A draft ruling limiting Aurizon’s Central Queensland Coal Network revenues “fundamentally fails” to recognise the commercial and regulatory risks involved in the network’s operation, the company has said in its formal response.
Aurizon on March 12 submitted a 347-page response to the Queensland Competition Authority’s draft decision to limit its Maximum Allowable Revenue (MAR) on the CQCN to just $3.9 billion over the four-year stretch from FY18 to FY21.
The figure is almost $1 billion less than Aurizon originally proposed it should be allowed to earn, and is $820 million less than the revised figure Aurizon proposed in its response.
As foreshadowed by Aurizon boss Andrew Harding in January, the company’s lengthy response focuses on errors it feels the QCA made during its analysis while preparing its draft decision.
“The impact of inadequate recognition of these risks on such a nationally important asset as the CQCN cannot be overstated,” Aurizon Network boss Michael Riches said on March 13.
“Within days of the draft decision being released in December 2017, Aurizon’s market capital value fell by more than $1.5 billion. Analysts, investors and stakeholders both locally and internationally have expressed concern regarding the long-term sustainability of Aurizon’s business if the draft decision is subsequently approved by the QCA as its final decision.”
A key component of the MAR figure is the weighted average cost of capital (WACC) factored in to help determine what a reasonable return Aurizon should earn operating the CQCN.
Aurizon initially proposed a WACC of 6.78%, and has now revised this to 7.03% based on inflation, but both figures are substantially higher than the 5.41% WACC offered in the QCA’s draft decision.
Aurizon has pointed out the QCA figure suggests the CQCN is financially the safest major piece of physical infrastructure to operate in the country, comparing it to the 6.3% WACC calculated for the Hunter Valley coal network.
“Despite professing to do so in the draft decision, the QCA does not step back … and consider whether the overall result – a rate of return of 5.41% – will promote the economically efficient operation of, use of, and investment in the CQCN,” Riches said.
Another major point of contention is maintenance: the QCA’s draft calls for Aurizon to reduce its maintenance allowance by $112 million, a figure Riches calls “insufficient to allow Aurizon Network to effectively manage its business”.
This, he says, is at odds with Queensland’s QCA Act, which stipulates the authority helps “promote the economically efficient operation of” shared infrastructure.
Given the allowable revenue figure will come into effect retrospectively from July 1, 2017 once the QCA’s final decision is made, Aurizon said in January it was left with little choice but to cut back on maintenance spending immediately, resulting in a 20 million tonne cut to the CQCN’s annual capacity.
Aurizon is as a result facing intense legal pressure from miners like BHP and Rio Tinto to revert back to its old, more expensive – but more flexible – maintenance practices, but the operator says its hands are tied.
“[The draft proposal] effectively direct[s] the manner in which Aurizon Network should carry out maintenance on its network,” Riches said.
“Those decisions will also have very real implications for users of the rail network, particularly as the QCA and its independent advisers are unambiguously telling Aurizon Network to prioritise maintenance tasks over tonnage throughput to achieve the lowest cost of maintenance, regardless of the consequences for the efficiency of the supply chain.”
A final decision from the QCA is expected later this year.