Watchdog move boosts Railtrack shares surge

Railtrack shares surged yesterday after the Rail Regulator, Tom Winsor, unveiled a new incentive regime allowing the company to increase its charges to train operators to reflect growth in passenger numbers.

Shares in the embattled rail network operator rose by almost 3 per cent to their highest level since January, ending the day up 23.5p at 845p.

Mr Winsor said that he intended to introduce a carrot- and-stick approach to the regulation of Railtrack in an effort to make it "more imaginative, more creative and more responsive" to the needs of passengers and train operators. "Good performance will be rewarded and bad performance will be penalised," he added.

But the regulator also said that the current charging arrangements penalised Railtrack for promoting growth on the railways by not giving it the scope to increase charges as train journeys increased.

Since privatisation, train journeys have grown by 25 per cent but Railtrack's income from charges, currently running at £2.3bn a year, is fixed. Railtrack says that charges will need to rise by £1bn a year - mainly funded through increased subsidies to the rail operators - if it is to afford a planned £18bn investment plan over the next five years.

Under the new pricing regime, due to take effect next April, Mr Winsor said usage charges should be increased to cover the extra costs to Railtrack caused by the wear and tear of additional trains.

Railtrack gave a cautious welcome to the announcement. Gerald Corbett, chief executive, said: "We see this as a step in the right direction. We have long been arguing for the right incentive framework to deliver the enhancement on the network which is necessary to allow continued growth in rail travel."

However, he said that the regulator's proposals did not go far enough. In particular, Railtrack criticised Mr Winsor's proposal that it should only be allowed to earn the same 7 per cent rate of return on enhancement projects as it receives on renewal and maintenance investment.

Mr Corbett said this took insufficient account of the greater financial risks Railtrack would have to shoulder and the premium its shareholders would expect.

Mr Winsor also disclosed that he will not now announce his final decisions on Railtrack's new charging formula until September. He had been due to announce it in July.

The two-month delay will give him more time to assess the impact on Railtrack of the West Coast main-line modernisation and the Shadow Strategic Rail Authority's proposals for additional investment in the network.