Assessment of asymmetric risk in the central Queensland coal system
Client: Queensland Rail
Sector: Rail transport
Synergies’ was engaged by Queensland Rail to conduct an assessment and allocation of asymmetric risks associated with QR’s rail network in the Central Queensland coal basin. Synergies developed an approach to adequately assessing and compensating risk for the possibilities identified in the study.
Regulated entities, such as rail infrastructure providers, often face a skewed distribution of returns (or, an asymmetric risk profile) because they are typically unable to gain from any upside risks, while tending to remain exposed to the downside risks. This is the case facing Queensland Rail (QR) with respect to its rail infrastructure in the Central Queensland coal system. The Synergies’ study developed a framework to guide the allocation of asymmetric risks and compensation for bearing them.
The critical issues for risk allocation are the efficient assignment of risks and appropriate compensation for the entity that bears the risk. Other considerations such as the risk of regulatory error, intergenerational equity and competitive neutrality are also important for rail infrastructure.
Synergies considered the particular asymmetric risks facing QR’s coal rail infrastructure to include derailment, asset stranding, landslip, flood, earthquake, terrorism, fire, credit, catastrophic failure, key person and contractual or other liability.
The preferred approach to the assignment and compensation of risk for QR’s Central Queensland coal network was identified as:- where sufficient information exists to underpin an estimate of the value at risk, then an allowance should be made within the regulatory cash flows
- where information is inadequate to underpin an estimate of the value at risk, then the best assessment of the exposure should be included within the regulatory cash flows and those premiums carried forward to future regulatory periods as a form of self-insurance with any shortfalls or over-recoveries addressed through subsequent adjustments to prices
- QRNA should be provided with protection against liability in appropriate cases where it is not possible to properly assign a probability of failure or the extent of liability.
