Alliance of Councils for Rail Freight

Submission to the Essential Services Commission of

Review of the Victorian Rail Access Regime

August 2009

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Executive Summary

In this Submission, the Alliance of Councils for Rail Freight submits the following key points to the Essential Services Commission’s 2009 Review of Rail Access Charges:

• The Alliance supports in principle that road and rail freight should operate within a regime that reflects the costs of providing underlying infrastructure is accepted;

• Where mature and well established rail freight businesses are established across Australia, it is appropriate that predictable and rational rail access charges that transfer infrastructure costs from access providers to access seekers should operate, within an efficient regulatory framework that takes account of externalities and the social and environmental benefits associated with the use of rail freight in various contexts;

• The Alliance submits the Objectives under which the Victorian Rail Access Regime has been established should be revised; and that the VRAR has not delivered the critical objective of promoting intrastate rail freight in Victoria but that instead the role of rail freight has declined during the period of regulation. The Alliance submits that while this decline reflects several factors, excessive access charges under VRAR have been one factor contributing to decline, while other factors endorsed by the regime, such as Performance Bond conditions for metropolitan access, have impeded competition;

• The Alliance further submits that the Objectives of the regime do not support the environmental objectives for Victoria set down in Our Environment Our Future, and do not recognize the social and community impacts that narrow economic regulation has in promoting modal shift away from rail and imposing the externalities of road freight on communities;

• The Alliance submits that the rail access charges framework applied over the next five years in relation to the intrastate rail freight network in Victoria needs to allow for four Exceptional Circumstances, namely-

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-unprecedented drought has so impacted the level of wheat production in the state that expected wheat traffic will again be so low as to fall short of providing the revenue streams needed to maintain adequate below rail and above rail businesses and infrastructure in Victoria;

-the intrastate rail freight network in Victoria has just been retrieved from the brink of physical collapse by very significant government infrastructure investment following the buy back of the network, and time is needed to allow rail freight businesses using this infrastructure to redevelop before full rigor in access charge costs is applied to them;

-the wheat industry is undergoing great structural change consequent on the ending of the single desk policy and the emergence of multiple operators, with the associated tendency for a disaggregation of grain receival points that can result in an alteration of the economies of scale in wheat transport, and the rapid transfer of infrastructure costs from the rail system to council roads and state highways as grain forwarders develop diverse collections points and forwarding strategies;

-the Victorian Government in Freight Futures has identified a range of future freight outcomes desired by business and the community that may be frustrated at birth unless a regulatory framework is in place for the time being that allows an infant resurgent intrastate rail industry to survive;

• The Alliance therefore submits that the Commission should set access charges for Victorian intrastate rail freight lines at the lowest possible rate, for example, it is suggested that the Commission set access prices at a level no higher than twice road access prices, and that the charges should be approximately 50% of those currently in place;

• During the period in which this access charge regime might operate (for example five years), the ESC should continue to require detailed reporting of traffic, tariffs and revenue, and a reset of the access regime should occur at the end of this period. The Alliance concedes that it is possible that the outworkings of the current unprecedented period of change may show at the end of this period that not all those freight lines in the silver and bronze categories continue to be viable. However the Alliance believes that during this period there is the opportunity for 4

freight governance and marketing to be enhanced, and for viable rail freight businesses to consolidate and better delineate stable markets and customers if the proposed five year developmental period is adopted;

• The Alliance represents over 30 municipalities in districts served by the intrastate rail freight network. These Councils do not have the capacity to fund the rebuilding of the road network to support the number and size of road freight vehicles that would be needed if the rail freight task were transferred to road. It is important to ensure that regulatory decisions do not further encourage a modal shift of this kind;

• In the body of this Submission, the Alliance addresses those of the questions posed by the ESC in its Issues Paper that are relevant to it. 5

Part I of Submission: Exceptional Circumstances

The Alliance of Councils for Rail Freight submits to the ESC that Exceptional Circumstances currently exist in the environment for Rail Freight in Victoria that require a specific Regulatory Response for a time period sufficient for these circumstances to be allayed in an orderly manner. The Regulatory Response needs to be reflected in the Access Regime and in Access Charges.

The Exceptional Circumstances are: • Drought; • Repurchase and Reinstatement of below-rail infrastructure by the Victorian Government; • Restructure and disaggregation of grain handling; • The emergence of new Government policy in Freight Futures.

As well as these Exceptional Circumstances there is the Over-Riding Imperative of achieving a modal share in transport less dominated by road. Since the original commencement of the VRAR, the issue of transport sustainability has become a pressing concern that must be an over-arching consideration in any regulatory framework. The Victorian Government has, since the VRAR was implemented, recognized this through its policy document Our Environment Our Future, while another Victorian Government process, the Fischer review, has documented the very poor level of comparative environmental sustainability of road versus rail transport. These factors support a regulatory regime that does not price or regulate rail transport out of those markets it best serves.

The Alliance expects that ESC would be familiar with these issues, but also believes that these issues should be at the forefront of any submission on future access regulation and access pricing for rail freight. Each issue will be briefly referenced.

Drought

While drought affects all rural industries in some way, it particularly affects wheat production, and the transportation of grains has been for many years the largest task of the Victorian intra-state rail freight system.

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In other parts of Australia, the drought has broken or been mitigated by useful rains this season, however in the Wimmera and Mallee poor rains have contributed to ongoing low harvests.

The Bureau of Meteorology in its Special Climate Statement No 14 summed up the position as the driest on record, as follows:1

“…for Australia’s cropping zones (as defined by the Grains Research and Development Council, which include cropping areas in both eastern and western Australia), this six- year period was more than 80 mm drier than the record 1939-45 drought, and clearly the driest on record. In terms of just the April to October crop and pasture growing season, 2007 was the 21st driest on record, with only 220 mm in the cropping zones compared with the long-term average of 273 mm, and the 2002 and 2006 cropping seasons both ranked in the six driest on record. Mean temperatures were also the highest on record for the crop zones for the past six-year period, some 0.6°C above average…”.

According to the Australian Bureau of Statistics 2007 Survey, 88.7% of agricultural businesses in Victoria were experiencing adverse seasonal conditions, and 40% had changed their cropping response as a result and 27.7% had accepted Exceptional Circumstances assistance.2

As these figures indicate, there is no doubt that Exceptional Circumstances exist in Australia’s grain industry; they are recognized and named as such by the Commonwealth Government. It is therefore submitted that Exceptional Circumstances also exist in relation to those parts of the Victorian intrastate rail freight industry that are integrally part of the grain industry – namely most grain lines.

The Regulatory Framework needs to be framed accordingly, and steps that would lead to the destruction of rail freight services or infrastructure as a result of regulatory actions need to be carefully avoided. In short, the economic assumptions that might be applied in average agricultural seasons must necessarily be suspended until full recovery of relevant agricultural businesses has occurred.

Repurchase and reinstatement of below-rail infrastructure by the Victorian Government

The Victorian intrastate rail freight industry suffered a double blow when the above driest on record conditions for agricultural production were accompanied by an approach to privatisation that resulted in investment and maintenance in country freight infrastructure stalling;

1 Bureau of Meteorology, Special Climate Statement 14, p.2 2 Australian Bureau of Statistics(2007) , Publication 7.111, Table 3 7 rolling stock being exported from the state and/or scrapped, and acrimonious disputes emerging between Government and the purchaser of the rail freight business.

This devastating setback to rail freight has been addressed by the Victorian government by three far-sighted and far reaching actions:

• Its commissioning and acceptance of much of the findings of the Victorian Rail Freight Network Review, led by Tim Fischer; • Its repurchase of below rail infrastructure from for $133M and • Its investment of more than $700M in rehabilitating freight rail infrastructure around the State.

These investments have come at the end of a devastating period of setback. The redevelopment of the rail freight industry to utilize this infrastructure will not happen overnight. Agricultural production will require better seasons for output to recover, while rail operators will take time to build up markets, rolling stock and skill sets. The promised network of intermodal terminals will also take some time to develop.

The Alliance submits that there is a need for breathing space for the intrastate rail freight industry to redevelop, and that during this period the rail access regime and access pricing should be focused on facilitating this recovery by recognizing these additional Exceptional Circumstances.

Grain handling Restructure

With the Senate inquiry into the Wheat industry Single Desk being finalised, the development of additional players in grain marketing and handling, and various new types of road vehicles emerging, there is a significant trend towards disaggregation in grain handling, rendering it more difficult to assemble grain in trainloads.

Should this disaggregation proceed to any great extent, it may well result in the transfer of significant grain traffic from rail to road, with a large increase in the number of B-double and larger trucks on Victorian roads, with resultant increases in damage to municipal and state roads, congestion and road trauma.

The Victorian Rail Freight Network Review, in discussing this problem, recommended the creation of an integrated Victorian or south eastern 8

Australian body to control the grain supply chain.3 Such bodies can co- exist with plural commodity marketing firms and with plural suppliers of above-rail services, and are used to co-ordinate grain supply chains in Canada and coal supply chains in the Hunter Valley.

However, it is important to note that until such governance changes emerge, there is a danger that uncontrolled disaggregation could destroy the basis of the Victorian Rail Freight system before it has a chance to redevelop its governance, marketing and operations.

Once again, these are significant issues that ESC should have regard to in considering access regimes and charges in the coming period.

3 Victorian Government: Victorian Freight Network Review (Switchpoint), p52

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Part II of Submission: Alliance Response to ESC Issues Paper

ESC question:

1. Is access to regional and metropolitan railway track services necessary in order to permit effective competition in a related market? Is access to certain terminal services (including the Dynon terminals) necessary in order to permit effective competition in a related market? If so which ones?

Response: Access to regional and metropolitan railway track services is essential in order to permit effective competition in the market for the movement of many products moved by the intrastate rail freight network.

Such access needs to include the capacity for intrastate freight trains to reach all main terminal and discharge points conventionally used for such traffic including Dynon and South Dynon, intermodal terminals at Altona and Somerton, the portside terminals at Hastings, Geelong, Corio and Portland, as well as general access to all points on the intrastate broad and narrow gauge rail networks where the handling of freight traffic is now feasible or can be readily reintroduced.

Notwithstanding the policy of preference to passenger trains provided for in the Rail Corporations Act, such access must include the provision of reasonable paths for freight traffic through areas and times of day in which passenger trains operate.

In addition, access to the metropolitan network is necessary for “second tier” operators providing maintenance trains and repositioning movements of various kinds. The Commission’s practice of allowing the imposition of excessive “Performance Bonds” of up to $500,000 is anti-competitive and has resulted in the exit of at least one such operator from Victoria. The imposition of such Bonds should not be sanctioned but should be prohibited as an anti-competitive practice.

The buy back of the freight network by the Victorian Government now substitutes one form of vertical integration (/Pacific National) from the intrastate rail freight network and substitutes another (V/Line Regional Networks Division/V Line Passenger).ESC should require V/Line Regional Networks Division to be structurally 10 separate by advocating to government its placement in a separate rail corporation such as a restructured Vic Track with revised objectives.

ESC question:

2. Do you consider that any of the railway tracks on the Victorian intra-state rail network are or should be treated as ‘major freight corridors’?

The Alliance considers that the corridors within the ARTC standard gauge network in Victoria are major freight corridors.

Where a purely intrastate movement needs to pass over a nationally regulated corridor, (as for example wheat train from Rainbow or Yaapeet en route to Portland or Geelong) it should not be subject to the access charges of the national regulatory regime. The state access charge applicable to a train of this type should be applied, and the relevant proportion of the charge should be remitted to the national access provider.

At this time the Alliance does not consider other rail corridors to be “major freight corridors” of a kind where national access regulation is vital, although it believes that a nationally consistent scheme of safety regulation is desirable.

Other rail corridors in Victoria generally serve passenger and/or freight priorities which form part of logistics chains contained within Victoria. It is preferable for these to remain subject to Victorian regulation, which can focus with greater precision on the needs of Victorian businesses and communities, and calibrate regulatory settings more accurately to evolving needs within Victoria.

This would be particularly important if ESC accepts the Alliance’s submission that a 5 year Exceptional Circumstances regime of access charges should be applied in 2010-15 in Victoria.

ESC question:

3. How should the Commission take into account the CIRA principles? How should it have regard to simplicity and national consistency?

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The Alliance considers that there are few “major freight corridors’ in Victoria, and it will always be on these that the greatest tonnage is conveyed and the greatest need for national consistency obtains.

The access regime, access charging framework and operational policies that guide intrastate rail freight movements within Victoria need to be determined for best community outcomes in Victoria.

In principle, there is no need for national consistency to apply with regard to the regulation of intrastate freight movements within Victoria vis a vis those for example in north Queensland.

With regard to simplicity, the Alliance considers the Commission should always seek as simple a regulatory framework as possible. There may be opportunities to move to a more light-handed regulatory model within Victoria, and there may be lessons to be learned from the future regulatory regime. Once the national regime is implemented, the Commission should conduct an evidence-based public consultation to determine whether the national principles can be applied in whole or in part within Victoria. This process could occur in 2015, after some evidence has emerged as to the operational outcomes of the national regime.

ESC question:

4. Has the VRAR provided benefits arising from increased above-rail competition? Is such competition dependent on the VRAR?

5. Have there been other benefits of the VRAR?

6. What have been the regulatory costs? Do you consider these costs to be excessive?

7. In your experience do you consider the benefits of the VRAR to have outweighed the costs? What have been the effects on service quality, innovation, efficient investment or the use of rail for freight?

The Alliance considers that the VRAR has ensured that there is a degree of variety and innovation among rail freight providers in Victoria, and this fact is demonstrated by the presence in the market of several service providers, including Pacific National, El Zorro, CRT/QR, and Genesee and Wyoming. 12

It is clearly preferable to have a variety of contending providers than a single private monopoly for whom the development of Victorian rail freight is not a priority.

It is unclear however whether the current regulated competition in above-rail services is preferable to the past model of a vertically integrated public enterprise committed to rail freight in the State. Although such a model may have become untenable once National Competition Policy emerged, and may have been unattractive to state governments wishing to divest themselves of many operational responsibilities, a body focusing on Victorian needs and backed by government investment would likely have produced a stronger outcome for rail in the state than the regulated competition model governed by the VRAR. The success of public corporations such as V/Line passenger corporation and the Port of Corporation in managing public investment to provide benefits for Victorian citizens and businesses during the same period contrasts adversely with the poor state of rail freight in Victoria and its poor market share.

The Alliance concludes that, in the context of National Competition Policy, regulated competition through the VRAR is preferable to an unregulated private monopoly in above-rail services, but that a regulated model accommodating both private providers and a state freight provider analogous to V/Line passenger would be better still. In either case, a regime such as the VRAR is now necessary, and preferable to such regulation being solely a national scheme.

However the Alliance considers that the VRAR has been complex and academic in character and has not met a number of its objectives. In particular, the regime has not sufficiently supported intrastate rail state but through excessive access charges and other measures has tended to impede it.

Therefore the Alliance supports the continuance of VRAR for 5 years but submits that the objectives of the regime are in urgent need of revision.

ESC question:

8. Have the recent changes in ownership and market structure materially altered the merits of access regulation? 13

9. Under the present market structure does V/Line have a commercial incentive to inhibit competition among train operators?

The buy back of the below-rail country freight network by the Victorian Government introduces a division between below rail management and above-rail freight service provision that was absent during the period of Freight Australia/Pacific National ownership of below rail infrastructure. Moreover, there is a further division in that the below rail owner is a separate public corporation from V/Line passenger corporation, albeit Vic Track on-leases the assets to the Department and V/Line.

Therefore in principle, the inhibition of monopoly inherent in the previous structure where Pacific National operated a vertically integrated monopoly has been reduced.

In practice, there are potential and actual issues associated with the allocation of infrastructure and/or train paths to V/Line passenger vis vis freight operators. Moreover, there remain several competing private train service providers. Accordingly the need for regulation continues at present, to ensure that the operations of any particular service provider are not restricted by anti-competitive measures arising from renewed government ownership of the track.

The Alliance submits that the V/Line Regional Network and Access Division should be structurally separated from V/Line passenger and placed with an alternative Rail Corporation, such as one based on VicTrack but with revised functions and objectives. These objectives need to task the track manager with the goal of providing infrastructure services that facilitate effective rail freight, including pursuing higher train speeds and curve speeds, and minimizing unnecessary axle load restrictions. Such a move may require legislation to amend the Rail Corporations Act.

ESC question:

10. Since the prices established in the PN Access Agreement will apply for an extended period, do the price regulation aspects of the VRAR have any role to play?

For reasons outlined in Part II of this Submission, the Alliance considers that the prices established in the PN Access Agreement should be suspended by the ESC on an Exceptional Circumstances 14 basis, and replaced by a set of prices that accord priority to the need to address exceptional circumstances and promote a resurgence of rail freight’s market share.

The PN Access Agreement did not provide a basis for that operator to successfully provide rail freight services during its period of ownership of the track, and the Alliance considers that this supports the need for those prices to be suspended.

The Alliance considers the recommendation of the Fischer Review that track services be provided at competitive prices is a correct long term setting, but that in the short term an excessive price for such services has the potential to destroy the possibility of reconstructing rail freight services on many lines in the short term. We think that this Fischer recommendation should not be implemented for at least 5 years.

The Alliance notes the Fischer Review recommendation that track access prices be set on the basis of the NSW ARTC rate. This recommendation would leave rail access charges far higher than corresponding road freight access charges and is not supported. The Alliance considers that prevailing Victorian rail access charges need to be halved.

The Alliance also notes that the Victorian Government’s approach to the current exceptional circumstances has been to provide certain temporary rebates of access charges as well as significant below track investment. The Alliance welcomes these approaches and submits that they demonstrate that the access charges set by the VRAR were much too high and needed revision downwards. However two year rebates do not give a sufficient medium term signals to grain and freight companies with regard to certainty. A five year frame of reference is needed or new road logistic chains will continue to be established.

The Alliance considers the temporary rebate approach has merit only as an emergency measure. For a period of 5 years, the Alliance considers that an Exceptional Circumstances regime should be the basis for setting intrastate much lower access charges in Victoria.

The Alliance considers the problems the intrastate rail freight industry faces right now are systematic and across the board, requiring a system-wide approach until a new equilibrium can be achieved. Short- term specific rebates are not an adequate response.

ESC question: 15

11. Would the repeal of the VRAR improve the flexibility of rail access pricing? 12. Is the VRAR an impediment to achieving a ‘one-stop-shop’ for rail access in Victoria? Do you consider there is merit in a ‘one-stop-shop’ for obtaining access to declared rail transport services in Victoria?

The Alliance considers that the VRAR should be retained at least until there has been an opportunity for recent investments, policy changes, and the Exceptional Circumstances access charges proposed in this Submission to be applied. Moreover, there may well be a case for the regime to be continued indefinitely given the distinct regional characteristics facing rail in Victoria, which is characterized by such factors as relatively short journeys, lack of major mineral traffic, high externalities of movement of freight to road as a result of greater population density and environmental sensitivities, and the specific local results of incomplete rail standardization. It may well be that circumstances in Victoria are so distinct as to justify the indefinite continuance of the VRAR.

That said, a “one-stop shop” and simplified approach as envisaged by the Fischer Report should be developed. A one-stop access shop that can provide paths and prices to service providers regardless of the number of track managers in the background should be developed as a matter of urgency.

In 2009 the highest priority is to have a regulatory regime for Victorian intrastate rail freight that is highly sensitive to local circumstances, to provide the regulatory climate in which the benefits of recent Victorian Government investments in the track can be realized, not lost.

ESC question:

13. Do the terms of the current franchising of the metropolitan rail network remove the need to retain the Passenger Declaration Order?

If a satisfactory Track Access Agreement between the incoming metropolitan franchisee, V/Line Passenger and the State can be agreed, the Alliance considers the Passenger Declaration Order could be dispensed with. It is assumed that such an agreement would have 16 the capacity for variation if extremely significant cross metropolitan rail freight movements were to develop within the life of the franchise.

ESC question:

14. Do you consider that there are market power issues with respect to the rail terminal services within the Dynon precinct? 15. Do you consider that the removal of the access obligations applying to these terminals would have any effect on above- rail competition at those terminals?

The Alliance considers that there are some market power issues at the Dynon precinct at this time. Present arrangements permit appropriate access by Asciano and other operators to terminal facilities. As the Dynon-Swanson precinct develops over the next decade, it is likely that the configuration of tracks and terminals in this area will be subject to significant change. It will be important that the future design of the intermodal terminal will accommodate efficient logistics and the capacity for multiple operators and new entrants. We see this as a matter for advocacy with precinct forward planners rather than one of immediate regulation by ESC.

The South Dynon terminal was constructed as public infrastructure for Victoria, and should ideally operate as a common user terminal, albeit Asciano may remain for the time being the main user. Government should move to buy back Asciano’s lease or renegotiate it to permit the terminal to operate as a common user terminal.

ESC question:

16. Are the existing VRAR objectives still appropriate? Are there other objectives that should be considered? 17. Do you consider that there is consistency between the current VRAR objectives and the general objectives of access regulation, or the Victorian Government’s current objectives with respect to the freight and logistics industry?

The Alliance notes that the objectives of access regulation stipulated within the Competition Principles Agreement, and within that agreements Clause on Price Oversight are highly specific and focused upon efficiency in resource allocation. CPA objectives do not recognize objectives of community or environmental sustainability and in that respect the CPA’s approach reflects the period when that agreement 17 was made, which was before the World Commission on Environment and Development (the Brundlandt Commission’s) 1987 findings had been fully understood. That Commission found that: Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This is an over-arching policy objective that informs the policy settings of many governments worldwide and needs to also guide rail and transport regulation, since transport emissions make up one-third of Australian emissions and their reduction constitutes one of our major national challenges, and since there are many other sustainability issues that would arise should regulatory decisions encourage more extensive modal shifts from rail to road transport.

The eight objectives of the Victorian Freight Network Strategy are also restricted to economic objectives. “Sustainability” is mentioned in the goals of the strategy in the context of “the sustainability of the freight network”; however this goal does not extend to environmental or community sustainability nor the sustainability of a rail freight alternative in circumstances where the road freight alternative in many instances involves significant direct and external environmental and social disbenefits compared to rail.

In the Alliance’s view, ESC in regulating the rail access regime must give high priority to issues of the economically efficient use of resources, the logistics and supply chain objectives enumerated in the Victorian Freight Network Strategy. However it should also take cognizance of over-arching sustainability commitments given by the Victorian and Australian governments. Victoria’s Environmental Sustainability Framework published in April 2005, sets three strategic directions for environmental sustainability and thirteen environmental quality objectives. The Framework sets a goal of making significant progress towards these objectives within a generation.

The Victorian Government published an Environmental Sustainability Action Statement Our Environment Our Future in July 2006. It sets out how the Victorian Government intends to implement the Environmental Sustainability Framework. These objectives need to be considered in relation to regulatory decisions taken by ESC. Action 15 of this Action Statement notes that “transport contributes 16.5% of Victoria’s greenhouse emissions – reducing these emissions is central to an effective greenhouse response in this state”4. Further, the

4 Victorian Government (2006), Our Environment Our Future, p. 77 18

Fischer Report noted Austroads findings that trucks produce 98% of carbon monoxide emissions and 92% of carbon emissions from land transport compared with 2% and 8% respectively from rail freight. Fischer also cited the 1998 ARRB Report findings that rail freight produces up to 90% fewer emissions per ton of freight carried than road of pollutants such as carbon monoxide, hydrocarbons, nitrogen oxides and sulphur dioxide.5

It is for these reasons that Victorian Government policy provided for a modal shift from road to rail of containers from the Port of Melbourne towards a target of 35%, and that the and Western Australian Governments have adopted similar objectives of encouraging modal shift from road to rail.

Therefore the Alliance contends that in the light of Victorian Government policy as a whole (not just that contained in the 2008 Freight Futures document which has a focused but limited horizon), ESC should have a high priority objective of creating a regulatory environment that is supportive of a move towards more sustainable transport modes (i.e. rail vis a vis road) in economically viable markets.

The absence of this objective from Freight Futures and the CPA derived ESC regulatory criteria represents a serious inconsistency with over- arching national, state and community expectations which should be remedied.

ESC question:

18. Are the principles that the Commission proposes to have regard to in considering the form of access regulation appropriate? 19. How can the objective of greater national consistency be best addressed in this Review? Would reliance on the national access regime and regulation by the ACCC promote a more effective and national consistent regulation for rail? 20. Should the Victorian rail industry seek to establish consistency modeled on the ARTC undertaking? Should some other model apply to networks with characteristics and freight tasks like those of the Victorian intrastate network?

5 Victorian Government: Victorian Freight Network Review (Switchpoint), p54 19

The Alliance offers the following comment on the Commission’s Regulatory principles:

Preference for Market Solutions The Alliance agrees that where negotiated outcomes can be achieved without regulation they are to be preferred. However the intrastate rail freight market in Victoria is not a pure market; there is diverse government involvement and there are significant environmental and community externalities at issue: regulated outcomes will often be preferable in this environment. Proportionality The Alliance agrees with the Commission’s principle that management behaviour should be constrained in proportion to the likely economic or social harm that would flow from the market failure to be addressed. There is no doubt that should regulatory burdens accelerate the modal shift of freight from rail to road, there will be very severe economic and social consequences in terms of economic efficiency, pollution, congestion, carbon footprint, road trauma and community impacts.6 These justify regulation but require that regulation should be informed by broad not narrow objectives. Promotion and protection of Agreed competition Consistency Agreed, but the distinctive nature of rail freight’s position in Victoria, acknowledged in the Commission’s discussion paper on page 45, raises the need to temper consistency with the

6 Ibid., 15-19 20

notion of fit to circumstances. Balancing long and short term Agreed: and in particular the benefits to consumers Commission’s attention is drawn to the need to maintain a rail network that can assist to move the sevenfold growth in containers predicted through the Port of Melbourne to 2035, which requires actions that do not lead to the abandonment of existing rail infrastructure or to a regulatory framework that drives above-rail operators out of Victoria or into bankruptcy. The issue of providing for future needs is emphasised in the Victorian Rail Freight Network Review.7 Principles currently omitted that • The principles should should be added: commence with that of no net harm to overall sustainability. • The principles should also reflect the Essential Services Commission’s statutory obligation to protect consumers. • The principles should also acknowledge the need to regulate in light of all relevant Victorian Government Policies, including Our Environment Our Future, not just Freight Futures.

National Consistency/ARTC and other Models

The Alliance agrees with the Discussion Paper’s observation that “diversity in ownership, industry structure and operational effectiveness means that regulatory arrangements must be tailored to some extent.”8 The Victorian intrastate rail freight system is

7 Ibid., p. 19 8 ESC, Review of the Victorian Rail Access Regime, Discussion Paper, p. 46 21 substantially independent of the rail freight systems of other states and national uniformity is not essential. There is no compelling case to adopt the ARTC model; the Commission should continue to study other models.

In this context, for example, the Canadian model of community and local government involvement in the management of some lightly used wheat lines should continue to be studied. There may well be communities in Victoria that would prefer a capacity to retain their rail freight service under the Canadian model than to have it withdrawn because of the costs and charges of regulation under current models.9

The Alliance foresees that at the end of the 5 year Exceptional Circumstances period it advocates, some bronze lines may prove to have been uncommercial. Provision should be developed in policy and regulation for these to be offered to local government and community operators broadly on the Canadian model. There is precedent for this in Victoria in the past where a number of Shires operated light railways connected to the Victorian freight system – examples being the Kerang to Koondrook tramway and the Dookie to Katamatite tramway. Both allowed Victorian government freight trucks to be moved on lightly constructed lines by Council staff with Council light locomotives, much reducing the cost of maintaining rail connection to those districts.

ESC question:

21. Has the VRAR afforded access seekers a fair and reasonable opportunity to be provided access? 22. Are there impediments to seeking access on reasonable terms? 23. Are the component parts of the regime effective and appropriate? 24. Has the Commission effectively and efficiently administered the current regime?

As previously mentioned, the imposition of very large Performance Bonds for second tier operators passing through the metropolitan network has been anti-competitive and has driven at least one operator from Victoria.

The ESC should not permit Performance Bonds of this kind to be imposed. If the metropolitan operator claims that poor performance by

9 The Canadian model is described in VFNR, p52 22 other access-seekers may prejudice its reliability bonus, the relevant franchise agreement should be amended to allow any such circumstance to be offset.

ESC question:

25. Is the current form of regulation appropriate for the VRAR? Is the extent of regulatory control commensurate with the market power present in industry? Are there other options that should be considered? 26. Should the form of regulation be modified to take account of the change in market structure and vertical separation of the access provider from rail freight train operations? 27. Should all or part of the VRAR be subject to the same form of regulation or is a simpler form of regulation appropriate for some parts? For example, should there be consideration of price monitoring as an alternative form of regulation for the Victorian rail industry, or parts of the industry (such as terminals).

The Alliance considers that the coming five years constitutes a critical transition period for much of the Victorian intrastate rail freight network. It also considers that the circumstances facing rail freight in Victoria are particularly difficult and specific for reasons set out earlier in this submission.

Therefore the Alliance submits that the VRAR should be retained for a five year period with access arrangements approved by the regulator, reference tariffs for all services likely to be used by a significant proportion of access seekers, indicative principles for the negotiation of non-reference prices, a revenue cap, the Commission instruments and scope for the regulator to resolve disputes.

The Alliance considers that a move toward light-handed regulation or the adoption of the ARTC model is premature.

ESC question:

28. What sort of regulatory framework, if any, do you consider would be appropriate for an MFTN? 23

29. What sorts of regulatory issues might a network of terminals give rise to over and above the regulatory issues for single terminals? 30. What sort of regulatory framework, if any, do you consider would be appropriate if PoMC were to have an extended supply chain role?

The Alliance notes that intermodal hubs could become localized natural monopolies, and supports the four aspects of regulation for such terminals advanced in the Discussion Paper, namely a fixed term; a commitment to provide access on a non-discriminatory basis; publication of terminal access prices and a binding dispute resolution process.

To the extent that Port of Melbourne Corporation extends its role in the intermodal supply chain beyond port management, circumstances may emerge that require more specific regulation, particularly if it sought to manage such terminals in a way that was discriminatory by mode, or which was anti-competitive with relation to competing ports such as Hastings or Geelong. In the short term, the four principles mentioned in the preceding paragraph could be those applying to the Port of Melbourne.

ESC question:

31. What factors should the Commission consider that affect the efficient operation of the Victorian rail industry and the competitiveness of rail freight?

The Alliance considers that the matters under this heading are of paramount importance at this time, and many of these issues have been referred to earlier in this Submission.

The factors that we would identify as supremely important are:

• The critical need for Victoria to move towards a bi-modal freight system in which rail’s future role is increased, because of its demonstrable superiority in appropriate roles with regard to economic efficiency, environmental sustainability, social and health impact, and urban amenity impact including congestion reduction;

• The need to ensure that regulation supports and does not impede this modal shift, having regard to the need to 24

compensate for decades in which state and national policy settings and investment strategies have been designed to undermine the role of rail freight and transfer its tasks to road transport;

• The need to overcome the devastating legacy on Victorian rail freight of two decades of poorly managed privatisation, disinvestment, drought, grain industry restructuring, commercial ineptitude and poor government policies, such that an Exceptional Circumstances period of five years is needed during which access charges are minimized and other regulatory impediments to the resurgence of rail freight are removed;

• The need to recognize that the goal of environmental sustainability set out in the Victorian Government’s policy Our Environment Our Future must be a key determinant of policy since environmentally unsustainable road transport is the cause of one-third of Australia’s greenhouse emissions. Where this policy is at odds with Freight Futures, (which is essentially an economic rather than a triple bottom line document) the Alliance considers that Our Environment Our Future must take priority on the basis that there is no economy if there is no planet. Such an orientation means the long term must take precedence over the short term, and economic decisions should not be taken in isolation of consideration of their social and environmental consequences. A healthy, competitive and sustainable rail freight industry is an essential part of a future sustainable Victorian economy. Decisions must not be taken that result in further undermining of the position of the rail freight industry, support further modal shift from road to rail, or result in the abandonment of further rail infrastructure that may have a role to play in a more sustainable future economy. 25

List of Submissions and Recommendations

1. A healthy, competitive and sustainable rail freight industry is an essential part of a future sustainable Victorian economy. Decisions must not be taken that result in further undermining of the position of the rail freight industry, support further modal shift from rail to road, or result in the abandonment of further rail infrastructure that may have a role to play in a more sustainable future economy;

2. Predictable and rational rail access charges that transfer an appropriate share of infrastructure costs from access providers to access seekers should operate, but within a regulatory framework that better takes account of externalities and the social and environmental benefits associated with the use of rail freight in various contexts;

3. The VRAR has not delivered the objective of promoting intrastate rail freight in Victoria but instead the role of rail freight has declined during the period of regulation;

4. The Alliance submits that the Objectives of the VRAR do not adequately align with the environmental objectives for Victoria set down in Our Environment Our Future, and do not recognize the social and community impacts that regulation guided by economic principles alone has had in promoting modal shift away from rail and imposing the externalities of road freight on communities;

5. The Alliance submits that the rail access charges framework applied over the next five years in relation to the intrastate rail freight network in Victoria needs to allow for four Exceptional Circumstances, namely--unprecedented drought; the recovery of the intrastate rail freight network from the brink of physical collapse by very significant government infrastructure investment following the buy back of the network, structural change in wheat logistics, and the new Freight Futures policy;

6. The Alliance submits that the ESC should, with regard to intrastate freight railways in Victoria, set an access charge for a period of five years at the lowest practicable level; this should result in an access charge no more than twice that applicable to 26

road freight, and should approximate to 50% of current access charges;

7. A one-stop access shop that can provide paths and prices to service providers regardless of the number of track managers in the background should be developed as a matter of urgency;

8. The Commission’s practice of allowing the imposition of excessive “Performance Bonds” for access of second tier train operators to metropolitan tracks of up to $500,000 is anti- competitive and has resulted in the exit of at least one such operator from Victoria; this practice should not be sanctioned but should be prohibited;

9. The V/Line Regional Network and Access Division should be structurally separated from V/Line passenger and placed with an alternative Rail Corporation, such as one based on VicTrack but with revised functions and objectives, including the objective of providing rapid improvement of train speeds and axle loads on freight lines. Such a move may require legislation to amend the Rail Corporations Act.

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LIST OF ACRONYMS

ACCC – Australian Competition and Consumer Commission

ARRB – Australian Road Research Board

ARTC – Australian Rail Track Corporation

CIRA – Competition Infrastructure Reform Agreement

CPA – Competition Principles Agreement

CRT/QR – CRT Transport, a subsidiary of QR (Queensland Rail)

ESC – Essential Services Commission

MFTN – Metropolitan Freight Terminal Network (proposed by Freight Futures report)

NSW ARTC Rate – Access Charges for NSW Rail Freight established by ARTC

PoMC – Port of Melbourne Corporation

PN – Pacific National

RFNR – (Victorian) Rail Freight Network Review (Fischer Report - “Switchpoint”)

VRAR – Victorian Rail Access Regime