Railways fares by tyndale

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									                   Railways: fares
                   Standard Note:   SN/BT/1904
                   Last updated:    19 November 2009
                   Author:          Louise Butcher
                   Section          Business and Transport

This Note covers fares, travel cards and penalty fares. For further briefings on railways-
related issues, visit the Railways page of the Parliament website.

In April 2005 the Department for Transport assumed responsibility for regulated fares.
‘Regulated fares’ are most fares used by commuters; where rail travel has a degree of
monopoly power; and long-distance ‘saver’ tickets to ensure that reasonably-priced walk-up
leisure travel remains available. All other fares are ‘unregulated’ and are determined
commercially by the train operating companies (TOCs). Around 45 per cent of fares are
subject to regulation. The fares structure was simplified in 2008.

Since January 2004 annual rises in regulated fares have been limited to RPI+1 per cent;
previously it was RPI-1 per cent. This has resulted in year-on-year fare increases with which
passengers have consistently expressed their dissatisfaction. However, as the RPI in July
2009 was -1.4 per cent regulated fares for 2010-11 will fall by 0.4 per cent from January
2010. On 3 May 2005 the penalty fare change was increased from £10 to £20.


1    Framework for fares regulation                                                         2 

2    Fares regulation policy, 2004-                                                         4 

3    Fares regulation policy, 1996-2003                                                     8 

4    Fare levels                                                                            9 
     4.1  2004-                                                                             9 
     4.2  1995-2004                                                                        10 

5    Travel cards                                                                          12 

6    Penalty fares                                                                         13 

This information is provided to Members of Parliament in support of their parliamentary duties
and is not intended to address the specific circumstances of any particular individual. It
should not be relied upon as being up to date; the law or policies may have changed since it
was last updated; and it should not be relied upon as legal or professional advice or as a
substitute for it. A suitably qualified professional should be consulted if specific advice or
information is required.

This information is provided subject to our general terms and conditions which are available
online or may be provided on request in hard copy. Authors are available to discuss the
content of this briefing with Members and their staff, but not with the general public.
1       Framework for fares regulation
The Secretary of State 1 has an obligation under section 28 of the Railways Act 1993, as
amended, to ensure that where it appears necessary, fares or certain classes of fare are
‘reasonable’ in all circumstances of the case:

        … if it appears to the [appropriate franchising authority] that the interests of persons
        who use, or who are likely to use, franchised services so require, [it] shall ensure that
        the franchise agreement in question contains any such provision as [it] may consider
        necessary for the purpose of securing that any fares, or any fares of a class or
        description, which are to be charged are, in [its] opinion, reasonable in all the
        circumstances of the case.

        The Secretary of State's first Instruction and Guidance to the Franchising Director after
        rail privatisation obliged him to consult the Rail Regulator before deciding whether to
        include this provision in a franchise agreement and what provision to include. Overall,
        the view of the then Franchising Director was that where effective competition was
        provided by other forms of transport, market forces were more efficient than regulation
        in keeping fares at a reasonable level. Where he did decide to regulate, the provisions
        were contained in the franchise agreement and he specified the maximum rate of fare
        rise that could take place during the term of the franchise. A joint announcement was
        made by then Secretary of State and the Franchising Director on 15 May 1995 giving
        details of the policy on fares regulation. Broadly, the Franchising Director was to
        regulate key commuter and leisure fares.

The Railways Act 1993, the Transport Act 2000, and the Railways Act 2005 give the
Secretary of State the power to regulate fares through the franchise agreements with the
TOCs where this is in the interests of passengers. Although the 1993 Act does not define
‘reasonable’, the principal market in which such regulation has been deemed necessary is
the commuter market around London and certain other cities, where commuters have few
practical alternatives to rail. Fares regulation has therefore been applied through franchise
agreements to limit increases in these fares. Fares regulation has also been applied outside
urban areas, to weekly seasons, long-distance ‘Saver’ fares and shorter distance standard
return fares.

Until 2008 fares were regulated through a ‘fares basket’ where a limit or ‘cap’ is applied to a
weighted average of the relevant fares on each train operating company (TOC). Because
fares regulation worked by applying a cap on the total value of fares baskets, there were
increases in individual fares that were greater (or less) than the permitted increase in the
basket as a whole. However, individual fares within fares baskets were limited to a rise of no
more than five per cent above the basic policy in any one year.

Between 1995 and 1998 the cap on increases to regulated fares was equal to that of the
Retail Price Index (RPI); from 1999 to 2003 it was one per cent less than RPI (RPI-1); 3 and
since 2004 it has been one per cent above RPI (RPI+1). 4

Unregulated fares are determined commercially by the TOCs. Changes to fares can be made
during a franchise agreement as long as the financial effect on the franchisee is neutral.

    formerly the Strategic Rail Authority (SRA) and, before that, the Franchising Director
    DoT and OPRAF, New Rail Fare Policy, 15 May 1995
    DfT, Directions and guidance to the Strategic Rail Authority, April 2002, paras 6.1-6.4 [DEP 02/2016]
    SRA, Fares review conclusions: Britain's Railway, properly delivered, June 2003; DfT, Directions and
    guidance to the Strategic Rail Authority, October 2004

To preserve the benefits of a co-ordinated national network, TOCs are obliged as a condition
of their franchise agreements to be a party to and comply with approved arrangements for
through tickets, conditions of carriage and telephone enquiries. The arrangements approved
for the purposes of this condition are the industry-wide and Department-controlled Ticketing
and Settlement Agreement (TSA), National Rail Conditions of Carriage and the National Rail
Enquiry Scheme (NRES). The TSA places an obligation upon TOCs to offer “inter-available”
fares (i.e. fares that can be used on the services of any train company) on all routes.
Unregulated fares can be set on a commercial basis by the TOC within the industry
framework provided by the TSA.

Under the Railways Act 2005 the responsibility for some consumer protection issues was
transferred from the SRA to the Office of Rail Regulation (ORR). This includes timetabling
information and the requirements for franchisees to be party to certain industry agreements
including through-ticketing. Issues about unregulated fares tend to come under the consumer
protection or competition law remit, which is dealt with by the ORR in conjunction with the
Office of Fair Trading (OFT). The Competition Act 1998 gave the Regulator and the OFT
concurrent powers to investigate suspected infringements of the Act’s prohibitions in relation
to “services relating to railways” (as defined in section 67 of the Railways Act 1993, as

    •    Chapter I prohibits agreements between undertakings, decisions by associations of
         undertakings or concerted practices which have the object or effect of preventing,
         restricting or distorting competition in the UK (or any part of it) and which may affect
         trade within the UK (or any part of it);

    •    Chapter II prohibits any conduct by one or more undertakings which amounts to the
         abuse of a dominant position in a market if it may affect trade within the UK (or any
         part of it).

There has been some question about how the Regulator uses this power. For example, in
2001 the Regulator received a number of complaints from passengers and passenger
representatives about the scale of increases of the unregulated fares on Virgin’s West Coast
Trains. After considering whether it would be appropriate to undertake a formal investigation
under the 1998 Act, and in particular what competition law requires to be established when
looking at whether a particular fare charged by a franchise operator is excessive, he
concluded that:

        ... in the absence either of evidence of excessive profit being generated across a
        franchise as a whole, or of other evidence that the level of a particular fare has no
        reasonable relationship to the real costs or the real value of the product offered, there
        are no reasonable grounds for suspecting a franchise operator of a breach of the
        Competition Act 1998. 5

The Regulator also noted that the powers conferred by the 1998 Act are not a means for
general control of prices. Rather, they are aimed at protecting competition. The Transport
Committee, in its 2006 report on train fares and ticketing, criticised the inability of the ORR to

    ORR press notice, “No grounds to suspect Virgin of breaking competition law on West Coast fares”, 30
    November 2001

control exorbitant rail fares through the 1988 Act and recommended that this power should
be reviewed. 6

2       Fares regulation policy, 2004-
Full details of the post-2004 fare structure, including the requirements as to ‘fares
baskets’, can be found in Appendix C to the 2003 Fares Review Conclusions.

In 2003 the SRA conducted a major fares review. The outcome of that review was that after
1 January 2004 fares would be regulated fares in two categories, known as ‘protected fares’
and ‘commuter fares’. Protected fares include saver returns, standard returns and weekly
season tickets, while commuter fares include season tickets to, from and within the London
Travelcard zones; standard singles and returns for journeys wholly within the London
Travelcard zones; and standard singles and standard returns to any station in the Travelcard
zones from a defined London suburban area, roughly 35-50 miles from London. 7

All other fares are unregulated and TOCs are free to determine these fares according to
market forces. Unregulated fares include all first class fares; ‘advance purchase’ fares;
tickets (other than Travelcards) which include through travel to London destinations served
by other public transport; tickets which include a non-rail element (e.g. leisure park
admission); saver tickets, for journeys where there was no saver fare in 2003; and weekly
season tickets, for journeys where there was no weekly season fare in 2003. Although a
particular fare may be unregulated, in certain cases the regulated fare acts as a ceiling – for
example, an unregulated Supersaver fare cannot logically exceed the price of the regulated
and less restrictive Saver fare.

Almost two years into the new fares regime the Transport Select Committee undertook an
inquiry into rail fares and published a highly critical report in May 2006. 8 The inquiry was
prompted by evidence about the high cost of some tickets and anecdotal evidence and press
reports about the level of complexity of ticket types and prices. The report cited some
examples that the Committee’s inquiry had uncovered such as the sixty per cent increase in
the standard open fare between London and Manchester on Virgin Trains since 1997. The
report also highlighted the difference in rises for regulated and unregulated fares since

        On average, across all types of services and all types of tickets, rail fares increased in
        real terms by 6.3% between January 1995 and January 2005. This average masks
        very significant differences between regulated and unregulated services. The price of
        regulated fares decreased by 4.2% over this ten year period, whilst some unregulated
        fares increased significantly. 9

The complexity of unregulated fares was outlined as follows:

        The range of ticket types, names and prices has increased greatly since privatisation,
        and many witnesses agreed that there is an almost impenetrable jungle of different
        fares, restrictions and price levels. Passenger Focus explained that "so complex is the
        fare structure that the current National Fares Manual (No. 91) valid from September
        2005, lists over 70 fare types, governed by 760 validity conditions, on 102 A4-sized

    Transport Committee, How fair are the fares? Train fares and ticketing (sixth report of session 2005-06), HC
    700, 19 May 2006, para 140
    SRA, Fares review conclusions, June 2003, appendix C
    op cit., How fair are the fares? Train fares and ticketing
    ibid., para 45

         pages." The Railway Consultancy pinpointed the two key areas of unnecessary
         complication in the current system as firstly, "the use of differing names for the same
         product" by different companies, and secondly, "the use of differing (e.g. time-of-travel)
         conditions applied to equivalent products." 10

The report concluded that “the way in which rail fares are currently managed does not serve
the best interests of passengers and it does not provide value for money for passengers or
tax payers.” In particular, the Committee criticised the “deeply fragmented and highly
complex” fares structure; how ‘walk on travel’ was being priced out of the market and the ‘no
frills’ reservation systems used by the TOCs. The report called for the Government to
strengthen the regulation of prices and the regulatory framework more generally so that train
operators could be held to account. In its response to the Committee the Government made
a commitment to reduce fares complexity. 11

In July 2007 the then Secretary of State for Transport, Ruth Kelly, announced the publication
of the Government’s new rail White Paper, Delivering a Sustainable Railway, which includes
its high level output specification (HLOS); at the same time it also published its Rail
Technical Strategy document. 12 On fares and tickets, the White Paper proposed the

         Cheap book-ahead fares and innovation have been welcomed but many find fare
         structures complicated. Passengers want to make the most of the opportunities that
         new technologies provide to enable them to access information and buy tickets in ways
         and places that suit them, rather than at the end of a queue.

         The Government’s strategy includes proposals for simpler fares, modernised ticketing
         and information. 13

While the Government would continue to cap regulated fares at RPI +1, the White Paper
indicated that the Government had no plans to make changes to unregulated fares. The
White Paper argued that “restricting the revenue raised from unregulated fares would have
one or more of the following consequences – lower rail investment, higher taxpayer subsidy,
or less generous deals on other fares”. 14 The Government did, however, announce a plan to
implement a simpler fares structure:

         The Government will therefore ask the industry to back the new structure with a ‘Price
         Promise’. That is to say, if passengers were pointed to one deal when there was a
         better deal on offer, they will be refunded the difference. Where passengers have
         accidentally boarded the wrong train for their ticket type, fair credit should be given
         against at least part of the cost of the original ticket when paying for the upgrade. Train
         operators also need to make clear whether tickets are available for purchase on the

The new structure, as proposed in July 2007, is set out below:

     ibid., para 28
     Response to the Committee’s sixth report of 2005-06 (thirteenth special report of 2005-06), HC 1640, 19
     October 2006
     HC Deb 24 July 2007, cc687-692
     DfT, Delivering a Sustainable Railway, Cm 7176, 24 July 2007, p92
     ibid., para 10.21
     ibid., para 10.24

                                      Simplified fares structure

Fare name                            Validity                           When bought

(Day) Anytime                        Any train                          Pre-book or ‘turn up and go’

(Day) Off-Peak                       Any train outside of the peak Pre-book or ‘turn up and go’
                                     times for travel

(Day) Super Off-Peak                 Any train at less busy times Pre-book or ‘turn up and go’
                                     of day

Advance                              One specific train                 Pre-book up to 18:00 the
                                                                        night before

Under this new structure, ‘Advance’ tickets would always be cheaper than the equivalent
ticket bought on the day. The further ahead tickets are bought, the better the price, but an
Advance option should always be available up to 18:00 the night before travel. ‘Off Peak’
fares are available on all but the busiest trains across the rail network and there would be no
change to season tickets.

The White Paper also stated that while there might be a case for regulating ‘saver’ fares
which had sharply increased in price on many routes, the Government would not be
proceeding with any changes in this area in the immediate future. 16

In April 2008 the Association of Train Operating Companies (ATOC) announced that it had
reached consensus on the new structure, as trailed in the 2007 White Paper, and would
introduce the changes in two stages, in May and September 2008:

          The changes mean that three main ticket types for single and return journeys will be
          available on the rail network. The current names will be replaced by new names.
          Simplified in two stages – in May and September 2008 - rail fares, whether single or
          return, Standard or First Class - will be grouped into the following three categories:
          Advance; Off–peak; Anytime.

          i) From 18 May 2008, all advance purchase fares, many of which are substantially
          discounted, will be known simply as Advance and have common terms and conditions.
          Discounts for Railcards will now also apply. At present, discounts on railcards are not
          available on all advance purchase tickets.

          Advance tickets are not a ‘walk on’ fare. They must be booked in advance for a
          specific train service and are available up to the day before travel. Current fare types
          that Advance tickets will cover have a wide range of names including Leisure Advance,
          Business Advance, Value Advance, SuperAdvance, Apex, etc.

          ii) From 7 September 2008, ‘walk-up’ fares (i.e. tickets that passengers don’t have to
          buy in advance) will be grouped into two categories – Anytime or Off-Peak.

          Anytime fares (singles and returns) can be purchased right up to the day and time of
          travel and used on any train without peak hour or any other restriction. Current ticket
          types that fall into the Anytime category include Open singles and returns.

     ibid., paras 10.32-10.33

         Off-peak tickets are, as their name suggests, cheaper fares for travelling during
         periods when train services are generally less busy. They can be bought at anytime
         for journeys, including day returns, right up until the time of departure but they carry
         restrictions on the time or day of travel. Current ticket types that will become known as
         Off-peak include the Saver and Cheap Day Returns.

         On some routes, where there are two off-peak fares, the cheaper fares will be called
         the Super Off-Peak. Current SuperSaver tickets fall into this category.

         The new fare categories mean that passengers have only to choose from one of three
         ticket types when planning their journey and web sites and booking office information
         will reflect this. The changes are designed to enable people to buy the best value
         ticket to match their journey more easily.

         Passenger feedback and research has suggested that people don’t always find it easy
         to buy the best value ticket to match their needs because of the range of different fares
         presently available. The new names are based on market research with customers
         and the findings are backed up by research undertaken by Passenger Focus, the main
         national passenger representative body.

In 2009 the Transport Committee published a report on the changes to rail fares since 2006
and evaluated wither the changes were proving effective. The Committee concluded that
things were still not as clear as they should be though it did welcome the announcement by
the Secretary of State, Lord Adonis, that the fares basket ‘flexibility’ that allowed TOCs to
increase individual fares within a basket by up to six per cent would cease. 18 The Committee

         ... fares are still complex, and even passengers who understand the system often have
         to spend considerable amounts of time finding the best deals, often only available on
         the internet. Although train operators were at pains to tell us that up to 15% of their
         seats were sold at the lowest fares, and that they were easily available, we have heard
         serious concerns that passengers have to go to extraordinary lengths to secure the
         best value fares. For example, the TSSA Union explained to us how it was almost
         invariably cheaper to buy split tickets where passengers had to undertake complex
         research and buy numerous tickets in order to minimise their fares. The complexity of
         the fares structure still remains an issue for passengers. Information on, and
         access to, the complete range of fares must be available and easily accessible to
         all passengers.

         The Government regulates fares where operators are likely to have a high degree of
         market power. Some 60% of rail travel is undertaken on regulated fares, such as
         Season Tickets and longer distance Off-Peak fares. The RPI+1% system has been in
         place since 2003. Train operating companies have some flexibility in setting prices
         through the 'fares basket' system. This allows some individual fares to be increased by
         up to 5% more than RPI +1%, provided the overall average does not exceed RPI +1%.
         When appearing before us in February, the then Minister of State, Lord Adonis
         announced that:

           In a time of economic stringency I do not think it acceptable for individual commuters
           to face significantly above-average fare increases. The Government's intention is,
           therefore, that in future the cap should apply to individual regulated fares, not just to
           the average of each fares basket.

     ATOC press notice, “ATOC announces simpler rail fares”, 24 April 2008
     DfT press notice “Most commuter fares set to drop next year”, 18 August 2009

         Lord Adonis confirmed this position when he appeared before us in June. We
         welcome the removal of regulated fares basket flexibility. No longer will train
         operators be able to continue the unacceptable practice of increasing selected
         regulated fares by six or seven times the inflation rate. 19

3        Fares regulation policy, 1996-2003
Until 2004 the Franchising Director and then the SRA regulated fares by imposing a ‘cap’ on
increases over the price that was charged in June 1995. From 1 January 1996, increases in
capped fares were not permitted to be more than the RPI from the 1995 base price. For the
four years from 1 January 1999, the price cap was RPI minus one, extended to 1 January
2004 because of the SRA review.

Regulated fares included:

     •    all standard class weekly season tickets for journeys where a weekly season ticket
          existed in June 1995;

     •    all ‘saver’ tickets for journeys where a saver ticket existed in June 1995; and

     •    an unrestricted standard class return, for each journey where no saver fare existed in
          June 1995 (typically journeys under 50 miles, or journeys within the old Network
          South East area);

The rules were slightly different for commuter fares. For London commuter services, and
certain other large urban areas, a wider range of fares, including most tickets purchased by
commuters, were regulated. Thus in London, Edinburgh and Cardiff, where there is
significant commuting by rail, all the key commuter fares (standard season tickets, standard
singles and unrestricted standard returns) were regulated. In these markets price control
operated by reference to ‘tariff baskets’ containing all relevant fares and weighted broadly
according to the income the TOC derived from each. The weighted average fare in each tariff
basket was be capped by the same RPI-related formula, although individual fares within a
basket could be increased by up to two per cent above the increase in the RPI in any one

In the London there was also an adjustment to the fares cap providing additional increases
and decreases according to the quality of service provided by the TOC. This was known as
the Fares Incentive Adjustment Payment (FIAP) regime. Where performance was better than
the target set down in the franchise agreement, fares could rise by up to two per cent above
inflation. Where performance had been worse fares were capped at up to two per cent below
inflation. The rationale was that passengers should both be compensated for poor
performance and pay for improved services through fares. As a result of the SRA
consultation on fares and studies carried out by both AEA Technology & National Economic
Research Associates (NERA), it concluded that the ‘FIAP’ automatic link between London
commuter fares and performance had not worked well and should be abolished. The SRA
decided that it was not possible to replace FIAP without retaining many of its drawbacks. 20

     Transport Committee, Rail fares and franchises (eighth report of session 2008-09), HC 233, 27 July 2009,
     paras 29-31
     op cit., Fares review conclusions, sections 5.3-5.4

4        Fare levels
4.1      2004-
In December 2003 ATOC published details of the fare increases to be introduced from
January 2004. This stated that regulated fares would rise, on average, by 4.1 per cent and
unregulated fares by around four per cent. 21 Fare rises in January 2005 were of a similar
order of magnitude. Both regulated and unregulated fares rose by around four per cent on
average. Analysts were beginning to comment on the large rise in walk-on fares since
privatisation, for example an analysis by Barry Doe, a fares consultant, found that the price of
standard rail tickets had risen by up to three times the rate of inflation since 1995. 22 On 12
December 2005 ATOC announced that from 2 January 2006 the majority of TOCs would
raising their regulated fares by 3.9 per cent and that unregulated fares would rise by varying
amounts according to operator, with average fare rises of around 4.5 per cent. 23 This
concealed considerable differences between operators.

In November 2006 ATOC announced the fare increases for 2006-07. It anticipated a rise in
regulated fares of 4.3 per cent with lower increases on some TOCs, for example on South
Eastern, regulated fares would rise on average by RPI+3 per cent as provided for in the new
franchise agreement. Unregulated fares would rise on average by 4.7 per cent. 24 When the
new fares came into operation in January 2007 it was met with a deluge of outrage in the
press and from consumer groups. 25 On 22 January rail passengers on First Great Western
staged a protest against the fare rises by using ‘fake’ tickets. 26 The 2006 round also saw
controversy on the First Capital Connect (FCC) franchise after FCC announced its decision
to restrict the times of the return journey for passengers using cheap day returns and travel
cards on its Thameslink and Great Northern franchise, with the stated aim of reducing
overcrowding. 27 The Government confirmed in a written answer that the restriction had been
part of the operator’s franchise bid. 28 The decision was heavily criticised by press and
consumers bodies which saw it as a de facto fare rise. 29

The 2008 rise was announced in November 2007. From 2 January 2008 regulated fares rose
by 4.8 per cent, and unregulated fares by an average of 5.4 per cent. 30 Again, the reception
from passengers was overwhelmingly negative, with some commenters linking the increase
for 2008 with the policy set out in the 2007 rail White Paper, which stated that passengers
should pay a greater proportion of the costs of maintaining and expanding the railway. 31 In
November 2008 ATOC announced that the fare rises for 2009 would be six per cent for
regulated fares and an average of seven per cent for unregulated fares. 32 Both of these rises
were based on the July 2008 RPI rate of five per cent; though when the fare rises came into
force in 2009 the RPI rate had fallen dramatically. Passengers again expressed their general

     ATOC press notice, “ATOC outlines rail fare rises”, 8 December 2003
     “Rail fares rise by up to three times inflation”, The Independent, 7 February 2005
     ATOC press notice, “ATOC announces 2006 rail fares”, 8 December 2005
     ATOC press notice, “ATOC announces 2007 rail fares”, 28 November 2006
     see, for example: “Sharp rise in London fares riles passengers”, Financial Times, 3 January 2007
     “Fake ticket protesters rail at ‘Worst Late Western’”, The Daily Telegraph, 23 January 2007
     ATOC pres notice, “First Capital Connect to introduce measures to relieve overcrowding”, 6 June 2006; since
     then the restriction has been lifted to some stations
     HC Deb 24 July 2006, c743W
     see, for example: “Train fares double in secret deal by ministers”, The Times, 29 June 2006; and London
     TravelWatch press notice, “Watchdog accuses operator of ‘profiteering”, 6 June 2006
     ATOC press notice, “ATOC Announces 2008 Rail fares changes”, 28 November 2007
      “Train fares set for series of increases”, Financial Times, 29 November 2007
     ATOC press notice, “ATOC announces 2009 rail fares changes”, 21 November 2008

discontent at the above-inflation fare rises 33 and The Times reported that in 2009 “the
average regulated fare will cost 0.6 per cent more in real terms than in 1997. On some routes
the increase will be more than 6 per cent”. 34

In July 2009 RPI stood at -1.4 per cent, meaning that regulated rail fares will fall by 0.4 per
cent in 2010. 35 This is the first fall since privatisation. In November ATOC announced that
overall rail fares would rise by an average of 1.1 per cent for 2010. 36 Despite the cut in
regulated fares, passenger groups had warned that train companies were likely to increase
unregulated fares and other charges in order to compensate for the cut. 37 For example, it has
been reported that the Government-run East Coast franchise will see fare rises of between
three and five per cent 38 while First Great Western will increase supersaver fares by 15 per
cent; some advance purchase tickets on Arriva Trains Wales will increase by almost 10 per
cent; and Southeastern Trains will increase the cost of off-peak fares by seven per cent. 39

4.2      1995-2004
Following privatisation the Franchising Director set out his rationale for linking fares to
service quality:


         There are two reasons to relate regulated fares to quality of service:

              •   in the case of most regulated fares the market is fairly insensitive to changes in
                  service quality by making a link between quality and fares OPRAF is providing
                  a strong financial incentive to deliver a high quality service.

              •   in determining whether prices are 'reasonable', in accordance with the Act the
                  quality of the service offered should be taken into account as, in a properly
                  functioning market, an operator would be able to command a higher price for a
                  higher quality product.

         Punctuality and Reliability

         OPRAF will therefore link the level of permitted increases to tariff baskets to
         franchisees' punctuality and reliability

         The approach will be to set out 'target' of train service performance for the individual
         years of the franchise, and to set out the maximum average increases which apply in
         each year provided that these targets are met. If performance falls a given amount
         below target at the point when a year's price ceilings are set, alternative lower ceilings
         will apply. Conversely, if the targets are being exceeded by a given amount, higher
         ceilings will apply. The targets, margins and alternative values of 'k' will all be specified
         at the outset.

         Other aspects of quality

     see, e.g.: “Rail users' fury as fare rises outstrip inflation”, The Guardian, 22 November 2008
     “Commuting cost less under British Rail”, The Times, 1 December 2008
     op cit., “Most commuter fares set to drop next year”
     ATOC press notice, “Train companies confirm lowest fare rise since privatisation”, 16 November 2009
     Passenger Focus press notice, “Passenger Focus welcomes 2010 fare reduction”, 18 August 2009
     “State-owned east coast line defends decision to raise fares by up to 5%”, The Guardian, 16 November 2009
     “Rail fares to rise by up to 15% next year”, The Daily Telegraph, 17 November 2009

         There will be no automatic linkage between fares regulation and other aspects of
         quality of service. But franchises will be encouraged to invest (or to persuade
         Railtrack, ROSCOs and others to invest) to improve the quality of service.

         Where a franchises wishes to fund such investment through higher (regulated) fares,
         he may apply to the Franchising Director for permission to increase fares at a faster
         rate than would otherwise be permitted. In deciding, whether to agree to this, the
         Franchising Director will take into account evidence on the value that customers might
         put on the improvements promised, and the extent to which the franchises will be able
         to demonstrate that such improvements have actually been delivered. Concessions
         under this procedure should be subject to withdrawal if the promised improvements do
         not materialise or are not maintained.

The SRA’s July 2002 consultation paper, proposing a fundamental review of fares policy, set
out information about fares since the introduction of franchising:

         ... between 1995 and 2002 ... standard class passengers faced an average increase of
         19.6%, around 1% above the corresponding change in RPI of 18.7%. Passengers in
         London and South East area have faced the lowest overall increase of 15.7%, a
         decrease in real terms. This is likely to reflect the large number of regulated fares in
         this area. InterCity passengers have faced the highest average increases of 33.8%,
         although the increase faced by standard class InterCity passengers was lower at
         26.7%. 41

The consultation paper stated that there was often a balance to be struck between conflicting
objectives. For example it pointed out that:

             •   lower fares may attract more passengers, but we need to consider how this
                  affects overcrowding;

             •   we need to protect rail users from excessive fares, but must not impose more
                 regulation on operators than is strictly necessary to achieve this;

             •   we need to strike a balance between funding the network from passengers and
                 funding from the taxpayer, as enforcing lower fares will almost certainly require
                 greater subsidy;

             •   we need to ensure that our policy is clear and consistent, allowing operators to
                 plan their business with a reasonable degree of assurance;

             •   improving the railway to achieve our objectives requires investment. Lower
                  fares may reduce the funds available for investment, and conversely, fares
                  revenue may provide a source of funding for investment.

         Finally, it is important to realise that none of our duties and objectives are absolute. We
         are required to show that any action we take in furthering these objectives represents
         ‘value for money’, and is affordable, given the money that we have available, and the
         other competing calls upon those funds. 42

In June 2003 the SRA published its conclusions to the review. Fares regulation would
continue but some changes would be made to the policy, the main ones were:

     •    a change in the annual rate of increase for regulated fares to RPI+1 for three years;
     OPRAF, Fares Regulation for Franchised Passenger Services: an Explanatory Note, 1995
     SRA, Future fares policy - seeking your views, July 2002, p10
     ibid., p8

     •    the removal of the ineffective link between fares and performance from January 2004;

     •    simplification of the mechanism used to regulate fares from January 2004; and

     •    a pledge to review the problems with the regulation of Saver 43 fares (off-peak fares
          for leisure travel of about 50 miles and over) by 2006. 44

5        Travel cards
Section 28(3) of the Railways Act 1993 requires that all TOCs participate in certain approved
discount card schemes for young and student travelers, disabled passengers and those over
60. All TOCs are obliged to participate in such schemes under the terms of their franchise
agreements. The other rail cards, including the network card, are commercial arrangements.

The mandatory schemes are:

     •    Young Persons Railcard (for young people aged between 16 and 25 and students in
          full time education);

     •    Senior Railcard (for those over the age of 60); and

     •    Disabled Persons Railcard (for those with severe disabilities).

The TOCs all send a representative to the scheme council, run under the auspices of ATOC,
and responsible for the administration of all the national cards, both mandatory and
voluntary. The council in turn elects a scheme management group to do most of the work.
The council agrees the conditions of the schemes and they then have to be approved by the
Secretary of State. Subject to certain minor variations, the schemes are standard in form. All
participants in the schemes are required to sell, honour and otherwise operate the relevant

Card revenue in respect of discount card sales is allocated to carriers pro rata to their share
of revenue from fares bought with the relevant discount card. All participating carriers are
subject to minimum marketing requirements which oblige them to ensure that discount cards
are sold and promoted at sites such as designated stations and, in respect of certain
discount cards, by ATOC licensed travel agents. Each participant's share of the marketing
budget (fixed by the scheme council) and other costs incurred in connection with the
operation of each scheme is set according to its share of revenue in the preceding year
arising from the sale of fares to holders of the relevant discount card. There are special
provisions for setting and reviewing initial marketing contributions from new entrants.

To ensure that scheme costs, voting rights and revenue are calculated and allocated fairly, a
participant is required to allow all other participants in the same scheme access to
information on the aggregate sales of discount cards and the tickets purchased with the
cards. ATOC estimates that almost seven per cent of industry revenue is accounted for from
travel using one of these railcards. 45

TOCs are also required to participate in any local authority‘s concessionary fare scheme
providing there is no loss to the train operator.

     in a statement to the House the then Secretary of State pledged that saver fares would continue until 2006
     unless it was possible to introduce a better regime earlier, see: HC Deb 19 June 2003, cc519-21
     op cit., Fares review conclusions
     op cit., How fair are the fares? Train fares and ticketing, Ev 80

The voluntary schemes are based on the Family & Friends and HM Forces Railcards (which
existed under British Rail) and the Network Card (which covers the south-eastern region of
England and is confined to passenger operators serving that area). The voluntary discount
card schemes operate on similar principles to the mandatory card schemes, and the national
schemes are governed by the same scheme council. Unlike the mandatory card schemes,
however, no decisions need to be referred to the Secretary of State for their prior approval.

The Network Card has a separate scheme council composed of the TOCs operating in the
south east. It was introduced in 1986 by the then Network SouthEast division of British Rail
to stimulate demand for off-peak travel. Its provision after privatisation was not made
mandatory by the 1993 Act but the TOCs in the south-east continued to offer it. GroupSave
was launched in July 1999 to target car-size parties who do not usually use the train. The
majority of TOCs are now offering it, including all the TOCs in the south-east. GroupSave is
a walk-up leisure fare where three or four can travel for the price of two adults.

In May 2009 the costs of a number of the mandatory and voluntary railcards were increased
by ATOC. The Guardian reported:

         Around 2.2m rail passengers use railcards, which mostly give a 33% discount on off-
         peak train fares. The changes mean students and other young people using a railcard,
         which costs £26 a year, will see their minimum fare rise from £8 to £12.

         Members of the armed services face the same increase in the minimum fare on their
         HM Forces railcard. Pensioners, meanwhile, are being forced to pay 8% more for their

         The minimum cost of using a Network card, which offers discounts on journeys in
         London and the south-east, has risen by nearly a third from £10 to £13. Meanwhile, the
         card itself now costs £25 a year – a 25% increase on last year's price.

         (...) A spokesman for the Department for Transport said: "Like regulated fares, railcard
         price rises are capped by the government; this is the first increase in two years and is
         within agreed existing guidelines". 46

The idea of a ‘national’ railcard has been floated over the years. The SRA looked at the
possibility of introducing a national railcard in its 2002 fares review and concluded that with
more work such a scheme might be possible without increasing the cost to the taxpayer. 47
However, when it gave evidence to the Transport Committee for its 2006 report into rail
fares, the Department for Transport indicated that initial results from a high-level economic
analysis of possible railcard options suggested that an untargeted railcard available to
anyone on any age would abstract from current revenue and therefore would require
additional taxpayer subsidy. 48

6        Penalty fares
The current Penalty Fares Rules and Penalty Fares Policy can be found on the
Department for Transport’s website.

The British Rail (Penalty Fares) Act 1989 established the original penalty fare regime and
section 130 of the Railways Act 1993 created the present legal basis for maintaining penalty

     “Railcard users hit by 50% fare increase”, The Guardian, 19 May 2009
     op cit., Fares review conclusions, para 7.3
     op cit., How fair are the fares? Train fares and ticketing, Ev 137

fares schemes already in existence, amending them and creating new schemes. Section 130
enables the Secretary of State to make regulations in connection with penalty fares
schemes, and the regulations empower the Secretary of State to make rules under these
regulations. No TOC is obliged to introduce a penalty fare scheme but any who does must
first submit the scheme to the Secretary of State for approval. In 2005 there were 12
operators with penalty fare schemes on their routes. 49

The Railways (Penalty Fares) Regulations 1994 (SI 1994/576), as amended, provide for
operators to recover unpaid penalty fares as a civil debt. They also state that passengers
may be charged a penalty fare or prosecuted for a given offence, but not both; and that it is
an offence for a passenger to refuse to give his or her name and address if an authorised
collector asks them to do so. The regulations set an appropriate level of fine for this offence
and set out the amount of the penalty fare itself. The regulations also allowed the SRA to
make further rules about charging penalty fares. The rules currently in force were published
in 2002, 50 though the responsibility for the operation of the rules and for making any future
rules has now passed to the Secretary of State.

Under the rules, any TOC who wants to charge penalty fares must send the Secretary of
State details of their scheme for his approval. The rules set out the circumstances in which
passengers may or may not be charged a penalty fare, and they make a number of
requirements about how penalty fares are charged. The rules allow the Secretary of State to
stop a TOC charging penalty fares, either completely or in part, if the TOC fails to follow any
of the rules or regulations, or if it believes that penalty fares are being charged in a way
which does not provide sufficient protection for passengers. The Government has made clear
that a penalty fare is a supplementary fare, not a fine. 51

The DfT published a consultation document in August 2004, on increasing the penalty fare
from £10 to £20. 52 A partial regulatory impact assessment published with the consultation
paper, set out the anticipated benefits. Following a positive response to the consultation, the
Railways (Penalty Fares) (Amendment) Regulations 2005 (SI 2005/1095), increasing the
penalty fare from £10 to £20, came into force on 5 April 2005. In November 2009 the
Government published a further consultation on raising the penalty fare to £50 or twice the
full single fare for the relevant journey, whichever is greater. 53 The consultation closes on 27
January 2010.

Even if a company does not have a penalty fare scheme the National Rail Conditions of
Carriage will apply to its passengers. These are available at any ticket office and online and
set out the agreement which a passenger enters into with a TOC when he/she buys a ticket.
Condition 7 deals with the situation which applies if a passenger joins a train without a valid
ticket. This Condition specifies that if you travel on a train without a valid ticket you are liable
to pay the full single or return fare for the journey you have made or wish to make and you
are not entitled to any discounts or special terms which would otherwise apply. Condition 7 is
waived if for any reason you were unable to buy a ticket for your journey or if it was indicated
that a ticket could be purchased on a train.

     RIA to: Railways (Penalty Fares) (Amendment) Regulations 2005
     SRA, Penalty Fares Rules, May 2002; previously the Penalty Fares Rules 1997
     HL Deb 25 January 2000, c1415
     DfT, Amendment of Railways (Penalty Fares) Regulations 1994, August 2004
     DfT, National Rail penalty fares rules policy and charge change consultation process, 4 November 2009

Condition 8 of the National Rail Conditions of Carriage deals with penalty fares regulations.
It simply says that if you travel on a train without a ticket you may have to pay a penalty fare
under those regulations. It says that copies of each TOC’s penalty fares regulations are
available from its ticket offices, although in practice these are often just displayed at the
station. It also says that in the event of a penalty fare being paid, Condition 7 will not apply.


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