During the last twenty years the European rail industry has been transformed. The former model of vertically-integrated, state-owned railways has been replaced with one based on separating rail infrastructure from train operations - to a greater or lesser degree. Sweden was the first country to go down this route. The Swedish move was followed by European legislation, starting with a European Directive in 1991 (91/440). Whilst this Directive, and subsequent legislation, did not require complete separation of infrastructure from operations, a number of countries have followed the Swedish model, most notably Britain. Others have adopted less radical responses, for example, the German model, where rail infrastructure and train operations have been created as separate divisions within a common holding company (see Nash, 2006). Directive 91/440 also required accounting separation of infrastructure and operations, which was intended to encourage clearer understanding of costs in these areas. One of the main aims behind vertical separation in Europe was the introduction of competition on the network, initially with respect to freight. A number of countries have also sought to introduce competition in passenger markets, both through franchising and, to a much lesser extent, open-access (or "on-track") competition. As part of further European legislation (for example, Directive 2001/14) aimed at facilitating competition, and promoting efficient allocation and use of capacity, countries are required to set rail infrastructure charges based on the direct cost of running different services, including: additional "wear and tear" costs of running more trains; scarcity charges; and environmental charges. Non-discriminatory mark-ups are also permitted. The changed model for organising rail transport in Europe has therefore created a key research need; namely to estimate the direct cost of running extra traffic on the network. In this Annex we are specifically concerned with estimating a sub-set of direct costs for the British rail network - namely "wear and tear" costs, and more specifically, the maintenance and track renewal cost part - using econometric methods. In other words, our emphasis is on the maintenance and track renewal element of short-run marginal cost.