Engineering Assessment of Aurizon Network's Capital Expenditure Claim 2013-14 (CIC)
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Queensland Competition Authority Engineering Assessment of Aurizon Network’s Capital Expenditure Claim 2013-14 22 MAY 2015 Commercial in Confidence (CIC) Solutions & & Title Engineering Assessment of Aurizon Network's Capital Expenditure Claim 2013-14 (CIC) Version: FINAL Authors: Clara Tetther CMT Solutions Paul Tribley CMT Solutions Rod Carr Marsden Jacob Associates Matthew Clarke Marsden Jacob Associates Etienne Coudray Atkins Date: 22 May 2015 Engineering assessment of Aurizon Network's 2013-14 Capital Expenditure Claim (CIC) Page ii of 98 CMT, Atkins and Marsden Jacob Associates for the Queensland Competition Authority Contents 1 INTRODUCTION 1 1.1 Background 1 1.2 Extent of the Review 2 1.3 Structure of this report 2 1.4 Supplementary Report 3 2 AURIZON NETWORK 2013-14 CAPITAL EXPENDITURE CLAIM 4 2.1 Aurizon Network 2013-14 CAPEX Submission Claim 4 2.2 Structure of claim 4 2.3 Supporting information 5 3 PRUDENCY ASSESSMENT METHODOLOGY AND CRITERIA 7 3.1 Overall methodology for prudency assessment 7 3.2 Risk matrix 13 3.3 Assessment forms 14 3.4 Projects review – Aurizon Network 15 4 ASSESSMENT RESULTS AND RECOMMENDATIONS 16 4.1 General 16 4.2 Projects selected for economic review 21 4.3 Procurement 21 4.4 Feasibility studies – market analysis 27 5 PROJECT ASSESSMENT SUMMARIES 32 5.1 Project assessments – Schedule 3 Expansion 32 5.2 Project assessments – Schedule 4 TACA 34 5.3 Project assessments – Schedule 5 Electrical 37 5.4 Project assessments – Schedule 6 S&TSS 39 5.5 Project assessments – Schedule 7 Telecommunications 43 5.6 Project assessments – Schedule 8 Corridor CAPEX 46 5.7 Project assessments – Schedule 9 CRIMP – voted feasibility studies 48 6 CONCLUSION 50 Engineering assessment of Aurizon Network's 2013-14 Capital Expenditure Claim (CIC) Page iii of 98 CMT, Atkins and Marsden Jacob Associates for the Queensland Competition Authority Appendices Appendix A: Aurizon Networks Pty Ltd 2013-14 Capital Expenditure Submission Appendix B: Individual Project Prudency Assessments List of Figures and Tables Figure 1-1: Central Queensland Coal Network ........................................................................... 1 Figure 3-1: Project methodology flowchart .................................................................................. 7 Figure 3-2: Project value split 2013-14 expenditure claim ........................................................... 8 Figure 3-3: Basic criteria for assessment of procurement processes ........................................ 12 Figure 3-4: Risk matrix ............................................................................................................. 13 Figure 4-1: Shortlisting of suppliers .......................................................................................... 23 Figure 4-2: Queensland coal production (million tonnes) .......................................................... 28 Figure 4-3: Thermal coal prices (AUD per metric tonne) ........................................................... 28 Table 3-1: Summary of representative sample of projects selected for assessment ................... 9 Table 3-2: Key criteria in assessment of prudency of scope, standard and cost ....................... 10 Table 4-1: Summary of assessments undertaken by the Review Team .................................... 16 Table 4-2: Prudency assessment summary .............................................................................. 20 Table 4-3: Summary of Land Acquisition costs per project ....................................................... 29 Table 5-1: Total claim value of expansion projects assessed ................................................... 32 Table 5-2: Total claim value of TACA projects assessed .......................................................... 34 Table 5-3: Total claim value of electrical projects assessed ..................................................... 37 Table 5-4: Total claim value of S&TSS projects assessed ........................................................ 39 Table 5-5: Total claim value of telecom projects assessed ....................................................... 43 Table 5-6: Total claim value and list of corridor projects assessed ........................................... 46 Table 5-7: Total claim value of feasibility projects assessed ..................................................... 48 Engineering assessment of Aurizon Network's 2013-14 Capital Expenditure Claim (CIC) Page iv of 98 CMT, Atkins and Marsden Jacob Associates for the Queensland Competition Authority Executive Summary Aurizon Network is obliged to maintain a Regulatory Asset Base (RAB) for the Central Queensland Coal Network (CQCN). The RAB is a compilation and summation of the assets upon which CQCN is permitted to earn a reasonable return. The RAB is used to support the modelling of Reference Tariffs for the CQCN and Aurizon Network’s Access Undertaking. The requirements of Aurizon Network’s Access Undertaking are that within four months of the end of the relevant year, Aurizon Network will provide to the QCA details of the capital expenditure that Aurizon Network considers should be approved and included in its RAB for that year. Unless otherwise agreed between Aurizon Network and the Queensland Competition Authority (QCA), Aurizon Network and QCA will annually roll forward all prudent capital expenditure approved by the QCA in each financial year. In October 2014, Aurizon Network formally submitted its request to the QCA to approve $321,681,594 (exclusive of Interest during Construction (IDC)) of capital expenditure on projects commissioned within the 2013-14 period. QCA will accept prudent capital expenditure upon a risk-based assessment of prudency in scope, standard and cost. QCA commissioned CMT Solutions, Atkins and Marsden Jacob Associates (known forthwith as the Review Team) to undertake a prudency review of a sample of 63 projects, including a total of three major feasibility projects made up of 25 individual studies. The total expenditure claim for the project sample projects was $244,104,259 (exclusive of IDC). The Review Team carried out an assessment determining whether the scope, standards and costs of the works were prudent. This assessment was undertaken in accordance with criteria agreed with the QCA, and in alignment with Schedule A of Aurizon Network’s Access Undertaking 2010. Detail of the assessment outcome is provided in Table 4-2 and summarised in the following paragraphs Prudency of scope ‘Scope’ in this report refers to the extent of the project and all its elements. In general the Review Team found the projects within the assessed sample to be prudent in scope. Prudency of standard ‘Standard’ in this report refers to the technical and/or operational criteria within which the work scope is specified. This includes consistency with existing standards for similar purposes, and compliance with national, industry and federal legislative requirements. Projects are assessed with respect to Aurizon Network’s internal standards and their relevance to and/or compliance with Australian Standards. International current industry trends and practices for similar purposes are also considered in the assessment if appropriate. From the information provided it was evident to the Review Team that Aurizon has established systems and structures to ensure high standards compliance across their engineering works. Works assessed were consistent with existing infrastructure and the appropriate assurances applied to ensure fitness for purpose for current and (as far as reasonably possible) known future requirements. Therefore in general the projects assessed were found to be prudent in standard with the following minor exceptions. Project A.04288 Radio System Replacement was not able to be assessed as prudent in standard for the 2013-14 expenditure claim. This project relies upon the submission of three reports to underlie a Engineering assessment of Aurizon Network's 2013-14 Capital Expenditure Claim (CIC) Page v of 98 CMT, Atkins and Marsden Jacob Associates for the Queensland Competition Authority robust strategy for radio system replacement over the CQCN. The project is not complete and the two reports submitted serve only as background information for the strategy and recommendations to be provided in the final report. As such these two reports on their own do not fulfil the criteria for prudency in standard. On completion of the final report the prudency of the completed works should be reassessed. Prudency of cost The projects were assessed as being consistent and aligned with overall supply chain and operational objectives. In general from the information provided the projects assessed had met contractual timeframes and safety and quality requirements. The expiry of Aurizon Network’s long term national contract for the supply of steel rail in 30 June 2013 provided the opportunity for Aurizon Network to take advantage of new opportunities for cost- effectively sourcing railway products from a global competitive market. The costs of rail procurement can be a significant item in capital expenditure projects, therefore prudency in the evaluation for procurement of this item is paramount in the achievement of overall prudency in project cost outcomes. The review of the steel rail tendering and procurement process undertaken highlighted that Aurizon Network’s stage gate process for evaluation of alternatives appears to be a sound and thorough process. However, the review identified a number of potential issues in the total