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. Last Updated: 07/27/2016

U.K. Rail Regulator Sets Soft Profit Curb

LONDON -- Britain's rail regulator on Wednesday unveiled a relatively lenient profit curb regime for Railtrack PLC in the first findings of a review that many had feared would blow a hole in the rail operator's profits.

Publishing preliminary conclusions of a five-year regulatory regime to take effect from 2001, regulator Tom Winsor said Railtrack would be allowed a real pretax rate of return on its regulated assets of 7 percent f with scope to increase that to 7.5 percent.

He also said he would consider Railtrack's current regulatory asset base as pounds 4.07 billion ($6.57 billion).

Winsor's predecessor Chris Bolt had previously indicated he would allow post-tax returns of only 5 percent to 6 percent.

"These are pretty good ? I actually can't believe it," said one rail industry analyst as shares in the company leapt 10 percent to 980 pence ($15.82) in early trade.

Winsor's ruling covers Railtrack's main source of income f the access charges it levies on train operators using its network. Final results of his review are expected in the spring of 2000.

The market had initially been braced for a tough ruling from Winsor, following comments from Winsor in the past few months about Railtrack's lagging performance.

This, analysts feared, could keep financial markets from helping fund the investment spending Railtrack is planning for Britain's creaking railway system.

But in the last two days hopes had risen of a softer approach, leading to a 12 percent gain in Railtrack's shares Monday and Tuesday.

The company's stock had been battered after London's fatal train accident in October.

Winsor said he wanted the review to provide enough transparency and predictability to give investors confidence to provide finance for infrastructure projects.

"It should also help to ensure that Railtrack has sufficient incentive to provide worthwhile network enhancements and help to minimize the transaction costs associated with the applicable process," he added.

Railtrack welcomed the initial findings.

However, it said a demand for efficiency gains of 5 percent a year would be challenging.

It said there were a number of issues it would take up with the regulator.

"In particular, the regulator's efficiency targets will be extremely challenging particularly in a context of growth and development and we are disappointed that he has not yet accepted our arguments for an increase in maintenance and renewal activity in order to sustain the network," Railtrack said in its response.

Railtrack plans to spend more than pounds 35 billion on the network over the next decade, and argues that it needs increased profits to maintain that spending.

In a separate announcement Wednesday, the rail operator said it was spending an increased pounds 5.8 billion on its busy West Coast Main Line.

The cost of upgrading the 640-kilometer route between London and Glasgow/Edinburgh, was almost three times more than company had orignially estimated.

Railtrack had forecast in 1994 that the upgrading would cost around pounds 2 billion.

"These improvements will deliver better safety and punctuality, modern track, higher trains speeds, reduced journey times and substantially increase the capacity on the line," chief executive Gerald Corbett said in a statement.

Giving specifics of the review, Winsor said Railtrack's rate of return could be within a range of 7 percent and 7.5 percent.

He also said he had considered Railtrack's initial regulatory asset base based on the first day's trading value of the company at pounds 2.93 billion.

He said Railtrack's assumed property income was of just below pounds 1 billion over the next period.