services. The authorities may face other regulatory problems, butthey will no longer have to deal directly with the question of access charges.

This does not apply to configurations (B), (C) and (D): although the integrity of the system as a whole is maintained(the infrastructure manager has authority over the entire network), the relation between the infrastructure and the operator oroperators becomes distended. There are still many possibilities for reform, depending on the degree of separation between
the infrastructure manager and the operator. Here the competitive pressure is exerted (with varying degrees of firmness) at
the level of the infrastructure user by the (more or less) explicit means of diversification and dynamisation of the supply ofservices. However, in all three cases, it is a question of sending the operators a price signal calculated to influence theirdemand for the use of the infrastructure. The question of user fees will then be the determining factor.

9Case (B) illustrates the lowest level of separation: third parties are denied access. Here separation is intended,

simply as a means of clarifying the enterprise's accounts by dividing the expenditure items more clearly between those that
relate to investment and maintenance costs and those that relate to operations. This model corresponds to the situation of
those countries which, following the Community decision, preferred not to call into question either the integrity or the unityof their monopoly. Thus, the whole of the network continues to be run by a single operator. However, this system seems
rather unstable and can be better understood as a staging post on the road to a more radical mode of organisation in which,separation having been made effective, third-party access can be encouraged. In the first case, pricing can remain a sort ofaccounting device by means of which the carrier is supposed to remunerate whoever undertakes to maintain and develop theinfrastructure, that is to say himself. Thus, the pricing rules are not really market mechanisms within which the parties,

endeavour to optimise their results. In cases (C) and (D), which are of more particular interest, the situation is quite different.

In case (C), the opening up to third parties is explicit but there remains a principal operator. Thus, the opening is still
marginal and may be restricted to certain market segments, for example, the international market. This transitional situation
may evolve into the much more competitive situation (D) in which, third party access having been generalised, the historical-operator is one actor among others. These two models lie at the heart of the two main scenarios for the implementation of thereforms undertaken in Europe.

We note, however, that the choice of system (C) does not protect the network concerned from sliding towards system(D). There will be de facto involvement of the international services and their demand for track will have to be reconciledwith that of the national operator. Here, Community policy has clearly taken the same path as led road freight transport fromprogressive liberalisation of international transport to complete freedom of cabotage.

Consequently, the opening up of the network, however partial, raises the problem of how to regulate between theoperator already in place and other potential operators. Even though the slot allocation rules may play a very important part,in the long run the calculation of access charges should prove decisive. Suppose, for example, that the allocation rules
favoured the operator in place, say through a practice involving “grandfather clauses” comparable to that observed in air,transport, but that, at the same time, there was a heavy demand for slots, for international traffic for example. The,

infrastructure monopoly could then take advantage of this excess of demand over available capacity by increasing the user
price where the supply was scarce. If the use of the “grandfather clause” were too expensive for the historical operator, he
could waive it and review his operating schedules in order to fall back on slots in better supply and the available capacity
would then be sufficient. If it were still profitable to exercise the right despite the higher price, this would bring theinfrastructure monopoly a return sufficient to finance the necessary investment in capacity.

In practice, this configuration might be relatively rare, but a similar problem might arise, including in the case ofconfiguration (B), if the historical operator were to make, within the same space-time frame, requests for slots on behalf ofdifferent services (national and regional passenger services, freight services, etc.). If these requests were sufficiently welljustified because of corresponding traffic demand, that would reduce to the expression of a need for investment in capacity
on the sections in question. The historical operator might then have an interest in sending a “price signal” reflecting theshortage of available slots to each of the requesting services. It would be up to the latter either to buy because they were able
to cover the cost or to transfer the demand to less busy routes or periods. This comes back to the above-mentioned choice
between managing the demand and being able to finance additional capacity.

10This alternative reduces to an infrastructure pricing principle which is well known but worth recalling in orderproperly to explore its conditions of application to rail transport.

3. INFRASTRUCTURE PRICING AND
MAXIMUM EXTRACTION OF AVAILABLE SURPLUS

Infrastructure pricing may have more than one objective. The following presentation is founded on the idea that thebasic principles should be established as a function of the collective efficiency of the system. Indeed, it would seem difficult
to defend a pricing system which regularly deviated from that objective. Thus, this theoretical look at the problem suggeststhat there should be no segmenting of pricing between different, possibly contradictory objectives, namely optimum use of,

the infrastructure, on the one hand and the financing of its renewal or the pursuit of social or environmental objectives on,

the other. In fact, all these objectives can be reduced to the general objective of maximising the global surplus generated by
the system.

On what principles should pricing be based in order to extract the maximum surplus from the system for sharing out
among the various actors? This surplus can be identified only by relating it to the costs of the system and, in particular, theinvestment costs.

3.1.

The concept of marginal cost and the optimisation of investment

Maximum efficiency obtained by marginal cost pricing in sectors with increasing returns is a decisive conclusion
contributed by the theory of welfare economics. However, this theoretical result presents a number of problems. Apart fromthe undoubted difficulties of application, the concept is also open to theoretical objections.

In many cases, however, in discussing this issue confusion is created insofar as the concept of marginal cost that is,

criticised is very often reduced to a user cost4. At first glance, this is hardly surprising. Understandably, since the marginal
cost enters into the equation as the derivative of a total cost function, any cost factor that does not vary with production will
vanish in the mathematical operation.

This classical presentation, without actually being false, can lead to inaccuracies with dangerous theoretical andpractical consequences, simply because in this approach it is assumed that the investment is given and realised. In a mannerof speaking, the act of investment is ignored as an optimising tool, on the same basis as pricing. However, the theoreticalframework of the optimal allocation of resources cannot be satisfied with this reduction or with the solution consisting intransposing this short-term static model to the long term and treating the fixed costs as variables, thus causing them to vanish.

Indeed, taking the fixed costs into account presupposes an analytical approach quite different from that which
consists in making them vanish. The fixed costs form part of the irreducible and fundamental linkage between the short andthe long term. Leaving out that linkage amounts to evading the embarrassing questions raised by coverage of the costs thus

11

incurred over several periods. From the standpoint of cost minimisation, it is well known that it is always possible todistinguish between directly avoidable costs5 costs that can be gradually absorbed and, finally, totally unavoidable costs.

,

This distinction then makes it necessary to bring other concepts into play.

In particular, it is necessary to introduce a terminological distinction in order to avoid confusion. The variablemarginal cost is a partial cost clearly distinguishable from the marginal cost, which has a different theoretical content: thepartial cost relates specifically to a short-term situation in which only the variable costs are considered, while the concept ofmarginal cost relates to a situation in which it is assumed that the authorities meet the demand, if need be by carrying out aproject that creates a discounted surplus greater than the total of the costs necessary to produce it. Thus, as many authors
have stressed6, this concept is fundamentally linked with the investment decision.

Taking the long term into account requires the use of a programme situated upstream of the decision to invest. The
fixed costs are not, strictly speaking, variabilised; however, the transport infrastructure is regarded not as a natural resource

made available but as a good, to produce which the community must sacrifice resources.

Suppose that there are several technologies capable of meeting a given level of demand. Each of these can becharacterised by a fixed cost independent of the level of utilisation of the infrastructure and by a variable cost. The producer,

or the authorities have a certain number of possible solutions available to meet the demand. To each investment there
corresponds a particular total cost function which depends on two variables, the investment

I 1 and the level of productionq:C( I,q ) = a( I ) + b( I,q ) 2
Thus it is possible to distinguish between two marginal costs:--

the short-term marginal cost when q varies for a given investment level:γ=--∂C( I,q ) 3;∂qthe long-term marginal cost when the investment varies:Γ=∂C( I,q ) 4.
∂I

It is reasonable to assume that the producer (or the authorities) wishes to produce the good or service in question at
the lowest possible price, if only to maximise the collective surplus. Thus, for each anticipated level of production, he will
adopt the technology calculated to supply that good or service at the lowest price. Therefore, to each level of production
there corresponds a minimum cost which itself relates to a particular total cost function belonging to the family of

C(I )

5.

i
If it is assumed that I can vary continuously, the totality of these optimal points, which minimise the cost of production, will

form a so called long-term cost curve. We note that the curve obtained as a result of such a theoretical projection will be-completely virtual. It defines a boundary of maximum efficiency of the production system at a given instant of time. Rather
than an objective to be achieved, it is primarily a theoretical benchmark. It is a short-term curve envelope. This curve

12defines a functional relation between the long-term total cost and the quantity produced, on condition that each level ofproduction is obtained with plant of the optimum size.

If it

is assumed that the producer is able, at any time, to adapt his investment to the level of demand, there will be an

infinity of short-term total cost functions. The system may be called upon to display its adaptability at any time. In this case,there is no contradiction between the short-term and long term marginal costs. The short-term marginal costs are always-

defined, while the size of the plant is optimal for the production level in question.
To discard the hypothesis of permanent adaptability (divisibility) is to accept that the demand can be met by atechnology or investment which is not necessarily optimal. In this situation, which is generally that of transport systems,
there is almost inevitably a difference between the short-term and long term marginal costs. There will then be several-

possibilities.

In the first case, that of underinvestment, the technology employed is not optimal since the short term marginal cost-is higher than the long-term marginal cost. In the second case, that of overinvestment, the short-term marginal cost is lower
than the long-term marginal cost

; the demand is met by an investment which costs too much for the use which is made of it.

When, exceptionally, the system is optimised, the supply is precisely adapted to the demand, the two marginal costs are equal
and, in this case, the marginal cost involves, over and above the short-term marginal expenditure, the optimal variations in
the cost of the plant necessary to meet the demand.

“

Under these conditions, and for practical applications of the theory of social returns, it is necessary to define the marginal cost of a specificservice as the additional costs of all kinds (labour, energy, raw materials, depreciation, interest charges) resulting from the provision of anadditional unit of that service when the existing fixed plant is precisely adapted to the volume of production in question7.”

Accordingly, the marginal cost to which pricing theory relates is defined at economic equilibrium and, consequently,
with total utilisation of the fixed plant. This leads to a radical distinction between the marginal cost as described above andthe partial cost. Thus, Marcel Boiteux considers it necessary, despite everything that may have been written on this subject
during the last thirty years, to denounce, once again, the frequent identifying in common parlance of the marginal with thevariable cost. He considers this faulty“” identification to be still “a major source of misunderstanding”8.

This also means that the determination of the marginal costs has real economic significance only on the assumptionthat the infrastructure is optimally managed. For the concept to be pertinent the maintenance operations and the investment,

renewal operations must be carried out at the optimal time and their cost must be minimised.

If the marginal costs thus defined are used for pricing purposes, the system will be coherent and optimal. This meansthat the consumers' choices will be optimally oriented since they will be encouraged to choose, among several ways ofsatisfying their needs within a given framework of constraints, that which is least expensive for the community. However, atthe same time, the community must ensure that the demand thus expressed is always satisfied at the least possible cost.

This clarification is a necessary preliminary to the application of practical pricing tools. Within this context it is now
clear that marginal cost pricing is future-oriented pricing. Accordingly, it should concern itself not with the previous cost of
the infrastructure but with the use that the users will make of it. A knowledge of the users' preferences then becomes one of
the keys to the global optimisation of the system from the standpoint of both economic calculation and pricing.

13However, the balance between supply and demand thus achieved may give rise to very different situations on the railsystem depending on the level at which the service quality is to be pitched. We have previously used expressions such as“meeting the demand” or “plant of optimum size”. For example, should there be perfectly regular timetables with zero delays
or would a reasonable amount of delay be acceptable if it permitted the more intensive use of capacity? Clearly, thesequestions prompt us to reflect on the quality of service to be provided which, in its turn, is also subject to a trade-off between
costs and benefits.

3.2.

The supply-demand equation or how to define an optimal quality of service

To deal with this problem, public economics traditionally relies on the notion of a mixed collective good, i.e. a good: theconsumption of a good by a user cannot be consumed by another, whereas certain otherso-called quality characteristics remain indivisible
because they concern all users. These mixed collective
goods are subject to so called congestion effects9. In the case of rail infrastructure,
the indivisibility of its use cannever be ensured inasmuch as two trains cannot share the same “slot” at the same time.
The slots are shared
between the different users. The use of infrastructure, from this point of view,is divisible. On the other hand, the quality of service, which depends on the reliability of the train timetables on acongested part of the network, is the same for all the users at a given instant10 This collective good is called mixed because.
it has two fundamentally different characteristics, the first-- access to infrastructure -- being divisible, thesuch that the quantity consumed can be distributed among the individual consumers (the good is therefore divisible)

other not. Congestion is a particular case of an external effect where the reasons why people cause and suffer it are linked with theconsumption of the same service.

In order to optimise the system and achieve the maximum available surplus on the infrastructure, the authorities must
both determine the optimal level of investment and, through good pricing, manage the level of demand. Investment and levelof demand are the two factors of the quality of service offered which different users value in varying degrees.

In order to isolate the problem posed by this linkage, let us consider an infrastructure the cost of using which is very,

low and may therefore be deemed negligible11.

Let us suppose that all the users i liable to use the infrastructure place different values on the use of this good,
given quality of service. We then obtain an inverse demand curve which we will denote byrepresents the utilisation of the infrastructure by the individual ifor awhere Q

Pi(Qi ,g),.
, and g an indicator of service qualityi

The quality of service offered on this infrastructure depends on two parameters: the number of users on theinfrastructure and its physical characteristics, which depend on the level of investment k. This level of investment varies withtime as a function of the outlay made by the operator, ψ ( k ) 6.

Taking into consideration several time periods t, we write Pit(Qit,gt), with
gt = (Qit,...,Qnt,k) the quality of service at period t. We then suppose that eachuser integrates this quality of service, Pit(Qit,gt) being the value that the user i
14

accords to the use of the infrastructure at a given level of quality g. This value
may evolve over time.
The individual surplus is given by the difference that exists between the value that the individual attributes to the useof the infrastructure and the cost which that use represents for him, remembering that in this case theuser cost, in its strictest sense, is seen as negligible. This cost is therefore
limited to the deterioration in quality of service suffered by the user, due to theutilisation of the infrastructure by others. This cost is all the more important thegreater the number of users and the weaker the investment. If we take Dt as thedeterioration of service quality at time t and Vit the value that the user i gives tothis deterioration, the surplus of user i for each period t is expressed by:

Pit − Qit Vit Dt ( Q1t ... Qit ... Qnt , k )Now let us assume that the operator is seeking to maximise the social surplus which this infrastructure is capable ofgenerating. For each individual i and for the entire length of time in question

T

Qit

t =1

0

∑ ⎛⎜⎝ ∫

, we have:

Pit . dQit − QitVit Dt ( Q1t ... Qit ... Qnt , k )⎞⎟⎠The global surplus is obtained by summing over all the users and subtracting the investment cost. This calculation
leads to the following expression:

T

n

Qi

t =1 i =10∑ ∑ ⎛⎜⎝ ∫ P . dQ − Q V D (Q ... Q ... Q , k )⎞⎟⎠ − ψ ( k )
it

it

it

it

t

1t

it

nt

The maximisation of the surplus depends on two variables, the utilisation of the infrastructure and the level ofinvestment.

The first n partial derivatives have the form:

oS

∂Qit

n

= Pit − Vit Dt (Q1t ... Qit ... Qnt , k ) − ∑ Q jt V jt
j =1

The relation for the investment is written as follows:

15

∂Dt
∂Qit

∂D t
∂S
=−
− Ψ ′( k )Vit Qit∂k∂kt =1 i =1
T

n

∑∑

7
Thus, the first-order conditions lead to the following two relations:n

Pit = Vit Dt ( Q1 ... Qi ... Qn , k ) + ∑ Q jt V jt
j =1

Ψ ′( k ) = −

T

∂Dt 8

n

∑ ∑V Q ∂k
it

t =1

oDt
∂Qti

(1) and

(2)

it

i =1

Equation (1) establishes the principle of the pricing rule. The first term of this expression represents the“cost”

accepted by the user i resulting from the loss of quality of service associated with congestion. The second term represents thevalue of the quality of service lost by all the users because of the last utilisation by the user i: this last term represents theexternal cost of congestion for which the latter is responsible.

Using classical pricing terminology, the optimal pricing is such that the price corresponds to the sum of the private
marginal cost and the social marginal cost. The first term is already borne by the user. The toll to be applied should
therefore correspond to:

n

oD 9

j=1etj ≠iti∑ Q jt V jt ∂ Q t

If we now consider the second equation (2), which incorporates the investment dimension, it indicates that thecapacity should be developed until the marginal investment is equivalent to all the congestion costs avoided.

Finally, and this is crucial, the optimum in terms of social efficiency will only be ensured if these two conditions are
satisfied. The golden rule of marginal cost pricing consists of these two conditions which theory suggests should be kept,

together. In common parlance, it could be said that this dual logic consists in establishing a price which, wherever there issaturation of the network, ensures either that demand is sufficiently well managed for the available capacity to be still
sufficient or that the cost of the necessary investment in capacity can be covered. However, the quality of service production
function may have different characteristics depending on the importance accorded to the intensity of the demand. The
optimisation procedures will then be more or less determined by scarcity phenomena.

The congestion toll described above may take several forms depending on the degree of divisibility of infrastructure,use. The less the divisibility, as in the case of road transport, the more the intensity of use will affect the quality of service.
But the greater the divisibility the less perceptible this effect and the more pricing should be oriented towards scarcity
management systems, as in the case of car parks. The analysis should therefore be focused on the technical and economic
relationship between the infrastructure and the uses of that infrastructure.

16

The rail system does not readily lend itself to this type of analysis. The existence of timetable slots seems to givecredence to the idea that the use of the infrastructure is totally divisible and that there is therefore a strong user rivalry among
the various consumers. Thus, it is theoretically possible to establish a market in user rights, for example by auctioning slots,,

and thus reconcile supply and demand. It seems that this might be practicable on railway lines dedicated to similar kinds oftraffic since, in this case, the slots auctioned would tend to be homogeneous. However, the only configuration that would
seem to lend itself to this exercise is that of lines specialising in freight and open to several carriers, which could only apply
to the lines, still to be organised, of a trans European rail freight network. The first “freight corridors” to be established are-

not organised along these competitive lines.

In most cases, competition remains latent and overshadowed by slot allocation rules which predate the reforms.
However, it is very real wherever network saturation is a problem, which brings us to the difficult question of capacity.

Rail capacity on part of the network can be very roughly and provisionally defined as the maximum possible numberof movements that can be handled per hour. The reality, however, is much more complex.

On the one hand, capacity is determined by the characteristics of the infrastructure itself: the configuration of thelines and sets of tracks, the existence of community lines, switches, track intersections, the speed permitted by the design ofthe track, gradients, etc. Moreover, the capacity also depends on the utilisation of the infrastructure: type of trains (length,
axle load, etc.), speed, number of stops, etc. The train schedule is then decisive and its organisation will have an impact on
the network's effective capacity which will be all the more considerable the more heterogeneous the slots concerned. The,

capacity will then depend on the train schedule as it has been drawn up. The scheduler and the rules of arbitration on which
he relies will thus play an important role, a role which, in railway tradition, has not been much influenced by theconsiderations of the economist who, for his part, is keen to maximise the surplus that can be extracted from theinfrastructure. To that end, he analyses the economic advantages which the consumers derive from using the infrastructure.
For example, a decrease in the time taken by a train to travel between two stations may lead to a reduction in the technicalcapacity of the infrastructure by eliminating slots, but that reduction in capacity may be justified because it results in a net
gain in surplus production. Conversely, the economist lacks mastery of the complex relations between the characteristics of
the infrastructure, the possible operating programmes and the response of the final demand.

This difficulty involves both infrastructure pricing and project evaluation. Whether it is a question of calculating adeveloping marginal cost or the return on an increase in capacity, it should be kept clearly in mind that such an increase canvery often be achieved in different ways: an additional junction, flyovers for avoiding track intersections, higher speed
limits, passing track en route or in the station, improved block arrangement, better power supply, safety and traffic control
installations, restoration of alternative routes, etc. As with the roads, the optimum infrastructure capacity is not a technicalbut an economic factor which, however, for rail forms part of a complex universe of technical solutions.

Here we have one of the explanations for that common tendency of railway reforms which separate infrastructure

,

“

”

management from transport production. The unified monopoly operator or separate operators not being omniscient, whatever
the theoretical optimisation models may suppose, have not efforts been made to improve the efficiency of the system bygiving the carrier the opportunity to make the best possible use of the signals sent him by the infrastructure manager and viceversa? Thus, it is for the carrier to interpret the infrastructure user price signal and for the infrastructure manager to interpret

17

the demand signals he receives from the carrier. These“interpretations” could be based on the teachings of public

economics.

However, to the above-mentioned difficulties we should add another associated with a familiar feature characteristicof most rail systems, namely the presence of very considerable fixed costs and modest marginal costs over most of the
network,,i.e. wherever there are no saturation effects. The principles we have noted then lead to pricing which can result ina considerable deficit which it is the community's responsibility to meet. Whence the now acknowledged need to take this“budgetary constraint” into account.
3.3

Allowing for the budgetary constraint.

The doctrine according to which the producer price of industries with diminishing costs should depend only on themarginal operating costs and the rule according to which the authorities should cover all the fixed costs from taxes first,,made an explicit appearance in the railway literature of the late nineteenth century. The French tradition of the economist
engineers of the

École des Ponts et Chaussées made a big contribution to these developments and their application. The

debate became more animated following the appearance of Hotelling's article12 in 1938. He concluded that the deficit
resulting from the application of this global pricing principle should be financed by global taxes which, like the taxes on rent
charges or inherited income, are supposed, in theory, not to affect the marginal behaviour of the economic agents.

Nevertheless, there may be a conflict between this theoretical viewpoint and another scarcity phenomenon, the publicfinances. Moreover, it assumes that resources are optimally allocated by the public operators, which is not necessarily thecase when they believe themselves to be free of all financial constraints. It is to correct these dysfunctions that an entire
theoretical school has devoted itself to justifying the addition of a budgetary constraint to marginal cost pricing. There areseveral ways of understanding this approach.

For some, this concern for a balanced budget is, in the words of Serge Christophe Kolm, no more than the obsession

-

of

“

a short-sighted and narrow-minded accountant who knows nothing of economics, trying mistakenly to transpose the criteria of the private to the public

sector13.

,” By refusing to consider the main analytical conclusions of welfare economics, the supporters of the balanced

budget deny themselves the possibility of satisfying, with the tools of economics, the demands of the public interest.
Without rebutting this position directly, Mark Blaug has made it the target of some equally critical remarks which reflect thedifficulties created by this pricing principle. Thus, according to Blaug, what the Anglo-Saxon authors call the Frenchschool14 has trouble in taking the existence of deficits into account:“

The characteristic feature of the French contributions to theliterature (on marginal cost pricing) is a total inability to take into account the problem of deficits in the diminishing cost industries which, indeed, hardly
receives a mention15.”

For others, there are fewer disadvantages (i.e. less loss of global surplus) in distorting optimal pricing to control thedeficit than in leaving the latter to drift while seeking to adhere strictly to the optimal pricing principle. Thus, in France andEurope there has been a slow swing of the pendulum: the arguments in favour of marginal cost pricing no longer convince,

the authorities, who are more concerned about the financial situation of the public corporations, especially that of the railway
companies which are steadily losing modal share, as well as about the unfortunate effects which the systematic covering of
the deficits is having on the management of those enterprises.

18

Driven by the structural difficulties of the public finances, this trend is also based on the failure of a pricing system
which requires transfers between taxpayers and users to ensure that the cost of the service to the community is explicitly
weighed against the interests of those who use it. The gap between those who benefit from the system and those who financeit leaves a space within which the economic agents can conceal their preferences. The deficit subsidies may also hide andhence permit inefficient operation. Now, if there were no strong incentive to seek the minimum average cost, the willingnessof the State to close any gap between the marginal cost and the average cost would result in enormous waste, which would be
all the more enormous as it would probably be invisible and almost undetectable16. Thus the balanced budget constraint isaimed at an efficiency deficit which goes far beyond the traditional criticisms levelled against the champions of marginal costpricing concerning the difficulties of evaluating the marginal cost and the technical, political and institutional barriers to
implementation.

The following list of criticisms, without being exhaustive, will serve as an illustration:

the pronounced

indivisibilities of the infrastructure would lead to “sawtooth” pricing incompatible with long term decisio making by then; the lack of rules for allocating certain cost elements would make competition impossible because of theexistence of cross-subsidies differential pricing on the network would bring into question an entire spatial standardi ation;z
system the practice would make it necessary for both users and authorities to gather, at great expense, information on the;economic agentscompetitive structure of the market, on externalities, on the elasticity of the demand, etc. and, in short, the additional costs
which the public would have to bear to implement these pricing systems would be out of all proportion to the advantages
which they are supposed to bring.

As Vickrey points out, we are constantly on the horns of a dilemma from which it is difficult to escape completely.
On the one hand, theoretically, the application of marginal cost pricing ensures that infrastructure utilisation is optimised but,
considering the financial scarcity constraint, we then deprive ourselves of information on the real value of a new project or, if
the project has already been carried out, about whether it is still worth operating. On the other hand, with the balanced
budget constraint, we can be sure that the project or its operation are worthwhile, but we do not know whether the
infrastructure is being utilised to best advantage17
excluding an.

More generally, by employing crude regulatory mechanisms, byumber of users and by eliminating certain activities, the application of such a rule might lead to a serious lossof social efficiency18.

All the solutions proposed for introducing a budgetary constraint into the pricing system must face this radical
criticism: the allocation of the fixed costs to a particular user or a particular use remains largely arbitrary. Thus, thecalculations form the subject of endless discussions about the relevance of a particular distribution scheme. It might seemthat subtle cost accounting could reduce the proportion of non apportionable costs and thus eliminate the problem.

-

However, these methods can always be debated and offer no solution for a usually still significant residuum.

Now, from the standpoint of the optimal allocation of resources, the pricing system should not be mainly concernedwith distributing the costs but, more fundamentally, should favour the achievement of a surplus. The objective is much more
ambitious. Leaving aside the utilisation costs, or which the allocation procedures do not, in theory, pose any particularfproblems, it is clearly the availability of the infrastructure that must be reflected in the scales and not its effective
consumption. Then, the efficient mode of contribution is not to seek to allocate costs but to find a means of extracting the19surplus needed to finance the infrastructure while ensuring that the surplus is achieved. From the moment that this surplus
exists (it is the role of public economic analysis to locate it), there exists a pricing system to bring it to light.

It is the segmentation of the demand which, in this respect, makes a vital contribution to economically efficientpricing. The theory of surpluses leads to precedence being given to pricing systems based on this latter principle. In
practice, it may lead to the adoption of the monopolists' rule to the effect that the best pricing consists in imposing thecharges that the traffic will bear.

In fact, the question of the social loss involved in pricing that deviates from the marginal cost, like the question of the
deficit and the limitation of its perverse effects, makes sense only if price unity is assumed. As soon as a discriminatory
approach is adopted, the difficulty may disappear. Price discrimination, which takes into account the response to prices ofeach segment of demand, then makes it possible to increase the global surplus since the number of users will increase, while
ensuring better coverage of the costs for the producer. The introduction of socially efficient price discrimination turns
pricing completely upside down. It should be distinguished from the pricing principle, often encountered in the literature,that everyone pays his share, which makes even less sense inasmuch as the allocation of some costs is arbitrary. It forms partof another approach which authorises any use of a good calculated to generate a positive net surplus. Under this condition,
not only will any discriminatory pricing system be neutral from the standpoint of the optimal allocation of resources, but it
will be totally justified from the standpoint of the community since it will enable a surplus to be generated. Thus, the firstprinciple considered to characterise optimal pricing gives way to another principle.

A pricing system is deemed to be economically satisfactory if the operator procures for each user a share in theabsolute utility of the service sufficient to constitute an effective incentive for him to use the infrastructure. The contribution
to this service is then said to be fair as long as, for each consumer and for each use, it does not exceed the net value of theutility he derives from it which, it should be recalled, must be positive. Although often disputed19 this approach, based on,tapping into a surplus, has a definite advantage in relation to the problem of financing which, as Jules Dupuit suggested,consists in demanding as the price of the service provided not what it costs the provider but an amount commensurable with“

the importance attached to it by the one for whom it is provided20.

This basic principle remains very theoretical and there are major difficulties to be overcome before it can be applied.
However, the tools do exist. In 1956, Marcel Boiteux21 proposed a solution which marked an epoch in the history of
economic thought. The literature has even associated the name of the author with that solution so that it is customary to
speak of Ramsey22 Boiteux pricing. Anglo-Saxon authors also refer to this principle as the-“Inverse Elasticity Rule”.

Tradition has it that this seminal article offers a general solution of the problem of the production and the Pareto-optimal
pricing of a public monopoly obliged to balance its budget within the context of a competitive economy.

Here, then, the decisive concept of elasticity of demand makes its appearance. Thus, if the enterprise is considered tohave several markets at its disposal, observance of the budgetary rule which requires deviation from the marginal cost willlead to the prices for each market being so determined as to make the mark-up between the consumer price and the marginal
cost proportional to the inverse of the price elasticity. In practice, this comes down to saddling the goods or services forwhich the demand is relatively inelastic with a larger share of the deficit. This pricing practice harks back intuitively to amechanism well known in the field of taxation: the loss for the community resulting from the imposition of a tax (that is, in20this case, the reduced consumption of a good consequent upon an increase in price) will be the greater the more elastic thedemand.

21

Figure 3.

Social loss and elasticity of demandyPriceSocial loss
p2

p2
Toll

Toll

p = Cmp = Cm

Q2

QCm

Q2

Quantity

QCm

Quantity

Assuming a monopolistic market on which the demand is very elastic, the slightest variation in price on this market
will be reflected in substantial changes in the pattern of consumption. Thus, the so called Boiteux rule consists in taking-

advantage of different relative market situations. The steeper the slope of the demand curve on a market, the lower theelasticity and the more limited the social loss resulting from a deviation from the marginal cost. Conversely, on a highly
elastic market, the slope of the curve will be flatter. In this case, a deviation of the price from the marginal cost will bereflected in a heavy social loss.

Thus, when by necessity an enterprise has to cover the whole of its costs and hence, in the case in question, when it
is obliged to deviate from the marginal cost, this theoretical demonstration makes it possible to justify placing the strain on
the consumption which is the most inelastic. When the demand is relatively inelastic, the deviation of the Ramsey-Boiteux
price from the marginal cost will be small and hence the deviation at the optimum will be minimised. The mark-ups will begreatest on the least sensitive demand. Thus, this method of pricing seeks not to distort the price signal sent to the mostsensitive users in order that they may not significantly modify their pattern of consumption and to levy the charges on theless sensitive users who will not reduce their consumption more than slightly relative to the social optimum, even if theprices are raised.

Thus, returning to the allocation of non-apportionable fixed costs, where a monopoly can rely on several products itshould parcel out its fixed costs according to the sensitivity of the demand. Prices are raised sharply where the demand is notsensitive and reduced where it is. The quantity consumed on each market remains as close as possible to the consumption
which would have been observed in the first-best case. The optimum obtained maximises the social surplus subject to theconstraint of a balanced company budget or, if this constraint seems too harsh or inaccessible, by assigning in the RamseyBoiteux optimisation programme a scarcity coefficient which overestimates the collective utility of the public contribution.

As Boiteux has himself been pointing out since 195623, to the difficulties of application of this pricing method there
must be added the unrealistic assumptions of the model. At the same time, the author questions whether the practicalapplication of the results obtained is of any real interest. In fact, the application of this rule poses a number of problems, inparticular, by requiring a knowledge of demand elasticities. More generally, the necessary hypothesis of an omniscienteconomic supremo is obviously unrealistic. The fact that it is a question of pricing the use of the rail infrastructure and not
the transport service itself is a further complication. The carrier is then the source of the demand, in the sense that he needs

22slots and he himself responds to a combined demand: that of the users or shippers and that of the transport organisingauthorities who purchase qualities of service from him. Thus, the effects of infrastructure pricing on the final demand are“”linked with the pricing principles which the carrier himself applies. For the system to be coherent and economicallyefficient, it is very likely that the two operators will have to price in accordance with similar principles, but this linkage has
still to be subjected to a complete analysis.

This brings us to an essential conclusion concerning the pricing system which Maurice Allais considers to be one of
the key elements distinguishing his theory of the markets economy from the standard model24. Within this more general
theoretical framework, which seeks to maximise the collective surplus, the deficit constraint can be removed provided there
is no objection to questioning price unity. That is an intuition already clearly expressed by Jules Dupuit25 in his time. If thesurplus generated by an infrastructure is greater than the cost of putting it in place, then there necessarily exists a pricing
system capable of tapping into this surplus to obtain the sums needed to finance the project while maintaining maximum
social utility. The achievement of the surplus becomes the challenge of the pricing procedures. It can justify the transition
from a logic of differentiation based on costs alone to a logic of discrimination based on segmentation of the demand. It is
not a question of differentiating prices solely on a user pays basis, which makes little sense since, once again, a portion of thecosts cannot be distributed in accordance with this principle. The discrimination of the demand should be based on theprinciple of he pays who can, especially when that is the only way of obtaining a return on projects with a positive global net
utility. Otherwise, if the project is not financed out of the general budget, a type of solution now considered best avoided, it
will never materialise.

We then enter a pricing universe that is more complex but still regulated by marginal cost in which it is less a matterof minimising the effect of a deficit linked to optimal pricing as of seeking to maximise the surplus by differentiating thepricing, segmenting the customer base and, finally, obliging all the economic actors to disclose their preferences. These
principles now need to be compared with the actual results of implementing the most significant recent reforms.

4.

APPLICATION OF PRINCIPLES AND
NETWORK CONSTRAINTS

In this final part of our paper, we shall compare the few theoretical principles that can be derived from economic
analysis with the practices of networks which, as a result of having been reformed, should have solved the infrastructure
pricing problem. Accordingly, we shall examine, in turn, the British, German and French cases.

4.1.

The British experience: making a surplus26

The restructuringof British Railways began in the early 80s. This long process, intended to

improve the efficiency of the sector, led the authorities gradually to modify the enterprise's internal organisation. On 1 April
1994, the reforms took a further step forward with the entry into force of theRailways Act which prepared theground for a phased privatisation of the sector by programming, in particular, for the separation of operations from23

infrastructure. The enterprise's transport services have thus been separated into smaller entities which, from the outset, theauthorities have made clear they intend to privatise. As for the infrastructure, it has been assigned to a new private-law,

company held by the State,

Railtrack. This company, still a monopoly, retains operational control over the traffic,

allocates capacity and, above all, is responsible for pricing use and determining the fees to be paid by the various operators toensure that the costs are covered27. The company, which initially was left in public hands and even benefited frominvestment subsidies, was privatised in 1996. BR's passenger transport business has been split up into 25 separate entities
which have been placed under private sector control by introducing a franchising system. The freight business has all beensold off to the private sector and opened up to competition. Thus, Railtrack buys services from and sells them to a range of
operators.

At the same time as splitting up BR, the Railways Act established a powerful regulatory system based on threebodies. The first, the Office of the Rail Regulator (ORR), is mainly responsible for supervising infrastructure access andpricing. It establishes the rules of competition and oversees their application, especially in the interests of the customer. The
task of the Office of Passenger Rail Franchising (OPRAF) is to grant franchises and supervise the correct application of theterms and conditions by each franchise holder, in particular as regards the consistency of the services actually provided.
Finally, the Health and Safety Executive (HSE) ensures that the safety regulations are observed. It issues rules governing thedesign, construction and operation of rolling stock, infrastructure and equipment.

Figure 4.

The British reforms

HSE
Franchising Director

Rail Regulator

awards franchises and pays subsidy

Scope of regulations
RUCC &
CRUCC

Rolling stockcompanies

Passenger train
operating companies(ROSCOs)(TOCs)

Heavy
maintenancesuppliers
maintain rolling stock

Infrastructure
Maintenance
Companies

Other passenger
train operators

Railtrack

Track renewal
companies

Other
service providers

Freight operators

telecommunications

Source: ORR Report, 1996-97.

Each operator signs a track access agreement with Railtrack. Two sectors should be distinguished. Initially (7-15
years), the franchised passenger line operators have been granted the access rights necessary to provide the services

24

stipulated in their specifications. On certain routes they enjoy protection which will eventually be withdrawn. The existing
freight carriers have been granted initial rights to enable them to satisfy their present customers. Apart from the time slots
allocated in connection with these rights, there are others which are open to competition.

The splitting up of the network immediately posed the problem of the allocation of costs among the various activities.
It was decided that the costs should be allocated to the various sectors in such a way that each sector bore the costs of the
fixed assets and personnel of which he was deemed to be the principal user. The basis for this pricing is that it must be
sufficient to ensure

Railtrack a certain return on its assets.

The rail operators pay Railtrack infrastructure user fees intended to cover the network utilisation and signalling costs
and the cost of supplying power, where appropriate. Thus, the overall aim is to pursue a balanced-budget pricing policy
which also takes into account the ability to pay of the applicants for time slots. Accordingly, it is not possible to speak ofRamsey-Boiteux pricing because of the special terms granted to the franchise operators.

In fact, the pricing system differs depending on whether one considers the operators who provide services underfranchise (subsidised services) or the operators who purchase time slots on the network. The companies which operatepassenger lines under licence are in a special situation since in this case the structure and the level of the access charges
applicable are directly controlled by the regulatory body. The access charges applicable to the passenger lines operated
under licence28 are based on a cost allocation study that uses the concepts of avoidable29 and additional30

costs.

In the event of a time slot purchase, Railtrack is free to negotiate its prices, although the contract must be approvedby the Regulator. The fees are negotiated but subject to approval based on the principles established by the Office of theRegulator.

The general principle requires that the fee structure should not deviate too far from the value of network access forthe users and that it should enable Railtrack to recover all the costs actually incurred in connection with the transport ofgoods, to which there should be added a possible contribution to cover the joint costs shared with the passenger services.
Thus, the pricing rule should be such that the minimum price is not less than the avoidable costs occasioned by the service
concerned. The price should be less than or equal to the costs which Railtrack would incur if the operator were alone on that
portion of the network and then had to assume all the costs. The price should not, when the various cost factors are taken
into account, differ appreciably from one user to another.

In addition to the transparency of the charges being more difficult to achieve for freight than for passenger transport
and it being difficult to determine precisely the share of the cost directly apportionable to a particular service, the allocationof the joint costs is a real headache.

The reforms have been the target of two main criticisms. Some consider that Railtrack, by setting low prices for
freight transport, for which it is competing, may seek to shift the fixed costs onto the passengers and thus improperly obtain
public funding to its advantage. Others, on the other hand, consider that the draconian safety regulations, though reasonable
in the case of passenger transport, are less justified in the case of freight transport and, accordingly, that there has been atransfer from the freight to the passenger sector.

25However, in 1995, before Railtrack was privatised, after examining the access charges applied to the franchisedpassenger services, the ORR concluded that they were too high and more than the operator really needed to fulfil his
infrastructure renewal obligations. The Regulator imposed corresponding price reductions, thus transferring the productivity
gains to the licensed operators. The charges are to be reviewed in the year 2000. Another object of criticism is the charge
structure, the fixed portion being considered too high (91 per cent).
management of resources.

This pricing is not conducive to the rational

In fact, this approach precludes the introduction into the access charge calculations ofdifferentials in terms of rush hours or the economic value of the slots. The costs considered here do not incorporate suchexternalities as noise or air pollution.

When the pricing rules were being drawn up, there was a keen debate between the advocates of a commercial strategy
and those who favoured a more managed approach. The arguments are important inasmuch as the same debate is now being
conducted at the European level. After holding numerous consultations, the ORR concluded that it was better to place themethod of calculating the infrastructure user fees on a commercial negotiation basis so as to give the operator a chance toattract all the economic agents capable of paying at least the directly apportionable costs. Thus, the main aim is to give theinfrastructure manager the means to induce the maximum possible number of operators to use the network. Clearly, then, theobjective is to achieve and engineer a surplus. This approach has been much criticised. The owner of the infrastructure canengage in cross-subsidisation and favour one party or another without necessarily ensuring the complete opening up of the
network

26

4.2

.

The German experience: covering the costs

As in other countries, the amount of federal subsidies granted to the rail sector in order to balance its budget andguarantee its borrowings had become considerable while, at the same time, rail's share of total traffic was being continuallyeroded. Reunification only worsened the crisis and, in 1993, the enterprise (made up of the DB and the R
more than DM 67 billion while theB) had debts ofovernment was anxious to support the development of the sector. The reform ofG

German railways was speeded up, profoundly transforming the rail transport situation across the Rhine. It opened the wayfor ever keener competition on the railways, on the one hand in the short term, by placing the historical rail operator in theposition of a service provider in its negotiations with each Land and, on the other, in the long term, by opening up the
network to third parties. The reforms entered into effect, following an amendment to the Constitution, on 1 January 1994.

Thus, the authorities gradually moved towards a vast controlled and concerted structural reform of the railway
company. The

Central Government(Bund) set up a private joint-stock company, the DB AG, in which at present it holds

all the shares but which is supposed to disappear in 1999. The rail system is organised in four independent sectors ofactivity: regional passenger transport, long-distance passenger transport, freight transport and infrastructure management.
These sectors are eventually to be privatised. However, theFederal Government will remain the principal shareholder in

the Fahrweg (infrastructure manager) in order to retain control over investment policy.

As in the United Kingdom, the reforms are based on new institutions. On the one hand, the Federal Office ofRailways - the Eisenbahnbundesamt (EBA) - has been set up to ensure the necessary co ordination and take care of the

-

-

-

general missions of the railways. It authorises operations, certifies equipment and organises work on the infrastructure. It
plans the work on the federal rail network, ensures that tendering procedures comply with the law, grants licences, applies
investment financing agreements, commences prosecutions and settles disputes. On the other hand, the Bundeseisenbahnvermögen(BEV), another federal body, is responsible for clearing the debts of the former company and for administering staff andpension costs as well as financial and property charges. Central government has taken over the costs of the staff of theformer DB with civil servant status who can now be made available to the DB AG for employment under ordinary market,

conditions.

At the same time, to meet the increasing costs of regional rail transport the central authorities have transferred to the,

Länder, with their agreement, the responsibility for organising and financing regional transport operations.

Thus, the latter

will henceforth find themselves in the position of organising authority. They will receive financial transfers from the Bund
to enable them to perform this task31.

Figure 5.

The German reforms

27

BUND
Financial transfers

Organisingauthority

Länder

%

res
sha

EBA
FederalRailway
OfficeBEV
Bundeseisenbahnvermögen(Restructuring body)

Participation
BUND

Network

Financing

Freight transport

Products(choice ofmodes)

Passenger
transport(L.D.)
Freighttransport

DBAG
Regional transport

Timetableorganisation

100

of

loss-making

Infrastructure
profit-making

Infrastructure pricing is an important component of these reforms. The Act authorises access for third parties andthus transposes into domestic law the principles of Directive 91/440. The operating subsidiaries of the DB AG pay the
infrastructure manager for the use of the infrastructure. These charges are published in a catalogue which tells the operators
exactly what price they will have to pay for the whole of a journey, depending on their requirements. In July 1994, DB
Infrastructure published an initial price schedule applicable to all users of the network. The system was chopped up into 4000 sections with well defined characteristics on the following principles.

The prices are identical as between the DB AG and third parties and must be identical for requests with similar
requirements. The differentiation to be found in the catalogues is based on objective criteria. The prices depend on the
category of line, the damage potential of the equipment used which largely depends on the type of use, the required,

regularity, the volume of purchases and the length of time for which the slot is used. The basic tables are compiled on thebasis of four criteria, namely the quality of the track (essentially the permissible speed), the traffic potential (principal,

characteristics of the rail links) according to the type of service requested, the wear and tear (based on a variable cost
analysis) and the planning quality. This last item relates to the quality of service demanded, the reliability (punctuality)
indicator determining the room for manoeuvre left to the infrastructure manager. This indicator is expressed in the form of apercentage representing the margin which the DB is allowed relative to the theoretical journey time. Using these criteria it,

is possible to construct the reference tableshown in Table 1.

The notion of quality introduces an element of economic demand management. Here, the aim of differentiation is todefine a scale of operator's requirements.

In choosing a quality of service the operators disclose their preferences.

,

However, there are strict limits to this mechanism since the percentage is fixed for each category. It would be different if theoperator could choose a level of reliability in each category.

28

Many weightings and modes of payment can be introduced on the basis of this table. If the stated maximum load is
exceeded, the basic slot price is increased by 1 per cent for every additional 100 tons.

For trains running empty, the basic slot price for price classes P1 to P3 is reduced by 10 per cent and that for priceclasses P4 to P7 by 5 per cent. For engines running light the basic slot price is reduced by 20 per cent.

,Every regular slot ordered must be paid for irrespective of its utilisation. It is possible to reserve optional slots. A
reservation fee of 20 per cent of the slot price is then collected. This fee is non returnable.

-

Customers who order many slots are granted a price reduction which depends on the annual total of train-kilometres.

1.

The pricing of the various transport sector modes should also take into account the environmental social costs
and propose coherent pricing rules. This presentation does not expand on this point which would require,

special development. We note that in this respect it is necessary to distinguish between two independent typesof questions. On the one hand, rail pricing should be considered in relation to the social costs actually taken
into account in the pricing of the principal competing mode, namely road transport. This concern for,

coherence might even lead to the legitimising of intermodal balancing subsidies, theoretically justified by asecond-order optimum. On the other hand, and this is a totally different problem, it is necessary to introduce
differential pricing within the rail mode in order to take into account the advantages and disadvantages of thedifferent technologies used by the operators and gradually encourage the use of those that are less polluting.

2.

Brooks M. and Button K. propose a detailed typology of these various experiences in Separating transport

,

,

“

track from operations: a typology of international experiences , International Journal of Transport Economics, Vol.

”

XXII, No. 3, October 1995.

3.

This is the case in the United States for certain passenger services for which Amtrak must negotiate an
infrastructure access charge with the integrated private operators.

4.

The calculation methods used in these studies can often be reduced to very simple procedures, especially as
the quality of data needed for more sophisticated calculations is very difficult to obtain. Nevertheless, thestatistical analysis can be made more precise by greater refinement and by establishing precise relations
between particular types of costs, networks and users.

29

5.

Avoidable fixed costs are then defined as those which would disappear if the firm stopped producing one ofits products.

6.

Winston in a survey of road pricing explains that the proposal to consider optimal pricing and optimal,,

investment in parallel harks back to the work of Herbert Mohring (1962).

This school includes such authors as T.E. Keeler, K.A. Small, M. Kraus, S. Glaister and S.A. Morrison.

Morrison S.A.

,
(1986), “A Survey of Road Pricing”,
N2,
o. March, pp. 85-97.
Mohring

,

H.

and

Harwitz,

M.I.

(1962),

Highway

Benefits:

Northwestern University Press, Evanston

Transportation Research, Vol. 20A,

An

Analytical

Framework

,

, IL.

Small Kenneth A.,

Clifford Winston and Carol A. Evans (1989), Road Work: A new
Highway Pricing and Investment Policy, Washington, D.C., The,

Brookings Institution.
Hau Timothy D.
,(1992), Economic Fundamentals of Road Pricing: A
Diagrammatic Analysis, Transport Division, Infrastructure and
Urban Development Department, The World Bank, December.
7.

8.

Allais, Maurice (1948),

Boiteux,

Revue d’É

conomie Politique, op. cit., p. 230.

Marcel (1994), “Le développement de l’approche économique du service public”,, Édition ASPE EUROPE, Paris, p. 46.

L’Europe àl’épreuve de l’intérêt général, Collection ISUPE

9.

Kolm Serge-Christophe,

SEDEIS.

(1968), “La théorie économique générale de l’encombrement”,

Futuribles,

10.

Although traffic management is generally based on rules of priority, which distinguishes the rail problem fromthat of the roads and creates a further difficulty for the theoretical approach to the pricing of rail infrastructure.

11.

Here we have used the demonstration proposed by Steven A. Morrison who bases himself on the work of,authors such as Mohring, Harwitz and Vickrey.

12.

, H. (1938), “The General Welfare in relation to problems of
Econometrica, 6(3),July, pp. 242-269.
Taxation and of Railways and Utility Rates”,

13.

Kolm Serge-Christophe

14.

Hotelling,(1971),

La valeur publique, l’État et le système des prix, CNRS, Dunod, Paris, p. 7.

In the literature, the French school is associated with the rejection of pricing based solely on balancing theaccounts. This takes little account of the analyses of Jules Dupuit in the last century or of the more recent
work of Maurice Allais and Marcel Boiteux.

15.

Blaug Mark,(1986), “La pensée économique, origine et développement”,

Economica, 4th Edition, Paris,

p. 718.

16.

Allais Maurice

,

d’

É

(1948), “Le problème de la coordination des transports et la théorie économique”,-

conomie politique, 58, pp. 212 271.

Revue

accountability of the managers. In no circumstances should this second factor be neglected

.”

Note

Prévision, Commissariat Général du Plan, p. 151.

18.

Bernard, A. (1983), “Coût marginal ou coût moyen ?”, in Quinet, E. (editor),
École Nationale des Ponts et Chaussées, report on transport economics seminarorganised in 1981-82 by the cole Nationale des Ponts et Chaussées, p. 36.
É
Les transports et la puissancepublique, Presses de l’19.

Very many commentaries on this type of pricing point out that fairness implies that the consumers should bear
the costs of producing the goods they consume and that all the consumers should pay the same unit price forthe same good. This is a frequently recurring complaint:“those systems which differentiate between deficit.”

tolls according to the characteristics of the demand are generally considered unreasonable and unfair

Oort, C.J.,

op. cit., p. 62.

Clearly, the theoretical considerations advanced here shatter this principle. The tolls applied may vary for
products that are identical both from the technical standpoint and by reason of their cost.

20.

Dupuit, Jules (1849), “De l’influence des péages sur l’utilité des voies de communication”,

Annalesdes ponts et chaussées, p. 248.

21.

Boiteux, Marcel, “Sur la gestion des monopoles publics astreints à l’équilibre budgétaire”,
Econometrica, No. 24, 1956, pp. 22-40.

22.

Ramsey F.

, (1927), “A contribution to the theory of taxation”, Economic
Journal, Vol. 37, No. 1.

24.

25.

With that “s” Maurice Allais distances himself from the standard model. For further details, see: Allais,
Maurice(1971), “Les théories de l’équilibre économique général et de l’efficacité maximale. Impasses
récentes et nouvelles perspectives Revue d’ conomie Politique, No. 3, May June, pp. 331-409.
”,
É-

Dupuit Jules,(1849), “De l’influence des péages sur l’utilité des voies de communication”,

Annales desponts et chaussées, pp. 170-248.

26.

We shall not describe the reforms themselves as they have already been extensively analysed. See, forexample:--Montagu,(1995), “L’accès à l’infrastructure ferroviaire, l’expérience britannique”,
26, January, pp. 5 15 Paper read at the AICCF/CCFE onference, Berlin 6 7 October 1994:
- .
C
, The
ailways and European ransport olicy.
R
T
P
Rail International-- (1994),--

Preston John,

Review, Vol--

Britain’s Railways: a new Era, The Department of Transport, London.

, March.

(1996), “The economics of British Rail Privatisation: an assessment”,

Transport

16, No. 1, pp. 1-21.

British Ministry of Transport(1996),

Transport Report.

Available on the Web at:<URL http://www.open.gov.uk/dot/ann_rpt/chap 1.htm>.

--- Nash, Christopher (1996), “The British Experience”, SOrovision of ailway ervices, Round Table 103,
from nfrastructure in theI
PR S
ECMT, pp. 59-102.
The--

Bradshaw, B.

and L. Mason (1994),.

Research Associates Ltd , Oxford.

Rail Privatisation:

eparation ofperations

Facts, Issues and Opportunities, Oxford Economic

27.

Railtrack derives its income from user fees paid by the operators (supply of electricity, etc.), rents paid for theuse of stations and depots and rents from its commercial assets. To these should be added the access charges
which are determined by negotiation (see below). The procedures have been progressively refined. At the
beginning, no rules for calculating the charges were laid down. The first charges were fixed at a level thatwould cover the total costs and ensure a return on the invested capital of the order of 828.

per cent.

The charge includes a fixed annual fee comprising the allocated fixed costs (joint costs) and the additional
fixed costs (specific to each company). The fixed charges, which correspond to about three quarters of the-infrastructure costs, form the subject of negotiations between the operators and Railtrack. The variablecharges contain infrastructure user fees calculated in terms of train miles which are different for eachcategory of rolling stock (10per cent of total costs). The costs incurred at regional and national levels

are shared out among all the franchise holders in proportion to their receipts from fares. The costs incurred at
local level, or on a single line, must be distributed among the users in proportion to the number of vehiclekilometres travelled.

29.

Avoidable costs:

rule for the allocation of the fixed costs of the whole of the services provided by anoperator, equal to the amount saved in the event of his services being eliminated.

30.

Additional costs:

increase in infrastructure costs imposed by its services, taking into account theconfiguration of the other services.

31.

The corresponding subsidies are financed from revenue generated by the petroleum tax (Mineralölsteuer). Notethat article 4 of the Railways Restructuring Act states that, from 1996, the DB AG will no longer receive any
direct funds from theFederal Government for managing regional passenger services. The subsidies areallocated to the Länder, which use them in accordance with their own regional transport policy. However, theLänder must use these transfers for public transport purposes.

Table 1

Price class

P1

P2

High-speed traffic Express passenger traffic.

Quality of service reference table

P3

P4

P5

P6

P7

Regional express

Average-speed main-

Short-haul regional

Local passenger

S-Bahn (urban(main lines)

passenger trafficline passenger traffic

passenger traffic

traffic

rail transport)

Max. load (t)

1 000

750

550

750

400

400

450

Permissible

200 km/h or more

Up to 200 km/h

Up to 160 km/h

Up to 140 km/h

speed on at least one section
Planning quality

105 %

108 %

110 %

120 %

120 %

120 %

108 %

Category of train

Intercity express

EuroCity and InterCity

InterRegio, main-line

Express night trains,

Regional express

Regional train,

S-Bahn train

express trainsaccompanied-car trains,

train, through

CityBahn, slow

fair trains

train

train

(ICE)

33

Table 2

Percentage reduction in terms of train-km per year.

Percent reduction

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Main-line traffic

14

28

42

56

70

84

98

112

126

140

154

168

182

196

210

224

238

252

266

280

0.3

3

25

63

134

205

250

293

333

370

407

444

481

518

555

592

629

666

703

740

train-km (millions)Short-haul traffic

34

train-km (millions)Customers who order slots for several years and sign a contract are granted a further price reduction in addition to thatmentioned above. For firm orders extending over 2, 3, 4 and 5 years the corresponding reductions are 2, 3, 4 and 6 per cent.

,

The German pricing policy makes the financing of rail activities truly transparent, even though the determination of
the costs in terms of train-km is far from receiving unanimous approval and constitutes an obstacle to the entry of new
operators. The relatively high prices and the choice of pricing applied to the train rather than the wagon are dissuading
new operators from moving in.

These price scales have introduced a certain flexibility, but it

is still insufficient and, in a way, is institutionalising the status

quo by discouraging the adoption of new techniques and limiting the freedom of manoeuvre of possible new entrants.
Separation has not progressed very far because DB AG is still both service provider and network operator. The transition is agentle one. The undertaking seems to have been genuinely successful since already more thansixty transport operators

have moved onto the DB AG's rail network and their number is steadily increasing

While proposing rather high marginal network entry costs, this pricing system reduces, on the one hand, theuncertainty for future operators by encouraging longer-term commitments and a search for financial and technical partners
and, on the other hand, short-term practices which could have pernicious effects on the continuity and quality of the rail
service.

Finally, the choice of a high level of global pricing guarantees the infrastructure manager a development capability,
which is one of the strong political choices of these reforms, together with the choice of a user tariff likely to lead to the
optimal utilisation of the network.

4.3.

The French example: a transitional phase32

Introduced against a background of social strife, in particular a big strike in 1995, the French reforms consisted inestablishing Réseau Ferré de France (RFF), a new public company which, as balance sheet liabilities, received three quarters of--the debt of the SNCF and, on the asset side, the national network infrastructure, with the exception of the stations andinstallations needed by the historical operator. The latter was entrusted with the management and maintenance of theinfrastructure on behalf of the RFF, which pays the bill for this service (16.8 billion francs for 1997, the first year of
implementation). The SNCF pays the RFF for the use of the infrastructure. For the first two years a limit was placed on this,fee (slightly under 6 billion in 1997) by the law and the decree establishing the new system.

The first characteristic of the system relates to the fact that, relieved of most of its debt and infrastructure financing,
the SNCF is in a position to balance its accounts, which it is expected to do in 1999. Secondly, the new infrastructurecompany, which at present can only count on earning 6 billion francs, must cover, in addition to nearly 17 billion in network
maintenance and management costs and unavoidable investment costs amounting to about 13.6 billion, charges of around 9
billion on the debt inherited from the reforms. Obviously, most of the difference between expenditure and income is coveredby theGovernment, in the form of either a capital grant or subsidies, the difference being made up by borrowing.

37

This, then, is a very special situation which can be interpreted in two different ways. Either the RFF may be regarded
as a body whose principal function is to take over the debt and cover the deficit (net of subsidies) of the infrastructure accountby borrowing. Naturally, in this case investment would be the adjustment variable and would inevitably face historical,decline. Or the present situation may be regarded as a transitional phase for putting new structures in place, after which
pricing that offers greater incentives and ensures better coverage of the costs will be gradually introduced.

Being capped in 1997 and 1998, the present fee system is obviously far removed from the principle of covering thecosts. It corresponds to about one fifth (in terms of the total amount) of the German system. There is little connection-

between the six billion constraint imposed and the reality of the actual costs, particularly as more than half of this sum comesfrom the regional organising authorities (mainly “Parisian” passenger transport) and less than half from the SNCF.

There is little point in studying this provisional system, precisely because it is capped. However, it should be notedthat the idea was to create incentives, especially where the demand for slots is high relative to capacity, i.e. on the urban andsuburban lines (the part of the network designated R ) and to a lesser extent on the busy high-speed lines (R ). On the other01
hand, on the low-density high-speed network and on the main-line network (R ) the fees are very low, while on the rest of,2
the network (R ) they are symbolic.
3
The fee system distinguishes between a monthly access charge AC, per kilometre of lines for which access is,requested, a reservation charge RC, per kilometre and per slot reserved and a traffic charge TC, per train-kilometre. There,,

are different reservation charges for peak periods, normal periods and slack periods. The corresponding charges for 1997 areshown in Table 3.

Clearly, this system is much less detailed and sophisticated than that introduced on the German network and thus
raises the question of whether it is sufficiently refined to enable the relevant marginal costs and homogeneous demand
segments to be distinguished in the event of the future system being steered towards a more determinedly economic form of
pricing.

Table 3.

French provisional pricing(1997 unit prices in francs)

Sub-network

R
0

AC

R

R

1

2

R

11 000RC (peak)

100

18

0.85

0

RC (normal)

44

6

0.85

0

RC (slack)

20

4

0.85

0

0.30

0.30

0.30

0.30

TC

250

3

11 0000Note: AC is expressed per month and per km of line, RC per slot-km, TC per train-km.
In the French case,clearly the main problem is how pricing will evolve after 1999.

This question isovershadowed by the fact that, overall, the rail system is running at a loss. The first step then will be to choose between two

38

strategic directions. One choice would be a low-toll system which would concentrate the public contribution on covering the
deficits of the RFF and financing new investment. In this case a policy of long-term marginal cost pricing without budgetary
constraint might be envisaged. A second choice would be a system that combined budgetary constraint with a RamseyBoiteux principle. In this case the SNCF would have to be subsidised for a fairly long time, but the subsidies could becorrelated with the loss-making services thus financed, thereby allowing the authorities latitude to compare their cost and theirutility.

On the basis of a study in progress, the RFF is to propose to theencourage a better allocation of resources.

39

Government a user pricing system designed to5.

CONCLUSION

To reach a conclusion on such a subject would be to suppose that a definitive theoretical contribution, which wasboth coherent and pertinent and proposed measurable concepts would make it possible to solve, down to a few details, this,difficult rail infrastructure pricing problem. Only a patient approach that takes into account all the attempts to apply
theoretical prescriptions will enable us to work towards a satisfactory solution.

It is no insult to the achievements of economic theory or railway economics to conclude with the following few lines
which were written about a century and a half ago:

We merely wished to show that the way in which the tolls are fixed can greatly extend the utility of certain routes and that the guiding principle inassessing these charges should not be to set a price proportional to the weight or the distance nor to favour a particular industry or a particular class ofpassengers, but rather to impose on each passenger and on each good only a price that is lower than that which would prevent the passenger or good fromusing the route. Admittedly, the methodical classification of these passengers and goods does call for inventiveness and an intimate knowledge of the local
circumstances, but a sound theory can do much to facilitate this work33

.

NOTES

32.

See the following official texts:--

Law No. 97-135 of 13 February 1997 establishing the public corporation Réseau

,view to the revival of rail transport

--

,

F

erré de France, with a;

Decree No. 97-446 of 5 May 1997 on national rail network user fees;-- and, finally, the Orders of 30 December 1997 on national rail network user fees, JO, 31 December
1997 pp. 19461-19463.
,

33.

Dupuit Jules,(1873), “Poids et mesure”, in Coquelin and Guillaumin (eds.), Dictionnaire deEdition, Vol. 2, Paris, pp. 339-344.

l’économie politique, 4th40

BIBLIOGRAPHY

Allais Maurice 1945 ,

,

)É

(

conomie pure et rendement social, Edition Sirey, Paris, 72

pp.

Allais Maurice 1948 , Le problème de la coordination des transports et la théorie économique , Revue d’,(58, pp. 212-271
.

)“

”

É

conomie politique,

Allais Maurice et al. (1965), Options de la politique tarifaire dans les transports, Report prepared at the request of,Commission of the European Economic Community, Studies Coll., Transport Ser

ies,

No. 1, Brussels.

Allais Maurice (1989),

,

d’

É

conomie Politique, 99,“L’économie des infrastructures de transport et les fondements du calcul économique”,
No. 2, pp. 159-197.

Allais Maurice (1989), Théorie générale des surplus, PUG, Presse,

Banister, David, Kenneth

Buttonet

Revue

Universitaire de Grenoble (2nd edition), 716 pp.

(1993),al.

Transport, the Environment andSustainable Development, Alexandrine Press, Oxford, 275 pp.

Baumstark L. (1997),,“Tarification de l’usage des infrastructures et théorie de l’allocation optimale des ressources, de la”.

logique des coûts à la révélation des préférences , Doctoral thesis, Université Lumière Lyons 2

Boiteux Marcel (1956), La vente au coût marginal , Revue Française de l’

,

“

”

É

nergie, December.

Boiteux Marcel (1956), Sur la gestion des monopoles publics astreints à l'équilibre budgétaire ,,No. 24, pp. 22-40” Econometrica,“.

Bowers Ph. (1995), Commercialisation, accès local et international aux réseaux ferrés , Public Transport International, No. 1

,

“

”

.

Brooks M.,, K. Button (1995), “Separating transport track from operations: a typology ofinternational experiences”, International Journal of Transport Economics,
Vol. XXII, No. 3, October.
Council Directive 91/440 of 29 July 1991 on the development of the Community's railways, OJ L 237 of 24/08/1991,
25

pp.

41

Council Directive 95/18/EC of 19 June 1995 on the licensing of railway undertakings (OJ L 143/70-74).

Council Directive 95/19/EC of 19 June 1995 on the allocation of railway infrastructure capacity and the charging of
infrastructure fees (OJ L 143/75-78), 27 June 1995.

Regulation (EEC) No. 1191/69 of the Council of 28 June 1969 (OJ L 156 ) on action by

Member States concerning theobligations inherent in the concept of a public service in transport by rail, road and inland waterway, last amended byRegulation No. 1893/91 of the Council, OJ L 169 of 29/6/1991.

Regulation (EEC) 1192/69 of the Council of 26 June 1969

on common rules for the normalisation of the accounts ofrailway undertakings, OJ L 156 of 28/06/1969.

Regulation (EEC) No. 1107/70 of the Council of 4 June 1970 on the granting of aids for transport by rail, road and inland
waterway, OJ L 130 of 15/06/1970.

Green Paper (1995), Towards fair and efficient pricing in transport, COM(95)691 of 20/12/1995, 58

pp.

White Paper (1996), A strategy for revitalising the Community's railways, COM(96) 421 final, Brussels, 30 July 1996, 54

ECMT (1995)
pp.

, Why

o

e

eed

D W N R

ailways?,pp.

Proceedings of International Seminar, Paris, 19-20 January,

226

ECMT (1993),

Privatisation ofE

The

CMT (1997),

Commissariat Général
2, La

S

R

ailways, Round Table 90, Paris.

eparation ofperations from nfrastructure in the

O

I

P

rovision ofRailwayS

ervices, Round Table 103, Parisdu Plan (1995),.

Transport, le prix d’une stratégie (Workshop chaired by A. B

du Plan (1996),

Transformation des opérateurs publics de réseaux en Allemagne.

onnafous), Vols. 1 andocumentation Française, ParisD

Commissariat Générale-- L scas du contrôle aérien, destransports ferroviaires, de la poste et des télécommunications, Study made by Cabinet ESL & Network, Vols. 1 and 2, March.

Commissariat Général du Plan (1993), Transports : pour une cohérence stratégique, Workshop on the strategic directions of transport
policy and their medium-term implications, Commissariat

Commissariat Général du Plan (1994),

La

Général du Plan, September.

Transports : pour un meilleur choix des investissements

Documentation Française, November,(Group chaired by Marcel Boiteux),

32

1 pp.

Commissariat Général du Plan (1995), Transports : le prix d’une stratégie (Workshop chaired by Alain Bonnafous), Vols. 1 and 2,
La

Documentation Française, pp. 213 and 182.

DB AG

(1996), “Der Trassenpreiskatalog der DB AG: ein Vorbild für Europa?” Lecture given by Mrs Haase at the“
Policy in Deregulated Transport Markets”, organised by the
University of Freiburg (Germany), Hinterzarten, October.

29th Scientific Transport Research Seminar, Competition

42

DB AG, Trassenpreise-- Güterverkehr, Frankfurt am Main, 1995

DB AG, Trassenpreise-- Personenverkehr, Frankfurt am Main, 1995.
.

Dodgson J.

, (1994), “Railway privatisation”, in: M. Bishop, J. Kay and C. Mayer (eds.),.

Privatisation and Economic

Performance, Oxford University Press, Oxford

Drèze H. (1994), Marginal-Cost Pricing , Introduction

,

“

”

Atkinson and Jacques Dreze
pp. 190-195(eds.),

to Part III in: Arnott, Richard, Kenneth Arrow, Anthony B.

Public Economics (Selected papers by William Vickrey), Cambridge University Press,.

Ewers H.-J.

,(1993), Privatisierung und Deregulierung bei den Eisenbahnen: das Beispiel der DB und der DR, Institutpp.

für Verkehrswissenschaft, Universität Münster, 15-17 September, 11Gillen, David W.

and Tae Hoon Oum (1991),

Transportation infrastructure: Pricing, Investment and Cost Recovery, Royal Commission

on National Passenger Transportation, Technical Seminar, Ottawa, Canada, September 26 and 27, 181

Guihéry L.

,

pp.

(1996), “Fédéralisme allemand et réforme des chemins de fer en Allemagne : le transport ferroviaire”rParis,

régional de voyageurs devient une nouvelle compétence des Länder , Documents- evue des questions allemandes, No. 1,
p. 79

.

Guihéry, L.

(1997), “Réforme des chemins de fer et tarification d’usage des infrastructures ferroviaires en Allemagne,”.

une organisation contrôlée de la concurrence sur le réseau ferré allemand , Transport, No. 382, March-April, pp. 112-121

Hau Timothy D. (1993),,“Economic Fundamentals of Road Pricing: A Diagrammatic Analysis”, Working Paper,

WPS 1070, Transport Division, Infrastructure and Urban Development Department, The World Bank, p. 87.

Horton, Sir Robert (1997), “Re-engineering Britain's railways: risks and rewards”,.

European Railway Review, June,

pp. 89-95

Hotelling H. (1938),“The general welfare in relation to problems of taxation andof railways and utility rates”, Econometrica, 6(3), July, pp. 242-69.
,

Hutter R. (1950),,“La théorie économique et la gestion commerciale du chemin de fer”,.

Revue Générale des Chemins de Fer,

February, July and October, p. 44

Kolm Serge-Christophe (1968), La théorie économique générale de l’encombrement

,

“

”,

Futuribles, SEDEIS, p. 82.

Laffont Jean-Jacques (1977), Effets externes et théorie économique, Monographies du séminaire d'économétrie, No. 13, éditions du,

CNRS, Paris, 200

pp.

43

Laffont Jean-Jacques,and Jean Tirole (1994), A Theory of Incentives in Procurement andRegulation, The MIT Press, Cambridge, Massachusetts, London, 705 pp.
Le Duc M.

(1995),eétudes de La ocumentation Française, Paris, 1995.
D
Services publics de réseau et Europ,: Les exemples de l’Allemagne, de l’Espagne, de l’Italie et du Royaume-Uni, Les

Morrison Steven, The Theory of Optimal Highway Pricing and Investment: Comment, Northeastern University, Boston, Massachusetts.

,

Nash C.

(1993), “Developments in transport policy: rail privatisation in Britain”,
olicy, Vol XXVII, No. 3, September, p . 317-322
P
.
p
.
,

Journal ofTransportE

conomics andOffice of the Rail Regulator, Framework for the approval of Railtrack's track access charges for freight services, a consultation document,
October 1994, 19 p .

pPreston J.

, (1996), “The economics of British Rail privatisation: an assessment”, in.

Transport Reviews, Vol. 16, No. 1,

p . 1-21p

Quinet E. (1990), Analyse économique des transports, PUF, Collection,

Économie, Paris, 302 pp.

Allais Maurice, Del Viscovo, Duquesne de la Vinelle, Oort and Seidenfus,

dans les transports

”.

Coll

ection(1965), “Options de la politique tarifaire

Report prepared at the request of the Commission of the European Economic Community, Studies, Transport Series, No. 1, Brussels.

Rathery A. (1984), “De nouvelles perspectives pour la politique des infrastructures de transport dans les Communautés,

européennes ? Possibilités offertes par une approche pragmatique de la tarification d'usage des infrastructures”,

No. 297, October, pp. 358-365

Rothengatter,

W.

Transports,.

(1991), “Deregulating the European Railway Industry:theoretical background and practical consequences”, Transportation
Research, Vol. 25A, No. 4, pp. 181-191.
Small, Kenneth A. (1990), “Highway Infrastructure: Crisis in Finance or Crisis in Management”, Review of the University ofCalifornia Institute of Transportation Studies, Vol. 13, No. 2, February, pp. 4 8-.

Small, Kenneth A., Clifford Winston and Carol A. Evans (1989), Road Work:A

ew Highway Pricing and Investment PolicyN,

The Brookings Institution Washington, D C,

The Department of Transport. .

(1993),

RailF

reightP

rivatisation (the Government's proposals), London

Vickrey W. (1987), Marginal- and Average-Cost Pricing ,,,” in: Eatwell“

Vol. III Macmillan, pp. 311-318.

44

et al.

(eds.),, 27 pp.

The New Palgrave

Dictionary,Vickrey W. (1994), Public Economics (Selected papers by William Vickrey), Edited by Richard Arnott, Kenneth Arrow,,

Anthony B. Atkinson and Jacques Dreze, Cambridge University Press, 558

pp.

Walters A.A. (1987), “Congestion”, The New Palgrave Dictionary, pp. 570 573,- .

Wilkinson A.W.

,

(1992), “La situation politique des British Railways”,

Le Rail, July, No. 33, p. 28-2.

SUMMARY

1.

INTRODUCTION .........................................................................................

2.

INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION ...............................................................
2.1. Network opening, redistribution of roles and pricing system.................
2.2. Degree of vertical separation in the rail sector and thequestion of access charges and user fees ...............................................

3.

INFRASTRUCTURE PRICING AND MAXIMUMEXTRACTION OF THE AVAILABLE SURPLUS .....................................
3.1. The concept of marginal cost and the optimisationof investment .........................................................................................
3.2. The supply-demand equation or how to define an
optimal quality of service .......................................................................
3.3. Allowing for the budgetary constraint....................................................

4.

APPLICATION OF PRINCIPLES AND NETWORKCONSTRAINTS ............................................................................................
4.1. The British experience: making a surplus ............................................
4.2. The German experience: covering the costs .........................................
4.3. The French example: a transitional phase .............................................

45

5.

CONCLUSION..............................................................................................

NOTES...................................................................................................................
BIBLIOGRAPHY..................................................................................................

Paris/Lyons, January 199846

1. INTRODUCTION

The rail sector very quickly came to be regarded by economists as a typicalexample of a “natural monopoly”. In fact, like other networks, though often evenmore emphatically, it displays all the characteristics which tend to compromise thetheoretical pact between the mechanisms of the competitive market and the
optimum allocation of resources (in the Pareto sense). On the one hand, on such amarket the break-even prices lack the qualities necessary to induce the economic
agents to take optimal decisions. On the other hand, it is not possible to find asatisfactory price system that enables an optimum to be decentralised on the basisof the decisions of individuals.
The sector is, in fact, characterised by increasing returns resulting frommultiple indivisibilities: functional indivisibilities such as the co-ordination ofactivities between upstream and downstream of production, for example, between
infrastructure choices and commercial policy, but also technical indivisibilities suchas that determined by the continuity of the network. To this there should be added
various effects such as “economies of scope” which enable the operator, by
diversifying the services offered, to reduce unit costs or important network
externalities, both positive and negative, or, finally, investment irreversibilities.
Thus, the rail sector accumulates the conditions for the appearance of what arecommonly called market failures. This largely explains the sector's mode ofoperation in the early 80s and the major role played by government throughout
its history.
However, the efficiency of this monopolistic organisation and the frequent
public intervention in the sector have gradually been called into question on two
counts. Firstly, it has been noted that the theoretical justifications for such anorganisation apply only to part of the monopoly (mainly the infrastructure).
Secondly, the very real advantages afforded by such an integrated structure havebeen offset by its no less real disadvantages (mainly its inability to exert sufficientpressure on production costs). Thus, the policies applied in this sector have sought
to eliminate these weaknesses by reintroducing, wherever possible, various kinds of47

competitive pressure. Infrastructure access charges have become a keystone of thereforms. This question forms the subject of the first part of our paper.
There have been many modern theoretical developments in this field and ourpresentation does not seek to be exhaustive in this respect. However, there are twotheoretical principles that deserve closer examination and these will be the focus of
our attention in the second part34.
The first principle states that infrastructure pricing cannot be separated from investment choices. The setting of“optimal” user fees presupposes the prior definition of a certain quality of service. For example, from the quality of service
required there follows an acceptable saturation level which, in its turn, determines a co-ordinated policy of investment anddemand management through infrastructure user fees. Hence the theoretical economic toll is a composite toll comprising a,,

cost toll relating to the costs which can be directly allocated to the users of the network and an adjustment, sometimes calleda pure toll, which enables the manager to produce the necessary quality of service by adjusting, as precisely as possible, theavailable capacity to the expressed demand (note that this second component only concerns the part of the network with nosurplus capacity).

The second principle involves relating pricing to the difficult question of covering the fixed and joint costs which
within the rail system, as in many other networks, represent a large proportion of total costs. The traditional theoreticalsolution based on marginal cost pricing, considered optimal, was to have these costs covered by the State budget. However,the perverse effects of systematic subsidisation, nowadays decried as public failures, mean that such a solution can no longer
reasonably be regarded as optimal. Nevertheless, imposing budgetary constraint on the enterprise responsible for the
infrastructure is not sufficient in itself to ensure the efficiency of the system. The pricing method and the formulas forallocating the fixed costs which by definition cannot rationally be allocated to any particular user, have definite,,

implications for the social surplus which the system can produce. One of the main difficulties encountered in connection
with pricing is that associated with the manager's technical and economic (but also political) ability to charge differential,
even discriminatory fees.

In the last part we compare these abstract principles with actual practice.

,48

2. INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION

2.1.

Network opening, redistribution of roles and pricing system

The idea of opening up the network is not a new one. Thus, networks have been identified in many different
industries: the high-tension lines in the power distribution sector, optical fibre systems in telecommunications and delivery
and collection in the postal sector, to which could be added numerous services such as the transport of electricity andinformation and the routing of mail.

Although, as far as the network is concerned, it seems preferable to retain amonopolistic structure because of the economic characteristics of the infrastructure, this is no longer true of the services forwhich, on the contrary, competition seems possible.

In order to solve the problem of opening up the network it is necessary to visualise how certain decisions which,were taken internally within a single institution can be made the subject of commercial negotiations. The analysis must
therefore focus on the types of relations that may exist between the decisionmakers, the private or public operators and theusers. The configuration of the system and the actors is illustrated by the diagram reproduced in Figure 1.

Figure 1.

A traditional organisation chart

Regulator

State

Vote-catching
Prestige

Satisfaction of demandat least cost

Infrastructure

Infrastructure
pricing
rules

Infrastructure
Operations

Disclosure of preferences

Opportunism

Customers
Electors
Tax payers

Users

49

It is thought that, under certain conditions, the intrusion of economic mechanisms into the integrated model will
introduce transparent processes, thus obliging the various actors to disclose their preferences. This then leads to the
explosion of an extreme situation in which the State produces the infrastructure regardless (or almost regardless) of thedemand, of which it has only a faint idea. In this situation the user benefits from a good without knowing its cost.

,This can be improved upon by identifying intermediate levels. It is possible to distinguish between the production of
the infrastructure and its management. Attention may also be focused on the behaviour of the agents and its determinants:
the efficiency of the system as a whole depends on the efficiency of the means deployed to encourage and promotepartnership between the economic actors and the authorities at various administrative levels. In short, it is a question oforganising effective modes of interaction between the public and the commercial spheres.

On the one hand, it is necessary to establish relations between the State or, more generally, the authorities responsible
for organising public transport and those directly concerned with the infrastructure so as to minimise infrastructure costs.
This is part of the new theory of regulation which seeks to define more precisely the contractual framework within whichthese relations are to fit.

On the other hand, it is necessary to make sure that all the transport operators have access to the infrastructure on fairterms. This poses a specific problem with respect to the relations to be established between the infrastructure operator,
public or private and the downstream service providers. Should or should not the monopoly be authorised to supply themarket downstream? Can the sole and final responsibility for the allocation of timetable slots be entrusted to a body whichitself also operates the infrastructure?

The determination of the prices at which the infrastructure manager opens up his network is one of the major
considerations for the sector as a whole. These access charges are important since they determine the terms of competition
between modes of transport. They must also ensure the overall efficiency of the system, that is, be sufficiently high for the
upstream monopoly to be able to offer a suitably maintained infrastructure where the rail system is pertinent, but not so highas to bar the arrival of new entrants. More generally, pricing policy make it possible, on the one hand, to encourage users tosprogramme their services better (in the sense of making the best possible use of capacities) and, on the other, to steer
investment towards ensuring that the system is developed and in particular the network expanded, so as to give the best,,

possible cost-benefit ratio.

When he wishes to formalise the importance of the pricing system in the resource allocation process, the economist
generally analyses the consequences of price distortion. Whatever the reasons, legitimate or not, for the distortion, theconsequent loss of global surplus needs to be estimated. Within this theoretical framework, assuming an initial situation inwhich the pricing system is optimal, any change in prices not justified by a change in the cost of the production factors or bya sudden imbalance between supply and demand would inevitably lead to the misallocation of resources, a poor investment
policy and, ultimately, less user satisfaction. In this case, the surplus available in the system would no longer be maximised.

This theoretical approach, even though it clearly relies on mechanisms less complex than they are in reality, provides
valuable benchmarks for the orientation of supply and ensures cohesion between different strategies capable of serving thesame purpose. The pricing system may then be understood as an information and co-ordination system, and if it offers a50certain number of minimum qualities, the regulation of the system, being based to a greater extent on the rationality of theeconomic agents, will gain in efficiency.

2.2.

Degree of vertical separation in the rail sector and the question of access charges and user fees

These theoretical analyses underlie many of the recent trends in the European rail sector. They form the context for
the adoption of European Directive 91/440 which first provided the impetus for the separation of infrastructure from,operations. The Council of Ministers took a further step by issuing two new Directives 95/18 and 95/19. Before the network
can be opened up, the conditions of network access must be established: licensing system, procedures for the allocation ofexisting capacities, coverage of infrastructure costs, network development, appeal procedures, etc.

However, thisCommunity drive is based on the reforms which many countries have already started to introduce. Although these reforms
may employ different means, they apply the same basic principles, namely the principles of decentralisation and the,organisation of competitive pressure.

In practice, these widely introduced vertical separation policies are very diverse. This diversity contrasts sharply
with a very homogeneous theoretical discussion of the question35. The main difference between all these systems appears to
relate to the role of the State. Sometimes, though this is not the most frequent case, the State more or less organises theservice, whereas the infrastructure is private36; in another configuration, the service may form the subject of a privatemonopoly, whereas the infrastructure remains in public hands (as in New Zealand). Under a third scenario, privatecompanies operate a network in “partnership” with another private partner who owns the infrastructure (as in the United
Kingdom).

The infrastructure user fee structure and its possible impact on the markets cannot be understood without taking into
account the institutional configuration governing the management and operation of the network. A summary typology of thepossible configurations is proposed in Figure 2.

Figure 2.

Typology of institutional configurations

51

Separation of
infrastructure
and operations
Infrastructure

Network opened
Access for third parties

Infrastructure

Infrastructure

Infrastructure

User pricing

User pricing

User pricing

Network broken up
Infrastructure

Infrastructure

TenderTenderOperations

Operations

Operations

Operations

Operations

Operations

A

B

C

D

E

F

Situation (A) is the one that has been most frequently inherited from the past, namely an integrated network,

occupying a monopoly position. As we have seen, adaptation, which may go as far as radical reform, involves creating levelsof responsibility that give rise to commercial partnerships and to the introduction, with varying degrees of firmness ofresolve, of the machinery of competition. Depending on the extent to which the network is broken down, several options are
possible.

Assuming that the integrated monopoly is maintained, it is possible to imagine the introduction of competitive
mechanisms similar to those in effect for certain urban public transport systems: invitations to tender for the management of
the entire system lead to the appointment of a manager for a specified period. The integrated monopoly may be completely
preserved (E). However, the network may also be broken up and tenders invited for each segment (F). The network may be
divided up on a geographical or a sectoral basis, for example with a network specialising in freight. In these various cases,,

the question of access charges does not really arise since the integrated monopoly is preserved: the bargaining takes place
within the enterprise itself without involving any market services. The authorities may face other regulatory problems, butthey will no longer have to deal directly with the question of access charges.

This does not apply to configurations (B), (C) and (D): although the integrity of the system as a whole is maintained(the infrastructure manager has authority over the entire network), the relation between the infrastructure and the operator oroperators becomes distended. There are still many possibilities for reform, depending on the degree of separation between
the infrastructure manager and the operator. Here the competitive pressure is exerted (with varying degrees of firmness) at
the level of the infrastructure user by the (more or less) explicit means of diversification and dynamisation of the supply ofservices. However, in all three cases, it is a question of sending the operators a price signal calculated to influence theirdemand for the use of the infrastructure. The question of user fees will then be the determining factor.

52

Case (B) illustrates the lowest level of separation: third parties are denied access. Here separation is intended,

simply as a means of clarifying the enterprise's accounts by dividing the expenditure items more clearly between those that
relate to investment and maintenance costs and those that relate to operations. This model corresponds to the situation of
those countries which, following the Community decision, preferred not to call into question either the integrity or the unityof their monopoly. Thus, the whole of the network continues to be run by a single operator. However, this system seems
rather unstable and can be better understood as a staging post on the road to a more radical mode of organisation in which,separation having been made effective, third-party access can be encouraged. In the first case, pricing can remain a sort ofaccounting device by means of which the carrier is supposed to remunerate whoever undertakes to maintain and develop theinfrastructure, that is to say himself. Thus, the pricing rules are not really market mechanisms within which the parties,

endeavour to optimise their results. In cases (C) and (D), which are of more particular interest, the situation is quite different.

In case (C), the opening up to third parties is explicit but there remains a principal operator. Thus, the opening is still
marginal and may be restricted to certain market segments, for example, the international market. This transitional situation
may evolve into the much more competitive situation (D) in which, third party access having been generalised, the historical-operator is one actor among others. These two models lie at the heart of the two main scenarios for the implementation of thereforms undertaken in Europe.

We note, however, that the choice of system (C) does not protect the network concerned from sliding towards system(D). There will be de facto involvement of the international services and their demand for track will have to be reconciledwith that of the national operator. Here, Community policy has clearly taken the same path as led road freight transport fromprogressive liberalisation of international transport to complete freedom of cabotage.

Consequently, the opening up of the network, however partial, raises the problem of how to regulate between theoperator already in place and other potential operators. Even though the slot allocation rules may play a very important part,in the long run the calculation of access charges should prove decisive. Suppose, for example, that the allocation rules
favoured the operator in place, say through a practice involving “grandfather clauses” comparable to that observed in air,transport, but that, at the same time, there was a heavy demand for slots, for international traffic for example. The,

infrastructure monopoly could then take advantage of this excess of demand over available capacity by increasing the user
price where the supply was scarce. If the use of the “grandfather clause” were too expensive for the historical operator, he
could waive it and review his operating schedules in order to fall back on slots in better supply and the available capacity
would then be sufficient. If it were still profitable to exercise the right despite the higher price, this would bring theinfrastructure monopoly a return sufficient to finance the necessary investment in capacity.

In practice, this configuration might be relatively rare, but a similar problem might arise, including in the case ofconfiguration (B), if the historical operator were to make, within the same space-time frame, requests for slots on behalf ofdifferent services (national and regional passenger services, freight services, etc.). If these requests were sufficiently welljustified because of corresponding traffic demand, that would reduce to the expression of a need for investment in capacity
on the sections in question. The historical operator might then have an interest in sending a “price signal” reflecting theshortage of available slots to each of the requesting services. It would be up to the latter either to buy because they were able
to cover the cost or to transfer the demand to less busy routes or periods. This comes back to the above-mentioned choice
between managing the demand and being able to finance additional capacity.

53This alternative reduces to an infrastructure pricing principle which is well known but worth recalling in orderproperly to explore its conditions of application to rail transport.

3. INFRASTRUCTURE PRICING AND
MAXIMUM EXTRACTION OF AVAILABLE SURPLUS

Infrastructure pricing may have more than one objective. The following presentation is founded on the idea that thebasic principles should be established as a function of the collective efficiency of the system. Indeed, it would seem difficult
to defend a pricing system which regularly deviated from that objective. Thus, this theoretical look at the problem suggeststhat there should be no segmenting of pricing between different, possibly contradictory objectives, namely optimum use of,

the infrastructure, on the one hand and the financing of its renewal or the pursuit of social or environmental objectives on,

the other. In fact, all these objectives can be reduced to the general objective of maximising the global surplus generated by
the system.

On what principles should pricing be based in order to extract the maximum surplus from the system for sharing out
among the various actors? This surplus can be identified only by relating it to the costs of the system and, in particular, theinvestment costs.

3.1.

The concept of marginal cost and the optimisation of investment

Maximum efficiency obtained by marginal cost pricing in sectors with increasing returns is a decisive conclusion
contributed by the theory of welfare economics. However, this theoretical result presents a number of problems. Apart fromthe undoubted difficulties of application, the concept is also open to theoretical objections.

In many cases, however, in discussing this issue confusion is created insofar as the concept of marginal cost that is,

criticised is very often reduced to a user cost37. At first glance, this is hardly surprising. Understandably, since the marginal
cost enters into the equation as the derivative of a total cost function, any cost factor that does not vary with production will
vanish in the mathematical operation.

This classical presentation, without actually being false, can lead to inaccuracies with dangerous theoretical andpractical consequences, simply because in this approach it is assumed that the investment is given and realised. In a mannerof speaking, the act of investment is ignored as an optimising tool, on the same basis as pricing. However, the theoreticalframework of the optimal allocation of resources cannot be satisfied with this reduction or with the solution consisting intransposing this short-term static model to the long term and treating the fixed costs as variables, thus causing them to vanish.

Indeed, taking the fixed costs into account presupposes an analytical approach quite different from that which
consists in making them vanish. The fixed costs form part of the irreducible and fundamental linkage between the short andthe long term. Leaving out that linkage amounts to evading the embarrassing questions raised by coverage of the costs thus

54

incurred over several periods. From the standpoint of cost minimisation, it is well known that it is always possible todistinguish between directly avoidable costs38 costs that can be gradually absorbed and, finally, totally unavoidable costs.

,

This distinction then makes it necessary to bring other concepts into play.

In particular, it is necessary to introduce a terminological distinction in order to avoid confusion. The variablemarginal cost is a partial cost clearly distinguishable from the marginal cost, which has a different theoretical content: thepartial cost relates specifically to a short-term situation in which only the variable costs are considered, while the concept ofmarginal cost relates to a situation in which it is assumed that the authorities meet the demand, if need be by carrying out aproject that creates a discounted surplus greater than the total of the costs necessary to produce it. Thus, as many authors
have stressed39, this concept is fundamentally linked with the investment decision.

Taking the long term into account requires the use of a programme situated upstream of the decision to invest. The
fixed costs are not, strictly speaking, variabilised; however, the transport infrastructure is regarded not as a natural resource

made available but as a good, to produce which the community must sacrifice resources.

Suppose that there are several technologies capable of meeting a given level of demand. Each of these can becharacterised by a fixed cost independent of the level of utilisation of the infrastructure and by a variable cost. The producer,

or the authorities have a certain number of possible solutions available to meet the demand. To each investment there
corresponds a particular total cost function which depends on two variables, the investment

I 10 and the level of productionq:C( I,q ) = a( I ) + b( I,q ) 11
Thus it is possible to distinguish between two marginal costs:--

the short-term marginal cost when q varies for a given investment level:γ=--∂C( I,q ) 12;∂q

the long-term marginal cost when the investment varies:Γ=∂C( I,q ) 13.
∂I

It is reasonable to assume that the producer (or the authorities) wishes to produce the good or service in question at
the lowest possible price, if only to maximise the collective surplus. Thus, for each anticipated level of production, he will
adopt the technology calculated to supply that good or service at the lowest price. Therefore, to each level of production
there corresponds a minimum cost which itself relates to a particular total cost function belonging to the family of

C(I )

14.

i
If it is assumed that I can vary continuously, the totality of these optimal points, which minimise the cost of production, will

form a so called long-term cost curve. We note that the curve obtained as a result of such a theoretical projection will be-completely virtual. It defines a boundary of maximum efficiency of the production system at a given instant of time. Rather
than an objective to be achieved, it is primarily a theoretical benchmark. It is a short-term curve envelope. This curve

55

defines a functional relation between the long-term total cost and the quantity produced, on condition that each level ofproduction is obtained with plant of the optimum size.

If it

is assumed that the producer is able, at any time, to adapt his investment to the level of demand, there will be an

infinity of short-term total cost functions. The system may be called upon to display its adaptability at any time. In this case,there is no contradiction between the short-term and long term marginal costs. The short-term marginal costs are always-

defined, while the size of the plant is optimal for the production level in question.
To discard the hypothesis of permanent adaptability (divisibility) is to accept that the demand can be met by atechnology or investment which is not necessarily optimal. In this situation, which is generally that of transport systems,
there is almost inevitably a difference between the short-term and long term marginal costs. There will then be several-

possibilities.

In the first case, that of underinvestment, the technology employed is not optimal since the short term marginal cost-is higher than the long-term marginal cost. In the second case, that of overinvestment, the short-term marginal cost is lower
than the long-term marginal cost

; the demand is met by an investment which costs too much for the use which is made of it.

When, exceptionally, the system is optimised, the supply is precisely adapted to the demand, the two marginal costs are equal
and, in this case, the marginal cost involves, over and above the short-term marginal expenditure, the optimal variations in
the cost of the plant necessary to meet the demand.

“

Under these conditions, and for practical applications of the theory of social returns, it is necessary to define the marginal cost of a specificservice as the additional costs of all kinds (labour, energy, raw materials, depreciation, interest charges) resulting from the provision of anadditional unit of that service when the existing fixed plant is precisely adapted to the volume of production in question40.”

Accordingly, the marginal cost to which pricing theory relates is defined at economic equilibrium and, consequently,
with total utilisation of the fixed plant. This leads to a radical distinction between the marginal cost as described above andthe partial cost. Thus, Marcel Boiteux considers it necessary, despite everything that may have been written on this subject
during the last thirty years, to denounce, once again, the frequent identifying in common parlance of the marginal with thevariable cost. He considers this faulty“” identification to be still “a major source of misunderstanding”41.

This also means that the determination of the marginal costs has real economic significance only on the assumptionthat the infrastructure is optimally managed. For the concept to be pertinent the maintenance operations and the investment,

renewal operations must be carried out at the optimal time and their cost must be minimised.

If the marginal costs thus defined are used for pricing purposes, the system will be coherent and optimal. This meansthat the consumers' choices will be optimally oriented since they will be encouraged to choose, among several ways ofsatisfying their needs within a given framework of constraints, that which is least expensive for the community. However, atthe same time, the community must ensure that the demand thus expressed is always satisfied at the least possible cost.

This clarification is a necessary preliminary to the application of practical pricing tools. Within this context it is now
clear that marginal cost pricing is future-oriented pricing. Accordingly, it should concern itself not with the previous cost of
the infrastructure but with the use that the users will make of it. A knowledge of the users' preferences then becomes one of
the keys to the global optimisation of the system from the standpoint of both economic calculation and pricing.

56However, the balance between supply and demand thus achieved may give rise to very different situations on the railsystem depending on the level at which the service quality is to be pitched. We have previously used expressions such as“meeting the demand” or “plant of optimum size”. For example, should there be perfectly regular timetables with zero delays
or would a reasonable amount of delay be acceptable if it permitted the more intensive use of capacity? Clearly, thesequestions prompt us to reflect on the quality of service to be provided which, in its turn, is also subject to a trade-off between
costs and benefits.

3.2.

The supply-demand equation or how to define an optimal quality of service

To deal with this problem, public economics traditionally relies on the notion of a mixed collective good, i.e. a good: theconsumption of a good by a user cannot be consumed by another, whereas certain otherso-called quality characteristics remain indivisible
because they concern all users. These mixed collective
goods are subject to so called congestion effects42. In the case of rail infrastructure,
the indivisibility of its use cannever be ensured inasmuch as two trains cannot share the same “slot” at the same time.
The slots are shared
between the different users. The use of infrastructure, from this point of view,is divisible. On the other hand, the quality of service, which depends on the reliability of the train timetables on acongested part of the network, is the same for all the users at a given instant43 This collective good is called mixed because.
it has two fundamentally different characteristics, the first-- access to infrastructure -- being divisible, thesuch that the quantity consumed can be distributed among the individual consumers (the good is therefore divisible)

other not. Congestion is a particular case of an external effect where the reasons why people cause and suffer it are linked with theconsumption of the same service.

In order to optimise the system and achieve the maximum available surplus on the infrastructure, the authorities must
both determine the optimal level of investment and, through good pricing, manage the level of demand. Investment and levelof demand are the two factors of the quality of service offered which different users value in varying degrees.

In order to isolate the problem posed by this linkage, let us consider an infrastructure the cost of using which is very,

low and may therefore be deemed negligible44.

Let us suppose that all the users i liable to use the infrastructure place different values on the use of this good,
given quality of service. We then obtain an inverse demand curve which we will denote byrepresents the utilisation of the infrastructure by the individual ifor awhere Q

Pi(Qi ,g),.
, and g an indicator of service qualityi

The quality of service offered on this infrastructure depends on two parameters: the number of users on theinfrastructure and its physical characteristics, which depend on the level of investment k. This level of investment varies with, ψ ( k ) 15.

time as a function of the outlay made by the operator

Taking into consideration several time periods t, we write Pit(Qit,gt), with
gt = (Qit,...,Qnt,k) the quality of service at period t. We then suppose that eachuser integrates this quality of service, Pit(Qit,gt) being the value that the user i57

accords to the use of the infrastructure at a given level of quality g. This value
may evolve over time.
The individual surplus is given by the difference that exists between the value that the individual attributes to the useof the infrastructure and the cost which that use represents for him, remembering that in this case theuser cost, in its strictest sense, is seen as negligible. This cost is therefore
limited to the deterioration in quality of service suffered by the user, due to theutilisation of the infrastructure by others. This cost is all the more important thegreater the number of users and the weaker the investment. If we take Dt as thedeterioration of service quality at time t and Vit the value that the user i gives tothis deterioration, the surplus of user i for each period t is expressed by:

Pit − Qit Vit Dt ( Q1t ... Qit ... Qnt , k )Now let us assume that the operator is seeking to maximise the social surplus which this infrastructure is capable ofgenerating. For each individual i and for the entire length of time in question

T

Qit

t =1

0

∑ ⎛⎜⎝ ∫

, we have:

Pit . dQit − QitVit Dt ( Q1t ... Qit ... Qnt , k )⎞⎟⎠The global surplus is obtained by summing over all the users and subtracting the investment cost. This calculation
leads to the following expression:

T

n

Qi

t =1 i =10∑ ∑ ⎛⎜⎝ ∫ P . dQ − Q V D (Q ... Q ... Q , k )⎞⎟⎠ − ψ ( k )
it

it

it

it

t

1t

it

nt

The maximisation of the surplus depends on two variables, the utilisation of the infrastructure and the level ofinvestment.

The first n partial derivatives have the form:

oS

∂Qit

n

= Pit − Vit Dt (Q1t ... Qit ... Qnt , k ) − ∑ Q jt V jt
j =1

The relation for the investment is written as follows:

58

∂Dt
∂Qit

∂D t
∂S
=−
− Ψ ′( k )Vit Qit∂k∂kt =1 i =1
T

n

∑∑

16
Thus, the first-order conditions lead to the following two relations:n

Pit = Vit Dt ( Q1 ... Qi ... Qn , k ) + ∑ Q jt V jt
j =1

Ψ ′( k ) = −T∂Dt 17n∑ ∑V Q ∂k
it

t =1

oDt
∂Qti

(1) and

(2)

it

i =1

Equation (1) establishes the principle of the pricing rule. The first term of this expression represents the“cost”

accepted by the user i resulting from the loss of quality of service associated with congestion. The second term represents thevalue of the quality of service lost by all the users because of the last utilisation by the user i: this last term represents theexternal cost of congestion for which the latter is responsible.

Using classical pricing terminology, the optimal pricing is such that the price corresponds to the sum of the private
marginal cost and the social marginal cost. The first term is already borne by the user. The toll to be applied should
therefore correspond to:no D 18j=1etj ≠iti∑ Q jt V jt ∂ Q t

If we now consider the second equation (2), which incorporates the investment dimension, it indicates that thecapacity should be developed until the marginal investment is equivalent to all the congestion costs avoided.

Finally, and this is crucial, the optimum in terms of social efficiency will only be ensured if these two conditions are
satisfied. The golden rule of marginal cost pricing consists of these two conditions which theory suggests should be kept,

together. In common parlance, it could be said that this dual logic consists in establishing a price which, wherever there issaturation of the network, ensures either that demand is sufficiently well managed for the available capacity to be still
sufficient or that the cost of the necessary investment in capacity can be covered. However, the quality of service production
function may have different characteristics depending on the importance accorded to the intensity of the demand. The
optimisation procedures will then be more or less determined by scarcity phenomena.

The congestion toll described above may take several forms depending on the degree of divisibility of infrastructure,use. The less the divisibility, as in the case of road transport, the more the intensity of use will affect the quality of service.
But the greater the divisibility the less perceptible this effect and the more pricing should be oriented towards scarcity
management systems, as in the case of car parks. The analysis should therefore be focused on the technical and economic
relationship between the infrastructure and the uses of that infrastructure.

59

The rail system does not readily lend itself to this type of analysis. The existence of timetable slots seems to givecredence to the idea that the use of the infrastructure is totally divisible and that there is therefore a strong user rivalry among
the various consumers. Thus, it is theoretically possible to establish a market in user rights, for example by auctioning slots,,

and thus reconcile supply and demand. It seems that this might be practicable on railway lines dedicated to similar kinds oftraffic since, in this case, the slots auctioned would tend to be homogeneous. However, the only configuration that would
seem to lend itself to this exercise is that of lines specialising in freight and open to several carriers, which could only apply
to the lines, still to be organised, of a trans European rail freight network. The first “freight corridors” to be established are-

not organised along these competitive lines.

In most cases, competition remains latent and overshadowed by slot allocation rules which predate the reforms.
However, it is very real wherever network saturation is a problem, which brings us to the difficult question of capacity.

Rail capacity on part of the network can be very roughly and provisionally defined as the maximum possible numberof movements that can be handled per hour. The reality, however, is much more complex.

On the one hand, capacity is determined by the characteristics of the infrastructure itself: the configuration of thelines and sets of tracks, the existence of community lines, switches, track intersections, the speed permitted by the design ofthe track, gradients, etc. Moreover, the capacity also depends on the utilisation of the infrastructure: type of trains (length,
axle load, etc.), speed, number of stops, etc. The train schedule is then decisive and its organisation will have an impact on
the network's effective capacity which will be all the more considerable the more heterogeneous the slots concerned. The,

capacity will then depend on the train schedule as it has been drawn up. The scheduler and the rules of arbitration on which
he relies will thus play an important role, a role which, in railway tradition, has not been much influenced by theconsiderations of the economist who, for his part, is keen to maximise the surplus that can be extracted from theinfrastructure. To that end, he analyses the economic advantages which the consumers derive from using the infrastructure.
For example, a decrease in the time taken by a train to travel between two stations may lead to a reduction in the technicalcapacity of the infrastructure by eliminating slots, but that reduction in capacity may be justified because it results in a net
gain in surplus production. Conversely, the economist lacks mastery of the complex relations between the characteristics of
the infrastructure, the possible operating programmes and the response of the final demand.

This difficulty involves both infrastructure pricing and project evaluation. Whether it is a question of calculating adeveloping marginal cost or the return on an increase in capacity, it should be kept clearly in mind that such an increase canvery often be achieved in different ways: an additional junction, flyovers for avoiding track intersections, higher speed
limits, passing track en route or in the station, improved block arrangement, better power supply, safety and traffic control
installations, restoration of alternative routes, etc. As with the roads, the optimum infrastructure capacity is not a technicalbut an economic factor which, however, for rail forms part of a complex universe of technical solutions.

Here we have one of the explanations for that common tendency of railway reforms which separate infrastructure

,

“

”

management from transport production. The unified monopoly operator or separate operators not being omniscient, whatever
the theoretical optimisation models may suppose, have not efforts been made to improve the efficiency of the system bygiving the carrier the opportunity to make the best possible use of the signals sent him by the infrastructure manager and viceversa? Thus, it is for the carrier to interpret the infrastructure user price signal and for the infrastructure manager to interpret

60

the demand signals he receives from the carrier. These“interpretations” could be based on the teachings of public

economics.

However, to the above-mentioned difficulties we should add another associated with a familiar feature characteristicof most rail systems, namely the presence of very considerable fixed costs and modest marginal costs over most of the
network,,i.e. wherever there are no saturation effects. The principles we have noted then lead to pricing which can result ina considerable deficit which it is the community's responsibility to meet. Whence the now acknowledged need to take this“budgetary constraint” into account.
3.3

Allowing for the budgetary constraint.

The doctrine according to which the producer price of industries with diminishing costs should depend only on themarginal operating costs and the rule according to which the authorities should cover all the fixed costs from taxes first,,made an explicit appearance in the railway literature of the late nineteenth century. The French tradition of the economist
engineers of the

École des Ponts et Chaussées made a big contribution to these developments and their application. The

debate became more animated following the appearance of Hotelling's article45 in 1938. He concluded that the deficit
resulting from the application of this global pricing principle should be financed by global taxes which, like the taxes on rent
charges or inherited income, are supposed, in theory, not to affect the marginal behaviour of the economic agents.

Nevertheless, there may be a conflict between this theoretical viewpoint and another scarcity phenomenon, the publicfinances. Moreover, it assumes that resources are optimally allocated by the public operators, which is not necessarily thecase when they believe themselves to be free of all financial constraints. It is to correct these dysfunctions that an entire
theoretical school has devoted itself to justifying the addition of a budgetary constraint to marginal cost pricing. There areseveral ways of understanding this approach.

For some, this concern for a balanced budget is, in the words of Serge Christophe Kolm, no more than the obsession

-

of

“

a short-sighted and narrow-minded accountant who knows nothing of economics, trying mistakenly to transpose the criteria of the private to the public

sector46.

,” By refusing to consider the main analytical conclusions of welfare economics, the supporters of the balanced

budget deny themselves the possibility of satisfying, with the tools of economics, the demands of the public interest.
Without rebutting this position directly, Mark Blaug has made it the target of some equally critical remarks which reflect thedifficulties created by this pricing principle. Thus, according to Blaug, what the Anglo-Saxon authors call the Frenchschool47 has trouble in taking the existence of deficits into account:“

The characteristic feature of the French contributions to theliterature (on marginal cost pricing) is a total inability to take into account the problem of deficits in the diminishing cost industries which, indeed, hardly
receives a mention48.”

For others, there are fewer disadvantages (i.e. less loss of global surplus) in distorting optimal pricing to control thedeficit than in leaving the latter to drift while seeking to adhere strictly to the optimal pricing principle. Thus, in France andEurope there has been a slow swing of the pendulum: the arguments in favour of marginal cost pricing no longer convince,

the authorities, who are more concerned about the financial situation of the public corporations, especially that of the railway
companies which are steadily losing modal share, as well as about the unfortunate effects which the systematic covering of
the deficits is having on the management of those enterprises.

61

Driven by the structural difficulties of the public finances, this trend is also based on the failure of a pricing system
which requires transfers between taxpayers and users to ensure that the cost of the service to the community is explicitly
weighed against the interests of those who use it. The gap between those who benefit from the system and those who financeit leaves a space within which the economic agents can conceal their preferences. The deficit subsidies may also hide andhence permit inefficient operation. Now, if there were no strong incentive to seek the minimum average cost, the willingnessof the State to close any gap between the marginal cost and the average cost would result in enormous waste, which would be
all the more enormous as it would probably be invisible and almost undetectable49. Thus the balanced budget constraint isaimed at an efficiency deficit which goes far beyond the traditional criticisms levelled against the champions of marginal costpricing concerning the difficulties of evaluating the marginal cost and the technical, political and institutional barriers to
implementation.

The following list of criticisms, without being exhaustive, will serve as an illustration:

the pronounced

indivisibilities of the infrastructure would lead to “sawtooth” pricing incompatible with long term decisio making by then; the lack of rules for allocating certain cost elements would make competition impossible because of theexistence of cross-subsidies differential pricing on the network would bring into question an entire spatial standardi ation;z
system the practice would make it necessary for both users and authorities to gather, at great expense, information on the;economic agentscompetitive structure of the market, on externalities, on the elasticity of the demand, etc. and, in short, the additional costs
which the public would have to bear to implement these pricing systems would be out of all proportion to the advantages
which they are supposed to bring.

As Vickrey points out, we are constantly on the horns of a dilemma from which it is difficult to escape completely.
On the one hand, theoretically, the application of marginal cost pricing ensures that infrastructure utilisation is optimised but,
considering the financial scarcity constraint, we then deprive ourselves of information on the real value of a new project or, if
the project has already been carried out, about whether it is still worth operating. On the other hand, with the balanced
budget constraint, we can be sure that the project or its operation are worthwhile, but we do not know whether the
infrastructure is being utilised to best advantage50
excluding an.

More generally, by employing crude regulatory mechanisms, byumber of users and by eliminating certain activities, the application of such a rule might lead to a serious lossof social efficiency51.

All the solutions proposed for introducing a budgetary constraint into the pricing system must face this radical
criticism: the allocation of the fixed costs to a particular user or a particular use remains largely arbitrary. Thus, thecalculations form the subject of endless discussions about the relevance of a particular distribution scheme. It might seemthat subtle cost accounting could reduce the proportion of non apportionable costs and thus eliminate the problem.

-

However, these methods can always be debated and offer no solution for a usually still significant residuum.

Now, from the standpoint of the optimal allocation of resources, the pricing system should not be mainly concernedwith distributing the costs but, more fundamentally, should favour the achievement of a surplus. The objective is much more
ambitious. Leaving aside the utilisation costs, or which the allocation procedures do not, in theory, pose any particularfproblems, it is clearly the availability of the infrastructure that must be reflected in the scales and not its effective
consumption. Then, the efficient mode of contribution is not to seek to allocate costs but to find a means of extracting the62surplus needed to finance the infrastructure while ensuring that the surplus is achieved. From the moment that this surplus
exists (it is the role of public economic analysis to locate it), there exists a pricing system to bring it to light.

It is the segmentation of the demand which, in this respect, makes a vital contribution to economically efficientpricing. The theory of surpluses leads to precedence being given to pricing systems based on this latter principle. In
practice, it may lead to the adoption of the monopolists' rule to the effect that the best pricing consists in imposing thecharges that the traffic will bear.

In fact, the question of the social loss involved in pricing that deviates from the marginal cost, like the question of the
deficit and the limitation of its perverse effects, makes sense only if price unity is assumed. As soon as a discriminatory
approach is adopted, the difficulty may disappear. Price discrimination, which takes into account the response to prices ofeach segment of demand, then makes it possible to increase the global surplus since the number of users will increase, while
ensuring better coverage of the costs for the producer. The introduction of socially efficient price discrimination turns
pricing completely upside down. It should be distinguished from the pricing principle, often encountered in the literature,that everyone pays his share, which makes even less sense inasmuch as the allocation of some costs is arbitrary. It forms partof another approach which authorises any use of a good calculated to generate a positive net surplus. Under this condition,
not only will any discriminatory pricing system be neutral from the standpoint of the optimal allocation of resources, but it
will be totally justified from the standpoint of the community since it will enable a surplus to be generated. Thus, the firstprinciple considered to characterise optimal pricing gives way to another principle.

A pricing system is deemed to be economically satisfactory if the operator procures for each user a share in theabsolute utility of the service sufficient to constitute an effective incentive for him to use the infrastructure. The contribution
to this service is then said to be fair as long as, for each consumer and for each use, it does not exceed the net value of theutility he derives from it which, it should be recalled, must be positive. Although often disputed52 this approach, based on,tapping into a surplus, has a definite advantage in relation to the problem of financing which, as Jules Dupuit suggested,consists in demanding as the price of the service provided not what it costs the provider but an amount commensurable with“

the importance attached to it by the one for whom it is provided53.

This basic principle remains very theoretical and there are major difficulties to be overcome before it can be applied.
However, the tools do exist. In 1956, Marcel Boiteux54 proposed a solution which marked an epoch in the history of
economic thought. The literature has even associated the name of the author with that solution so that it is customary to
speak of Ramsey55 Boiteux pricing. Anglo-Saxon authors also refer to this principle as the-“Inverse Elasticity Rule”.

Tradition has it that this seminal article offers a general solution of the problem of the production and the Pareto-optimal
pricing of a public monopoly obliged to balance its budget within the context of a competitive economy.

Here, then, the decisive concept of elasticity of demand makes its appearance. Thus, if the enterprise is considered tohave several markets at its disposal, observance of the budgetary rule which requires deviation from the marginal cost willlead to the prices for each market being so determined as to make the mark-up between the consumer price and the marginal
cost proportional to the inverse of the price elasticity. In practice, this comes down to saddling the goods or services forwhich the demand is relatively inelastic with a larger share of the deficit. This pricing practice harks back intuitively to amechanism well known in the field of taxation: the loss for the community resulting from the imposition of a tax (that is, in63this case, the reduced consumption of a good consequent upon an increase in price) will be the greater the more elastic thedemand.

64

Figure 3.

Social loss and elasticity of demandyPriceSocial loss
p2

p2
Toll

Toll

p = Cmp = Cm

Q2

QCm

Q2

Quantity

QCm

Quantity

Assuming a monopolistic market on which the demand is very elastic, the slightest variation in price on this market
will be reflected in substantial changes in the pattern of consumption. Thus, the so called Boiteux rule consists in taking-

advantage of different relative market situations. The steeper the slope of the demand curve on a market, the lower theelasticity and the more limited the social loss resulting from a deviation from the marginal cost. Conversely, on a highly
elastic market, the slope of the curve will be flatter. In this case, a deviation of the price from the marginal cost will bereflected in a heavy social loss.

Thus, when by necessity an enterprise has to cover the whole of its costs and hence, in the case in question, when it
is obliged to deviate from the marginal cost, this theoretical demonstration makes it possible to justify placing the strain on
the consumption which is the most inelastic. When the demand is relatively inelastic, the deviation of the Ramsey-Boiteux
price from the marginal cost will be small and hence the deviation at the optimum will be minimised. The mark-ups will begreatest on the least sensitive demand. Thus, this method of pricing seeks not to distort the price signal sent to the mostsensitive users in order that they may not significantly modify their pattern of consumption and to levy the charges on theless sensitive users who will not reduce their consumption more than slightly relative to the social optimum, even if theprices are raised.

Thus, returning to the allocation of non-apportionable fixed costs, where a monopoly can rely on several products itshould parcel out its fixed costs according to the sensitivity of the demand. Prices are raised sharply where the demand is notsensitive and reduced where it is. The quantity consumed on each market remains as close as possible to the consumption
which would have been observed in the first-best case. The optimum obtained maximises the social surplus subject to theconstraint of a balanced company budget or, if this constraint seems too harsh or inaccessible, by assigning in the RamseyBoiteux optimisation programme a scarcity coefficient which overestimates the collective utility of the public contribution.

As Boiteux has himself been pointing out since 195656, to the difficulties of application of this pricing method there
must be added the unrealistic assumptions of the model. At the same time, the author questions whether the practicalapplication of the results obtained is of any real interest. In fact, the application of this rule poses a number of problems, inparticular, by requiring a knowledge of demand elasticities. More generally, the necessary hypothesis of an omniscienteconomic supremo is obviously unrealistic. The fact that it is a question of pricing the use of the rail infrastructure and not
the transport service itself is a further complication. The carrier is then the source of the demand, in the sense that he needs

65slots and he himself responds to a combined demand: that of the users or shippers and that of the transport organisingauthorities who purchase qualities of service from him. Thus, the effects of infrastructure pricing on the final demand are“”linked with the pricing principles which the carrier himself applies. For the system to be coherent and economicallyefficient, it is very likely that the two operators will have to price in accordance with similar principles, but this linkage has
still to be subjected to a complete analysis.

This brings us to an essential conclusion concerning the pricing system which Maurice Allais considers to be one of
the key elements distinguishing his theory of the markets economy from the standard model57. Within this more general
theoretical framework, which seeks to maximise the collective surplus, the deficit constraint can be removed provided there
is no objection to questioning price unity. That is an intuition already clearly expressed by Jules Dupuit58 in his time. If thesurplus generated by an infrastructure is greater than the cost of putting it in place, then there necessarily exists a pricing
system capable of tapping into this surplus to obtain the sums needed to finance the project while maintaining maximum
social utility. The achievement of the surplus becomes the challenge of the pricing procedures. It can justify the transition
from a logic of differentiation based on costs alone to a logic of discrimination based on segmentation of the demand. It is
not a question of differentiating prices solely on a user pays basis, which makes little sense since, once again, a portion of thecosts cannot be distributed in accordance with this principle. The discrimination of the demand should be based on theprinciple of he pays who can, especially when that is the only way of obtaining a return on projects with a positive global net
utility. Otherwise, if the project is not financed out of the general budget, a type of solution now considered best avoided, it
will never materialise.

We then enter a pricing universe that is more complex but still regulated by marginal cost in which it is less a matterof minimising the effect of a deficit linked to optimal pricing as of seeking to maximise the surplus by differentiating thepricing, segmenting the customer base and, finally, obliging all the economic actors to disclose their preferences. These
principles now need to be compared with the actual results of implementing the most significant recent reforms.

4.

APPLICATION OF PRINCIPLES AND
NETWORK CONSTRAINTS

In this final part of our paper, we shall compare the few theoretical principles that can be derived from economic
analysis with the practices of networks which, as a result of having been reformed, should have solved the infrastructure
pricing problem. Accordingly, we shall examine, in turn, the British, German and French cases.

4.1.

The British experience: making a surplus59

The restructuringof British Railways began in the early 80s. This long process, intended to

improve the efficiency of the sector, led the authorities gradually to modify the enterprise's internal organisation. On 1 April
1994, the reforms took a further step forward with the entry into force of theRailways Act which prepared theground for a phased privatisation of the sector by programming, in particular, for the separation of operations from66

infrastructure. The enterprise's transport services have thus been separated into smaller entities which, from the outset, theauthorities have made clear they intend to privatise. As for the infrastructure, it has been assigned to a new private-law,

company held by the State,

Railtrack. This company, still a monopoly, retains operational control over the traffic,

allocates capacity and, above all, is responsible for pricing use and determining the fees to be paid by the various operators toensure that the costs are covered60. The company, which initially was left in public hands and even benefited frominvestment subsidies, was privatised in 1996. BR's passenger transport business has been split up into 25 separate entities
which have been placed under private sector control by introducing a franchising system. The freight business has all beensold off to the private sector and opened up to competition. Thus, Railtrack buys services from and sells them to a range of
operators.

At the same time as splitting up BR, the Railways Act established a powerful regulatory system based on threebodies. The first, the Office of the Rail Regulator (ORR), is mainly responsible for supervising infrastructure access andpricing. It establishes the rules of competition and oversees their application, especially in the interests of the customer. The
task of the Office of Passenger Rail Franchising (OPRAF) is to grant franchises and supervise the correct application of theterms and conditions by each franchise holder, in particular as regards the consistency of the services actually provided.
Finally, the Health and Safety Executive (HSE) ensures that the safety regulations are observed. It issues rules governing thedesign, construction and operation of rolling stock, infrastructure and equipment.

Figure 4.

The British reforms

HSE
Franchising Director

Rail Regulator

awards franchises and pays subsidy

Scope of regulations
RUCC &
CRUCC

Rolling stockcompanies

Passenger train
operating companies(ROSCOs)(TOCs)

Heavy
maintenancesuppliers
maintain rolling stock

Infrastructure
Maintenance
Companies

Other passenger
train operators

Railtrack

Track renewal
companies

Other
service providers

Freight operators

telecommunications

Source: ORR Report, 1996-97.

Each operator signs a track access agreement with Railtrack. Two sectors should be distinguished. Initially (7-15
years), the franchised passenger line operators have been granted the access rights necessary to provide the services

67

stipulated in their specifications. On certain routes they enjoy protection which will eventually be withdrawn. The existing
freight carriers have been granted initial rights to enable them to satisfy their present customers. Apart from the time slots
allocated in connection with these rights, there are others which are open to competition.

The splitting up of the network immediately posed the problem of the allocation of costs among the various activities.
It was decided that the costs should be allocated to the various sectors in such a way that each sector bore the costs of the
fixed assets and personnel of which he was deemed to be the principal user. The basis for this pricing is that it must be
sufficient to ensure

Railtrack a certain return on its assets.

The rail operators pay Railtrack infrastructure user fees intended to cover the network utilisation and signalling costs
and the cost of supplying power, where appropriate. Thus, the overall aim is to pursue a balanced-budget pricing policy
which also takes into account the ability to pay of the applicants for time slots. Accordingly, it is not possible to speak ofRamsey-Boiteux pricing because of the special terms granted to the franchise operators.

In fact, the pricing system differs depending on whether one considers the operators who provide services underfranchise (subsidised services) or the operators who purchase time slots on the network. The companies which operatepassenger lines under licence are in a special situation since in this case the structure and the level of the access charges
applicable are directly controlled by the regulatory body. The access charges applicable to the passenger lines operated
under licence61 are based on a cost allocation study that uses the concepts of avoidable62 and additional63

costs.

In the event of a time slot purchase, Railtrack is free to negotiate its prices, although the contract must be approvedby the Regulator. The fees are negotiated but subject to approval based on the principles established by the Office of theRegulator.

The general principle requires that the fee structure should not deviate too far from the value of network access forthe users and that it should enable Railtrack to recover all the costs actually incurred in connection with the transport ofgoods, to which there should be added a possible contribution to cover the joint costs shared with the passenger services.
Thus, the pricing rule should be such that the minimum price is not less than the avoidable costs occasioned by the service
concerned. The price should be less than or equal to the costs which Railtrack would incur if the operator were alone on that
portion of the network and then had to assume all the costs. The price should not, when the various cost factors are taken
into account, differ appreciably from one user to another.

In addition to the transparency of the charges being more difficult to achieve for freight than for passenger transport
and it being difficult to determine precisely the share of the cost directly apportionable to a particular service, the allocationof the joint costs is a real headache.

The reforms have been the target of two main criticisms. Some consider that Railtrack, by setting low prices for
freight transport, for which it is competing, may seek to shift the fixed costs onto the passengers and thus improperly obtain
public funding to its advantage. Others, on the other hand, consider that the draconian safety regulations, though reasonable
in the case of passenger transport, are less justified in the case of freight transport and, accordingly, that there has been atransfer from the freight to the passenger sector.

68However, in 1995, before Railtrack was privatised, after examining the access charges applied to the franchisedpassenger services, the ORR concluded that they were too high and more than the operator really needed to fulfil his
infrastructure renewal obligations. The Regulator imposed corresponding price reductions, thus transferring the productivity
gains to the licensed operators. The charges are to be reviewed in the year 2000. Another object of criticism is the charge
structure, the fixed portion being considered too high (91 per cent).
management of resources.

This pricing is not conducive to the rational

In fact, this approach precludes the introduction into the access charge calculations ofdifferentials in terms of rush hours or the economic value of the slots. The costs considered here do not incorporate suchexternalities as noise or air pollution.

When the pricing rules were being drawn up, there was a keen debate between the advocates of a commercial strategy
and those who favoured a more managed approach. The arguments are important inasmuch as the same debate is now being
conducted at the European level. After holding numerous consultations, the ORR concluded that it was better to place themethod of calculating the infrastructure user fees on a commercial negotiation basis so as to give the operator a chance toattract all the economic agents capable of paying at least the directly apportionable costs. Thus, the main aim is to give theinfrastructure manager the means to induce the maximum possible number of operators to use the network. Clearly, then, theobjective is to achieve and engineer a surplus. This approach has been much criticised. The owner of the infrastructure canengage in cross-subsidisation and favour one party or another without necessarily ensuring the complete opening up of the
network

69

4.2

.

The German experience: covering the costs

As in other countries, the amount of federal subsidies granted to the rail sector in order to balance its budget andguarantee its borrowings had become considerable while, at the same time, rail's share of total traffic was being continuallyeroded. Reunification only worsened the crisis and, in 1993, the enterprise (made up of the DB and the R
more than DM 67 billion while theB) had debts ofovernment was anxious to support the development of the sector. The reform ofG

German railways was speeded up, profoundly transforming the rail transport situation across the Rhine. It opened the wayfor ever keener competition on the railways, on the one hand in the short term, by placing the historical rail operator in theposition of a service provider in its negotiations with each Land and, on the other, in the long term, by opening up the
network to third parties. The reforms entered into effect, following an amendment to the Constitution, on 1 January 1994.

Thus, the authorities gradually moved towards a vast controlled and concerted structural reform of the railway
company. The

Central Government(Bund) set up a private joint-stock company, the DB AG, in which at present it holds

all the shares but which is supposed to disappear in 1999. The rail system is organised in four independent sectors ofactivity: regional passenger transport, long-distance passenger transport, freight transport and infrastructure management.
These sectors are eventually to be privatised. However, theFederal Government will remain the principal shareholder in

the Fahrweg (infrastructure manager) in order to retain control over investment policy.

As in the United Kingdom, the reforms are based on new institutions. On the one hand, the Federal Office ofRailways - the Eisenbahnbundesamt (EBA) - has been set up to ensure the necessary co ordination and take care of the

-

-

-

general missions of the railways. It authorises operations, certifies equipment and organises work on the infrastructure. It
plans the work on the federal rail network, ensures that tendering procedures comply with the law, grants licences, applies
investment financing agreements, commences prosecutions and settles disputes. On the other hand, the Bundeseisenbahnvermögen(BEV), another federal body, is responsible for clearing the debts of the former company and for administering staff andpension costs as well as financial and property charges. Central government has taken over the costs of the staff of theformer DB with civil servant status who can now be made available to the DB AG for employment under ordinary market,

conditions.

At the same time, to meet the increasing costs of regional rail transport the central authorities have transferred to the,

Länder, with their agreement, the responsibility for organising and financing regional transport operations.

Thus, the latter

will henceforth find themselves in the position of organising authority. They will receive financial transfers from the Bund
to enable them to perform this task64.

Figure 5.

The German reforms

70

BUND
Financial transfers

Organisingauthority

Länder

%

res
sha

EBA
FederalRailway
OfficeBEV
Bundeseisenbahnvermögen(Restructuring body)

Participation
BUND

Network

Financing

Freight transport

Products(choice ofmodes)

Passenger
transport(L.D.)
Freighttransport

DBAG
Regional transport

Timetableorganisation

100

of

loss-making

Infrastructure
profit-making

Infrastructure pricing is an important component of these reforms. The Act authorises access for third parties andthus transposes into domestic law the principles of Directive 91/440. The operating subsidiaries of the DB AG pay the
infrastructure manager for the use of the infrastructure. These charges are published in a catalogue which tells the operators
exactly what price they will have to pay for the whole of a journey, depending on their requirements. In July 1994, DB
Infrastructure published an initial price schedule applicable to all users of the network. The system was chopped up into 4000 sections with well defined characteristics on the following principles.

The prices are identical as between the DB AG and third parties and must be identical for requests with similar
requirements. The differentiation to be found in the catalogues is based on objective criteria. The prices depend on the
category of line, the damage potential of the equipment used which largely depends on the type of use, the required,

regularity, the volume of purchases and the length of time for which the slot is used. The basic tables are compiled on thebasis of four criteria, namely the quality of the track (essentially the permissible speed), the traffic potential (principal,

characteristics of the rail links) according to the type of service requested, the wear and tear (based on a variable cost
analysis) and the planning quality. This last item relates to the quality of service demanded, the reliability (punctuality)
indicator determining the room for manoeuvre left to the infrastructure manager. This indicator is expressed in the form of apercentage representing the margin which the DB is allowed relative to the theoretical journey time. Using these criteria it,

is possible to construct the reference tableshown in Table 1.

The notion of quality introduces an element of economic demand management. Here, the aim of differentiation is todefine a scale of operator's requirements.

In choosing a quality of service the operators disclose their preferences.

,

However, there are strict limits to this mechanism since the percentage is fixed for each category. It would be different if theoperator could choose a level of reliability in each category.

71

Many weightings and modes of payment can be introduced on the basis of this table. If the stated maximum load is
exceeded, the basic slot price is increased by 1 per cent for every additional 100 tons.

For trains running empty, the basic slot price for price classes P1 to P3 is reduced by 10 per cent and that for priceclasses P4 to P7 by 5 per cent. For engines running light the basic slot price is reduced by 20 per cent.

,Every regular slot ordered must be paid for irrespective of its utilisation. It is possible to reserve optional slots. A
reservation fee of 20 per cent of the slot price is then collected. This fee is non returnable.

-

Customers who order many slots are granted a price reduction which depends on the annual total of train-kilometres.

1.

The pricing of the various transport sector modes should also take into account the environmental social costs
and propose coherent pricing rules. This presentation does not expand on this point which would require,

special development. We note that in this respect it is necessary to distinguish between two independent typesof questions. On the one hand, rail pricing should be considered in relation to the social costs actually taken
into account in the pricing of the principal competing mode, namely road transport. This concern for,

coherence might even lead to the legitimising of intermodal balancing subsidies, theoretically justified by asecond-order optimum. On the other hand, and this is a totally different problem, it is necessary to introduce
differential pricing within the rail mode in order to take into account the advantages and disadvantages of thedifferent technologies used by the operators and gradually encourage the use of those that are less polluting.

2.

Brooks M. and Button K. propose a detailed typology of these various experiences in Separating transport

,

,

“

track from operations: a typology of international experiences , International Journal of Transport Economics, Vol.

”

XXII, No. 3, October 1995.

3.

This is the case in the United States for certain passenger services for which Amtrak must negotiate an
infrastructure access charge with the integrated private operators.

4.

The calculation methods used in these studies can often be reduced to very simple procedures, especially as
the quality of data needed for more sophisticated calculations is very difficult to obtain. Nevertheless, thestatistical analysis can be made more precise by greater refinement and by establishing precise relations
between particular types of costs, networks and users.

72

5.

Avoidable fixed costs are then defined as those which would disappear if the firm stopped producing one ofits products.

6.

Winston in a survey of road pricing explains that the proposal to consider optimal pricing and optimal,,

investment in parallel harks back to the work of Herbert Mohring (1962).

This school includes such authors as T.E. Keeler, K.A. Small, M. Kraus, S. Glaister and S.A. Morrison.

Morrison S.A.

,
(1986), “A Survey of Road Pricing”,
N2,
o. March, pp. 85-97.
Mohring

,

H.

and

Harwitz,

M.I.

(1962),

Highway

Benefits:

Northwestern University Press, Evanston

Transportation Research, Vol. 20A,

An

Analytical

Framework

,

, IL.

Small Kenneth A.,

Clifford Winston and Carol A. Evans (1989), Road Work: A new
Highway Pricing and Investment Policy, Washington, D.C., The,

Brookings Institution.
Hau Timothy D.
,(1992), Economic Fundamentals of Road Pricing: A
Diagrammatic Analysis, Transport Division, Infrastructure and
Urban Development Department, The World Bank, December.
7.

8.

Allais, Maurice (1948),

Boiteux,

Revue d’É

conomie Politique, op. cit., p. 230.

Marcel (1994), “Le développement de l’approche économique du service public”,, Édition ASPE EUROPE, Paris, p. 46.

L’Europe àl’épreuve de l’intérêt général, Collection ISUPE

9.

Kolm Serge-Christophe,

SEDEIS.

(1968), “La théorie économique générale de l’encombrement”,

Futuribles,

10.

Although traffic management is generally based on rules of priority, which distinguishes the rail problem fromthat of the roads and creates a further difficulty for the theoretical approach to the pricing of rail infrastructure.

11.

Here we have used the demonstration proposed by Steven A. Morrison who bases himself on the work of,authors such as Mohring, Harwitz and Vickrey.

12.

, H. (1938), “The General Welfare in relation to problems of
Econometrica, 6(3),July, pp. 242-269.
Taxation and of Railways and Utility Rates”,

13.

Kolm Serge-Christophe

14.

Hotelling,(1971),

La valeur publique, l’État et le système des prix, CNRS, Dunod, Paris, p. 7.

In the literature, the French school is associated with the rejection of pricing based solely on balancing theaccounts. This takes little account of the analyses of Jules Dupuit in the last century or of the more recent
work of Maurice Allais and Marcel Boiteux.

15.

Blaug Mark,(1986), “La pensée économique, origine et développement”,

Economica, 4th Edition, Paris,

p. 718.

16.

Allais Maurice

,

d’

É

(1948), “Le problème de la coordination des transports et la théorie économique”,-

conomie politique, 58, pp. 212 271.

Revue

accountability of the managers. In no circumstances should this second factor be neglected

.”

Note

Prévision, Commissariat Général du Plan, p. 151.

18.

Bernard, A. (1983), “Coût marginal ou coût moyen ?”, in Quinet, E. (editor),
École Nationale des Ponts et Chaussées, report on transport economics seminarorganised in 1981-82 by the cole Nationale des Ponts et Chaussées, p. 36.
É
Les transports et la puissancepublique, Presses de l’19.

Very many commentaries on this type of pricing point out that fairness implies that the consumers should bear
the costs of producing the goods they consume and that all the consumers should pay the same unit price forthe same good. This is a frequently recurring complaint:“those systems which differentiate between deficit.”

tolls according to the characteristics of the demand are generally considered unreasonable and unfair

Oort, C.J.,

op. cit., p. 62.

Clearly, the theoretical considerations advanced here shatter this principle. The tolls applied may vary for
products that are identical both from the technical standpoint and by reason of their cost.

20.

Dupuit, Jules (1849), “De l’influence des péages sur l’utilité des voies de communication”,

Annalesdes ponts et chaussées, p. 248.

21.

Boiteux, Marcel, “Sur la gestion des monopoles publics astreints à l’équilibre budgétaire”,
Econometrica, No. 24, 1956, pp. 22-40.

22.

Ramsey F.

, (1927), “A contribution to the theory of taxation”, Economic
Journal, Vol. 37, No. 1.

24.

25.

With that “s” Maurice Allais distances himself from the standard model. For further details, see: Allais,
Maurice(1971), “Les théories de l’équilibre économique général et de l’efficacité maximale. Impasses
récentes et nouvelles perspectives Revue d’ conomie Politique, No. 3, May June, pp. 331-409.
”,
É-

Dupuit Jules,(1849), “De l’influence des péages sur l’utilité des voies de communication”,

Annales desponts et chaussées, pp. 170-248.

26.

We shall not describe the reforms themselves as they have already been extensively analysed. See, forexample:--Montagu,(1995), “L’accès à l’infrastructure ferroviaire, l’expérience britannique”,
26, January, pp. 5 15 Paper read at the AICCF/CCFE onference, Berlin 6 7 October 1994:
- .
C
, The
ailways and European ransport olicy.
R
T
P
Rail International-- (1994),--

Preston John,

Review, Vol--

Britain’s Railways: a new Era, The Department of Transport, London.

, March.

(1996), “The economics of British Rail Privatisation: an assessment”,

Transport

16, No. 1, pp. 1-21.

British Ministry of Transport(1996),

Transport Report.

Available on the Web at:<URL http://www.open.gov.uk/dot/ann_rpt/chap 1.htm>.

--- Nash, Christopher (1996), “The British Experience”, SOrovision of ailway ervices, Round Table 103,
from nfrastructure in theI
PR S
ECMT, pp. 59-102.
The--

Bradshaw, B.

and L. Mason (1994),.

Research Associates Ltd , Oxford.

Rail Privatisation:

eparation ofperations

Facts, Issues and Opportunities, Oxford Economic

27.

Railtrack derives its income from user fees paid by the operators (supply of electricity, etc.), rents paid for theuse of stations and depots and rents from its commercial assets. To these should be added the access charges
which are determined by negotiation (see below). The procedures have been progressively refined. At the
beginning, no rules for calculating the charges were laid down. The first charges were fixed at a level thatwould cover the total costs and ensure a return on the invested capital of the order of 828.

per cent.

The charge includes a fixed annual fee comprising the allocated fixed costs (joint costs) and the additional
fixed costs (specific to each company). The fixed charges, which correspond to about three quarters of the-infrastructure costs, form the subject of negotiations between the operators and Railtrack. The variablecharges contain infrastructure user fees calculated in terms of train miles which are different for eachcategory of rolling stock (10per cent of total costs). The costs incurred at regional and national levels

are shared out among all the franchise holders in proportion to their receipts from fares. The costs incurred at
local level, or on a single line, must be distributed among the users in proportion to the number of vehiclekilometres travelled.

29.

Avoidable costs:

rule for the allocation of the fixed costs of the whole of the services provided by anoperator, equal to the amount saved in the event of his services being eliminated.

30.

Additional costs:

increase in infrastructure costs imposed by its services, taking into account theconfiguration of the other services.

31.

The corresponding subsidies are financed from revenue generated by the petroleum tax (Mineralölsteuer). Notethat article 4 of the Railways Restructuring Act states that, from 1996, the DB AG will no longer receive any
direct funds from theFederal Government for managing regional passenger services. The subsidies areallocated to the Länder, which use them in accordance with their own regional transport policy. However, theLänder must use these transfers for public transport purposes.

Table 1

Price class

P1

P2

High-speed traffic Express passenger traffic.

Quality of service reference table

P3

P4

P5

P6

P7

Regional express

Average-speed main-

Short-haul regional

Local passenger

S-Bahn (urban(main lines)

passenger trafficline passenger traffic

passenger traffic

traffic

rail transport)

Max. load (t)

1 000

750

550

750

400

400

450

Permissible

200 km/h or more

Up to 200 km/h

Up to 160 km/h

Up to 140 km/h

speed on at least one section
Planning quality

105 %

108 %

110 %

120 %

120 %

120 %

108 %

Category of train

Intercity express

EuroCity and InterCity

InterRegio, main-line

Express night trains,

Regional express

Regional train,

S-Bahn train

express trainsaccompanied-car trains,

train, through

CityBahn, slow

fair trains

train

train

(ICE)

33

Table 2

Percentage reduction in terms of train-km per year.

Percent reduction

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Main-line traffic

14

28

42

56

70

84

98

112

126

140

154

168

182

196

210

224

238

252

266

280

0.3

3

25

63

134

205

250

293

333

370

407

444

481

518

555

592

629

666

703

740

train-km (millions)Short-haul traffic

34

train-km (millions)Customers who order slots for several years and sign a contract are granted a further price reduction in addition to thatmentioned above. For firm orders extending over 2, 3, 4 and 5 years the corresponding reductions are 2, 3, 4 and 6 per cent.

,

The German pricing policy makes the financing of rail activities truly transparent, even though the determination of
the costs in terms of train-km is far from receiving unanimous approval and constitutes an obstacle to the entry of new
operators. The relatively high prices and the choice of pricing applied to the train rather than the wagon are dissuading
new operators from moving in.

These price scales have introduced a certain flexibility, but it

is still insufficient and, in a way, is institutionalising the status

quo by discouraging the adoption of new techniques and limiting the freedom of manoeuvre of possible new entrants.
Separation has not progressed very far because DB AG is still both service provider and network operator. The transition is agentle one. The undertaking seems to have been genuinely successful since already more thansixty transport operators

have moved onto the DB AG's rail network and their number is steadily increasing

While proposing rather high marginal network entry costs, this pricing system reduces, on the one hand, theuncertainty for future operators by encouraging longer-term commitments and a search for financial and technical partners
and, on the other hand, short-term practices which could have pernicious effects on the continuity and quality of the rail
service.

Finally, the choice of a high level of global pricing guarantees the infrastructure manager a development capability,
which is one of the strong political choices of these reforms, together with the choice of a user tariff likely to lead to the
optimal utilisation of the network.

4.3.

The French example: a transitional phase65

Introduced against a background of social strife, in particular a big strike in 1995, the French reforms consisted inestablishing Réseau Ferré de France (RFF), a new public company which, as balance sheet liabilities, received three quarters of--the debt of the SNCF and, on the asset side, the national network infrastructure, with the exception of the stations andinstallations needed by the historical operator. The latter was entrusted with the management and maintenance of theinfrastructure on behalf of the RFF, which pays the bill for this service (16.8 billion francs for 1997, the first year of
implementation). The SNCF pays the RFF for the use of the infrastructure. For the first two years a limit was placed on this,fee (slightly under 6 billion in 1997) by the law and the decree establishing the new system.

The first characteristic of the system relates to the fact that, relieved of most of its debt and infrastructure financing,
the SNCF is in a position to balance its accounts, which it is expected to do in 1999. Secondly, the new infrastructurecompany, which at present can only count on earning 6 billion francs, must cover, in addition to nearly 17 billion in network
maintenance and management costs and unavoidable investment costs amounting to about 13.6 billion, charges of around 9
billion on the debt inherited from the reforms. Obviously, most of the difference between expenditure and income is coveredby theGovernment, in the form of either a capital grant or subsidies, the difference being made up by borrowing.

80This, then, is a very special situation which can be interpreted in two different ways. Either the RFF may be regarded
as a body whose principal function is to take over the debt and cover the deficit (net of subsidies) of the infrastructure accountby borrowing. Naturally, in this case investment would be the adjustment variable and would inevitably face historical,decline. Or the present situation may be regarded as a transitional phase for putting new structures in place, after which
pricing that offers greater incentives and ensures better coverage of the costs will be gradually introduced.

Being capped in 1997 and 1998, the present fee system is obviously far removed from the principle of covering thecosts. It corresponds to about one fifth (in terms of the total amount) of the German system. There is little connection-

between the six billion constraint imposed and the reality of the actual costs, particularly as more than half of this sum comesfrom the regional organising authorities (mainly “Parisian” passenger transport) and less than half from the SNCF.

There is little point in studying this provisional system, precisely because it is capped. However, it should be notedthat the idea was to create incentives, especially where the demand for slots is high relative to capacity, i.e. on the urban andsuburban lines (the part of the network designated R ) and to a lesser extent on the busy high-speed lines (R ). On the other01
hand, on the low-density high-speed network and on the main-line network (R ) the fees are very low, while on the rest of,2
the network (R ) they are symbolic.
3
The fee system distinguishes between a monthly access charge AC, per kilometre of lines for which access is,requested, a reservation charge RC, per kilometre and per slot reserved and a traffic charge TC, per train-kilometre. There,,

are different reservation charges for peak periods, normal periods and slack periods. The corresponding charges for 1997 areshown in Table 3.

Clearly, this system is much less detailed and sophisticated than that introduced on the German network and thus
raises the question of whether it is sufficiently refined to enable the relevant marginal costs and homogeneous demand
segments to be distinguished in the event of the future system being steered towards a more determinedly economic form of
pricing.

Table 3.

French provisional pricing(1997 unit prices in francs)

Sub-network

R
0

AC

R

R

1

2

R

11 000RC (peak)

100

18

0.85

0

RC (normal)

44

6

0.85

0

RC (slack)

20

4

0.85

0

0.30

0.30

0.30

0.30

TC

250

3

11 0000Note: AC is expressed per month and per km of line, RC per slot-km, TC per train-km.
In the French case,clearly the main problem is how pricing will evolve after 1999.

This question isovershadowed by the fact that, overall, the rail system is running at a loss. The first step then will be to choose between two81

strategic directions. One choice would be a low-toll system which would concentrate the public contribution on covering the
deficits of the RFF and financing new investment. In this case a policy of long-term marginal cost pricing without budgetary
constraint might be envisaged. A second choice would be a system that combined budgetary constraint with a RamseyBoiteux principle. In this case the SNCF would have to be subsidised for a fairly long time, but the subsidies could becorrelated with the loss-making services thus financed, thereby allowing the authorities latitude to compare their cost and theirutility.

On the basis of a study in progress, the RFF is to propose to theencourage a better allocation of resources.

82

Government a user pricing system designed to5.

CONCLUSION

To reach a conclusion on such a subject would be to suppose that a definitive theoretical contribution, which wasboth coherent and pertinent and proposed measurable concepts would make it possible to solve, down to a few details, this,difficult rail infrastructure pricing problem. Only a patient approach that takes into account all the attempts to apply
theoretical prescriptions will enable us to work towards a satisfactory solution.

It is no insult to the achievements of economic theory or railway economics to conclude with the following few lines
which were written about a century and a half ago:

We merely wished to show that the way in which the tolls are fixed can greatly extend the utility of certain routes and that the guiding principle inassessing these charges should not be to set a price proportional to the weight or the distance nor to favour a particular industry or a particular class ofpassengers, but rather to impose on each passenger and on each good only a price that is lower than that which would prevent the passenger or good fromusing the route. Admittedly, the methodical classification of these passengers and goods does call for inventiveness and an intimate knowledge of the local
circumstances, but a sound theory can do much to facilitate this work66

.

NOTES

32.

See the following official texts:--

Law No. 97-135 of 13 February 1997 establishing the public corporation Réseau

,view to the revival of rail transport

--

,

F

erré de France, with a;

Decree No. 97-446 of 5 May 1997 on national rail network user fees;-- and, finally, the Orders of 30 December 1997 on national rail network user fees, JO, 31 December
1997 pp. 19461-19463.
,

33.

Dupuit Jules,(1873), “Poids et mesure”, in Coquelin and Guillaumin (eds.), Dictionnaire deEdition, Vol. 2, Paris, pp. 339-344.

l’économie politique, 4th83BIBLIOGRAPHY

Allais Maurice 1945 ,

,

)É

(

conomie pure et rendement social, Edition Sirey, Paris, 72

pp.

Allais Maurice 1948 , Le problème de la coordination des transports et la théorie économique , Revue d’,(58, pp. 212-271
.

)“

”

É

conomie politique,

Allais Maurice et al. (1965), Options de la politique tarifaire dans les transports, Report prepared at the request of,Commission of the European Economic Community, Studies Coll., Transport Ser

ies,

No. 1, Brussels.

Allais Maurice (1989),

,

d’

É

conomie Politique, 99,“L’économie des infrastructures de transport et les fondements du calcul économique”,
No. 2, pp. 159-197.

Allais Maurice (1989), Théorie générale des surplus, PUG, Presse,

Banister, David, Kenneth

Buttonet

Revue

Universitaire de Grenoble (2nd edition), 716 pp.

(1993),al.

Transport, the Environment andSustainable Development, Alexandrine Press, Oxford, 275 pp.

Baumstark L. (1997),,“Tarification de l’usage des infrastructures et théorie de l’allocation optimale des ressources, de la”.

logique des coûts à la révélation des préférences , Doctoral thesis, Université Lumière Lyons 2

Boiteux Marcel (1956), La vente au coût marginal , Revue Française de l’

,

“

”

É

nergie, December.

Boiteux Marcel (1956), Sur la gestion des monopoles publics astreints à l'équilibre budgétaire ,,No. 24, pp. 22-40” Econometrica,“.

Bowers Ph. (1995), Commercialisation, accès local et international aux réseaux ferrés , Public Transport International, No. 1

,

“

”

.

Brooks M.,, K. Button (1995), “Separating transport track from operations: a typology ofinternational experiences”, International Journal of Transport Economics,
Vol. XXII, No. 3, October.
Council Directive 91/440 of 29 July 1991 on the development of the Community's railways, OJ L 237 of 24/08/1991,
25

pp.

84

Council Directive 95/18/EC of 19 June 1995 on the licensing of railway undertakings (OJ L 143/70-74).

Council Directive 95/19/EC of 19 June 1995 on the allocation of railway infrastructure capacity and the charging of
infrastructure fees (OJ L 143/75-78), 27 June 1995.

Regulation (EEC) No. 1191/69 of the Council of 28 June 1969 (OJ L 156 ) on action by

Member States concerning theobligations inherent in the concept of a public service in transport by rail, road and inland waterway, last amended byRegulation No. 1893/91 of the Council, OJ L 169 of 29/6/1991.

Regulation (EEC) 1192/69 of the Council of 26 June 1969

on common rules for the normalisation of the accounts ofrailway undertakings, OJ L 156 of 28/06/1969.

Regulation (EEC) No. 1107/70 of the Council of 4 June 1970 on the granting of aids for transport by rail, road and inland
waterway, OJ L 130 of 15/06/1970.

Green Paper (1995), Towards fair and efficient pricing in transport, COM(95)691 of 20/12/1995, 58

pp.

White Paper (1996), A strategy for revitalising the Community's railways, COM(96) 421 final, Brussels, 30 July 1996, 54

ECMT (1995)
pp.

, Why

o

e

eed

D W N R

ailways?,pp.

Proceedings of International Seminar, Paris, 19-20 January,

226

ECMT (1993),

Privatisation ofE

The

CMT (1997),

Commissariat Général
2, La

S

R

ailways, Round Table 90, Paris.

eparation ofperations from nfrastructure in the

O

I

P

rovision ofRailwayS

ervices, Round Table 103, Parisdu Plan (1995),.

Transport, le prix d’une stratégie (Workshop chaired by A. B

du Plan (1996),

Transformation des opérateurs publics de réseaux en Allemagne.

onnafous), Vols. 1 andocumentation Française, ParisD

Commissariat Générale-- L scas du contrôle aérien, destransports ferroviaires, de la poste et des télécommunications, Study made by Cabinet ESL & Network, Vols. 1 and 2, March.

Commissariat Général du Plan (1993), Transports : pour une cohérence stratégique, Workshop on the strategic directions of transport
policy and their medium-term implications, Commissariat

Commissariat Général du Plan (1994),

La

Général du Plan, September.

Transports : pour un meilleur choix des investissements

Documentation Française, November,(Group chaired by Marcel Boiteux),

32

1 pp.

Commissariat Général du Plan (1995), Transports : le prix d’une stratégie (Workshop chaired by Alain Bonnafous), Vols. 1 and 2,
La

Documentation Française, pp. 213 and 182.

DB AG

(1996), “Der Trassenpreiskatalog der DB AG: ein Vorbild für Europa?” Lecture given by Mrs Haase at the“
Policy in Deregulated Transport Markets”, organised by the
University of Freiburg (Germany), Hinterzarten, October.

29th Scientific Transport Research Seminar, Competition

85

DB AG, Trassenpreise-- Güterverkehr, Frankfurt am Main, 1995

DB AG, Trassenpreise-- Personenverkehr, Frankfurt am Main, 1995.
.

Dodgson J.

, (1994), “Railway privatisation”, in: M. Bishop, J. Kay and C. Mayer (eds.),.

Privatisation and Economic

Performance, Oxford University Press, Oxford

Drèze H. (1994), Marginal-Cost Pricing , Introduction

,

“

”

Atkinson and Jacques Dreze
pp. 190-195(eds.),

to Part III in: Arnott, Richard, Kenneth Arrow, Anthony B.

Public Economics (Selected papers by William Vickrey), Cambridge University Press,.

Ewers H.-J.

,(1993), Privatisierung und Deregulierung bei den Eisenbahnen: das Beispiel der DB und der DR, Institutpp.

für Verkehrswissenschaft, Universität Münster, 15-17 September, 11Gillen, David W.

and Tae Hoon Oum (1991),

Transportation infrastructure: Pricing, Investment and Cost Recovery, Royal Commission

on National Passenger Transportation, Technical Seminar, Ottawa, Canada, September 26 and 27, 181

Guihéry L.

,

pp.

(1996), “Fédéralisme allemand et réforme des chemins de fer en Allemagne : le transport ferroviaire”rParis,

régional de voyageurs devient une nouvelle compétence des Länder , Documents- evue des questions allemandes, No. 1,
p. 79

.

Guihéry, L.

(1997), “Réforme des chemins de fer et tarification d’usage des infrastructures ferroviaires en Allemagne,”.

une organisation contrôlée de la concurrence sur le réseau ferré allemand , Transport, No. 382, March-April, pp. 112-121

Hau Timothy D. (1993),,“Economic Fundamentals of Road Pricing: A Diagrammatic Analysis”, Working Paper,

WPS 1070, Transport Division, Infrastructure and Urban Development Department, The World Bank, p. 87.

Horton, Sir Robert (1997), “Re-engineering Britain's railways: risks and rewards”,.

European Railway Review, June,

pp. 89-95

Hotelling H. (1938),“The general welfare in relation to problems of taxation andof railways and utility rates”, Econometrica, 6(3), July, pp. 242-69.
,

Hutter R. (1950),,“La théorie économique et la gestion commerciale du chemin de fer”,.

Revue Générale des Chemins de Fer,

February, July and October, p. 44

Kolm Serge-Christophe (1968), La théorie économique générale de l’encombrement

,

“

”,

Futuribles, SEDEIS, p. 82.

Laffont Jean-Jacques (1977), Effets externes et théorie économique, Monographies du séminaire d'économétrie, No. 13, éditions du,

CNRS, Paris, 200

pp.

86

Laffont Jean-Jacques,and Jean Tirole (1994), A Theory of Incentives in Procurement andRegulation, The MIT Press, Cambridge, Massachusetts, London, 705 pp.
Le Duc M.

(1995),eétudes de La ocumentation Française, Paris, 1995.
D
Services publics de réseau et Europ,: Les exemples de l’Allemagne, de l’Espagne, de l’Italie et du Royaume-Uni, Les

Morrison Steven, The Theory of Optimal Highway Pricing and Investment: Comment, Northeastern University, Boston, Massachusetts.

,

Nash C.

(1993), “Developments in transport policy: rail privatisation in Britain”,
olicy, Vol XXVII, No. 3, September, p . 317-322
P
.
p
.
,

Journal ofTransportE

conomics andOffice of the Rail Regulator, Framework for the approval of Railtrack's track access charges for freight services, a consultation document,
October 1994, 19 p .

pPreston J.

, (1996), “The economics of British Rail privatisation: an assessment”, in.

Transport Reviews, Vol. 16, No. 1,

p . 1-21p

Quinet E. (1990), Analyse économique des transports, PUF, Collection,

Économie, Paris, 302 pp.

Allais Maurice, Del Viscovo, Duquesne de la Vinelle, Oort and Seidenfus,

dans les transports

”.

Coll

ection(1965), “Options de la politique tarifaire

Report prepared at the request of the Commission of the European Economic Community, Studies, Transport Series, No. 1, Brussels.

Rathery A. (1984), “De nouvelles perspectives pour la politique des infrastructures de transport dans les Communautés,

européennes ? Possibilités offertes par une approche pragmatique de la tarification d'usage des infrastructures”,

No. 297, October, pp. 358-365

Rothengatter,

W.

Transports,.

(1991), “Deregulating the European Railway Industry:theoretical background and practical consequences”, Transportation
Research, Vol. 25A, No. 4, pp. 181-191.
Small, Kenneth A. (1990), “Highway Infrastructure: Crisis in Finance or Crisis in Management”, Review of the University ofCalifornia Institute of Transportation Studies, Vol. 13, No. 2, February, pp. 4 8-.

Small, Kenneth A., Clifford Winston and Carol A. Evans (1989), Road Work:A

ew Highway Pricing and Investment PolicyN,

The Brookings Institution Washington, D C,

The Department of Transport. .

(1993),

RailF

reightP

rivatisation (the Government's proposals), London

Vickrey W. (1987), Marginal- and Average-Cost Pricing ,,,” in: Eatwell“

Vol. III Macmillan, pp. 311-318.

87

et al.

(eds.),, 27 pp.

The New Palgrave

Dictionary,Vickrey W. (1994), Public Economics (Selected papers by William Vickrey), Edited by Richard Arnott, Kenneth Arrow,,

Anthony B. Atkinson and Jacques Dreze, Cambridge University Press, 558

pp.

Walters A.A. (1987), “Congestion”, The New Palgrave Dictionary, pp. 570 573,- .

Wilkinson A.W.

,

(1992), “La situation politique des British Railways”,

88

Le Rail, July, No. 33, p. 28-2.

FRANCE

Luc BAUMSTARK
Chargé de Mission
Commissariat Général du Plan
Paris
Alain BONNAFOUS
Professeur
Laboratoire d’Économie des Transports
Lyons
France47

48

SUMMARY1.

INTRODUCTION ..................................................................................... 51

2.

INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION ........................................................... 53
2.1. Network opening, redistribution of roles and pricing system ............ 53
2.2. Degree of vertical separation in the rail sector and thequestion of access charges and user fees ........................................... 55

3.

INFRASTRUCTURE PRICING AND MAXIMUM EXTRACTION
OF THE AVAILABLE SURPLUS ........................................................... 59
3.1. The concept of marginal cost and the optimisationof investment ..................................................................................... 60
3.2. The supply-demand equation or how to define an
optimal quality of service ................................................................... 64
3.3. Allowing for the budgetary constraint................................................ 69

4.

APPLICATION OF PRINCIPLES AND NETWORKCONSTRAINTS ........................................................................................ 76
4.1. The British experience: making a surplus ........................................ 76
4.2. The German experience: covering the costs ..................................... 79
4.3. The French example: a transitional phase ......................................... 85

49

5.

CONCLUSION.......................................................................................... 88

NOTES............................................................................................................... 89

BIBLIOGRAPHY.............................................................................................. 95

Paris/Lyons, January 199850

1. INTRODUCTION

The rail sector very quickly came to be regarded by economists as a typicalexample of a “natural monopoly”. In fact, like other networks, though often evenmore emphatically, it displays all the characteristics which tend to compromise thetheoretical pact between the mechanisms of the competitive market and the
optimum allocation of resources (in the Pareto sense). On the one hand, on such amarket the break-even prices lack the qualities necessary to induce the economic
agents to take optimal decisions. On the other hand, it is not possible to find asatisfactory price system that enables an optimum to be decentralised on the basis of
the decisions of individuals.
The sector is, in fact, characterised by increasing returns resulting frommultiple indivisibilities: functional indivisibilities such as the co-ordination ofactivities between upstream and downstream of production, for example, between
infrastructure choices and commercial policy, but also technical indivisibilities suchas that determined by the continuity of the network. To this there should be added
various effects such as “economies of scope” which enable the operator, by
diversifying the services offered, to reduce unit costs or important network
externalities, both positive and negative, or, finally, investment irreversibilities.
Thus, the rail sector accumulates the conditions for the appearance of what arecommonly called market failures. This largely explains the sector's mode ofoperation in the early 80s and the major role played by government throughout
its history.
However, the efficiency of this monopolistic organisation and the frequent
public intervention in the sector have gradually been called into question on two
counts. Firstly, it has been noted that the theoretical justifications for such anorganisation apply only to part of the monopoly (mainly the infrastructure).
Secondly, the very real advantages afforded by such an integrated structure havebeen offset by its no less real disadvantages (mainly its inability to exert sufficientpressure on production costs). Thus, the policies applied in this sector have sought
to eliminate these weaknesses by reintroducing, wherever possible, various kinds of51

competitive pressure. Infrastructure access charges have become a keystone of thereforms. This question forms the subject of the first part of our paper.
There have been many modern theoretical developments in this field and ourpresentation does not seek to be exhaustive in this respect. However, there are twotheoretical principles that deserve closer examination and these will be the focus of
our attention in the second part1.
The first principle states that infrastructure pricing cannot be separated
from investment choices. The setting of “optimal” user fees presupposes theprior definition of a certain quality of service. For example, from the quality ofservice required there follows an acceptable saturation level which, in its turn,
determines a co-ordinated policy of investment and demand management
through infrastructure user fees. Hence, the theoretical economic toll is acomposite toll, comprising a cost toll relating to the costs which can be directly
allocated to the users of the network and an adjustment, sometimes called a puretoll, which enables the manager to produce the necessary quality of service byadjusting, as precisely as possible, the available capacity to the expressed
demand (note that this second component only concerns the part of the networkwith no surplus capacity).
The second principle involves relating pricing to the difficult question ofcovering the fixed and joint costs which within the rail system, as in many othernetworks, represent a large proportion of total costs. The traditional theoreticalsolution based on marginal cost pricing, considered optimal, was to have thesecosts covered by the State budget. However, the perverse effects of systematic
subsidisation, nowadays decried as public failures, mean that such a solution can
no longer reasonably be regarded as optimal. Nevertheless, imposing budgetary
constraint on the enterprise responsible for the infrastructure is not sufficient in
itself to ensure the efficiency of the system. The pricing method and theformulas for allocating the fixed costs which, by definition, cannot rationally beallocated to any particular user, have definite implications for the social surplus
which the system can produce. One of the main difficulties encountered inconnection with pricing is that associated with the manager's technical andeconomic (but also political) ability to charge differential, even discriminatory
fees.
In the last part, we compare these abstract principles with actual practice.

52

2. INFRASTRUCTURE PRICING, KEYSTONE OF
INSTITUTIONAL INNOVATION

2.1. Network opening, redistribution of roles and pricing system
The idea of opening up the network is not a new one. Thus, networks havebeen identified in many different industries: the high-tension lines in the power
distribution sector, optical fibre systems in telecommunications and delivery andcollection in the postal sector, to which could be added numerous services suchas the transport of electricity and information and the routing of mail. Although,as far as the network is concerned, it seems preferable to retain a monopolistic
structure because of the economic characteristics of the infrastructure, this is nolonger true of the services for which, on the contrary, competition seems
possible.
In order to solve the problem of opening up the network, it is necessary tovisualise how certain decisions which were taken internally within a single
institution can be made the subject of commercial negotiations. The analysis
must therefore focus on the types of relations that may exist between thedecisionmakers, the private or public operators and the users. The configurationof the system and the actors is illustrated by the diagram reproduced in Figure 1.

Figure 1. A traditional organisation chart

Regulator

State

Vote-catching
Prestige

Satisfaction of demandat least cost

Infrastructure

Infrastructure
pricing
rules

Infrastructure
Operations

Disclosure of preferences

Opportunism

Customers
Electors
Tax payers

Users

53

It is thought that, under certain conditions, the intrusion of economic
mechanisms into the integrated model will introduce transparent processes, thus
obliging the various actors to disclose their preferences. This then leads to the
explosion of an extreme situation in which the State produces the infrastructure
regardless (or almost regardless) of the demand, of which it has only a faint idea.
In this situation, the user benefits from a good without knowing its cost.
This can be improved upon by identifying intermediate levels. It is
possible to distinguish between the production of the infrastructure and its
management. Attention may also be focused on the behaviour of the agents andits determinants: the efficiency of the system as a whole depends on theefficiency of the means deployed to encourage and promote partnership between
the economic actors and the authorities at various administrative levels. In short,
it is a question of organising effective modes of interaction between the public
and the commercial spheres.
On the one hand, it is necessary to establish relations between the State or,more generally, the authorities responsible for organising public transport andthose directly concerned with the infrastructure so as to minimise infrastructure
costs. This is part of the new theory of regulation which seeks to define more
precisely the contractual framework within which these relations are to fit.
On the other hand, it is necessary to make sure that all the transport
operators have access to the infrastructure on fair terms. This poses a specificproblem with respect to the relations to be established between the infrastructure
operator, public or private and the downstream service providers. Should or
should not the monopoly be authorised to supply the market downstream? Can
the sole and final responsibility for the allocation of timetable slots be entrusted
to a body which itself also operates the infrastructure?
The determination of the prices at which the infrastructure manager opens
up his network is one of the major considerations for the sector as a whole.
These access charges are important since they determine the terms ofcompetition between modes of transport. They must also ensure the overall
efficiency of the system, that is, be sufficiently high for the upstream monopoly
to be able to offer a suitably maintained infrastructure where the rail system ispertinent, but not so high as to bar the arrival of new entrants. More generally,
pricing policy makes it possible, on the one hand, to encourage users toprogramme their services better (in the sense of making the best possible use of54

capacities) and, on the other, to steer investment towards ensuring that thesystem is developed and, in particular, the network expanded, so as to give thebest possible cost-benefit ratio.
When he wishes to formalise the importance of the pricing system in the
resource allocation process, the economist generally analyses the consequencesof price distortion. Whatever the reasons, legitimate or not, for the distortion,
the consequent loss of global surplus needs to be estimated. Within thistheoretical framework, assuming an initial situation in which the pricing systemis optimal, any change in prices not justified by a change in the cost of the
production factors or by a sudden imbalance between supply and demand would
inevitably lead to the misallocation of resources, a poor investment policy and,ultimately, less user satisfaction. In this case, the surplus available in the system
would no longer be maximised.
This theoretical approach, even though it clearly relies on mechanisms lesscomplex than they are in reality, provides valuable benchmarks for theorientation of supply and ensures cohesion between different strategies capableof serving the same purpose. The pricing system may then be understood as an
information and co-ordination system, and if it offers a certain number ofminimum qualities, the regulation of the system, being based to a greater extent
on the rationality of the economic agents, will gain in efficiency.

2.2. Degree of vertical separation in the rail sector and the question ofaccess charges and user fees
These theoretical analyses underlie many of the recent trends in theEuropean rail sector. They form the context for the adoption of European
Directive 91/440, which first provided the impetus for the separation of
infrastructure from operations. The Council of Ministers took a further step by
issuing two new Directives 95/18 and 95/19. Before the network can be openedup, the conditions of network access must be established: licensing system,
procedures for the allocation of existing capacities, coverage of infrastructure
costs, network development, appeal procedures, etc. However, this Community
drive is based on the reforms which many countries have already started to
introduce. Although these reforms may employ different means, they apply thesame basic principles, namely, the principles of decentralisation and theorganisation of competitive pressure.
In practice, these widely introduced vertical separation policies are very
diverse. This diversity contrasts sharply with a very homogeneous theoretical55

discussion of the question2. The main difference between all these systems
appears to relate to the role of the State. Sometimes, though this is not the mostfrequent case, the State more or less organises the service, whereas theinfrastructure is private3; in another configuration, the service may form thesubject of a private monopoly, whereas the infrastructure remains in public
hands (as in New Zealand). Under a third scenario, private companies operate a
network in “partnership” with another private partner who owns theinfrastructure (as in the United Kingdom).
The infrastructure user fee structure and its possible impact on the markets
cannot be understood without taking into account the institutional configuration
governing the management and operation of the network. A summary typologyof the possible configurations is proposed in Figure 2.

Figure 2. Typology of institutional configurations
Separation of
infrastructure
and operations
Infrastructure

Network opened
Access for third parties

Infrastructure

Infrastructure

Infrastructure

User pricing

User pricing

User pricing

Network broken up
Infrastructure

Infrastructure

TenderTenderOperations

Operations

Operations

Operations

Operations

Operations

A

B

C

D

E

56

F

Situation (A) is the one that has been most frequently inherited from thepast, namely, an integrated network occupying a monopoly position. As wehave seen, adaptation, which may go as far as radical reform, involves creatinglevels of responsibility that give rise to commercial partnerships and to theintroduction, with varying degrees of firmness of resolve, of the machinery ofcompetition. Depending on the extent to which the network is broken down,
several options are possible.
Assuming that the integrated monopoly is maintained, it is possible toimagine the introduction of competitive mechanisms similar to those in effect for
certain urban public transport systems: invitations to tender for the managementof the entire system lead to the appointment of a manager for a specified period.
The integrated monopoly may be completely preserved (E). However, thenetwork may also be broken up and tenders invited for each segment (F). The
network may be divided up on a geographical or a sectoral basis, for example,
with a network specialising in freight. In these various cases, the question ofaccess charges does not really arise since the integrated monopoly is preserved:
the bargaining takes place within the enterprise itself without involving any
market services. The authorities may face other regulatory problems, but they
will no longer have to deal directly with the question of access charges.
This does not apply to configurations (B), (C) and (D): although the
integrity of the system as a whole is maintained (the infrastructure manager has
authority over the entire network), the relation between the infrastructure and theoperator or operators becomes distended. There are still many possibilities forreform, depending on the degree of separation between the infrastructure
manager and the operator. Here the competitive pressure is exerted (withvarying degrees of firmness) at the level of the infrastructure user by the (moreor less) explicit means of diversification and dynamisation of the supply ofservices. However, in all three cases, it is a question of sending the operators a
price signal calculated to influence their demand for the use of the infrastructure.
The question of user fees will then be the determining factor.
Case (B) illustrates the lowest level of separation: third parties are denied
access. Here, separation is intended simply as a means of clarifying theenterprise's accounts by dividing the expenditure items more clearly between
those that relate to investment and maintenance costs and those that relate tooperations. This model corresponds to the situation of those countries which,following the Community decision, preferred not to call into question either the
integrity or the unity of their monopoly. Thus, the whole of the network
continues to be run by a single operator. However, this system seems rather
unstable and can be better understood as a staging post on the road to a moreradical mode of organisation in which, separation having been made effective,
57

third-party access can be encouraged. In the first case, pricing can remain a sortof accounting device by means of which the carrier is supposed to remunerate
whoever undertakes to maintain and develop the infrastructure, that is to say,himself. Thus, the pricing rules are not really market mechanisms within which
the parties endeavour to optimise their results. In cases (C) and (D), which areof more particular interest, the situation is quite different.
In case (C), the opening up to third parties is explicit but there remains a
principal operator. Thus, the opening is still marginal and may be restricted tocertain market segments, for example, the international market. This transitionalsituation may evolve into the much more competitive situation (D) in which,third-party access having been generalised, the historical operator is one actor
among others. These two models lie at the heart of the two main scenarios forthe implementation of the reforms undertaken in Europe.
We note, however, that the choice of system (C) does not protect the
network concerned from sliding towards system (D). There will be de facto
involvement of the international services and their demand for track will have tobe reconciled with that of the national operator. Here, Community policy has
clearly taken the same path as led road freight transport from progressive
liberalisation of international transport to complete freedom of cabotage.
Consequently, the opening up of the network, however partial, raises the
problem of how to regulate between the operator already in place and otherpotential operators. Even though the slot allocation rules may play a very
important part, in the long run the calculation of access charges should prove
decisive. Suppose, for example, that the allocation rules favoured the operator inplace, say, through a practice involving “grandfather clauses” comparable to thatobserved in air transport, but that, at the same time, there was a heavy demand
for slots, for international traffic, for example. The infrastructure monopoly
could then take advantage of this excess of demand over available capacity byincreasing the user price where the supply was scarce. If the use of the“grandfather clause” were too expensive for the historical operator, he could
waive it and review his operating schedules in order to fall back on slots in bettersupply and the available capacity would then be sufficient. If it were still
profitable to exercise the right despite the higher price, this would bring theinfrastructure monopoly a return sufficient to finance the necessary investment
in capacity.

58

In practice, this configuration might be relatively rare, but a similar
problem might arise, including in the case of configuration (B), if the historicaloperator were to make, within the same space-time frame, requests for slots onbehalf of different services (national and regional passenger services, freight
services, etc.). If these requests were sufficiently well justified because ofcorresponding traffic demand, that would reduce to the expression of a need forinvestment in capacity on the sections in question. The historical operator mightthen have an interest in sending a “price signal” reflecting the shortage ofavailable slots to each of the requesting services. It would be up to the latter
either to buy because they were able to cover the cost or to transfer the demand
to less busy routes or periods. This comes back to the above-mentioned choice
between managing the demand and being able to finance additional capacity.
This alternative reduces to an infrastructure pricing principle which is wellknown but worth recalling in order properly to explore its conditions ofapplication to rail transport.

3. INFRASTRUCTURE PRICING AND
MAXIMUM EXTRACTION OF AVAILABLE SURPLUS

Infrastructure pricing may have more than one objective. The following
presentation is founded on the idea that the basic principles should beestablished as a function of the collective efficiency of the system. Indeed, itwould seem difficult to defend a pricing system which regularly deviated fromthat objective. Thus, this theoretical look at the problem suggests that there
should be no segmenting of pricing between different, possibly contradictory
objectives, namely, optimum use of the infrastructure, on the one hand, and thefinancing of its renewal or the pursuit of social or environmental objectives on
the other. In fact, all these objectives can be reduced to the general objective of
maximising the global surplus generated by the system.
On what principles should pricing be based in order to extract the
maximum surplus from the system for sharing out among the various actors?
This surplus can be identified only by relating it to the costs of the system and,in particular, the investment costs.

59

3.1. The concept of marginal cost and the optimisation of investment
Maximum efficiency obtained by marginal cost pricing in sectors withincreasing returns is a decisive conclusion contributed by the theory of welfare
economics. However, this theoretical result presents a number of problems.
Apart from the undoubted difficulties of application, the concept is also open totheoretical objections.
In many cases, however, in discussing this issue, confusion is createdinsofar as the concept of marginal cost that is criticised is very often reduced to auser cost4. At first glance, this is hardly surprising. Understandably, since themarginal cost enters into the equation as the derivative of a total cost function,
any cost factor that does not vary with production will vanish in themathematical operation.
This classical presentation, without actually being false, can lead toinaccuracies with dangerous theoretical and practical consequences, simply
because in this approach it is assumed that the investment is given and realised.
In a manner of speaking, the act of investment is ignored as an optimising tool,on the same basis as pricing. However, the theoretical framework of the optimal
allocation of resources cannot be satisfied with this reduction or with thesolution consisting in transposing this short-term static model to the long term
and treating the fixed costs as variables, thus causing them to vanish.
Indeed, taking the fixed costs into account presupposes an analytical
approach quite different from that which consists in making them vanish. The
fixed costs form part of the irreducible and fundamental linkage between the
short and the long term. Leaving out that linkage amounts to evading theembarrassing questions raised by coverage of the costs thus incurred over
several periods. From the standpoint of cost minimisation, it is well known that
it is always possible to distinguish between directly avoidable costs5, costs thatcan be gradually absorbed and, finally, totally unavoidable costs. Thisdistinction then makes it necessary to bring other concepts into play.
In particular, it is necessary to introduce a terminological distinction inorder to avoid confusion. The variable marginal cost is a partial cost clearly
distinguishable from the marginal cost, which has a different theoretical content:
the partial cost relates specifically to a short-term situation in which only thevariable costs are considered, while the concept of marginal cost relates to asituation in which it is assumed that the authorities meet the demand, if

60need be by carrying out a project that creates a discounted surplus greater than
the total of the costs necessary to produce it. Thus, as many authors havestressed6, this concept is fundamentally linked with the investment decision.
Taking the long term into account requires the use of a programme situatedupstream of the decision to invest. The fixed costs are not, strictly speaking,variabilised; however, the transport infrastructure is regarded not as a natural
resource made available but as a good, to produce which the community mustsacrifice resources.
Suppose that there are several technologies capable of meeting a given levelof demand. Each of these can be characterised by a fixed cost, independent of
the level of utilisation of the infrastructure and by a variable cost. The producer
or the authorities have a certain number of possible solutions available to meetthe demand. To each investment there corresponds a particular total costfunction which depends on two variables, the investment I 1 and the level ofproduction q:

C( I,q ) = a( I ) + b( I,q ) 2
Thus it is possible to distinguish between two marginal costs:--

the short-term marginal cost when q varies for a given investment level:γ=--∂C( I,q )3 ;∂q

the long-term marginal cost when the investment varies:Γ=∂C( I,q ).4∂I

It is reasonable to assume that the producer (or the authorities) wishes to
produce the good or service in question at the lowest possible price, if only tomaximise the collective surplus. Thus, for each anticipated level of production,
he will adopt the technology calculated to supply that good or service at thelowest price. Therefore, to each level of production there corresponds a
minimum cost which itself relates to a particular total cost function belonging to
the family of C(Ii)5. If it is assumed that I can vary continuously, the totality ofthese optimal points, which minimise the cost of production, will form aso-called long-term cost curve. We note that the curve obtained as a result ofsuch a theoretical projection will be completely virtual. It defines a boundary of61

maximum efficiency of the production system at a given instant of time. Rather
than an objective to be achieved, it is primarily a theoretical benchmark. It is a
short-term curve envelope. This curve defines a functional relation between thelong-term total cost and the quantity produced, on condition that each level ofproduction is obtained with plant of the optimum size.
If it is assumed that the producer is able, at any time, to adapt his
investment to the level of demand, there will be an infinity of short-term total
cost functions. The system may be called upon to display its adaptability at any
time. In this case, there is no contradiction between the short-term andlong-term marginal costs. The short-term marginal costs are always defined,
while the size of the plant is optimal for the production level in question.
To discard the hypothesis of permanent adaptability (divisibility) is toaccept that the demand can be met by a technology or investment which is notnecessarily optimal. In this situation, which is generally that of transportsystems, there is almost inevitably a difference between the short-term andlong-term marginal costs. There will then be several possibilities.
In the first case, that of underinvestment, the technology employed is not
optimal since the short-term marginal cost is higher than the long-term marginalcost. In the second case, that of overinvestment, the short-term marginal cost islower than the long-term marginal cost; the demand is met by an investment
which costs too much for the use which is made of it. When, exceptionally, thesystem is optimised, the supply is precisely adapted to the demand, the two
marginal costs are equal and, in this case, the marginal cost involves, over andabove the short-term marginal expenditure, the optimal variations in the cost of
the plant necessary to meet the demand.
“Under these conditions, and for practical applications of the theory ofsocial returns, it is necessary to define the marginal cost of a specificservice as the additional costs of all kinds (labour, energy, raw materials,
depreciation, interest charges) resulting from the provision of an additional
unit of that service when the existing fixed plant is precisely adapted to thevolume of production in question7.”
Accordingly, the marginal cost to which pricing theory relates is defined at
economic equilibrium and, consequently, with total utilisation of the fixed plant.
This leads to a radical distinction between the marginal cost as described above
and the partial cost. Thus, Marcel Boiteux considers it necessary, despite
everything that may have been written on this subject during the last thirty years,
to denounce, once again, the frequent identifying in common parlance of the62marginal with the variable cost. He considers this “faulty” identification to be
still “a major source of misunderstanding”8.
This also means that the determination of the marginal costs has real
economic significance only on the assumption that the infrastructure is optimallymanaged. For the concept to be pertinent, the maintenance operations and theinvestment renewal operations must be carried out at the optimal time and theircost must be minimised.
If the marginal costs thus defined are used for pricing purposes, the system
will be coherent and optimal. This means that the consumers' choices will be
optimally oriented since they will be encouraged to choose, among several waysof satisfying their needs within a given framework of constraints, that which isleast expensive for the community. However, at the same time, the community
must ensure that the demand thus expressed is always satisfied at the least
possible cost.
This clarification is a necessary preliminary to the application of practicalpricing tools. Within this context it is now clear that marginal cost pricing isfuture-oriented pricing. Accordingly, it should concern itself not with theprevious cost of the infrastructure but with the use that the users will make of it.
A knowledge of the users' preferences then becomes one of the keys to theglobal optimisation of the system from the standpoint of both economic
calculation and pricing.
However, the balance between supply and demand thus achieved may giverise to very different situations on the rail system depending on the level atwhich the service quality is to be pitched. We have previously used expressions
such as “meeting the demand” or “plant of optimum size”. For example, should
there be perfectly regular timetables with zero delays or would a reasonableamount of delay be acceptable if it permitted the more intensive use of capacity?
Clearly, these questions prompt us to reflect on the quality of service to beprovided which, in its turn, is also subject to a trade-off between costs
and benefits.

63

3.2. The supply-demand equation or how to define an optimal qualityof service
To deal with this problem, public economics traditionally relies on thenotion of a mixed collective good, i.e. a good such that the quantity consumed
can be distributed among the individual consumers (the good is therefore
divisible): the consumption of a good by a user cannot be consumed by another,whereas certain other so-called quality characteristics remain indivisible because
they concern all users. These mixed collective goods are subject to so-called
congestion effects9. In the case of rail infrastructure, the indivisibility of its use
can never be ensured inasmuch as two trains cannot share the same “slot” at thesame time. The slots are shared between the different users. The use of
infrastructure, from this point of view, is divisible. On the other hand, thequality of service, which depends on the reliability of the train timetables on acongested part of the network, is the same for all the users at a given instant10.
This collective good is called mixed because it has two fundamentally different
characteristics, the first -- access to infrastructure -- being divisible, the othernot. Congestion is a particular case of an external effect where the reasons why
people cause and suffer it are linked with the consumption of the same service.
In order to optimise the system and achieve the maximum available surplus
on the infrastructure, the authorities must both determine the optimal level ofinvestment and, through good pricing, manage the level of demand. Investment
and level of demand are the two factors of the quality of service offered which
different users value in varying degrees.
In order to isolate the problem posed by this linkage, let us consider an
infrastructure, the cost of using which is very low and may therefore be deemed
negligible11.
Let us suppose that all the users i liable to use the infrastructure place
different values on the use of this good, for a given quality of service. We thenobtain an inverse demand curve which we will denote by Pi(Qi ,g), where Qi
represents the utilisation of the infrastructure by the individual i, and g anindicator of service quality.
The quality of service offered on this infrastructure depends on two
parameters: the number of users on the infrastructure and its physicalcharacteristics, which depend on the level of investment k. This level ofinvestment varies with time as a function of the outlay made by the operator,ψ ( k ) 6.

64

Taking into consideration several time periods t, we write Pit(Qit,gt), with
gt = (Qit,...,Qnt,k) the quality of service at period t. We then suppose that eachuser integrates this quality of service, Pit(Qit,gt) being the value that the user i
accords to the use of the infrastructure at a given level of quality g. This value
may evolve over time.
The individual surplus is given by the difference that exists between thevalue that the individual attributes to the use of the infrastructure and the costwhich that use represents for him, remembering that in this case the user cost, in
its strictest sense, is seen as negligible. This cost is therefore limited to thedeterioration in quality of service suffered by the user, due to the utilisation of
the infrastructure by others. This cost is all the more important the greater thenumber of users and the weaker the investment. If we take Dt as thedeterioration of service quality at time t and Vit the value that the user i gives tothis deterioration, the surplus of user i for each period t is expressed by:

Pit − Qit Vit Dt ( Q1t ... Qit ... Qnt , k )Now let us assume that the operator is seeking to maximise the social
surplus which this infrastructure is capable of generating. For each individual iand for the entire length of time in question, we have:
T

Qit

t =1

0

∑ ⎛⎜⎝ ∫

Pit . dQit − Qit Vit Dt (Q1t ... Qit ... Qnt , k )⎞⎟⎠The global surplus is obtained by summing over all the users andsubtracting the investment cost. This calculation leads to the following
expression:
T

n

Qi

t =1 i =10∑ ∑ ⎜⎛⎝ ∫ P . dQ − Q V D (Q ... Q ... Q , k )⎟⎞⎠ − ψ ( k )
it

it

it

it

t

1t

it

nt

The maximisation of the surplus depends on two variables, the utilisation of
the infrastructure and the level of investment.
The first n partial derivatives have the form:

65

oS

∂Qit

n

= Pit − Vit Dt (Q1t ... Qit ... Qnt , k ) − ∑ Q jt V jt
j =1

∂Dt
∂Qit

The relation for the investment is written as follows:∂D t∂S
Vit Qit=−− Ψ ′( k )∂k∂kt =1 i =1
T

n

∑∑

7
Thus, the first-order conditions lead to the following two relations:n

Pit = Vit Dt (Q1 ... Qi ... Qn , k ) + ∑ Q jt V jt
j =1

Ψ ′( k ) = −

T

∂Dt

n

∑ ∑V Q ∂k 8
it

t =1

oDt
∂Qti

(1) and

(2)

it

i =1

Equation (1) establishes the principle of the pricing rule. The first term of
this expression represents the “cost” accepted by the user i resulting from theloss of quality of service associated with congestion. The second term
represents the value of the quality of service lost by all the users because of thelast utilisation by the user i: this last term represents the external cost ofcongestion for which the latter is responsible.
Using classical pricing terminology, the optimal pricing is such that theprice corresponds to the sum of the private marginal cost and the social marginalcost. The first term is already borne by the user. The toll to be applied should
therefore correspond to:noD∑ Q jt V jt ∂ Q t 9

j=1etj ≠iti

If we now consider the second equation (2), which incorporates theinvestment dimension, it indicates that the capacity should be developed until
the marginal investment is equivalent to all the congestion costs avoided.

66

Finally, and this is crucial, the optimum in terms of social efficiency will
only be ensured if these two conditions are satisfied. The golden rule ofmarginal cost pricing consists of these two conditions, which theory suggests
should be kept together. In common parlance, it could be said that this dual
logic consists in establishing a price which, wherever there is saturation of the
network, ensures either that demand is sufficiently well managed for theavailable capacity to be still sufficient or that the cost of the necessary
investment in capacity can be covered. However, the quality of service
production function may have different characteristics depending on theimportance accorded to the intensity of the demand. The optimisation
procedures will then be more or less determined by scarcity phenomena.
The congestion toll described above may take several forms, depending on
the degree of divisibility of infrastructure use. The less the divisibility, as in thecase of road transport, the more the intensity of use will affect the quality ofservice. But the greater the divisibility the less perceptible this effect and themore pricing should be oriented towards scarcity management systems, as in thecase of car parks. The analysis should therefore be focused on the technical andeconomic relationship between the infrastructure and the uses of that
infrastructure.
The rail system does not readily lend itself to this type of analysis. The
existence of timetable slots seems to give credence to the idea that the use of theinfrastructure is totally divisible and that there is therefore a strong user rivalry
among the various consumers. Thus, it is theoretically possible to establish amarket in user rights, for example, by auctioning slots, and thus reconcile supply
and demand. It seems that this might be practicable on railway lines dedicatedto similar kinds of traffic since, in this case, the slots auctioned would tend to behomogeneous. However, the only configuration that would seem to lend itself tothis exercise is that of lines specialising in freight and open to several carriers,
which could only apply to the lines, still to be organised, of a trans-European rail
freight network. The first “freight corridors” to be established are not organisedalong these competitive lines.
In most cases, competition remains latent and overshadowed by slot
allocation rules which predate the reforms. However, it is very real wherever
network saturation is a problem, which brings us to the difficult questionof capacity.
Rail capacity on part of the network can be very roughly and provisionallydefined as the maximum possible number of movements that can be handled perhour. The reality, however, is much more complex.

67

On the one hand, capacity is determined by the characteristics of theinfrastructure itself: the configuration of the lines and sets of tracks, theexistence of community lines, switches, track intersections, the speed permitted
by the design of the track, gradients, etc. Moreover, the capacity also depends
on the utilisation of the infrastructure: type of trains (length, axle load, etc.),
speed, number of stops, etc. The train schedule is then decisive and its
organisation will have an impact on the network's effective capacity, which willbe all the more considerable the more heterogeneous the slots concerned. The
capacity will then depend on the train schedule as it has been drawn up. The
scheduler and the rules of arbitration on which he relies will thus play animportant role, a role which, in railway tradition, has not been much influenced
by the considerations of the economist who, for his part, is keen to maximise thesurplus that can be extracted from the infrastructure. To that end, he analyses
the economic advantages which the consumers derive from using theinfrastructure. For example, a decrease in the time taken by a train to travel
between two stations may lead to a reduction in the technical capacity of theinfrastructure by eliminating slots, but that reduction in capacity may be justified
because it results in a net gain in surplus production. Conversely, the economist
lacks mastery of the complex relations between the characteristics of theinfrastructure, the possible operating programmes and the response of the final
demand.
This difficulty involves both infrastructure pricing and project evaluation.
Whether it is a question of calculating a developing marginal cost or the returnon an increase in capacity, it should be kept clearly in mind that such an increase
can very often be achieved in different ways: an additional junction, flyovers foravoiding track intersections, higher speed limits, passing track en route or in thestation, improved block arrangement, better power supply, safety and traffic
control installations, restoration of alternative routes, etc. As with the roads, theoptimum infrastructure capacity is not a technical but an economic factor which,however, for rail forms part of a complex universe of technical solutions.
Here, we have one of the explanations for that common tendency of railway
reforms which “separate” infrastructure management from transport production.
The unified monopoly operator or separate operators not being omniscient,whatever the theoretical optimisation models may suppose, have not efforts been
made to improve the efficiency of the system by giving the carrier theopportunity to make the best possible use of the signals sent him by the
infrastructure manager and vice versa? Thus, it is for the carrier to interpret the
infrastructure user price signal and for the infrastructure manager to interpret thedemand signals he receives from the carrier. These “interpretations” could bebased on the teachings of public economics.

68However, to the above-mentioned difficulties we should add anotherassociated with a familiar feature characteristic of most rail systems, namely, thepresence of very considerable fixed costs and modest marginal costs over mostof the network, i.e. wherever there are no saturation effects. The principles wehave noted then lead to pricing which can result in a considerable deficit which
it is the community's responsibility to meet. Whence the now acknowledged
need to take this “budgetary constraint” into account.

3.3. Allowing for the budgetary constraint
The doctrine according to which the producer price of industries withdiminishing costs should depend only on the marginal operating costs, and therule according to which the authorities should cover all the fixed costs fromtaxes, first made an explicit appearance in the railway literature of the latenineteenth century. The French tradition of the economist engineers of the École
des Ponts et Chaussées made a big contribution to these developments and theirapplication. The debate became more animated following the appearance ofHotelling's article12 in 1938. He concluded that the deficit resulting from theapplication of this global pricing principle should be financed by global taxes
which, like the taxes on rent charges or inherited income, are supposed, intheory, not to affect the marginal behaviour of the economic agents.
Nevertheless, there may be a conflict between this theoretical viewpoint
and another scarcity phenomenon, the public finances. Moreover, it assumes
that resources are optimally allocated by the public operators, which is notnecessarily the case when they believe themselves to be free of all financial
constraints. It is to correct these dysfunctions that an entire theoretical school
has devoted itself to justifying the addition of a budgetary constraint to marginal
cost pricing. There are several ways of understanding this approach.

69

For some, this concern for a balanced budget is, in the words ofSerge-Christophe Kolm, no more than the obsession of “a short-sighted andnarrow-minded accountant, who knows nothing of economics, trying mistakenly
to transpose the criteria of the private to the public sector13.” By refusing toconsider the main analytical conclusions of welfare economics, the supporters of
the balanced budget deny themselves the possibility of satisfying, with the toolsof economics, the demands of the public interest. Without rebutting this position
directly, Mark Blaug has made it the target of some equally critical remarks
which reflect the difficulties created by this pricing principle. Thus, according
to Blaug, what the Anglo-Saxon authors call the French school14 has trouble intaking the existence of deficits into account: “The characteristic feature of theFrench contributions to the literature (on marginal cost pricing) is a total
inability to take into account the problem of deficits in the diminishing costindustries which, indeed, hardly receives a mention15.”
For others, there are fewer disadvantages (i.e. less loss of global surplus) in
distorting optimal pricing to control the deficit than in leaving the latter to drift
while seeking to adhere strictly to the optimal pricing principle. Thus, in Franceand Europe, there has been a slow swing of the pendulum: the arguments infavour of marginal cost pricing no longer convince the authorities, who are moreconcerned about the financial situation of the public corporations, especially thatof the railway companies which are steadily losing modal share, as well as about
the unfortunate effects which the systematic covering of the deficits is having on
the management of those enterprises.
Driven by the structural difficulties of the public finances, this trend is also
based on the failure of a pricing system which requires transfers between
taxpayers and users to ensure that the cost of the service to the community is
explicitly weighed against the interests of those who use it. The gap between
those who benefit from the system and those who finance it leaves a spacewithin which the economic agents can conceal their preferences. The deficit
subsidies may also hide and hence permit inefficient operation. Now, if there
were no strong incentive to seek the minimum average cost, the willingness of
the State to close any gap between the marginal cost and the average cost would
result in enormous waste, which would be all the more enormous as it would
probably be invisible and almost undetectable16. Thus the balanced budget
constraint is aimed at an efficiency deficit which goes far beyond the traditional
criticisms levelled against the champions of marginal cost pricing concerning thedifficulties of evaluating the marginal cost and the technical, political andinstitutional barriers to implementation.

70

The following list of criticisms, without being exhaustive, will serve as anillustration: the pronounced indivisibilities of the infrastructure would lead to“sawtooth” pricing incompatible with long-term decisionmaking by the
economic agents; the lack of rules for allocating certain cost elements would
make competition impossible because of the existence of cross-subsidies;differential pricing on the network would bring into question an entire spatial
standardization system; the practice would make it necessary for both users andauthorities to gather, at great expense, information on the competitive structureof the market, on externalities, on the elasticity of the demand, etc. and, in short,the additional costs which the public would have to bear to implement thesepricing systems would be out of all proportion to the advantages which they aresupposed to bring.
As Vickrey points out, we are constantly on the horns of a dilemma fromwhich it is difficult to escape completely. On the one hand, theoretically, theapplication of marginal cost pricing ensures that infrastructure utilisation is
optimised but, considering the financial scarcity constraint, we then deprive
ourselves of information on the real value of a new project or, if the project has
already been carried out, about whether it is still worth operating. On the other
hand, with the balanced budget constraint, we can be sure that the project or its
operation are worthwhile, but we do not know whether the infrastructure is
being utilised to best advantage17. More generally, by employing crude
regulatory mechanisms, by excluding a number of users and by eliminating
certain activities, the application of such a rule might lead to a serious loss ofsocial efficiency18.
All the solutions proposed for introducing a budgetary constraint into thepricing system must face this radical criticism: the allocation of the fixed costs
to a particular user or a particular use remains largely arbitrary. Thus, thecalculations form the subject of endless discussions about the relevance of aparticular distribution scheme. It might seem that subtle cost accounting could
reduce the proportion of non-apportionable costs and thus eliminate the problem.
However, these methods can always be debated and offer no solution for ausually still significant residuum.
Now, from the standpoint of the optimal allocation of resources, the pricing
system should not be mainly concerned with distributing the costs but, more
fundamentally, should favour the achievement of a surplus. The objective ismuch more ambitious. Leaving aside the utilisation costs, for which theallocation procedures do not, in theory, pose any particular problems, it isclearly the availability of the infrastructure that must be reflected in the scales
and not its effective consumption. Then, the efficient mode of contribution is
not to seek to allocate costs but to find a means of extracting the surplus needed71to finance the infrastructure while ensuring that the surplus is achieved. Fromthe moment that this surplus exists (it is the role of public economic analysis tolocate it), there exists a pricing system to bring it to light.
It is the segmentation of the demand which, in this respect, makes a vital
contribution to economically efficient pricing. The theory of surpluses leads toprecedence being given to pricing systems based on this latter principle. In
practice, it may lead to the adoption of the monopolists' rule to the effect that thebest pricing consists in imposing the charges that the traffic will bear.
In fact, the question of the social loss involved in pricing that deviates fromthe marginal cost, like the question of the deficit and the limitation of its
perverse effects, makes sense only if price unity is assumed. As soon as adiscriminatory approach is adopted, the difficulty may disappear. Pricediscrimination, which takes into account the response to prices of each segmentof demand, then makes it possible to increase the global surplus since thenumber of users will increase, while ensuring better coverage of the costs for the
producer. The introduction of socially efficient price discrimination turns
pricing completely upside down. It should be distinguished from the pricing
principle, often encountered in the literature, that everyone pays his share, whichmakes even less sense inasmuch as the allocation of some costs is arbitrary. It
forms part of another approach which authorises any use of a good calculated togenerate a positive net surplus. Under this condition, not only will any
discriminatory pricing system be neutral from the standpoint of the optimal
allocation of resources, but it will be totally justified from the standpoint of thecommunity since it will enable a surplus to be generated. Thus, the firstprinciple considered to characterise optimal pricing gives way toanother principle.
A pricing system is deemed to be economically satisfactory if the operator
procures for each user a share in the absolute utility of the service sufficient toconstitute an effective incentive for him to use the infrastructure. The
contribution to this service is then said to be fair as long as, for each consumer
and for each use, it does not exceed the net value of the utility he derives from it
which, it should be recalled, must be positive. Although often disputed19, thisapproach, based on tapping into a surplus, has a definite advantage in relation to
the problem of financing which, as Jules Dupuit suggested, consists in72

“demanding as the price of the service provided not what it costs the provider
but an amount commensurable with the importance attached to it by the one forwhom it is provided20.
This basic principle remains very theoretical and there are major difficulties
to be overcome before it can be applied. However, the tools do exist. In 1956,
Marcel Boiteux21 proposed a solution which marked an epoch in the history of
economic thought. The literature has even associated the name of the author
with that solution so that it is customary to speak of Ramsey22-Boiteux pricing.
Anglo-Saxon authors also refer to this principle as the “Inverse Elasticity Rule”.
Tradition has it that this seminal article offers a general solution of the problemof the production and the Pareto-optimal pricing of a public monopoly obliged tobalance its budget within the context of a competitive economy.
Here, then, the decisive concept of elasticity of demand makes its
appearance. Thus, if the enterprise is considered to have several markets at its
disposal, observance of the budgetary rule which requires deviation from themarginal cost will lead to the prices for each market being so determined as tomake the mark-up between the consumer price and the marginal cost
proportional to the inverse of the price elasticity. In practice, this comes down
to saddling the goods or services for which the demand is relatively inelastic
with a larger share of the deficit. This pricing practice harks back intuitively to amechanism well known in the field of taxation: the loss for the community
resulting from the imposition of a tax (that is, in this case, the reduced
consumption of a good consequent upon an increase in price) will be the greater
the more elastic the demand.

Figure 3. Social loss and elasticity of demandyPriceSocial loss
p2

p2
Toll

Toll

p = Cmp = Cm

Q2

QCm

Q2

Quantity73

QCm

QuantityAssuming a monopolistic market on which the demand is very elastic, theslightest variation in price on this market will be reflected in substantial changes
in the pattern of consumption. Thus, the so-called Boiteux rule consists intaking advantage of different relative market situations. The steeper the slope ofthe demand curve on a market, the lower the elasticity and the more limited thesocial loss resulting from a deviation from the marginal cost. Conversely, on ahighly elastic market, the slope of the curve will be flatter. In this case, adeviation of the price from the marginal cost will be reflected in a heavysocial loss.
Thus, when by necessity an enterprise has to cover the whole of its costs
and hence, in the case in question, when it is obliged to deviate from themarginal cost, this theoretical demonstration makes it possible to justify placing
the strain on the consumption which is the most inelastic. When the demand isrelatively inelastic, the deviation of the Ramsey-Boiteux price from the marginal
cost will be small and hence the deviation at the optimum will be minimised.
The mark-ups will be greatest on the least sensitive demand. Thus, this methodof pricing seeks not to distort the price signal sent to the most sensitive users inorder that they may not significantly modify their pattern of consumption and tolevy the charges on the less sensitive users who will not reduce theirconsumption more than slightly relative to the social optimum, even if the prices
are raised.
Thus, returning to the allocation of non-apportionable fixed costs, where amonopoly can rely on several products it should parcel out its fixed costs
according to the sensitivity of the demand. Prices are raised sharply where thedemand is not sensitive and reduced where it is. The quantity consumed on eachmarket remains as close as possible to the consumption which would have been
observed in the first-best case. The optimum obtained maximises the social
surplus subject to the constraint of a balanced company budget or, if thisconstraint seems too harsh or inaccessible, by assigning in the Ramsey-Boiteux
optimisation programme a scarcity coefficient which overestimates the collective
utility of the public contribution.
As Boiteux has himself been pointing out since 195623, to the difficulties ofapplication of this pricing method there must be added the unrealistic
assumptions of the model. At the same time, the author questions whether thepractical application of the results obtained is of any real interest. In fact, theapplication of this rule poses a number of problems, in particular, by requiring aknowledge of demand elasticities. More generally, the necessary hypothesis ofan omniscient economic supremo is obviously unrealistic. The fact that it is aquestion of pricing the use of the rail infrastructure and not the transport service
itself is a further complication. The carrier is then the source of the demand, in74

the sense that he needs slots and he himself responds to a combined demand:
that of the users or shippers and that of the transport organising authorities who“purchase” qualities of service from him. Thus, the effects of infrastructure
pricing on the final demand are linked with the pricing principles which thecarrier himself applies. For the system to be coherent and economicallyefficient, it is very likely that the two operators will have to price in accordancewith similar principles, but this linkage has still to be subjected to acomplete analysis.
This brings us to an essential conclusion concerning the pricing system
which Maurice Allais considers to be one of the key elements distinguishing his
theory of the markets economy from the standard model24. Within this moregeneral theoretical framework, which seeks to maximise the collective surplus,
the deficit constraint can be removed provided there is no objection toquestioning price unity. That is an intuition already clearly expressed by
Jules Dupuit25 in his time. If the surplus generated by an infrastructure is greaterthan the cost of putting it in place, then there necessarily exists a pricing systemcapable of tapping into this surplus to obtain the sums needed to finance theproject while maintaining maximum social utility. The achievement of thesurplus becomes the challenge of the pricing procedures. It can justify thetransition from a logic of differentiation based on costs alone to a logic ofdiscrimination based on segmentation of the demand. It is not a question ofdifferentiating prices solely on a user pays basis, which makes little sense since,
once again, a portion of the costs cannot be distributed in accordance with thisprinciple. The discrimination of the demand should be based on the principle ofhe pays who can, especially when that is the only way of obtaining a return on
projects with a positive global net utility. Otherwise, if the project is notfinanced out of the general budget, a type of solution now considered best
avoided, it will never materialise.
We then enter a pricing universe that is more complex but still regulated bymarginal cost in which it is less a matter of minimising the effect of a deficit
linked to optimal pricing as of seeking to maximise the surplus by differentiating
the pricing, segmenting the customer base and, finally, obliging all the economic
actors to disclose their preferences. These principles now need to be comparedwith the actual results of implementing the most significant recent reforms.

75

4. APPLICATION OF PRINCIPLES AND
NETWORK CONSTRAINTS

In this final part of our paper, we shall compare the few theoreticalprinciples that can be derived from economic analysis with the practices of
networks which, as a result of having been reformed, should have solved theinfrastructure pricing problem. Accordingly, we shall examine, in turn, theBritish, German and French cases.
4.1. The British experience: making a surplus26
The restructuring of British Railways began in the early 80s. This longprocess, intended to improve the efficiency of the sector, led the authorities
gradually to modify the enterprise's internal organisation. On 1 April 1994, thereforms took a further step forward with the entry into force of the Railways Act
which prepared the ground for a phased privatisation of the sector byprogramming, in particular, for the separation of operations from infrastructure.
The enterprise's transport services have thus been separated into smaller entities
which, from the outset, the authorities have made clear they intend to privatise.
As for the infrastructure, it has been assigned to a new, private-law company
held by the State, Railtrack. This company, still a monopoly, retains operational
control over the traffic, allocates capacity and, above all, is responsible for
pricing use and determining the fees to be paid by the various operators toensure that the costs are covered27. The company, which initially was left inpublic hands and even benefited from investment subsidies, was privatisedin 1996. BR's passenger transport business has been split up into 25 separate
entities which have been placed under private sector control by introducing afranchising system. The freight business has all been sold off to the private
sector and opened up to competition. Thus, Railtrack buys services from andsells them to a range of operators.
At the same time as splitting up BR, the Railways Act established apowerful regulatory system based on three bodies. The first, the Office of theRail Regulator (ORR), is mainly responsible for supervising infrastructureaccess and pricing. It establishes the rules of competition and oversees theirapplication, especially in the interests of the customer. The task of the Office ofPassenger Rail Franchising (OPRAF) is to grant franchises and supervise thecorrect application of the terms and conditions by each franchise holder, inparticular as regards the consistency of the services actually provided. Finally,
the Health and Safety Executive (HSE) ensures that the safety regulations are76

observed. It issues rules governing the design, construction and operation ofrolling stock, infrastructure and equipment.

Figure 4. The British reforms
HSE
Franchising Director

Rail Regulator

awards franchises and pays subsidy

Scope of regulations
RUCC &
CRUCC

Rolling stockcompanies

Passenger train
operating companies(ROSCOs)(TOCs)

Heavy
maintenancesuppliers
maintain rolling stock

Infrastructure
Maintenance
Companies

Other passenger
train operators

Railtrack

Track renewal
companies

Other
service providers

Freight operators

telecommunications

Source: ORR Report, 1996-97.

Each operator signs a track access agreement with Railtrack. Two sectors
should be distinguished. Initially (7-15 years), the franchised passenger line
operators have been granted the access rights necessary to provide the services
stipulated in their specifications. On certain routes they enjoy protection which
will eventually be withdrawn. The existing freight carriers have been granted
initial rights to enable them to satisfy their present customers. Apart from thetime slots allocated in connection with these rights, there are others which areopen to competition.
The splitting up of the network immediately posed the problem of theallocation of costs among the various activities. It was decided that the costs
should be allocated to the various sectors in such a way that each sector bore thecosts of the fixed assets and personnel of which he was deemed to be theprincipal user. The basis for this pricing is that it must be sufficient to ensure
Railtrack a certain return on its assets.

77

The rail operators pay Railtrack infrastructure user fees intended to cover
the network utilisation and signalling costs and the cost of supplying power,
where appropriate. Thus, the overall aim is to pursue a balanced-budget pricing
policy which also takes into account the ability to pay of the applicants for timeslots. Accordingly, it is not possible to speak of Ramsey-Boiteux pricing
because of the special terms granted to the franchise operators.
In fact, the pricing system differs depending on whether one considers theoperators who provide services under franchise (subsidised services) or theoperators who purchase time slots on the network. The companies which
operate passenger lines under licence are in a special situation since in this casethe structure and the level of the access charges applicable are directly controlled
by the regulatory body. The access charges applicable to the passenger lines
operated under licence28 are based on a cost allocation study that uses theconcepts of avoidable29 and additional30 costs.
In the event of a time slot purchase, Railtrack is free to negotiate its prices,
although the contract must be approved by the Regulator. The fees arenegotiated but subject to approval based on the principles established by the
Office of the Regulator.
The general principle requires that the fee structure should not deviate too
far from the value of network access for the users and that it should enable
Railtrack to recover all the costs actually incurred in connection with thetransport of goods, to which there should be added a possible contribution tocover the joint costs shared with the passenger services. Thus, the pricing ruleshould be such that the minimum price is not less than the avoidable costs
occasioned by the service concerned. The price should be less than or equal tothe costs which Railtrack would incur if the operator were alone on that portionof the network and then had to assume all the costs. The price should not, whenthe various cost factors are taken into account, differ appreciably from one user
to another.
In addition to the transparency of the charges being more difficult toachieve for freight than for passenger transport and it being difficult todetermine precisely the share of the cost directly apportionable to a particularservice, the allocation of the joint costs is a real headache.
The reforms have been the target of two main criticisms. Some consider
that Railtrack, by setting low prices for freight transport, for which it iscompeting, may seek to shift the fixed costs onto the passengers and thus
improperly obtain public funding to its advantage. Others, on the other hand,consider that the draconian safety regulations, though reasonable in the case of78

passenger transport, are less justified in the case of freight transport and,accordingly, that there has been a transfer from the freight to thepassenger sector.
However, in 1995, before Railtrack was privatised, after examining theaccess charges applied to the franchised passenger services, the ORR concluded
that they were too high and more than the operator really needed to fulfil his
infrastructure renewal obligations. The Regulator imposed corresponding pricereductions, thus transferring the productivity gains to the licensed operators.
The charges are to be reviewed in the year 2000. Another object of criticism isthe charge structure, the fixed portion being considered too high (91 per cent).
This pricing is not conducive to the rational management of resources. In fact,
this approach precludes the introduction into the access charge calculations ofdifferentials in terms of rush hours or the economic value of the slots. The costs
considered here do not incorporate such externalities as noise or air pollution.
When the pricing rules were being drawn up, there was a keen debate
between the advocates of a commercial strategy and those who favoured a moremanaged approach. The arguments are important inasmuch as the same debate
is now being conducted at the European level. After holding numerous
consultations, the ORR concluded that it was better to place the method of
calculating the infrastructure user fees on a commercial negotiation basis so as togive the operator a chance to attract all the economic agents capable of paying atleast the directly apportionable costs. Thus, the main aim is to give theinfrastructure manager the means to induce the maximum possible number ofoperators to use the network. Clearly, then, the objective is to achieve andengineer a surplus. This approach has been much criticised. The owner of theinfrastructure can engage in cross-subsidisation and favour one party or anotherwithout necessarily ensuring the complete opening up of the network

4.2. The German experience: covering the costs
As in other countries, the amount of federal subsidies granted to the rail
sector in order to balance its budget and guarantee its borrowings had become
considerable while, at the same time, rail's share of total traffic was being
continually eroded. Reunification only worsened the crisis and, in 1993, theenterprise (made up of the DB and the RB) had debts of more thanDM 67 billion while the Government was anxious to support the development of
the sector. The reform of German railways was speeded up, profoundlytransforming the rail transport situation across the Rhine. It opened the way forever keener competition on the railways, on the one hand in the short term, by

79

placing the historical rail operator in the position of a service provider in its
negotiations with each Land and, on the other, in the long term, by opening up
the network to third parties. The reforms entered into effect, following anamendment to the Constitution, on 1 January 1994.
Thus, the authorities gradually moved towards a vast controlled andconcerted structural reform of the railway company. The Central Government(Bund) set up a private joint-stock company, the DB AG, in which at present it
holds all the shares but which is supposed to disappear in 1999. The rail system
is organised in four independent sectors of activity: regional passenger
transport, long-distance passenger transport, freight transport and infrastructure
management. These sectors are eventually to be privatised. However, theFederal Government will remain the principal shareholder in the Fahrweg(infrastructure manager) in order to retain control over investment policy.
As in the United Kingdom, the reforms are based on new institutions. On
the one hand, the Federal Office of Railways -- the Eisenbahnbundesamt(EBA) -- has been set up to ensure the necessary co-ordination and take care of
the general missions of the railways. It authorises operations, certifies
equipment and organises work on the infrastructure. It plans the work on thefederal rail network, ensures that tendering procedures comply with the law,
grants licences, applies investment financing agreements, commences prosecutions
and settles disputes. On the other hand, the Bundeseisenbahnvermögen (BEV),
another federal body, is responsible for clearing the debts of the former company
and for administering staff and pension costs as well as financial and property
charges. Central government has taken over the costs of the staff of the former
DB with civil servant status, who can now be made available to the DB AG for
employment under ordinary market conditions.
At the same time, to meet the increasing costs of regional rail transport, thecentral authorities have transferred to the Länder, with their agreement, theresponsibility for organising and financing regional transport operations. Thus,
the latter will henceforth find themselves in the position of organising authority.
They will receive financial transfers from the Bund to enable them to perform
this task31.

80

Figure 5. The German reforms

BUND
Financial transfers
EBA
FederalRailway
OfficeNetwork

Financing

Freight transport

Products(choice ofmodes)

%

res
sha

DBAG
Passenger
transport(L.D.)
Freighttransport

Timetableorganisation

Organisingauthority

Regional transport

Länder

100

of

BEV
Bundeseisenbahnvermögen(Restructuring body)

Participation
BUND
loss-making

Infrastructure
profit-making

Infrastructure pricing is an important component of these reforms. The Act
authorises access for third parties and thus transposes into domestic law the
principles of Directive 91/440. The operating subsidiaries of the DB AG pay the
infrastructure manager for the use of the infrastructure. These charges are
published in a catalogue which tells the operators exactly what price they will
have to pay for the whole of a journey, depending on their requirements. In
July 1994, DB Infrastructure published an initial price schedule applicable to allusers of the network. The system was chopped up into 4 000 sections with welldefined characteristics on the following principles.
The prices are identical as between the DB AG and third parties and mustbe identical for requests with similar requirements. The differentiation to befound in the catalogues is based on objective criteria. The prices depend on the
category of line, the damage potential of the equipment used, which largely
depends on the type of use, the required regularity, the volume of purchases andthe length of time for which the slot is used. The basic tables are compiled on
the basis of four criteria, namely, the quality of the track (essentially thepermissible speed), the traffic potential (principal characteristics of the rail links)
according to the type of service requested, the wear and tear (based on a variable
cost analysis) and the planning quality. This last item relates to the quality ofservice demanded, the reliability (punctuality) indicator determining the room81

for manoeuvre left to the infrastructure manager. This indicator is expressed in
the form of a percentage representing the margin which the DB is allowed
relative to the theoretical journey time. Using these criteria, it is possible toconstruct the reference table shown in Table 1.
The notion of quality introduces an element of economic demand
management. Here, the aim of differentiation is to define a scale of operator's
requirements. In choosing a quality of service, the operators disclose theirpreferences. However, there are strict limits to this mechanism since thepercentage is fixed for each category. It would be different if the operator could
choose a level of reliability in each category.
Many weightings and modes of payment can be introduced on the basis of
this table. If the stated maximum load is exceeded, the basic slot price isincreased by 1 per cent for every additional 100 tons.
For trains running empty, the basic slot price for price classes P1 to P3 isreduced by 10 per cent and that for price classes P4 to P7 by 5 per cent. For
engines running light, the basic slot price is reduced by 20 per cent.
Every regular slot ordered must be paid for irrespective of its utilisation. It
is possible to reserve optional slots. A reservation fee of 20 per cent of the slot
price is then collected. This fee is non-returnable.
Customers who order many slots are granted a price reduction which
depends on the annual total of train-kilometres.

82

Table 1. Quality of service reference table
Price class

P4
P2
P3
P1
Average-speed
Express
Regional
High-speed
main- line
express
traffic
passenger traffic(main lines) passenger traffic passenger traffic

P5
Short-haulregionalpassenger
traffic
400

P6
Local
passenger
traffic

Max. load (t)
1 000
750
550
750
400
200 km/h or Up to 200 km/h Up to 160 km/h Up to 140 km/h
Permissible
more
speed on at least
one section
Planning quality
105 %
108 %
110 %
120 %
120 %
120 %
Regional
Regional
Express night
EuroCity andInterRegio,
Category of train
Intercity
train,
express train,
trains,InterCity
main-line
express
CityBahn,through
express trains accompanied(ICE)slow train
train
car trains, fairtrainsP7
S-Bahn(urban railtransport)
450

108 %
S-Bahntrain

Table 2. Percentage reduction in terms of train-km per year
Percent reduction

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Main-line traffic
train-km (millions)

14

28

42

56

70

84

98 112 126 140 154 168 182 196 210 224 238 252 266 280

0.3
Short-haul traffic
train-km (millions)325

63 134 205 250 293 333 370 407 444 481 518 555 592 629 666 703 740

Customers who order slots for several years and sign a contract are granted
a further price reduction in addition to that mentioned above. For firm orders
extending over 2, 3, 4 and 5 years, the corresponding reductions are 2, 3, 4 and6 per cent.
The German pricing policy makes the financing of rail activities truly
transparent, even though the determination of the costs in terms of train-km is
far from receiving unanimous approval and constitutes an obstacle to the entryof new operators. The relatively high prices and the choice of pricing applied tothe train rather than the wagon are dissuading new operators from moving in.
These price scales have introduced a certain flexibility, but it is still insufficientand, in a way, is institutionalising the status quo by discouraging the adoption of
new techniques and limiting the freedom of manoeuvre of possible new entrants.
Separation has not progressed very far because DB AG is still both service
provider and network operator. The transition is a gentle one. The undertaking
seems to have been genuinely successful since already more than sixty transport
operators have moved onto the DB AG's rail network and their number issteadily increasing
While proposing rather high marginal network entry costs, this pricing
system reduces, on the one hand, the uncertainty for future operators byencouraging longer-term commitments and a search for financial and technicalpartners and, on the other hand, short-term practices which could havepernicious effects on the continuity and quality of the rail service.
Finally, the choice of a high level of global pricing guarantees theinfrastructure manager a development capability, which is one of the strong
political choices of these reforms, together with the choice of a user tariff likely
to lead to the optimal utilisation of the network.
4.3. The French example: a transitional phase32
Introduced against a background of social strife, in particular a big strikein 1995, the French reforms consisted in establishing Réseau Ferré de France(RFF), a new public company which, as balance-sheet liabilities, received
three-quarters of the debt of the SNCF and, on the asset side, the national
network infrastructure, with the exception of the stations and installations
needed by the historical operator. The latter was entrusted with the management
and maintenance of the infrastructure on behalf of the RFF, which pays the bill
for this service (16.8 billion francs for 1997, the first year of implementation).

85

The SNCF pays the RFF for the use of the infrastructure. For the first two years,
a limit was placed on this fee (slightly under 6 billion in 1997) by the law andthe decree establishing the new system.
The first characteristic of the system relates to the fact that, relieved of mostof its debt and infrastructure financing, the SNCF is in a position to balance its
accounts, which it is expected to do in 1999. Secondly, the new infrastructurecompany, which at present can only count on earning 6 billion francs, mustcover, in addition to nearly 17 billion in network maintenance and management
costs and unavoidable investment costs amounting to about 13.6 billion, charges
of around 9 billion on the debt inherited from the reforms. Obviously, most of
the difference between expenditure and income is covered by the Government,in the form of either a capital grant or subsidies, the difference being made up by
borrowing.
This, then, is a very special situation which can be interpreted in two
different ways. Either the RFF may be regarded as a body whose principal
function is to take over the debt and cover the deficit (net of subsidies) of theinfrastructure account by borrowing. Naturally, in this case, investment would
be the adjustment variable and would inevitably face historical decline. Or thepresent situation may be regarded as a transitional phase for putting new
structures in place, after which pricing that offers greater incentives and ensuresbetter coverage of the costs will be gradually introduced.
Being capped in 1997 and 1998, the present fee system is obviously far
removed from the principle of covering the costs. It corresponds to about
one-fifth (in terms of the total amount) of the German system. There is little
connection between the six billion constraint imposed and the reality of theactual costs, particularly as more than half of this sum comes from the regionalorganising authorities (mainly “Parisian” passenger transport) and less than halffrom the SNCF.
There is little point in studying this provisional system, precisely because itis capped. However, it should be noted that the idea was to create incentives,
especially where the demand for slots is high relative to capacity, i.e. on theurban and suburban lines (the part of the network designated R0) and to a lesser
extent on the busy high-speed lines (R1). On the other hand, on the low-density,
high-speed network and on the main-line network (R2) the fees are very low,while on the rest of the network (R3) they are symbolic.
The fee system distinguishes between a monthly access charge, AC, perkilometre of lines for which access is requested, a reservation charge, RC, perkilometre and per slot reserved and a traffic charge, TC, per train-kilometre.
86

There are different reservation charges for peak periods, normal periods andslack periods. The corresponding charges for 1997 are shown in Table 3.
Clearly, this system is much less detailed and sophisticated than that
introduced on the German network and thus raises the question of whether it issufficiently refined to enable the relevant marginal costs and homogeneous
demand segments to be distinguished in the event of the future system being
steered towards a more determinedly economic form of pricing.

Table 3. French provisional pricing(1997 unit prices in francs)
Sub-networkAC
RC (peak)RC (normal)
RC (slack)TC

R1
11 000
18
6
4
0.30

R0
11 000
100
44
20
0.30

R2
250
0.85
0.85
0.85
0.30

R3
0
0
0
0
0.30

Note: AC is expressed per month and per km of line, RC per slot-km, TC per train-km.

In the French case, clearly the main problem is how pricing will evolveafter 1999. This question is overshadowed by the fact that, overall, the railsystem is running at a loss. The first step then will be to choose between two
strategic directions. One choice would be a low-toll system which would
concentrate the public contribution on covering the deficits of the RFF andfinancing new investment. In this case a policy of long-term marginal costpricing without budgetary constraint might be envisaged. A second choice
would be a system that combined budgetary constraint with a Ramsey-Boiteux
principle. In this case the SNCF would have to be subsidised for a fairly longtime, but the subsidies could be correlated with the loss-making services thus
financed, thereby allowing the authorities latitude to compare their cost and theirutility.
On the basis of a study in progress, the RFF is to propose to theGovernment a user pricing system designed to encourage a better allocationof resources.

875. CONCLUSION

To reach a conclusion on such a subject would be to suppose that adefinitive theoretical contribution, which was both coherent and pertinent andproposed measurable concepts, would make it possible to solve, down to a few
details, this difficult rail infrastructure pricing problem. Only a patient approachthat takes into account all the attempts to apply theoretical prescriptions will
enable us to work towards a satisfactory solution.
It is no insult to the achievements of economic theory or railway economics
to conclude with the following few lines which were written about a century anda half ago:
We merely wished to show that the way in which the tolls are fixed cangreatly extend the utility of certain routes and that the guiding principle inassessing these charges should not be to set a price proportional to the weightor the distance nor to favour a particular industry or a particular class ofpassengers, but rather to impose on each passenger and on each good only aprice that is lower than that which would prevent the passenger or good fromusing the route. Admittedly, the methodical classification of these passengers
and goods does call for inventiveness and an intimate knowledge of the local
circumstances, but a sound theory can do much to facilitate this work33.

88

NOTES

1.

The pricing of the various transport sector modes should also take into
account the environmental social costs and propose coherent pricing
rules. This presentation does not expand on this point, which would
require special development. We note that in this respect it isnecessary to distinguish between two independent types of questions.
On the one hand, rail pricing should be considered in relation to thesocial costs actually taken into account in the pricing of the principal
competing mode, namely, road transport. This concern for coherence
might even lead to the legitimising of intermodal balancing subsidies,
theoretically justified by a second-order optimum. On the other hand,
and this is a totally different problem, it is necessary to introduce
differential pricing within the rail mode in order to take into accountthe advantages and disadvantages of the different technologies used by
the operators and gradually encourage the use of those that are lesspolluting.

2.

Brooks, M. and Button, K. propose a detailed typology of thesevarious experiences in “Separating transport track from operations: atypology of international experiences”, International Journal ofTransport Economics, Vol. XXII, No. 3, October 1995.

3.

This is the case in the United States for certain passenger services forwhich Amtrak must negotiate an infrastructure access charge with the
integrated private operators.

4.

The calculation methods used in these studies can often be reduced tovery simple procedures, especially as the quality of data needed formore sophisticated calculations is very difficult to obtain.
Nevertheless, the statistical analysis can be made more precise bygreater refinement and by establishing precise relations between
particular types of costs, networks and users.

89

5.

Avoidable fixed costs are then defined as those which would disappear
if the firm stopped producing one of its products.

6.

Winston, in a survey of road pricing, explains that the proposal toconsider optimal pricing and optimal investment in parallel harks backto the work of Herbert Mohring (1962).
This school includes such authors as T.E. Keeler, K.A. Small,
M. Kraus, S. Glaister and S.A. Morrison.
Morrison, S.A. (1986), “A Survey of Road Pricing”, Transportation
Research, Vol. 20A, No. 2, March, pp. 85-97.
Mohring, H. and Harwitz, M.I. (1962), Highway Benefits: An
Analytical Framework, Northwestern University Press, Evanston, IL.
Small, Kenneth A., Clifford Winston and Carol A. Evans (1989), Road
Work: A new Highway Pricing and Investment Policy, Washington,
D.C., The Brookings Institution.
Hau, Timothy D. (1992), Economic Fundamentals of Road Pricing: A
Diagrammatic Analysis, Transport Division, Infrastructure and Urban
Development Department, The World Bank, December.

7.

Allais, Maurice (1948), Revue d’Économie Politique, op. cit., p. 230.

8.

Boiteux, Marcel (1994), “Le développement de l’approcheéconomique du service public”, L’Europe à l’épreuve de l’intérêt
général, Collection ISUPE, Édition ASPE EUROPE, Paris, p. 46.

9.

Kolm, Serge-Christophe (1968), “La théorie économique générale del’encombrement”, Futuribles, SEDEIS.
See also the work of H. Lévy-Lambert, notably: Levy-Lambert,
Hubert (1968), “Tarification de services à qualité variable-- application aux péages de circulation”, Econometrica, July-October,Vol. 36, No. 3-4, pp. 564-574.

10.

Although traffic management is generally based on rules of priority,
which distinguishes the rail problem from that of the roads and createsa further difficulty for the theoretical approach to the pricing of rail
infrastructure.

11.

Here we have used the demonstration proposed by Steven A. Morrison,
who bases himself on the work of authors such as Mohring, Harwitz
and Vickrey.

90

12.

Hotelling, H. (1938), “The General Welfare in relation to problems of
Taxation and of Railways and Utility Rates”, Econometrica, 6(3), July,
pp. 242-269.

13.

Kolm, Serge-Christophe (1971), La valeur publique, l’État et lesystème des prix, CNRS, Dunod, Paris, p. 7.

14.

In the literature, the French school is associated with the rejection ofpricing based solely on balancing the accounts. This takes little
account of the analyses of Jules Dupuit in the last century or of themore recent work of Maurice Allais and Marcel Boiteux.

15.

Blaug, Mark (1986), “La pensée économique,développement”, Economica, 4th Edition, Paris, p. 718.

16.

Allais, Maurice (1948), “Le problème de la coordination des transports
et la théorie économique”, Revue d’Économie politique, 58,
pp. 212-271.

17.

Vickrey, W. (1948), “Some Objections to Marginal Cost Pricing”, inJournal of Political Economy, 56, pp. 218-238. (Reedited by Richard
Arnott, Kenneth Arrow, Anthony B. Atkinson and Jacques H. Dreze,
William Vickrey, Public Economics, p. 217).
This is also the view of the Forecasts Directorate: “In situations inwhich increasing returns are found to exist, there will be a conflict ofobjectives between the perfect orientation of consumer demand and theproper accountability of the managers. In no circumstances should
this second factor be neglected.” Note Prévision, Commissariat
Général du Plan, p. 151.

18.

Bernard, A. (1983), “Coût marginal ou coût moyen ?”, in Quinet, E.
(editor), Les transports et la puissance publique, Presses de l’École
Nationale des Ponts et Chaussées, report on transport economics
seminar organised in 1981-82 by the École Nationale des Ponts et
Chaussées, p. 36.

19.

Very many commentaries on this type of pricing point out that fairness
implies that the consumers should bear the costs of producing thegoods they consume and that all the consumers should pay the same
unit price for the same good. This is a frequently recurring complaint:“those systems which differentiate between deficit tolls according to91

origineetthe characteristics of the demand are generally consideredunreasonable and unfair.” Oort, C.J., op. cit., p. 62.
Clearly, the theoretical considerations advanced here shatter thisprinciple. The tolls applied may vary for products that are identicalboth from the technical standpoint and by reason of their cost.
20.

Dupuit, Jules (1849), “De l’influence des péages sur l’utilité des voies
de communication”, Annales des ponts et chaussées, p. 248.

21.

Boiteux, Marcel, “Sur la gestion des monopoles publics astreints àl’équilibre budgétaire”, Econometrica, No. 24, 1956, pp. 22-40.

22.

Ramsey, F. (1927), “A contribution to the theory of taxation”,
Economic Journal, Vol. 37, No. 1.

23.

Boiteux, M., op. cit., p. 35.

24.

With that “s” Maurice Allais distances himself from the standard
model. For further details, see: Allais, Maurice (1971), “Les théories
de l’équilibre économique général et de l’efficacité maximale.
Impasses récentes et nouvelles perspectives”, Revue d’Économie
Politique, No. 3, May-June, pp. 331-409.

25.

Dupuit, Jules (1849), “De l’influence des péages sur l’utilité des voies
de communication”, Annales des ponts et chaussées, pp. 170-248.

26.

We shall not describe the reforms themselves as they have alreadybeen extensively analysed. See, for example:-- Montagu (1995), “L’accès à l’infrastructure ferroviaire,l’expérience britannique”, Rail International, 26, January,
pp. 5-15. Paper read at the AICCF/CCFE Conference, Berlin,
6-7 October 1994: The Railways and European Transport Policy.
-- (1994), Britain’s Railways: a new Era, The Department ofTransport, London, March.
-- Preston, John (1996), “The economics of British Rail Privatisation:
an assessment”, Transport Review, Vol. 16, No. 1, pp. 1-21.
-- British Ministry of Transport (1996), Transport Report.
Available on the Web at:<URL http://www.open.gov.uk/dot/ann_rpt/chap-1.htm>.
-- Nash, Christopher (1996), “The British Experience”, The
Separation of Operations from Infrastructure in the Provision ofRailway Services, Round Table 103, ECMT, pp. 59-102.
92

-- Bradshaw, B. and L. Mason (1994), Rail Privatisation: Facts,
Issues and Opportunities, Oxford Economic Research Associates
Ltd., Oxford.
-- Baumstark, Luc, Laurent Guihéry, Florence Lacaille (1997),“Process of Deregulation within the Railways Sector: Access
Pricing and Institutional Organisation”, World Conference
Research Rail 97, Florence.
27.

Railtrack derives its income from user fees paid by the operators(supply of electricity, etc.), rents paid for the use of stations and depots
and rents from its commercial assets. To these should be added theaccess charges which are determined by negotiation (see below). The
procedures have been progressively refined. At the beginning, no rules
for calculating the charges were laid down. The first charges were
fixed at a level that would cover the total costs and ensure a return on
the invested capital of the order of 8 per cent.

28.

The charge includes a fixed annual fee comprising the allocated fixed
costs (joint costs) and the additional fixed costs (specific to eachcompany).
The fixed charges, which correspond to about
three-quarters of the infrastructure costs, form the subject ofnegotiations between the operators and Railtrack. The variable charges
contain infrastructure user fees calculated in terms of train-miles which
are different for each category of rolling stock (10 per cent of total
costs). The costs incurred at regional and national levels are shared out
among all the franchise holders in proportion to their receipts fromfares. The costs incurred at local level, or on a single line, must be
distributed among the users in proportion to the number of vehiclekilometres travelled.

29.

Avoidable costs: rule for the allocation of the fixed costs of the wholeof the services provided by an operator, equal to the amount saved in
the event of his services being eliminated.

30.

Additional costs: increase in infrastructure costs imposed by its
services, taking into account the configuration of the other services.

31.

The corresponding subsidies are financed from revenue generated by
the petroleum tax (Mineralölsteuer). Note that article 4 of theRailways Restructuring Act states that, from 1996, the DB AG will nolonger receive any direct funds from the Federal Government for
managing regional passenger services. The subsidies are allocated to93the Länder, which use them in accordance with their own regionaltransport policy. However, the Länder must use these transfers for
public transport purposes.
32.

See the following official texts:-- Law No. 97-135 of 13 February 1997, establishing the public
corporation, Réseau Ferré de France, with a view to the revival ofrail transport;-- Decree No. 97-446 of 5 May 1997 on national rail network user
fees;-- and, finally, the Orders of 30 December 1997 on national rail
network user fees, JO, 31 December 1997, pp. 19461-19463.

33.

Dupuit, Jules (1873), “Poids et mesure”, in Coquelin and Guillaumin(eds.), Dictionnaire de l’économie politique, 4th Edition, Vol. 2, Paris,
pp. 339-344.

94

BIBLIOGRAPHY

Allais, Maurice (1945), Économie pure et rendement social, Edition Sirey, Paris,
72 pp.
Allais, Maurice (1948), “Le problème de la coordination des transports et lathéorie économique”, Revue d’Économie politique, 58, pp. 212-271.
Allais, Maurice et al. (1965), Options de la politique tarifaire dans les transports,
Report prepared at the request of Commission of the European Economic
Community, Studies Coll., Transport Series, No. 1, Brussels.
Allais, Maurice (1989), “L’économie des infrastructures de transport et les
fondements du calcul économique”, Revue d’Économie Politique, 99, No. 2,
pp. 159-197.
Allais, Maurice (1989), Théorie générale des surplus, PUG, Presse Universitairede Grenoble (2nd edition), 716 pp.
Banister, David, Kenneth Button et al. (1993), Transport, the Environment andSustainable Development, Alexandrine Press, Oxford, 275 pp.
Baumstark, L. (1997), “Tarification de l’usage des infrastructures et théorie del’allocation optimale des ressources, de la logique des coûts à la révélation despréférences”, Doctoral thesis, Université Lumière Lyons 2.
Boiteux, Marcel (1956), “La vente au coût marginal”, Revue Française del’Énergie, December.
Boiteux, Marcel (1956), “Sur la gestion des monopoles publics astreints àl'équilibre budgétaire”, Econometrica, No. 24, pp. 22-40.
Bowers, Ph. (1995), “Commercialisation, accès local et international aux réseauxferrés”, Public Transport International, No. 1.

95

Brooks, M., K. Button (1995), “Separating transport track from operations: atypology of international experiences”, International Journal of Transport
Economics, Vol. XXII, No. 3, October.
Council Directive 91/440 of 29 July 1991 on the development of theCommunity's railways, OJ L 237 of 24/08/1991, 25 pp.
Council Directive 95/18/EC of 19 June 1995 on the licensing of railway
undertakings (OJ L 143/70-74).
Council Directive 95/19/EC of 19 June 1995 on the allocation of railway
infrastructure capacity and the charging of infrastructure fees (OJ L 143/75-78),
27 June 1995.
Regulation (EEC) No. 1191/69 of the Council of 28 June 1969 (OJ L 156 ) on
action by Member States concerning the obligations inherent in the concept of apublic service in transport by rail, road and inland waterway, last amended byRegulation No. 1893/91 of the Council, OJ L 169 of 29/6/1991.
Regulation (EEC) 1192/69 of the Council of 26 June 1969 on common rules forthe normalisation of the accounts of railway undertakings, OJ L 156 of
28/06/1969.
Regulation (EEC) No. 1107/70 of the Council of 4 June 1970 on the granting ofaids for transport by rail, road and inland waterway, OJ L 130 of 15/06/1970.
Green Paper (1995), Towards fair and efficient pricing in transport,
COM(95)691 of 20/12/1995, 58 pp.
White Paper (1996), A strategy for revitalising the Community's railways,
COM(96) 421 final, Brussels, 30 July 1996, 54 pp.
ECMT (1995), Why Do We Need Railways?, Proceedings of International
Seminar, Paris, 19-20 January, 226 pp.
ECMT (1993), Privatisation of Railways, Round Table 90, Paris.
ECMT (1997), The Separation of Operations from Infrastructure in theProvision of Railway Services, Round Table 103, Paris.
Commissariat Général du Plan (1995), Transport, le prix d’une stratégie(Workshop chaired by A. Bonnafous), Vols. 1 and 2, La Documentation
Française, Paris.

96

Commissariat Général du Plan (1996), Transformation des opérateurs publics deréseaux en Allemagne -- Les cas du contrôle aérien, des transports ferroviaires,de la poste et des télécommunications, Study made by Cabinet ESL & Network,
Vols. 1 and 2, March.
Commissariat Général du Plan (1993), Transports : pour une cohérence
stratégique, Workshop on the strategic directions of transport policy and theirmedium-term implications, Commissariat Général du Plan, September.
Commissariat Général du Plan (1994), Transports : pour un meilleur choix desinvestissements (Group chaired by Marcel Boiteux), La Documentation
Française, November, 132 pp.
Commissariat Général du Plan (1995), Transports : le prix d’une stratégie(Workshop chaired by Alain Bonnafous), Vols. 1 and 2, La Documentation
Française, pp. 213 and 182.
DB AG (1996), “Der Trassenpreiskatalog der DB AG: ein Vorbild für Europa?”
Lecture given by Mrs Haase at the 29th Scientific Transport Research Seminar,“Competition Policy in Deregulated Transport Markets”, organised by the
University of Freiburg (Germany), Hinterzarten, October.
DB AG, Trassenpreise -- Güterverkehr, Frankfurt am Main, 1995.
DB AG, Trassenpreise -- Personenverkehr, Frankfurt am Main, 1995.
Dodgson, J. (1994), “Railway privatisation”, in: M. Bishop, J. Kay and
C. Mayer (eds.), Privatisation and Economic Performance, Oxford University
Press, Oxford.
Drèze, H. (1994), “Marginal-Cost Pricing”, Introduction to Part III in:
Arnott, Richard, Kenneth Arrow, Anthony B. Atkinson and Jacques Dreze(eds.), Public Economics (Selected papers by William Vickrey), Cambridge
University Press, pp. 190-195.
Ewers, H.-J. (1993), Privatisierung und Deregulierung bei den Eisenbahnen: das
Beispiel der DB und der DR, Institut für Verkehrswissenschaft, Universität
Münster, 15-17 September, 11 pp.
Gillen, David W. and Tae Hoon Oum (1991), Transportation infrastructure:
Pricing, Investment and Cost Recovery, Royal Commission on National

97

Passenger
Transportation,
September 26 and 27, 181 pp.

Technical

Seminar,

Ottawa,Canada,Guihéry, L. (1996), “Fédéralisme allemand et réforme des chemins de fer en
Allemagne : le transport ferroviaire régional de voyageurs devient une nouvellecompétence des Länder”, Documents-revue des questions allemandes, No. 1,
Paris, p. 79.
Guihéry, L. (1997), “Réforme des chemins de fer et tarification d’usage desinfrastructures ferroviaires en Allemagne, une organisation contrôlée de laconcurrence sur le réseau ferré allemand”, Transport, No. 382, March-April,
pp. 112-121.
Hau, Timothy D. (1993), “Economic Fundamentals of Road Pricing:
A Diagrammatic Analysis”, Working Paper, WPS 1070, Transport Division,
Infrastructure and Urban Development Department, The World Bank, p. 87.
Horton, Sir Robert (1997), “Re-engineering Britain's railways:
rewards”, European Railway Review, June, pp. 89-95.

risks andHotelling, H. (1938), “The general welfare in relation to problems of taxationand of railways and utility rates”, Econometrica, 6(3), July, pp. 242-69.
Hutter, R. (1950), “La théorie économique et la gestion commerciale du cheminde fer”, Revue Générale des Chemins de Fer, February, July and October, p. 44.
Kolm, Serge-Christophe (1968), “La théorie économique générale del’encombrement”, Futuribles, SEDEIS, p. 82.
Laffont, Jean-Jacques (1977), Effets externes et théorie économique,
Monographies du séminaire d'économétrie, No. 13, éditions du CNRS, Paris,
200 pp.
Laffont, Jean-Jacques and Jean Tirole (1994), A Theory of Incentives in
Procurement and Regulation, The MIT Press, Cambridge, Massachusetts,
London, 705 pp.
Le Duc, M. (1995), Services publics de réseau et Europe : Les exemples del’Allemagne, de l’Espagne, de l’Italie et du Royaume-Uni, Les études de La
Documentation Française, Paris, 1995.

98Morrison, Steven, The Theory of Optimal Highway Pricing and Investment:
Comment, Northeastern University, Boston, Massachusetts.
Nash, C. (1993), “Developments in transport policy: rail privatisation in
Britain”, Journal of Transport Economics and Policy, Vol. XXVII, No. 3,
September, pp. 317-322.
Office of the Rail Regulator, Framework for the approval of Railtrack's track
access charges for freight services, a consultation document, October 1994,
19 pp.
Preston, J. (1996), “The economics of British Rail privatisation: an assessment”,
in Transport Reviews, Vol. 16, No. 1, pp. 1-21.
Quinet, E. (1990), Analyse économique des transports, PUF, Collection
Économie, Paris, 302 pp.
Allais, Maurice, Del Viscovo, Duquesne de la Vinelle, Oort and Seidenfus(1965), “Options de la politique tarifaire dans les transports”. Report prepared at
the request of the Commission of the European Economic Community, Studies
Collection, Transport Series, No. 1, Brussels.
Rathery, A. (1984), “De nouvelles perspectives pour la politique desinfrastructures de transport dans les Communautés européennes ? Possibilités
offertes par une approche pragmatique de la tarification d'usage desinfrastructures”, Transports, No. 297, October, pp. 358-365.
Rothengatter, W. (1991), “Deregulating the European Railway Industry:theoretical background and practical consequences”, Transportation Research,
Vol. 25A, No. 4, pp. 181-191.
Small, Kenneth A. (1990), “Highway Infrastructure: Crisis in Finance or Crisis
in Management”,
Review of the University of California Institute ofTransportation Studies, Vol. 13, No. 2, February, pp. 4-8.
Small, Kenneth A., Clifford Winston and Carol A. Evans (1989), Road Work:A New Highway Pricing and Investment Policy, The Brookings Institution,
Washington, D.C.
The Department of Transport (1993), Rail Freight Privatisation (theGovernment's proposals), London, 27 pp.

99

Vickrey, W. (1987), “Marginal- and Average-Cost Pricing”, in: Eatwell et al.
(eds.), The New Palgrave Dictionary, Vol. III, Macmillan, pp. 311-318.
Vickrey, W. (1994), Public Economics (Selected papers by William Vickrey),
Edited by Richard Arnott, Kenneth Arrow, Anthony B. Atkinson and
Jacques Dreze, Cambridge University Press, 558 pp.
Walters, A.A.
pp. 570-573.

(1987),“Congestion”,

The

New

Palgrave

Dictionary,Wilkinson, A.W. (1992), “La situation politique des British Railways”, Le Rail,July, No. 33, p. 28-2.

100

UNITED KINGDOMJohn DODGSON
National Economic Research Associates
LondonUnited Kingdom

101

Acknowledgement
I am grateful to my colleague at NERA, Stuart Holder,for valuable comments on an earlier draft.
However, I alone am responsible for the contents of this paper.

102

SUMMARY1.

INTRODUCTION ................................................................................... 105

2.

WHAT IS RAILWAY INFRASTRUCTURE? ....................................... 106

3.

WHY CHARGE FOR RAILWAY INFRASTRUCTURE? .................... 110

4.

COST-BASED CHARGES ..................................................................... 112
4.1. Concepts of costs .............................................................................. 112
4.2. Measurement of costs in practice ..................................................... 114
4.3. The relationship between rail infrastructure costs andtraffic levels: A statistical approach ................................................ 119

5.

AUCTIONING CAPACITY.................................................................... 119

6.

HOW SHOULD TOTAL COSTS BE COVERED?................................ 122

7.

WHAT IS THE RESIDUAL ROLE OF ADMINISTRATIVE
ALLOCATION MECHANISMS? .......................................................... 124

8.

CONCLUSIONS...................................................................................... 126

NOTES............................................................................................................. 127
BIBLIOGRAPHY............................................................................................ 130

London, November 1997

103

104

1. INTRODUCTION

This paper is concerned with the issue of user charges for railway
infrastructure. The approach of the paper is to consider the principles that mightunderlie a set of user charges, rather than to provide detailed descriptions ofactual systems of user charges. However, reference will be made to the British
approach in a number of cases to show the methods which have actually beenused in practice in applying principles of rail access charging.
There are a number of major questions which are relevant when
considering rail access charges. These include:
−
−
−
−
−
−
−
−
−

What do we mean by rail infrastructure, and what is the nature of thecosts involved in providing it?
What is the purpose of user charges for rail infrastructure services?
What objectives are they intended to achieve in practice?
Given the objectives for rail infrastructure charges, how can they bedesigned in practice to achieve these objectives?
To what extent should user charges reflect costs?
What theoretical concepts of costs are relevant: short-run marginal
costs, long-run marginal costs, short-run average costs or long-run
average costs?
How can these costs be measured in practice on real rail systems?
Who should pay the charges?
Who should pay for those elements of rail infrastructure costs which
are not recovered by means of charges?
What role will administrative allocation mechanisms continue to playin a charge-based system?

In considering rail infrastructure charges, it should be noted that there are anumber of mechanisms by which charges might be levied. These include:−

Standard published tariffs which are paid by all users of particular
types of infrastructure services;
105

−
−

Negotiated tariffs, agreed between train operators and infrastructure
providers (these tariffs will usually not be revealed publicly);
Systems whereby scarce access rights are auctioned in some way tothe highest bidder or bidders. Auction systems are complex, though
they can in principle provide a mechanism to extract the maximum
value from a given set of rail infrastructure assets, and to point theway to the most effective improvements in those assets by means ofinvestment.

Charges are also likely to continue to be subject to external review orrevision by government or regulatory bodies. One issue likely to be of concern
is the issue of avoiding charges which discriminate between train operators
performing similar tasks. In addition, both the structure and levels of charges
are likely to be subject to review. In Great Britain, the independent Rail
Regulator, supported by his officials in the Office of the Rail Regulator (ORR),
regulates both the structure and levels of access charges, as well as the accessagreements themselves1. The level of track access charges for the main
passenger services is regulated through a rule which has been applied across anumber of formerly publicly-owned industries in Britain, namely, telecoms, gas,
electricity, water and airports. This rule is the (RPI-X) rule, in which regulated
prices are allowed to rise by no more than the Retail Price Index, RPI, less anelement X which allows for the scope by which the Regulator believes theindustry has to reduce its unit costs in real terms each year. The value of X isset at the beginning of each review period, which normally lasts five years, andis then normally held constant over the review period2. Towards the end of thisperiod, there is a further review, when X is set for the following five years. The
aim of this rule is to prevent the regulated firm from making excess profits,
while at the same time preserving incentives, in that if the regulated firm cuts
costs below X per cent per annum, it can keep the gains until the next review.

2. WHAT IS RAILWAY INFRASTRUCTURE?

In this chapter, we consider what railway infrastructure consists of. This isnecessary in order to be able to move on in later chapters to consider the natureof the costs of its provision, and how these costs will vary with traffic levels
both in the short- and the long-term, but also because there may be somedifferences of definition between different railway systems across Europe, andsuch differences might create confusion in discussion unless such differences
are made explicit.

106

By infrastructure, we mean the infrastructure on which trains run, which
we can classify under the following headings:
1.

The line of route. This takes the form of the land and track bed itself,
including necessary earthworks in the form of embankments andcuttings, plus civil engineering structures such as bridges and tunnels.
Although some major structures may need renewal, much of thecapital expenditure in this category will be sunk, and cannot berecovered. However, this does not mean that there will not besignificant maintenance costs on an on-going basis. The earthworks
will need to be kept in good order, particularly through maintenanceof drainage facilities, while vegetation will need to be tended. Steelstructures will need to be maintained by painting, while brickwork
will need some attention as time goes by.

2.

The track. The track itself consists of the ballast, sleepers, fastenings,
rails, pointwork and crossings. They will need continuous inspection
to maintain alignments, and in turn this will require tamping and otherremedial action on the ballast. Rails and sleepers will need renewal
from time to time, especially on heavily-used sections of route. There
will be relatively low day-to-day operating costs, though wear-and-tearwill be closely related to the actual numbers and weights of trains.

3.

Signalling. The signal control system in operation on any section ofline can vary considerably in complexity, from a single train in
operation, to complex power signalling which, on high-speed lines,
may involve some form of cab signalling system. The capital
equipment in a conventional system will consist of fixed signals, track
circuits, point control equipment, signal cabling or wires and signal
boxes or control centres. Major renewal of equipment is likely to be
infrequent, so that any network is likely to have very different
vintages of technology in operation across the system. However,equipment is likely to require regular maintenance. In addition,
day-to-day operation costs will reflect the labour requirements of thetechnology in operation and the complexity of the operation.

4.

Electricity power supply. Where services are electrified, the electric
supply equipment should also be regarded as part of the infrastructure.
This equipment includes the overhead posts and catenary, or the thirdrail, the sub-stations and power supply cables, control equipment and(where provided by the rail infrastructure authority) any generating107

equipment. A major element of costs will be that of the electricity
itself, which might be bought off the rail infrastructure authority, or
directly from the generator.
5.

Stations and depots. The final element of the infrastructure is thestations, freight depots and rolling stock depots. These might beowned by the infrastructure authority itself, or be owned (or leased)by train operators. This paper is not primarily concerned with thisparticular aspect of rail infrastructure.

The five various components of rail infrastructure are shown in Table 1.
As well as providing a brief description of the main assets under each heading,this table also shows the main characteristics of capital, renewal, maintenanceand operating costs under each type of infrastructure cost.
Infrastructure operation also includes other cost elements which are notprimarily associated with physical assets. These include the important functionsof train planning and timetable production, as well as general management
activity.

108

Table 1. Rail Infrastructure Assets and Costs
Type of asset

Description ofassetsLand,embankments,
cuttings, bridges,
tunnels
Ballast, sleepers,
rails, switches andcrossings

Capitalexpenditure
Original route
construction

3. Signalling

Fixed signals,
track circuits,
signal boxes,
control equipment

Construction of
signals, boxes,
etc.

4. Electricity
power
supplyOverhead line or
third rail, substations, cabling,
power control
equipment
Platforms andbuildings

Electricity power
supply andassociatedsupplyequipment
Construction of
stations anddepots

1. Line of route

2. The track

5. Stations anddepotsBallast, track
and pointwork

Major renewals

Maintenance costs

Major structure
replacement

Culverts, vegetation,brickwork, steel
structures

Renewal of
sleepers, rails
and other
trackwork
Replacement ofsignals, boxes,
etc., usually withmore modern
equipment
Replacement of
supplyequipment

Inspection, ballast
tamping, partial repairof track

Renewal or
replacement ofbuildings

Operating costs

Maintenance of
signals and control
equipment

Signal operations
staff, plus power andother supplies

Maintenance of supply
equipment

Electric power, plus
costs of control staff

Maintenance ofstructures

Labour and othercosts incurred byinfrastructure
authority or otherorganisation

3. WHY CHARGE FOR RAILWAY INFRASTRUCTURE?

Why should charges be levied for railway infrastructure? One simple
answer is that charges are levied for most goods and services, and so should
also be levied for railway infrastructure.
A more considered answer is that the market system -- through whichcharges are levied for goods and services throughout the economy tocompensate the firms which provide them for the costs they incur in doing so -ensures that society values the output of these goods and services more than it
values the opportunity costs of the inputs used to produce them. That is to say,in the case of rail infrastructure, the inputs in terms of labour, energy, materials
and capital used to provide and maintain railway track could alternatively be
employed to produce other goods and services. By employing them in therailway industry, we give up these other goods and services. We therefore needto ensure that society values the provision of the rail infrastructure more highly
than it values the goods or services which have been given up.
In the past, railway services were generally provided by single, verticallyintegrated firms. In such circumstances, there would be no explicit system ofcharges paid by the part of the firm which operated trains to the part which
operated infrastructure. However, where the railway companies were required
to operate commercially, in the days before government subsidy, railway
customers would pay in charges sufficient in total to cover both the train
operating costs and the infrastructure costs. Hence, the costs of rail
infrastructure would be covered by rail users.
We next consider the reasons for having separate charges for rail
infrastructure access.
A specific reason for levying charges for railway track capacity is toprovide a mechanism by which different train operators can have access to therailway network on a comparable basis. This might enable new operators
providing innovative services to improve the range and quality of transport
services which railways can provide, and it may permit competition between
train operators to reduce costs and improve service quality
However, where a rail system remains vertically integrated, the integrated
rail company will be reluctant to permit new operators onto its network when
they will compete with its own train services. It is clear that the new operator
should make some contribution to the costs of infrastructure provision, but the110infrastructure provider may try to charge a rate so high that it discourages entry
or, at the least, puts the entrant at a comparative disadvantage3. In order to deal
with this situation, American regulatory economists, William Baumol andRobert Willig, developed the Efficient Component Pricing Rule (the ECPR).
Under this rule (see Baumol, 1983), the track access charge is set equal to theadditional cost to the infrastructure provider of accommodating extra trains,plus the loss of profits from its own trains as a result of the increased
competition.
However, the difficulties of securing a “level playing-field” for different
train operators competing with an integrated supplier have increasingly led,
mainly because of pressure from the European Commission underDirective 91/440, to a split between rail infrastructure and operations in Europe,
both from an accounting and, increasingly, from an operational point of view.
Once the infrastructure and operations parts of the railway company areseparate, then the provision of infrastructure access to train operators becomes amarket transaction.
We can distinguish four objectives of the resulting systems of charges.
These are as follows:1.

Efficient use of infrastructure. Charges should ensure that whateverlevel of infrastructure is provided is used most effectively. Thismeans that the value of the infrastructure to rail users should be
maximised. A given amount of railway track might be used in a
number of different ways, and an administrative allocation mechanism
might not make the best use of that capacity. For example, train paths
might be allocated to slow stopping trains, which prevent use of thecapacity by more highly-valued fast trains which have greater earningpotential. Or spare paths might be provided for occasional freights
which rarely run, and which might be accommodated in a more
effective manner if the freight operator had to pay the costs of thepaths left available for this occasional use. Or there might be many
alternative ways of allocating train paths through a complex networkof junctions, and pricing systems might give better incentives todetermine the best pattern of paths for the different types of train
passing through the junctions than do administrative systems based on
historic timetable patterns. Finally, pricing systems might provide away to improve the quality of the output supplied by a particular blockof infrastructure facilities.

111

2.

Efficient provision of infrastructure. This means that the charging
mechanism should lead to the provision of the correct level of rail
infrastructure given the demands for rail use. Consequently, charges
should give appropriate signals for investment in improvements in theinfrastructure, and for contractions in the infrastructure to eliminate
excess capacity (other than that whose retention is justified on thebasis of anticipated increases in demand). In addition, the charging
system should give incentives for the infrastructure provider toprovide infrastructure of a specified quality at minimum cost: thismeans there should be no incentives for the infrastructure provider to
employ excessive levels of labour or use excessive levels of capital.

3.

Efficiency in the rest of the railway business. The infrastructure
charges should also provide incentives for efficiency in the rest of therailway business. One important way they can do this is by providing
a framework which encourages effective competition in the market forrail services, by encouraging competition where this will improve therange or quality of train services provided and/or reduce the costs ofproviding these services. Thus rail infrastructure charges can aid in
the development of the most efficient market structure for both staticand dynamic efficiency in the railway industry.

4.

Consistency with government objectives. Such consistency can
include consistency with fiscal objectives, such as an objective to
reduce public subsidy for rail services, and consistency with transport
policy objectives. The latter might include a desire to achieve
efficiency in intermodal competition by means of user charges forboth road and rail services, derived on an equivalent basis.

4. COST-BASED CHARGES

4.1. Concepts of costs
One of the most common principles of rail infrastructure charges is thatthey should be based on the costs of providing rail infrastructure. The generalprinciple relevant here is that rail users should be prepared to pay the costs

112which they impose on society by diverting resources from other uses to theprovision and use of rail infrastructure. However, there are a number ofalternative cost concepts that can be relevant. These include:
−
−

−
−

Short-run average costs: the total costs of providing infrastructureservices at the existing level of capacity, divided by the number oftraffic units4;
Long-run average costs: the total costs of providing infrastructureservices, allowing for any required increase or decrease in capacity to
produce services at lowest possible costs, divided by the number oftraffic units;
Short-run marginal costs: the extra cost of handling an extra unit oftraffic on the existing system;
Long-run marginal costs: the extra cost of handling an extra unit oftraffic on the system when capacity can be changed so as to handle theincreased traffic volume at least cost.

Although charges based on average costs would enable the rail operator torecover total costs, as long as demand were sufficient, optimum resource
allocation will be achieved where charges are set equal to marginal costs.
Where capital stock is optimally-adjusted, that is to say where the total cost ofcatering for the traffic on offer is minimised, short-run marginal costs will beequal to long-run marginal costs and so the marginal-cost-based pricing rule
will have prices set equal to both SRMC and to LRMC. However, since trafficlevels are always subject to change -- and these changes often cannot be
forecast in advance -- and since railway infrastructure provision can only bechanged slowly in response to traffic changes, the railway infrastructure in
existence at any particular point in time may not be the level that is optimal forthe traffic on offer. In these circumstances, prices set equal to short-run
marginal costs will ensure the optimum use of the existing capacity. This isbecause capacity will only be allocated to those users who value the services
that the infrastructure provides at least as much as the extra costs which need to
be incurred to provide it.
However, even if short-run marginal costs can be measured, an issue which
we will turn to in the next chapter, use of SRMC might lead to a set of charges
which fluctuate over time. In contrast, LRMC-cost-based charges might besubject to less fluctuation and therefore can provide a more stable basis onwhich to plan future service and investment levels.

4.2. Measurement of costs in practice113

In this chapter, we consider cost measurement in practice, with particularreference to the measurement of marginal infrastructure costs.
4.2.1.

Short-run marginal costs (SRMC)

Short-run marginal costs show how the infrastructure costs change in the
short-run when rail traffic levels change. In general, these changes tend to be
low when traffic is not close to capacity limits. In such circumstances of
uncongested rail networks, the main variations in infrastructure costs withtraffic levels are the following:−−−

If the number and/or weight of trains increases, this can increase trackwear-and-tear, and hence the maintenance expenditures necessary tokeep track quality standards at a given level;5
An increase in the number of trains might increase signal operation
costs. For example, in an old-fashioned mechanical signalbox, thenumber of individual lever movements will increase as the number oftrains increases. This will involve the signal person in extra effort,
though it might not involve him or her in extra time since they have to
be on duty for the period when the box is open. On the other hand, if
signal boxes are not manned for 24 hours, extra trains might increasebox opening hours. In addition, more complex operations might
attract extra wage payments, and eventually more skilled staff may berequired. In modern, computer-based signalling systems, additional
movements may involve very little extra cost at all, once the system
has been installed. (The complexity of the movements that have to behandled will determine the cost and complexity of the signallingsystem that is required, but this is an issue which relates to long-run
marginal costs.);
There will be administrative costs in running additional trains. In an
extreme example, a “one-off” special passenger excursion may requireconsiderable management effort in determining a path for the train
through the system and in providing special notices to signalmen for
the running of the train.

Where a rail system is near to capacity, short-run marginal costs reflect theopportunity costs of use of the capacity by the different trains on the system.
There are a number of components of the opportunity costs of running aparticular train. If a train runs in a particular path:− it may displace another train to a less-preferred path. This path may
be less preferred because it has less commercial potential (for

114

−
−
−

example, it may disrupt a regular, clockface timetable, or it may offer
a freight customer a less-desirable loading time) or it might reducerolling-stock utilisation (for example, by increasing turn-round time ata terminal);
it might increase journey times of other trains (for example, if they aredelayed in crossing junctions);
it may increase delays imposed on other trains if it runs late;it may mean that another train is displaced completely from the
network.

The third of these types of congestion cost, namely, the delays imposed by
an extra train on others, might be measured by means of a “performance
regime”, such as that operated in Britain by Railtrack. Under this system,
Railtrack is required to pay penalty payments to train operators if their trains aredelayed. On the other hand, a train operator whose own trains cause delays
must make a penalty payment to Railtrack. Thus, delays imposed by one train
operator on another require a penalty payment, effectively from one operator toanother, channelled through the infrastructure provider, Railtrack. On the other
hand, good performance is rewarded with bonuses.
In addition, the system includes the contractors who maintain theinfrastructure, so that if delays are caused by their actions, Railtrack can recoup
80 per cent of the cost from them -- but not 100 per cent, so that Railtrack still
has an incentive to encourage the contractors to improve their performance.
Train running throughout the system is monitored, and delays longer than
three minutes are attributed to the party responsible6. According to Brian
Mellitt, Railtrack’s Director of Engineering and Production (Mellitt, 1997), theaverage payment per minute of train delay across a range of services varies
between £17 for regional passenger services to up to £130-170 per minute forsome South-East commuter services. These payments are based on average
numbers of passengers per train, time values for rail passengers and average
fares and fare elasticity values.

1154.2.2.

Long-run marginal costs (LRMC) and long-run incremental
costs (LRIC)

Long-run marginal costs show the extra costs of providing an extra unit oftraffic when the level of infrastructure provided can be adjusted. This long-run
marginal cost for an extra unit of traffic in the form of a single train can beequal to short-run marginal costs (i.e. marginal capacity costs can be zero) if
there is already enough capacity to handle the traffic at minimum cost.
Expansions in capacity usually occur in order to accommodate a number of
additional trains, rather than a single additional train. In these circumstances,
we can distinguish long-run incremental costs, where the LRICs are theadditional capacity and other costs of handling an extra block of traffic. These
LRICs can be expressed in unit terms as long-run average incremental costs(LRAICs), which are equal to the LRICs averaged over the extra units of traffic
handled by the additional capacity.
The use of LRICs in railway track costing can be illustrated by reference totheir use in Britain. In Britain, LRICs have been used in two ways in railway
infrastructure costing.
The first instance was in the allocation of total infrastructure costs between
different train operators. Here, the need was to have a system of charges thatcovered the total costs of the commercial rail infrastructure company, Railtrack.
An attempt was therefore made to allocate those costs which did not vary in the
short-term with traffic levels, to the different train operators.
To do this, the network was divided into individual sections and the assets
devoted to each section were identified. Unit cost figures were associated witheach type of asset, such as length of plain line, 2-aspect signal, track circuit orpoint. The exercise then considered what assets would be saved in the longterm if each operator’s trains no longer used that part of the network: thislong-term analysis considered reconfigurations of the route, such as that
required to switch from 4-aspect to 3-aspect signals where traffic reductions
warranted.
The approach is illustrated in Figure 1. This shows the track and signallingplan for a four-track route, used by four operators: a commuter train operator,
an express service operator, an infrequent long-distance passenger operator anda freight operator.
Figure 1. Calculation of long-run incremental costs forindividual train operators

116

A

B

Down slow
Up slow
Down fast
Up fastC

Track

PointsSignalStation platform

Freight depot

The initial assessment of LRICs in the British railway industry asked
the question:
What infrastructure costs would be saved if each operator’s trains
were withdrawn in turn?
We consider these operators’ characteristics and infrastructure needs asfollows:−−−−

The commuter operator operates a 15 minute headway service
between the hours of 06.00 and 24.00 every day. This requires use of
the two slow lines, though trains can be diverted to the fast lines in an
emergency;
The express service operator operates a 30-minute headway service
over the fast lines between 07.00 and 23.00 every day;
The infrequent long-distance passenger operator operates six trains a
day in each direction. These join or leave the route at point A, andthen cross from the slow lines to the fast lines at point B;
The freight operator serves the freight depot at point C, using the fastlines in between the express operators’ services.

We assume that the whole route section is signalled from a modern powersignal box which controls a much longer section of interconnected routes.
The original LRIC approach would involve considering what assets would
no longer be needed if each operator’s trains were withdrawn. We next
consider this in turn:

117

−
−
−
−

If the commuter operator did not operate, the slow lines would not beneeded at all, so the four-track layout could be reduced to a two-track
one;
If the express operator did not operate, the fast lines would not beneeded, except for the link to the freight depot;
If the occasional long-distance service did not operate, the junction
and associated signalling at point A would not be needed;
If the freight operator did not operate, the links and associatedsignalling for the freight depot would not be needed.

Each of these service withdrawals would be considered in turn and the cost
implications calculated. Each of the resulting LRIC cost allocations was thenallocated to one of the 24 mainland passenger Train Operating Companies or toanother operator. When this exercise was carried out, about half the “fixed”
track costs were allocated to LRICs and the rest had to be treated as common
costs. However, this exercise was not then used to relate traffic levels to costs,
since the block of LRICs from each section of route was then aggregated over
all route sections to give a total LRIC allocation to each TOC. To this wasadded the allocation of common costs to that TOC, to give a total annual fixed
track access charge to each TOC. TOCs cannot avoid these access charges byrunning fewer trains, so in effect they are simply a block sum which each TOC
has to meet. The block sums differ from TOC to TOC, but because they were
known in advance before the franchise bidding process, bidders factored theminto their bid as a fixed cost that they would have to meet out of revenue. They
have not been used to show how infrastructure costs vary from service-toservice as a way of seeing whether individual services are providing the
taxpayer with value for money.
In part, this reflects the fact that the LRIC exercise described above was a“one-off” exercise for cost allocation. Only a limited number of service
changes were considered, namely, those involving all of a particular operator’s
trains from each route. In practice, costs might be saved by withdrawing or
rescheduling only certain trains from a route, such as certain peak-hour trains,or trains at the beginning and end of the day, or certain trains that conflict withother trains that a new operator might wish to operate; such relatively small
adjustments to services might lead to significant savings in costs at the margin.

118

Alternatively, substantial “blocks” of infrastructure costs might be saved if all
trains were removed from a route. The overall social costs and benefits of this
could be considered using some form of social cost-benefit analysis7.
The second application of the LRIC approach in Britain arises where train
operators are seeking additional train paths. Where this is the case, Railtrack
will require that the train operator provides at least the extra costs ofaccommodating the additional train paths on the network, and where capacity isfull, these costs will include additional capital costs. Now it is necessary toestimate long-run incremental costs on a much more incremental basis. In the
British situation, the charges will normally be determined by a process ofnegotiation between the infrastructure provider and the train operator, though
the Regulator can be called on to mediate.

4.3. The relationship between rail infrastructure costs and traffic levels:a statistical approach
One method to derive a closer relationship between rail infrastructure costs
and traffic levels would be to use statistical analysis. In this approach, a crosssection of data on different route sections of a rail administration’s system could
be used to relate cost levels to traffic levels and to other factors, such as section
length, which are believed to influence costs. This application of statistical cost
analysis differs from the more common application, which is to compare total
costs across different systems. The first requirement for such an approach
would be appropriately-disaggregated cost and traffic data for route sections ofa national network. Such data may already exist from some European systems:
for example, Dodgson and Rodriguez Alvarez (1996) discuss cost allocation
methods for RENFE data on infrastructure costs on individual route sections of
the Spanish national railway system.

5. AUCTIONING CAPACITY

So far, we have considered systems of published tariffs and havementioned a role for negotiated charges. One proposal for charging for railway
track capacity we have yet to consider is the use of some form of auctioning
mechanism. In this chapter, we outline the logic for using auction mechanisms
and discuss the way they might be used for railway track capacity.

119

We first of all consider why auctions might be appropriate. Auctions areused, in practice, to sell a variety of products. A major reason for using an
auction is that the seller may not have a very clear idea of what potential
purchasers may be prepared to pay. An auction mechanism can then maximise
the seller’s return. This is true in the case of works of art, each of which is insome case unique, and in the case of perishable agricultural products and fish,
where demand and supply are both subject to considerable variability. It is also
relevant in the case of railway track, where markets are not yet developed, sothat providers of railway track capacity may have very little idea of what
different parts of the capacity are “worth” to different train operators. In
addition, individual train paths are both unique and perishable.
Most auctions involve the sale of fairly clearly-defined lots, such as aparticular painting, but a major problem with rail capacity is that a particular
block of capacity often does not consist of a clearly-defined number of separate
train paths, but can be parcelled up into different sets of non-conflicting paths,
especially where train paths can conflict across flat junctions. Secondly, train
operators will be interested in packages of slots, for example, to provide aregular-interval service of trains and/or to maximise utilisation of their rollingstock, so they will not be interested in bidding for individual slots. Third, theirvaluations of these packages may also depend on the services operated bycompeting and complementary operators. Fourth, the packages of slots
allocated to the operators must be mutually compatible in that they avoid
conflicting movements. Finally, depending on the form of the auction
mechanism, bidders might have incentives to understate their true valuations of
the track capacity they seek to occupy.
The problem of using auction mechanisms to allocate capacity in thetransport sector has been considered in the case of airports. Here, airlines
require packages of slots which will enable them to operate commercial
services, but the availability of slots will be limited by runway (and terminal)capacity.
Rassenti, Smith and Bulfin (1982) considered a system ofcombinatorial auctions in which airlines bid for alternative packages of slots on
the understanding that they will only actually receive one of these packages.
The airport then has to maximise its revenue from airlines while at the sametime choosing a mutually-compatible set of bids from the airlines wishing to use
its capacity. The mathematical models required to solve for the optimal bid arecomplex and, although there has been interest in the potential for auctions tosolve this problem of allocating runway capacity, such systems have not been
introduced in practice. One of the difficulties is that faced by airlines in
deciding how to formulate the alternative bids that they might make8.

120

Another problem in the airport case is that airlines need to negotiate with anumber of infrastructure suppliers to build up a set of take-off and landing slotsthat enable them to operate their services between different airports. Except in
the case of international services, train operators will be negotiating with asingle national railway track supplier. However, in the railway case, potential
conflicts between train operators are likely to be greater than in the airline case.
This is because most airport take-off and landing slots are defined in terms of a
15-minute period, with the actual slot used within this period on any day being
determined by air traffic control according to administrative/safety procedures.
On the other hand, rail timetables, and certainly those for passenger trains,determine the precise ordering of train paths through a particular network,
which makes allocation more complex.
One approach to the auctioning of railway track capacity is that developed
by Lerz (1996). Lerz proposes the use of a system which is based on asecond-price sealed bid auction. In this type of auction, developed by 1996
Nobel Prize winner in economics, William Vickrey, bidders provide sealed
bids, but if they win, they only pay the price bid by the next highest bid.
At first sight, this seems odd, in that the seller seems to be foregoing somerevenue. However, it can be demonstrated that if bidders know they will only
pay the second-highest bid, their optimal bidding strategy is then to reveal theirtrue valuation of the good or service they seek to buy. This is because, if theybid more than their true valuation, they risk winning the auction and paying
more than their true valuation: this would occur if the next highest bidder
values the capacity at more than they do, so that they end up paying asecond-price bid which exceeds their own true valuation. On the other hand, if
they bid less than their true valuation, they may end up losing the auction incircumstances where they would have been prepared to pay a higher price than
the winning bidder.
This sounds complicated enough, but in the case of railway track, the sellerof railway track capacity will usually not be aware as to how best to parcel up
the track capacity available into different “lots”, since operators will usually notwant to bid for individual train paths unless they can be sure of getting an
acceptable package9. Lerz considers a pricing mechanism in which bidders pay
a price which reflects the congestion costs imposed by each train operator on allother operators, including those priced off the system because of capacity
constraints. These “congestion charges” are in addition to user fees which
cover the infrastructure suppliers’ costs in providing the capacity. They
represent an application of a second-price auction, in that they are equal to thedifference between the valuation which all other operators place on the use of
the capacity in the absence of the operator paying the congestion fee, and the121valuation which all other operators place on the actual use of the capacity: thisgives a definition of congestion costs in terms of the opportunity costs which
each operator’s actual use of the capacity imposes on all other operators10.
This still leaves the problem of deciding how to parcel up the capacity, but
this auction system can help to do this because each operator will bid not forindividual slots but for a complete timetable of train paths which includes not
only his own paths, but also those of all other operators on the system. Each
operator would therefore bid for alternative timetables in the knowledge that
only one timetable would be operated in practice. It can be shown that each
operator has an incentive to reveal his own valuations correctly, though thisdoes not mean that operators would be convinced that they did indeed have suchincentives. Implementing this type of system of auction for railway capacity inpractice would be extremely difficult.

6. HOW SHOULD TOTAL COSTS BE COVERED?

A charging system based on average costs would recover total costs.
However, the problem with such charging systems in industries like railways,
where there are significant joint costs, is that some users may be prepared to pay
a price which exceeds marginal costs, but not one which covers average costs.
These customers will then be lost from the system even though they wereprepared to pay economically efficient prices. Moreover, more of the joint costs
will then be loaded onto the remaining users.
However, if charges are based on short-run marginal costs and there are nocongestion charges, then track access charging revenue will fall well short ofcovering total costs. Even where charges were based on long-run marginal
costs or long-run incremental costs, the British evidence suggests that revenue
would not cover total rail infrastructure charges. The question which then arises
is that of how total costs will be covered. The following are the main possible
methods:

1.

Government subsidy for rail infrastructure.
The European
Commission’s Railways White Paper (Commission of the European
Communities, 1996, p. 18) notes that the Commission’s Green Paperon transport pricing proposes that, as a long-term objective, charges inthe transport sector should cover both direct and external costs. While122confirming this as a long-term objective, the White Paper notes that in
the short term it is legitimate for States to finance investment inrailway infrastructure to compensate for unpaid external costs in theroads sector or to meet non-transport objectives. The danger with theuse of government subsidies -- apart from the unanswered question of
how long a period “the short term” is intended to cover -- is that care
will be needed to ensure that the provision of subsidy does not blunt
incentives on the rail infrastructure authority to secure efficiency inthe provision of railway track and signalling. The infrastructure
authority needs to provide infrastructure at minimum cost, and it also
needs to provide the appropriate level of infrastructure for the traffic
on offer. If the Government simply provides a block grant, equal tothe infrastructure authority’s deficit, then the authority may well beinefficient in its use of manpower, capital and other resources and it
may carry excess capacity in rail infrastructure. The challenge istherefore to devise a subsidy system that provides the appropriate
incentives.
2.

3.

Multi-part tariffs. With multi-part tariffs, train operators pay track
access charges which reflect marginal costs, together with fixed sums
which together will cover all the infrastructure operator’s costs. These
fixed costs would need to be designed so that they did not deter
individual operators from providing any train services at all whenthese operators would be prepared to pay marginal infrastructure
costs. Where train services cannot be justified commercially, but are
justified on social grounds (for example, because of benefits in termsof reduced traffic congestion and/or reduced air pollution), thengovernments might pay, or contribute to, the fixed elements of theaccess fees. This is, in effect, what happens in Britain, where most of
the passenger train operating companies receive franchise paymentsfrom the Government via its Office of Passenger Rail Franchising(OPRAF). However. one operator, Gatwick Express, receives no
subsidy and so has to meet all the fixed -- as well as the variable -elements of its track access charge itself, while other operators havecontracted to go without subsidy by the end of their franchise period.
The infrastructure authority, Railtrack, has incentives to operate
efficiently because it is a commercial organisation whose profitability
depends on its ability to control costs.
Ramsey pricing. This is a form of pricing advocated by public
enterprise economists. Ramsey prices involve mark-ups above
marginal costs, where prices exceed marginal costs so as to recoverfull costs from customers with minimum losses of economic

123efficiency. To do this, the mark-ups are inversely related to thepurchasers’ elasticities of demand for the service, in this case rail track
capacity, being sold. This is broadly equivalent to the old railway
policy of “charging what the traffic will bear”. Applied to railway
track and signalling capacity, it involves charging a higher mark-up to
those train operators whose customers are more captive to rail, such as
regular commuters, and a lower mark-up to those train operators
whose customers are less captive to rail, such as intermodal freightshippers.
4.

Some combination of the above. In practice, cost recovery might beachieved by some combination of the above methods. Thus charges
could cover marginal costs with some additional mark-ups based on
ability to pay, though not ones sufficient to cover total costs. The
remaining costs might then be recovered by a combination of fixedblock payments and carefully-designed government subsidies.

7. WHAT IS THE RESIDUAL ROLE OF
ADMINISTRATIVE ALLOCATION MECHANISMS?

In this chapter of the paper, we show how, even in a system based on
infrastructure charging methods, administrative mechanisms still have an
important role to play in allocating track capacity between different train
operators. In effect, this is because no practicable track charging system could
fully “clear the market”, so that the timetable would be fully determined by the
charging system.
To illustrate the use of administrative systems, we consider themechanisms in operation in Britain. Train operators need to know what they
will pay for railway track capacity, but they also need to have some guarantees
that they will be able to obtain the types of capacity they will need to run theirtrains. This is achieved by means of track access agreements. These
agreements between Railtrack and each train operating company require124

approval by the Regulator and set out the conditions under which access isprovided. They are also public documents, and so can be consulted by othertrain operators or interested third parties.
Although the agreements differ between operators, that between Railtrack
and Great Western is typical. This train operator operates high-speed diesel
trains over a network of routes from London Paddington to the South-West of
Britain and to Wales. The access agreement specifies maximum numbers ofpeak morning slots into Paddington and evening peak hour slots out. Apartfrom on the single-track Cotswold route, individual train paths are not specified,though the operator has rights to numbers of paths, to point-to-point journey
times, to stops at certain specified stations, to operate relief trains, to use routes
for empty stock movement, to use diversionary routes where the normal lines
are blocked and to use routes to move stock to heavy maintenance facilities.
Thus, the access agreements do not in general specify particular train
paths. Instead, the rights are exercised through the timetabling process which is
specified in every track access agreement. The timetabling process which has
been in operation since 199411 is essentially a consultative one in which:
−

−

−
−
−

Railtrack produces the Rules of the Plan and the Rules of the Route,which set out key parameters for timetable planning and details ofengineering works proposed. The Rules of the Plan detail timing
capabilities of the network such as running times for different
categories of trains, minimum headways between trains over different
sections of route and stopping times at stations. The Rules of theRoute deal with the timing and location of engineering possessions
and permitted speed and other restrictions, for planned maintenance
work;
There is an iterative “bidding” process (but not one that involves
payments) in which train operators bid for train paths consistent with
their access rights, and Railtrack allocates capacity on the basis of“public interest decision criteria”12. At present, there are usually twosuch iterations for Mondays-Saturdays, but one for Sundays.
Operators are likely to wish to bid 42-46 weeks in advance of theintroduction of a new timetable coming into operation;
An appeals procedure is used to settle disputes;
Railtrack produces and publishes the passenger timetable twice a year;
andSpare capacity within the timetable is allocated through a separate“spot bidding” process.

125Though systems are likely to vary from railway to railway, some form ofadministrative system for timetable planning and the allocation of capacity will
be needed to complement the allocation of capacity on the basis of track user
charges, where there are a number of train operators competing to operate on
the same network.

8. CONCLUSIONSThis paper has considered principles in determining track user charges forrailway services. The most important principle is that charges should be basedon costs, and the second most important is that the appropriate concept of costs
is marginal costs. Where capacity is constrained, some form of congestion-based
scheme would be appropriate where different operators are competing to use thecapacity and this, in turn, might imply differentiation between peak and offpeak charges. However, although auctioning mechanisms might be used todetermine these congestion charges in principle, it will be difficult to implement
such mechanisms in practice.
In the meantime, charges should be based at least on short-run marginal
infrastructure provision costs. This will leave a high proportion of total costs
unrecovered, so attempts should be made to consider whether other elements ofthe costs of infrastructure provision on particular routes could be properly
apportioned to individual train operators on the basis of causality. One
approach worth investigating to do this would be the use of statistical analysesof rail infrastructure cost data.
Finally, charging systems will need to be accompanied by administrative
systems for drawing up the operating timetables which are necessary for thesafe physical operation of any railway system.

126

NOTES

1.

The nature of these agreements is discussed in Chapter 7.

2.

The initial value of X for Railtrack was set at 2 per cent in the Rail
Regulator’s first review. In addition, the Regulator imposed an 8 per cent
cut in Railtrack’s charges for passenger Train Operating Companies
between 1994-95 and 1995-96. For more details of the original
determination of Railtrack’s charges, see Dodgson (1997).

3.

The vertically-integrated railway might also simply be obstructive andrefuse access, or make it impossibly bureaucratic.

4.

There may be difficulties in practice in defining a traffic unit, where rail
capacity handles different types of train.

5.

In Britain, the costs of track wear-and-tear have been measured by track
engineers, and can be shown to be related to the speed and axle weight oftrains. These cost relationships form the basis of a set of published variable
track charges which are levied by Railtrack on different types of rail
vehicle-locomotives, multiple units, coaches and wagons. However, thesecharges only account for 3 per cent of total track costs.

6.

Delays which are not attributed are allocated an unexplained code, and arethen attributed to Railtrack by default.

7.

Social cost-benefit analysis is to be used to consider changes in service
specifications for passenger train operations in Britain: see Office ofPassenger Rail Franchising (1997).

8.

However, there is some formal (and informal) slot trading between airlines
at some airports, and there may be potential in the railway industry fortrain operators to exchange or adjust train paths by mutual agreement.

9.

Acceptable in the sense of enabling the operator to operate a commercially
viable service.
127

10. This is more complex than the road congestion case, where each vehicle ofa similar size imposes a similar time cost on all other vehicles in the trafficflow.
11. The Rail Regulator issued a Consultation Document seeking the industry’s
views on this process in October 1997.
12. These criteria consist of the following, none of which necessarily has
priority over another:
1)

Sharing the capacity and securing the development of the network forthe carriage of passengers and goods in the most efficient andeconomical manner in the interests of all users of railway services
having regard, in particular, to safety, the effect on the environment of
the provision of railway services and the proper maintenance,
improvement and enlargement of the network;

2)

Enabling a Train Operator to comply with any contract to which it isparty (including any contracts with their customers and, in the case ofa Train Operator who is a franchisee or franchise operator, including
the franchise agreement to which it is a party), in each case to theextent that Railtrack is aware or has been informed of such contracts;

3)

Maintaining and improving levels of service reliability;

4)

Maintaining, renewing and carrying out other necessary work on or in
relation to the network;

5)

Maintaining and improving connections between railway passenger
services;

6)

Avoiding material deterioration of the service patterns of operators of
trains (namely, the train departure and arrival frequencies, stopping
patterns, intervals between departures and journey times) which those
operators possess at the time of the application of these criteria;

7)

Ensuring that, where the demand of passengers to travel between two
points is evenly spread over a given period, the overall pattern of rail
services should be similarly spread over that period;

128

8)

Enabling operators of trains to utilise their railway assets efficiently
and avoiding having to increase the numbers of railway assets which
the operators require to maintain their service patterns;

9)

Facilitating new commercial opportunities, including promoting
competition in final markets and ensuring reasonable access to the
network by new operators of trains;

10) Avoiding, wherever practicable, frequent timetable changes, inparticular for railway passenger services; and
11) Taking into account the commercial interests of Railtrack and existingand potential operators of trains in a manner compatible with theabove.

129

BIBLIOGRAPHY

Baumol, W.J. (1983), “Some subtle pricing issues in railroad regulation”,
International Journal of Transport Economics, 341-355.
Bolt, C. (1995), “Setting track access charges for the railways”. Paper
presented to the Conference on New Developments in Access Pricing for
Network Utilities, 24 May 1995, London Business School. (Bolt is Chief
Economic Adviser, Office of the Rail Regulator.)
Commission of the European Communities (1996), White Paper: A Strategy for
Revitalising the Community’s Railways, COM(96) 421 Final.
Dodgson, J.S. (1997), “Railway privatisation and infrastructure”, in:
D.A. Hensher and J. King (eds.), World Transport Research, Elsevier.
Dodgson, J.S. and P. Rodriguez Alvarez (1996), “Rentabilidad de los diferentes
servicios de RENFE”, in: J.A. Herce and Ginés de Rus, La Regulacion de losTransportes en España, FEDEA/Editorial Civitas, Madrid, pp 313-388.
Lerz, S. (1996), Congestion Theory and Railway Traffic, Labyrint Publications,
The Netherlands.
Mellitt, B. (1997), “The new rail performance regime”, Modern Railways, July,
433-437.
Office of Passenger Rail Franchising (1997), Appraisal of Support for
Passenger Rail Services. Planning Criteria: an Interim Guide, OPRAF,
London, November.
Rassenti, S.J., V.L. Smith and R. Bulfin (1982), “A combinatorial auction
mechanism for airport time slot allocation”, Bell Journal of Economics, 13,
pp. 662-677.

130

SWEDENJan Owen JANSSON
Department of Management and Economics
University of Linköping
Sweden131

132

An analysis of the rail transport system

SUMMARY

1.

BACKGROUND, PURPOSE AND APPROACH .......................................135
1.1. The Swedish experiment .........................................................................135
1.2. Purpose of this paper ...............................................................................137
1.3. The pricing analogy between rail and road transport ............................137
1.4. Comprehensive cost analysis with a view to deriving optimal
charges for rail infrastructure use ............................................................139

2.

THEORETICAL BASIS.................................................................................139
2.1. Total rail transport costs ..........................................................................139
2.2. The fundamental optimality condition for pricing policy................. 140

3.

WHY IS OPTIMAL PRICING OF TRACK AND TRAIN SERVICES
VERY SPECIAL? ...........................................................................................142
3.1. “The division of labour is limited by the size of the market” ................142
3.2. Marked small-scale diseconomies .................................................... 145

4.

PRICE-RELEVANT COSTING VS. TOTAL COST ALLOCATION
AND “LONG-RUN MARGINAL COST” APPROACHES ................... 146
4.1. Short-run vs. long-run marginal costing: why all the fuss? ............. 147

133

5.

THE SHAPE OF THE CURVES OF PRICE-RELEVANT COSTSFOR RAIL TRANSPORT ....................................................................... 151
5.1. Breakdown of the total optimal price under different
organisational conditions.................................................................. 154

6.

PRICE-RELEVANT MARGINAL COST OF RAIL TRACK
WEAR-AND-TEAR ................................................................................ 158
6.1. Price-relevant maintenance costs...................................................... 159
6.2. Price-relevant reconstruction costs ................................................... 159

7.

PRICE-RELEVANT MARGINAL COSTS OF ACCIDENTS............... 160
7.1. Ex ante and ex post accident costs.................................................... 161
7.2. From ex post cost responsibility to ex ante externality charges ....... 163

8.

PRICE-RELEVANT MARGINAL COST OF TRAIN TRANSPORT... 167
8.1. The average cost of a marginal carriage ........................................... 168
8.2. Peak-load pricing of interurban train services ........................................170

9.

TENTATIVE CONCLUSIONS .............................................................. 174
9.1. What really matters........................................................................... 175
9.2. The role of Railtrack in rail transport pricing policy........................ 177

NOTES............................................................................................................. 178

BIBLIOGRAPHY............................................................................................ 179

Linköping, November 1997134

1. BACKGROUND, PURPOSE AND APPROACH

As long as the national railways were fully vertically-integrated, “user charges
for railway infrastructure” were not a big issue. Internal pricing of track services
did not exist anywhere in the world.
Sweden was the first country to separate rail track planning and operationfrom the provision of rail transport services.

1.1. The Swedish experiment
What was the main reason for the creation of the Swedish rail track
administration, “Banverket”? During the discussions that preceded the Swedish
Parliament’s decision to separate SJ and Banverket in 1988, the key sentence
repeated over and over again was that “the road transport model should be adopted
by the railways”. This meant that rail transport infrastructure should be separately
managed like the roads and be accessible to any train operators fulfilling strict
safety requirements and paying rail track charges. The underlying reasons for thisradical change were complex but it was clear at that time that SJ’s chronic financial
problems called for radical change; by dividing the organisation into two parts, it
was thought that at least the new SJ, relieved of responsibility for the rail track,
would sooner or later be able to pay its way, and also be stimulated by competitionon the rail track to rationalise its operations. The entry of new train operators wasenvisaged at the time of the decision, although the legal prerequisites did not yet
exist for it.
1.1.1

Has the “road transport model” worked for the railways?

Almost ten years have elapsed since the separation of infrastructure fromoperations and it can be observed that competition is still rather limited. SJ still has
the sole right to run main-line passenger services. Regional branch line135

services are increasingly put out to tender by the regional (county) transport
administrations, which keep services going by county council subsidies. SJ wins
most of the contracts for regional and commuter train services.
Freight train operation is open to all, and a few small, independent train
operators and one or two big industrial firms with their own rail transport systems
are emerging. Since freight trains mainly run by night and passenger trains by day,so far there has been fairly little overlap of the two types of transport as far as thedemand for rail track capacity is concerned.
The level of rail track charges has not been a barrier to new entrants because
they have been rather low since the creation of Banverket; revenue from them hascovered just a fraction of the total expenditure on rail track investment, repair andmaintenance. It is now even being proposed by the committee of inquiry preparing
the new Swedish transport policy that freight trains be completely exempted fromrail track charges (Banverket, 1997a). Banverket is not obliged to cover costs andis financed by grants from the central government. In recent years, these grants
have been relatively large because one of the priorities of current transport andenvironmental policy in Sweden is to bring about a renaissance of electricallypowered rail transport. Heavy investments in new rail track in order to makepossible much higher train speeds are the main means to that end. Before theseparation of SJ and Banverket, rail track investment had been lagging behind for
decades because of SJ’s chronic financial problems. The most important effect by
far of the separation in 1988 has been a surge in rail track investment that no one
could have dreamt of before. It should be emphasized, however, that thisinvestment has not been financed by the rail transport sector but by the taxpayer.
The Swedish Parliament has obviously been willing to subsidise rail transport evenmore than it was before the separation of SJ and Banverket. As mentioned,
environmental concerns have been a main motive, but the good news some years
ago that the restructured SJ would need less and less financial support and ought tobe able to pay its way in the near future may also have had a positive psychologicaleffect on the Swedish Parliament’s attitude to the rail transport sector as a whole.
Some sceptics claim that the SJ’s good financial performance in recent years
is to some extent due to “creative accounting”; other people, including the present
author, consider that SJ should not be obliged to break even. Part of the large
subsidies to the rail transport sector as a whole should be directed to SJ in order tomake possible a low-fare (peak-load pricing) policy that exploits the relatively low
marginal cost of rail transport services.

1361.2. Purpose of this paper
One thing that was never thoroughly discussed, neither in the preparatory
stage before the separation nor during the formative years when Banverket was
being built up and the “leaner” SJ was getting off the ground, was pricing policy
for rail transport as a whole. It seemed too tricky an issue for the politicians to get
to grips with. They seemed to rest content with the idea that rail and roadinfrastructure were now treated on an equal footing -- marginal cost pricing andcost-benefit analysis are applied to both -- and wishfully thought that SJ would
soon break even and increase its market share at the expense of fossil fuel-burning
road and air transport.
The purpose of this paper is to step in where the Swedish debate on railtransport pricing policy left off.

1.3. The pricing analogy between rail and road transport
The theory of rail user charges is still in its infancy. The situation is rather
similar to that in the 1960s when the theory of road user charges was emerging.
When the main pioneer in the field, Alan Walters, ventured to stick his neck out in
US discussions of highway financing in the 1950s and 60s, his argument(see Walters, 1961), which today is generally accepted by both economists andhighway engineers, turned the conventional wisdom of the time on its head. He
argued that road user charges were far too low in urban areas and too high on many
non-urban roads, whereas the highway cost allocation studies which dominated thefield at that time concluded the opposite.
The longstanding clash of opinion between the proponents of average cost andmarginal cost pricing seems to resurface in the new field of railway infrastructureuser charges (Dodgson, 1995, Hylén 1995 and European Commission, 1996). This
must be avoided. However, it is not enough just to embrace “the road transportmodel”, as in the Swedish example.
The big problem, as the author sees it, is that the pricing policy of a railtransport system in which infrastructure and operations are separated, will still
differ from that of the road transport system in crucial respects:−

Even if there are several competing train operators on one and thesame line, they will never be as numerous as all the independent road
users on the different links of a road network: monopoly, duopoly, orat best (or at worst, some would say) oligopoly, will still characterise

137

−

rail transport systems in which infrastructure and operation are
separated. This could result in serious problems of market failure if
not handled with care. Needless to say, the problems of technicalco-ordination are much bigger with rail than with the road.
Related to the last-mentioned point is another crucial difference
between rail and road transport services. The former are almost
entirely provided in the form of scheduled public1 transport (SPT),
whereas private car travel and own-account road haulage and carriage
for hire or reward dominate road transport.

The highly developed theory of optimal road user charges is quite involved
because it is assumed that road user charges should (i) regulate road capacity
utilisation in order to avoid costly congestion, (ii) contribute to improved roadsafety by covering the cost of accident externalities, (iii) implement thepolluter-pays principle, (iv) internalise noise pollution costs, (v) cover the costs of
the wear-and-tear caused by motor vehicles. In addition there may be a problem ofcapital costs: if optimal congestion tolls are set too low to recover the capital costsof roads, some other financial instruments have to be applied. It goes without
saying that charges to internalise transport externalities like air pollution, noise andaccident spillover cannot be used to finance road capacity expansion.
A proper user charge system should cover all these costs but in addition -- andthis is the author’s main point -- if market failure is apparent at the rail service
provision stage, rail user charges should take this into account too, given that thegoal of net social benefit maximisation is the same as for road transport.
Perhaps these problems look more formidable than they actually are. Afterall, electrically-powered trains do not pollute and rail passenger transport is verysafe. On the other hand, the noise problem, especially in built-up areas, is a serious
one and the external accident costs generated by level crossings are considerable.
The main problem, however, is that rail transport is an activity with sharply
decreasing costs at both the rail track stage and the transport service stage becauseof its SPT character. Optimal rail user charges would, in most places, make a very
insufficient contribution to rail track capital, maintenance and repair costs.

138

1.4. Comprehensive cost analysis with a view to deriving optimal charges forrail transport infrastructure use
Let us not anticipate too much, but tackle the problems in a systematic way.
This means that we should take an overall view of the problem of rail transport
pricing. In the present state of theoretical knowledge, it is not advisable to consider
the problems of railway infrastructure user charge services within a narrowly
defined system.
In the following two chapters, the theoretical basis for a comprehensive railtransport cost analysis is laid down. In Chapter 2, the short-run cost structure isconsidered and, in Chapter 3, the long-run cost structure. This is followed in
Chapter 4 by a repudiation of total cost allocation and half-baked long-run marginal
cost approaches to costing and pricing. In Chapters 5 to 8, short-run price-relevant
marginal costs are categorised, and short-run cost and output relationships are
discussed. Special attention is paid to rail track wear-and-tear, accidents and thelevel and structure of the price-relevant costs of rail transport services.
Tentative conclusions are drawn in Chapter 9.

2. THEORETICAL BASIS

It goes without saying that optimal pricing cannot be based solely on cost
information. Demand functions to match the price-relevant cost functions are
required too. In fact, the strong emphasis on the supply, or cost-side, in this paper
is more apparent than real, because in line with standard practice in transporteconomics, we widen the conventional cost concept to what is usually known as"the generalised cost".

2.1. Total rail transport costs
Rail transport users both demand services and supply their own time going
to/from stations, waiting for the train and then travelling by it. In other services,
this twofold role is normally dealt with by treating the quality of service as ademand factor. User inputs in the production of transport services, on the other
hand, are assigned a monetary value and treated more or less in the same way as thevarious producer inputs for the purposes of appraisal of transport infrastructure
investment. In transport demand analysis, the translation of quality of service into

139

user time cost in order to obtain a "generalised cost" instead of just the monetary
value has also been standard practice for several decades.
A similarly broad definition is appropriate for discussing optimal transport
pricing. The natural production function is a transport system consisting oftransport infrastructure carrying moving vehicles, terminals for change of mode andparking facilities for idle vehicles, transport vehicles with crew and passengers, andthe price of system-external resources used by transport. The corresponding totaltransport system costs (TC) can be conveniently divided into four parts in the caseof rail transport:
TC = TCinf + TCtrain + TC ext + TCuser(1)= total cost of rail transport infrastructure
TCinf
TCtrain = total cost of the train operator(s)TCext
TCuserQ= total transport system-external cost
= total time cost of rail users= transport volume

It is clear that the ultimate determinant of each of these total costs is transportvolume, Q.
By taking the derivative of TC with respect to Q, the social marginal cost
(MC) is obtained, i.e. the sum of all marginal costs:

dTC= MC = MC inf + MC train + MC exr + MC userdQ

(2)

2.2. The fundamental optimality condition for pricing policy
The total benefit (TB) of rail transport is obviously also a function of Q
(together with a host of other variables which can be ignored for the moment).
The goal is to maximise the net social benefit, i.e. the difference between the
total benefit and the total cost. A first-order condition for a maximum is that140

the derivative of total benefit with respect to Q, i.e. the marginal benefit, isequal to the derivative of total cost with respect to Q, i.e. the marginal
cost (MC).

dTB dTC
=
dQ
dQ

(3)

Since the costs in this case also include passenger or freight time costs, theoptimality condition (3) is not obtained by setting the price equal to the marginal
cost, as is normally done. Instead we use the “generalised cost” (GC), i.e. the total
perceived (by the users) sacrifice of another transport mode, including time costs aswell as monetary outlays, that should be equal to MC.
GC = MC(4)

Subtracting the real part of GC from both sides of (4), i.e. the monetary
outlay, the price in the usual sense of the word remains on the left-hand side, andthe right-hand side is written MC - ACuser.
(4a)

price = MC - ACuser

It is a well-established postulate of transport economics that, for ahomogeneous collective of transport users, the average user cost (ACuser) is equal to
the “private marginal cost”, or real sacrifice of one transport mode for another by
an individual user.
It is obvious from a comparison of (2) and (4a) that the right-hand side of (4a)is not identical with the social marginal cost, MC. There is a need for a separate
designation: the cost-expression in question is called the “price-relevant marginalcost” or just the price-relevant cost (PC) for short. Unfortunately there is a problemof terminology: other authors on optimal transport pricing use -- either
unthinkingly or just to comply with the time-honoured maxim that “price should
equal the marginal cost” in first-best optimum -- the term “marginal cost” without adistinguishing prefix when referring to a cost expression of the kind represented by(4a) above. This can sometimes be confusing but provided that one is aware of the
problem there should be no difficulty.

141

3. WHY IS OPTIMAL PRICING OF TRACK AND
TRAIN SERVICES VERY SPECIAL?

While it is wise to bear in mind the simple, theoretical premise set out above,it is not much use for practical purposes. How do we go about estimating all the
price-relevant cost components?
We would argue that sound economic cost theory, elementary railway
engineering principles and common sense can take us some way towards the final
goal of obtaining a complete picture of the price-relevant cost structure. Hopefully,
this will be demonstrated in what follows. However, it must be remembered thatthe modern price theory of rail transport is still in its infancy. There are still anumber of basic theoretical and methodological problems to solve, and we cannot
solve all of them at one stroke. For the moment, it is primarily a matter of choosing
the right theoretical direction.
We are at a theoretical cross-roads. One direction represents the adoption of
cost accounting principles from industrial firms with a view to running the railways
in as “business-like” a manner as possible. While the objective is a commendable
one if it serves to enhance cost awareness, the means to the end would be counterproductive: like road transport systems, rail transport systems do not lendthemselves to the cost accounting principles of manufacturing industry. The
reasons why are developed below.
The other direction would take us along the line of development of the theoryof road user charges, which started some forty years ago. We can learn a lot fromthis development, and if we can avoid repeating earlier mistakes, including the
fruitless debate over short-run versus long-run marginal cost pricing, the theory ofrail user charges will soon catch up with road pricing theory. These ideas arefollowed up in Chapter 4.

3.1. “The division of labour is limited by the size of the market”
The long-run cost structure is also relevant to transport pricing policy. It is
not that long-run capacity costs should be added to short-run price-relevantcosts -- that would be a sort of double-counting as will be explained later on -but the long-run cost structure is crucial for first-best optimal pricing. It is thefundamental characteristics of the long-run cost structure of transport systems,
coupled with the nature of the markets concerned that distinguish the pricetheory of transport infrastructure (as well as SPT) services from the price theory142

of mainstream microeconomics. The conventional cost diagrams in Figure 1
below provide a basis for a discussion of those characteristics.
The top diagram gives the general shape of the long-run total cost (LRTC)
curve as a function of the output volume (Q) for all kinds of products, goods aswell as services, in line with elementary production and cost theory (which isabout as axiomatic as the notion that demand falls when the price rises).
Initially, increasing returns-to-scale prevail, which means that the LRTC
increases degressively with respect to Q. Thereafter, there is a relatively wide
interval when basically constant returns-to-scale apply, but sooner or later
decreasing returns-to-scale set in, and the LRTC increases progressively withrespect to Q.

Figure 1. The general shape of the curve of long-run total and average costs
defines three cost-output intervals

Total cost

LRTC

Average cost

Q

LRAC

Q
1st interval

2nd interval

3rd interval

Needless to say, the character and extent of the three cost-output intervals
can vary widely between different types of products. The general feature is that
all three intervals exist for all products, which explains the (often rather drawnout) U-shape of the long-run average cost (LRAC) curve in the bottom diagramof Figure 1. The flat part of the LRAC corresponds, of course, to the output
interval in the left-hand diagram, where total costs increase in direct proportion
to output.

143

Observations in the third output interval are difficult to make in reality,
because a production plant with such a large capacity would be non-viable: thesame output could be produced at a lower unit cost by two plants, each one withhalf the capacity. Actual observations could also be expected to be rare in thefirst output interval for a similar reason, at least as far as manufacturing industry
is concerned. Small firms, or rather production at low-capacity plants ofstorable and transportable goods, could not survive if it is possible to produce
such goods for substantially lower average costs at plants with higher capacity.
Engineering cost studies of cost and output relationships, which examine
technically feasible but not necessarily observable production scenarios, andconsider plants of widely differing capacities with different technologies,
regularly arrive at markedly L-shaped long-run average cost curves2. There is
ample evidence in the engineering costing literature that small-scale production
is often very uneconomic compared with large-scale production [see the classic,
empirical studies by Haldi and Whitcomb (1967), and Pratten (1971) as well asa reference work like that by Sherer and Ross (1990)].
3.1.1.

The nature of the product makes production under conditions ofconstant returns to scale atypical for transport infrastructureservices

Mainstream price theory focuses on the second output interval, because it
is assumed that most industrial production takes place in it. The price theory oftransport infrastructure (TI) and scheduled public transport (SPT), on the other
hand, should primarily focus on the first interval and, in the case of some
TI services, on the third interval, because it is usually there that these services
are produced. Why this is so can be explained as follows.
TI services and SPT services have the common characteristics of mostservices, i.e. they are non-storable and non-transportable and are "spatiallyunique" in the sense that transport between C and D is normally not a substitutefor transport between A and B. This means that the number of separate,
potential markets for TI and SPT services is very great indeed, which in turnmeans that the average market size is very small in terms of the demand base.
The qualification "potential" is important. Bearing in mind the spatially uniquecharacter of transport demand, it can be argued that the most common market
form as regards TI and SPT services is that there is no supply at all. The routes
concerned are too thin and the average cost is too high to maintain any kind of
TI, let alone direct SPT service.
This is amply confirmed by cross-section cost studies of transport
infrastructure. Empirical observations are especially useful, because they make144

it possible to plot the entire long-run relationship between cost and output. The
whole range of the L-shaped average cost curve will be represented among theobservations. In manufacturing industries, the average costs of all plants and/or
firms of a particular industry making easily transportable goods should be moreor less on the same level, as a high-cost plant or firm could not survive where
all plants in the industry serve the same national or even global market.
Individual roads, on the other hand, are natural local monopolies. The fact thata particular motorway produces road services at a fifth of the cost per
vehicle-kilometre of a small road between two villages in a different part of thecountry is of no consequence for the viability of the latter. The situation isdifferent if the demand base is going to expand considerably, since it will
sooner or later pay in terms of user cost savings to upgrade the existing road.

3.2. Marked small-scale diseconomies
There is little empirical data for rail track and train costs of the kind thatexists for roads, airports and seaports. "Banverket" in Sweden has not existed
long enough to produce reliable figures of the cost of rail track services withrespect to traffic volume. The question of economies of scale in rail transport(rail track and train) services was once a hotly debated issue until it became
clear that one has to distinguish firm-size economies and traffic volume
economies on a particular line. Why were branch lines closed down whenrailway administrations were trying to improve their financial position?
Obviously it was because costs per unit of traffic are typically several times
higher than those on trunk lines, notwithstanding the high proportion of sunkcosts in capacity costs. Harris (1977) pointed out that the question of firm size
economies was not relevant to the issue of line closures, and showed thatsignificant economies of traffic density exist in the US railway freight industry(Figure 2). The average costs comprise both track costs and freight train costsin this case. The article from which the figure is taken shows that more thanhalf of the sharp decline in costs is due to marked small-scale diseconomies in
the capital and maintenance costs of the rail track.

145

Figure 2. Rail freight costs versus traffic volume in the United States
Dollar per ton-miles

0.25
0.20

Dollar per ton-miles

LSI

0.15
PRSL

0.10
0.05

EJE

CV
DE

0.04

BAR
MEC

TM

PLE
GTW
DTS
ACY
OTI
CEW NWP
TPW
MS
LV
AAR
WM FECOMI SOMGAGASCL ATSF
SLSF
CO
RFP
IF
CGA
WP MP
SOU
NW
OM
LN UP
SOO
DLE
SSW
MKT CSCEIKCSAGS
GSF DAGN
FWO
CEI
DW
CCO
ITC

0.03

MI

0.02
0.01

AC

CNWT

AC1

0
0
Source:

1

2

3

4

5

6

8

10

12 14 16 18
Million ton-miles per track-mile

Harris (1977).

4. PRICE-RELEVANT COSTING VS. TOTAL COST ALLOCATION
AND “LONG-RUN MARGINAL COST” APPROACHES

Modern price theory for TI services began with the theory of congestion
tolls in the 1960s (Walters, 1961, 1968; Ministry of Transport, 1964), whichapplied the marginal cost pricing principle to urban traffic. Until now, themodern approach to pricing, consistent with the goal of social surplus
maximisation, has coexisted with the traditional total cost allocation approach.
The latter has its roots in American highway cost allocation studies from a longtime ago; it boils down to allocating the "total cost responsibility" to eachcategory of road traffic.
Total road vehicle-kilometres (Q) is composed of a number of traffic
categories:n

Q = ∑ Qii =1

Q1 = total car-kilometres146

Q2 = total light truck-kilometres, etc.
The method of calculation in traditional total cost allocation is to first
decide which parts of TC = TCinf + TCuser + TCext should be included in the"cost liability", which road users are required to pay in the form of motor
vehicle and fuel taxation. In the second step the total cost liability is allocatedbetween traffic categories 1 .... n in accordance with various criteria like axle
load, etc. In the older versions of this approach, only Tcinf, i.e. the total
expenditure, or cost of the national road administration, was considered
price-relevant. The main cost allocation problem was how to allocate roadinvestment costs between cars, buses, light, and heavy trucks of different
configurations. In later versions TCext is an important additional component
which increases the total cost liability of the road traffic. The remaining
problem with this approach is how to deal with the total costs of road users,
TCuser This is not a road traffic-external cost to be sure, but should not thedegree of congestion be reflected in the structure of road user charges?
The total cost allocation approach may at best result in a first
approximation of the prices that are consistent with social surplus maximisation.
To arrive at a more precise idea of those prices, we should focus on therelationship between the different cost components and Q. It should be stressedthat the relationship between TCuser and Q is of vital importance for optimal
pricing.
Marginal costing is not without problems, as attested by the long-standing
debate on the relative virtues of short-run versus long-run marginal cost pricing.

4.1. Short-run vs. long-run marginal costing: why all the fuss?
When the marginal cost principle held sway in the 1960s, it was consideredthat road investment or capital costs were not price-relevant. Short-run variable
costs had to be distinguished from the costs that were fixed in the short run,because it is the short-run marginal cost that was to be estimated and combinedwith the corresponding demand function to give the optimal price.
In retrospect, one can wonder why there was such a fuss about short-run
versus long-run marginal costs? How could this issue dominate the debate,given that SRMC = LRMC along the growth path? Were there reasons tobelieve that there was systematic under- or overinvestment in the road network?

147

The reason why the debate could go on for so long is simply that the
LRMC calculations which were presented as an alternative basis for road user
charges were wrong, and therefore appeared to result in a much higher marginalcost.
4.1.1.

The double-counting fallacy

One common mistake was to add infrastructure capital costs in the form ofa “marginal capacity cost”, or something similar, to the short-run price-relevant
marginal cost. Obviously, this meant that the short-run price-relevant cost wasconsiderably increased. What was overlooked was the fact that, by increasing
road capacity, more traffic can be accommodated without inflicting congestion
costs on the original traffic. A trade-off is involved: when capacity-expanding
investments are justified, an equivalent traffic (time, accident and vehicle
operating) cost is saved, which would occur even if the investments were notmade. Consequently, the additional traffic does not cause any congestion costs
for the original traffic under these circumstances. A congestion cost component
should not therefore be included in the long-run marginal cost calculation.
The mistake of counting both the additional capacity costs and the
additional congestion costs that the capacity addition eliminates, was ascribableto the fact that the “square” total cost allocation procedure continued to be used.
4.1.2.

Quality improvements ignored

Another even more common mistake was to forget that investments in the
non-urban road network, where serious congestion is generally absent, are madeprimarily to raise the quality of road services (in other respects than eliminating
traffic congestion). Let us consider this fact in the light of the empiricalapproach to long-run marginal cost estimation, known as “development cost”
calculations. By means of time series analysis of the total costs of the wholeinterurban road network and the steadily growing total road traffic, it wasthought that the indivisibility problem of long-run marginal cost calculations
could be avoided: what appeared as a marked indivisibility on an individualroad link was smoothed out when set in the context of the whole road network.
The error of the "development cost" school of thought is, however, that one
decisive term of the price-relevant long-run cost expression is overlooked.
Only under the unrealistic assumption that road investments are purely capacityexpanding, without any accompanying quality-raising effect like shortening of
distances or improved layout, would it be reasonable to take the ratio of theannual capital costs of new investments to the additional traffic on the roads as aproxy for LRMC. Since, on the contrary, non-urban road investments are148

almost wholly justified by cost savings for the existing traffic (including
autonomous traffic growth), it is a big mistake to ignore the negative user costterm in the LRMC expression. The correct proxy for the price-relevant longrun marginal cost of the inter-urban road services has the following form:

LRMC proxy =
Ct
Bt
∆Qt

C t − Bt
∆Q t

(5)

= Capital cost of new investments year t= Benefits for existing traffic year t in the form of user cost savings
resulting from the new investments.
= Addition to the traffic on the roads in year t.

It is well known that the traditional practice of national roadadministrations, when calculating the benefits of prospective investment
projects, is to disregard newly generated traffic; only cost savings to existing
traffic and projected autonomous traffic growth are included on the benefit side.
Provided that the selected projects have a positive net benefit/cost-ratio, it
follows that Bt is equal to or greater than Ct, which means that the price-relevant
cost is zero or even negative.
There are, of course, in-between cases. In particular, in countries more
densely populated than Sweden, it is presumably less rare that road investments(outside urban areas) are made, partly because there is a real shortage ofcapacity. In such countries, it is likely that the benefits to existing traffic, Bt-- given the rate of capacity utilisation -- will fall well short of the capital costs,
Ct, and the value of the LRMC proxy will be positive, which is consistent with apositive congestion toll in this case.
The lessons that can be drawn from the long discussions of optimal charges
for non-urban road services are generally relevant for all transport
infrastructure, including railways. The boom in interurban railway investment
in recent years was to a large extent justified by the resulting train user benefits
in the form of straighter lines and, above all, higher speeds. Applying
formula (5) for the LRMCproxy would most likely result in rather low marginal
costs. There is much less urban (overground) rail investment in spite of the factthat there is strong demand pressure from commuters in many large cities. The
big obstacles are land scarcity and encroachment costs. Once again, theproblem for railways is similar to that for urban roads.

149

4.1.3.

The importance of unaccounted-for encroachment costs for the
relationship between short-run and long-run marginal cost

The equality of SRMC and LRMC presupposes that investments are
optimal (defined by the goal of social surplus maximisation). The problem inpractical cost-benefit analysis is that all the relevant costs are not readilytranslatable into monetary terms. The unaccounted-for costs may still have astrong influence on the relationship between SRMC and LRMC, in particular
the encroachment costs of new infrastructure. It is very difficult to assign amonetary value to these costs and include them in cost-benefit analysis oftransport infrastructure investments; they do, nevertheless, play an importantrole in the decisionmaking process. Many planned roads, railways and airports
will never be built, or it may take a very long time to persuade politicians andlocal residents to accept a project in its original design. Financing difficulties
are another frequent reason for infrastructure investments falling behindschedule, often compounded by the fact that the original projects aresubstantially modified in order to lessen the encroachment costs, which leads toadditional building costs. This means that the SRMC and LRMC can besubstantially different. As we should always use short-run costs for pricing
purposes (disregarding sunk capital costs), we will focus on the SRMC in thefollowing discussion. It is wise to bear in mind that the SRMC is higher thanthe LRMC under the aforementioned circumstances. The fact of discarding thelong-run marginal cost will therefore not give a downwards bias to the result, as
is often claimed by LRMC proponents.

150

5. THE SHAPE OF THE CURVES OF
PRICE-RELEVANT COSTS FOR RAIL TRANSPORT

Having rejected total cost allocation and fallacious long-run marginal cost
approaches as a basis for optimal pricing in rail transport systems, we shall now
turn to the short-run cost structure. In the price-relevant short run, rail transport
infrastructure is fixed, but like the labour input, the rolling stock on a particularline can be assumed to be variable, given the physical mobility of this type of
capital input.
We shall consider track costs, train costs, user costs and external costs. For
simplicity’s sake, only passenger train services will be considered. The user
costs then consist of passenger time costs, which can be divided into passenger
time cost on the train, and so-called disguised waiting time costs, or the cost of“frequency delay” (a distinction first made by Panzar, 1979). We have included
just one kind of system-external marginal cost -- the accident cost -- which isalso divided into two: the external accident cost of road users and rail track
trespassers, and the external accident cost to the rest of society. There are othercosts of secondary importance which should, of course, be included in any
calculation aiming at a complete picture of PC. The aim here, however, is toconsider the main cost components and to examine some tricky aspects of railtransport pricing policy.
In Figure 3 below, the structure of the short-run cost and output
relationships is given. The likely shape of the average (variable) costs andmarginal costs (AC and MC) curves is depicted, and the price-relevant part isshaded (lined or dotted).
Track and train marginal costs and system-external marginal costs are fully
price-relevant, whereas only the difference, MC--AC, is price-relevant topassenger costs. When AC is falling, which is true of the average cost of
frequency delay, MC is below AC, and the price-relevant component isnegative, i.e. a deduction in the total PC summation. This is the so-called
Mohring effect (“discovered” by Mohring, 1972).

151

Figure 3. The shape, in principle, of the short-run average and marginal
cost curves for electrically-powered rail transport
ECU

ECU

MC
AC

AC
MC
Q

Q

Track cost

Train cost

ECU

ECU

MC

AC

AC

MC

Q

Q

Passengers’ travel time cost

Passengers’ frequency delay cost

ECU

ECU

AC
MC

AC = MC
Q

Q

External accident cost of the rest ofsociety (external cost)

External accident cost of road users andtrespassers (external cost)

152

The cost curves drawn assume that rail transport capacity (engines andcarriages) are optimally adjusted as passenger trips (Q) increase along aparticular line. Disregarding fixed-formation trains, this will mean that trains
get both longer and more frequent with increases in passenger demand.
A simple optimisation model results in a “square root law”: both the number ofcarriages per train and the number of trains (= departures) should increase inproportion to the square root of the transport volume along the expansion pathfor there to be an optimal trade-off between engine and engine driver costs andpassengers frequency-delay costs. Interestingly, a recent comparison of the
train input of Swedish Railways on different lines and line sections gave thefollowing regression result (Molinder, 1997):
0.48

Departures = 8.51 . Q. e0.38D(6)

where D is a dummy variable indicating whether or not a station at the end of aline section is a junction. The explanatory power of the simple equation is not
greater than 61 per cent, but the volume-coefficient is highly significant (thet-value = 6.7) and, it can be seen, is very close to the 0.50 postulated by the“square root law”.
This pattern of train capacity increasing along the expansion path also
explains the assumption of a falling average accident cost (per rail passenger
trip) inflicted on road users (at level crossings) and rail track trespassers. As afirst approximation, the total accident cost can be assumed to be proportional to
the number of trains. Since the number of passengers per train increases withthe total transport volume -- roughly in proportion to Q -- the external accident
cost per passenger falls as Q rises.

A fixed track capacity is the only reason why the train marginal cost, as
well as the passenger travel time cost, will eventually rise, as depicted in theright-hand top chart and the left-hand chart in the middle row of Figure 3,
respectively. This indicates that there is a profound, potential difference in the
optimal price level of rail transport between some main lines with a generallyhigh rate of track capacity utilisation, and branch and twig lines with a couple ofshort trains per day, as well as between peak and off-peak times on a particularline, capacity being strained at peak times.
While roads are common facilities, where a high rate of capacity utilisation
leads to congestion and thus lower speeds, railways are better characterised as“departmentalised” facilities. When a train is using a certain section of the
track, or “block”, other trains cannot use the same block at the same time. If
there is excess demand in the short run, queuing costs are incurred. In the long153

run, queuing costs should be provided for in the scheduling, as the planners of
train timetables and itineraries will inevitably bear the consequences of scarce
rail track capacity. “Scarcity costs” will translate into accelerating train andpassenger time costs in one form or another as the rate of rail capacity
utilisation rises.
An important point to bear in mind is that, if there is just one train operator
in the system, the rail track scarcity costs are internalised in the timetable,
which is made simultaneously for all train services in the network. There
should be no need for rail track scarcity charges levied by the track owner on
different trains. It is the task of the rail undertaking to design a peak-loadpricing structure which optimises the rate of capacity utilisation over time,taking into consideration both rail track capacity and rolling stock capacity
constraints. (This point is developed at more length in Chapter 8.) If this is notdone satisfactorily, a complicated “second-best” situation occurs, where thetrack-owner may have to step in.
When a considerable number of independent rail transport companies use
the same track, a system of rail track charges is advisable; this may be thoughtof as a set of “access charges” for blocks where excess demand would occur inthe absence of such charges, so that the train operator with the highest
willingness to pay gets first access.

5.1. Breakdown of the total optimal price under different organisational
conditions
An algebraic formalisation of the preceding points is given below. Thisfacilitates a more systematic treatment of how price-relevant cost should be
divided between the rail track administration (“Railtrack” for short), the train
service operator(s) and the Government, which levies externality charges ortaxes on behalf of parties external to the rail transport system. The basic
objective is that final consumers, i.e. train passengers, should pay the same total
price-relevant marginal cost for rail transport, irrespective of how the railtransport system is organised.

154

First, the definitions of short-run average and marginal cost and output
relationships are given in Table 1 below. It will be remembered that marginal
cost is equal to average cost plus the product of output and the derivative of theaverage cost with respect to output.

Table 1. Average cost and the difference between
marginal cost and average cost
Cost description
Track wear and tear

AC
f(Q)

Train operationg(Q)Accidentsh(Q)Passenger timet(Q)MC - AC

df
dQ
dg
Q
dQ
dh
Q
dQ
dt
Q
dQ
Q

The total price-relevant marginal cost (PC), according to the definition in
Chapter 2, is equal to the total marginal cost minus the user average cost-- passenger average cost in this case. The optimal fare should consequently beequal to PC.
Optimal fare =
+Q

df
dQ

f(Q)
+ Q
↑
negative

+

g(Q)

dg
+
dQ

+ h(Q)

Q

dh
dt
+ Q
dQ
dQ

↑
negative,
positive

155↑
negative↑
negative,
positive(7)

We shall look more closely at some components of PC in Chapters 6 to 8.
The preceding reasoning, and the diagrams in Figure 3 indicate that MCtrack andMCext are below ACtrack and ACext , respectively, and MCtrain and MCpass canbe both below and above ACtrain and ACpass respectively, depending on the rateof track capacity utilisation.
In a vertically-integrated rail transport system, there is only one price -- thetrain fare -- and an externality tax on trains, which will be included in the fare.
In a separated system there are also rail user charges on trains, which, of course,
will also be included in the fare. To illustrate our main point, let us disregard
the process of converting rail user charges into train fares and instead look at theprice structure as if Railtrack could charge passengers directly. Then we canregard all costs and prices as direct functions of passenger trip volume, Q.
Table 2 below shows how the given total price of rail passenger transportshould be divided between the track charge, the net train fare (excluding trackand external costs) and the externality tax under the hypothetical conditions juststated.
It is assumed that Railtrack steps in and makes good the shortfall between
the total price and the price-relevant cost. It could just as well be an agent of
the Government -- a regulatory body or the Treasury, which in the present
example is assumed to levy only an externality tax -- who does it. The point isthat somebody with a good overview of the rail transport cost structure and theobjective of net social benefit maximisation, has to step in when the market
situation is such that deviations from the fundamental optimality condition
would otherwise occur.
In Table 2, four different situations are illustrated. Further variants are, ofcourse, conceivable -- for example, a variant between (3) and (4) where“competition among the few” prevails. Railtrack’s compensating action would
then naturally be somewhere in the middle of the bottom half of Table 2.
If total cost recovery is required in the rail transport system, it can alreadybe concluded at this stage that this requirement would in most cases conflictsharply with the fundamental optimality condition. If the cost recovery
requirement is imposed separately on Railtrack, a two-part structure of rail user
charges would be advisable. If there is just one rail transport company, a fixed,
lump-sum levy on the company that would allow Railtrack to break even would
be preferable; “poll taxes” also seem the best solution when there are several
train operators on the line.

156

Table 2. Different distributions of the total priceRail transport systemorganisation(1) Vertically fullyintegrated NSBmaximising concern(2) Separate Railtrack andsingle NSB-maximisingtrain operator(3) Separate Railtrack andsingle profit-maximisingtrain operator(4) Separate Railtrack andmany profit-maximisingtrain operators

Track chargef (Q) + Q

dfg(Q) + Q

dQ

dittof(Q) + Q

df

Total price(Net) train fare
dg

+Q

dQ

dt
dQ

ditto

+

dt ⎤ edg⎡⎢g(Q) + Q dQ +Q dQ ⎥ 1 + e⎦
dg
dt ⎤ 1 ⎣
⎡
g(Q)
Q
Q
+
+
⎢
dQ
dQ ⎥⎦ 1 + e⎣
dQf(Q) + Q

df
dQ

Q

dg
dt
+Q
dQ
dQ

+

Externality tax
dhh (Q) + Q

dQ

ditto

ditto

ditto
g(Q)

6. PRICE-RELEVANT MARGINAL COST OF
RAIL TRACK WEAR-AND-TEAR

The total expenditure of Railtrack (or “Banverket”, when the Swedishadministration is referred to) can be divided into four main categories: rail track
investment, reconstruction, maintenance and unallocatable overheads.
The short-run marginal track cost, MCtrack should be based on thewear-and-tear caused by rail traffic, which necessitates maintenance andreconstruction of track, bridges, catenary systems, etc. Major rail track
investments are normally not justified when the existing infrastructure is wornout and/or is not worth repairing, because new track is shorter, has superior
alignment, and allows higher train speeds -- in short, raises the quality of railtransport services. This will make track investments along existing routes
profitable sooner or later when total traffic is on the increase (Banverket, 1997).

Table 3. Breakdown of expenditure on rail track maintenance andreconstruction by Banverket in 1996 (%)
Track-specific maintenanceremedying failures
damageinspection
servicing of switches
replacement of rails and sleepers
adjustment of track position
periodic maintenance
winter maintenanceother maintenance

34
3
1
2
2
4
2
1
2
15

Non-track maintenance

33

Reconstruction
tracksbridgescatenary systems
electrical equipment
signalling
marshalling yards
TOTAL

33
15
5
4
4
3
2
100

As Table 3 shows, Banverket’s total expenditure on track maintenance andreconstruction which could be used as the basis for calculating the short-run

158

Mctrack, breaks down as follows: one-third on reconstruction, one-third on
track-specific maintenance, and one-third on non-track maintenance.
The last third is thus excluded from the reckoning from the start.

6.1. Price-relevant maintenance costs
Of the other maintenance costs, some are fixed, or very nearly fixed,
i.e. are independent of traffic volume (Hedström, 1996). Some activities fall
into the category of “public goods”, i.e. they benefit an unlimited number oftrains; for example, cutting the grass and removing the weeds from railway
embankments. A correlation analysis of expenditure on this kind of public
goods-producing activity and traffic volume, would most likely show asignificant relationship. However, this cannot be a basis for calculating Mctrack .
As in expression (5), there is the possibility that the LRMCproxy could take avalue of zero: while total expenditure or cost (C) is found to rise in proportion
to traffic volume (Q), it would be hasty to conclude that price-relevant marginal
cost is equal to average cost. It may be that some offsetting benefit (B) is also
increasing with C and Q. In the investment case discussed in Chapter 4, it waspointed out that the cost savings for existing traffic typically remain in line with
C over time, making the long-run marginal cost of non-urban transport systems
close to zero. In the present case, it can be established that a number ofqualities of rail track services are enhanced with increases in traffic volume. In
order to calculate the relevant MCtrack component, the correct procedure in thiscase is also to deduct the user cost savings from the producer cost, which would
typically nullify the price-relevant cost (see further, Jansson and Lindberg,1997).

6.2. Price-relevant reconstruction costs
Replacement of components of existing rail infrastructure constitutes
another third of Banverket’s total expenditure, excluding investment
expenditure proper. As Table 3 shows, track (rails and sleepers) is by far the
single biggest item. The method of calculating the price-relevant marginal costfor this is first to estimate how the interval between replacements is affected bytraffic volume, i.e. to estimate the useful life of different components withrespect to traffic volume. Then the present value of total reconstruction costs is
calculated as a function of useful life, and the price-relevant reconstruction
marginal cost is obtained by derivation with respect to traffic volume. For
example, if the useful life is inversely proportional to traffic volume, the159price-relevant marginal cost is equal to the average reconstruction cost. On thebasis of engineering rules of thumb, it would seem that the useful life of mostcomponents (rails, sleepers, electrical equipment, catenary systems, etc.) is notthat closely dependent on traffic volume.
A safe guess would be that the price-relevant short-run MCtrack is less thanhalf the average cost of railway infrastructure maintenance and reconstruction.
The structure of MCtrack with respect to axle load is a different matter.
First, it should be pointed out that track quality strongly influences the cost ofwear-and-tear. In the same way as for roads, there is a trade-off between
investment in quality and the necessary maintenance cost, with the traffic
volume as the balancing factor. The least well-constructed track will thus havethe highest marginal wear-and-tear costs -- some evidence suggests about
five times higher (on Swedish type II track) than on high quality track.
Wear-and-tear is also dependent on axle load for a given traffic volume. Thosestudies which have tried to establish a direct link between maintenance cost andaxle load have arrived at an almost linear, or slightly progressive, relationship.
Although it is not possible to draw any firm conclusions about how
reconstruction and maintenance costs increase with axle load, it is clear that therelationship is far less progressive than the so-called “fourth power law” in theroad sector.

7. PRICE-RELEVANT MARGINAL COSTS OF ACCIDENTS

In analysing accident costs, a basic distinction needs to be made between
accidents that involve only rail users, and accidents that occur at interfaces withother transport systems. Rail-road crossings are notorious accident black spots(see Banverket, 1997, Evans and Morrison, 1997 and Johansson, 1997). It may
also be noted that a large proportion of serious road accidents occur where
pedestrians and cyclists have to cross roads used by motor vehicles. The total
number of accidents, N can be written:
N = A + X,

(8)

where A stands for the number of intra-system accidents, and X for inter-system
accidents. As may be suspected from the data in Table 4 below, it is the Xaccidents that give rise to the really significant component in optimal accident
externality charges in rail transport systems.

160

There are many theoretical and empirical problems involved in thevaluation of the more serious types of accidents. A brief summary of somerelevant points is given below:

7.1. Ex ante and ex post accident costs
Total ex post accident costs are literally “inestimable”. Ex ante costs, on
the other hand, can be defined as the total willingness to pay (WTP) forcomplete safety, on the part of different individuals directly or indirectly
exposed to accident risks. We can distinguish the WTP of three groups:
f(r) =

willingness to pay for complete safety, of the household to which a
certain person exposed to the risk r belongs; f(r) ≈ ar for low valuesof r ;

g(r) =

ditto, of relatives and friends of the above person; g(r) ≈ br for low
values of r ;h(r) =

ditto, of the rest of society; h(r) ≈ cr.

161

Table 4. Rail accidents in Sweden 1989-96; number of persons
killed or seriously injured (including suspected suicides)
Accident category

KilledRailway staff
hit when working on the track(ranging work)?
level crossings
other

7
5
2
0
0

Seriously
injured
44
12
10
0
22

Passengers
level crossings
other

10
2
8

68
6
62

Other persons
road users at level crossings
trespassers
TOTAL

166
127
39
183

100
88
12
212

Source: SJ (1997).

Figure 4. Households’ willingness to pay, at different risk levels,
for complete safety for a particular household member
ECU
f(r)
a

“value of a statistical life”(in the case of fatal accidents)<0r accident risk (r)1162The assumed general shape of f(r) is depicted in Figure 4 above. It can beassumed that this function is approximately linear for very small risks (below r)
coinciding with a line from the origin, ar, which obviously takes a value = a at
a risk level of unity. At high risk levels, however, the tip of the shape of thefunction f(r) bends upwards at an accelerating rate, and will never reach therange close to r=1.
The function g(r) presumably (but not necessarily) rises less steeply thanf(r), and h(r) could be approximated to cr in the whole range; it represents the"cold-blooded" part of the total accident costs, i.e. the assumption that the restof society regards victims of traffic accidents in the same way as hard-hearted
slave-owners regarded slaves.
The main difference between ex ante and ex post valuations of serious
casualties should be noted: let us assume that r stands for fatality risk, and thata representative household is prepared to pay f(r) (≈ ar for low risks) forcomplete safety for a particular household member. If 1/r households have asimilar willingness to pay for safety, it can be concluded that one life will besaved for a total payment of f(r)/r ≈ a. However, no normal household would
be willing to sacrifice a member for a sum of money = a; life is invaluable.
Compensation to families which have lost a dearly-loved member can help tomitigate their grief and suffering; the same goes, of course, for disabled victimsof traffic accidents. It should be clearly stated that there is no economic way ofdetermining the right compensation. The "value of a statistical life", a, forexample, is an arbitrary entity; a sum of money to compensate bereaved
families is equally arbitrary.

7.2. From ex post cost responsibility to ex ante externality charges
In a vertically-disintegrated rail transport system, the responsibility for
accident costs can be shouldered by the track owner or the train operator, or
both. The governing principle should be that the organisation(s) which oversee
the safety of rail transport should have an effective incentive (in the form of
ex post responsibility for accident costs) to improve safety. In any case, thesecosts will be passed on to rail transport users, paying the corresponding ex ante
charges as part of train fares or freight rates. The question is: how is theprice-relevant marginal cost to be calculated?

163

Let us disregard the tricky matter of the division of the ex post cost
responsibility between the track owner and train operator(s), and assume thepoint of view of a vertically-integrated railway undertaking which seeks tomaximise the social surplus: how should the fact that both intra-system andinter-system accidents are by-products of the transport services provided betaken into account in the pricing of train services? The following principles
seem consistent with the goal of social surplus maximisation.
The railway undertaking pays a legally stipulated sum a + b + c incompensation for every intra-system casualty, of which a goes to thehouseholds of the victims, and b + c to the public purse. (A small company
with modest turnover would have to take out insurance against serious
accidents.) To get from these ex post expenditures to a price-relevant accident
cost which can be included in the optimal rail fare, the relationship between thenumber of accidents (A) and transport volume (Q) first has to be estimated.
A = f(Q)(9a)

The accident risk, r is defined:r=

A f(Q)=Q
Q(9b)

The fact that the railway undertaking bears full ex post responsibility for
accident costs is a strong incentive to improve safety. Transport users can dolittle about this apart from abstaining from less essential trips. For the trade-off
to be consistent with the goal of social surplus maximisation, the marginal
expected accident cost has to be included in the train fare. Transport users
become aware of risks, or rather the cost of accident risks, through the optimal
fare. The intra-system accident cost component in the price-relevant cost is
derived as follows:

PC A =

dA(a+b+c)
dQ

(9c)

TC A
Q

(9d)

= (1 + E rQ )If the number of accidents, A, is proportional to the traffic volume, Q, therisk-elasticity, ErQ is zero, and the accident charge equals the average164intrasystem accident cost. It should be remembered, however, that a good partof the revenue from this charge goes back to transport users/payers and theirfamilies in the form of reimbursements of the costs of medical care and sickness
benefits and compensation for grief and suffering, assuming that the general
health insurance scheme does not cover these costs. However, in rail passenger
transport, average intra-system accident costs are rather small. Inter-system
accidents are a somewhat different matter.
Unfortunately, trains occasionally hit cars, cyclists, or pedestrians. The
outcome of such collisions is nearly always that only the lighter vehicles areseriously damaged.
The number of inter-system accidents is X, which is a function of bothtrain transport volume Q, and the traffic volume of the other transport system,
denoted by M.
X = g(Q, M)(10a)

The inter-system accident cost component in the price-relevant cost is
obtained as follows:

PC x =

dX(a + b + c)
dQ

(10b)

The risk for the other party of such accidents is denoted by R. Since
R = X/M, we can alternatively write PCx like this:PC x =

dR(a + b + c)M
dQ

(10c)

= E RQ

TC x
Q

(10d)

To sum up, the total price-relevant accident cost comes to:

PC A&X = (1 + E rQ )

TC A
TC X
+ E RQ
Q
Q

165

(11)

On the one hand, intra-system and inter-system average accident costs arefactors of potential importance and, on the other, the risk-elasticities withrespect to passenger travel volume, ErQ and ERQ, are important for the
price-relevant accident cost. What is the likely order of magnitude of PCA&X ?
7.2.1.

The order of magnitude of price-relevant
a numerical example based on Swedish data

accident costs:

In Sweden, the position is as follows: the intra-system average fatality andserious injury accident cost, TCA/Q, counting both passengers and railway staff,-3
is no more than 1.5. It was 10 ECU per passenger-km, or .3 ECU per average
train trip of 180 km during the period 1989-96. The value of the risk-elasticity,
ErQ is not known but is unlikely to differ much from zero. Passenger casualties
could be expected to be proportional to transport volume, and staff casualties
proportional to the number of rolling stock units in operation, which in turn isroughly proportional to transport volume. The proportionality between A and Q
means, of course, that the risk (r) is constant with respect to the volume oftravel, and that the risk-elasticity is zero.
The corresponding inter-system accident cost, TCx/Q is many times higher.
In Sweden it was 7.5 . 10-3 ECU per passenger-km during the period 1989-3
1996 if trespassers are included and 6 . 10 ECU per passenger-km if they are
excluded. The risk-elasticity ERQ, i.e. the relative change in the risk for external
parties as train passenger volume changes is, like ErQ, strictly unknown, butcommon sense suggests a value between 0 and 1. Given the number of roadvehicles crossing railway lines, the more trains there are, the greater the risk toroad users of a collision. It is unlikely that the number of collisions will
increase proportionally to train passenger volume Q. As was pointed out in
connection with the cost-output diagrams in Figure 2, train lengths will increase
as Q increases, which means that the number of trains will not increase in thesame proportions as Q.
It is worth noting that, for traffic on urban roads, a principal component of
the price-relevant accident cost is the cost inflicted on unprotected (vulnerable)road users, mainly at junctions and at pedestrian crossings. However, this pricerelevant cost is only about half the average cost of accidents involving protected
and unprotected road users, because the corresponding risk-elasticity seems to
be around one half (Brüde and Larsson, 1993), i.e. given the volume of travel
on foot and by bicycle, the number of pedestrians and cyclists hit by vehicles
increases in proportion to the square root of the motor vehicle traffic volume.

166

It is quite possible that ERQ is also about one half in the present case ofcollisions at level crossings. The total price-relevant accident cost for rail
3
passenger transport in Sweden could consequently be around 6 . 10- ECU perpassenger-km, or close to 1 ECU per passenger trip of average length.

8. PRICE-RELEVANT MARGINAL COST OF RAIL TRANSPORT

Given the externality charges and rail track user charges levied byRailtrack and/or the Treasury, what is the optimal passenger fare? This
question forms a large part of transport economics. Here we shall only make a
few simple, but nonetheless fundamental, points. The basis for the discussion isthat fares should be equal to the marginal train cost plus the difference between
marginal and average train user costs.

PC = MC train + Q

dAC pass(12)dQ

The number of trips by the rail transport system concerned is Q.
The external marginal cost appears as the charges payable by the rail
undertaking. These charges are consequently part of MCtrain, and will be passed
onto rail passengers in the fares they are charged.
It should be pointed out that each of the two price-relevant cost
components of (12) will take quite different values depending on the way inwhich additional passengers (or freight) are taken on. The sum of the twocomponents is the same in an optimum situation, irrespective of how capacity isaugmented. Three examples illustrate this point:−

Additional passengers can normally be accommodated (or almost)
without any additional producer inputs, simply by increasing theoccupancy rate. During peak periods in particular, this cannot be done
without having an effect on passenger costs. PC will in this caseconsist solely of an occasionally high passenger cost component,
representing the queuing and/or crowding costs of passengers or
freight.

167

−

−

Another, more frequent, way of accommodating additional customers
is to increase the number of trains. In this case MCtrain will be fairly
substantial, while the user cost component becomes negative due tothe Mohring effect.
A third possibility is to increase the size of vehicles -- train length in
this particular case. This would leave the passenger cost component
in the price-relevant cost more or less unchanged, and only MCtrain
would contribute to PC.

8.1. The average cost of a marginal carriage
The theory lends itself particularly well to practical calculations in railtransport, where train size (length) is adjustable; carriages can be added to or
uncoupled from the train in a marshalling yard during the night.
Boarding/alighting charges are, moreover, a very minor complication because,
unlike with bus transport for example, the number of inlets and outlets increases
proportionally to vehicle size and tickets are bought in advance, which meansthat the ticket transaction time is not part of the transport vehicle time.
It is more difficult to estimate the “Mohring” effect in long-distance public
transport, for which prospective travellers use timetables, than in urban
transport, including commuter rail services.
The right approach forlong-distance rail transport, therefore, is to calculate PC by assuming that
additional passenger demand is met by increasing vehicle size. This approach
avoids most of the difficulties of passenger cost estimation, but not entirely. If
train length increases proportionally to the number of passengers, it should intheory be possible to keep total time at stations constant, irrespective of thenumber of carriages. In practice, this time increases slightly with the number ofpassengers. However, the boarding/alighting charges should play a relatively
minor role.
In calculating the incremental cost of adding another carriage to a train, it
is also necessary to find out how energy costs change as a train is lengthened.
In a joint study with SJ, a Linköping University research team found that, for agiven train speed, energy consumption will increase linearly with train length in
the whole range of observations (Jansson et al., 1992). The price-relevant cost
can then be formulated in a very simple way. In the normal scenario, the least
unit of supply is another carriage carried from the point of departure, say, thecentral station of Stockholm, to the final destination, for example, Malmö, andback again. The incremental cost of producing this additional capacity

168

constitutes the numerator of the pricing-relevant cost, and the number of
additional passengers thus accommodated constitutes the denominator:

PC ti =

µ ti + αDβ(13)PC ti = pricing-relevant cost per occupied seat day t

µ ti
α
D

β

train departure i (t = 1..... 365, and i = 1 ......m)= opportunity cost day t train departure i of the marginal carriage= additional running cost of a train per kilometre caused by coupling up
another carriage= round trip distance= target number of occupied seats per carriage.

This formulation of the price-relevant cost presupposes that the train on theroute concerned only makes one round trip per day. On a shorter route, it may
be possible to make one and a half or two round trips, which would mean thatthe denominator has to be increased by a factor of 1.5 or 2.
Note that the price-relevant cost is given per occupied seat on a round trip.
This cost should be shared out among all the passengers successively occupyinga particular seat during a round trip. The number of passengers per seat andround trip could be two, one in each direction, or more than two, since many
passengers do not travel the whole distance.
An efficiency condition is that, summed over all the departures every dayof the year, the opportunity cost of a carriage should equal the annual
capital cost.
The financial result of optimal pricing of passenger train services is easily
imagined. The revenue will cover the capital and operating costs of carriages,
including guards' wage costs, but will make no contribution to the costs ofengines, including engine-drivers' wage costs, nor to the major part of overhead
costs, which are independent of train length. Only about half the total costs ofpassenger services will be covered by optimal train fares.

1698.2. Peak-load pricing of interurban train services
With reference to expression (13) for the level of the price-relevant cost of railpassenger transport, an additional efficiency condition is useful for the derivation of
the peak-load pricing structure. It can be written as follows:µt1 = µt2 = ..... µti ..... = µtm = µt

(14)

The rolling stock on a particular line can be assumed as given on one
particular day. The number of engines and carriages can only be changed from one
day to another. An efficiency condition is then that each day the given number ofcarriages should be distributed between the m trains such that capacity utilisation isnearly constant. This means in turn that the opportunity cost of a carriage is thesame for every departure on a particular day, as shown in (14) above.
The stochastic element in rail travel demand is substantial, so a very highoccupancy rate should not be aimed at. The mean occupancy rate of SJ’s trains iscurrently about 1/3 but it varies systematically in different sub-markets.
By eliminating the systematic differences by means of peak-load pricing, aiming
basically at equalisation of the train occupancy rate in time and space, it should bepossible to raise the mean occupancy rate to at least 1/2, which would be a very
considerable improvement.
The first demand equalisation to aim at should be to make the
Monday-Thursday and Saturday (off-peak) level of demand nearly equal to the
Friday and Sunday (peak) level. A representative example of the time profile ofrail travel demand by day of the week in Sweden is given in Figure 5.
It was found in Jansson et al. (1992) that µi = 0 at off-peak times, i.e. if fares
at off-peak times were based on just the running cost component α D of the pricerelevant cost [see equation (4) above], the level of demand would just fall short ofthe peak level as it would do when peak traffic alone pays the carriage’s capitalcosts.

170

Figure 5. Rail travel between Stockholm and Gävle
on different days of the week
Volume of travel
600
500
400
300
200
100
0
Mon

Tues

Wed

Thur

Fri

Sat

Sun

The second demand equalisation to aim at should be to level out spatial peaks
and troughs. We have not gone into this matter very deeply and a lot still remains
to be done. We shall take just a rather typical example -- the line between
Stockholm and Sundsvall in the north of Sweden. Dividing it into three sections,the daily passenger flow at peak and off-peak times on the three sections was asfollows:

Table 5. Passenger flow per day on three sections of theStockholm-Sundsvall line in 1984
Line segment

Fri, Sun

Mon-Thur, Sat

Stockholm - Gävle

3 307

1 751

Gävle - Söderhamn

2 490

1 240

Söderhamn - Sundsvall

1 494

734

171

The peak/off-peak price differentiation advocated above would equalise theflow figures in each row of Table 5. To match spatial supply and demand better,the first step is to make some trains from Stockholm turn around in Gävle, andsome in Söderhamn. Spatial demand equalisation would then imply a pricedifferentiation with the aim of making the occupancy rate equal on each section of
the line.
8.2.1.

Comparison with SJ's fares

The following comparison of SJ’s fares and optimal fares according to theprinciples laid down in this report focuses on fare differentiation by day of theweek (see also Jansson et al., 1992). As can be seen in Table 6, in both the cases
investigated (with and without a budget constraint), off-peak fares should be only
about one-third of the peak fares. Examples of fares are given for a rather short, amedium-distance and a fairly long-distance route. The absolute values of the
figures -- in 1990 Swedish kronor -- can be disregarded. It is the fare structure thatis interesting. Since the elasticity of the demand for rail travel differs somewhat forroutes with and without airline competition, both cases are considered in theillustration.
It can be seen that the distance makes little difference as far as thepeak/off-peak differentiation is concerned. It is worth noting that where airtransport is not an alternative, the distance-dependency is about the same as in SJ’s
tariff, and that where air transport is an alternative, fares taper off more markedly inboth cases of optimal fares.
The comparison with SJ’s fares is complicated somewhat by the fact that SJ
has abandoned the differentiation of fares by day of the week, which was the basic
feature of its 1979 "low-fares policy". In 1989, it introduced a new faredifferentiation, with reduced fares for departures in the same day. Some
20 per cent of departures every day are "red", which means that the fares are only
half the fares that apply to the remaining 80 per cent of "black" departures.

172

Table 6. Comparison of optimal rail fares for different days of the week
and SJ's fare structure in 1990, SK per second-class single trip from start to end
Distance

170 km335 km

550 kmDay of theweek

Fri, Sun

Optimal fares
without budget constraintAir
No aircompetitioncompetition
113
113

SJ
fares

with budget constraintAir
No aircompetitioncompetition
154
154

Mon-Thu, Sat

30

30

56

57

Fri, Sun

187

202

240

303

Mon-Thu, Sat

50

58

87

123

Fri, Sun

254

294

292

462

Mon-Thu, Sat

72

96

104

204

Black

Red

128

64

242

121

342

171

In autumn 1997, SJ reverted to a peak-load pricing structure by day of theweek. It has partly copied the fare structures of airlines. It now combines properpeak-load pricing and price discrimination in a way that is not quite clear to thegeneral public (which is also the idea). Peak-load pricing does not apply tofirst-class passengers, who are mainly business travellers who do not pay for theirtickets out of their own pockets. Second-class seats are divided into two categories-- full-price and half-price. There is no visible difference between the twocategories but their relevant proportions vary widely on different days. On very
busy days (Fridays and the eve of departures, etc.) there are hardly any half-priceseats but on days when demand is slack there are plenty of them. To prevent costconscious business travellers from taking advantage of the low fares, twoconditions have to be met: (a) an annual pass at the modest price of 18 Ecus has tobe purchased and (b) tickets must be booked one week in advance.
If social surplus maximisation were the goal of SJ, i.e. maximisation of thesum of the (positive or negative) profit of SJ and the rail consumers’ surplus, thiskind of peak-load pricing would need to be open and implemented in full. The low
off-peak fares in the optimal tariff structure would apply to 70 per cent of total
travel, which means that the weighted average fare level would be substantiallylower than the level of SJ's fares in the Table, even when the financial result isconstrained to the same extent as that of SJ in the comparison.
We made a rough calculation of the likely increase in transport volume as aresult of adopting the optimal fare structure in full. In the unconstrained case,transport volume would double. Most of the increase would, of course, occur inthe off-peak period. In the constrained case, the price level has to be substantiallyhigher; as a consequence, the increase in the total volume of travel falls to 40 per
cent. It is worth noting that the net welfare gain in the latter case is as high as
75 per cent of the net welfare gain from peak-load pricing in the case where nobudget constraint is assumed.

9. TENTATIVE CONCLUSIONS

We are in unexplored territory, so the following summing-up is necessarily“tentative”. The salient economic feature of rail transport is the pronounced
economies-of-demand density. Only on the very busiest inter-city lines and, inparticular, urban commuter services, will physical barriers to capacity
expansion be sufficiently significant to turn rail transport into a constant- or
increasing-cost activity.
Pricing and investment policies are mutually174dependent on one another. If rail track investment falls behind for a long time,
the number of bottlenecks on the railway network will increase, taking the formof increasingly frequent delays and making it increasingly difficult to schedule
services, with forced detours and waiting times. In other words, at a
suboptimally low level of investment, it is theoretically possible to evoke theincreasing-cost characteristics of rail transport; among other things, this would
imply that optimal pricing policy is consistent with total system cost recovery -at least for a certain period of time before demand starts to fall off, due to thedecreasing quality of service.
Nobody should desire such a scenario.
Instead, optimal railway
investments should be continuously undertaken to eliminate bottlenecks,
shorten rail connections and improve the track to make comfortable high-speed
train services possible. Then, one can be certain that the total price-relevant
cost of rail transport will fall short of the total average cost. Optimal pricing
would not cover the total costs of infrastructure, traffic operation (including
rolling stock capital costs) and externalities.
This may be considered a big problem in some countries. In othercountries it seems acceptable to subsidise the railways, provided that thetravelling public/taxpayers get good value for their money: whateverorganisational form is chosen, the railways must acquire the image of efficientundertakings, responsive to the needs of their customers and charging
reasonably low fares so that ordinary people can afford to travel by rail on a
non-exceptional basis. Otherwise, subsidisation will be increasingly unpopular.

9.1. What really matters
The preceding analysis of the structure of rail transport costs in general,and track costs in particular, leads to the conclusion that there are no more
dramatic changes that have to be made to improve allocative efficiency, except
one: somehow or other, train operators need to be induced to adopt properpeak-load pricing instead of the traditional, distance-based fare structures, or socalled “market pricing”, which in fact boils down to skewed pricediscrimination. Making business travellers pay much more for the same service,
except for relatively small comforts like meals served at your seat, is probably a
good compromise between equity, efficiency and financial requirements. The
important thing, though, is to make rail travel once again the popular mode oftransport it used to be.

175This is both possible and consistent with economic efficiency conditions.
In off-peak periods -- roughly Monday to Thursday, and Saturday -- as well ason the return-haul on temporarily unbalanced routes and on line sections with asubstantial amount of slack in demand, the price-relevant costs of rail transport
are at a level which would make rail transport very competitive if the farestructure reflected those costs. More than half the population does not work
regularly. Pensioners, the unemployed and students represent a large potential
market for off-peak travel if only fares were set at the level of the price-relevantcosts.
9.1.1.

The price structure is more important than the price level

It is important to note that, even if a strict budget constraint is imposed on
traffic operations, a peak-load fare structure will increase the social surplus
substantially more than time- and space-constant fares.
The best alternative is probably social surplus maximisation, taking theso-called “shadow price” of public money into account. In Sweden, the costs oftax-financed public investment in the transport sector are inflated by a factor of
1.6 to take account of the fact that value-added tax is not levied on the services
in question and, secondly, of the distortions caused by raising additional income
tax revenue. The theoretical and empirical foundations of the current shadow
price of public money are not very robust. The basic idea is that progressive
income taxation is a wasteful, but for distributional reasons, necessary form oftaxation. (To reduce the need for income taxation yields 1:30 for every nominal
krona saved?) Apart from poll taxes and other lump-sum taxes, which are very
unpopular, well-designed commodity taxes seem to be the least distorting formof taxation, and should be used as far as is politically possible, at least up to a
VAT rate of 30 per cent, so as to reduce the need for income tax.
This means that a value-added-tax of this order of magnitude should be
imposed on all public services sold in the market, irrespective of the total
financial result. It is to the margin that the shadow price of public money
should be applied.

176

9.2. The role of Railtrack in rail transport pricing policy
The problems and possibilities identified in this paper have now beensummarised. The final, important question remains: what can Railtrack do
about them?
In a vertically-disintegrated organisation, there should still be somebody
who has an overall responsibility for the rail transport sector. A precedent is theSwedish Road Administration, which was recently given responsibility -- within
its obviously limited capacity -- for ensuring that the development of the wholeroad transport sector is in line with the public interest. A similar role may beenvisaged for Railtrack. Given the specific characteristics of supply (cost) anddemand in the rail transport sector, Railtrack user charges should be used tocompensate for deviations from the fundamental optimality condition stated at
the outset.
In a country like Sweden, the potential for this is rather limited because thepresent level of track user charges is very low. While this is right from thepoint of view of allocative efficiency, it leaves little scope to press for peak-loadpricing of train services.
In countries where cost recovery is a requirement imposed on the Railtrack
authority, the potential to influence the final price structure of rail transport is,of course, greater.
It is difficult to generalise about how the rail track administration should
perform this balancing act. If there is just one train operator on each particularline, by far the best approach is to try to make the goals of the administrationand the train operator the same, i.e. social surplus maximisation. Then there
should be no need to compensate for deviations from first-best optimal pricingof Railtrack services.
If there are several train operators on the same railway line, maximisingindividual profits, a number of deviations from the efficiency conditions could
easily occur. It is difficult to conceive that a Railtrack pricing policy would be
sufficient to compensate for all deviations.

177

NOTES

1.

The term “public transport” is not used here to mean that transport
services are publicly produced and/or that the service producer is a public
enterprise, but that the transport vehicle in question is used by a numberof independent transport consumers in common, i.e. at the same time on
the same route.

2.

The decreasing returns-to-scale in the third output interval, necessary
for the commonly assumed U-shape of LRAC, which are caused byorganisational "diseconomies of size" rather than technical limitations,
are more difficult to verify by theoretical engineering calculations.

178

BIBLIOGRAPHY

Brüde, U. and J. Larsson (1993), ”Trafiksäkerhet i tätortskorsningar”,
Linköping, VTI-meddelande 685.
thDodgson, J. (1995), Railway privatisation and infrastructure charging, 7 World
Conference on Transportation Research, Sydney, July.
European Commission (1996), A strategy for revitalising the Communities
Railways, Com(96)421.
Evans, A. & A. Morrisson (1997), Incorporating accident risk and disruption ineconomic models of public transport, Journal of Transport Economics andPolicy, May.
Haldi, J. and D. Whitcomb (1967), Economies of scale in industrial plants,
Journal of Political Economy, Vol. 75, No. 4.
Hansson, L. (1997), The internalization of external effects in Swedish transport
policy -- a comparison between road and rail traffic, International Institute forIndustrial Environmental Economics, Lund University.
Harris, R. (1977), Economies of traffic density, Bell Journal of Economics, Vol.
30, No. 4.
Hedström, R. (1996), Samband mellan trafikbelastning -- banstandard -underhållskostnader, VTI-meddelande 806.
Hylén, B. (1995), Access to rail infrastructure -- Regulation and pricing,A state-of-the-art report from ten European countries, VTI, No. 42-1995.
Jansson, J.O., P. Andersson, P. Cardebring and T. Sonesson (1992),
Prissättning och finansiering av järnvägens persontransporttjänster, TFB &VTI forskning/research No. 5.
179

Jansson, J.O. and G. Lindberg (1997), Transport pricing principle, D2 of PETS
(Pricing European Transport Systems). Research project for the Commission of
the European Communities: Transport -- DG VII.
Jansson, J.O. (1997), Theory and practice of transport infrastructure and public
transport pricing, in: Recent Developments in Transport Economics, G. de Rus
and C. Nash (eds.), Ashgate, Aldershot.
Johansson, J. (1997), The economics of railway safety -- state of the art,
Department of Infrastructure and Planning, KTH, Stockholm.
Kopicki, R. and L.S. Thompson (1995), Best methods of railway restructuring
and privatisation, CFS Discussion Paper Series, No. 111, The World Bank,
August.
Ministry of Transport (1964), Road pricing -- the economic and technicalpossibilities, London (Smeed Report).
Mohring, H. (1972), Optimization and scale economies in urban bus
transportation, American Economic Review, Vol. 62, No. 4.
Molinder, J. (1997), Värdet av turtäthet, Working paper, EKI, Linköping
University.
Nilsson, J.-E. (1997), Efficiency implications of innovations in administeringtransport infrastructure, Department of Economics, Stockholm University.
Panzar, J. (1979), Equilibrium and welfare in unregulated airline markets,
American Economic Review, Papers and Proceedings.
Pratten, C. (1971), Economies of scale in manufacturing industry, Cambridge
University Press.
Scherer, F. and D. Ross (1990), Industrial market structure and economic
performance, Houghton Mifflin Co., Boston.
SJ (1977), Trafiksäkerheten 1996, SJ Stab Trafiksäkerhet.

180

Swedish National Rail Administration (Banverket) (1997), Banverkets
beräkningshandledning.
Swedish National Rail Administration (Banverket) (1997a), Översyn av
banavgiftssystemet, Banverkets rapport enligt regeringsuppdrag 1997-05-29.
Walters, A. (1961), The theory and measurement of private and social cost of
highway congestion, Econometrica, Vol. 29, No. 4.
Walters, A. (1968), The economics of road user charges, World Bank
occasional paper No. 5, Washington.

181

182

NOTE BY THE CHAIRMANINTRODUCTION TO THE DISCUSSION

The ideas developed in this note refer to the French experience

Claude MARTINAND
Chairman
Réseau Ferré de France
Paris-La Défense

183

184

SUMMARY1.

THE MAJOR ISSUES INVOLVED IN INFRASTRUCTURE
PRICING.................................................................................................. 187
1.1. A vital signal for all the actors.......................................................... 187
1.2. A factor for the lasting equilibrium of the railway system
accounts ............................................................................................ 187

2.

THE MAIN OBJECTIVES TO BE CONSIDERED ............................... 189

3.

THE BASES FOR OPTIMAL PRICING ................................................ 190

4.

THREE MAJOR CHOICES TO BE DEBATED .................................... 192
4.1. The overall level of the charges........................................................ 192
4.2. Price differentiation according to the network ................................. 192
4.3. Price differentiation according to the activity .................................. 193

5.

PRACTICAL CHARGING METHODS ................................................. 193

Paris, March 1998

185

186

1. THE MAJOR ISSUES INVOLVED IN INFRASTRUCTURE PRICING

1.1. A vital signal for all the actors
The fact is that user charges constitute, without a shadow of a doubt, themain economic signal of the railway system, which will guide the short-term
operating choices and medium- and long-term investment choices of thedifferent actors concerned:
−
−
−
−
−

The train operators using the network, and their clients;
The infrastructure company (RFF) and its operator (SNCF);
The territorial authorities, as the organising and cofinancing
authorities of infrastructure and train services;
The State as "regulator", the organising and supervising authority of
the RFF and the SNCF;
All the actors concerned by competition and co-operation between
transport modes.

1.2. A factor for the lasting equilibrium of the railway system accounts
In addition, charging for infrastructure use and the methods of financing
the network (operation), maintaining it in good order and developing it(investment) are indissolubly linked. The financial equilibrium of theinfrastructure company has to be ensured from one year to the next and must be
sustainable.
At any given moment, the infrastructure costs reflect at the same time thequality of the network, its state of maintenance and modernisation and the levelof performance of the operator responsible for the maintenance and operation of
the network (service quality and productivity).
The various costs of the rail network have to be covered by:−

Income from users (charges and fees);

187

−
−
−

Public contributions (contribution to infrastructure costs, equipment
subsidies and capital endowment);
Possible contributions by indirect beneficiaries (transport and otherlevies paid into the FITTVN or the FARIF);
Borrowings on the financial markets, which in fact merely transfer
today’s investment expenditure to tomorrow’s users (or eventaxpayers), at a not insignificant cost.

It is also worth listing the different benefits of general interest that may
justify public contributions to transport infrastructure or services:
−
−

−
−

−

Implementation of the public service obligations imposed for
geographical or social reasons, which merits public contributions;
Balanced regional development, implying equality of opportunity for
all regions, thanks to adequate conditions of access at a reasonable
cost to the user (and the community); but rail transport is notnecessarily the only mode or the most appropriate one for thispurpose;Targeted structuring of the regional, national or European space bymeans of investments orienting the localisation of activities andanticipating future traffic (cf. trans-European networks);
Harmonization of infrastructure costs and intermodal competition (ifthere is no internalisation of the external or social costs) and incentive
pricing to encourage the use of the transport mode which is safest,
least polluting and most advantageous for society as a whole;
Elimination of cost burdens inherited from previous imbalances in theinfrastructure accounts (in the context of the application of
Directive 91-440).

The nature and method of payment of these contributions are of
considerable importance:−−−−

Operation or investment;
Infrastructure or services;
Fixed a priori or a posteriori (subsidy to cover the deficit is to be
avoided);
Incentive or neutral.

The supervision of this “state aid” with respect to the rules laid down by
European or national texts (competition law) is increasingly strict and noteverything is possible any more.

188

It should be pointed out that the French rail reform of 1997 has not yet
ensured the prospect of lasting financial equilibrium for the railway system.
The completion of the financial aspects of the reform and the pricing system
therefore cannot be dealt with independently from one another.

2. THE MAIN OBJECTIVES TO BE CONSIDERED

Charging for rail infrastructure use has been implemented in very different
ways in different European countries. It has also been the subject of many
analyses and studies, notably by the Commission (DG VII) and the Union
Internationale des Chemins de fer (UIC), with a view to drafting
recommendations or a directive on eventual harmonization, for example, foralternative and competing routes serving the ports.
In this context, it is appropriate to recall the main objectives that should betaken into account in the pricing system:
1.

2.

3.
4.

5.

Cover all or part of the operating and maintenance costs of the rail
network and reflect the level of service provided to the carrier. This
coverage may be achieved globally or, on the contrary, for eachsection of the network, and this may be in identical or differentiatedfashion;Favour the best possible use of the rail network from the standpointsof the management of priorities in operation (routes/slots) andeconomic efficiency criteria (economic surplus, for example) and nondiscrimination;
Contribute to the costs of developing the rail network through making
investment self-financing;
Encourage the use of the rail transport in intermodal competition,
because of the insufficient harmonization of the conditions ofintermodal competition (external costs, social costs);
Contribute to the balanced regional development, through improving
the accessibility of disadvantaged areas, for reasons of equity andsolidarity.

These objectives are to some extent contradictory, it must be admitted, andany pricing policy will have to reflect the ranking of objectives established in
the compromise accepted. Each option decided upon must be able to be189evaluated from the standpoint of efficiency on the one hand and equity on
the other.
In order to both reflect the costs more accurately and to permit a pricing
policy differentiated according to the objectives decided upon, it is usual toadopt pricing formula with two or three terms and a segmentation of the
network into sub-networks and basic homogeneous sections.
The tariff formula includes a reservation fee and an operating charge and,possibly, an access fee. Decree 97-446 effectively provided for these threeterms. The operating charge seems well suited for translating objective 1 (costcoverage) and objectives 4 (harmonization of intermodal competition) and5 (regional development), thanks to subsidies to avoid the total imputation of
costs. The reservation fee seems well suited for translating objectives 2 (betteruse of the network) and 3 (contribution to the costs of developing the network),
especially on the most heavily trafficked parts of the network.
Unless the pricing is determined section by section, the network can besegmented into sub-networks, in particular according to traffic volume andservice quality. The provisional pricing system has opted for four sub-networks:−−−−

R0 : the most heavily trafficked lines, in particular around the majorrail nodes (about 750 kilometres);
R1 : new high-speed lines (about 830 kilometres);R2 : strongly developing intercity lines (about 4 630 kilometres);R3 : other lines (the rest of the network).

Lastly, price differentiation according to time may be envisaged, either
daily (peak hours) or annually (peak days), in particular on the most heavily
trafficked network.

3. THE BASES FOR OPTIMAL PRICING

Theoretical studies by experts have led to optimal pricing proposals being
made to decisionmakers. These are based on the different types of cost:

190

−
−
−
−

Marginal cost (short-term), integrating the costs of congestion;
Marginal social cost, integrating the externalities;
Marginal social cost of development (long-term), integrating the costof renewal investment;
Total cost, but this cost depends on the conventions adopted forcovering different expenditures on the operating account and, above
all, the methods of financing investments and the corresponding
amortization.

Economic theory concludes that optimal pricing should be based on themarginal social cost of development. However, because of the budget
equilibrium constraints, a second-rank optimum, designed to cause the least
possible distortion to the choices of the economic actors (Ramsey-Boiteux),
may be adopted.
It should, in fact, be noted that our knowledge of the costs and how theyvary as a function of different parameters is very fragmentary and inadequate.
To give an order of magnitude, it is considered that the present amount of
6 billion must be higher than the variable costs and the total cost for RFF can be
estimated at over 23 billion for 1998 (excluding the present contribution to theinfrastructure costs of 11.8 billion and excluding the financial costs ofeliminating the debt of 134.2 billion).
If the contribution to the infrastructure costs is maintained at its present
level (11.8 billion), an amount of 12 billion will balance the infrastructure
account. This subsidy can then be justified by objectives 4 (harmonization ofintermodal competition) and 5 (regional development).
As compared with the theoretical conclusions, it has to be said that thedifferent European countries have opted for very different policies:−−

Total cost in the United Kingdom and Germany, these countries
preferring to subsidize the railways through public service agreements
and investment subsidies;
Marginal cost in Sweden, the equilibrium of the infrastructure accountbeing ensured directly by the State.

There is, thus, very clearly much to debate and choices to be made between
different options according to the different issues identified and theconsequences of these choices.

191

4. THREE MAJOR CHOICES TO BE DEBATED

4.1. The overall level of user charges−−

What overall level of charges should be aimed at, either in steps
during a transition period, or right from 1999, with the State being
prepared to make a contribution to the SNCF for its public service
missions, permitting it to pay these charges without bringing its
accounts into imbalance again?
Would an overall total in the order of at least 12 billion, halfway
between the present level and the result of total cost pricing, be theright compromise, taking account of the specificities of the Frenchsituation (extensive territory with a low and very uneven population
density), regional development considerations implying a sufficiently
dense network?

Such a level would significantly improve the self-financing capacity of the
RFF and would reduce the public financing requirement for the development of
the network. It would respect the rules stemming from the second phase of the
Economic and Monetary Union Treaty and would avoid having to reclassify the
RFF debt as public debt. It would ensure the financial equilibrium of therailway system while maintaining contributions to the RFF at their present level.

4.2. Price differentiation according to the network−−−−

What price differentiation should be envisaged, combining therespective levels of the operating charges and reservation fees,
according to the segmentation of the network?
Is the present segmentation of the network appropriate? Should it bemaintained or modified and, if so, how?
Should the segmentation of the network be supplemented by atemporal differentiation, which would be introduced only on thesaturated sections of the network?
Can the reservation fee be devoted to objectives 2 (optimal utilisationof the network) and 3 (development costs) and the operating charge toobjective 1 (cost coverage), the public contribution to operation being
devoted essentially, if not exclusively, to objectives 4 (harmonizationof competition) and 5 (regional development) and the public
investment subsidies being devoted to objectives 3 (development

192

costs), 4 (harmonization
development)?

ofcompetition)

and5(regional

In short, for which part of the network should we try to achieve total costcoverage and on which part should we renounce this, provided that thecorresponding public contributions are received?

4.3. Price differentiation according to the activity−−

Depending on the reality of the intermodal competition, which varies
greatly according to the activity and the market, should we envisage
price differentiation according to the nature of the activity (freight,
mainline services, regional and local services) and according to theorigin or destination of the links (services to or from the ports, forexample)? Is such an option to some extent the same as that of the"contributive capacity" advocated by the SNCF?
Should the total cost pricing on certain parts of the network concern
all train categories or only those that are determining factors for
operation and for capacity increase requirements (the case of suburban
trains in the Île-de-France, for example)?

5. PRACTICAL CHARGING METHODSIn addition to these three sets of major choices, practical charging methods
also need to be clarified and discussed.
The charging should be stable (which argues in favour of introducing thefinal pricing system right away, with no transition stage), relatively simple andtransparent, if we want it to produce all its incentive effects.
Any differentiation envisaged must be able to be effectively measured atreasonable cost if it is to be useful. Many refinements relating to the technicalcharacteristics of the network or the trains are interesting in theory but rarely
operational. To what extent should we take account of the train characteristics(power, length, axle weight, etc.) and the way in which it uses the infrastructure(speed, stops, etc.)?

193

−
−

−

−

−

Charging is generally based on the train-kilometre. Should we add acharge connected with the time that a particular part of theinfrastructure is used (a platform in a saturated station for example)?
The access fee (fixed term) must not be discriminatory nor constitute abarrier to entry: at what level should this access fee be fixed? Should
we envisage a possibility of choice (as in Germany), with a highaccess fee and lower variable charges or no charge for access andhigher variable charges?
Should we also introduce the possibility of negotiating the charges, asin the United Kingdom, according to the length of the contracts, oreven income guarantees, or provide only for simple quantity
discounts?
Should we envisage reciprocal penalties and indemnities according to
the respect of commitments of regularity, either by the infrastructure
manager or by the train operators? (such a system is used only in the
United Kingdom)?
Should we implement articles 6 and 10 of Decree 97-446 relating to
specific charges in the case of particular investments? Should we giveup this idea or use it only when really justified, i.e. rarely, in order toavoid a kind of "balkanisation" of the pricing?

Many other questions are no doubt worthy of mention, at the risk ofclouding the debate on the major issues. These will be raised at theappropriate time.

194

SUMMARY OF DISCUSSIONS

195

196

SUMMARY

INTRODUCTION ........................................................................................... 199

1.

STRATEGIC OBJECTIVES IN THE DESIGN OF USERCHARGES............................................................................................... 199

2.

BASIC PRINCIPLES .............................................................................. 202

3.

PRACTICAL DETAILS.......................................................................... 205

CONCLUSIONS.............................................................................................. 207

197

198

INTRODUCTION

Against a background of historical decline in rail transport in Europe(except for high-speed passenger transport), railway reform has now entered thephase of implementation. After separating infrastructure from operations, on an
accounting basis at least, governments now have to define the user charges thattrain operators will pay for the services provided by infrastructure managers.
The very newness of the concept of infrastructure charging raises problems andcountries have not all taken the same approach in the solutions adopted. At thesame time, the development of European “freight corridors” as a means offacilitating international rail transport inevitably makes user charging an issue
as soon as more than one network is involved. Underlying this issue arebudgetary pressures in Europe that seek to reduce subsidies to rail networks.
What features must a user charging system have in order to reverse thehistorical decline of the railways: in other words, to make services morecompetitive, end deficits and reduce the reliance on subsidies?
The Round Table set out to answer these questions by determining:----

firstly, strategic objectives in the design of user charges;
secondly, the basic principles for user charging systems;
thirdly, practical points for the design of user charging systems.

1. STRATEGIC OBJECTIVES IN
THE DESIGN OF USER CHARGES

It is the vertical separation of rail operations and infrastructure that brings
the issue of user charges for railway infrastructure to the fore. The main
objective in separating operations and infrastructure was to make the component
costs of rail services transparent (use of track, equipment, manning), enabling
inefficiencies to be better identified and controlled. Separating the accounts for199

operations and infrastructure is also prerequisite to introducing competition.
Since competition encourages innovation and productivity gains, it could reduce
the railways’ reliance on subsidies and increase their modal share.
Once more than one undertaking has rights of access to infrastructure to
run trains, a mechanism is required to ensure that fees and conditions for accessare non-discriminatory. This can be promoted by setting rules for the structure(and/or level) of charges that can be levied. Among the many objectives thatpolicymakers may seek to achieve through such rules are:
−
−
−
−
−
−

Cost recovery (possibly including external costs) from users;
Better utilisation of infrastructure capacity;
Guidance for investment choices;
An increase in the market share for railways as opposed to othermodes;A reduction in the costs of rail transport and an increase inproductivity;
An improvement in the quality of rail services.

Moreover, the problem of infrastructure charges is linked to that ofinfrastructure funding. A balance has to be struck between these imperatives
and different countries address this in different ways.
To date, half the networks in ECMT countries have defined principles forthe formulation of charges, at least for freight transport. However, at present,
the level and structure of these charges vary widely from country to country.
This is due in part to pricing polices which involve trade-offs between
geographical, historical and societal considerations. For example, countries
with remote or disadvantaged areas tend to impose low charges for serving
them. Moreover, it is difficult to speak of any move towards uniformity, given
the extent to which pricing practices are shaped by divergent railway reforms.
In the United Kingdom, for example, Railtrack -- the infrastructure manager -has been privatised, and user charges must be such as to generate returns on thecompany’s assets.
It is readily seen, then, that pricing rules are tied in with how railway
reform has been organised -- given that the relations between the players
involved in rail services differ enormously from one country to another -- andwith the strategic objectives that have been assigned thereto. These objectives
are many and sometimes conflicting, and one might well question whether user
charges for railway infrastructure are necessarily the best means of pursuingpolicy goals. Another result of this multiplicity of objectives is that any efforts

200

at European harmonization will necessarily be very difficult. Setting multiple
goals for the charging system is likely to make it extremely complicated, when
what is needed to attract new rail operators is a straightforward, transparent
charging system. Given the variety of national pricing arrangements, the Round
Table sought to highlight the essential elements that economic theory suggests
should be the basis of all rail infrastructure charging systems.
In a market economy, pricing serves to guide decisions in such a way as toencourage the more efficient use of available resources. Prices are amanagement tool which gives the system new possibilities for development.
This is how the introduction of user charges for railway infrastructure must be
seen -- as a powerful instrument for modernising the railways and improving
their performance, i.e. for making them better able to meet competition fromother modes of transport. In order to bolster the railways’ share of aggregatetransport, it is necessary to tackle costs, network quality and the productivity of
all railway companies, whether they provide infrastructure or operate services.
Accordingly, a system of user charges should serve to optimise network
management, i.e. to improve capacity utilisation, orient investment decisions
and encourage productivity gains throughout, thereby making it possible toreduce recourse to government funding.
There is a direct and very rational link between access charges and theeconomic value of infrastructure: pricing and capacity management are related
elements. If infrastructure access is not charged at the real cost of making it
available, service operators will be inclined to overuse it, because they will nothave to pay the actual costs of providing it. Prices that do not reflect the valueof the resource used may lead to excessive demand for, or inefficient use of, that
resource. That is generally the situation which has prevailed until now. Publicfunding in the form of subsidies made up infrastructure account deficits, wheresuch an account existed. With infrastructure use failing to generate adequate
returns, expansion was impossible without government subsidies. These are an
unreliable resource as always at the mercy of budget restrictions.
The primary economic objective of user charging should thus be toencourage rational use of infrastructure. With appropriate charges, i.e. charges
that reflect the costs of making the infrastructure available, the economic utilityof the infrastructure will become clear from the amount of use made of it. The
revenues generated from user charges will give a signal to infrastructure
managers that will tell them if infrastructure development will be efficient. The
network will thus be managed by demand instead of by subsidies, which areoften poorly planned and arbitrary. The principles of user charging forinfrastructure will largely determine investment policy. This should clarify

201

risks that were often not apparent in integrated undertakings whose goals were
often far too broad-ranging, complex and conflicting.
Clear, unambiguous objectives have to be set for the railway system if it is
to be rescued from its current plight. From the above, what might be called“cost regulation”, therefore has to be a priority objective. This would put an
end to following too many conflicting objectives. Also, the goal of cost
regulation is perfectly consistent with the primary objective of railway
restructuring, which is to introduce transparency and competition into therailway system: in a market economy, firms compete on the basis of theirrespective production costs, which presupposes that they are in full control of
their internal pricing structures, hence the notion of transparency.
What features must a pricing system have in order to achieve this?

2. BASIC PRINCIPLES

The fundamental principle for incorporation in a system of user charges isto relate the charge for running one additional train to the additional costs
entailed. This is the marginal-cost pricing principle. Such marginal costs are
incurred through extra wear and tear on tracks, signalling operations, theadministrative costs generated by additional trains and, where applicable, theelectric power consumed. These particular marginal costs are designated as“short-run”.
If a network is congested, as happens when capacity is inadequate, acongestion charge must be added to shift demand to less congested periods, or
to finance additional capacity. One might add that automatically increasing
capacity to meet demand does not necessarily ensure optimal resource
allocation:
discouraging use when infrastructure is congested can beperfectly justifiable.
Assuming that capacity is to be increased, the additional costs incurred are
long-run marginal costs. These long-run marginal costs should be passed on to
train operators, to encourage them to improve their operations, i.e. how they
manage their requests to run trains. Once they have to “pay” the full costs ofrunning trains out of their own pockets, train operators will be encouraged to
opt for the least expensive train paths. It should be noted that congestion costs
become very real when infrastructure is close to capacity, particularly since202capacity is never optimal -- it can only be extended in steps, not continuously.
It is therefore important on congested lines to allocate scarce paths by making
operators pay the price.
One might conclude from this that, in order to optimise user charges forrailway infrastructure, i.e. to promote rational use thereof, pricing should bebased on long-run marginal costs. However, it should be noted that it is rather
difficult to evaluate long-run costs when several different operators arecompeting for paths. Where this is the case, the costs of the additional capacity
needed by one train operator, which translate the long-run marginal costs into
operational terms, are determined by a series of approximations. Marginal costsin general are difficult to measure and we have to make do with reasonableapproximations.
Experience has shown that a pricing system based on marginal costs
cannot enable the infrastructure provider to break even if the network has large
capacity surpluses. Networks are characterised by economies of density andscale -- short-run marginal costs decline as the network grows -- which meansthat marginal cost pricing leaves some costs uncovered. In such cases where
marginal costs are lower than average costs, they should be supplemented by
fixed charges. Indeed, the Round Table concluded that this was essential for a
pricing system that does not lead to infrastructure account deficits. After all, it
makes more sense to finance contracted services than to finance a deficit. Thus,in order to recoup costs -- a priority for the Round Table -- in addition to thevariable element corresponding to short-run marginal costs, charges should
include a fixed element. This would give us a two-part charge -- short-run
marginal costs plus a fixed element -- that would have the advantage of ease ofuse, a feature that should not be overlooked, in the view of the Round Table.
However, there should also be incentives for infrastructure managers to improve
efficiency and to lower user charges in relative terms.
Given a choice between financing the deficit of a train operator or that ofan infrastructure provider, the Round Table felt it was better to assist theoperator of train services. In fact, the Round Table went one step further: if
appropriate decisions are to be made throughout the entire chain of railway
services, it would be better to subsidise the end user and institute a pricing
system that reflects true costs. Contrary to what one might think, it is because
railways have not been subjected to the rules of a market economy that
Europe’s railway undertakings find themselves in their current situation.
One consideration is that such pricing principles, with a fixed element toensure break-even, would penalise remote areas with little traffic. In this case,to maintain services, subsidies could always be maintained. However, even203

then it would be preferable that funding should go to subsidise operators rather
than infrastructure deficits, i.e. to subsidise the end-user. Furthermore,
focusing on real costs would provide a sounder basis for decisions on whether
or not to maintain loss-making lines.
To take account of the externalities (such as noise) generated when an
additional train is run, pricing could be based on long-run marginal social costs,
by factoring in social costs which are not directly internalised. However, inview of the difficulties in evaluating external costs, the Round Table took theview that the externalities problem confused the issue of infrastructure user
charging and served only to delay the institution of a vitally urgent
pricing system. Ideally, a pricing system based on long-run marginal social
costs would be adopted for all modes. This would avoid the distortion ofcompetition between modes that makes it difficult to solve the problems of therailway undertakings.
Lastly, it should be noted that any theory on better pricing along the abovelines, assumes that charge-payers will behave rationally and avoid taking
expensive routes. In this connection, some Round Table experts were of theopinion that established carriers did not have a long tradition of rational
economic behaviour.
In conclusion, the following key principles can be highlighted.
−−−−

Infrastructure pricing and investment should be linked, and this iswhere congestion plays a key role; infrastructure charges should
preferably be demand-based;
Fixed costs should be covered. Any subsidies required in the interestof social welfare to offset resulting price rises, should be targetted as
closely as possible to the end user;
The use of a two-part tariff presents an opportunity to avoid excluding
traffic which cannot afford to pay a substantial share of fixed charges,
with a minimum tariff corresponding to short-run marginal costs;
Pricing should be transparent, which requires simplicity and a good
information system.

3. PRACTICAL DETAILS204

To preclude any risk of misinterpretation, user charges for railway
infrastructure should be set in a manner that is simple, transparent,
non-discriminatory and stable. Non-discrimination was discussed at length at
the Round Table. Some experts thought it important to offer more favourable
terms to new railway undertakings than to well-established carriers whose size
already guaranteed them preferential terms. Setting low access charges andrestricting reductions for large quantities would encourage competition, which
is one of the basic objectives of reform. However, the new railway
undertakings appearing in Europe belong to large groups that have substantial
capital and therefore need not be given preferential treatment. The demand forpaths is really not a “spot” market, where initiatives would be taken with noconsideration for their implications.
A differentiated tariff is desirable so that those who want limited accessrights will not have to pay a large proportion of common costs. It is important
not to kill off potential demand. With that in mind, it is essential to set up
appropriate user-friendly information systems taking advantage of leading-edge
technologies, such as Internet.
Negotiating procedures should also be instituted alongside posted tariffs inorder to respond with some flexibility to market imperatives: congestion costs - i.e. the costs of expanding capacity -- can vary widely, depending on
circumstances, and theoretical pricing models should be applied with somedegree of latitude.

205

It should also be noted that the possibility of cross-subsidisation, which
benefits large enterprises -- the only ones able to spread fixed costs overdifferent segments of the market -- should be eliminated. Cross subsidies do notmake for transparency, which is a prerequisite for the success of railway reform.
It may be worthwhile, although complex, to impose penalties on operators
responsible for disrupting the system by, for example, causing delays. Thus
both parties would be constrained to meet their commitments.
In Europe, the harmonization of user charges for infrastructure is hamperedby the disparity of the reforms under way -- but progress can be made byestablishing priorities: harmonized pricing structures could be adopted forinternational freight corridors and for the high-speed network. This would yieldsingle pricing formulas conducive to the development of international railtransport.
For some of the Round Table’s experts, ideally, infrastructure funding inEurope should be harmonized, which would make it much easier to devise a
uniform user charging system. Failing this, a viable short-term alternative could
be to cover infrastructure costs to the same extent on preferred routes.
Consideration could also be given to setting up an international system for
infrastructure managers that would offset current disparities in infrastructure
cost coverage. In the longer term, an increase in road transport taxes tointernalise externalities -- in the form of a sophisticated road pricing system -would pave the way for uniform coverage of infrastructure costs in the transport
sector. In any event, it is certain that international co-ordination will be neededto achieve an efficient system.
Train paths can be allocated in a variety of ways. It is preferable toinstitute a dynamic process which makes each of the companies concerned
aware that any given path entails a certain cost. Insofar as the infrastructure
provider is in a monopoly position, its decisions must be subject to appeal to anarbitrator assigned to moderate the viewpoints of the parties in question. For
some experts, it is vital to introduce a specific structure for this purpose, which
could also advise governments on railway organisation and on investment
decisions in particular. Clearly, infrastructure managers, which are in amonopoly situation, might be tempted to earn an economic rent from train
operators instead of investing in track renovation and capacity.
Moreover, it would be aberrant and contrary to the spirit of railway
liberalisation if the traditional carrier enjoyed preferential rights over certain
paths. User charges and train path allocations should not favour one enterpriseat the expense of another. The Round Table pointed out that the task of206

allocating paths was complicated by the fact that traditional carriers operate
suburban trains, which often have preferential access at peak hours and areheavily subsidised. Where this is the case, some compromise on policy will
have to be reached.

CONCLUSION

The potential opening up of rail networks to third parties marks a decisivephase in railway reform in Europe. User charging is the quid pro quo, in
economic terms, for the possibility of having more than one railway operator
providing services. As things stand in Europe, there is very little effective
competition between undertakings operating services on the same network.
User charging systems must be designed to allow effective competition or, atleast, rational use of infrastructure.
Pricing must not disguise the fact that reducing the costs of the railways isa key issue. In order to do so, the actual costs of running a train must betransparent. This is the only way in which all the players in the railway system
will be able to take efficient decisions.
Relating the running of a train to the costs of operating it means taking
marginal costs as the basis for pricing, ideally, long-term marginal social costs,
including the costs of expanding infrastructure where it is congested andexternalities. To ensure, at the same time, that infrastructure costs are fully
covered, a two- or three-component pricing structure, which includes a fixedcharge, is recommended. Within this fixed element, care should be taken to
ensure that potential new entrants seeking low-volume operations are notexcluded through a high access charge. The Round Table felt that it waspreferable to cover train operators’ losses, i.e. to subsidise end-users, rather thanthe deficits of infrastructure operators.
In Europe, having a range of unco-ordinated charging systems complicatesthe issue for international transport enormously. Given that this is the case, itwould be preferable to harmonize the structure of the different charging systems
and, at a later stage, to standardize the extent of coverage of infrastructure
charges. This would avoid charging different rates for international transport on
different routes.

207

To sum up, the methods recommended by the Round Table are based on
marginal costs. This is the ideal theory and it should be stressed that departurefrom it will result in deficits and waste of resources for the community. Lastly,
to those who would object that the concept of marginal costs which underpins
the Round Table’s proposal is a difficult one to apply, it can be responded that it
is possible to make reasonable estimates which provide valid approximations.

208

LIST OF PARTICIPANTS

Monsieur Claude MARTINAND
Président
Réseau Ferré de FranceTour Pascal A
F-92045 PARIS-LA DEFENSE

ChairmanProf. Dr. Gerd ABERLE
Justus-Liebig-Universität Giessen
Lehrstuhl VWL I
Licher Strasse 62
D-35394 GIESSEN

Rapporteur

Monsieur Luc BAUMSTARK
Commissariat Général du Plan
5 rue Casimir Perier
F-75007 PARIS

Co-rapporteur

Monsieur Alain BONNAFOUS
Directeur de la MRASH
Laboratoire d’Économie des Transports (LET)MRASH
14 avenue Berthelot
F-69363 LYON CEDEX 07

Co-rapporteur

209

Mr. John DODGSON
Senior Consultant
National Economic Research Associates - NERA
15 Stratford Place
GB- LONDON W1N 9AFN

RapporteurProf Jan Owen JANSSON
Professor of Transport Economics
Linköping Universiteit
Linköping Högskola
S-581 83 LINKÖPING

Rapporteur

Monsieur François BEFAHY
General Manager - “Voyageurs National”
SNCB
85 rue de France
B-1060 BRUXELLES

Mr. Magnus BØENPermanent Adviser
Ministry of Transport and Communications
P O Box 8010 Dep
Akersgt 59
N-0030 OSLO 1

Mr. K. CELINSKI
Director of Department of Railways
Ministry of Transport and Maritime Economy
6/4 Chalubinskiego str
PL-00 928 WARSAW

Monsieur Gunnar GUSTAFSSON
Directeur du Département Infrastructure
Union Internationale des Chemins de Fer
16 rue Jean Rey
75015 PARIS

210

Mme Dagman HAASE
Director Marketing and Sales
Deutsche Bahn AG
Stephensonstrasse 1
D-60326 FRANKFURT (Main)

Mr Jan HODGSON
Communautés Européennes
DG VII B2, BU31, 7ème étage
200 rue de la Loi
B-1049 BRUXELLES

Mr. Bertil HYLEN
Railway University
Swedish National Road and Transport Research InstituteS-581 95 LINKÖPING

Monsieur Jean-François JANIN
Sous-Directeur - DTT
Ministère de l’Équipement, des Transports et du Logement
Grande Arche de la Défense Paroi Sud
F-92055 LA DEFENSE CEDEX

M. le Professeur Andres LOPEZ PITA
Universidad Politecnica de Cataluna
Catedratico de Ferrocarriles
Gran Capitan s/n Modulo B1
E-08034 BARCELONEMr Harald MINKEN
Chief Research Economist
Institute of Transport Economics (TOI)
Postboks 6110 Etterstad
N-0602 OSLO

211

ObserverProf. Christopher NASH
University of Leeds
Institute for Transport Studies
GB- LEEDS LS2 9JT

Mr Jan-Eric NILSSON
Dalarna University
Centre for Research on Transportationand Society - CTS
S-781 88 BORLANGE

Monsieur David NIVEN REED
Chargé de Mission
Union Internationale des Chemins de Fer
16 rue Jean Rey
75015 PARISMr Marco PONTI
Professor of Transport Economics
TRT Trasporti e Territorio SRL
Piazza Arcole 4
I-20143 MILAN

Mr David REAMS
Office of the Rail Regulator
1 Waterhouse Square138-142 Holborn
GB- LONDON EC1N 2ST

M. le Professeur Robert RIVIER
École Polytechnique Fédérale de LausanneDépartement de Génie Civil
ITEP - TSO
CH-1015 LAUSANNE

212

Mr. Nicolas ROODT
Ministry of Transport, Publics Works and Water Management
Department of Infrastructure Policy - IB/B
PO Box 29 901
NL- 2500 EX THE HAGUE

Mr. Gottfried SCHMITTNahverkehrsgesellschaft Baden-Württemberg
Wilhemsplatz 11
D-70182 STUTTGART

Mr. Robin TUCKER
27 Old Deer Park Gardens
GB-RICHMOND TW9 2TN (Surrey)

Mrs. Caroline VAN DER MAAS
Ministry of Transport, Publics Works and Water Management
Transport Research Centre AVV
PO Box 1031
NL-3001 BA ROTTERDAM

Professeur José Manuel VIEGAS
CESUR - IST
Av. Rovisco Pais
P-1096 LISBONNE CODEX

Mr. Jerzy WRONKA
Research Institute for Transport Economics
Korzeniowskiego 1
PL-70 211 SZCZECIN213

ECMT SECRETARIAT

M. Gerhard AURBACH - Secretary-General

Mr. Jack SHORT, Deputy Secretary-General

ECONOMICDIVISIONRESEARCH,

STATISTICS

Mr. Alain RATHERY, Head of Division
Mr. Michel VIOLLAND, Administrator
Ms Françoise ROULLET, Assistant
Mrs Julie PAILLIEZ, Assistant

TRANSPORT POLICY DIVISION
Mr. Stephen PERKINS - Principal Administrator

214

AND

DOCUMENTATIONALSO AVAILABLE

Express Delivery Services. Series ECMT - Round Table 101 (1996)(75 96 04 1) ISBN 92-821-1214-4
France FF110
Other Countries FF 145 US$28

DM42

Changing Daily Urban Mobility: Less or Differently?. Series ECMT - Round Table 102 (1996)(75 96 06 1) ISBN 92-821-1216-0
France FF260
£34
US$50
DM76
The Separation of Operations from Infrastructure in the Provision of Railway Services. Series
ECMT - Round Table 103 (1997)(75 97 02 1P) ISBN 92-821-1221-7
France FF295
£38
US$58
DM86
New Trends in Logistics in Europe - Round Table 104 (1997)(75 97 05 1 P) ISBN 92-821-1224-1
France FF215
£28

$US42

DM63

Infrastructure-Induced Mobility. Series ECMT - Round Table 105 (1998)(75 98 07 1 P) ISBN 92-821-1232-2
France FF400
£40
$US67

DM119

Intercity Transport markets in Countries in Transition. Series ECMT - Round Table 106(1998)(75 98 10 1 P) ISBN 92-821-1235-7
France FF400
£41
$US66
DM119
Rail Restructuring in Europe (1998)(75 98 08 1 P) ISBN 92-821-1233-0
France FF180

£18

$US30

DM54

Prices charged at the OECD Bookshop.
The OECD CATALOGUE OF PUBLICATIONS and supplements will be sent free of charge
on request addressed either to OECD Publications Service,or to the OECD Distributor in your country.

215