Marginal rail- (24.03.06)

When rail franchising started, the rail regulator used to specify the minimum level of service that a franchise could offer. With the most recent franchises being offered, the Department of Transport is specifying the maximum level of service as well as a minimum, sometimes at levels below the existing service that often has increased in recent years.

Ignoring whether this is being done in an attempt to save government subsidy or to ultimately close rural railways, it appears to make a basic economic mistake. Much of the costs of providing a rail service are sunk (fixed) by the peak level of service that is offered. Capacity constraints at these times (normally morning and afternoon peaks) means that the minimum level of service at these times is normally also the maximum, even in rural areas. At other times of the day, the marginal cost of providing the service over empty tracks with trains that would otherwise stand idle is fairly low.

The marginal benefit of running these off peak services can however be fairly high, even when the services themselves may appear lightly used. The knowledge of a frequent service and the flexibility that results from this is attractive in itself to passengers that may even only use the peak service. There is an existance value that means the lack of an off peak service will eventually erode a peak service on the same line. The end result would be to require higher government subsidy or would threaten the viability of the service altogether.

As usual, the market provides the best indicator of whether the service is justified or not. Where a franchise makes the commercial decision to run additional services above a minimum level, they should be able to do so whilst carrying the financial risk. For a government to set a maximum service is an example of inappropriate market control.