Rail infrastructure charges : the issue of scarcity.

European legislation now requires rail infrastructure charges to be based on marginal social cost, although with mark ups permitted for financial reasons, and external costs only have to be charged for when the same is true for competing modes. It also permits charging for scarce capacity, although subject to a capacity review being undertaken. There are broadly two approaches to the measurement of the opportunity cost of scarce capacity. The first is a market led approach in which train operating companies bid for that capacity. Given the need for a set of slots in order to put together a sensible timetable, it is difficult to see how such a bidding process to reveal the value of individual slots could be organised. One possibility is to pre package the slots, but that requires prior knowledge about the set of services the operator wishes to provide; an alternative is an iterative procedure which could however be very time-consuming. Also, the result will at best reveal the value placed on the slot by the operator; only if the subsidy regime gives appropriate incentives in terms of social benefits will this correspond to the social value of the use of the slot. The second approach is via social cost benefit analysis. Methodologies and data exist with which to quantify the social benefits of alternative uses of a particular slot, including valuing overcrowding and people being unable to travel at their preferred time or by their preferred mode. However, the information requirements necessary to apply these methods are stringent; strictly the best alternative use of the slot has to be known, and extensive information on relevant values, elasticities and cross elasticities is also needed. In particular the extent to which traffic will divert to road, and the nature of the roads that would be used, needs to be known in order to quantify the benefits of the service in terms of the relief of congestion, environmental and accident costs of road traffic. In a congested country without an adequate system of charging for the use of roads, this is a crucial element in the appraisal. Both approaches to charging for scarcity are problematic. Moreover, the cost-benefit approach only gives the true opportunity cost as part of a calculation that itself reveals the optimal allocation of capacity. For the covering abstract see ITRD E126595.