In 2018, Synergies was a key economic advisor to Australia’s leading rail infrastructure company (Aurizon Network) for the preparation of its regulatory submission responding to the Queensland Competition Authority’s ‘UT5’ draft decision. The QCA’s draft decision signalled that the regulator was unlikely to approve Aurizon Network’s proposed prices for access to the Central Queensland Coal Network (CQCN), on the basis that costs, and thus prices should be lower. Aurizon Network did not support the QCA’s preliminary view on the basis that it did not reflect the commercial reality of operating and maintaining the network. Following Aurizon Network’s unsuccessful application for judicial review of the QCA’s draft decision, the QCA approved Aurizon Network’s amended draft access undertaking on 21 February 2019.
Aurizon Network is a wholly owned subsidiary of Aurizon Holdings Limited, which manages Australia’s largest coal export rail network, the central Queensland coal network (CQCN).
In accordance with Part 5 of the Queensland Competition Authority Act 1997, Aurizon Network must allow third party train operators to use its network.
Prices for access to the CQCN are regulated by the QCA. The process for gaining access to the network is governed by Aurizon Network’s access undertaking, which is approved, from time to time, by the QCA.
Regulatory decisions are and continue to be a significant challenge for Aurizon, especially where they can be a source of uncertainty for customers and shareholders. Preparing regulatory submissions is time consuming and involves a significant commitment of resources, both for the regulated firm and the regulator alike.
In late 2017, Aurizon Network requested Synergies’ assistance to coordinate, prepare and advise on particular aspects of its submission. Key regulatory issues for Aurizon Network centred on:
What is an efficient level of maintenance expenditure that the infrastructure owner should be permitted to recover through its access charges?
What is an appropriate rate of return on assets involved in supplying and maintaining Queensland’s rail freight infrastructure that is commensurate to the risks that the infrastructure owner must manage?
What are relevant regulatory precedent decisions for the determination of key financial parameters (such as weighted average costs of capital) used to establish a rate of return?
How should uncertainty in the coal market outlook be reflected in the charges that Aurizon Network is permitted to impose on customers?
How should the current access regime be applied to incentivise Aurizon Network to become more efficient and deliver a high standard of service to its customers?
Synergies has extensive and long standing experience with Aurizon Network, having played a substantial role in all of its draft access undertakings to date (UT1-UT5). As a result, prior to commencing this project, we had a deep understanding of Aurizon Network’s business and the policy and regulatory issues involved.
Synergies provided a dedicated resource to Aurizon Network, whose role was to co-ordinate input from throughout Aurizon’s business and to manage the drafting of Aurizon Network’s submission.
In addition, Synergies provided specialised economic advice to Aurizon Network on regulatory pricing issues including the conventional building block approach to tariff setting, asset beta analysis as part of a Weighted Average Cost of Capital (WACC) and rate of return assessment, operating and maintenance cost issues. This advice drew on Synergies’ experience as a leading economic specialist in incentive based regulation, and a key advisor in rail, ports and energy sectors across Australia.
A copy of Aurizon Network’s regulatory submission to the QCA is available here.
Synergies is proud of its long standing relationship with Aurizon Network. Our expertise and knowledge of rail freight issues assist our client to deliver a strong, evidenced based submission to the QCA.