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  "documentTitle": "Rail industry cost and revenue sharing (2011)",
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      "text": "The relative attractiveness of an outperformance-only EBS mechanism and a symmetrical mechanism depends on how train operators price these two mechanisms, and this is uncertain.",
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      "text": "ORR/ATOC/Network Rail. Rail industry cost and revenue sharing.",
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      "text": "It is uncertain how train operators would price the option value if an outperformance-only Regional EBS mechanism were introduced through a franchise bidding competition. However, L.E.K. thinks it likely that bidders would price this conservatively due to the uncertainty over the level of variability and train operators lack of control over this item",
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      "text": "The existence of the option value would make it more difficult to secure VfM through implementing an outperformance-only Regional EBS during existing franchises. Train operators would be unlikely to agree to pay for the option value (or at least to pay for its full value) so there would be a negative VfM impact unless the train operators made a large enough contribution to Regional IM efficiency improvements to offset this",
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      "text": "In summary, the relative attractiveness of an outperformance-only EBS mechanism and a symmetrical mechanism depends on how train operators price these two mechanisms, and this is uncertain. If both mechanisms were priced competitively based on good information then the symmetrical EBS mechanism would be the more attractive because TOCs would be less likely to ignore the mechanism. However, the uncertainty over the pricing of this mechanism should not be underestimated",
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      "text": "The main advantage of an outperformance-only EBS mechanism over a symmetrical mechanism is that bidders would not have to charge a risk premium to protect themselves against the potential downside risk. However, it should be noted that the EBS mechanism could include caps and tapered sharing percentages to limit the downside exposure to train operators and therefore limit the risk premium charged by TOCs",
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      "text": "There are two significant disadvantages of an outperformance-only Regional EBS mechanism relative to a symmetrical mechanism: First, if train operators believe that the Regional IM is going to under-perform their baseline then they may simply ignore the EBS mechanism because there would be no reward for contributing to efficiency improvements. Second, it becomes more difficult to value the EBS mechanism because the value becomes more sensitive to the variability of the Regional IM's performance versus baseline. This concept is described in more detail later but in essence, the train operators would benefit from this underlying variability because they receive a share of any outperformance but do not have to make any payments in the event of underperformance. This phenomenon is often referred to as \"option value\"",
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