Railtrack shares hit as track access charges set for review

Railtrack shares plummeted after the rail regulator announced a far-reaching review of track access charges paid by train operators. Randeep Ramesh, Transport Correspondent, explains why the industry watchdog's bark is as bad as his bite.

More than pounds 400m was wiped from the company's market value as shares fell from their morning price of 1080p after John Swift QC, the regulator, announced he was looking for "radical and innovative changes to the current charging" regime.

The regulator's review is likely to see a cut in the tariffs Railtrack, which owns the nation's track, signalling and stations, is allowed to charge freight and passenger train operators.

What also concerned the City was the regulator's view that the fees did not reflect Railtrack's costs. "We are looking to see if the same output and service can be provided at a lower cost," Mr Swift said.

In fact, the document he produced was blunter. In it, Mr Swift said: "The real pre-tax cost of capital in current circumstances falls in the range of 6 to 8 per cent ... a lower cost of capital figure might be appropriate". One director at Railtrack fumed at this paragraph, saying: "The regulator must realise that our business is investment-intensive."

Also likely to be hit are the revenues produced by track access charges. The existing price control, which cuts charges by two per cent below inflation each year, expires in 2001. More than 90 per cent of the company's income comes from these fees and any cut would seriously impact the bottom line. Last month, Railtrack's interim figure showed a rise in profits of 10 per cent to pounds 190m.

The Railtrack director, who did not wish to be named, said: "It is not about profit. What about interest and dividend cover? Remember, we have to borrow to fulfil our investment programme."

One option being considered would see the track charges reduced and then any savings being used to cut subsidy to the operators. Mr Swift said: "We look forward to hearing from the Government. It is a political matter whether money could be hypothecated [ring-fenced] and returned to the Department of Environment, Transport and the Regions or whether it is given back to the taxpayer."

City analysts were bearish on the short term prospects of the share price. "It does show that there's still considerable uncertainty, which obviously has an impact on the share price," said Gert Zonneveld, an analyst with Panmure Gordon.

The fall comes after a rally that has seen Railtrack's stock rise almost 10 per cent in two weeks and has shaken top brass at the company.