WA rail access framework review

Synergies was engaged by the WA Government to assist with the review and presented an initial round options for regulation and prepared a consultation paper on behalf of the WA Government. Following this process, the WA Government decided to broadly maintain its approach to rail access regulation but to review some aspects of the regime, most significantly including the pricing methodology. Synergies then prepared a detailed analysis and evaluation of pricing methodology options. Synergies has also developed a high level cost benefit assessment of the proposed regulatory changes.

The Issue

The Western Australian Rail Access Regime (‘WARAR’) sets the maximum and minimum revenue that the railway owner can recover through access charges paid by users of the railway, and does so both for specific services, and for the entirety of services on a route. In doing so, the WARAR provides a wide range of possible prices within the floor and ceiling band which the infrastructure owner and access seekers can negotiate. If negotiations on this basis between the access seeker and the railway owner break down, then the parties have recourse to arbitration.

This process is designed to ‘guide’ the parties to reach a private solution which the WA Government has previously indicated is designed to ensure that parties negotiate prices within a reasonable range.

The WARAR however provides only limited guidance as to what constitutes a reasonable price.

The wide range of possible pricing outcomes available under the WARAR potentially disadvantages access seekers during commercial negotiations, where infrastructure owners have access to information about actual costs of providing the service to which the access seeker is not privy.

To re-align the bargaining powers of parties in access negotiations, additional prescription and/or guidance could be made available and included in the regime.

After 15 years in operation, the WA Treasury Department is reviewing the WARAR to identify these issues and implement improvements to drive greater efficiency in the use of, and investment in, critical railway infrastructure.

The Solution

Synergies identified two main types of ‘levers’ available to provide more pricing guidance:

• the asset valuation methodology for deriving prices which relates assessing the floor and ceiling costs, particularly (a) how capital costs are assessed and (b) treatment of maintenance expenditure;
• further guidance on what is considered to be a reasonable price.

Asset valuation

Synergies examined different costing and asset valuation approaches, with a view that each particular valuation approach has consequences, for the assessment of floor and ceiling price limits (i.e. the band of prices to cover the cost of maintaining or replacing the asset base).

Synergies examined these options and assessed each pathway against evaluative criteria available under the various options to provide additional guidance on what is a ‘reasonable’ access charge.

Based on this analysis, the WA Government is planning to change its gross replacement cost asset valuation methodology, and introduce a building block pricing methodology, based on the use of Depreciated Optimised Replacement Cost (DORC) for initial value asset valuations.

Pricing guidance

Most regulatory regimes provide detailed price guidance as to the setting of ceiling prices. However, there are only limited circumstances where guidance is provided in relation to how prices should be set below the ceiling price.

One way to overcome this potential imbalance and to promote more effective commercial negotiations is for the WA regime to provide additional pricing guidance to both access seekers and infrastructure owner.

Synergies examined several pricing guidance options, ranging from high level pricing principles through to indicative tariffs.

Ultimately, we recommended to WA Treasury a ‘package’ of options that could be tailored to meet the particular characteristics of certain railway routes. This is because we considered that less prescriptive guidance would be required on routes that are subject to pricing constraints arising from other transport modes (i.e. road), and conversely, a more prescriptive approach may be more suited to routes where competitive tension was not sufficient to constrain prices (e.g. vertically integrated railway lines).

The Benefits

Synergies’ analysis delivered the following benefits to our client:

• The advice drew on our firm’s regulatory pricing expertise and considered a range of primary and secondary criteria that sought to promote commercial negotiations in setting prices whilst also decreasing uncertainty about the likely access price;
• Our technical assessment of the potential pricing options considered practical issues to addressed industry concerns about transitional matters and how best to expedite access solutions; and
• We examined the options, having regard to the different characteristics of various railway routes in WA to ensure our client was fully informed.