Monday 19th Mar, 2018

Aurizon riled up over draft access framework

Coal wagons Aurizon. Photo: Aurizon
Photo: Aurizon

Rail operator Aurizon “will consider the full range” of options to challenge the Queensland Competition Authority’s new draft access framework for the Central Queensland Coal Network.

The QCA on December 15 handed down its draft figures for the fifth access undertaking (i.e. UT5), to cover Aurizon’s operation and management of the CQCN from FY17 to FY21 (inclusive).

The state competition authority’s calculations come to a maximum allowable revenue (MAR) for Aurizon of $3.893 billion over four years, some $999 million below the MAR calculated by Aurizon in its UT5 submission and, “implausibly,” $40 million below the final MAR calculated for UT4, the prior access undertaking.

Aurizon said the QCA’s proposal would have a “significant” impact on efficiency, capacity and reliability, if it was not fixed.

“Aurizon is of the view the QCA has made fundamental errors and miscalculations in its assessment,” the company said.

The company took particular issue with the QCA’s thinking on maintenance spending, saying the authority was providing a UT5 maintenance allowance “almost identical” to UT4, despite recognising the network would be handling roughly 15% more volume, and would be worth roughly $1 billion more than under UT4.

“Aurizon cannot reconcile how a heavy haul rail network with 20% greater asset base supporting substantially higher throughput can be expected to be operated with the same maintenance budget,” the company said.

“Recognising Aurizon’s maintenance allowance reflects its direct costs only, this can only lead to a degradation in the quality of the CQCN and necessarily the service able to be provided to customers, who in the current market environment are demanding an increase in the reliability and capacity of the network.”

Another key figure disputed by Aurizon is the QCA’s calculation of Aurizon’s financial risk in operating the CQCN, defined via the weighted average cost of capital (WACC).

The final WACC figure under the previous undertaking was 7.17%. Aurizon proposed 6.78% for UT5, but the QCA has come back with a draft proposal of just 5.41%.

Aurizon pointed out the QCA’s proposed figure is below the Australian Competition and Consumer Commission’s recent recommendation of 6.3% for the Hunter Valley Coal Network, “an almost identical asset serving Australia’s coal industry, but which Hunter Valley customers have stated has lower risks than the CQCN1”.

The proposed WACC is also below the 6.12% granted to government-owned SEQWater by QCA in December 2017, implying, in Aurizon’s words “that Aurizon has almost the lowest risk of any regulated asset in Australia”.

“Aurizon finds it implausible that the QCA could regard the risk profile of the CQCN equivalent to or lower than the risk profiles applied by other regulators to monopoly utilities and gas pipelines where customer and asset stranding risks are significantly lower,” the rail operator argued.

“When compared to decisions of other national regulators the inconsistency becomes even more stark.”

Aurizon warned that, if implemented, the QCA’s draft decision “would have significant implications for the operational efficiency, volume capacity and reliability of the CQCN”.

“The result would be an overall deterioration in performance of the export supply chain that serves the Queensland coal industry,” the company said.

“Given Aurizon’s level of concern and the implications for the Queensland coal supply chain, Aurizon will consider the full range of potential responses to the Draft Decision.”