ACCC accepts ARTC rail proposal


ARTC and ACCC finally settle on an undertaking to promote efficiency and investment in the Hunter Valley export coal chain

ACCC accepts ARTC rail proposal
ACCC accepts ARTC rail proposal

By Anna Game-Lopata | July 5, 2011

Rail manager Australian Rail Track Corporation (ARTC) and Australian Competition and Consumer Commission (ACCC)
have finally settled on an undertaking to promote efficiency and investment in the Hunter Valley export coal chain.

As a result of ongoing negotiations since 2009,
ARTC
offered a proposal in June this year to manage the Hunter Valley Coal Chain that was acceptable to everyone.

ACCC General Manager transport Anthony Wing
tells SCR
the extensive consultation process involved the coal industry, non-coal users of the network, rail operators, port operators, the Hunter Valley Coal Chain Coordinator (HVCCC) and ARTC.

The new arrangements, approved by the ACCC, include the negotiation of long term access contracts between users of the rail network and ARTC, processes for investment, incentives to promote alignment and efficient use of infrastructure.

"The ACCC is satisfied these access arrangements appropriately balance the interests of all parties, and provide the certainty to underpin investment in infrastructure needed to meet surging demand for Australian coal exports," Wing says.

The Hunter Valley rail network exports around 100 million tonnes of coal worth about $9 billion per year in earnings to Australia every year.

It is one of the largest and most complex coal export operations in the world.

Non coal export users include passenger trains, grain trains, north-south freight trains crossing the network, and coal trains supplying domestic users such as power stations.

Prior to the ACCC’s decision to accept the ARTC’s most recent Hunter Valley Access Undertaking (HVAU), the network was regulated by the NSW Independent Pricing and Regulatory Tribunal (IPART).

"This is a milestone for the industry," Wing says, "as it places regulation in the hands of ACCC and the HVAU."

Wing says the unique features of the Hunter Valley network promoted the need for the HVAU.

"In particular, bottle necks resulting from demand highlighted the urgent need for new investment and coordination of the chain," he says.

However between 2009 and 2011, two ARTC submissions to the ACCC were rejected.

Key aspects of earlier submissions the ACCC took issue with included regulation of ARTC’s access revenues, its rate of return on investment, the processes for determining efficiency, dispute resolution and access arrangements for non-coal access seekers.

"This year’s HVAU incorporates greater transparency in relation to ARTC assessment decisions, better capacity management and trading protocols and an extensively revised capacity investment framework," Wing says.

Innovative features of the HVAU include a tri-partite contracting structure under which coal producers
can contract directly with ARTC, and exercise their access rights using an accredited rail operator.

"This approach was recommended by a review of the coal chain operations in 2008 by Nick Greiner AC, which resulted in the development of a framework to govern the expansion and management of the chain," Wing says.

This year's HVAU also allows for the execution of long term take or pay contracts to underpin investment in the rail network.

"The approach will help coal producers plan complementary long term investment in new mines, mine expansions, above rail and port terminal infrastructure, promoting efficient investment in Australia’s export infrastructure," Wing says.

MANAGING CAPACITY

Anthony Wing says the newly revised HVAU incorporates numerous provisions designed to facilitate alignment of capacity management on the Hunter Valley rail network with other components of the supply chain.

"For example it proposes consultation between ARTC and the Hunter Valley Coal Chain Coordinator (HVCCC) on a range of capacity management issues, helping to achieve a coordinated approach to the planning and daily management of coal chain throughput," he says.

Notably, an ‘anti-hoarding’ provision allows ARTC to remove capacity allocations from access rights holders who cannot, in certain circumstances, demonstrate a sustained need for that capacity.

"This provision should ensure capacity is available to those parties who want it allowing for variation or cancellation of access rights where a user consistently runs services inconsistent with their contracted allocation," Wing says.

Such ‘inconsistent services’ are disruptive to the access rights of other network users, and the risk of cancellation should encourage users to run services as allocated, to promote overall efficiency.

PROMOTING INVESTMENT

While previous versions of the HVAU included provisions dealing with the creation of additional capacity on the Hunter Valley rail network, Wing says coal producer stakeholders expressed concern these were not sufficient to ensure timely and efficient investment in the network.

"In the June 2011 HVAU, the additional capacity investment framework proposed by ARTC seeks to address these concerns," Wing says.

"The framework incorporates several pathways by which investment in additional capacity may be pursued, including at the instigation of ARTC, following recommendation by the HVCCC or at the request of particular access seekers."

There is also a user-funding option to allow users to fund investment in new network capacity in circumstances where ARTC chooses not to.

"The negotiation of user-funding contracts with ACCC arbitration available in the event of a dispute, along with clearer decision-making criteria for ARTC when making investment related decisions are significant additions to the HVAU," Wing says.

PRICING

Wing says a bone of contention for ACCC with previous undertakings from ARTC revolved around the percentage return on investment required to provide a competitive, yet commercially viable environment for all parties.

"This year’s undertaking settles on a revenue cap and methodologies to promote pricing that is efficient and reflects the cost of providing access to the network," Wing says.

While ACCC has expressed concerns about a percentage return on investment for ARTC above 8 percent, Wing says the watchdog accepts stakeholders’ view that it should sit at a pre-tax rate of 9.1 percent.

"ARTC has made it clear an appropriate rate of return is necessary to provide certainty that planned investment for the rail network will occur," Wing says.

"We believe the pricing mechanisms in the June 2011 HVAU seek to ensure access charges that reflect efficient costs, while also allowing ARTC to obtain a return on its investment commensurate with commercial and regulatory risks.

"The ACCC recognises the proposed rate of return has been endorsed by export coal users of the network, however we believe it’s nevertheless significant
the HVAU allows non-coal users to avoid pricing adjustments as a result of its implementation."

ACCC chairman Graeme Samuel
adds the ACCC decision to accept
the ARTC's latest
undertaking is another key step in the
development of long-term solutions to capacity constraints in the Hunter Valley coal export supply chain.

"In addition to the capacity management arrangements for the port of Newcastle, authorised by the ACCC in December 2009, these rail access arrangements should allow all parties to work together to remove export bottlenecks for the coal industry," he says.

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