Review of the Victorian Rail Access Regime November 2009

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REVIEW OF THE VICTORIAN RAIL ACCESS REGIME

DRAFT REPORT

NOVEMBER 2009

An appropriate citation for this paper is:

Essential Services Commission 2009, Review of the Victorian Rail Access Regime: Draft Report, November

© Essential Services Commission. This publication is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968 and the permission of the Essential Services Commission.

CHAIRPERSON’S INTRODUCTION

The Commission is undertaking the present Review of the Victorian Rail Access Regime at the direction by the Minister for Finance (‘Minister’). The purpose of the Review is to advise the Minister as to whether the rail access regime needs to be retained and if so what form it should take and what objectives should govern the regulator when carrying out its obligations.

The Commission has been the economic regulator of the rail industry since rail access was introduced in 2001, following the privatisation of the Victorian rail freight business and the regional rail network. The first regime was replaced by the current, more prescriptive access framework in 2006 prior to the below rail infrastructure reverting to public ownership.

In 2007, a taskforce chaired by Mr Tim Fischer reviewed the overall Victorian rail industry and recommended simplification of the rail access regime and the introduction of a one-stop-shop for rail access. These recommendations are relevant to this Review.

The terms of reference require the Commission to have regard to the factors that affect the efficient operation of the Victorian rail industry, including market conditions. However, the Review is clearly directed only to making recommendations on the regulatory framework relevant to rail access.

This Draft Report presents the Commission's preliminary consideration of all of the matters under review. These considerations have benefited from consultation with stakeholders, public hearings and written submissions.

The Commission’s main draft recommendations are:

• the rail access regime should be retained for rail infrastructure services in order to facilitate competition between providers of rail freight services, but should be scaled back to a light-handed regime

• a negotiate/arbitrate framework should be applied, but access providers should retain the ability to voluntarily submit an access undertaking.

The Commission is also seeking comment on its preliminary views that the access regime should:

(i) continue to apply to the South Dynon rail terminal

(ii) cease to apply to the Dynon Intermodal terminal, and

(iii) be extended in its application to the rail terminals situated on East and West Swanson Docks.

ESSENTIAL SERVICES COMMISSION REVIEW OF THE VICTORIAN CHAIRPERSON’S 3 VICTORIA RAIL ACCESS REGIME: INTRODUCTION DRAFT REPORT

ACRONYMS

ABARE Australian Bureau of Agricultural and Resource Economics

ACCC Australian Competition and Consumer Commission

ACRfD Alliance of Councils for Rail Freight Development

AEMO Australian Energy Market Operator

AER Australian Energy Regulator

ARA Australasian Railway Association

ARG Australian Railroad Group Pty Ltd

ARTC Australian Rail Track Corporation

BITRE Bureau of Industry, Transport and Regional Economics

CIRA Competition and Infrastructure Reform Agreement

COAG Council of Australian Governments

CPA Competition Principles Agreement

CRT CRT Group

DOI Victorian Department of Infrastructure

ESC Essential Services Commission

ESCOSA Essential Services Commission of South Australia

GIFT Gippsland Intermodal Freight Terminal

GTK Gross Tonne Kilometres

GVFLC Goulburn Valley Freight & Logistics

GWI Genesee & Wyoming Incorporated

IMT Intermodal Terminal

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IPART Independent Pricing and Regulatory Tribunal

ISO Independent System Operator

MCE Ministerial Council on Energy

MFT Melbourne Freight Terminal

MFTN Metropolitan Freight Terminal Network

MOU Memorandum of Understanding

MTM Metro Trains Melbourne

NCC National Competition Council

NERA National Economic Research Associates

PBRT Port Botany Rail Team

PFN Principal Freight Network

PoMC Port of Melbourne Corporation

POTA P&O Trans Australia

PPP Public-Private Partnerships

QCA Queensland Competition Authority

QR Queensland Rail

RCA Rail Corporation Act 1996

RFNR Victorian Rail Freight Network Review

RFR Regional Fast Rail

RIC Rail Infrastructure Committee

SCT SCT Group

TPA Trade Practices Act 1974

VBS Vehicle Booking System

VFF Victorian Farmers Federation

VFLC Victorian Freight and Logistics Council

VRAR Victorian Rail Access Regime

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GLOSSARY

Access agreement An agreement between an access provider and an access seeker for the provision of a declared rail transport service.

Access arrangement A mandatory access undertaking under the current VRAR.

Access provider A provider of a declared rail transport service.

Access regime Procedures to govern access to rail track including setting an access pricing policy, criteria for permitting access and operating conditions.

Access seeker A person seeking access to a declared rail transport service or seeking interconnection.

Access undertaking A document which establishes the terms and conditions under which a service provider is willing to offer or negotiate access to service(s) provided by an essential facility to an access seeker.

Broad gauge Means that the distance between the rails (rail gauge) is 1 greater than the standard gauge of 1,435 mm (4 ft 8 ⁄2 in).

Container A reusable steel rectangular box for carrying cargo.

Container terminal A docking, unloading and loading area within a port designed to suit the sizes and needs of container ships.

Declared Order An Order of the Governor in Council pursuant to s.38I of the RCA (Declaration of rail transport services).

Declared rail transport A rail transport service declared under a Declaration service Order.

Rail corridor A rail network running from one location to another.

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Interconnection Means that access seekers who own or operate, or intend to own or operate, railway track or sidings, may connect that infrastructure to the access provider’s declared railway track.

Intermodal A system whereby standard-sized cargo containers can be moved seamlessly between different ‘modes’ of transport, typically specially adapted ships, barges, trucks and trains.

Line haul The distance ‘point to point’ between terminals.

Multi-user rail Intermodal A facility that provides: a rail terminal service; rail access terminal services; transfer interfaces with other non-rail logistics and transport modes; and support services, to any and all organisations within and related to the rail industry subject to capability, capacity and the completion of agreements with those organisations on reasonable commercial terms.

Non-reference service A declared rail transport service that is not a reference service.

Pricing Order or Pricing An Order of the Governor in Council pursuant to s.38J of Principles Order the RCA (Pricing Principles Order) specifying the principles and/or authorising the Commission to the methodology for calculating prices for declared rail transport services.

Rail gauge The distance or width, between the inner sides of the rails.

Rail infrastructure A facility that is used to operate a railway and includes- railway track, railway track sidings, associated track structures and works (such as cuttings, tunnels, bridges, stations, platforms, excavations, land fill, track support earthworks and drainage works), over-track structures, under-track structures, service roads, signalling systems, rolling stock control systems, communications systems, notices and signs, overhead electrical power supply systems and associated buildings, depots, yards, plant, machinery and equipment.

Rail sidings A low-speed track section distinct from a main track or branch track. It may connect to main track or to other sidings at either end. The distinction between sidings and other types of track is that a "siding" generally denotes an auxiliary or not exactly specified usage. Sidings often have lighter rails, meant for lower speed or less heavy traffic,

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and few, if any, signals.

Reference service A declared rail transport service that is likely to represent a significant proportion of demand by access seekers, or a service provided by the access provider to itself or an affiliate.

Reference tariff or price The price, or an indicative price, for a reference service.

Rolling stock A vehicle that operates on or uses a railway track or tramway track, and includes a locomotive, carriage, rail car, rail motor, light rail vehicle, train, tram, light inspection vehicle, road/rail vehicle, trolley, wagon or monorail vehicle.

Standard gauge The distance between the inside edges of the rails of 1 standard gauge track is 1,435 mm (4 ft 8 ⁄2 in).

Stevedore Individual or firm employed for the purpose of loading and unloading a vessel.

Supply chain A sequence of activities related to transportation of raw materials into saleable products. These activities are typically performed by multiple firms in a ‘chain’ or network.

TEU ‘Twenty-foot Equivalent Unit’ is the industry standard to measure containers. A 20-foot container’s dimensions are twenty feet long (6.09 metres), 8 feet wide (2.4 metres) and 8 feet six inches high (2.6 metres).

Terminal A facility at which freight is loaded or unloaded from rolling stock, or stored, and includes hard stands, equipment and other infrastructure used for the loading or unloading of freight from rolling stock at the facility.

Terminal ancillary services Terminal services which include shunting, wagon maintenance and storage, which a user may not necessarily need to use when acquiring other terminal services.

Train kilometres Distance travelled by a train.

Vertical integration The degree to which a firm owns its upstream suppliers and its downstream buyers.

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ESSENTIAL SERVICES COMMISSION REVIEW OF THE VICTORIAN GLOSSARY 10 VICTORIA RAIL ACCESS REGIME: DRAFT REPORT

CONTENTS

CHAIRPERSON’S INTRODUCTION 3

ACRONYMS 5

GLOSSARY 7

CONTENTS 11

DRAFT REPORT SUMMARY 13

LIST OF DRAFT RECOMMENDATIONS & PRELIMINARY POSITIONS FOR COMMENT 25

LIST OF QUESTIONS in chapter 8 30

PART I: BACKGROUND 32

1 INTRODUCTION 33

1.1 Purpose and scope of the review 33 1.2 Objectives of the Commission and relevant principles 34 1.3 Purpose of the Draft Report and making a submission 35 1.4 Review process and timetable 36 1.5 Structure of the Draft Report 36 2 POLICY CONTEXT & THE VRAR 37

2.1 Policy context 37 2.2 The current rail access regime 41 3 THE VICTORIAN RAIL INDUSTRY 54

3.1 The Victorian rail industry 54 3.2 Recent developments & government role in the rail industry 63 3.3 Future trends and challenges 68 4 COMPARATIVE RAIL ACCESS REGIMES 76

4.1 Australian rail access regimes 76 4.2 ARTC’s rail access framework 81 4.3 Summary of the comparison of VRAR with other rail access regimes 84

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4.4 Steps towards a nationally consistent rail access framework 86 PART II: ANALYSIS 88

5 THE NEED FOR CONTINUING ECONOMIC REGULATION 89

5.1 When is economic regulation desirable? 90 5.2 Stakeholder views on merits of retaining regulation 93 5.3 Market power 96 5.4 The case for regulating rail infrastructure services to passenger trains 107 5.5 The case for regulating rail infrastructure services to freight trains 107 5.6 The case for regulating access to certain terminals 116 5.7 Preliminary conclusions – Chapter 5 123 6 THE FORM OF ECONOMIC REGULATION 125

6.1 Approach to selecting the form of regulation 126 6.2 Stakeholders views on the form of access regulation 130 6.3 Assessment of the appropriate form of regulation 132 6.4 Choosing a preferred form of light-handed regulation 138 6.5 Overview of how it may work 141 7 REGULATORY OBJECTIVES 162

7.1 Introduction 162 7.2 Discussion of key issues 163 7.3 Conclusions 170 8 A ONE-STOP-SHOP 172

8.1 What is the one-stop-shop concept seeking to address? 173 8.2 Options for implementing a one-stop-shop 178 8.3 Possible functions of a one-stop-shop 180 8.4 Implementation issues 187 8.5 Concluding comments 188 APPENDIX A TERMS OF REFERENCE 189

APPENDIX B SUBMISSIONS RECEIVED 192

APPENDIX C CPA CLAUSE 6 PRINCIPLES 193

APPENDIX D COSTS OF REGULATION 198

APPENDIX E EXAMPLES OF LIGHT HANDED ACCESS REGIMES 202

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DRAFT REPORT SUMMARY

On 26 June 2009, the Minister for Finance directed the Commission to undertake a review of the Victorian Rail Access Regime (‘VRAR’). The current VRAR came into effect on 1 January 2006. The Terms of Reference require the Commission to advise on:

• whether a Victorian rail access regime is still required given the current and likely future structure of the industry, and having regard to the costs and benefits of economic regulation.

• if regulation is needed,

o what services should be regulated

o what form should regulation take, and

o whether the current objectives for VRAR remain relevant, and if not, what new objectives the VRAR should adopt.

This Draft Report sets out the Commission’s preliminary conclusions and draft recommendations on the matters under the Terms of Reference.

The Commission has benefited from consultation with stakeholders including:

• ten submissions received in response to the Issues Paper from: the Alliance of Councils for Rail Freight Development (‘ACRFD’); Asciano; BlueScope Steel; El Zorro; P&O Trans Australia (‘POTA’); Port of Melbourne Corporation (‘PoMC’) (including a confidential supplement); V/Line; the Victorian Farmers Federation (‘VFF’); the Victorian Freight and Logistics Council (‘VFLC’); and Wakefield Transport Group (‘Wakefield’).

• two public hearings held in Melbourne and Shepparton in September 2009. Policy context

In carrying out the review the Commission is to have regard to relevant government policies and objectives with regard to the rail industry and with regard to economic regulation. Of particular importance to the policy context for rail in Victoria are the findings of the 2007 Rail Freight Network Review (or ‘Fischer Review’)1 and the Government’s recent policy statement Freight Futures.

Among other things the Fischer Review recommended:

1 The Victorian Rail Freight Network review (December 2007) ‘Switchpoint: The Template for Rail Freight to Revive and Thrive!’

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• the Government provides a fit-for-purpose regional rail freight system at a reasonable cost, which is capable of efficiently transporting known freight volumes at prices competitive with road

• a simpler access regime be adopted and consideration be given to the Commission’s ongoing role in rail freight access, and

• a “one stop shop” for track access to simplify the process of obtaining access for train operators. The Government's policy statement Freight Futures contains the following policy objectives, among others:

• facilitating the efficient movement of freight in Victoria

• reducing the cost and improving the reliability of supply chains in Victoria, and

• optimising the use of existing network infrastructure.

Relevant government objectives with respect to economic regulation are set out in the Competition and Infrastructure Reform Agreement (‘CIRA’). This agreement, executed by all Australian governments, provides for governments to implement a simpler and consistent national system of rail access regulation. The proposed national system of rail access regulation would have the following features:

• nationally significant railways, including the interstate network and major intra-state freight corridors, should use the Australian Rail Track Corporation (‘ARTC’) access undertaking as the regulatory model

• access regimes should facilitate commercially negotiated access terms and conditions in the first instance, and

• state-based rail access regimes must be submitted for certification before the end of 2010.

In undertaking this Review it is incumbent on the Commission to ensure that its recommendations are consistent with the CIRA principles. The current rail access regime

The services currently regulated under the VRAR include:

• track access services provided to freight trains on the regional and metropolitan rail networks

• track access provided to V/Line Passenger, and

• terminal services provided in the rail terminals in the Dynon precincts.

The VRAR is comparatively prescriptive in that:

• it requires an access provider to have in place an access arrangement approved by the Commission:

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• pricing must be consistent with the Pricing Order which prescribes the pricing principles that an access provider must apply when charging for access;

• Commission instruments set the rules for a broad range of access related activities; and

• contains a detailed dispute resolution framework.

Under the VRAR each access provider is required to have at all times an access arrangement approved by the Commission. The access arrangement must contain:

• the terms and conditions, including the price, for the provision of each reference service

• information on the availability and the indicative terms and conditions for the non-reference services

• procedure for making access applications and for assessing and determining access applications, and

• the term of the access arrangement.

Access arrangements must also conform to a Pricing Order, which prescribes the pricing principles that an access provider must apply when charging for access and also establishes principles for allocating costs between passenger and freight services. The Pricing Order also requires that an access arrangement must contain a revenue cap. Prices specified in access arrangements must also comply with the Rail Pricing Access Guideline issued by the Commission, which sets out the methodology to be used by access providers when calculating rail access prices. Commission Instruments establish the rules applying to access providers and cover a broad range of activities: account keeping, ring fencing of access-related activities, the use of capacity, network management and the framework for access negotiation. In addition, there are rules for handling confidential access seeker and user information.

The VRAR also contains a dispute resolution framework in which the Commission acts as arbitrator of disputes notified to it by either an access seeker or an access provider. The dispute resolution framework provides a 'last resort' mechanism to resolve access disputes. The Victorian rail industry

The main types of freight carried by rail in Victoria are bulk grain, containerised freight and other freight, which includes logs, steel products, cement and crushed rock. Bulk grain is the largest rail freight task in Victoria in non-drought years and is transported from regional receival sites in Victoria and the Murray region in southern New South Wales (NSW) to port or domestic terminals. Containerised freight consists mainly of agricultural and processed products and is typically transported to the Port of Melbourne from regional industries and intermodal terminals (‘IMTs’).

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Recent developments

Since the current access regime was introduced in 2006 there have been a number of important market structure changes in the rail industry, which include:

• the entry of several competing above-rail operators into the industry following the introduction of the access regime,

• the Victorian Government’s buy-back of the regional rail network, completed in May 2007, with V/Line now managing both the regional rail network and passenger train operations on that network, and

• Pacific National’s relinquishment of its lease over the Dynon Intermodal Terminal. Future trends and challenges

Some of the key issues that stakeholders identified as affecting the rail industry are:

• the tenuous position of the rail industry overall with freight volumes on rail at historically low levels

• the Victorian government’s plans for a Metropolitan Freight Terminal Network, which may involve an increased use of rail, and

• strong interest in the concept of a “one-stop-shop” recommended by the Fischer Review. Comparative rail access regimes

Since the Council of Australian Governments (COAG) has agreed to implement a simpler and nationally consistent system of rail access regulation, it is important to consider the rail access regimes applying in other Australian jurisdictions.

Although each jurisdiction is unique in some respects, it is apparent that the VRAR differs in some ways more fundamentally from other rail access frameworks in Australia. These differences include:

• the scope of the ex ante arrangements. The Victorian regime appears to be more prescriptive than other state-based regimes. As well as having more regulatory instruments than the other regimes, the instruments regulate the activities of access providers more closely than regimes in Western Australia, South Australia or New South Wales. Even in Queensland, where there is a vertically integrated below and above-rail operator, the arrangements do not appear to be any more extensive or prescriptive than in Victoria

• unlike other jurisdictions, the majority of declared services (terminals aside) in Victoria are not priced by reference to a 'floor-ceiling test', and

• the requirement that reference prices be set so as to recover a 'reasonable forecast of the access provider's efficient costs of providing the declared rail transport services' (that is, prices are set with respect to a 'revenue

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requirement') is uncommon. Although other jurisdictions specify a notional 'revenue requirement' this is generally to produce the relevant ceiling price.

The fact that the VRAR differs significantly from regulatory frameworks in comparable markets elsewhere is not necessarily symptomatic of a need for change. Indeed, diversity in ownership, industry structure and operational environments means that regulatory arrangements must be tailored to some extent. However, the degree of prescription of the VRAR may not be well suited to the current structure of the rail industry in Victoria. The need for continuing economic regulation

The question whether the Victorian rail access regime is still required involves considering whether, given the present and anticipated future state of the rail industry, access regulation continues to be needed for each of the services and facilities currently subject to regulation under the regime, and whether any other facilities should be subject to the regime. Two criteria are relevant when considering these questions:

• whether the economic and social benefits of regulation outweigh the economic and social costs, and

• whether coverage of the services under the regime is consistent with the principles in the national access framework.

The benefits of regulation are likely to be important where there is scope for the misuse of market power, where there are weak incentives to improve efficiency and where there are significant barriers to effective competition.

The costs of regulation are likely to be higher where regulation affects prices to such an extent that it deters the scope for greater competition, or where potential investments are impeded or delayed by certain forms of regulation. The costs of regulation will also depend on the form of regulation employed.

Under the national access framework, access regulation should only be applied to services provided by means of ‘significant infrastructure facilities’ for which:

• it would not be economically feasible to duplicate the facility

• access to the service is necessary in order to permit effective competition in a downstream or upstream market

• the safe use of the facility by the person seeking access can be ensured at an economically feasible cost, and

• the facility is “significant” to the State or regional economy.

Stakeholders' views

Stakeholders saw benefit in retaining the rail access regime for access to rail infrastructure. However, several stakeholders were of the view that a light-handed regime may be more appropriate than the current VRAR.

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There were differing views on whether the Dynon terminals and any other terminals should continue to be covered by access regulation. Some stakeholders considered that access regulation for terminals should be retained while others took the opposite view. One stakeholder considered that a light-handed regulation would be the more appropriate form of regulation for terminals.

The case for regulating – passenger train access

In 2009 the Government appointed MTM as the new franchise operator of the metropolitan rail network for an eight year period. MTM was required to enter into a Track Access Agreement with the State and V/Line Passenger under which it will provide V/Line Passenger with access rights to the metropolitan network over the term of the franchise. The implication of this agreement is that V/Line is no longer an access seeker.

In these circumstances the Commission can see no purpose to the continued operation of the Passenger Network Declaration Order.

The case for regulating – freight rail network access

Rail infrastructure services on the regional rail network and parts of the metropolitan network meet the criteria for coverage under the national access framework because:

• all of the intra-state rail network that is part of the Principal Freight Network is significant to freight logistics in Victoria;

• safe use of the facilities is ensured by applicable safety regulation

• in light of the excess capacity on the regional rail network and the high cost and constraints to works in metropolitan areas, it would appear to be uneconomical for another party to develop a competing rail infrastructure facility to provide the same services to freight trains as the regional and metropolitan networks currently provide, and

• access to the below-rail networks is necessary to permit effective competition in the above-rail freight market.

The VRAR does not appear to provide any substantial benefits associated with preventing the misuse of market power. However, there are several other identified benefits of the access framework:

• Passenger service providers have low incentives to provide freight access because of insignificance to their operations and their dependence on subsidies. Stakeholders have raised concerns about the risk that access providers may hinder access for freight trains and concerns about the maintenance of neutrality between competing train operators. The VRAR provides greater certainty for regional industries to ensure efficient access to export markets and greater confidence in rail based supply chains.

• There is a potential benefit from formal access obligations in terms of reducing transaction costs for market participants. (The Commission has

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also explored the question of transaction costs more broadly in the context of the one-stop-shop concept – see below).

• In a subsidised market, access rights may reduce the risk that private parties, such as the vertically integrated stevedore/terminal/rail operators, might capture some benefits of rail subsidies and thereby obtain rents.

• Regional development considerations have been emphasised by a number of stakeholders to this Review. These include enhancing the development of regional industry as well as concerns about the impact on domestic amenity from greater truck use. These issues are an important consideration in regard to the objective of the long-term well-being of consumers and Victorians.

From the Commission’s analysis the costs associated with light-handed regulation appear to be relatively modest. The Commission’s preliminary assessment is that the expected benefits outweigh the expected costs of regulation and rail network access services to freight trains should continue to be covered but with a lighter- handed regime.

The case for regulating – rail terminals

The South Dynon terminal and the East and West Swanson on-dock terminals appear to meet the criteria for coverage under the national access framework because:

• the rail freight supply chain should be considered as a network of services and the Melbourne Intermodal terminals are an integral part of the supply chain for intra-state freight and hence are significant infrastructure facilities

• safe use of the facilities is ensured by applicable safety regulation

• Intermodal terminals have pronounced economies of scale, with a minimum efficient scale of several hundred thousand TEU. In Victoria only South Dynon is of this scale. The SCT and CRT facilities are much smaller operations and should not be regarded as a duplication of South Dynon. The services provided by the on-dock terminals are not able to be economically duplicated given the high cost of road transfers to the port from alternative sites and because each on-dock terminal is advantaged to serve the affiliated adjacent stevedore terminal; and

• In the intra-state container freight market, if a competing train operator is to be able to offer an equivalent service to an inland terminal as the current operators it will need access to an on-dock terminal. With respect to the interstate market, at the present time, access to South Dynon would be essential for any substantial scale entrant into the interstate rail haulage market. Hence access to the on-dock terminals and to South Dynon are necessary to permit effective competition in related markets.

The benefit of applying access regulation to the essential terminals is closely linked to the benefit of access regulation of rail infrastructure (previously described). Where access to terminals is essential to facilitate competition in the above-rail market, these same benefits will be relevant.

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On the other hand, there appears to be no compelling reason for continuing to make the Dynon Intermodal terminal subject to a VRAR. Freight volumes at the Dynon Intermodal terminal are low and it has not yet demonstrated the ability to economically duplicate the services of South Dynon. Given the additional road transfer costs, it is questionable whether any off-dock terminal could economically duplicate the services of an on-dock terminal.

The Commission’s analysis leads to the preliminary conclusion that:

• South Dynon should remain covered

• the Dynon Intermodal terminal and the North Dynon Agent’s Sidings should no longer be covered, and

• the Swanson Dock East and Swanson Dock West rail terminals should be covered by a VRAR.

Based on its present analysis the Commission intends to recommend that the on- dock terminals come under the regime.

However, the Commission is cognisant that this proposal implies the extension of coverage of a VRAR to previously unregulated terminals and wishes to ensure that the analysis is correct and is tested thoroughly through public consultation. The Commission is seeking any other information that might be relevant to this preliminary position and detailed stakeholder comment. The form of economic regulation

There are several types of economic regulation which are generally presented along a spectrum from 'light handed' to 'full regulation'.

The existence of vertical integration will also be an important influence on the incentives of an access provider to exercise market power, and hence on the appropriate form of regulation. Lighter handed models may be preferable where the market is in transition from conditions of substantial market power to more competitive conditions, but where competition is not yet fully effective.

Views of stakeholders

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• the view that the ARTC undertaking would be appropriate and is slightly more light-handed than the existing framework (e.g. the current train operators), and • some who suggested a more light-handed negotiate/arbitrate framework (e.g. Wakefield).

In regard to terminals, there was less detail from stakeholders in regard to the proposed form of regulation, but the emphasis appeared to be on transparency and equity between operators.

Form of regulation for the rail networks and terminals

Having regard to the range of considerations, the Commission has formulated a proposed two-tier system of regulation:

(a) The first tier would establish a basic access regime that would apply to all declared rail transport services – the default negotiate/arbitrate model. However, access providers may choose to maintain an access undertaking approved by the Commission.

(b) The second tier would apply to any ‘major corridors’ – this would require a mandatory undertaking similar to the ARTC undertaking. If the access provider was ARTC, then it could satisfy this requirement by submitting the undertaking to the ACCC instead of the Commission.2

The Commission also considers that a light-handed rail access regime can be formulated in Victoria having regard to the existing VRAR and the requirements for certification. The Commission makes recommendations for: • better defining the scope of the regime • modifying the extent of prescription on operational matters • providing further detail on the access undertakings • modifying the negotiation framework • identifying the pricing principles • modifying the framework for resolving access disputes, and • providing for regular reviews. Relevance of the existing VRAR objectives

The Rail Corporation Act (RCA) includes objectives the Commission must seek to realise when carrying out its regulatory functions. These are:

• to ensure access seekers have a fair and reasonable opportunity to be provided declared rail transport services, and

2 Under Draft recommendation 6.4, all intra-state tracks that are transferred to ARTC but are not yet under a Commonwealth access undertaking would remain under the VRAR until they are covered at the Commonwealth level.

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• to promote competition in rail transport services so as to achieve an increase in the use of, and efficient investment in, rail infrastructure.

In addition, the Commission’s regulatory objectives in the Essential Services Commission Act 2001 (ESC Act) are applicable, but subordinate to those in the RCA. Since the VRAR was enacted, the ESC Act has been amended to include an objects clause for access regimes mirroring that in the national access framework:

The object of this Part is to promote the economically efficient operation of, use of and investment in, the infrastructure by means of which services are provided, thereby promoting effective competition in upstream and downstream markets.

The Commission’s draft recommendation is that to ensure consistency between the VRAR and the national access framework, the objectives in the ESC Act should not be subordinate to those in the RCA.

The Commission seeks stakeholder comment on the merits of replacing the existing objectives in s.38F of the RCA with the following:

• to facilitate access to declared rail transport services on fair and reasonable commercial terms

• to facilitate competitive markets in the provision of rail industry services, and

• to promote the efficient allocation of resources (including efficient investment) in the rail industry and the optimal use of existing rail infrastructure. One stop shop

The Commission is exploring options for a one-stop-shop for rail access which was recommended by the Fischer Review.

At the present time, the Commission is the regulator of train path allocation, train control and other network management activities through the requirements under the Network Management and Capacity Use Rules that access providers must submit protocols for all such activities to the Commission for its approval. In this Review the Commission is contemplating that these Network Management and Capacity Use Rules, in all of their detail, need not form part of the access regime under a light-handed regulation framework. If so, then it is legitimate to consider whether any other form of regulation or governance, perhaps not part of the access regime itself, should nevertheless be considered in relation to these activities. The Commission's advice to the Minister would not be complete if it omitted these considerations noting that the terms of reference direct it to have regard to factors that affect the efficient operation of the rail industry. For these reasons, the Commission feels that it is appropriate to consider whether any other regulatory or governance frameworks are relevant to train path allocation, train control and other network management activities under a light-handed VRAR.

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separated from V/Line and questioned whether V/Line’s role as both access provider and passenger service operator is consistent with facilitating rail freight.

A one-stop-shop is intended to simplify the process for freight train operators to obtain access to rail networks by minimising the number of contractual and operational interfaces for access seekers. It may involve the establishment of a single provider of freight train scheduling services. This provider may act as a central clearinghouse for access seekers, handling and co-ordinating requests for access according to an agreed set of protocols. Such a clearinghouse might also have a registered user system, a centralised request and dispatch system and a real time update system.

A one-stop-shop may also be given other functions commonly carried out by an independent system operator (‘ISO’), such as:

• train control functions

• functions with respect to system planning

• performance measurement and monitoring

• standards setting to enhance interoperability, and

• market based train path allocation, such as auctioning.

A one-stop-shop might also be responsible for track management and maintenance responsibilities under one model.

The Commission is considering several options for the type of one-stop-shop that could be established, including:

• a clearinghouse entity (that is, a single body to negotiate access agreements, allocate train paths and possibly also carry out financial settlements),

• an ISO responsible for carrying out some or all of the functions of an ISO listed above, and

• a fully vertically separated below-rail access provider responsible for track management and maintenance responsibilities.

The Commission is also examining the scope of operation of a one-stop-shop including:

• whether it should apply to all of the intra-state rail track

• all Victorian rail track including both intra-state and interstate, or

• a Priority Freight Network, and

• whether it should apply to terminal services.

One issue that requires further consideration is the governance arrangements that would apply to a one-stop-shop. Under some of the options described, this could be implemented through a Victorian rail ISO broadly analogous to the Australian

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Energy Market Operator (‘AEMO’), which is designed provide for industry representation and draw on industry expertise, while at the same time ensuring independence. There are also questions regarding the regulation, if any, of a one- stop-shop.

The Commission seeks stakeholder comments on the options considered for a one-stop-shop, as well as the issues involved and potential difficulties in implementing such a proposal.

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LIST OF DRAFT RECOMMENDATIONS & PRELIMINARY POSITIONS FOR COMMENT

Coverage

Draft recommendation 5.1 (page 106)

Rail infrastructure services provided to V/Line Passenger should cease to be declared services.

Draft recommendation 5.2 (page 114)

Intra-state rail infrastructure services provided to freight trains should remain covered by the VRAR. All of the intra-state regional rail network and those parts of the metropolitan rail network that are part of the Principal Freight Network should remain as declared facilities.

Preliminary position for comment 5.3 (page 122)

The Commission’s preliminary position regarding coverage of terminals under the VRAR is as follows: • South Dynon should remain covered • the Dynon Intermodal terminal and the North Dynon Agent’s Sidings should no longer be covered, and • the Swanson Dock East and Swanson Dock West rail terminals should be covered by the VRAR.

Based on its present analysis the Commission intends to recommend that the on-dock terminals come under the regime.

However, the Commission is cognisant that this proposal implies the extension of coverage of the VRAR to previously unregulated terminals and wishes to ensure that the analysis is correct and is tested thoroughly through public consultation. The Commission is seeking any other information that might be relevant to this preliminary position and detailed stakeholder comment.

The form of regulation

Draft recommendation 6.1 (page 141)

The VRAR provide a two tier system of regulation for declared rail transport services:

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(a) the first tier should apply to all declared rail transport services except those provided on ‘major corridors’, and: • the default form of regulation should be a negotiate/arbitrate framework • access providers would be entitled to submit a voluntary access undertaking for approval by the Commission.

(b) the second tier will apply to all declared rail transport services provided by means of facilities designated as ‘major corridors’, and the access provider must submit an access undertaking to be approved by the Commission, and the undertaking must have a form similar to the ARTC undertaking. A ‘major corridor’ can be defined as one carrying: • long distance containerised freight trains, or • a significant ‘heavy haul’ task, such as coal or iron ore trains.

Draft recommendation 6.2 (page 142)

Initially, none of the facilities proposed to be declared represent ‘major corridors’ for the purposes of Draft recommendation 6.1(b).

The Commission should be able to designate a facility covered by the VRAR as a ‘major corridor’ if the nature of the freight tasks on any facilities changes significantly, or the interconnectivity of those facilities with other ‘major freight corridors’ changes.

Before exercising this discretion, the Commission should be required to conduct a public consultation on the question. Form of regulation – detailed elements

Draft recommendation 6.3 (page 143)

The Commission should have the ability to exclude terminal ancillary services from the regime if the additional benefits from their inclusion are not greater than the additional costs. Before exercising this discretion, the Commission should be required to conduct a public consultation on the question.

Draft recommendation 6.4 (page 144)

Intra-state rail lines transferred to ARTC should remain covered by the VRAR until such time as they are included in an undertaking approved by the ACCC.

The types of services potentially covered by the regime should be more tightly defined so that it cannot be applied, for example, to tram tracks or to rolling stock.

The criteria for declaring rail transport services to be 'declared rail transport services' under the RCA should be amended to reflect more closely the criteria set out in the CPA and the TPA for declaring services in the context of a State-based access regime.

Draft recommendation 6.5 (page 146)

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The existing requirement that the Commission make Capacity Use Rules and Network Management Rules should be replaced by high level statutory obligations on the access provider to: • transparently establish protocols for capacity allocation and network management (retaining the ‘use it or lose it’ principle), and • not to discriminate between users when carrying out those activities.

If the one-stop-shop concept were adopted by Government then it may be appropriate for the Commission to approve protocols for capacity allocation and train management in those circumstances. However, this need not form part of the access regime.

Draft recommendation 6.6 (page 149)

For either a voluntary and mandatory access undertaking, the undertaking should (in addition to, or in place of, requirements in s.38X of the RCA): • have a form similar to the ARTC access undertaking • include indicative terms and conditions of access to reference services, and • have a nominated expiry date between three and ten years

The Commission will consider on application whether it will accept a voluntary undertaking based on the “publish/arbitrate/negotiate” approach whereby reference prices are not approved ex ante, but remain subject to the dispute resolution process.

Draft recommendation 6.7 (page 151)

The Negotiation Guidelines should be retained and the VRAR should require: • compliance with the Negotiation Guidelines as an ongoing obligation of access providers, and • access provider to use all reasonable endeavours to allocate to an access seeker any train path requested by the access seeker in an access application.

Draft recommendation 6.8 (page 151)

The Negotiation Guidelines should be amended to include a requirement for access providers to publish appropriate performance indicators. The Guidelines should specify those indicators.

Draft recommendation 6.9 (page 152)

The current requirement for the Commission to issue Account Keeping Rules and Ring Fencing Rules should be replaced by: • statutory obligations for access providers to maintain separate accounting records for access activities • to provide financial records to the Commission on demand, and

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• an ability for the Commission to make record keeping guidelines (including specifying appropriate cost allocation principles) or Ring Fencing Rules if it considers them to be needed.

Draft recommendation 6.10 (page 153)

Regarding the system and business rules for handling confidential information, the present requirement that an access provider submit such a system to the Commission for approval be replaced by an obligation for the access provider to establish and maintain a fit-for-purpose system with the ability of the Commission to audit it, and the access provider’s to compliance with it, at any time.

Draft recommendation 6.11 (page 155)

The following pricing principles should apply: • The prohibition of different pricing between access seekers if the service provided is the same should be retained. • The general access pricing principles in s.35C of the ESC Act should apply. • The principles of allocating costs between passenger and freight services should be retained. • The principle of floor-ceiling price limits should be applied to all declared rail transport services. The floor price should be adjusted if there are Government contributions.

These pricing principles should apply as ongoing access provider obligations. The remaining elements of the Pricing Order should not be retained.

Draft Recommendation 6.12 (page 158) The following changes be made to the dispute resolution framework in the RCA: • provision that an alternative arbitrator may be appointed by the Commission at the request of the parties to a dispute, with appropriate amendments to ensure the alternative arbitrator is provided with guidance to adhere to the same principles as the Commission, and to ensure enforceability of the determination, and • the Rail Access Dispute Resolution Guideline should be amended to include procedures for ring fencing of the Commission’s arbitration functions from its regulatory functions.

Draft Recommendation 6.13 (page 159)

The RCA should include a schedule for periodic reviews of the VRAR. Objectives

Draft recommendation 7.1 (page 171)

The objectives in s.38F of the RCA should not prevail over the objectives in s.8 and s.38A of the ESC Act in the event that there is considered to be a conflict between the objectives.

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Draft recommendation 7.2 (page 171)

The existing objectives in s.38F of the RCA be replaced with the following: • to facilitate access to declared rail transport services on fair and reasonable commercial terms • to facilitate competitive markets in the provision of rail industry services, and • to promote the efficient allocation of resources (including efficient investment) in the rail industry and the optimal use of existing rail infrastructure.

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LIST OF QUESTIONS IN CHAPTER 8

Question 8.1 (page 177)

How significant are the underlying problems that the one-stop-shop concept seeks to address?

Question 8.2 (page 179)

Are the options identified appropriate ones? What other options should be considered?

Question 8.3 (page 182)

What are the merits of the clearinghouse model? Would it provide any efficiency improvement over what the access providers could achieve themselves with clear operating rules?

What are the practical limitations of this model?

Question 8.4 (page 183)

Would there be benefit in more integrated train control? If so, how might that be accomplished? What would be the impediments?

Question 8.5 (page 183)

Would there be benefit in greater supply chain planning coordination? How should this be achieved? Are there other models to a one-stop-shop that might be preferable?

Question 8.6 (page 184)

Would there be benefit in performance measurement and target setting for the rail industry in Victoria? What would be the most appropriate body or cooperative structure for such a role?

Question 8.7 (page 184)

Would there be any benefit in a one-stop-shop having responsibility for setting standards?

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Question 8.8 (page 185)

Does train path auctioning have any relevance for rail freight access in Victoria? If so, what would be the benefits over the existing pricing arrangements?

Question 8.9 (page 186)

What would the benefits be of a vertically separated track manager? If this were the preferred option, would there be any realistic alternative to ARTC management?

Question 8.10 (page 187)

Would there be any benefits from a rail network ISO? Does the Victorian rail industry have enough scale to support the functions of an ISO?

Question 8.11 (page 187)

What would be the regulatory implications, if any, of an ISO?

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PART I: BACKGROUND

Part 1 contains four chapters which cover information that needs to be examined and taken into account into this Review. Part 1 is structured as follows: • Introduction sets out the purpose and scope of the review, the objectives of the Commission and relevant principles, the purpose of the Draft Report and making a submission and the review process and timetable • Chapter 2 provides an overview of the policy context for the Review and sets out the main features of the current Victorian rail access regime (‘VRAR’) • Chapter 3 discusses the Victorian rail industry and recent industry developments that are particularly relevant to this Review, and • Chapter 4 discusses rail access regimes in other Australian jurisdictions including the ARTC undertaking model.

Readers who are familiar with the industry and/or just wish to access those parts of the report that directly address the elements of the terms of reference can skip Part I and go straight to Part II (page 86).

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1 INTRODUCTION

The Essential Services Commission (the ‘Commission’) is the independent economic regulator of essential services in Victoria. Among its regulatory functions, the Commission is responsible for economic regulation of the Victorian rail sector under the Rail Corporations Act 1996 (‘RCA’). The RCA establishes the Victorian Rail Access Regime (‘VRAR’), contained in Part 2A of the RCA. The current VRAR came into effect on 1 January 2006.

The Commission also carries out inquiries and provides recommendations to the Victorian Government under Part 5 of the Essential Services Commission Act 2001 (the ‘ESC Act’). The Commission must inquiry into any matter that the Minister directs. The present review is an inquiry of this type.

1.1 Purpose and scope of the review

On 26 June 2009, the Minister for Finance (‘Minister’), under section 41 of the ESC Act, directed the Commission to undertake a review of the VRAR. The Minister indicated that the Specific Terms of Reference for the review are as follows:

The review will examine, report on, and make recommendations in relation to:

i Whether a Victorian rail access regime is still required given the current and likely future structure of the industry, and having regard to the costs and benefits of economic regulation.

ii If continuing the access regime is recommended:

a. whether the current objectives for the Victorian Rail Access Regime (VRAR) remain relevant, and if not, what new objectives the VRAR should adopt;

b. what services the VRAR should regulate; and

c. what form the regulation of those services should take.

In conducting its review, the Commission is to have regard to factors that affect the efficient operation of the Victorian rail industry, including market conditions, the Government's investment in, and funding of, rail infrastructure and the rail industry and the Government's policies and priorities for the rail freight network.

In conducting its review, the Commission is to have regard to:

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i. the objectives set out in section 38F of the Rail Corporations Act 1996 and section 8 of the Essential Services Commission Act 2001, and the matters which the Commission must have regard to as specified in sections 8A of the Essential Services Commission Act 2001 (ESC Act);

ii. relevant principles in the Competition Principles Agreement and Part 3A of the ESC Act; and

iii. Victoria's obligations under the Competition and Infrastructure Reform Agreement.

The Commission expects that the review will meet the requirement under the Council of Australian Governments (‘COAG’) National Reform Agenda, whereby the State governments have agreed to review existing rail access regimes for compliance with the principles in the Competition and Infrastructure Reform Agreement (‘CIRA’), and then submit them for certification as soon as practicable thereafter, and no later than the end of 2010.

1.2 Objectives of the Commission and relevant principles

The Terms of Reference require the Commission to have regard to its rail industry specific objectives set out in s.38F of the RCA, namely: • to ensure access seekers, and any other person the Commission considers may want to be provided declared rail transport services, have a fair and reasonable opportunity to be provided declared rail transport services; and • to promote competition in rail transport services to achieve an increase in the use of, and efficient investment in, rail infrastructure.

While having regard to these objectives, the Terms of Reference also direct the Commission to consider whether these objectives remain relevant.

Also in accordance with the Terms of Reference, the Commission will have regard to its general regulatory objectives which are set out in s.8 of the ESC Act, namely:

(1) In performing its functions and exercising its powers, the objective of the Commission is to promote the long term interests of Victorian consumers.

(2) Without derogating from subsection (1), in performing its functions and exercising its powers in relation to essential services, the Commission must in seeking to achieve the objective specified in subsection (1) have regard to the price, quality and reliability of essential services.

Section 8A of the ESC Act states that in seeking to achieve these general objectives, the Commission must have regard to the following matters to the extent that they are relevant in any particular case:

(a) efficiency in the industry and incentives for long-term investment;

(b) the financial viability of regulated industry;

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(c) the degree of, and scope for, competition within the industry, including countervailing market power and information asymmetries;

(d) the relevant health, safety, environmental and social legislation applying to the industry;

(e) the benefits and costs of regulation (including externalities and the gains from competition and efficiency) for –

o consumers and users of products or services (including low income and vulnerable consumers); and

o regulated entities. (f) consistency in regulation between States and on a national basis;

(g) any matters specified in the empowering instrument.

The Terms of Reference indicate that the Commission is to have regard to relevant principles in the Competition Principles Agreement (CPA) and the Competition Infrastructure Reform Agreement (CIRA). The CPA and the CIRA are discussed in section 4.1 of this Draft Report.

Clause 6(5)(a) of the CPA, and Part 3A of the ESC Act (Third Party Access Regimes), include the following objective which is relevant to this review:

The Commission is also to have regard to the Government's policies and priorities for the rail freight network, and in this regard it will be appropriate for the Commission to have regard to the goals and objectives of the Freight Futures policy, where they are relevant.

1.3 Purpose of the Draft Report and making a submission

This Draft Report sets out the Commission’s preliminary conclusions on the matters under the Terms of Reference.

Submissions in response to this Draft Report and/or in response must be made by 4 December 2009.

Submissions should be sent electronically to: [email protected] or by mail addressed to:

Review of the Victorian Rail Access Regime 2009 Essential Services Commission Level 2, 35 Spring Street Melbourne VIC 3000

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The Commission will make submissions available to the public on its website, with the exception of any commercially confidential or sensitive information which has been identified as such in the submission. Please direct any queries about this Draft Report to Michael Cunningham, on (03) 9651 0247.

1.4 Review process and timetable

The review is being conducted in accordance with Part 5 of the ESC Act (Inquiries and Reports).

An Issues Paper was released on 16 July 2009, to which ten submissions were received from: the Alliance of Councils for Rail Freight Development (‘ACRFD’); Asciano; BlueScope Steel; El Zorro; P&O Trans Australia (‘POTA’); Port of Melbourne Corporation (‘PoMC’) (including a confidential supplement); V/Line; the Victorian Farmers Federation (‘VFF’); the Victorian Freight and Logistics Council (‘VFLC’); and Wakefield Transport Group (‘Wakefield’).

Two public hearings have been held: • in Melbourne on 1 September 2009 and • in Shepparton on 8 September 2009.

At these hearings presentations were made by representatives of the Commission, Asciano, ACRFD, the VFF, the VFLC and DIIRD. Transcripts of the proceedings are available on the Commission’s website.

The following timetable applies to the remainder of this review: • Submissions to Draft Report due by: 4 December 2009 • Final Report submitted to Minister: end January.

1.5 Structure of the Draft Report

The structure of this Draft Report is as follows:

Chapter 2 includes an overview of the policy context for the Review and outlines the Victorian rail access regime.

Chapter 3 provides an overview of the Victorian rail industry.

Chapter 4 discusses rail access regimes in other Australian jurisdictions.

Chapter 5 presents the Commission’s assessment of the need for continuing economic regulation and the services that should be covered.

Chapter 6 examines the relevance of the existing regulatory objectives.

Chapter 7 presents the Commission’s preliminary assessment of the appropriate form of regulation.

Chapter 8 addresses the concept of a rail one-stop-shop.

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2 POLICY CONTEXT & THE VRAR

In carrying out the review the Commission is to have regard to relevant government policies and objectives with regard to the rail industry and with regard economic regulation. This chapter provides an overview of the policy context for the Review. It also sets out the main features of the current Victorian rail access regime (VRAR).

2.1 Policy context

Of particular importance to the policy context for rail in Victoria are the findings of the 2007 Rail Freight Network Review (or ‘Fischer Review’)3 and the Government’s recent policy statement Freight Futures. Also pertinent to this review are the regulatory principles in the CIRA. This section summarises key aspects of these policies and objectives, which will be relevant throughout this report.

2.1.1 Rail Freight Network Review (“Fischer Review”)

The Fischer Review was tasked with conducting a review of the rail freight network and identifying opportunities for future development and improvement. The Fischer Review recommended that:

the Government provides a fit-for-purpose regional rail freight system at a reasonable cost, which is capable of efficiently transporting known freight volumes at prices competitive with road4

The importance of this was emphasised as follows:

the below-rail network is unviable and requires ongoing significant support, due to the relatively low and seasonal volumes on it. However, the condition of the network and associated infrastructure are fundamental to the viability of above-rail operations, which need to be profitable to be able to provide adequate rolling stock.5

The freight-only network was prioritised for rehabilitation works as follows:

3 The Victorian Rail Freight Network review (December 2007) ‘Switchpoint: The Template for Rail Freight to Revive and Thrive’. 4 Ibid., p.5. 5 ibid., p.6.

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• Platinum – the base network – included only the Geelong to Mildura line, which was already being upgraded to an 70 km/h standard with Commonwealth funding • Gold – the first priority for rehabilitation – were the core grain lines to be maintained at a class 4 or 5 standard.6 • Silver lines were only to receive funds for major maintenance if there were co-commitments by grain bulk handlers (if so they should be maintained to class 4 or 5 standard). • Bronze lines were those that should not have major maintenance carried out.

The Fischer Review also recommended: • the adoption of the access prices that apply to the NSW regional network owned by the Rail Infrastructure Corporation (‘RIC’) and managed by ARTC. The Fischer Review was concerned that the prevailing access prices, established in negotiations between the Government and Pacific National at the time of the buy-back –were likely to cause a loss of freight volumes from the rail network. • a simpler access regime be adopted, and consideration be given to the Commission’s ongoing role in rail freight access • a “one-stop-shop” for track access to simplify the process of obtaining access for train operators. (This would reduce the transaction costs and operational complexity of train operations, including improving the efficiency of interfaces between networks, in order to better compete against road transport which does not have these transaction costs and complexities.) • the government consider the option of offering some of the Bronze lines to local communities or groups • a Government-owned entity be made responsible for developing the rail freight business, and • establishment of an ongoing asset management regime to maintain network at designated speeds post-rehabilitation, with an ongoing audit framework to monitor track condition.

Most of these recommendations are directly relevant to the current Review.

2.1.2 Freight Futures

The Victorian Government’s freight strategy is set out in the policy document ‘Freight Futures’ (December 2008). This strategy should be read in conjunction with the Victorian Transport Plan (December 2008) and the recent Port Futures strategy.

This section summarises the main elements of the freight strategy most pertinent to the present Review.

6 The class of rail line is defined by the speed that trains are allowed to operate i.e. classes 1 and 2 are >80 km/h; class 3 is 65 to 80 km/h; class 4 is 50 -65km/h; and class 5 is < 50km/h.

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Objectives The policy objectives of Freight Futures include: • facilitating the efficient movement of freight in Victoria • reducing the cost and improving the reliability of supply chains in Victoria • managing and mitigating any adverse impacts of freight planning and operations on communities and the environment • optimising the use of existing network infrastructure • provide appropriate priority for freight on the network in the context of competing demands • planning and delivering new network infrastructure in a timely manner • identifying and protecting freight network options where necessary, and • providing a policy environment that encourages private sector investment. Key strategies relevant to this Review

The strategy includes: • identifying and developing a Principal Freight Network (PFN) comprising certain major arterial roads and expressways, as well as railway lines commonly used for carrying freight. The PFN will have priority of investment to improve the efficiency of freight supply chains. Future freight corridors will also be identified and protected • improving the integration of freight network planning with land use planning. To this end, Freight Activity Centres will be identified, which will be protected with appropriate zoning to facilitate these centres achieving the mass and concentration important to freight efficiency. The “logistics city” planning concept will also be developed • establishing a Metropolitan Freight Terminal Network (‘MFTN’), including a new Melbourne International Freight Terminal north of Footscray Road; a series of major ‘open access’ terminals located in the west, north and south- east industrial areas of Melbourne; and an integrated system of high capacity transport links to connect these terminals to the port • revitalising the rail network, including rehabilitating prioritised sections of the regional rail network to maintain operating speeds where a sustainable commercial economic benefit will result, and facilitating the development of new Intermodal terminals, and • alleviating the impact of road freight transport in the inner west through the Truck Action Plan – a combination of road works to enhance capacity on selected routes and restrictions on truck movements on residential streets. Freight Futures emphasises that it is ‘the role of Government to establish appropriate policy settings and create the right governance and regulatory environment to ensure effective co-ordination of the network as a whole’, enabling

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the private sector (and for that matter, State-owned enterprises) to invest and participate with confidence.7

It also emphasised the need to establish appropriate governance arrangements, and to maximise the efficient use of the Principal Freight Network. One of the directions of Freight Futures is to undertake regulatory reform and reduce the regulatory burden on the freight industry.

Effective regulation of freight transport requires continual reform due to changes to economic and business conditions. Effective regulation is also an important driver of productivity growth in the state and national economies.8

2.1.3 CIRA

On 10 February 2006, COAG agreed to a new National Reform Agenda, part of which is the CIRA. The CIRA also outlines some specific objectives for the regulation of rail freight infrastructure. Central to this was the agreement to implement a simpler and consistent national system of rail access regulation.

It was agreed that the proposed national system of rail access regulation should have the following features: • it would use the Australian Rail Track Corporation (‘ARTC’) access undertaking to the Australian Competition and Consumer Commission (‘ACCC’) as a model • it should apply to nationally significant railways including the interstate network, and to major intra-state freight corridors where the benefits exceed the costs • pricing and access mechanisms should be appropriately modified if vertically integrated operators have control of relevant track, and • State-based rail access regimes should be effective state-based regimes conforming to the requirements of clause 6 of the Competition Principles Agreement (‘CPA’) and must be submitted for certification before the end of 2010.

These principles are at a high level, and it is not clear: • whether a ‘major freight corridor’ corresponds to a ‘significant infrastructure facility’ within the meaning of the National Access Regime • how consistency might best be served with respect to a network that contains some major and minor freight routes, or

7 Victorian Department of Infrastructure 2008, Freight Futures, p.35. 8 Ibid, p.71.

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• whether a ‘lighter-handed’ form of regulation than the ARTC access undertaking might be applicable to some rail networks that are significant to State or regional economies, but perhaps not nationally significant.9

The CIRA also contains other principles of agreement with respect to access regimes generally, including: • the objectives should promote the economically efficient use of, operation and investment in, significant infrastructure thereby promoting competition in upstream and downstream markets • in the first instance the terms and conditions of access should be commercially agreed between the access seeker and the operator • price monitoring of services provided by means of significant infrastructure facilities (i.e. in the context of access regimes) should be considered where it would aid transparency, or as a first step where price regulation may be required, or when scaling back from more intrusive regulation • pricing principles should provide for: revenue adequacy to meet the efficient economic costs of providing access; efficient multi-part pricing and price discrimination; and prevent vertically integrated businesses setting prices in a way which unfairly advantages their downstream operations, and • merits reviews should be limited to the information submitted to the regulator.

The COAG Reform Council has recently observed that:

the task of establishing a national rail access regime has not been completed and … the review of the CIRA due to commence in 2011 may need to reconsider if and how it is to be achieved.10

While COAG has not yet agreed or implemented a specific national rail model, it is incumbent on the Commission, in conducting its Review, to ensure that its recommendations are consistent with the CIRA principles.

2.2 The current rail access regime

The Victorian Government legislated for its first rail access regime in 1999.11 However, the access regime was not activated until 2001 when declaration orders, which identified the infrastructure subject to access, were proclaimed.

9 For example, ESCOSA states that “whilst the South Australian Rail Access Regime is considered by the Commission to be more light-handed compared to other access regimes (e.g. Victoria or ARTC), the Commission notes that this in part reflects different market conditions and industry structures.” ESCOSA (2009) ‘2009 SA Rail Access Regime Inquiry: Draft Inquiry Report’, p.11. 10 COAG Reform Council (March 2009) ‘COAG Reform Council Report: Report to the Council of Australian Governments on Implementation of the National Reform Agenda’, p.59. 11 See Rail Corporations Act 1996 version 010 dated 29/4/1999 at: http://www.dms.dpc.vic.gov.au/ .

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This first VRAR was a negotiate/arbitrate regime. However, concerns in relation to its workability arose due to: resistance to the imposition of the regime by Freight Australia, who had purchased the Victorian government's above rail freight operations and entered into a long term lease over the Victorian regional rail network and Dynon Intermodal Terminal in 199912 costly and time consuming dispute resolution processes adopted by the regulator, and lack of progress in the development of above-rail competition.

For these reasons, at around the time that Freight Australia was purchased by Pacific National in July 2004, the Victorian government decided to redesign the access regime, leading to the introduction of the current VRAR on 1 January 2006.

In moving to reform the VRAR, the Victorian Government released a number of discussion papers and sought submissions from stakeholders.13 The government decided to adopt a framework in which each access provider is required to have, at all times, an approved access arrangement. An access arrangement sets out the terms and conditions upon which an access provider will offer or negotiate access to a declared service with an access seeker (i.e. a train operator). This framework was aimed at narrowing the circumstances that could lead to disputes and improving transparency and efficiency of the negotiation process by specifying access terms and conditions for reference services and the processes for negotiation in advance.

About the time Pacific National acquired the Victorian Government’s former rail freight business from Freight Australia in July 2004, the Government decided to redesign the access regime because of concerns about its workability, leading to the introduction of the current VRAR on 1 January 2006.

In moving to reform the VRAR, the Victorian Government released a number of discussion papers and sought submissions from stakeholders.14 The government decided to adopt a framework in which each access provider is required to have, at all times, an approved access arrangement. An access arrangement sets out the terms and conditions upon which an access provider will offer or negotiate access to a declared service with an access seeker (i.e. a train operator). This framework was aimed at narrowing the circumstances that could lead to disputes and

12 Freight Australia argued that the Pricing Orders did not allow it to recoup its investment or be compensated for risk, and allowed its above-rail competitors to obtain the benefit of its investment and operate more cheaply than its own above-rail operator. 13 See, for example, Victorian Department of Infrastructure (DOI), Options for reform of the Victorian Rail Access Regime July 2004; Victorian DOI, Reform of the Victorian Rail Access Regime: proposed legislative Framework Reforms December 2004; Victorian DOI, Victorian Intra-state Rail Access Pricing Options Paper, April 2005. 14 See, for example, Victorian Department of Infrastructure (DOI), Options for reform of the Victorian Rail Access Regime July 2004; Victorian DOI, Reform of the Victorian Rail Access Regime: proposed legislative Framework Reforms December 2004; Victorian DOI, Victorian Intra-state Rail Access Pricing Options Paper, April 2005.

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improving transparency and efficiency of the negotiation process by specifying access terms and conditions for reference services and the processes for negotiation in advance.

2.2.1 Statutory framework

The VRAR is established in Part 2A of the Rail Corporations Act 1996 (RCA); in certain Orders-in-Counsel which declare the services subject to the regime and the pricing principles; in Gazetted regulatory instruments; and in several guidelines produced by the Commission.

The statutory framework has a number of elements that are designed to guide the Commission in its role as economic regulator, including: • the rail-specific objectives contained in the RCA • the Commission’s general regulatory objectives set out in its Act, and • other matters identified in relevant regulatory instruments.

The relevant objectives were set out in section 1.2 of this report.

In addition, the Commission is required to give consideration to a range of matters. These include: • section 38ZI of the RCA, which requires the Commission to have regard to a range of matters, including:

o the access provider’s legitimate business interests and investment in the rail network owned or operated by that access provider

o the costs to the access provider of providing access, and

o the interests of users • the 2005 Rail Pricing Order and the 2006 Rail Access Pricing Guidelines (made pursuant to that Order), which specify the principles an access provider must apply when determining access prices; and • finally, other matters of relevance for the Commission include:

o relevant government policies such as its objective of increasing the percentage of the freight transported to Victoria’s ports by rail;15

o ensuring that access fees are sufficient to recover the access provider’s efficient costs, to the extent possible, so as to avoid the need for the government to provide supplementary contributions, and to ensure that where government contributions are made that the benefits flow to the intended beneficiaries; and

o reports and analysis specific to the rail industry, most notably, the recent COAG National Reform Agenda, the recommendations of the Fischer Inquiry and the Auditor General’s report.

15 In its Growing Victoria Together Statement, the government announced a target to move 30% of port-related freight by rail by 2010.

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2.2.2 General overview of the VRAR

The main elements of the legislation establishing the VRAR provides for the following: processes and principles by which transport infrastructure can become covered by the access regime and therefore made available for access the processes for making a Pricing Principles Order which establishes the pricing principles to which all rail access prices must conform procedural requirements for making the Commission Instruments, which are rules and guidelines to be made by the Commission to facilitate the access process and ensure access providers act in a non-discriminatory way an obligation on all access providers to submit an access arrangement to the Commission for approval. An access arrangement sets out the terms and conditions upon which an access provider will provide and negotiate with an access seeker. The RCA also sets out the contents of what an access arrangement must contain. the processes the Commission must follow in assessing and approving access arrangements processes to vary an approved access arrangement processes for access seekers to interconnect their own private sidings and/or railways to the declared track processes for resolving access disputes between access providers and access seekers obligations to which an access provider must adhere to, for example, compliance with the Pricing Principles Order, the Commission Instruments and a binding access arrangement, and enforcement procedures in the event an access arrangement is breached. These elements of the regime are discussed in more detail below.

2.2.3 Declaration

The range of services the access regime applies to is determined by the Declaration Orders made by Order of the Governor in Council under s.38I of the RCA.

There are currently three Declaration Orders in place, all of which came into effect on 1 January 2006.16 They are: the Freight Network Declaration Order 2005, which declares the below-rail services provided to freight operators on the regional and metropolitan intra-state rail networks. This right of access is subject to the principles of passenger priority (s.38H of the RCA)

16 Victoria Government Gazette, Special Gazette Number S259, 16 December 2005, pp. 1- 33.

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the Passenger Network Declaration Order 2005, which declares the rail services provided to V/Line Passenger (in its capacity as a user of railway tracks for regional passenger operations) on the regional and metropolitan rail networks, and the Dynon Terminal Order 2005, which declares terminal services at the South Dynon and Dynon Intermodal terminals. Terminal services are defined broadly in the RCA to include most services provided within the terminal precincts, including ancillary services.

2.2.4 Pricing Principles

A Pricing Principles Order may be made by Order of the Governor in Council (s38J), and the Rail Network Pricing Order (the ‘Pricing Order’) was made by the Government in October 2005 and came into effect on 1 January 2006. The Pricing Order prescribes the pricing principles that an access provider must apply when charging for access. The Commission must also observe these principles when carrying out its regulatory functions. The Pricing Order also authorises the Commission to determine a methodology for the calculation of access charges. General pricing principles

Section 4.1 of the Pricing Order sets out the following general pricing principles: prices charged by an access provider, including internal transfer prices, must be set with the objective of generating revenue such that across all declared rail transport services the expected revenue is equal to a reasonable forecast of the access provider's efficient cost of providing those services (taking account of the amount of any capital contributions from third parties) having regard to the standard and quality of those services, including the reasonably estimated financing costs associated with efficient capital expenditure incurred by that access provider since 30 April 1999 (hereafter 'Cost Reflectivity') the structure of prices may allow for multi-part pricing and price discrimination when it aids efficiency the framework for setting prices must seek to provide an access provider with incentives, including within an Access Period and between Access Periods, to incur an efficient level of costs for providing declared rail transport services the framework for setting prices must seek to avoid volatility in prices arising by reason of volatility in freight traffic, and where an access seeker or a user, or a third party on behalf of an access seeker or a user, makes any contribution towards capital or maintenance expenditure incurred in relation to the provision of declared rail transport services to that access seeker or user, the prices for the provision of those declared rail transport services must be reduced so that the revenue to be derived from the provision of those services is to be adjusted to take account of the contribution and any outgoing capital or maintenance savings. Revenue Cap

Section 4.2 of the Pricing Order requires that an access arrangement must incorporate a revenue cap. The revenue cap is to be set equal to the level of

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revenue that is expected to be consistent with the Cost Reflectivity pricing principle stated above adjusted for any subsidy contribution from government towards the costs of maintaining and renewing the network.

In subsequent Access Periods the prices must be set to adjust for the under and over recovery of revenue in the preceding Access Period against the revenue cap applying in that period. This is the 'under and over-recovery adjustment mechanism' (clause 4.2(c)).

The Pricing Order also provides for other mechanisms for adjusting the revenue cap, including an efficiency carry over mechanism and a service and quality standard adjustment mechanism.

A revenue cap does not apply to terminal services and consequently there are no 'under and over' adjustments, but prices must still be set so that projected revenue from all services is equal to projected efficient costs in accordance with the Cost Reflectivity principle. Freight and passenger cost allocation

Under section 4.3 of the Pricing Order, the costs allocated to passenger services include: • Firstly, the efficient costs directly attributable to passenger services arising from the requirement to maintain the rail infrastructure to a higher standard than would be required if only freight trains operated on the infrastructure, and specifically to meet the quality and service levels and standards specified by the Secretary or Director of Transport. • Secondly, a share of the efficient indirect costs (i.e. not directly attributable to either passenger or freight services), proportionate to the use of the rail infrastructure for passenger and freight services.

Prices for freight services are to be set with the objective of recovering the forecast efficient costs of providing all declared rail transport services minus the costs allocated to passenger services. Floor and ceiling prices

The prices for terminal services and for railway track non-reference services must be set with respect to a floor and ceiling so that these prices have the objective of setting a forecast revenue that: • at least covers the directly attributable or incremental costs of providing the service, and • does not recover more than the stand alone cost of providing the service.

These floor and ceiling constraints do not apply to railway track reference services.

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The Rail Access Pricing Guideline

The Commission issued a rail access pricing methodology − the Rail Access Pricing Guideline Version 2.0, 200917 − to be used by access providers when preparing their access arrangements. It includes the methodology for calculating the revenue cap and the mechanisms for adjusting it over time. The Pricing Guideline adopts a ’hybrid revenue cap’ whereby over recovery of revenue stemming from above forecast volumes within an access period (other than the volatility of grain harvests) are able to be retained by the access provider in order to provide an incentive for the access provider to attract more volume or modal share for rail. Non-discriminatory pricing

In addition to the foregoing pricing regulations, section 38ZZY of the RCA requires that an access provider will not calculate prices differently for different access seekers if the services provided are the same. The question as to whether services in question are ‘the same’ would be a matter the Commission may be called upon to form a view in the context of approving an access arrangement or resolving an access regime dispute.

2.2.5 Commission Instruments

The RCA requires the Commission to make certain regulatory Instruments to help guide and facilitate the process of access and its regulation.18 The ‘Commission Instruments’ are as follows: • Account Keeping Rules — which require access providers to keep and maintain accounting records and to prepare accounts in relation to access activities and other activities regarding the provision of access. The rules are designed to ensure that the Commission has available to it audited information that can be used to assist in assessing the basis of prices submitted to it in the context of an access arrangement approval process or an access dispute. • Ring Fencing Rules — which previously required the holder of the Primary Infrastructure Lease (i.e. Pacific National when it operated the regional rail network) to separate its access activities from its other activities, and to provide declared transport services to itself or a related body corporate on an arm's length basis. Since the buy-back, the Ring Fencing Rules don't apply to any access provider. • Capacity Use Rules — which regulate an access provider's activities of assessing and allocating the capacity of a rail network and allocating train paths. The rules require access providers and users to surrender certain unutilised or under-utilised train paths, and require access providers to prepare certain protocols for the allocation of the capacity of a network.

17 This superseded an earlier guideline issued in 2005. 18 The Commission Instruments were published in the Victoria Government Gazette on 4 January 2006 and came into effect from that date.

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• Network Management Rules — these rules regulate an access provider's rail network management activities, such as train service scheduling and planning, train control services, management of the interaction of rail infrastructure and rolling stock and management of incidents that affect the operation of a rail network. The rules require access providers to prepare certain protocols for the management of a rail network. • Negotiation Guidelines — which specify the information that an access provider must provide to an access seeker (including information in relation to the management of the capacity of a rail network, the availability of train paths and timetabling), the procedure by which an access seeker can apply for access, the procedure, method and timeframes in which an access provider will assess applications for access, and requirements for an access arrangement to contain a negotiation protocol incorporating an alternative dispute resolution process, as well as the principles and processes governing applications for interconnection.

2.2.6 Assessment of Access Arrangements

An access provider must submit to the Commission for approval a proposed access arrangement (or arrangements) in relation to its declared rail transport services (s.38W).

An access arrangement aims to facilitate access to the rail network of an access provider by setting out the processes to be followed by the access provider for assessing access applications from an access seeker and negotiating access agreements. In the event that a dispute arises during the negotiation of an access agreement, the process and principles contained within the access arrangement may be relevant to the determination of that dispute.

The RCA (s.38X) sets out the following matters that an access arrangement must contain:

• a description of the reference service(s) to which the access arrangement relates

• information as to whether that service is being provided by the access provider to itself or a related body corporate of the access provider

• the terms and conditions for the provision of each reference service

• the price, or methodology for the calculation of the price, to be charged in respect of the provision of each reference service

• information on the availability and the indicative terms and conditions for the provision of declared rail transport services that are not reference services

• the procedure for making an access application

• the procedure and method the access provider will use to assess and determine an access application, and

• a date for the expiry of the access arrangement.

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The access arrangement provides clear guidance in relation to access provider conduct that is consistent with the Pricing Order and the Commission Instruments. Any dispute resolution decision made by the Commission must not be inconsistent with the terms and conditions contained in a binding access arrangement. Confidential information

In addition, the RCA requires each access provider to develop a system and business rules for handling confidential access seeker and user information, to be approved by the Commission (s 38ZZZB). Reference services

The access arrangement must contain standing offer terms and conditions for reference services, but is only required to have indicative terms and conditions for non-reference services. Hence, the degree to which terms and conditions must be approved by the Commission ex ante – and hence the overall prescription of the regulatory framework – will depend on the definition of reference services.

Reference services are defined in s.38A of the RCA to include not only those services likely to represent a significant proportion of demand by access seekers of declared rail transport services, but also all services provided by an access provider to itself or a related body corporate. In 2006, Pacific National was a vertically integrated service provider and all freight services were operated by Pacific National. Hence at that time, the definition of reference services was necessarily broad. However, now that the access provider on the regional rail network is not a freight operator, the definition of reference services could be narrowed, which would change the balance between the 'ex ante' and 'ex post' aspects of the regulatory framework. That said, in recent applications for renewal of access arrangements in 2009, access providers have not sought to change the definition of reference services. Criteria for Assessment

In assessing proposed access arrangements, the Commission must take account of the matters set out in s38ZI of the RCA. These matters include whether the proposed access arrangement is consistent with the Commission's statutory objectives s38F of the RCA and other criteria mirroring clause 6(4)(i) of the CPA. Timeframes and process for Decisions

The Commission has 90 days within which to make its Final Decision to approve or reject a proposed access arrangement (s38ZG). On receiving a proposed access arrangement, submissions must be invited within 21 days of the publication of the access arrangement. The Commission must have regard to the submissions received and make its Draft Decision, and the Commission is required to call for written submissions and comment on the Draft Decision and consider all submissions in making its Final Decision.

Where the Commission does not approve an access arrangement in its Draft Decision, it must specify any amendments or matters to be addressed by the access provider in order for the Commission to approve the arrangement (s38ZC). Access providers have 14 days upon receiving a copy of the Draft Decision to

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submit to the Commission revisions to the proposed access arrangement that address the matters identified by the Commission in its Draft Decision.

The Commission may not approve a revised proposed access arrangement unless all of the matters it has identified in its Draft Decision, as needing to be rectified or addressed, have been addressed (s38ZE). In making a Final Decision the Commission must set out its reasons for approving or not approving the proposed access arrangement, taking into account the matters in s.38ZI. These include the matters specified in paragraph (i) of clause 6(4) of the CPA.

Where the Commission's Final Decision is to not approve a proposed access arrangement, the Commission must make an access arrangement for the declared services within 30 days of making the Final Decision (s38ZJ). The Commission must also make the access arrangement where an access provider does not submit a proposed access arrangement, or does not submit an application for renewal of an existing access arrangement (in each case within a 90 day period). Current rail access arrangements in place

In May and June 2006, a number of access arrangements were established and approved by the Commission for the Victorian rail access providers. Some of these rail access arrangements have recently be renewed for a further term: VicTrack's access arrangement initially covered the North Dynon Agent's Sidings and miscellaneous other sidings, but was amended in July 2007 to incorporate the rail sidings within the Dynon Intermodal Terminal. It has subsequently been renewed for the period to 2012. The Pacific National access arrangement established in 2006 for the regional intra-state rail network was substituted to V/Line Passenger in 2007, and has recently been renewed for the period to 2012. Connex's access arrangement made in 2006 covers the metropolitan rail network until June 2011. The new franchisee MTM is required to apply to the Commission to have the access arrangement substituted to prior to commencing its operations (s.38ZQ). Pacific National's access arrangement covering the South Dynon Terminal was established in June 2006 and the reference prices were revised, and the terminal management protocol approved, in November 2006. This access arrangement has subsequently been renewed for the period to 2012. Variations

The VRAR provides a process for varying an access arrangement during an Access Period. Under s.38ZO, an access provider can apply to the Commission to vary its binding access arrangement, and the Commission can decide whether to consider the application, and whether or not to vary the access arrangement. Section 38ZP allows the Commission to vary an access arrangement on its own initiative. For any material variation the process and timeframes are the same as those that apply to access arrangement approval. In each case, any proposed variation must not relate to the expiration date of the existing access arrangement.

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2.2.7 Interconnections

Interconnections are provided for under the VRAR (s.38ZT) whereby access seekers who own or operate, or intend to own or operate, railway track or sidings, may connect that infrastructure to the access provider's declared railway track. Under s.38ZT(2), the access provider must do all things reasonably necessary to enable the access seeker to connect the track or siding.

Section 7 of the Negotiation Guidelines sets out a detailed framework for negotiation of railway track interconnection. However, under s38ZT(3) of the RCA, the access provider may refuse to provide a connection if the access seeker, within the time specified (if any) in the negotiation guidelines: • has not provided reasonable evidence that it has obtained every relevant statutory approval for construction of the connection, or • has not agreed in writing to:

o pay the reasonable construction costs faced by the access provider, and

o comply with any reasonable requirements of the access provider during construction of the connection.

If the parties cannot agree with the terms and conditions for the connection or the nature of the construction requirements, either party can apply to the Commission to resolve the dispute (s38ZT(4)).

2.2.8 Dispute resolution

The dispute resolution framework in s38ZV of the RCA provides a 'last resort' mechanism to resolve access disputes. These disputes could include: • where an access provider and access seeker are unable to agree on the terms and conditions of access to the access provider's declared rail transport services or rail infrastructure or • where an access seeker or user alleges that an access provider is hindering access or is not complying with its access provider obligations under the RCA or • disputes related to rail infrastructure such as interconnection disputes or extensions to rail infrastructure in order to provide a declared service.

The access arrangements approved by the Commission all incorporate alternative dispute resolution procedures that may be employed by the parties prior to referring a dispute to the Commission. Decision making process

If a dispute arises, an access provider, an access seeker or a user may notify the Commission of an access regime dispute.19 The Commission has released a Rail Access Regime Dispute Resolution Guideline to describe how the Commission

19 RCA, s.38ZV.

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intends to carry out its function of making decisions in respect of access regime disputes.

The Commission must make a decision on the dispute within 45 days of receiving the notification. However, under s.38ZZ, the Commission can apply to the Minister administering the RCA for an extension of the time. If the Minister agrees, a date may be specified not more than six months after the original notification. The Dispute Resolution Guideline indicates certain circumstances in which the Commission expects it may seek Ministerial approval for an extension of the timeframe, for example, in the interests of facilitating a mediated outcome, or in order to obtain expert reports.20

The Commission may also choose not to make a decision under s.38ZZA if it considers the notification received was vexatious or the subject-matter of the dispute is trivial, misconceived or lacking in substance.

Decisions made by the Commission must be consistent with the rules and principles established under the VRAR. In addition, a decision must be consistent with the binding access arrangement currently in place. The Commission must also consult with the Secretary and Director of the Department of Transport if it is required to make a decision which involves requiring the access provider to: • provide the declared service which is the subject of the dispute • provide an interconnection, and • extend, or permit the extension of, rail infrastructure controlled by the access provider.21

Under s.38ZZQ, parties can appeal a decision of the Commission.

2.2.9 Access provider obligations

Under s38ZZS, an access provider must not hinder or prevent: • access by an access seeker to a declared rail transport service • an access seeker from entering into an agreement for the provision of a declared rail transport service • the provision of a declared rail transport service to which a person is entitled under an agreement or a dispute resolution decision, and • interconnection.

An access provider must at all times have an approved access arrangement in place and must comply with that access arrangement, and must also comply at all times with the Commission Instruments and the pricing principles.

An access provider must not use confidential access seeker information except for the relevant purpose (s.38ZZZ) and must not disclose that information.

20 Rail Access Regime Dispute Resolution Guideline (August 2007), pp.16 and 34. 21 RCA, s.38ZZF.

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2.2.10 Enforcement

The Commission has a compliance enforcement role which is separate from, and additional to, the Commission's role in dealing with rail access disputes.

Division 8 Part 2A of the RCA sets out the mechanism for the enforcement of the statutory provisions and regulatory decisions. For example, in respect of a contravention of a penalty provision (for example, non-compliance with an access arrangement), the Commission may apply to the Supreme Court for a pecuniary civil penalty, an injunction or declaratory relief directing the party to cease the contravention, remedy it or prevent its reoccurrence.

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3 THE VICTORIAN RAIL INDUSTRY

This chapter provides information on the Victorian rail industry and recent industry developments that are particularly relevant to this Review.

3.1 The Victorian rail industry

The Victorian rail industry comprises: • railway track access providers (or 'below-rail' services) • passenger train operators (or ‘above-rail’ passenger services) • freight train operators (or 'above-rail' freight services) • rail terminal operators, such as intermodal terminals and grain loading terminals, and • third party equipment and infrastructure maintainers and suppliers.

This chapter provides an overview of the main features of the rail industry relevant to this Review.

3.1.1 Railway track access providers

The Victorian rail network comprises three main networks: • the interstate network which is operated by the Australian Rail Track Corporation (ARTC) • the metropolitan network which is presently operated by Connex Melbourne Pty Ltd (Connex), although the Victorian government has recently selected Metro Trains Melbourne Pty Ltd (MTM) as the operator from 1 December 200922, and • the regional, intra-state network operated by V/Line Passenger (V/Line). Interstate network

The Victorian interstate rail network consists of 1,213 kilometres (km) of standard gauge track between Albury, Melbourne and the South Australian border, and the 171 km Portland to Maroona standard gauge rail line23 (see Map 1). This network

22 Premier of Victoria media release (25 June 2009) 'Train and Tram Operators Announcement'. 23 ARTC took over management of this line in November 2008. It will be upgraded to an 80 km/h standard.

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is leased by ARTC until 2059.24 The main interstate lines are used mostly by trains carrying containerised freight between Australian capital cities, and interstate passenger services operated by Great Southern Railway Ltd and CountryLink XPT. Some intra-state freight tasks and V/Line's Albury/Wodonga to Melbourne passenger service also operate on these lines.

ARTC has a voluntary access undertaking approved by the Australian Competition and Consumer Commission (ACCC). The interstate railway tracks are not covered by the VRAR and are not part of the scope of this Review.

Some of the regional Victorian rail lines have recently been transferred from V/Line to ARTC25. These include: • the Portland to Maroona line • northern corridor lines, including one of the two broad gauge rail lines from Donnybrook to Seymour (approximately 75km in length) and the broad gauge line from Seymour to Wodonga (200km), all of which ARTC will standardise to duplicate its existing rail line in this corridor, and • the Albion to Jacana line, which ARTC will partially convert to dual gauge (12km).

The line from Benalla to Oaklands will be maintained by ARTC and is being standardised.26

The lines transferred to ARTC are no longer covered by the current VRAR Declaration Orders, and are not yet covered by ARTC's interstate undertaking with the ACCC. One of the questions for this review is whether lines that are currently not covered by either regimes should be covered by either the state-based or federal access regimes. Metropolitan network

The metropolitan network consists of 15 train routes over 400 kilometres of broad gauge track, which are used predominantly for passenger services within Melbourne (see Map 1). Certain lines are also used by regional passenger services terminating at Southern Cross Station and Flinders Street Station, and some lines are used by freight services (see Map 1).

The new franchisee, MTM, will operate the network for a period of eight years, with various extension options.27 The Infrastructure Lease will require the franchisee to maintain the network in accordance with an Asset Management Plan which spans

24 This lease was recently extended by 45 years from 2014 to 2059. See: ARTC media release, ‘Works on Track for Wodonga Rail Bypass’ 9/2/2009. 25 Minister for Public Transport, Media Release: Future of Portland to Maroona Rail Line Secured, 16, July 2008. ARTC holds the Victorian interstate lease until 2059 (ARTC Annual Report 2007/08). 26 Minister for Public Transport media release, 1/7/09, ‘Benalla to Oaklands Line Upgrade on Track’. 27 Invitation to Tender: Melbourne Metropolitan Train Franchise, Volume 2, Franchise Overview, October 2008, p.17.

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the franchise period, and to ensure that it can meet its performance requirements for passenger services. Regional intra-state network

The regional intra-state network consists of 3,442 km28 of railway tracks, including 1,483 km of track used by passenger services and freight trains (the 'passenger network'), and 1,380 km of track currently used by freight trains only (the 'freight network'), and a further 579 km of the freight network that is currently booked out of service. Although mostly broad gauge, there are some standard gauge lines29 and some dual gauge lines.30

In May 2007 the Victorian Government purchased the regional intra-state rail network lease from Pacific National, together with the below-rail track management business operations, for approximately $134m. V/Line became the network operator and leases the network under the 'Regional Infrastructure Lease' until 201731. This lease is currently being reformulated.

3.1.2 Passenger train operators Metropolitan

Connex provides all metropolitan above-rail passenger services under a franchise which expires on 30 November 2009 at which time MTM will become the franchisee.

Connex operates more than 1,930 passenger services per day. These services carried approximately 200 million passenger trips in 2007/08. Metropolitan passenger numbers have been increasing at an average rate of in excess of 20 per cent per annum since 2004/05.

The terms of the 2008-09 tender for the Melbourne Metropolitan Train Franchise required the successful Franchisee to enter into a range of agreements, including Inter-operator Agreements between the Franchisee and other rail operators. The Franchise Agreement would contain provisions to ensure that Inter-operator Agreements cannot be amended or terminated without the approval of the State32. Among these would be a Track Access Agreement between the Franchisee, the

28 Excludes the Portland to Maroona and Benalla to Oaklands lines. 29 Standard gauge lines which form part of the regional intrastate network include Murtoa to Hopetoun, Dimboola to Yaapeet, and Ararat to Maryborough. The Victorian government has also committed to converting the Benalla to Oaklands line to standard gauge (see Freight Futures, p.55). 30 Dual gauge lines include Maryborough to Dunolly, North Geelong to Gheringhap, the Geelong grain loop and rail lines into the North and South Dynon Terminals and the port of Melbourne. 31 V/Line leases the network from the Director of Public Transport, who in turn leases the network from VicTrack – its owner. 32 DoT, 'Invitation to Tender: Melbourne Metropolitan Train Franchise', Volume 2, p.72.

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State and V/Line Passenger which will provide V/Line Passenger with access rights to the metropolitan network.33 Regional

V/Line holds the franchise to provide regional passenger services (Franchise Agreement: V/Line Passenger) which expires in December 2009.

V/Line operates more than 200 passenger services per day to service a range of regional cities and towns. Passenger services have been enhanced in recent years by the introduction of Regional Fast Rail (RFR) services to Geelong, Ballarat, Bendigo and Traralgon. V/Line services carried approximately 12 million passengers in 2007/08, an increase of 23 per cent over the previous year.34 Timetabling and priority

Passenger service timetables and service standards are determined by the Director of Public Transport. On both the metropolitan and regional rail networks passenger trains have priority over freight trains.

3.1.3 Freight train operators

Prior to the introduction of the VRAR in 2006, there was only one above-rail freight train operator in Victoria. Currently, there are four above-rail freight train operators in Victorian (although some of these operate only on the ARTC standard gauge network): • Asciano and its subsidiaries Pacific National and Patrick Port Link operate a minimum of three grain trains under contract to GrainCorp Operations Ltd (two of these are broad gauge), and operate five container trains (four broad gauge and one standard gauge) servicing localities such as Wodonga, Shepparton, Mildura, Warrnambool and Gippsland • El Zorro, operates grain trains under contract to AWB Ltd, and hauls containerised mineral sands from south-west Victoria to Melbourne (one grain train is broad gauge and the other two trains are standard gauge) • Genesee & Wyoming Incorporated (GWI) is contracted to ABB Grain to operate a grain train once harvests recover (standard gauge only), and • Interail, a subsidiary of Queensland Rail (QR), operates a container train service to Horsham (standard gauge only).

The main types of freight carried by rail in Victoria are as follows: • Bulk grain – the largest rail freight task in Victoria in non-drought years. Grain is transported from regional receival sites in Victoria and the Murray region in southern New South Wales (NSW) to port or domestic terminals. The region produces approximately 4.8 million tonnes35 per annum, with more than 85

33 ibid, p.73. 34 http://www.railpage.com.au/f-t11343135-previous.htm 35 Essential Services Commission (2009), Review of Victorian Grain Handling and Storage Access Regime: Draft Report, February 2009.

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per cent of the export task and approximately 25 per cent of the domestic grain task moved by rail.36 In an average harvest year the bulk grain rail task is approximately 2 to 2½ million tonnes. • Containerised freight – consisting mainly of agricultural and processed products such as grain, meat, fruit, wine, rice, pet food and milk products. Paper products from Gippsland are also containerised. Mineral sands are a relatively new commodity to be carried on rail, with El Zorro recently signing an agreement with Iluka Resources to transport mineral sands from Portland to Melbourne.37 Typically, containerised freight is transported to the Port of Melbourne from regional industries in localities such as Wodonga, Merbein, Mooroopna, Mildura, Tocumwal, Warrnambool, Horsham and Gippsland. The total intra-state containerised rail task on the broad gauge network was estimated to be around 120,000 TEU in calendar 200638 but is estimated at approximately 70,000 TEU in 2008-09. • Other freight includes:

o Logs railed from Bairnsdale, Wodonga and Warrnambool to the port of Geelong.

o Steel products (approximately 300,000 tonnes per annum) railed from the BlueScope Steel’s mill at WesternPort to a dedicated rail terminal in west Melbourne via the Stony Point/Frankston line.

o Cement and crushed rock.

Table 3.1 shows a summary of container train services in Victoria and the regional Intermodal terminals (IMTs) which they connect.

36 AWB submission to the Victorian Rail Access Review, p.5. 37 Lloyd's List DCN, Iluka ready for more after first Portland run, 17 September 2008. 38 PoMC submission to the Fischer Review.

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Table 3.1 Container train services Victoria & southern NSW Service Operator Rail gauge Avg. Services per a

Wodonga, Pacific National SG 5 (unchanged) • CRT’s BandianaSites Commodities serviced IMT – being relocated Chemical, paper, paper products and Riverina to Ettamogah other rural products • Pacific National IMT Griffith • Bowmen IMT Wagga Wagga

Shepparton, Pacific National BG 3 (reduced from 5) • Gray's Container Terminal Tocumwal Rice, grains, dairy products, stock Tocumwal week foods, canned and fresh fruits, wines • Pacific National Mooroopna IMT Deniliquin NA BG 0 (reduced from 2-3) Rice, grains

Merbein, Pacific National BG 3 (reduced from 5) • Wakefield Transport IMT Merbien Wines, mineral sands, fresh fruits, Donald, Ballarat grains, stock foods and malt • Pea Growers Co-operative Donald

Horsham Interail (QR) SG 3-4 (reduced from 5) • Wimmera Container Line Grains, stock foods and meat

Warrnambool Pacific National BG 4 (reduced from 5) • WestVic Container Export IMT Dairy products, grains and stock Warrnambool foods

Portland El Zorro SG 2-3 per month • Kalari rail siding Mineral sands

Maryvale Pacific National BG 5 (unchanged) • PaperlinX paper mill Imported pulp and exported paper products

Morwell El Zorro BG Trial service • Gippsland Intermodal Freight Terminal N/A (GIFT) a Comparison is against information reported by PoMC in its submission to the Victorian Rail Freight Network Review (RFNR) Source: PoMC, other industry sources

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3.1.4 Rail terminals and rail terminal operators

The interstate and intra-state rail networks are supported by a number of terminals for loading or unloading freight and/or transferring freight between road and rail transport. The major metropolitan terminals are situated in the Dynon precincts and the Port of Melbourne. There are also intermodal terminals in the metropolitan industrial areas of Altona and Somerton, as well as in regional Victorian freight centres. Regional intermodal terminals

Table 3.1 shows the Victorian regional intermodal terminals (IMTs). The regional IMTs have an important role to play in accumulating freight for rail services and the modal share of rail in the intra-state freight market will be strongly influenced by their commercial effectiveness.

There are a range of proposed new IMTs in regional areas – such as the ‘LOGIC’ terminal 14 km south of Wodonga; the Goulburn Valley Freight and Logistics Centre (GVFLC) near Mooroopna; relocation of the Horsham and Ballarat IMTs; a proposed new IMT at Lara near Geelong; and the Gippsland Intermodal Freight Terminal (GIFT), among others. Although the GVFLC and the relocation of the Horsham terminal to Dooen are progressing, most other prospective developments appear to have stalled at the present time and a terminal at Boort has recently closed. Metropolitan intermodal terminals

Table 3.2 summarises the metropolitan intermodal terminals.

In Altona/Laverton there are established intermodal terminals operated by SCT, an interstate rail operator, and CRT (a subsidiary of QR). The SCT intermodal terminal handles interstate containerised and non-containerised goods, and handled approximately 13,000 TEU of containerised, and 408,000 tonnes of non- containerised, rail freight in 2004-05.39 CRT specialises in the movement of polymer, food, specialty chemicals and industrial products, and its intermodal terminal at Altona previously handled around 35,000 TEU of rail freight in 2004- 0540 but its current throughput is believed to be significantly lower as it no longer operates a metropolitan port shuttle. A third intermodal terminal in the Altona/Laverton area, adjoining the SCT facility, is under consideration by the Salta/Westgate group.41

POTA operates an intermodal terminal in Somerton adjacent to a major industrial area. This 100 ha terminal is currently used only as a road-road terminal. However,

39 Ibid p.36. 40 Ibid. 41 www.salta.com.au/Tempo/versions/v_starting_01/downloads/media/AGE- Salta_poses_rail_solution.pdf

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it has potential to be used as a consolidation point for regional rail services or interstate rail services.42

Table 3.2 Metropolitan intermodal terminals terminal operator

Altona CRT(QR) Laverton SCT Laverton (to be developed) Salta/Westgate Dynon Intermodal VicTrack/POTA South Dynon Asciano West Swanson POTA East Swanson Asciano Somerton POTA Source: DoT

The major rail terminals in Melbourne are in the Dynon & Swanson precincts and include: • the South Dynon terminal, leased by Asciano until 2031.43 This terminal is used for interstate domestic freight. Asciano is currently the only user. The terminal handles approximately 35 trains per week, and had a throughput of approximately 410,000 TEU in 2006.44 • the Dynon Intermodal Terminal is owned by VicTrack, who also operates the rail sidings within the terminal. Lifting and ancillary services are currently provided by P&O Trans Australia (POTA). This terminal is used for a mix of intra-state and interstate containerised freight. There are currently two rail operators using the terminal45, and current annual throughput is believed to be significantly lower than the 100,000 TEU reported by VicTrack for 2007- 08.46 VicTrack also owns and operates the North Dynon Agent's Sidings in the Dynon precincts. These sidings service some small private rail terminals. • Pacific National/Asciano and POTA each operate on-dock rail terminals within the Port of Melbourne at East and West Swanson respectively. These are used to directly deliver export cargoes to the Swanson Dock container terminals. The East Swanson rail terminal, operated by Asciano, handled an

42 www.theage.com.au/news/Business/Somerton-is-on-track-to-join-the-hub- club/2005/05/1116361619104.html. 43 Auditor General (Victoria) (2009) 'Buy back of the Regional Intrastate Rail Network' p.25. 44 Essential Services Commission (November 2006), South Dynon Terminal Access Arrangement Variation: Final Decision, pp.41-44. 45 The Dynon Intermodal Terminal is being used by QR for interstate services, and by El Zorro for mineral sands. 46 VicTrack Annual Report 2007-08. See also Table 5.2 of this report.

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estimated 85,000 TEU in 2004-0547. The West Swanson rail terminal, operated by POTA, handled approximately 44,000 TEU in the same year.48

Map 2 shows detail of the Dynon/Swanson precincts including each operator’s terminals and tracks. Table 3.3 shows a summary of all of the train services handled at these terminals.

Table 3.3 Dynon/Swanson terminal operations Terminal Rail service operator operator

East Swanson Pacific National Pacific National: • 3 return services per week Melbourne/Adelaide on standard gauge • 5 return services per week Melbourne/Griffith/Leeton/Wagga Wagga/Ettamogah on standard gauge • 3 return services per week Melbourne/Merbein on broad gauge • 3 return services per week Melbourne/Maroopna (Shepparton) and Tocumwal (NSW) on broad gauge • 4 return services per week Melbourne/Warrnambool on broad gauge

South Dynon Pacific National Pacific National: approx. 35 intercapital super freight services per week linking with Sydney/Brisbane/Adelaide and Perth on standard gauge

West Swanson POTA POTA - 3 return services per week Melbourne/Adelaide on standard gauge (services are currently reduced)

Dynon Intermodal POTA/VicTrack QR - two services per week to Perth and Brisbane on standard gauge El Zorro provides intermodal services Melbourne/Portland (services vary based upon customer requirements)

North Dynon VicTrack Pacific National - daily service to/from Maryvale on broad gauge Agents Sidings Note: Both Adelaide-Melbourne services are normally 5 services per week but currently reduced due to market conditions. POTA previously contracted QR to provide is Adelaide service but since 3 October 2009 operates the service itself. Source: PoMC

47 Meyrick/ARUP (2006) National Intermodal Terminal Study, p.35. 48 Ibid.

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Access to terminals

In Victoria at present there is a mix of privately operated rail terminals and those operating as “open access” terminals. The term “open access” is sometimes used within the industry to refer to a terminal which will accept freight from any freight owner or freight forwarder, although there may be an exclusive contract for train operations servicing the terminal. This model is common among IMTs in regional Victoria.

A “multi-user” terminal may refer to a terminal that hosts more than one train operator, but doesn’t necessarily have formal access obligations – such as the Acacia Ridge terminal near Brisbane. In Victoria, terminals with formal access obligations, sometimes referred to as “common user” terminals, include the POTA/VicTrack terminal at Dynon and the Asciano terminal at South Dynon, although the latter currently operates with only a single user. The POTA’s lease with VicTrack for the Dynon obliges POTA to operate the terminal as a “multi user” terminal, and both terminals are covered by the VRAR.

The Victorian government has announced a policy of establishing a Metropolitan Freight Terminal Network (MFTN) with possible new major “open access” or “common user” IMTs to be located in areas such as Donnybrook, Wyndham and/or Lyndhurst, in areas earmarked for future industrial development. 49

3.2 Recent developments & government role in the rail industry

Over the last two or three years there have been a number of important market structure changes in the rail industry. This has resulted in important changes to the Government’s roles in the industry, with wider roles for government-owned rail businesses and greater responsibility for Government in supporting the on-going costs of network maintenance and upgrading.

The main recent structural changes to the rail industry have included: • Several entrants into the industry following the introduction of the access regime. The main competitive entrant has been El Zorro, with other operators such as Interrail (QR) and GWI also emerging as smaller operators in the State. • The Victorian Government’s buy-back of the regional rail network, completed in May 2007, resulted in the government-owned rural rail passenger service provider, V/Line, now managing both the regional rail network and passenger train operations on that network. • Pacific National’s relinquishment of its lease over the North Dynon Intermodal Terminal lease in 2006 placed the terminal in the management of the government-owned rail asset owner VicTrack. In turn VicTrack has granted a concession over the terminal’s freight-handling services to POTA.

49 PoMC 2009, Port Development Strategy.

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• The recently completed process for re-franchising the metropolitan rail network and passenger services resulted in a new operator of the Metropolitan railway network and passenger services, MTM.

3.2.1 Above-rail contestability

Prior to the introduction of the VRAR in 2006 there was only one freight operator on the rail network, Pacific National (which also leased the country rail network infrastructure from the Victorian government). After the VRAR was introduced, El Zorro entered the market with a haulage contract with AWB Ltd, under which El Zorro would make available 2 to 3 locomotives, while AWB would invest in 84 wagons.50 The agreement envisaged El Zorro operating one standard gauge and one broad gauge grain train.51

Subsequently El Zorro also won a contract to rail containerised mineral sands from Portland to Melbourne. It was unsuccessful in retaining a contract to haul containers from Warrnambool to Melbourne.

Pacific National entered into a contract with GrainCorp, the largest grain handler in Victoria, to operate trains in NSW and Victoria. These trains would mostly operate on the broad gauge network. ABB Grain also entered into an agreement with GWI for the operation of one grain train in Victoria.

Pacific National has also retained most of the general freight services. This includes container trains operating between regional Victoria and southern NSW and the Port of Melbourne. However, the increasing scope for competition and choice between rail operators was evidenced by the outcome of Asciano’s decision to withdraw its container train services at Horsham. It was successfully replaced by a competitor, Interrail (a subsidiary of QR).

V/Line’s Network Service Plan indicates that the operators now authorised to operate on its network include Pacific National, El Zorro, GWI, Interrail and SCT. Although some of these operators have yet to establish a significant presence on the intra-state network, they represent some potential for competitive entry for rail haulage services within the State.

On the other hand, there also remains the risk that operators may exit the market. In December 2007, Asciano, the parent company of Pacific National, announced that it intended closing its Victorian rail freight business for commercial reasons, most notably heavy losses in grain freight operations.52 However, although services have been reduced, Asciano has not ceased its Victorian operations, and circumstances may now have changed.

The competitive market environment in Victoria between freight train operators remains uncertain. Although new entrants have emerged, Wakefield suggested

50 Weekly Times, 27 August 2008. 51 http://www.mailtimes.com.au/news/local/news/general/rail-deal-for-grain- freight/1255368.aspx 52 See: Asciano Limited, Investor Briefing, 11 December 2007. http://www.asciano.com/Articles/071211_Amended_presentation.pdf

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that Pacific National retains a dominant position on the broad gauge rail network and retains control of the ‘vast majority of the broad gauge stock’. Asciano indicated that the regime ‘has delivered effective above-rail competition’.53

In part the contestability of the market depends on the return to more normal climate conditions and grain production levels. ABARE is currently forecasting a Victorian grain harvest of 5.5 million tonnes in 2009-1054, the highest in five years. With three train operators contracted by the major bulk handlers and changed commercial arrangements (take or pay contracts have pushed volume risk from the train operators to the bulk handlers). However, ACRFD has emphasised that there will be a shortage of grain trains.

ACRFD was also concerned that the average age of the rolling stock fleet in Victoria is believed to be 34 years, and thus several years older than that of overseas comparators. In addition to the competitiveness of road transport, other factors inhibiting investment in rolling stock in Victoria – and hence the development of above-rail competition – include the interoperability constraints imposed by broad gauge and the lack of certainty around track standards and line closures.

3.2.2 Buy-back Vertical integration

Following the buy-back, regional rail freight operations are no longer vertically integrated and instead V/Line is a vertically integrated passenger service provider.

A number of submitters to this Review were concerned about the vertical integration of the access providers with above-rail passenger service provision, resulting in a conflict of interest when providing access to freight trains. For example, El Zorro stated:

we do not believe it is beneficial for the State, rail operators and consumers that two above-rail operators have a conflicting role acting as track access managers. … [W]e have had the experience of the passenger operator unreasonably claiming priority for the movement of non-revenue trains to stabling yards at the expense of regional freight movements55

Asciano held a similar view:

The track providers, particularly as they are vertically integrated providing passenger services, will have an incentive to discriminate against freight traffic and to shift wherever possible all the non price risk to the freight operators.56

53 Asciano submission on the Issues Paper , p.7. 54 ABARE ‘Crop Report’, September: http://www.abare.gov.au/publications_html/cr/cr_09/cr09_Sept.pdf 55 L Zorro submission on the Issues Paper, p.3, 56 Asciano submission on the Issues Paper, p.7.

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Some submitters went further to maintain that structural separation of V/Line’s access activities is required. Access prices

As part of the government’s buy-back agreement, Pacific National (as access seeker) entered into an access agreement with V/Line which specified new prices for access. These access prices have become the prices offered by V/Line to other train operators using the same services. The newly agreed prices were 25 per cent lower than prices proposed by Pacific National as affordable prices in May 200657, and appear to reflect an assessment of the market bearable prices at the time of the buy-back.

The Fischer Review expressed concern about access prices and recommended the adoption of the lower charges applying on the NSW rural rail network owned by the Rail Infrastructure Corporation (RIC). The Commission notes that the review report didn’t contain any analysis supporting this view.

Several stakeholders to this Review were concerned that current access charges are too high for rail to be competitive with road transport. ACRFD stated that the current rebates, while an appropriate emergency measure, do not provide sufficient medium term signals with regard to certainty. ACRFD advocated that the access charges in the PN Access Agreement be suspended on an “Exceptional Circumstances” basis and replaced by lower prices (half the current access prices), to promote a resurgence of rail freight, for a five year period. Maintenance funding

The Auditor-General’s May 2007 report Maintaining Victoria’s Rail Infrastructure Assets contains a comprehensive discussion of the adequacy of track maintenance on the Victorian rail network.58 While the report found that the maintenance arrangements for the metropolitan infrastructure and the interstate infrastructure linking Victoria with New South Wales and South Australia were satisfactory, it found that the arrangements for the regional intra-state infrastructure did not provide for adequate maintenance and renewal.59 The Auditor-General found that:

DoI should seek to strengthen the current arrangements so that it provides clear assurance that the infrastructure is being adequately maintained and renewed.60

The Fischer Review recommended that the regional rail freight network be maintained at a ‘fit-for-purpose’ level and at a reasonable cost. It prioritised lines, and maintenance on the freight rail network into Platinum, Gold, Silver and Bronze. The only intra-state freight line designated as Platinum was the Geelong to Mildura

57 Pacific National (May 2006) ‘revised proposed access arrangement’. 58 Victorian Auditor General’s Office (2007), op. cit. 59 The Primary Infrastructure Lease did not require Pacific National to maintain or renew rail infrastructure under its control until the last five years of the lease. 60 Victorian Auditor General’s Office (2007), op. cit., p.55.

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line, which is being upgraded to an 80 km/h standard with Auslink funding. Gold were the core grain lines to be maintained at a class 4 or 5 standard.61 Silver lines were only to receive funds for major maintenance if there were co-commitments by grain bulk handlers (if so they should be maintained to class 4 or 5 standard). Bronze lines were those that should not have major maintenance carried out.

Following the Fischer Review the Government adopted two streams of funding for rail freight: • Transitional funding to rail freight users through a two-year program of rebates paid to industry participants. These rebates are paid to grain bulk handlers and regional Intermodal terminals operators, and the package amounted to $21.4m. • Specific funding of freight network projects as summarised in Table 3.4.

Table 3.4 shows that the Victorian government earmarked approximately $115 million for upgrading and rehabilitating the regional freight-only rail network. Of this amount, approximately $72 million has been spent representing 77 per cent of the works completed. Out of this V/Line was allocated approximately $40 million and 47 per cent of the works are completed.

Table 3.4 Victorian government funding – freight network Projects Funds made V/Line Status/% Actual available Budget completed Cost to June 09 ($m) from DOT ($m) DOT projects: Gehringhap-Mildura 53.0 NA 100 53.0 V/Line projects: Rehabilitate Gold linesa 23.7 15.6 74 11.5 Rehabilitate Silver lines - Quambatook – Manangatang 7.4 7.3 59 4.3 - Charlton – Sea Lake 5.1 5.1 18 0.9 - Warracknabeal – Hopetoun 4.2 4.2 45 1.9 - Ouyen – Murrayville 5.0 7.3 0 0 V/Line sub-total 45.4 39.5 47 18.6 ARTC projects: - Benalla - Oaklands 17.0 NA NA NA Total 115.4 NA 77 71.6 a Korong Vale – Quambatook; Korong Vale – Charlton; Murtoa – Warracknabeal; Shepparton – Tocumwal; Swan Hill – Piangil; and Mildura – Yelta. Source: V/Line

61 The class of rail line is defined by the speed that trains are allowed to operate i.e. classes 1 and 2 are >80 km/h; class 3 is 65 to 80 km/h; class 4 is 50 -65km/h; and class 5 is < 50km/h.

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3.2.3 Dynon terminals

As part of the Toll Holdings acquisition of Patrick Corporation, Pacific National (now part of Asciano) relinquished the lease over the North Dynon Intermodal Terminal in 2007. The two Dynon terminals (North and South) are now operated by different businesses. Terminal services within the North Dynon Intermodal Terminal are now managed by POTA, which also operates the West Swanson rail terminal, and is 50 per cent owned by stevedore DP World.

Following that divestment, Pacific National/Asciano gradually shifted their operations so that the intra-state container trains previously terminating at North Dynon Intermodal Terminal were instead unloaded at Asciano’s East Swanson terminal.

At the South Dynon Terminal, Asciano indicated in its submission there have been no applications for access to the terminal over the three years its access arrangement has been in place. Instead, competing interstate rail operators have tended to favour constructing their own terminal infrastructure or using the North Dynon Intermodal Terminal. This raises the question as to whether there is a market for the terminal’s services. In part it is likely to reflect the fact that Asciano retains a 90-95 per cent market share on the intra-state rail corridors. The market for the terminal services in the Dynon precincts will in part depend on the extent to which competitors can gain market share in the interstate rail freight market.

3.3 Future trends and challenges

Some of the key issues brought to the Commission’s attention by stakeholders in their submissions were: • the tenuous position of the rail industry overall with freight volumes on rail at historically low levels • the Victorian government’s plans for a Metropolitan Freight Terminal Network, which may involve an increased use of rail. This project will require consideration be given to the appropriate regulatory framework for such a network, and • a number of submitters have emphasised the need for structural change, and many of the proposals centre around the concept of a “one stop shop” mentioned by the Fischer Review and with various possible meanings. However, stakeholders have emphasised that this concept warrants detailed consideration. Again, specific regulatory issues would also be raised under such a model.

3.3.1 Rail freight activity V/Line data

Notwithstanding the prospective developments, at the present time the Victorian rail industry is experiencing a significant reduction in rail freight quantities. Table 3.5 presents summary information on the V/Line intra-state freight task measured

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in gross tonne kilometres (GTK). There are limitations to this data62, however, it should be sufficiently reliable to draw broad conclusions regarding the trends. The data supports recent concerns about declining intra-state rail freight volumes.63

Table 3.5 V/Line regional freight task Million GTK 2000-01 2004-05 2007-08 2008-09

Grain 1,954 1,405 179.1 157.5 Containers, general & other 1,818 1,547 324.1 253.9 bulk Total 3,772 2,951 503.3 411.3 Sources: ESC (2006) ‘Pacific National Rail Access Arrangement Final Decision’ (p.60), V/Line data reported to ESC

The information in Table 3.5 suggests: • Grain volumes have decreased considerably and have been heavily affected by drought. The scale of the decline and the longer-term trend suggests that other factors may also be at work, such as the timeliness and reliability of rail freight services. • Over the four years up to 2004-05, non-grain freight decreased at an average annual rate of 4.0 per cent. Over the four years to 2008-09 it declined at approximately 38.9 per cent per annum. Given its importance to containerised agricultural products the climate conditions will have been one of the factors that have impacted container freight volumes. Grain industry data

Figure 3.1 shows the rail mode share for grain outloaded from all of the inland receival sites of the major three Victorian bulk handlers. The rail share has steadily fallen since around 2003-04 from over 90 per cent to less than 40 per cent over the three years to 2008-09.

62 There may be some inconsistencies in the data provided by Pacific National to 2004-05, and the 2008-09 data provided by V/Line. Furthermore, in November 2008 some rail lines were transferred to ARTC, which would have affected the amount of GTKs on the V/Line network. 63 News Weekly 2 February 2008, ‘End of the line for rail freight?’.

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Figure 3.1 Rail mode share grain freight Victoria

100% 3.0 90% 2.5 80% 70% 2.0 60% onnes 50% 1.5 40% 1.0 30%

20% t of millions 0.5 10% 0% 0.0 Per centof total inland receivals inland total centof Per

02 03 -04 -05 -06 005 2001- 2002- 2003 2004 2 2006-07 2007-08 Share of grain outloaded by rail, moving 3 yr avg (LHS) Total grain inland receivals, moving three year average (RHS)

Data source: ABA, AWB & GrainCorp Port-related containerised rail freight

Total rail-based containerised freight at the port of Melbourne has decreased considerably since 2006 as shown in Table 3.6. This data includes freight transferred from the Dynon terminals.

Table 3.6 Port-related containers on rail - breakdown Calendar 2006 2008-09Annualised % change

Interstate 212,000 167,000 –9.1 Intra-state 122,000 69,000 –20.4 Total 334,000 236,000 –13.0 Source: PoMC

Intra-state containerised rail freight has almost halved since 2006 and is declining at an average rate of over 20 per cent per annum.

Data published by the Bureau of Industry, Transport and Regional Economics (BITRE) also shows a significant recent decline in port-related containerised rail freight volumes at the Port of Melbourne (see Figure 3.2). This data is concentrated on the on-dock terminals, and largely represents intra-state freight and Adelaide-Melbourne freight. It shows that much of the recent decline in containerised freight on rail occurred in late 2007.

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Figure 3.2 Trend in port containers on raila

180 9.0

160 8.0

140 7.0

120 6.0

100 5.0

80 4.0 Percent 60 3.0

40 2.0 TEU per annum (annualised) per TEU 20 1.0

- - Sep'06 Dec'06 Mar'07 Jun'07 Sep'07 Dec'07 Mar'08 Jun'08

Annualised TEU on rail (est) rail share %

a includes only containers handled at on-dock terminals Data source: Bureau of Industry, Transport & Regional Economics, ‘Waterline’ 45 Future outlook

Since total Victorian intra-state freight increased by 47 per cent between 1996 and 200564, or approximately 4.4 per cent per year, the decline in rail freight indicates a substantial modal shift to road freight. Intense competition from road freight and the relatively poor reliability and track speeds for freight trains are to be considered as important factors behind these trends.65

This has in turn impacted the economics of freight rail as highlighted by the Fischer taskforce:

The lack of regular volume is the single most important factor to rail operator viability.

Victoria's rail task is projected to double over the period from 2000 to 202066 but it is uncertain how much of this growth will be captured by rail.

64 BITRE Yearbook 2007. 65 Meyrick (2006), Rail Freight Task – Victoria, p.7. 66 National Transport Commission (NTC) 2006, Twice the Task, SKM, Meyrick and Associates, Melbourne and BTRE (2006), Freight Measurement and Modelling in Australia, Report 112, p.220.

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3.3.2 The metropolitan freight terminal network PoMC’s wider supply chain role & the MFTN

Direction 17 of Freight Futures is a strategy to extend the role of PoMC beyond the port gate so that it participates in and influences the efficiency of the port-related container freight supply chain. There are a wide range of strategies within Freight Futures which may be relevant to a wider PoMC supply chain role. One of the key strategies is the Government’s commitment to establish a Metropolitan Freight Terminal Network (MFTN). This will include: • a new Melbourne International Freight Terminal north of Footscray Road • a series of major ‘open access’ terminals located in the west, north and south-east industrial areas of Melbourne, and • an integrated system of high capacity transport links (possibly rail or large trucks) to connect these terminals to the port. It is intended that the new outer urban freight terminals will accommodate many of the non-port related freight activities to be relocated out of the Port of Melbourne, and will serve as collection and distribution points for freight in each of the major industrial areas. Freight Futures indicates certain directions and expectations on some aspects of the MFTN: • it ‘must be planned, implemented and managed as an integrated system of terminals and high capacity connecting transport services, with appropriate involvement from both Government and the private sector, and’67 • it should be ‘accessible to all carriers (i.e. ‘open access’) and operate on a 24/7 basis’.68 Freight Futures also gives emphasis to the aim of private sector participation, for example, through Public-Private Partnerships (PPPs). It states that the role of Government is ‘to establish appropriate policy settings and create the right governance and regulatory environment to ensure effective co-ordination of the network as a whole’, enabling the private sector (and for that matter, State-owned enterprises) to invest and participate with confidence.69 Implementation of the MFTN The key steps for implementing the MFTN, as outlined in Freight Futures, are: • establishing appropriate governance arrangements and responsibilities to drive planning and implementation activities • strategic and detailed business planning

67 DOI 2008, Freight Futures, p.35. 68 Ibid,, p.34. 69 Ibid,, p.35.

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• facilitating the development of a Stage 1 Terminal Network, based around existing sites and infrastructure in the Altona/Laverton, Somerton and Dandenong areas • planning and protecting options for a longer term Stage 2 Terminal Network by identifying and acquiring sites and/or establishing appropriate zonings in the statutory planning system • detailed planning for the reconfiguration of the Dynon precinct to provide for the decentralisation of non-port related activities to external sites, the establishment of the Melbourne International Freight Terminal on vacated land between Footscray and Dynon Roads and its effective integration with the port stevedoring terminals and the MFTN, and • facilitating the relocation of the South Dynon interstate rail terminals to a new location in the Donnybrook/Beveridge area, to the north of the metropolitan area, by acquiring a suitable site and commencing investment in base infrastructure.

In its recent Port Development Strategy, PoMC has outlined a vision for a future MFTN which it will elaborate more fully in a Port System Plan it is currently developing – see Figure 3.3.

PoMC stated it:

regards the planning and development of an effective “Port System”, including adequate capacity and efficiently operated metropolitan freight terminals, as essential to the achievement of the Government’s objective of encouraging a greater share of port- related traffic by rail. PoMC also believes that ensuring appropriate access to these terminals is likely to be required to promote effective competition in the port-focussed rail services.70

70 PoMC August 2009, ‘Port Development Strategy: 2035 Vision’, p.28.

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Figure 3.3 Port system conceptual diagram

Data source: PoMC

3.3.3 One-stop-shop

The Fischer Review identified the system of multiple access providers, networks and network interfaces in Victoria as a hurdle to achieving a competitive rail industry in Victoria. In this Review a number of submitters have endorsed this view and see the establishment of a “one-stop-shop” for rail access as an important or strongly desirable reform.

The rail industry suffers from relatively high transaction costs compared to road transport. For example, it is necessary to enter into formal access agreements for each network that a train operates on, as well as the need to schedule in the timetables, a train path. The train path defines the point and time of entry of a train to the network, its position at different times over its route, and its exit point and time. Where more than one network is involved the train path must be booked with each network operator such that it smoothly interfaces with the train path on the connecting network. The scheduling of these train paths are subject to the access agreements with each network operator, and the protocols of each network. Efficiency in scheduling and train control is likely to be of key importance to rail industry efficiency.

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The VFLC expressed a clear concept for the one-stop-shop proposal:

A preferred position is that access and pathway provision should be independent of both passengers and freight, and that correctly performed this would not disadvantage or imperil passenger performance. The benefit to freight would be substantial.

Submitters such as Wakefield, El Zorro and BlueScope Steel also strongly endorsed the “one stop shop” concept. However, Asciano noted that there are limitations that must be taken into account and may be difficult to address:

Asciano believes to effectively control its business it needs a direct relationship, including contractually, with the access provider. The access provider’s decisions have the ability to make or break a service and it is vital that we have appropriate direct relationships. Thus having a one stop access would not be of interest if there were multiple access providers.

Although there may be differences in how the “one-stop-shop” role might be conceived, the Commission considers that the notion of a “one stop shop” for freight access has sufficient merit for the options to be examined in detail. Chapter 8 explores this concept of an independent operator for rail freight.

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4 COMPARATIVE RAIL ACCESS REGIMES

It is relevant for this Review to consider the rail access regimes applying in other Australian jurisdictions. Among other things, COAG has agreed to implement a simpler and nationally consistent system of rail access regulation. This chapter provides a brief comparison of existing regimes, firstly by outlining some of the key features of rail access regimes around Australia. The ARTC undertaking model is then considered in greater detail.

4.1 Australian rail access regimes

Almost all railway tracks in Australia are subject to an access regime.71 In most cases these access regimes have been imposed through legislation or intergovernmental agreement, with the exception of the recent declarations of the Tasmanian and Pilbara rail lines. In most instances the State-based rail access regimes have not yet been certified.

4.1.1 Manner in which access is established

Rail access regimes in Australia differ with regard to how they have been established. In NSW, Queensland and federally, rail access is established through undertakings submitted by rail access providers. In South Australia and Western Australia the rail access regimes are largely set out in legislation as negotiate/arbitrate frameworks (NSW also has a default regime of this type). The VRAR combines a legislated access regime with requirements for rail network operators to have access arrangements, which resemble an undertaking.

Victoria is not the only example of a compulsory undertaking approach. ARTC was obliged to submit an access undertaking to the ACCC under the intergovernmental agreement through which ARTC was established. On the other hand, in NSW and Queensland the rail infrastructure was first declared under state legislation which gave rail access providers the opportunity to submit undertakings post-declaration. However, the Queensland Competition Authority (QCA) also has the ability to require QR to submit an access undertaking or can impose an undertaking in some circumstances.

71 In October 2008 the Federal Treasurer declared BHP Billiton's Goldsworthy rail line and Rio Tinto's Hamersley and Robe rail lines under Part IIIA of the TPA. Prior to that, these were the only major railway lines in Australia not covered by an access regime.

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4.1.2 Ex-ante and ex-post regulation

The negotiate/arbitrate regulatory model is in principle an ex-post regulatory model in which the regulator (or other appointed arbitrator) will resolve access disputes after they arise. However, the regulator can issue guidance in relation to pricing methodologies and other terms and conditions of access, and the extent of detail in this guidance can change the character of regulation from ex-post toward ex-ante regulation.

An undertaking may involve ex-ante approval of reference prices for reference services, but references services may be broadly or narrowly defined. For example in the QR undertaking, reference services are limited to coal haulage on the heavy haul rail networks. Reference prices may also be standing offer prices or simply indicative prices. The ARTC undertaking uses the latter approach, with indicative reference prices subject to negotiation. Hence the undertaking framework may have varying degrees of emphasis on ex-post dispute resolution.

In principle, an undertaking need not contain any approved prices ex-ante. For example, in the National Competition Council's (NCC) 'light regulation' model for certain gas pipelines and in the Western Australian rail access regime, there is no ex-ante approval of reference prices.

The VRAR has a comparatively high emphasis on ex-ante price determination because reference services have been defined broadly, and because an access arrangement must include standing offer prices for all reference services. Finding and appropriate balance between ex-ante and ex-post regulation will require consideration of a range of factors, many of which will be specific to the particular market circumstances and access environment, including: • Transaction costs (i.e. the costs of negotiating and executing an access agreement); • Compliance costs (i.e. the up front costs of developing and approving ex-ante terms and conditions); • Flexibility (i.e. the potential loss of flexibility to meet changing market conditions); and • Transparency and certainty (i.e. the benefits of more transparent and certain terms and conditions of access).

4.1.3 Price regulation

One of the most important aspects of an access regime is the form of price regulation. The degree to which a regulatory regime is considered prescriptive depends to a large extent on the manner in which prices are regulated. There are various forms of price regulation, but it is useful to draw a distinction between the constraints applied to the pricing behaviour of regulated entities, and the processes employed in giving effect to those constraints.

Australian jurisdictions have a considerable degree of commonality, as well as some important differences with respect to the regulation of rail access prices. The main types of constraints are: • pricing principles which must be adhered to, and/or

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• parameters to be used when setting prices, or • quantitative controls such as revenue caps or price caps.

Pricing principles, and parameters to be used when calculating ceiling prices, are used within negotiate/arbitrate frameworks, but have a much more prescriptive application if the same principles are employed within an ex ante framework with a price approval process.

Most rail access regimes have pricing principles that are broadly consistent with those in clause 6(5)(b) of the CPA, which provide for prices to generate an appropriate amount of revenue, permit multi-part pricing and price discrimination when it aids efficiency, but prohibit certain forms of price discrimination between like-for-like services provided to parties competing in the same upstream or downstream market. One exception is that on some rail networks revenue adequacy is only achieved, if at all, through subsidies provided by government. For example, ARTC, the NSW and Queensland non-coal regional networks and the Victorian regional networks are in this category.

Almost all Australian rail access regimes have, in addition to the foregoing principles, floor and ceiling pricing principles to ensure there are no cross subsidies between different services or services provided on different parts of a rail network. The VRAR is exceptional in not having floor and ceiling bounds for rail track services (instead applying an average pricing approach and a revenue cap to prevent any cross-subsidies) but does apply floor and ceiling pricing principles to rail terminal services and non-reference services.

Although there are small differences between regimes, the floor and ceiling prices are typically defined as follows. The floor price is the cost that would be avoided if a service were not provided (i.e. the avoidable or incremental cost). The ceiling price is the full economic cost of providing the service (or a group of services) on a stand-alone basis. In the ARTC undertaking, the ceiling revenue limit for each segment is based on the full economic cost of the segment.

In the negotiate/arbitrate regimes in SA and WA (and NSW in its default form), the regulators have the responsibility for issuing certain guidelines, including guidelines to assist in the calculation of certain parameters for determining floor and ceiling prices (e.g. cost of capital or the regulatory asset base).

The VRAR has a revenue cap which requires access prices to be set no higher than would provide for full cost recovery, where full cost recovery in this case does not include a return on the government’s sunk investments and is net of government subsidies.

Outside of the coal networks and some of the high density freight lines in Western Australia, actual access prices are set well below the ceiling prices, providing a broad scope within which actual access prices may be determined..

4.1.4 Other elements of rail regulation regimes

Other elements of rail access regulation include:

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• transparency requirements, including publication of prices and/or standard access agreements • the process of offering of terms and conditions to access seekers, and negotiation and dispute resolution frameworks • protocols for network management and capacity allocation • reporting of information to the regulator, and • 'fit for purpose' track standards.

Some of these elements apply only to regimes that require regulated entities to provide access undertakings. For example, transparency obligations in relation to access prices generally apply only to reference services within undertakings. The negotiate/arbitrate regimes in WA, SA and the default regime in NSW do not have transparency provisions.

In some cases the same elements are treated differently under undertakings and legislated negotiate/arbitrate models. For example, rail access undertakings often provide detailed timeframes and information exchange requirements associated with making a formal access offer to an access seeker, and they also commonly include alternative dispute resolution methods, such as mediation, prior to an access regime dispute being referred to the regulator for determination. Legislated negotiate/arbitrate models, on the other hand, may have broadly defined timeframes for negotiations but may not require an access provider to provide information guidelines to access seekers.

On the other hand, some elements are treated the same under the different regimes. For example, all regimes require access providers to maintain protocols for network management and capacity allocation. Within undertakings, such as QR's and ARTC's, these are incorporated within the undertaking, whereas in WA, for example, they are separate guidelines that the access provider must issue to the regulator for approval.

Table 4.1 shows a comparison of rail access regimes in different jurisdictions.

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Table 4.1 Australian Rail Access Regimes

State & Regulator Relevant legislative

Victoria Rail Corporations Act Below-rail intra-state Yes Yes Yes Limited largely Yes Yes Yes No instruments and Access ESC 1996 (Vic) network, metro network to terminals Regime and Declared terminals and non- Services access applies to Information (North and South Dynon) reference services NSW Transport Administration Below-rail coal network, Yes Limited No Yes Yes (operations No No No – however IPART Act 1988 (NSW) and grain and metropolitan protocol) was certified in NSW Rail Access passenger rail networks, guidelines 2002 but since Hunter valley coal rail Negotiation Undertaking lapsed network timeframes Yes, Qld Queensland Competition Yes up to Ex-anteYes Yes Yes Yes Yes No Schedule D QCA Authority Act 1997 (Qld) Below-rail coal network indicative reference(coal only) tariffs (ring fencing) in and QR Access Undertaking active Floor ceiling Undertaking proposal price limits SA Railways (Operations Below-rail network Yes, must Limited No Yes Network No mgmt No Yes No ESCOSA and Access) Act 1997 provide rules (SA) Information Capacity Brochure with allocation prescribed rules A/c information keeping/ring Tarcoola to Australasia Railway Below-rail network Yes Limited No but Yes No No Yesfencing AccessYes regime Darwin (N.T) (Third Party Access) Act prescriptive (account certified? ESCOSA 1999 (NT) pricing rules keeping) WA Railways (Access) Act Below-rail network No Yes No Yes Yes Yes Yes, separate No ERA 1998 (WA) and Railways published in subsidiaries (Access) Code 2000 selected cases (WA) Commonwealth Trade Practices Act Interstate below-rail Yes Yes Yes Yes Yes Yes No n/a (ARTC) 1974 (Cth) Part IIIA network. ACCC and ARTC Interstate Access Undertaking

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4.1.5 Review of the SA Rail Access Regime

The Essential Services Commission of South Australia (ESCOSA) is currently conducting an inquiry into the Access Regime that applies to the major intra-state railways in Australia. A Draft Report was released in July 2009. The inquiry is focused on whether the Access Regime is consistent with certain principles of CIRA (see Section 2.1.3), particularly the clause 2 principles seeking to establish a simpler and consistent national approach to the economic regulation of significant infrastructure. In addition, ESCOSA is to report on whether or not the Access Regime could otherwise be generally improved.

With respect to CIRA, ESCOSA’s Draft Report provided a number of relevant observations: • ESCOSA does not interpret the desire for a consistent national approach to mean that a uniform access regime should be applied to all significant railways in Australia • although ESCOSA acknowledged the SA Access Regime to be more light handed than that of Victoria or the ARTC, this in part reflected largely shorter- haul, bulk transport lines with fewer users relative to the interstate networks, and • ESCOSA found no persuasive arguments for the introduction of price regulation, including price monitoring, to the SA intra-state rail network. ESCOSA is however recommending some changes to the objects of the Act to more explicitly provide for economic efficiency, the introduction of additional principles that need to be taken into account by an arbitrator, the introduction of timeframes for decision making by the regulator and various other minor changes.

4.2 ARTC’s rail access framework

4.2.1 ARTC’s Interstate Access Undertaking

In 1997 the Australian Transport Ministers entered into an agreement over the management of access and investment on the interstate rail network, and from that agreement ARTC was established as a national “one-stop-shop” for national rail operators. It was also agreed that an undertaking would be submitted to the ACCC to define the terms and conditions on which train operators could obtain access to the interstate network.

ARTC’s first interstate undertaking was approved on 1 May 2002 and in July 2008 the second ARTC undertaking was approved for a period of 10 years.

The ARTC Interstate Access Undertaking sets out the principles and processes under which ARTC as a below-rail infrastructure provider is obliged to provide access to operators wishing to run trains on ARTC's interstate rail network. The 10 year term seeks to provide regulatory certainty to encourage above and below-rail investment in interstate rail transport.

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ARTC was originally established as a 'one stop shop' for rolling stock operators seeking access to the interstate rail network that operates between Brisbane and Perth. ARTC maintains and manages over 10,000 route kilometres of standard gauge track in New South Wales, Victoria, South Australia and Western Australia. ARTC owns some rail corridors and directly manages the interstate network in South Australia. It has also taken long term leases over the standard gauge interstate networks in Victoria and NSW. The scope of its current Interstate Access Undertaking covers its interstate network linking: • Kalgoorlie in Western Australia, Adelaide, Wolseley and Crystal Brook in South Australia • Melbourne and Wodonga in Victoria, and • Broken Hill, Cootamundra, Albury, Macarthur, Moss Vale, Unanderra, Newcastle (to the Queensland border) and Parkes in New South Wales.

ARTC also manages access to the connection from the interstate mainline network to the Appleton and Swanson Dock precincts in Melbourne.

ARTC maintains a wholesale agreement with WestNet Rail to allow it to facilitate access for interstate train operators to WestNet's network from Kalgoorlie to Perth – although operators are believed to mainly deal direct with WestNet. Operators seeking access to the Sydney to Brisbane corridor for interstate services are required to deal separately with QR for access from the Queensland border into Brisbane. Parts of the NSW rail network under ARTC control which are not covered by the Interstate Access Undertaking are covered under the NSW Rail Access Regime, including the Hunter Valley coal networks and regional freight lines.

The Interstate Access Undertaking provides for: • clear negotiation and dispute resolution processes • defined access prices for indicative (reference) services • ability for access seekers to negotiate away from defined prices within floor and ceiling bands • a detailed indicative or standard access agreement to provide certainty to ARTC and access seekers about their rights and obligations • capacity and network transit management rules • public reporting of service quality indicators, and • a review of the Undertaking after five years to ensure it continues to meet the needs of access seekers, industry and ARTC.

The Undertaking contains pricing principles that support differential or market- based pricing within floor and ceiling limits, having regard to the characteristics of the service and a range of commercial factors. Some additional limits are placed on the degree of price discrimination, including charging the same price for the same service to access seekers operating in the same end market.

The Undertaking also contains approved indicative access prices for the operation of intermodal train services across the ARTC network. The prices vary by route

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segment and are broken into a variable component (per gross tonne kilometre) and a flag-fall (per train kilometre)72. Approximately 60−65 per cent of access revenues are contracted at the indicative intermodal prices. These indicative prices are varied annually according to a prescribed escalation formula.

ARTC publishes reference tariffs for two types of passenger service (Express Passenger and Passenger) and several types of freight service (Express, Regular, Super and Standard) which also vary over the different segments of the interstate network. The rate for the Super freight service is set at the approved intermodal indicative rate with other rates set by ARTC having regard to the pricing principles, the approved intermodal indicative prices, the characteristics of the services and other commercial factors.

ARTC is required to make certain information available to access seekers and publishes detailed information on its website, including: • network maps and a description of the network, including route standards, indicative sectional running times and performance indicators • network management principles and committed capacity • indicative prices and contract terms, and • actual prices negotiated for services not covered by the indicative prices.

To assist with access negotiations, ARTC is also obliged to make detailed capacity and operating information available on request. With respect to capacity, ARTC is obliged to publish an indication of available network capacity and to present the results of a capacity analysis with its Indicative Access Proposal. Should additional capacity be required, then ARTC is obliged to provide an indicative cost where available or otherwise outline the requirements for an investigation into the additional capacity needed.

In approving ARTC's access undertaking, the ACCC noted the difficulty of promoting network interfacing across networks that are controlled by separate entities73. The ACCC also noted that clause 3.1 of CIRA does not require the ACCC to develop the national system of rail access regulation or to consider whether the ARTC Undertaking should be a future 'model' for national rail access regulation74.

A number of stakeholders to this Review, including train operators Asciano and El Zorro, saw the ARTC undertaking as an appropriate form of regulation for Victorian rail infrastructure managers.

72 The pro-forma structure of access charges also includes an 'excess network occupancy' component, which accounts for any excessive capacity consumption of the access seeker's proposed use of the network. 73 ACCC, July 2008, Final Decision: Australian Rail Track Corporation Access Undertaking – Interstate Rail Network, p.27. 74 Ibid, p.28.

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4.2.2 The ARTC Hunter Valley Undertaking

In 2004, the ARTC leased the NSW Interstate and Hunter Valley Rail Assets from the NSW Government for a period of 60 years. Under the terms of the lease, ARTC is required to submit an access undertaking or undertakings to the ACCC for approval in relation to the NSW leased network. On 23 April 2009, the ARTC lodged a draft undertaking with the ACCC for the Hunter Valley rail network. (The NSW interstate networks are covered by the Interstate Access Undertaking).

The Draft Hunter Valley Undertaking is still under consideration by the ACCC and until the undertaking is approved, the Hunter Valley rail network is subject to the 2004 NSW Rail Access Undertaking. The NSW undertaking is essentially a negotiate/arbitrate model.

The draft Hunter Valley Undertaking contains a number of provisions tailored to the needs of the coal system (focus on optimising coal export throughput, recognition of the role of the Hunter Valley Supply Chain Co-ordinator, option to directly contract with the customer rather than the train operator). ARTC may also require the access seeker to demonstrate that it has sufficient “exit” capability (i.e. export capacity at the Port of Newcastle).

Pricing is negotiated with each access seeker between floor and ceiling limits, the latter being economic cost of the segments of the network utilised. The definition of economic cost includes a loss capitalisation component that allows the ARTC to capitalise economic losses incurred over time (on new investment) and to recover those losses in future revenues such that it earns an economic return over the life of the assets. This approach provides an incentive for ARTC to bring forward investment in new capacity in efficient increments without the need to raise prices for existing users to cover the full costs of capacity that might be initially under- utilised.

For coal services, indicative access charges are to be developed for indicative services with certain characteristics. Actual access charges are to be negotiated and may be structured on the basis of actual usage (a function of distance and gross mass for a pricing zone) and a take-or-pay component (based on contracted access rights irrespective of whether the access holder uses any or all of those rights).

4.3 Summary of the comparison of VRAR with other rail access regimes

Although each jurisdiction is unique in some respects, it is apparent that the VRAR differs in some ways more fundamentally from other rail access frameworks in Australia. These differences include: • the scope of the ex ante arrangements. The Victorian regime appears to be more prescriptive than other state-based regimes. As well as having more regulatory instruments than the other regimes, the instruments seek to regulate the activities of access providers and access seekers more closely than regimes in Western Australia, South Australia or Queensland. Even in Queensland, where there is a vertically integrated below and above-rail operator, the arrangements do not appear to be any more extensive or prescriptive than in Victoria

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• unlike other jurisdictions, the majority of declared services (terminals aside) are not priced by reference to a 'floor-ceiling test' (although efficient price discrimination is still encouraged, subject to the constraint contained in s.38ZZY(1) of the RCA), and • the requirement that reference prices be set so as to recover a 'reasonable forecast of the access provider's efficient costs of providing the declared rail transport services' (that is, prices are set with respect to a 'revenue requirement') is not found elsewhere. Although other jurisdictions (including in Queensland) specify a notional 'revenue requirement' this is generally to produce the relevant ceiling price.

4.3.1 Proportionality to the degree of market power

A variety of regulatory regimes have developed for rail access in Australia, reflecting the distinct nature of the different rail markets as well different objectives, priorities and approaches of the jurisdictions.

The degree of market power of rail access providers ultimately depends on the competitiveness of trains against road transport for the freight tasks using each rail network. Rail is highly competitive against road transport for heavy haul and high volume freight tasks such as bulk minerals like coal and iron ore. It is also competitive with road transport for intermodal freight over long distances such as Melbourne to Perth or Sydney to Perth, but only marginally competitive over shorter distances such as Melbourne to Sydney or Sydney to Brisbane. Rail is generally uncompetitive with road for lower density and shorter distance freight tasks, including grain haulage, in the absence of subsidies.75

Vertical integration of the rail track operator with above-rail operations will also be important to the case for, or design of, access regimes. A vertically integrated provider has incentives to restrict access which are not present for an unintegrated access provider.

The brief survey of Australian rail regimes above showed that the existing Victorian regime is significantly wider-reaching than most other state-based regimes and encompasses more regulatory instruments and a broader scope to also cover rail terminals. Even in Queensland, where there is a vertically integrated below and above-rail provider, and a substantial long distance heavy haul coal freight task, the arrangements are comparable to those in Victoria.

Including (some) container terminals (as opposed to rail yards which may be considered part of the main line rail infrastructure) within the scope of the VRAR is unique amongst Australian rail access regimes. Whilst terminals are generally able to be developed and duplicated economically, certain facilities may become bottleneck facilities which limit rail competition because of their location and characteristics. This is a matter to be tested in this review.

75 A number of submissions to the Review indicated a concern about the equity and consistency of cost recovery principles for the use of roads and railway tracks by trucks and trains respectively.

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To assist in considering the appropriate form of rail access regulation to apply in different market circumstances, ARTC devised a market power matrix shown in Table 4.1. The appropriate regulatory response is characterised as a function of the degree to which control of the rail infrastructure confers market power on the access provider, and whether the access provider is vertically integrated. Under this scheme, a vertically integrated access provider with substantial market power will face the most prescriptive economic regulation, while a non-vertically integrated access provider with little, if any, market power will face the lightest form of economic regulation.

Table 4.1 ARTC’s market power matrix

Source: ARTC submissions to Productivity Commission ‘Review of National Competition Policy Arrangements’

The fact that the VRAR differs significantly from frameworks in comparable markets elsewhere is not necessarily symptomatic of a need for change. Indeed, diversity in ownership, industry structure and operational environments mean that regulatory arrangements must be tailored to some extent. However, the foregoing observations suggest that the degree of prescription of the VRAR may not be well suited to the structure of the rail industry in Victoria.

4.4 Steps towards a nationally consistent rail access framework As noted in Section 4.1.5 above, the desire for a nationally consistent approach to rail access does not mean that a uniform access regime should be applied to all significant railways in Australia. Indeed, the draft principles for the National Rail Access Regime Framework prepared by the ARTC and ACCC in 2006, explicitly acknowledged that different regulatory arrangements should apply to rail networks depending on the degree of market power and the industry structure. The CIRA determined that a simpler and consistent national system of rail access regulation should use the ARTC access undertaking to the ACCC as a model. This

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model should apply to nationally significant railways, including the interstate network, and to major intra-state freight corridors where the benefits exceed the costs. Pricing and access mechanisms should be appropriately modified if vertically integrated operators have control of relevant track and/or if the market conditions warrant a more light-handed approach (i.e. the network does not hold substantial market power). Although the Victorian rail networks remain in part vertically integrated, with some parts of the network managed by vertically integrated passenger operators (in the metropolitan area and on certain regional lines), there are not the same competitive issues around third party access. Any access will be sought by freight train operators not competitive passenger operators. Arguably therefore the incentives for the access provider to prevent or hinder access will be low. If the ARTC model is to be adopted for the VRAR, it would need to contain the following features: • an indicative service(s) • a policy that determines whether an undertaking applies to an expansion of the track • an indicative price(s) for the indicative service(s) and principles for determining access prices • the incentives of the access provider in terms of quality of service and operating efficiency • a protocol governing capacity management, network transit management, interface between the train operator and track provider and interconnection between the tracks • an indicative access agreement • the access related information to be maintained by the access provider on its website, and • the duration of the undertaking. It is clear however that the Victorian regional intra-state networks do not hold substantial market power and therefore a more light-handed regime than the ARTC model may be warranted. Based on the foregoing review of comparative rail access regimes in other Australian jurisdictions, and taking into account the market circumstances in Victoria, at a minimum the Victorian regime should include76: • negotiation and dispute resolution • regulatory reporting of information • some ring-fencing of the rail network services, and • possibly certain transparency obligations.

76 ESC interview with ARTC.

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PART II: ANALYSIS

Part 2 contains the Commission’s analysis and preliminary conclusions which address the requirements of the Terms of Reference. Part 2 is structured as follows: • Chapter 5 addresses whether the Victorian rail access regime is still required • Chapter 6 examines the options for the form of access regulation that should be applied to those infrastructure services that are recommended to be retained under the VRAR • Chapter 7 considers the on-going relevance of the existing VRAR objectives, and • Chapter 8 identifies options and seeks comment from stakeholders in regard to one of the institutional reforms recommended by the Fischer Review, namely a “one-stop-shop” for track access. A one-stop-shop is intended to simplify the process of obtaining access for train operators, and this chapter explores that concept and how it might improve access for freight trains.

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5 THE NEED FOR CONTINUING ECONOMIC REGULATION

Key points • The rail supply chain does not have sustainable market power against road transport alternatives. • Within the rail supply chain there are several benefits to ensuring access to rail infrastructure.

o It is likely to be necessary in order to facilitate rail freight competitiveness and above-rail competition given the lack of incentives of passenger service operators to provide access to rail freight. Facilitating rail freight has associated regional development implications.

o In a subsidised environment ensuring above-rail contestability assists to minimise the risk that parties, such as the vertically integrated stevedore and freight service providers, are able to capture some of the benefits from the rail subsidies. • Access to on-dock freight terminals is essential for an above rail competitor in the Victorian intrastate market • In the short term, access to South Dynon will be necessary for any significant scale of competitive entry in the interstate rail linehaul market (until Government plans for further development of major rail terminals are advanced).

This chapter addresses whether the Victorian rail access regime is still required. This question is addressed by considering whether access regulation continues to be needed for each of the services and facilities currently subject to regulation under the regime, and whether any other facilities should be subject to the regime. Because the Victorian government has committed to future certification of its rail access regime (should it continue), it is also necessary to consider whether the coverage of the services under the regime would be consistent with the principles in the national access framework.

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The chapter is structured as follows: • Section 5.1 describes the decision framework that the Commission employs when addressing these questions. This section gives emphasis to two necessary conditions, namely that the benefits exceed the costs, and the facilities meet the criteria for a ‘significant infrastructure facility’ in clause 6 of the Competition Principles Agreement (‘CPA’) • Section 5.2 describes stakeholders’ views on the merits of retaining regulation. This shows a general consensus towards retaining access regulation of railway tracks and mixed views with regard to its application to terminals. • Section 5.3 examines whether there is market power in the rail supply chain. A market power assessment is an essential part of, but not the only consideration in regard to, the assessment of the benefits of regulation in the following sections. It is found that the rail supply chain as a whole does not have a substantial degree of market power against road transport, but some infrastructure services along the rail supply chain are essential for competition in contestable markets such as above-rail competition. • Sections 5.4 consider the case for regulating passenger services and finds that there is no longer a need for such regulation. • Section 5.5 considers the case for regulating rail freight services and finds that under a light handed form of regulation, the benefits of regulation would outweigh the costs. • Section 5.6 considers the case for regulating terminal services and finds that access to some of these facilities is essential for above rail competition, and hence for the benefits of access regulation of railway tracks to be realised. The Commission forms a preliminary view in regard to the terminals that ought to be covered by access regulation.

5.1 When is economic regulation desirable? Net social benefits – the public interest test

The case for economic regulation of an industry or a service is typically affirmed or negated following an assessment of whether the social benefits of such regulation outweigh the social costs, interpreted broadly to include all benefits and costs, and having regard to whether there are alternative market-based approaches that yield similar net benefits.

Examples of where economic regulation may be well suited to generating net benefits include: • natural monopolies or poorly contestable markets – where there are large sunk costs and economies of scale • legislated monopolies (other than franchises where there is competition for the market), and • where vertical integration, and control of key facilities, can be used to inhibit or reduce competition.

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Access regimes have been applied in the rail industry to reduce or prevent the misuse of market power, facilitate above-rail competition and promote a more innovative and efficient industry. Firms that possess market power have the ability to constrain supply and charge excessive prices thus leading to economic inefficiency. Preventing such inefficiencies are key social benefits which must be weighed against the costs of regulation.

The benefits of regulation are likely to be less important where there is little scope for the misuse of market power, where there are strong incentives to improve efficiency and where the barriers to competition are less important. However, the prevention of market power misuse may not be the only source of benefit. Other benefits of regulation might include the facilitation of longer-term interests of users by providing greater certainty over access, potential benefits in terms of the facilitation of innovation and the development of alternative rail-based supply chain options by opening access to the rail network to more market participants, or taking into account regional development implications of rail accessibility.

The assessment of the benefits of rail access regulation is a forward looking exercise that involves balancing the risks if regulation is withdrawn − such as the risk and economic cost of the misuse of market power − against the costs of regulation and the risks of regulatory failure or risks of discouraging economically efficient investment.

The costs of regulation include both the direct and indirect costs. The Productivity Commission identified the following potential costs of regulation77: • administrative costs for government and compliance costs for businesses • constraints on the scope for infrastructure providers to deliver and price their services efficiently • reduced incentives to invest in infrastructure facilities and/or inefficient investment in related markets, and • potential for wasteful strategic behaviour by both service providers and access seekers.

The costs of regulation are likely to be higher where there is scope for greater competition that could be deterred by the impact of regulation on prices, or where there is potential for investment that may be impeded or delayed by certain forms of regulation.

Hence the benefits and costs of economic regulation are both related to the degree of market power and of contestability in an industry. Both market power and competition are relevant to impeding or facilitating the goal of greater economic efficiency. In considering whether there is a convincing case that regulation is needed, it is important to establish whether there is a threat of competition from substitute services, or whether the incumbent infrastructure provider enjoys substantial and enduring market power.

77 Productivity Commission, September 2001, Review of the National Access Regime, Inquiry Report.

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Monopoly bottleneck facilities

The exercise of market power by the providers of infrastructure services can be particularly damaging where these providers supply key inputs into other related firms and industries. For instance, where a facility is a ‘monopoly bottleneck facility’, the owner may have the ability and incentive to leverage its market power into a related market, thereby reducing competition in that market also. The National Access Regime78 is a specific regulatory framework established to address market circumstances of this kind.

A necessary condition for applying access regulation is that the services are provided by means of ‘significant infrastructure facilities’ which meet the criteria in Clause 6 of the CPA: • it would not be economically feasible to duplicate the facility • access to the service is necessary in order to permit effective competition in a downstream or upstream market • the safe use of the facility by the person seeking access can be ensured at an economically feasible cost, and 79 • the facility is “significant” to the State or regional economy .

The criteria that it would not be feasible to duplicate the facility, means that:

over a relevant range of demand for the service … it is less costly for a singe facility , rather than multiple facilities, to provide the service80

The criteria that access to the service is necessary in order to permit effective competition in a dependent market requires:

a comparison of the future state of competition in the dependent market with a right or ability to use [the] service and the future state of competition in the dependent market without any right or ability or with a restricted right or ability to use the service81

The criteria is only satisfied if there would be a material difference in the degree of competition in a dependent market if access rights to the facility were, or were not, applied.

The National Access Framework also requires that access regulation must not be applied to a service if it would be contrary to the public interest. In the context of the certification of a state-based access regime, however, there is no explicit public

78 The National Access Framework is established in clause 6 of the Competition Principles Agreement and Part IIIA of the Trade Practices Act 1974. 79 NCC (2003), p.23. 80 National Competition Council (2007) ‘Tasmanian Rail Network: Application for declaration of a service provided by the Tasmanian Railway Network’, p.13. 81 Federal Court (2006) ‘Sydney Airport Corporation Ltd v Australian Competition Tribunal’, 83.

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interest test, and the NCC generally relies on state jurisdictions to assess whether the public interest test is met.82 Summary

In summary the following conditions should both be met if economic regulation is to be applied to an industry: • the social benefits outweigh the social costs and similar benefits cannot be achieved through market-based reforms, and • the facilities are ‘significant infrastructure facilities’ and meet the criteria in clause 6 of the CPA (as discussed in chapter 2).

5.2 Stakeholder views on merits of retaining regulation Rail infrastructure

The general consensus of stakeholders was that the VRAR should be retained for the intra-state rail network. This view was held by: • train operators such as Asciano and El Zorro • other interested supply chain participants such as Wakefield, PoMC, BlueScope Steel and GrainCorp • representative bodies such as the VFF and ACRFD, and • access providers including V/Line and Connex.

For example, ACRFD stated that:

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 intra-state rail network.83

V/Line had the following view:

The current regime for the regional rail network needs to be modified to reflect the changed management arrangements for the network … V/Line considers in these circumstances that there is still a role for a modified regime to approve commercial terms (excluding track standards) for standard forms of access and the resolution of disputes concerning non-standard applications84

The VFF stated:

There is obviously no easy answer to this question since the State government has taken over ownership of the non ARTC freight

82 NCC (2009) ‘Certification of State and Territory Access Regimes’, p.31. 83 ACRFD submission on the Issues Paper, p.9. 84 V/Line submission on the Issues Paper, p.6.

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network but the VFF feels that there appears to be evidence supporting a light-handed Access Regime

Wakefield was of the view that the VRAR will be required until the network is all standard gauge.

I feel the current form of regulation appropriate. Market power is still an issue as the infrastructure does not provide the level of efficiencies required to attract new entrants and the Gauge is a major hurdle also.

Asciano maintained:

V/Line and Connex (soon to be MTM) are monopoly service providers. Where freight has no alternative mode to rail, then the track providers will have the incentive to raise prices and output will be reduced when compared to the efficient level. … regulation is vital. The track owners, particularly as they are vertically integrated providing passenger services, will have an incentive to discriminate against freight traffic and so to shift wherever possible all non price risk to freight operators. … All other non vertically integrated track providers (WestNet, ARTC, RailCorp, CRIC) both government owned and private, are subject to regulation.

Another common theme was the belief that regulation of the intra-state rail network is necessary due to vertical integration of access providers with above-rail passenger services, resulting in a conflict of interest when providing access to freight trains.

Some submitters went further to maintain that structural separation of V/Line’s access activities is required, as is discussed in chapter 8 under the topic of the “one stop shop”.

In summary, stakeholders see benefit in retaining the rail access regime. However, most stakeholders were of the view that a light-handed regime may be more appropriate than the current VRAR. Terminals

There were differing views on whether there should be continued access regulation applied to the Dynon terminals.

Wakefield noted that ‘most serious rail operators would have their own facility’ but saw a need to retain access obligations at the Dynon terminals in the short term, until the Melbourne Freight Terminal (MFT) is established:

Rail operators could currently be greatly disadvantaged by terminals not providing access to suit pathing of trains adding costs to stable at Tottenham.

Asciano saw no need for the access regime to apply to South Dynon:

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An access undertaking has been in place at South Dynon for over three years. Pacific National has not received a single access application in that time.85

Asciano observed that there have been significant costs associated with declaration.

In addition to the Commission’s costs, Asciano incurs significant compliance costs including audit costs. … it is Asciano’s view that the declaration of South Dynon has not resulted so far in lower investment in the terminal. However as the economy recovers and investment funds are freed up this concern will become more relevant.

POTA indicated that it has a ‘Multi-User Terminal Access Policy’ as part of its terminal management contract with VicTrack, and this makes the access obligations within the VRAR redundant.

Bluescope saw the need for continued access obligations to apply to the Dynon terminals:

we believe the access regime for terminals is a key requirement for competition as well as ensuring rail capability is available to meet the growing needs of manufacturers such as BlueScope Steel. OneSteel and BlueScope Steel jointly share a ‘steel industry’ rail terminal in the Dynon precinct on Footscray Road, which is also co-located with the Pacific National gauge transfer operation ensuring our products connect with interstate networks. We certainly see the need for open and competitive access to capable terminal operations for industry solutions, as we currently operate.

ACRFD was of the view that South Dynon should ideally operate as a common user facility, although Asciano may remain for the time being the main user. ACRFD suggested that for the future:

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.

With regard to a future Metropolitan Freight Terminal Network, El Zorro suggested:

The proposed MFTN should have a “light handed” regulatory approach based on the four guiding principles first raised in 2007 by ESC.86

85 Asciano submission on the Issues Paper, p.4. 86 El Zorro submission on the issues paper, p.7.

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5.3 Market power

The benefits of regulation are most commonly associated with preventing the misuse of market power. This section considers whether there is market power in the rail supply chain or its elements.

5.3.1 Defining the markets

As outlined in Section 3.1, the component parts of the Victorian rail industry include: • Railway access providers (or providers of ‘below-rail’ services) • Freight train operators (or providers of ‘above-rail’ freight services) • Passenger train operators • Rail terminal operators, covering intermodal terminals and grain loading terminals, and • Users of freight and passenger rail services.

The rail freight supply chain also includes short-distance truck haulage for moving freight between terminals and the origins/destinations. This supply chain as a whole competes against long-distance direct road haulage. Each separate functional level of the rail freight supply chain is a dependent market of the others.

By and large the Victorian intra-state rail freight market can be seen as a geographically separate market to other States, with the main exception being the Riverina area of southern NSW. That said, there is competition for this freight in the border areas from road transport with some “leakage” of contestable freight from the Victorian market transferred into the South Australian grain networks by road.

It is evident that below-rail services and above-rail freight services are economically separable services given the existence of several non-integrated below-rail service providers in the Australian rail sector, such as ARTC, as well as above-rail operators that specialise in rail line haul services and terminal operations, such as Pacific National and SCT. Relevant to the promotion of competition criterion in clause 6(5)(a) of the CPA, the rail line haul market is a separable dependent market.

Similarly, it is also common for terminal services to be provided by separate entities. In Victoria, for example, there are several terminal operators: Wakefield Transport, WestVic Containers, Wimmera Container Lines and VicTrack, to name just a few. Some of the terminal operators have their own short-haul truck fleets. Several terminals are operated by the stevedores and their affiliates, for example terminals in the Swanson/Dynon precincts, Somerton and Shepparton.

The market is separated or segmented in several ways. • Some of the rolling stock, such as wagons, are often specialised for certain freight types – for example, grain wagons, container flats. This imposes some limits on rolling stock substitutability between these different tasks. Similarly, loading and unloading terminals tend to be specialised – for example, bulk grain receival sites, and Intermodal container terminals.

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• Virtually all interstate freight services are carried on the ARTC interstate network. The rail infrastructure included within the VRAR serves only part of the intra-state freight market. Some intra-state freight is carried on the ARTC network. On the intra-state rail network there are two rail gauges, although most of the intra-state track is broad gauge. The majority of standard gauge track is on the interstate network. This also affects the mobility of resources within the industry since rolling stock is not readily transferable between standard and broad gauge networks, and therefore each network tends to have a separate inventory of rolling stock used on those lines. The lack of mobility of resources across the Victorian intra-state network has significant implications for rolling stock utilisation and efficiency. • On the regional rail network there is also a distinction between the freight- only network and the shared passenger network. Train path availability is potentially constrained on the passenger network because passenger services take priority. There is only one provider of above-rail regional (intra- state) passenger services, V/Line, and no plans at present to change this situation.

This rail freight supply chain is depicted in Figure 5.1.

Figure 5.1 shows that freight is typically accumulated at an inland rail terminal and then carried by rail either directly to a port terminal for export, or alternatively to an off-dock terminal and transported by road from there to the port terminal. A third alternative is for the freight to be transported by truck from its origins to the port. The Victoria intra-state rail freight task is predominantly export goods transported from regional Victoria (either bulk grain or containers) to a port. In summary there are three supply chain options: (a) road transport from origin to port (b) road transport from origin to inland rail terminal and rail transport to the port terminal, using an on-dock rail terminal (c) road transport from origin to inland rail terminal and rail transport to an off- dock terminal, then road haulage from that terminal to the port.

By implication, a market power assessment should consider: • the degree to which any of the rail supply chain options have market power against the road transport option • the extent to which option (c) is competitive against option (b) and hence the degree of competition between off-dock terminals and on-dock terminals for intra-state freight tasks, and • whether there is more than one competing supply chain under either option (b) or options (c), e.g. because there are alternative inland terminals for freight at a given point of origin, or because a given inland terminal has effective choice between alternative train operators and/or on-dock port terminals.

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Figure 5.1 Illustrative rail supply chain

B Intra-state and Inland Rail metropolitan freight trains Terminal A Grains Terminal

PTS

Inter-state Train

PTS C

Off-Dock Terminals

PTS

West East

On-Dock Terminals D

PTS - Passenger train station - freight origin

- road transport - intra-state freight only track

- intra-state passenger and freight track - inter-state track

A Access providers are Asciano & El Zorro B Inland rail terminal operators mostly independent (a few affiliated with above rail operators) C Terminal operators are Asciano, POTA, SCT D Terminal operators are Asciano and POTA

Data source: Essential Services Commission

5.3.2 Competition from road transport

In assessing the extent of the competition from road transport, it is appropriate to consider the affordability of full recovery of rail access provider costs, having regard to competitive road prices. One method of undertaking this assessment involves calculating the cost of road transport and subtracting the additional pickup and delivery (PUD) costs associated with rail freight and the incremental above-rail costs, as occurs under the regulatory regime applying to the Tarcoola to Darwin rail

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line. 87 This methodology can be used to determine the maximum rail supply chain freight rates that the market will bear, given the competition from road transport. If the maximum rail freight rate is less than the total costs of all of the components of the rail supply chain, then there is an “affordability gap”.

A further consideration is whether there is a shift in modal choice over a range of price relativities between modes. This notion is depicted in Figure 5.2. The mode share is a smooth function of the road and rail prices for grain haulage. For example, substitution of this kind may arise where freight tasks are heterogeneous (e.g. in relation to origins and destinations).

Figure 5.2 Illustration of mode substitution

Data source: Pacific National, submission to ESC Draft Decision on PN and Connex proposed access arrangements, 2 May 2006

As part of the review of the access arrangements in 2006, the Commission carried out preliminary analysis of the affordability of full recovery of rail access provider costs taking into account the level of competitive road prices.88 Although there was considerable uncertainty in the estimates, the Commission concluded that the affordability gap may be as high as $19 million per annum for freight rail access services.

87 See: Essential Services Commission of South Australia (February 2004) ‘Rail Industry (Tarcoola-Darwin) Guideline No.2, Arbitrator Pricing requirements’. 88 Essential Services Commission (June 2006) ‘Victorian intra-state country rail network affordability – Information Paper’.

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As part of the Government’s agreement to buy back the rail infrastructure, six months later PN and the Government reached agreement on the level of access charges to be charged to PN under a 10-year access agreement. The agreed prices can be regarded as the best estimates of the affordable market access prices given the information available in November 2006. Those prices were expected to recover only approximately 40 per cent of below-rail costs in an average year and anecdotally, affordability has further reduced with the loss of rail volumes.89

Notwithstanding the subsidies, recently, Std+D found that below-rail grain prices in many areas are no longer demonstrably cheaper than road, and exporters using road transport (including direct from farm) will see little price disadvantage in many areas compared to GrainCorp’s rail-based chain.90 Similarly, for containerised freight, Booz & Company has noted the increased competition from road operators who are now utilising higher performance vehicles. This has extended the range at which road operations are competitive with rail to at least 300-500 km.91

The observation that there is an affordability gap suggests that the rail supply chain in an average year, and considered on an average basis across all commodities, does not have market power. Market power refers to the power to behave in a market in a manner not constrained by competitors in that market for a sustained period. Conversely, some stakeholders held that V/Line still maintains some market power:

V/Line is a monopoly service provider and has incentives to increase price and lower demand below efficient levels for some freight and achieve a non-commercial outcome on risk allocation for all types of freight.92

In the Commission’s view, if the supply chain as a whole does not have market power, then the components of that supply chain do not have sustainable market power either. V/Line may be able to exercise market power in the short term because it does not have any significant statutory obligations or financial incentives to sustain freight markets.

5.3.3 Competition along the rail supply chain Regional intermodal terminals

Economies of scale are important in freight terminals and the costs of short road movements and extra handling in the pick-up and delivery of freight can be crucial

89 Media release “Bracks Government to Subsidise Regional Rail Freight Network” (8 June 2007). 90 Strategic Design + Development (2008), Grain Supply Chain Pilot Study, Stage 1 Final Report, National Transport Commission, p.44. 91 Booz & Company (January 2009), ‘Capacity Constraints and Intermodal, Working Paper #1, Understanding the Intermodal Supply Chain’, National Transport Commission, p.23. 92 Asciano submission on the Issues Paper, p.7.

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to the economics of a terminal operation. For these reasons, regional intermodal terminal operators tend to be localised monopolies.

On the other hand, this is not always the case with grain receival centres. Competing bulk handers in several localities have rival facilities located in close proximity.

Regional Intermodal terminal operators typically use an ‘open access’ model under which they will handle containerised freight for any logistics business, freight forwarder or freight owner. They can also typically provide truck pick-up and delivery services to and from their Intermodal terminal. They contract for a single rail service provider to operate services from their terminal, usually on take-or-pay terms, with ideally a minimum of five services per week93. In short, competition in the above-rail market takes the form of competition for contracts offered by the peripheral rail terminal operators, who essentially offer a concession in respect of train operations at their terminal. However, this will not always be the case because some train services visit several intermodal terminals along a rail corridor and in some cases rail operators manage regional intermodal terminals.

In February 2008, the Victorian Government announced a two-year package to provide a temporary rebate to regional terminal operators for container freight carried on rail services from Warrnambool, Horsham, Mildura and Shepparton/Tocumwal. These subsidies are based on a benchmark of $100 per TEU. Similarly, in December 2007 the Victorian government announced its decision also to increase subsidies for grain shipments by means of a rebate system for grain handlers of approximately $6 per tonne.94

The foregoing observations suggest that there is some direct competition between competing grain bulk handler supply chains, but there is little direct competition between regional rail intermodal terminals, which tend to have localised monopolies. That said, the competitiveness of road transport and the heavy reliance of these terminals on rebates from Government indicates that they do not have substantial market power.

Access to the regional terminals is not necessary for above-rail competition because operators can compete for the contract to service the terminal. Competition in below-rail services

Generally there is only one set of railway tracks of a particular gauge along each corridor served by rail. Exceptions include Geelong to Footscray and Somerton to Seymour. In both instances V/Line or Connex operates a broad gauge line adjacent to the standard gauge ARTC line. In all other corridors there is a single rail infrastructure provider.

93 At present most are operating less than this as shown in Table 3.1 94 Media Release, Minister for Public Transport, Rail Freight Network Review Released, 21 December 2007.

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In most instances rail freight terminals are located close to the origins or destinations of freight, and for this reason, the ARTC network offers a limited degree of direct competition to the intra-state network.

Given the sunk nature of investments in rail infrastructure, there are significant barriers to entry of a new rail access (infrastructure) provider, unless on an entirely new corridor. Hence the railway access providers are typically monopoly service providers within the localities they service. Factors constraining the degree of competition in above-rail freight services

Above-rail operations are relatively contestable activities because trains are highly mobile equipment and can be moved from market to market in the absence of specific impediments. Some of the factors inhibiting competition in Victoria are: • the market fragmentation discussed earlier, and constraints (or additional costs) to mobility associated with incompatible rail gauges. This imposes sunk costs on the investor in rolling-stock which might deter entry • the small size of the market in which even modest economies of scale in fleet operation may become an important factor • the lack of growth and year-to-year volatility of the market, which increase the risks associated with investing in rolling-stock and the difficulties for an entrant to ensure that it will achieve a consistently high rate of rolling-stock utilisation.

Given these risks, take-or-pay contracts between terminal operators and train operators have formed the basis of competitive entry into the Victorian market in recent times.95 Dynon/Swanson terminals

The Dynon/Swanson terminal precincts form a hub for containerised rail freight movements either for export through the port of Melbourne and for interstate domestic container shipments by rail.

Traditionally the larger South Dynon terminal has been used for interstate trains and Dynon Intermodal terminal for intra-state freight trains, with port-related freight trucked to the stevedore terminals at Swanson Dock. This specialisation has been disrupted by the following factors: • in 2003 rail terminals were constructed at East and West Swanson Dock, operated by the two container stevedores, Patrick (now a subsidiary of Asciano) and P&O (now DP World), and • in 2006 Pacific National relinquished the lease over the Dynon Intermodal terminal and extended its lease over the South Dynon terminal. As a result of these changes, most of the intra-state container services operated by Pacific National are now handled at the East Swanson terminal (see Table 3.3) and the Dynon Intermodal terminal and the North Dynon Agents Sidings are now used for only two of the intra-state freight services. Dynon Intermodal is emerging as a

95 ESC (2009) Grain Handling Regulation Review Final Report, p.36.

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competitor to South Dynon for interstate trains and is used for one interstate service. South Dynon continues to handle the great majority of interstate rail freight, with SCT’s Laverton terminal representing another smaller competitor.

The dominant position of South Dynon for interstate rail freight reflects Pacific National’s dominant market share of interstate line haul operations, and the ability of other rail terminals to offer competition to South Dynon with respect to handling interstate freight will be limited by the ability of the competing interstate hauliers, such as QR National and SCT, to capture market share from Pacific National.

Another competitive factor is the scale advantages of South Dynon. The much shorter track lengths at the Dynon Intermodal terminal96 require more shunting to handle the larger trains used for interstate haulage.97 Shunting is a key cost driver of terminal costs and hence shorter track lengths can increase relative costs and reduce competitiveness relative to the South Dynon Terminal, which has greater track length requiring less shunting.

In this regard, the ACCC made the following comments regarding North Dynon Terminal in the context of Toll Holding’s acquisition of Patrick Corporation:

Market inquiries revealed that the Dynon terminal would face significant difficulties in accommodating trains of the length required to operate an efficient east-west service. Although Dynon has accommodated such trains in the past, significant degradation of the terminal over recent years and increased rail line congestion in the entire Dynon precinct would make it very difficult to find suitable times to be able to shunt long trains into the Dynon terminal. Furthermore, market inquiries revealed that road access at Dynon would be inadequate if a new east-west service of reasonable scale were to commence.98 While it appears that VicTrack and POTA have subsequently started to address the degradation of the terminal referred to by the ACCC, the other rail and road limitations of the terminal would remain relevant.

The Commission’s preliminary conclusions with respect to interstate freight terminals is that at present although the three interstate rail operators, Pacific National, QR and SCT each use separate terminals in Melbourne, Pacific National has a dominant share of the interstate market, and other than South Dynon the terminals are of small scale. The current limitations to the availability of efficient scale terminals in Melbourne may represent a terminal infrastructure constraint to any significant interstate rail competitor. The use of alternative terminals may imply a cost disadvantage relative to South Dynon.

96 The Dynon terminal has 8 rail paths for freight loading, each of 500m. The North Dynon Agent’s Sidings can be used to split 1500m interstate trains into 3 parts for accommodating in the terminal. South Dynon has 4 x 850m sidings and 2 x 1200m sidings. 97 On the East-West rail corridor, the majority of train services have 1500m lengths between Melbourne and Adelaide. 98 ACCC media release, 18 January 2006.

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In the longer term the Victorian government’s freight strategies have highlighted alternative sites that may be developed for combined intra-state and interstate container terminals. It has previously been believed that the Dynon precinct is strategically advantaged in its geographical position close to the centre of Melbourne. However, this thinking is changing and outer urban locations are now being considered as offering potentially greater efficiency due to lower congestion and efficient access to industrial areas via the ring-roads. For this reason the current roles of South Dynon and Dynon Intermodal may evolve as the Freight Futures plan is implemented.

The planned development of a major new interstate terminal may require consideration of whether access regulation is needed at the new terminal. This is likely to depend on the details of the terminal design concept, the business model and hence its economic role in the market place. At present the great majority of intra-state containerised freight is railed to the East Swanson terminal destined for the export market. It is notable that all of the train services handled at Pacific National’s East Swanson terminal are Pacific National trains and all of the train services handled at POTA’s99 West Swanson terminal are POTA/QR services.

While the Dynon Intermodal terminal handles a small amount of this freight, it is likely to be relatively inefficient to rail the freight to the Dynon precincts and then truck the containers from Dynon to the Swanson Dock terminals because of the extra handling involved. This additional handling cost may provide the on-dock rail terminals operated by the stevedores or their affiliates with an important competitive advantage over other terminals with respect to intra-state above-rail operations.

This situation is likely to be accentuated with the introduction of a Road Freight Access Charge at Swanson Dock, which is expected to be in 2010. This is likely to be broadly similar in concept to the levy recently proposed by Sydney Port Corporation for Port Botany. The effect of the levy would be to significantly advantage on-dock terminals over those outside the port.

Table 5.1 provides some indicative estimates of rail costs associated with the alternative rail terminal options to demonstrate these observations.

99 POTA is 50 per cent owned by DP World.

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Table 5.1 Indicative estimates of comparable costs for discharging freight at alternative terminals ($/20’ container) East Swanson rail East Swanson rail Dynon to terminal to East terminal to West Swanson Dock Swanson Dock Swanson Dock

Rail line haula 300 300 300 Terminal handling 40 40 80 Transfer 55 65 80 VBS 0 0 5 Road Port Levyb 0 0 25a Access Charge Total 395 405 490 a Assumes 10c/NTK, 10 tonnes per box and 300 km lead. b Assumption based on Sydney Port Corporation’s announced levy at Port Botany of $180 per truck from 5am to 1pm; $80 from 1pm to 9pm; 0 from 9pm to 5am; and -$20 on weekends. Average cost assumes an even distribution of trucks over time and 2 TEU per truck. Source: industry estimates unless otherwise stated

Shippers determine the shipping lines that will carry their freight and hence the ocean terminal that containers must be loaded or unloaded. Freight from an upcountry Intermodal terminal will typically be destined for both stevedore terminals. Each on-dock rail terminal is advantaged to handle freight to the adjacent export container terminal it serves.

At the present time it is not demonstrated that any rail terminal located further from the port terminals can effectively compete against the on-dock terminals, given the additional handling and transport costs associated with trucking the containers from other rail terminals into the port. The evidence of current patterns of operation, shown in Table 3.3, supports a conclusion that the on-dock terminals have strong locational advantages that would impose a high barrier to entry for any prospective off-dock competitor.

At present freight is regularly transferred from Patrick’s East Swanson rail terminal to the DP World container terminal via Coode Road. However, PoMC has plans to close Coode Road which provides access for vehicles to move between East and West Swanson Docks.100 The Commission understands this closure is planned for the near future. Once the closure is completed, transferring containers from East to West Swanson, or vice versa, will require road vehicles (rather than port internal transfer vehicles) and use of the road system external to the port, such as Footscray Road. Effectively, this will make such transfers between East and West

100 Port of Melbourne Corporation (August 2009) Port Development Strategy 2035 Vision, p.32

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Swanson significantly more costly and analogous to off-dock transfers to the port. This change will reinforce the monopoly bottleneck nature of each terminal with respect to the adjacent ocean terminal it serves.

The vertically integrated operators of those terminals – each of whom are freight train operators – would have an incentive to restrict access to their terminal by other train operators. Such constraints might hinder competition between above- rail operators if they do not have access to alternative intermodal terminals that could provide broadly equivalent services, and unless there is some degree of competitive tension between those substitute terminals.

When considering the intra-state market, it is notable that container trains will need to access rail terminals at both the origin and destination of the journey. These terminals are commonly owned and operated by unrelated parties.

When entering into a contract with the rail service provider, the inland intermodal terminal operator will need secure access to a rail terminal at or near the port so that the rail services can deliver export containers to the port terminal. Given the vertical integration between on-dock terminal operations and above-rail operations, and the relatively inefficiency of railing freight via an off-dock metropolitan terminal, the inland intermodal terminal operator may face a lack of choice between rail service operators. Only Pacific National and POTA have a demonstrated ability to access the on-dock terminals. Prospective competitors such as El Zorro and QR would need to have access to those on-dock terminals in order to compete in the intra-state containerised freight market. In short, the control of the Swanson Dock rail terminals by the two stevedores appears to provide an ability to limit competition in the intra-state container rail freight market, since most of that freight needs to be delivered directly to a stevedore port terminal.

Hence it may be argued that the stevedores at the port terminals may be able to exercise some market power and inhibit competition in above-rail container train operations in Victoria. Some stakeholders have also remarked on the lack of transparency in on-dock rail terminal charges in previous reviews.101

If regional terminal operators are to be able to exercise control over the rail service provider(s) permitted to service their terminal, and exercise effective choice between alternative above-rail operators, it would appear to be necessary for access obligations to apply to the on-dock rail terminals. These regional Intermodal terminals may need to be supported by access to hub terminals, such as the on- dock terminals, in order to ensure that they will be able to exercise effective choice between above-rail service providers.

The East and West Swanson Dock rail terminals appear to be bottleneck facilities that confer market power on their vertically integrated operators Pacific National and POTA. There are likely to be significant benefits to imposing access requirements on those terminals, in terms of enhancing above-rail contestability and greater choice between above-rail operators for the operators of regional Intermodal terminals and regional freight customers.

101 See VCEC, 2006 ‘Making the Right Choices: Options for Managing Transport Congestion’ pp.338-340.

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5.4 The case for regulating rail infrastructure services to passenger trains

The below-rail services provided to V/Line Passenger for regional passenger operations on the rural and metropolitan rail networks are currently covered by the access regime through the Passenger Network Declaration Order 2005. On the regional rail network V/Line provides infrastructure services to itself.

In 2009 the Government appointed MTM as the new franchise operator of the metropolitan rail network for an eight year period. MTM was required to enter into a Track Access Agreement with the State and V/Line Passenger under which it will provide V/Line Passenger with access rights to the metropolitan network over the term of the franchise. This agreement will establish the terms and conditions of V- Line’s access and a dispute resolution process for contractual issues that may arise.

The implication of this agreement is that V/Line is no longer an access seeker and need not become an access seeker because a similar agreement can be established for the next franchise period. In the event that changes are made to the management of the regional rail network, the Government could similarly establish a track access agreement for V/Line prior to carrying out such a restructure.

This effectively means the Passenger Network Declaration Order is redundant. In these circumstances the Commission can see no purpose to the continued operation of the Passenger Network Declaration Order.

Draft recommendation 5.1 Rail infrastructure services provided to V/Line Passenger should cease to be declared services.

5.5 The case for regulating rail infrastructure services to freight trains

5.5.1 Compliance with the CPA coverage criteria

Significance

On the Victorian regional rail network, grain is the largest freight task in average climate conditions and the vast majority of the bulk grain carried on rail is exported. Intermodal containerised freight is second in terms of importance and primarily comprises export containers railed from regional Victorian industries to the Port of Melbourne.102 Other general freight tasks transported by rail and exported from

102 Meyrick and Associates (2006), ‘Rail Freight Task – Victoria’. prepared for the Essential Services Commission Victoria.

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Victoria include logs, which are railed to the port of Geelong, chipped at port, and exported as woodchips.

In addition to carrying freight with origins in Gippsland, the metropolitan rail network carries approximately 300,000 tonnes per annum of steel products from the BlueScope WesternPort steel mill, which are railed to interstate markets.

Asciano observed:

The facility is significant to the State economy, particularly when you consider its importance for grain and for steel, it is likely to become more important as Government seeks to limit the impact on the environment of the anticipated growth in freight.

On the regional network, the Mildura line is part of the declared Auslink network and may therefore be considered of national not just regional significance. Federal and State Governments have committed $73 million to its recently completed rehabilitation.

A number of other projects of national or regional significance currently underway on the Victorian network include: the Wodonga bypass; standardisation of lines between Donnybrook and Wodonga; and upgrading of the Maroona-Portland rail line. Most of these projects are being undertaken in the context of also transferring lines to ARTC management. However, to date, not all of the lines transferred have been brought within ARTC’s access undertaking with the ACCC.

The State Government’s identification in its Freight Futures policy of the whole of the freight rail network, and parts of the metropolitan rail network, as forming part of the Principal Freight Network of Victoria is also relevant from a State or regional significance perspective.

The Commission’s preliminary conclusion is that all of the intra-state rail freight network is significant to freight logistics in Victoria and on that basis, when having regard to freight services, the regional rail network and parts of metropolitan networks are significant infrastructure facilities.

Safe use

The imposition of access obligations must be consistent with the safe use of services at an economically feasible cost and where there is a safety requirement, an appropriate regulatory arrangement exists. In Victoria the Rail Safety Act 2006 establishes:103 • the statutory role of the Director, Public Transport Safety • duties that apply to operators, rail contractors and rail safety workers • a strengthened accreditation scheme, and • sanctions and penalties for safety breaches.

103 Public Transport Safety Victoria website: http://www.ptsv.vic.gov.au/web26/home.nsf/AllDocs/3AF8B48986647F87CA2570A1000B 0A65?OpenDocument

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Asciano indicated:

safe use of the facility is possible, as has been demonstrated under the current access regime.

Economic feasibility of duplication

An effective access regime can only be applied to the services of using facilities it would not be economically feasible to duplicate. In order to assess this criterion, it is necessary to assess whether the declared rail infrastructure has sufficient available capacity to serve the range of reasonably foreseeable demand for the service(s), and if this is not the case, assess whether the existing facility can be expanded to provide additional capacity at lower cost than developing another facility.

This test will nearly always be met for a railway line, because where there is excess capacity on an existing line, it will be lower cost to use that capacity rather than constructing a new line, and where capacity is constrained, augmentation of the existing rail infrastructure, whether through the addition of new passing loops or double tracking, will nearly always be a lower cost outcome than constructing a completely new facility.

There does not appear to be any significant capacity constraints on the regional network at current volumes. Evidence that the regional Victorian rail network maintains a considerable degree of excess capacity is shown from the V/Line’s monthly Capacity Use reports summarised in Table 5.2. Overall, approximately one quarter of available train paths were used in the period January 2009 to June 2009.104

104 More important than potential rail infrastructure constraints are the potentially constrained supply of rollingstock, particularly given the barriers to mobility of equipment imposed by the incompatibility of rail gauges. In its review of Australian grain supply chains, Sd+D noted that in view of forecast reduced export tonnages in coming years, there is expected to be sufficient rail haulage capacity to handle most export volumes under current freight contracts in most years. However, any future heavy seasons would need to be handled by a combination of trucking and trains. (See: Sd+D, Grain Supply Chain Pilot Study, Stage 1 Final Report, National transport Commission, p42).

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Table 5.2 V/Line network capacity use Month Scheduled Scheduled Unscheduled Unscheduled Overall train paths % utilised train paths % utilised % utilised (No.) (No.) Jan ‘09 565 49.9 848 3.3 21.9 Feb ‘09 510 60.2 780 5.1 26.9 Mar ‘09 510 69.4 849 8.1 31.1 Apr ‘09 540 53.2 838 6.1 24.5 May ‘09 525 53.0 879 4.2 22.4 Jun ‘09 536 46.6 725 4.4 22.4 Average per 531 55.2 820 5.2 24.9 month Source: V/Line

Although the poor condition of parts of the regional network could potentially constrain future growth in freight volumes in some localities, the data presented above and the heavy reliance of V/Line on government support is consistent with Asciano’s view that:

No one could credibly argue that it would be economically feasible to duplicate the network. The economics of the current network are challenging and there could be no reasonable business case put forward for duplication of the current network.

The metropolitan network is more capacity-constrained due to the intensive use of passenger services and the strong growth in passenger rail demand in recent years. Connex has advised the Commission that there is currently available capacity for approximately two freight train paths per hour (each way) overnight and approximately one per hour (each way) through the day, but only within the inter-peak period, on the Dandenong and Frankston rail lines. In addition, Connex expects a significant growth in inter-peak services for passenger operation during the day in the next few years and this will further restrict the available paths for freight movements.105

On the Metropolitan rail network there are formidable physical constraints to duplication, and new passenger rail corridors will involve very large costs.106

105 As MTM is the franchisee for the Melbourne metropolitan rail network from 30 November 2009 the above availability is subject to MTM's operating plans. 106 The East West Link Needs Assessment study recommended a “Melbourne Metro” rail tunnel be constructed, running from Caulfield, through Domain, Flinders Street, University to Footscray and Sunbury. The Study states that the new rail tunnel could be completed as early as 2019, and it is expected to cost more than $4.5 billion. See: http://www4.transport.vic.gov.au/vtp/projects/melbournemetro.html. The Victorian Government also proposes to construct a new Regional Rail Link from Werribee to Deer Park, and to upgrade lines from Southern Cross Station to Werribee. The project is

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The foregoing observations suggest that it would appear to be uneconomical for another party to develop a competing rail infrastructure facility to provide the same services to freight trains as the regional and metropolitan networks currently provide.

Is access necessary to compete in a related market?

A further consideration is whether access to the service is likely to promote a material increase in competition in a dependent market. When certification of an access regime is sought, that access regime is typically already in place, and the test should consider whether withdrawal of the access regime would be likely detrimental to competition in any of the related markets. This involves:

Relevant dependent markets for rail infrastructure will include above-rail operations and terminal services, and could potentially include logistics or freight forwarding services to freight owners.

The rail line haul services markets are likely to be predominantly Victorian-based, with demand for the services coming from primary producers, freight forwarders, logistics providers and end customers.

Stakeholders felt that access is important for above-rail competition. Asciano maintained:

Access to below-rail is necessary in order to permit effective competition in the market for above-rail services.

Wakefield argued that there were formidable market barriers to effective competition on the broad gauge network due to the investment required in broad gauge rolling stock. To date Pacific National (Asciano) retains the great majority of this rolling stock. Wakefield felt that this gives greater emphasis to the need for the access regime. It was suggested that in the absence of the VRAR, Asciano may face an insignificant degree of competition on the broad gauge network.

Asciano observed that to facilitate competition:

It is important to provide above-rail operators with appropriate incentives to invest which will need a non-discriminatory access

expected to cost over $4 billion. See: http://www4.transport.vic.gov.au/vtp/pdfs/factsheets/VTP_FS_regional_rail_link.pdf. 107 Federal Court (2006) ‘Sydney Airport Corporation Ltd v Australian Competition Tribunal’, 83.

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regime with a degree of certainty about how their services will be treated.

The introduction of the VRAR in 2006 was followed by the entry of a number of new operators. Previously, Pacific National (now part of Asciano) was the only freight operator on both the regional and the metropolitan networks. Competitive entry commenced prior to the buy-back, with the entry of El Zorro in late 2006, and other operators entering into access agreements more recently (see section 3.1.3). There is little doubt that the degree of above-rail competition has increased over the period since the introduction of the regime. However, there are also some market and infrastructure impediments to the development of fully effective competition between above-rail operators.

Not all agree that access regulation has facilitated competition, for example, El Zorro stated:

Our view is that the VRAR reduced competition because it raised the barrier to entry for small rail operators wanting to access the network.

The Commission’s consultation with stakeholders has found that stakeholders see significant benefit from the greater degree of competition now in the market and see competition as vitally important for driving efficiency improvements in the industry and reducing above-rail transport costs.

Absent the access regime, there are a number of potential risks to the ongoing development of above-rail freight competition.

First, although V/Line and Connex or MTM are not vertically integrated freight service providers, they are vertically-integrated passenger operators, and this has represented a source of concern to several stakeholders. Specifically, V/Line and Connex or MTM have little commercial incentive to facilitate the use of the rail network by rail freight operators, since freight trains contribute only small increments of revenue.

Furthermore, V/Line’s losses are fully subsidised by the Victorian government, so it does not have an effective incremental financial incentive to provide access to freight trains. El Zorro stated:

we have had the experience of the passenger operator unreasonably claiming priority for the movement of non-revenue trains to stabling yards at the expense of regional freight movements.

Second, Asciano’s submission highlights a concern about the risk of access providers discriminating between competing operators in regard to the same service. This concern may arise due to the weakness of the access provider’s commercial incentives overall and therefore the lack of normal commercial disciplines.

A contrasting view was expressed by El Zorro, who considered it a shortcoming of the present access regime that it discourages discrimination between operators:

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Regulatory costs have been onerous, mostly on account of a “one size fits all” mentality applied by regulators and track managers. A more flexible approach would be helpful for new entrants to the market place.

However, El Zorro did not consider that removal of the access regime would be likely to increase the flexibility of pricing.

A third potential risk to competition that could arise in the absence of the access regime could result from inefficient line closure or track maintenance conditions. In V/Line’s application for variation of its access arrangement in 2007 it sought to reduce the track standards to 20 kmph. However, the Commission held that ‘fit for purpose’ track standards are an essential and important element of the terms and conditions of access to railway tracks, and must be specified in an access arrangement.

In V/Line’s recent application for renewal of its access arrangement, it again sought to remove any effective obligation to maintain track standards. The Commission found that the effect of its proposal was to provide V/Line with the unilateral discretion to amend the Performance Standard and decided that V/Line can not book lines out of service without obtaining approval through varying its access arrangement. In relation to this issue, Asciano noted in its submission to that renewal process:

The lack of commitment to a network standard creates significant uncertainty for above-rail operators. … Business cases for investment in long lived assets such as locomotives and wagons will be undermined given there is no certainty, even for the length of the access agreement, that the network will support a viable above-rail service.

V/Line has indeed booked out approximately 579 km of freight track since May 2007, and retains 1,394 km of freight track. While these line closures may be efficient, the Commission is not aware of any benefit-cost analysis undertaken by V/Line in support of these line closures, and notes that they do not appear to conform closely to the prioritisation of rail lines indicated in the Fischer Review.

In summary, V/Line has very little incentive to retain freight lines in operation and may use line closures as a threat in its subsidy negotiations with government.

Closure of rail tracks may impact on the competitiveness of above-rail freight operations. In the absence of the access regime there is a relatively greater risk of line closures that may impact on above-rail competition.

A fourth observation is the possible impact of the exercise of market power in some segments of the market, and the impact on track usage and competition. Asciano observed:

V/Line is a monopoly service provider and has incentives to increase price and lower demand below efficient levels for some freight and achieve a non-commercial outcome for risk allocation for all types of freight.

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The foregoing discussion indicates that the access regime has coincided with the development of competition in the Victorian above-rail market, and absent the access regime, there are material risks of conduct by access providers that may be detrimental to the ongoing development of competition in the above-rail market.

The Commission’s preliminary conclusion is that access to the below-rail networks is necessary to permit effective competition in the above-rail freight market.

However, access by freight trains is not needed to metropolitan rail lines that are not part of the Principal Freight Network because they are not used by freight trains at the present time.

Preliminary conclusions – coverage criteria

In the Commission’s preliminary assessment all of the coverage criteria under the CPA are met in respect of rail infrastructure services provided to freight trains.

5.5.2 Public interest

The discussion in section 5.3 highlighted that there is little evidence of substantial market power in the provision of rail infrastructure services to freight trains. The question of whether there is a public interest in retaining the VRAR also depends on a consideration of other potential benefits of economic regulation. Incentive to provide access

Because the revenue from freight reference services represents a relatively insignificant proportion of total revenues, V/Line and Connex (soon to be replaced by MTM under the new franchise arrangements) may have insufficient incentive to provide access to freight services. This is supported by observations by stakeholders that passenger service operators sometimes give priority to non- revenue train movements over freight trains. Indeed V/Line actually has no statutory obligation to maintain and provide access to non-passenger railway lines.

These observations suggest that there is a risk that access might be hindered simply because to make reasonable endeavours to accommodate an access seeker would divert scarce management resources away from the core business of operating passenger services. In these circumstances there may be benefit in giving freight trains a statutory entitlement to access as well as a dispute resolution mechanism to which the parties can have recourse in the event that they are not able to negotiate a commercial outcome because of lack of interest by the passenger service operator.

The views expressed in submissions suggest that this is seen as a benefit by stakeholders. Competitive neutrality issues

Rail operators attach importance to the principle of paying ‘the same rate for the same service’ and this is a feature of the access arrangements at present. Absent the access regime, rail operators may carry an additional risk that V/Line or MTM might enter into more advantageous terms and conditions with one of its competitors for provision of the same services, perhaps influenced by factors other

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than the cost of providing the service. Although neither of the access providers would have a strong incentive to discriminate between users of ‘like-for-like’ services, given their weak incentives overall, there may be the possibility that they might prescribe different terms and conditions to provide the same services.

If these concerns are important, as they seem to be to rail operators, then there may be some ongoing benefit in the Commission having an ongoing dispute resolution role, so that the Commission can hear and resolve matters where a party claim that discrimination of this kind has occurred. Transaction cost issues

There is a potential benefit in terms of reducing transaction costs for market participants. Trucks travel freely on the road system and do not incur the costs of entering into access agreements, scheduling train paths, providing train manifests and dealing with interface issues between networks – all of which give rise to a significant transaction cost disadvantage of rail over road.

Elements of regulatory frameworks which reduce transaction costs by establishing more standardised agreements and formalised access processes may yield benefits in terms of reducing these transaction costs. Both V/Line and Connex have suggested that the ex ante approval of the terms and conditions under the existing access regime reduces their costs of negotiating access agreements with access seekers. Incentives to pursue efficient pricing

Where the government is a major provider of subsidies it may prefer to ensure there are no impediments to competition in the above-rail market in order to minimise the risk that individual businesses in the supply chain could capture private benefits from the subsidies and thereby obtain rents.

Regional development

A number of submitters to this review have a regional development focus, most significantly the ACRFD. The support of such submitters for the ongoing application of the rail access regime suggests that they regard it as supportive of regional economic development. Arguably, the promotion of market entry by smaller regionally focused operators supports this objective.

Costs

The costs of access regulation are examined in Appendix D. To summarise the conclusions of that analysis, the costs of the VRAR in its present heavy-handed form are relatively high. The Commission’s estimate is approximately $560,000 per annum in total or $140,000 per access provider. Similar analysis undertaken recently by the Commission for its reviews of the Grain Handling and Storage Access Regime and the Victorian ports price monitoring regime suggest that the costs associated with light-handed regulation are considerably lower – approximately half of the cost.

This estimate suggests that the total cost of retaining access regulation of the intra- state rail infrastructure can be expected to be around $140,000 per annum. This cost appears to be relatively modest.

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Preliminary conclusion

The VRAR does not appear to provide any substantial benefits associated with preventing the misuse of market power. At the very least this suggests that access regulation should be scaled back if it is retained. However, there are several other identified benefits of the access framework. Although these benefits are difficult to quantify, taken together they appear to be significant. In the Commission’s preliminary assessment the benefits outweigh the expected costs of light-handed regulation.

5.5.3 Preliminary conclusions - regulating rail infrastructure services to freight trains

The Commission’s preliminary conclusions are that: • the intra-state rail infrastructure services meet all of the requirements under the CPA for facilities to be covered under a State-based access regime, and • there is a net public benefit to retaining access regulation of rail infrastructure services for freight trains if a light-handed form of access regulation is employed.

Draft recommendation 5.2

5.6 The case for regulating access to certain terminals

Terminal services form an integral part of the rail supply chain. Freight transported by rail must access a terminal at the ‘rail head’ terminal and at the end of the journey.

In the grain market, inland terminals are regarded as contestable or competitive activities, whereas port grain handling terminals are for the most part considered monopoly facilities. Hence most are currently subject to access obligations under voluntary undertakings recently approved by the ACCC.

Rail terminals such as intermodal container terminals can be declared under the RCA as “associated rail infrastructure”, and as such the scope of this Review includes whether intermodal container terminals should be covered by acces regulation.

There is limited NCC precedent in relation to the certification or declaration of access to rail terminal infrastructure. In recently recommending declaration of the Tasmanian Railway Network, terminals formed part of the declared services. However, there was no specific discussion in the NCC’s draft or final recommendations regarding these terminals.

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Although the application of formal access regimes to terminals is limited in other Australian jurisdictions, the imposition of multi-user arrangements on Intermodal terminals is relatively common. Examples include Acacia Ridge near Brisbane and the Enfield terminal currently being developed in Sydney.

5.6.1 Compliance with the CPA coverage criteria

Significance

The Commission is cognisant of the need to consider the rail freight supply chain as a network of services with a high degree of interdependency. For instance, the significance of an individual branch line taken in isolation may not be high but a network of branch lines would likely be significant. Because terminals are an integral part of the rail freight supply chain, then to the extent intra-state freight services are significant and access to specific terminals in necessary to promote competition for those services, then those terminals will be significant. This is a more relevant test than considering the usage of individual terminals, sidings or branch lines in isolation – but it does rely on an assessment of how necessary access to a terminal is to promoting competition.

Based on present information, the Commission’s preliminary conclusion is that the Melbourne intermodal terminals are an integral component of the supply chain for intra-state freight services and are significant infrastructure facilities. The discussion in section 5.3.3 above supports the view that the on-dock rail terminals are essential to the supply chain for intra-state freight (including its future development) and are therefore significant.

Based on their size, capacity and current roles in handling interstate and intra-state intermodal freight, the South Dynon and Dynon Intermodal terminals are two of the largest and most important intermodal terminals in Victoria. Given the importance of South Dynon to Victoria’s interstate containerised freight, there is little doubt that it is significant to constitutional trade and commerce within Victoria. On the other hand there is less certainty that Dynon Intermodal terminal could be considered as significant to the interstate freight market based on its current levels of usage. The freight handled at Dynon would appear to be readily able to be accommodated at another terminal. Safe use

The Commission does not consider that the VRAR imposes safety-related barriers to entry, and hence the safe use criterion would be satisfied. Economic feasibility of duplication

Location is a critical factor in the establishing an intermodal terminal. In this regard, Meyrick and Associates/ARUP have noted:

The primary characteristics which make a terminal work are its location relative to a traffic base and its location relative to road

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and rail links. If these criteria are not met, then whatever other characteristics the terminal has will be largely irrelevant.108

However, terminals also have pronounced economies of scale, which can make them natural monopoly facilities. Technical estimates of the average cost for handling containers at intermodal terminals of various sizes and technologies suggest that terminals may need to be as large as 400,000 TEU or more, to be fully efficient.109

Consistent with this view, Booz & Company’s recent intermodal supply chain study for the National Transport Commission recommended a preferred model of large common-user intermodal terminals “to create economies of scale and scope, and facilitate greater line haul competition.”110 P&O has previously suggested that a metropolitan Intermodal terminal should handle ‘at least 100,000 TEU p.a. and ideally up to at least 500,000 TEU p.a.’ and ‘80% of the Intermodal terminal’s metropolitan cargo should be destined to/originate from within a 10km radius of the Intermodal terminal’.111

There are a number of Intermodal terminals in operation in Melbourne, and a key question is the extent to which the services provided by either the South Dynon or Dynon Intermodal terminal are already duplicated. It was Asciano’s view with respect to South Dynon that:

The facility has already been duplicated with competitors in above- rail interstate haulage (QR and SCT) utilising alternate facilities within the state.112

The location and scale factors suggest that the SCT and CRT facilities should not be regarded as a duplication of the South Dynon facilities, but relatively small niche operations. The Somerton terminal does not currently handle rail freight. The Dynon Intermodal terminal is adjacent to South Dynon, has a significant potential for expansion, and therefore represents the most relevant test of whether South Dynon services are effectively duplicated.

Prior to Pacific National’s relinquishment of the lease, the Dynon Intermodal terminal was mainly used to handle intra-state freight from regional locations and ultimately destined for the port. Since VicTrack and POTA have taken over management of the Dynon Intermodal terminal much of Pacific National’s intra- state freight is now handled at East Swanson, while some interstate freight has

108 Meyrick and Associates/ARUP (2006) ‘National Intermodal Terminal Study: Final Report’, p.9. 109 A. Ballis, J. Gollias (2002) ‘Comparative evaluation of innovative and existing rail-road transportation terminals’ Transport Research Part A, 36, 593-611 110 Booz & Company (2009), Capacity Constraints & Supply Chain Performance – Intermodal. Final Report – Towards Co-modalism. Report prepared for the National Transport Commission, p. 7. 111 P&O Ports Limited (2005), submission to VCEC, Inquiry into Managing Transport Congestion, p.5. 112 Ibid, p.4.

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been attracted to the terminal. As a result, the terminal can be regarded more directly competing against both Asciano’s South Dynon and East Swanson terminals in the intra-state and interstate markets. Its ability to compete in these markets may be constrained by: • the ability of Asciano’s above-rail competitors to gain market share in the intra-state and interstate rail haul markets • its relatively inefficient location for handling intra-state container freight compared to the East and West Swanson rail terminals • possible competitive disadvantage to South Dynon from additional shunting costs and availability constraints associated with shorter sidings within the terminal, and • lack of economies of scale at current volumes.

The freight volumes at the Dynon Intermodal terminal are low relative to South Dynon and it has not yet demonstrated the ability to economically duplicate the services of South Dynon. In summary, while the Dynon Intermodal terminal is competing with South Dynon, it is not yet demonstrated to be an economically sustainable competitor.

With regard to the on-dock terminals, it is questionable whether the services provided by the Swanson dock rail terminals could be economically duplicated by an off-dock terminal such as Dynon. Any alternative location for a receiving rail terminal would involve an expensive truck movement which would likely render the alternative service uncompetitive. While ultimately the optimal logistics arrangement will depend on the mix (destination) of freight on the train, an intermodal movement, including the double handling in the rail terminal is generally much more expensive than a direct rail movement.

Furthermore, at the present time most of the capacity in the Dynon precincts is controlled by the two container stevedores or their affiliates. Hence, although POTA has a multi-user commitment at Dynon, it is open to question whether either of the Dynon terminals could represent a fully effective competitor to the East and West Swanson rail terminals.

The picture is less clear with respect to other intermodal freight terminals used to service the intra-state freight market both in the country and across Melbourne. Location is important and while there appears to be a degree of substitutability between terminals, the economics of the sector are such that duplication of terminal services may not be economic in every case.

As the government progresses its MFTN strategy these circumstances may change with the development of new ‘greenfields’ terminals, but at the present time there is good reason to view this criterion as satisfied at the present time, particularly in respect of the on-dock terminals and South Dynon. Is access necessary to compete in a related market?

The Federal Court has previously concluded that in the context of the separation of above and below-rail markets, rail freight terminals should be seen as forming part

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of the rail infrastructure, not the rail line haul market.113 Hence, the above-rail market can be regarded as one relevant dependent market.

Broadly speaking, a principle to guide whether access should be made available to a terminal is whether access to that terminal is essential for a train operator to compete in the haulage market. The great majority of intra-state containerised rail freight is currently transported directly to the port terminal. The only train operators currently using those terminals are affiliated with the stevedores. If a competing train operator is to be able to offer an equivalent service to an inland terminal operator it will need to be able to obtain access to the on-dock terminals.

Another relevant dependent market is Intermodal terminals, because with the network characteristics of the rail industry, intermodal terminals are dependent on other intermodal terminals. In order for inland intermodal terminals to compete in the wider transport market they will need to be able to ensure that trains operating from their terminals will be able to access terminals at the end of the journey for unloading. For those terminals to provide a viable competitive supply chain alternative to road transport it will be necessary for the trains that service those terminals to have access to the on-dock terminals. The importance of connection through to the wharf was noted in BlueScope Steel’s submission.

Freight owners and inland terminal operators may only be able to exercise effective choice in regard to the preferred above-rail operator if there is access through to the port terminal.

With respect to the interstate market it has been found that the greater majority of this rail freight is handled at South Dynon. Although there are some other terminals handling relatively small quantities of interstate rail freight, such as SCT’s Laverton terminal and the Dynon Intermodal terminal, those terminals do not appear to have either the scale or the siding length to offer a competitive alternative option to South Dynon for any substantial scale entrant into the interstate rail haulage market. Until such time as the Government’s strategies in relation to implementing large new rail terminals – such as the proposed Donnybrook terminal and/or the future Metropolitan Intermodal Freight Terminal – if a new entrant were to be able to compete effectively in the interstate linehaul market on any significant scale it would need access to the South Dynon terminal. The fact that no entrant of this type has emerged over the last three years and no party has sought access to South Dynon over that period does not refute this conclusion because it is based on a forward looking assessment of the implications of the removal of access on the contestability of above rail interstate freight services.

5.6.2 Public interest

An important question for the Commission to consider is whether access to a terminal is essential for a party to provide services in the rail freight supply chain. Where access to the facility is essential, then the benefits of access regulation of rail infrastructure can not be realised without the associated application of access

113 Pacific National v Queensland Rail [2006] FCA 91 in relation to the Acacia Ridge intermodal terminal in metropolitan Brisbane.

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regulation to the essential terminal. The benefit of applying to access regulation to the essential terminals is derived from the benefit of applying access regulation to rail infrastructure.

However, as discussed above (section 5.5.1), the costs of regulation increases with the number of entities regulated.

The Commission understands that competition between train operators primarily takes place in bidding for contracts to carry freight from a particular Intermodal terminal, or a factory (if it has a siding, such as Paperlinx, Maryvale), to the destination – generally the port. In the same process, the regional Intermodal terminal and the rail supply chain as a whole is effectively competing against road transport.

It is the Commission’s preliminary view that for competition between train operators in such a bidding process to be effective, and to allow regional Intermodal terminals to provide a competitive alternative service to road transport, it is necessary for the train operators to have assured access to the on-dock rail terminals at the port in order to efficiently deliver the freight. If one operator has access to an on-dock terminal and another does not, then the party with access will have a crucial advantage. This would diminish competition or prevent the emergence of competition in rail operations for container freight.

By the same reasoning it is not clear that access to the Dynon Intermodal terminal is essential to intra-state container freight services, because few of those services use the terminal and it is not closely integrated with the port. South Dynon terminal does not handle significant quantities of intra-state freight, so by implication its use is also not essential for competition in above-rail services in Victoria.

With regard to interstate freight, it has been concluded that access to South Dynon is essential to the development of effective competition in the interstate linehaul market. If the benefits of the national access framework applying to the interstate network are to be fully realised then, at the present time and until new efficient scale interstate rail terminals are developed in Victoria, access to that terminal continues to provide a significant benefit. Under a light handed form of regulation, the benefits are likely to outweigh the costs. If South Dynon were to be covered under a voluntary Commonwealth-based access undertaking (which may be considered more logical to Asciano given the interstate nature of the freight handled at the terminal) then it need not be covered under the VRAR.

On the other hand, Dynon Intermodal terminal has been found to offer limited scale and siding length and therefore does not offer a competitive alternative option to South Dynon for any substantial scale entrant. Access to that terminal does not appear to be necessary to support competition in the interstate line haul market. The view is reinforced by recognition that in any case the Dynon Intermodal terminal has in place a Multi-User business model established under the leasehold arrangements between VicTrack and POTA. This will any case provide assurance that access to that terminal will remain available over the term of that lease to 2013.

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5.6.3 Preliminary conclusions – regulating rail terminals

In summary, the Commission’s preliminary analysis leads to the following conclusions: • South Dynon terminal meets the test that access is necessary to enable effective competition in the interstate line haul market and that it cannot be economically duplicated. • There is a net public benefit to applying access regulation to the South Dynon terminal for an interim period, until Government strategies for developing other efficient-scale terminals are more advanced, associated with the benefit of above rail competition in the interstate freight market. • The on-dock East and West Swanson terminals both meet the criteria that access is necessary to compete in the related markets of intra-state container line haul and regional Intermodal terminal services. • There is a net public benefit to applying access regulation to the on-dock rail terminals which derives from the finding that their use is essential to above rail competition in the intra-state freight market and from the finding that there is benefit to retaining access regulation of intra-state rail infrastructure services. • The Dynon Intermodal terminal may not meet the coverage criteria in the CPA.

Preliminary position for comment 5.3

The Commission’s preliminary position regarding coverage of terminals under the VRAR is as follows: • South Dynon should remain covered • the Dynon Intermodal terminal and the North Dynon Agent’s Sidings should no longer be covered • the Swanson Dock East and Swanson Dock West rail terminals should be covered by the VRAR.

Based on its present analysis the Commission intends to recommend that the on-dock terminals come under the regime.

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5.7 Preliminary conclusions – Chapter 5

The VRAR does not appear to provide any substantial benefits associated with preventing the misuse of market power. However, there are several other identified benefits of the access framework:

• There is a potential benefit from formal access obligations in terms of reducing transaction costs for market participants. (The Commission has also explored the question of transaction costs more broadly in the context of the one-stop-shop concept – see below).

From the Commission’s analysis the costs associated with light-handed regulation appear to be relatively modest and in the Commission’s preliminary assessment, the expected benefits outweigh the expected costs of light-handed regulation of access to the rail network for freight trains.

The Commission’s preliminary conclusions are that there is significant benefit in retaining the VRAR and continuing the coverage of rail infrastructure services, albeit with consideration given to a more light handed approach because of the lack of market power held by participants in the intra-state rail freight supply chain and the relatively high costs of heavy-handed regulation.

Because intermodal rail terminals are an integral part of the rail freight supply chain, there is a prima-facie case for continuing coverage of some intermodal terminals under the VRAR. The Commission’s preliminary conclusion is that such coverage should be limited to:

• the on-dock terminals in support of maintaining competition and choice of operators in the intra-state freight container market, and

• the South Dynon terminal in support of facilitating the development of competition in the intra-state freight market.

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The need for coverage of South Dynon is considered to be temporary until such time as Government strategies to see the development of major new rail terminals are closer to realisation. Because access to the interstate rail network is covered under the National Rail Access Regime, then in principle access could be dealt with under the national regime. If Asciano were to opt for coverage under the national access framework then its coverage by the VRR should cease.

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6 THE FORM OF ECONOMIC REGULATION

Key points • The minimal market power of the rail supply chain suggests light-handed regulation of declared rail infrastructure services is to be preferred to heavy-handed forms of regulation • An assessment against the general principles of good regulation, consistency with similar jurisdictions and the applicable principles from the CPA and the CIRA indicates that a negotiate/arbitrate model is the preferred form of light-handed regulation • The ability to submit a voluntary access undertaking is also consistent with national access framework • If market power emerges or a line becomes a major corridor then a mandatory ARTC-type undertaking would be appropriate, consistently with the CIRA. • The VRAR should provide for a smooth transition to Commonwealth jurisdiction if rail lines are transferred to the ARTC and as they become incorporated in an ACCC-approved undertaking.

This Chapter examines the options for the form of access regulation that should be applied to those infrastructure services that are recommended to be retained under the VRAR. The draft recommendations in Chapter 5 were for the intra-state rail network (excluding some Metropolitan rail lines that do not carry freight trains) and the Swanson Dock rail terminals to be covered under the access regime.

This Chapter is structured as follows: • Section 6.1 discusses the key principles that will guide the choice of the form of regulation. These include the general principles of good regulation, the specific requirements of an effective access regime under the Competition Principles Agreement (‘CPA’) and a decision framework proposed by NERA for assessing when light-handed regulation may be appropriate. • Section 6.2 summarises the views of stakeholders in relation to the form of regulation. It is found that there are a range of views from those preferring the current framework or the form of the ARTC undertaking, to those preferring a light-handed form of regulation. • Section 6.3 makes a high level assessment of whether heavy-handed or light-handed regulation would be appropriate. This section employs the decision framework discussed in section 6.1 and, having regard to the limited

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market power and the costs and risks of prescriptive regulation, reaches the preliminary conclusion that light-handed regulation is appropriate. • Section 6.4 sets out the Commission’s preliminary views on the preferred form of light-handed regulation, and discusses whether the preferred regime could be certified as an effective access regime under Part IIIA of the Trade Practices Act 1974 (Cth) and whether it would promote national consistency among rail access regimes. The Commission’s draft recommendation that there be a two tier approach is presented in this section. • Section 6.5 examines each of the elements of the access regime and considers what changes ought to be made by reference to the current VRAR. In doing so it considers the specific requirements that the light-handed regime would need to satisfy in order to be certified as an effective access regime under Part IIIA of the Trade Practices Act. A number of draft recommendations on the specific elements of the regime are developed in this section.

6.1 Approach to selecting the form of regulation

6.1.1 Forms of regulation

There are several types of economic regulation which are generally presented along a spectrum from 'light handed', to 'heavy handed'. So called 'heavy handed' forms of economic regulation typically include some form of price control such as prior regulatory approval of prices and/or price caps or revenue caps, whereas 'light-handed' forms of regulation generally give primacy to negotiated outcomes between access providers and access seekers, and may involve price and service quality monitoring and/or dispute resolution.

Price regulation is generally not the only element of regulatory frameworks, which may encompass standard terms and conditions, service quality standards, market and operational conduct, ring-fencing, to mention only a few examples. The ‘heavy handedness’ of a regulatory regime may relate to the breadth of variables of the regulator controls and the compliance costs imposed on businesses.114 However, the form of price regulation is usually a key factor in determining how prescriptive the regime is perceived to be. The following are the most common forms of price regulation: • Formal price controls — this includes price and revenue caps, and/or formal approval of reference prices. For example, the regulator may adopt a building block approach to estimating efficient costs of supply for the purpose of approving prices that are expected to generate appropriate levels of revenue, or for setting revenue caps. Other methodologies such as indexing are also sometimes used. Examples include reference price determination for Queensland Rail's coal networks and on the Victorian intra-state rail network.

114 NERA (2004) ‘Alternative Approaches to Light Handed Regulation: A report to the Essential Services Commission Victoria’, p.8.

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• Negotiate/arbitrate models — this form of regulation provides customers with a legislated right to negotiate access with an access provider backed up by arbitration where disputes occur or negotiations fail. Negotiate/arbitrate regimes are often supported by some form of access application process and pricing principles. They give emphasis to facilitating commercial agreement over terms and conditions, with regulatory intervention, by means of arbitration, only if commercial agreement cannot be reached. This form of regulation may or may not require transparency with regard to standard terms and conditions including prices. • Undertakings — within the National Access Framework, undertakings are an alternative to the default negotiate/arbitrate framework which provide for ex ante regulatory approval of the standard terms and conditions of access including reference prices. Because the reference services are typically only a subset of the regulated services, this form of regulation combines elements of both the price controls and negotiate/arbitrate models. • Price monitoring regimes — this form of regulation generally involves transparency obligations on businesses in regard to their standard terms and conditions; disclosure of certain business and financial information to facilitate the monitoring of prices, service quality and performance standards; and public reporting by the regulator of price and service quality outcomes. This form of regulation typically relies on the threat of more prescriptive regulation if substantial market power is misused. This form of regulation has not been used to date in the Australian rail industry.

These forms of price regulation are not necessarily mutually exclusive and there are significant overlaps between them. For example, negotiate/arbitrate models can contain some aspects of cost of service regulation, or they can be combined with transparency obligations and price monitoring. Access regimes may include a mix of ex ante and ex post price regulation, with some prices for certain reference services pre-approved by the regulator and published to inform potential access seekers of the prices they would incur, with the prices for other services determined through negotiation, with the regulator only determining those prices in the context of resolving access disputes.

6.1.2 Decision framework for the form of regulation The following specific regulatory options were identified in the issues paper for comment: • no change • minimal amendments to the RCA in order to replace the current model with an undertaking-based negotiate/arbitrate framework broadly consistent with the ARTC undertaking • substantial revision of Part 2A of the RCA to implement an effective State- based access regime incorporating light-handed regulatory principles such as price monitoring and negotiate/arbitrate provisions, and • adopting the national access regime under which access providers can voluntarily submit an undertaking to the ACCC.

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In selecting among the alternatives, the benefits of reduced transaction costs and increased transparency are typically balanced against the costs of limiting flexibility and the costs of compliance, having regard to the balance of market power in the industry. The degree of prescription in the form of regulation is usually related to the degree of market power and the scope for enhancement of competition over time. Thus, the heavier-handed models such as formal price control are typically more appropriate where an access provider has substantial market power. The existence of vertical integration will also be an important influence on the incentives of an access provider to exercise market power, and hence on the appropriate form of regulation. Lighter handed models may be preferable where the market is in transition from conditions of substantial market power to more competitive conditions, but where competition is not yet fully effective.

ARTC’s market power matrix presented in Table 4.1 provides a useful summary of the way in which the proportionate regulatory response might vary along the spectrum of market power, and in circumstances where market power is present.

NERA has proposed as a decision framework for assessing the likely effectiveness of alternative forms of regulation. The key considerations include: • The prevailing market circumstances: The form of regulation needs to be suited to the circumstances, including: the degree of market power and scope for substitution; the presence of vertical integration; the extent to which there is productive inefficiency; the size or importance of the industry and the scope for price discrimination. • The institutional context: The clarity with which a threat of regulatory sanction is articulated through guidelines and rules and the extent to which information asymmetries are overcome through information disclosure requirements, will be crucial to the effectiveness of any regulatory framework, whether it is more or less prescriptive. The historical context which provides participants with an understanding of regulatory sanctions may also be important to a regime’s effectiveness. • Dynamic considerations: The incentives for regulated businesses to undertake efficient investments and the regulatory risks they face will be particularly important in industries with a relatively high potential for efficient investment. Light-handed regulatory frameworks provide businesses with greater flexibility over pricing and hence less exposure to regulatory risk – but this will depend on the nature of the threat of more heavy-handed regulation. • Stage of market development: In markets that are experiencing high rates of growth and/or technology change, there is a greater risk that heavier handed forms of regulation may impose unforseen and unwarranted efficiency losses.

Overall, a light-handed regulatory regime must be well designed and be “effective” for the market circumstances. Otherwise the practical application of the framework may give rise to a regime that is not in fact light-handed.

There are a number of examples of regulatory regimes that were intended to be light-handed but, in practice, turned out not to be so, as the processes for administering the regulatory principles became increasingly burdensome.

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… An important lesson is that unless the characteristics of the industry are conducive to particular forms of light handed regulation, simply establishing ‘loose’ pricing principles accompanied by poorly designed procedures is unlikely to result in the desired outcome. … it does not necessarily follow that a regime will be lighter-handed than alternatives.115

6.1.3 Principles for the form of access regulation

The Commission has previously employed the following principles when considering appropriate forms of regulation116: • Preference for market solutions. This is consistent with the principle in the CIRA that in the first instance negotiated outcomes are to be preferred. • Proportionality. The extent to which management behaviour is constrained is proportional to the likely economic or social harm that would flow from the market failure that it seeks to address. • Promotion and protection of competition. The regulatory framework should provide scope and incentive for pro-active competitive conduct by the regulated entity, and not stifle innovation. • Consistency. This principle is reflected in the CIRA’s aim to make third party access regimes simpler and more consistent. • Balancing short and long term benefits to consumers. Regulation should strike an effective balance between protecting users from monopolistic pricing and facilitating efficient investment and other dynamic efficiencies.

6.1.4 Effective access regimes

The Commission will also need to consider the requirements for an effective state- based access regime. The NCC has published guidelines on the matters it will consider when making recommendations on the effectiveness of access regimes.117 In addition to satisfying the Clause 6 principles in defining the scope of services to be regulated, other key requirements include: • the negotiation and dispute resolution frameworks must be well specified, and dispute resolution should be by an independent arbitrator • regulatory accounts should be maintained for the services under the access regime that are separate from other services that are not subject to the access regime, and with appropriate cost allocation principles • where vertical integration issues arise, appropriate competitive neutrality provisions should apply, such as the 'prohibition of anti-competitive price

115 Ibid, pp.9-10. 116 ESC (June 2004) 'Regulation of the Victorian Ports: Final Report' p.91. 117 NCC, May 2009, 'Certification of State and Territory Access Regimes: A Guide to Certification under Part IIIA of the Trade Practices Act 1974 (Cth)'.

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discrimination between affiliated users and third party access seekers operating in the same market'118 • a price regulation framework, if applied, should appropriately address market power asymmetries that could reduce the effectiveness of a pure negotiate/arbitrate framework. In particular, price outcomes should ultimately fall within an efficient range that would be expected in an effectively or workably competitive market119 • any price regulation should be by an independent regulator • the negotiate-arbitrate framework and any price regulation arrangements should facilitate efficient price discrimination between users, and • there must be credible enforcement mechanisms.

6.2 Stakeholders views on the form of access regulation

6.2.1 Railway track services

There were differing views on the appropriate form that regulation should take. Many were of the view that it should be a lighter-handed form, some considered that the ARTC undertaking ought to be used as the model, while others favoured retention of the existing model.

The view that regulation should be lighter-handed was implied in VFLC’s comments that ‘there is a reduced need to continue regulation’ but ‘regulatory oversight would still be required’. The VFF also indicated that ‘the necessity for a heavy handed approach has somewhat relaxed’. Wakefield suggested:

My view (given its limitations) would be Negotiate/Arbitrate with some formal pricing aspects. And a light handed approach.

Other submitters held that the regulatory model should be based on the ARTC undertaking, for example Asciano stated:

The level of detail in the current regulatory framework provides a reasonable level of certainty … generally speaking Asciano believes that the structure and form of the ARTC access undertaking is an appropriate starting point. In particular, the level of intrusiveness would seem appropriate for the Victorian situation. … It is vital, if an ARTC style regulatory approach is adopted that it is obligatory for the access providers to seek approval of their undertakings.120

El Zorro also held that ‘the ARTC model has proven satisfactory over an extended period of time. It is supported by El Zorro’, but noted that ‘price monitoring should be considered if the form of regulation is to be modified’.

118 Ibid, p.55. 119 Ibid, p.58. 120 Asciano submission on the Issues Paper, pp. 8-10.

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With regard to the appropriateness of the ARTC undertaking as a model, the VFF indicated:

While there can be benefits of national consistency, it should only be pursued if there are proven efficiency gains and reductions in transaction costs delivered. Since there is significant uncertainty around the nationally consistent approach a Victorian rail access regime should not be withdrawn until there is a clear … nationally consistent approach that is of benefit to rail access providers and access seekers.

Wakefield similarly expressed the view that there is some way to go before a common approach is agreed on national regulation, and at the present time regional issues are paramount. The current State government rebates may not be possible under a national system.

Some stakeholders preferred the current model, such as ACRFD who stated:

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.

The views of access providers were not dissimilar and the benefits of certainty and reduced transaction costs associated with approved prices were noted. However, V/Line proposed that regulation should be limited to the approval of commercial terms excluding track standards.

6.2.2 Terminal services

Among the submitters that favoured continued application of access regulation to the Dynon rail terminals there were no detailed discussions of the form that regulation should take.

Wakefield indicated:

There just needs to be a mechanism whereby rail operators have some price guidelines for access and ancillary services to access Dynon precinct prior to the MFT (Metropolitan Freight Terminal). Rail operators could currently be greatly disadvantaged by terminals not providing access to terminals to suit pathing of trains.

El Zorro suggested:

The most suitable access obligation is to allow all above-rail operators to use the facility in accordance with known rules applied impartially by an independent terminal manager.

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POTA felt that access entitlements could be ensured through a contractually established Multi-User Policy.

ACRFD was of the view that the Victorian Government should buy back the lease to the South Dynon terminal and then operate it as a common user facility.

6.2.3 Summary

In regard to the regulation of rail infrastructure, the views of stakeholders were divided between: • those preferring the current framework to continue, perhaps with some modifications (which included the access providers) • the view that the ARTC undertaking would be appropriate and is slightly more light-handed than the existing framework (e.g. the current train operators), and • some who suggested a more light-handed negotiate/arbitrate framework (e.g. Wakefield).

In regard to terminals, there was less detail in regard to the proposed form of regulation, but the emphasis appeared to be on transparency and equity between operators.

6.3 Assessment of the appropriate form of regulation

6.3.1 High level assessment against the decision criteria

The Commission’s initial approach is to apply the decision framework set out in section 6.1.2 above at a high level, first to the intra-state rail infrastructure and second to the Swanson Dock intra-state rail terminals. The purpose of this assessment will be to establish whether a more light-handed form of regulation is warranted or whether heavier-handed regulation is likely to be required.

Table 6.1 identifies, for rail infrastructure regulation, some of the key considerations against each of the decision criteria. The implication of this high- level assessment is that a light-handed form of regulation would be warranted and if appropriately designed, is likely to be effective.

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Table 6.1 Application of decision framework – rail infrastructure NERA decision criteria Situation Preliminary conclusion

The prevailing market Little or no market power. Vertical The ARTC matrix suggests little circumstances integration of track and passenger prescription. operations, but not with respect to rail freight

The institutional The RCA and Commission guidelines This supports the view that light context provide for clear enforcement and handed regulation is likely to be dispute resolution processes. Historical sufficiently effective. experience is one of prescriptive . regulation. Dynamic The major dynamics are the incentives Heavy-handed regulation may considerations for ongoing major maintenance activities impose a disincentive by on the regional rail network and reducing flexibility or through decisions on closure of lines (i.e. conflicts between disinvestment). franchise/lease obligations and regulatory obligations.

Stage of market The rail industry is in a relative declining The costs of heavier-handed development stage, although there are some regulation would be relatively prospects for renewal under alternative onerous in this context. road, fuel or congestion pricing scenarios, or major new mining or corridor projects.

Table 6.2 presents a corresponding assessment for the regulation of Swanson Dock and South Dynon terminals. The high-level assessment suggests that – for slightly different reasons – a light-handed form of regulation would also be warranted for those terminals.

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Table 6.2 Application of decision framework – Swanson Dock & South Dynon terminals NERA decision criteria Assessment Preliminary conclusion

The prevailing market Some degree of localised market The ARTC matrix suggests highly circumstances power and vertical integration of prescriptive regulation with respect terminal and train operations to anti-competitive behaviours but less prescriptive on pricing.

The institutional The RCA and Commission This supports the effectiveness of context guidelines provide for clear light handed regulation. enforcement and dispute resolution processes. Historical experience is . one of prescriptive regulation.

Dynamic Port Botany example suggests that Heavy-handed regulation may considerations significant investments in siding impose a disincentive to investment alignment and/or gantries may be in terminal infrastructure or contingent on development on port equipment. shuttles and the MFTN. Stage of market The rail share of port-related The costs of heavier-handed development container freight is low and appears regulation would be relatively to be declining. onerous in this context.

In summary, there is very limited market power for rail access providers on the Victorian intra-state rail networks, although there is a degree of localised market power and vertical integration with container train operations at on-dock rail terminals. The Commission’s preliminary assessment is that a light-handed form of regulation would be most appropriate for both rail infrastructure and for declared terminals.

6.3.2 Elements of a light-handed regime

This section describes some of the elements of an access regime that are typical of more light-handed regulation, although they are not necessarily present in all light-handed regimes. (a) Definition of scope

In an effective light-handed regime the scope of regulation is usually well defined. The legislation that establishes the regime identifies clearly those services provided by the infrastructure that are within the scope of the regime and therefore subject to its regulation and those services that fall outside the scope of the regime. There may be greater limitations to widening the coverage of the regime, or varying its form, through subordinate regulatory instruments. The scope of the regime may be defined in the establishing legislation itself or through declaration orders.

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(b) Prescription on operational matters

As shown in Table 4.1, rail access regimes also differ in regard to whether they include various operating rules. Some access regimes address issues such as train management and train path allocation policies, such as Western Australia (WA) and Queensland. This is especially important where the access provider is vertically integrated. The VRAR has regulatory instruments that deal with capacity allocation and real-time network management. However, in a non-vertically integrated setting, a light-handed access regime may deal with some of these issues in less detail, or may leave some of these operational matters to be dealt with under separate regulation. (c) Access undertakings

A light-handed regime is more likely to be an ex post regime, although it may have some ex ante elements. One ex ante element that may be present in a light- handed regime is an access undertaking, although an undertaking is more likely to be voluntary in a light-handed regime, rather than being a mandatory requirement.

In the alternative, the regime may permit the regulator to require nominated access providers to provide access undertakings to the regulator for approval. An access provider may be nominated in this way because it has a certain level of market power or because it is a vertically integrated entity that both provides and acquires the infrastructure services. The regulator may take the view that the requirements of competition and efficiency are such that the access provider should be obliged to submit an access undertaking to the regulator for approval. (d) Ex post price regulation

A common feature of light-handed regimes is that the regulator does not have responsibility for pre-approving reference tariffs. In other words, access providers are not required to obtain the regulator's prior approval to the prices they charge for access to the access provider's infrastructure.

The role of the regulator in a light-handed regime is typically to resolve access disputes if they arise. For example, the South Australian, Tarcoola-Darwin, Western Australian and New South Wales rail access frameworks are all of this form. In each of these regimes, the regulator has the power to determine access prices in the context of resolving disputes over access prices.

A light-handed regime may also include some price monitoring or transparency requirements. The regulator may 'track' prices, profits and service quality and to ensure that pricing is transparent. If the tracking shows a need for greater intervention by the regulator, then the regulator may have the power to exercise more direct price control.

As an example, the Economic Regulatory Authority in WA carries out the following ‘tracking’ roles:121

121 http://www.era.wa.gov.au/3/198/48/role_of_the_era.pm

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• providing advice, on request, to access seekers that the price offered is consistent with access prices charged to the railway owner or its associates • maintaining a public register of access agreements (although the access agreements themselves are not public) • obtaining information and documents from the railway owners and releasing information that will benefit negotiations (other than commercially confidential information), if appropriate. (e) Pricing Principles

In most cases in light-handed frameworks there is some level of price guidance issued by the regulator, for example in terms of high-level pricing principles that guide access providers when calculating prices for access. For example, in the SA, WA and NSW regimes the pricing principles require that negotiated access prices must be between a ceiling (stand alone cost) and a floor (short-run marginal cost). The regulator may also have a role in determining asset valuations or other parameters to be used for calculating the ceiling price (e.g. WA and NSW).

In a negotiate/arbitrate regime the regulator is bound by the pricing principles when determining access disputes relating to prices. In a price monitoring framework the regulator may ‘track’ whether these pricing principles are being complied with. This form of compliance monitoring is also common in negotiate/arbitrate regimes.122 IPART conducts a formal annual review of compliance with the pricing principles.123 (f) Dispute resolution

A dispute resolution regime is a fundamental part of a light-handed regulatory access regime, particularly if the regime is to be certified as an effective State- based access regime for the purposes of Part IIIA of the TPA. Clause 6(4)(g) of the CPA requires a State-based access regime to include an independent arbitration mechanism. Price monitoring alone is not considered by the NCC as effective unless it includes a mechanism for resolving access disputes.124

Many light-handed rail regimes adopt a negotiate/arbitrate model for dealing with requests for access, and the regulator usually fulfils the role of the independent arbitrator of disputes. However, some regimes also include processes for the appointment of other independent arbitrators (e.g. SA and WA).125

A dispute resolution mechanism in a light-handed regime can require the arbitrator to resolve access disputes, such as:

122 For example, see: Essential Services Commission of South Australia (2008) ‘Rail Industry (Tarcoola-Darwin) Guideline No. 2: Arbitrator Pricing Requirements’, section 1.2, p.1. 123 IPART (2006) ‘NSW Rail Access Undertaking Annual Review of Compliance: IPART Guidelines’, November. 124 National Competition Council (March 2004), ‘Submission in response to Productivity Commission’s draft report on the review of the National Gas Access Regime’, p.13. 125 For SA see: Essential Services Commission of South Australia (2008) ‘Information Kit 2.1: South Australian Rail Access Regime’, p.8; and for WA see: http://www.era.wa.gov.au/3/198/48/role_of_the_era.pm

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• disputes over the terms and conditions of access including access prices • whether the access provider has made reasonable endeavours to provide access or has hindered access, or • whether the access provider has complied with other statutory obligations.

The regulator may in some circumstances have the discretion not to hear or determine certain types of disputes, for example, vexatious or trivial disputes, and in some cases, if no prima facie case that market power has been misused. To illustrate, under the Victorian shipping channel access regime, the Commission can, under s.60(8)(b) of the Port Services Act 1995 (Vic), refuse to make a determination: • if it is satisfied that the access provider has complied with its statutory obligations • if it is satisfied that the terms and conditions of access being offered do not constitute a taking advantage of a substantial degree of market power, or • having regard to its statutory objectives.

As another example, the Australian Energy Regulator (AER) also has the discretion to decline to determine a dispute where there is an access agreement in place between the access provider and the user, and the dispute concerns an issue the subject of the access agreement, such as the access prices already agreed between the parties (section 186 of the National Gas Law, a schedule to the National Gas (South Australia) Act 2008 (SA)). (g) Access provider obligations and enforcement

Most light-handed access regimes impose an obligation on access providers not to hinder or prevent access to the access provider's infrastructure or to do anything that has the effect of hindering or preventing access. Most light-handed access regimes also require access providers to provide requisite information to access seekers and use reasonable endeavours to accommodate the access seeker or negotiate in good faith. The regulator usually has the power to enforce these obligations by seeking a civil penalty or other order against the access provider for infringement.

Light-handed access regimes often impose additional obligations on access providers. These include minimum requirements regarding negotiation processes, treatment of confidential access seeker information, provision of accounts to the regulator and ring fencing. The SA rail regime requires access providers to establish and adhere to a Compliance System. They must provide an annual compliance report to the regulator, and the latter may undertake ad hoc audits of compliance systems at any time.126 The WA regime includes ring fencing of the railway owners.

The VRAR can require access providers to comply with the ring fencing rules (although at present none is subject to this requirement), account keeping rules,

126 Essential Services Commission of South Australia (2008) ‘Information Kit 2.1: South Australian Rail Access Regime’, chapter 6.

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negotiation guidelines and provisions of the RCA relating to the treatment of confidential information. The latter requires access providers and access seekers to keep certain information confidential and to use that information only for access- related purposes. Access providers must also have an approved business system for managing confidential information. While these obligations support the VRAR, they are not all necessarily essential parts of the access regime. (h) Overall simplicity

It is desirable that a light-handed rail access regime should be kept relatively simple in order to reduce the risk that specific aspects of the regime may be impediments to certification under Part IIIA of the TPA. However, a simplified regime must still meet the minimum requirements of the Clause 6 principles set out in Section 2.2.2. These include well specified negotiation and dispute regulation frameworks and credible enforcement mechanisms.

6.4 Choosing a preferred form of light-handed regulation

The previous section described the main features of light handed regulation regimes. This section assesses which aspects are to be considered most relevant in the Victorian context having regard to the principles set out in section 6.1. It concludes with the draft recommendations on the preferred form of regulation.

6.4.1 Assessment of light-handed options Preference for market solutions

The CIRA requires that in the first instance access terms and conditions should be determined if possible by negotiation. This suggests that ex post regulation is generally to be preferred. Since, as discussed above, all effective access regimes must have an enforceable dispute resolution mechanism, this suggests that the minimum regulatory response is a negotiate/arbitrate model. Price monitoring alone would not be regarded by the NCC as effective.

However, the national access framework also permits access providers to submit voluntary access undertakings for approval, even after a service has been declared. The effect of the latter is to replace the default negotiate/arbitrate framework with a voluntary undertaking. This ability was introduced in 2006, when it was explained as a measure

to enhance the incentives for commercial negotiation between access providers and access seekers. … Post-declaration undertakings will reduce the need to determine terms and conditions of access through arbitration procedures. This will improve certainty for service providers and access seekers and will facilitate commercial negotiations between them.127

127 House of Representatives, Trade Practices Amendment (National Access Regime) Bill 2005: Second Reading Speech, 8 February 2006.

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Therefore, it is also consistent with the CIRA principle of facilitating commercial negotiation to permit rail access providers to submit a voluntary access undertaking. Proportionality & promotion and protection of competition In section 6.2, the preliminary analysis suggested that a light-handed regulatory framework representing a minimal regulatory response is to be regarded as the most appropriate to the circumstances of the Victorian rail industry at the present time. However, there are circumstances where a rail access provider may acquire greater market power, for example, the development of a mineral deposit may result in a ‘heavy haul’ rail task, where rail has a considerable advantage over road transport. There is currently a feasibility study being undertaken into development of a major coal deposit at Oaklands, on the Victorian rail network.128 As another example, an intra-state rail line could become part of a longer rail freight corridor. In short, there are possible circumstances where a Victorian rail line could become a ‘major corridor’. The CIRA indicates that the appropriate regulatory framework for a ‘major corridor’ is the ARTC undertaking model. For the present purposes a ‘major corridor’ can be defined as one carrying: • long distance containerised freight trains, and • a significant ‘heavy haul’ task, such as coal or iron ore trains. Consistency The Victorian rail network is most closely comparable to regional NSW (but excluding the Hunter Valley coal network), SA, and the south western part of WA which is covered by the WA access regime. The access regimes applying to these networks are all negotiate/arbitrate frameworks. Although there are differences between them, there are also broad similarities. Therefore, consistency with other jurisdictions most relevant to Victoria would suggest that the negotiate/arbitrate model should be used in Victoria. On the other hand, the ‘major corridors’ such as the ARTC interstate track and the Queensland and Hunter Valley NSW coal networks, all have similar undertaking frameworks (with the Queensland undertaking having additional ring fencing requirements due to the vertical integration of QR). This suggests that if any Victorian rail lines were to become ‘major corridors’ a similar access model should apply – that is, a mandatory undertaking similar to ARTC’s. Balancing short and long term benefits to consumers The rail industry in Victoria is currently facing significant change from two directions:

128 Coal Mining 21 May 2009, ‘Coalworks is confident about Oaklands coal project’. Note: The base case is for mining 3 million tonnes of thermal coal per annum via open pit at Oaklands increasing to 6 million tonnes per annum. http://www.miningcoal.com.au/article/coalworks-is-confident-about-oaklands-coal- project/482273.aspx

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• firstly, considerable weakening of its traditional freight-customer base associated with lack of competitiveness against road transport, and • secondly, strong policy directions promoting short-haul urban container port shuttles. Both these circumstances demand large improvements in rail industry efficiency if it is to be viable in the longer term. The key implication for regulation is that it will need to be flexible and enable industry participants to be adaptable. It should also strongly support, while not being an impediment to, efficiency improvement. The ex post regulatory role under the negotiate/arbitrate model is likely to be relatively more flexible than the alternative options because the regulator is primarily called upon to deal with circumstances that are current at the time of regulatory decision making, and does not rely so heavily on forecasts of market conditions over a regulatory period. It is relatively less likely to impose inefficient constraints where it imposes less ex ante constraints to market conduct overall. These considerations suggest that a mandatory undertaking is likely to be less consistent with the long-term interests of consumers than a negotiate/arbitrate regime. They also highlight the importance of a regular review of the regime.

6.4.2 Preliminary conclusion on the form of regulation

The foregoing section concluded that a light-handed rail access regime, if based on a negotiate/arbitrate model and containing some of the elements of the current ARTC access regime, would appear to be a reasonable and satisfactory alternative to the current VRAR.

Such a regime could have a two-tier system of regulation:

(a) The first tier could establish a basic access regime that would apply to all rail infrastructure, rail transport services and basic terminal services declared by the Governor-In-Council to be subject to the access regime. The regime would adopt an ex post regulatory framework. Access providers and access seekers would be free to negotiate terms of access. If access providers and access seekers were unable to agree on terms and conditions of access, they would be able to refer their dispute to the Commission for a dispute resolution determination. Access providers would be entitled to, but not required to, maintain an access undertaking approved by the Commission.

(b) The second tier could apply to rail corridors, rail infrastructure, rail services or terminal services declared to be national ‘major corridors’. In addition to the elements of the basic regime, affected access providers would be required to maintain an approved access undertaking. The Commission could have the discretion to require affected access providers to provide indicative pricing in their access undertaking or even standing offer prices. The form of the undertaking should be similar to the ARTC undertaking.

For the avoidance of doubt, if the access provider was ARTC, then it would be able to satisfy the mandatory access undertaking requirement by submitting the undertaking to the ACCC instead of the Commission.

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Draft recommendation 6.1 The VRAR provide a two tier system of regulation for declared rail transport services:

(a) the first tier should apply to all declared rail transport services except those provided on ‘major corridors’, and:

o the default form of regulation should be a negotiate/arbitrate framework

o access providers would be entitled to submit a voluntary access undertaking for approval by the Commission.

6.5 Overview of how it may work

This section examines how a light-handed rail access regime may be formulated in Victoria having regard to the existing VRAR and the requirements for certification. It considers issues such as: • defining the scope of the regime • the extent of prescription on operational matters • the role of access undertakings • the negotiation framework • pricing principles • the framework for resolving access disputes • access provider obligations and enforcement • regular reviews • appropriate treatment of interstate issues, and • overall simplicity and effectiveness.

6.5.1 Defining the scope of the regime How would the two tiers be determined?

Given the two-tiered model contemplated in this Draft Report for the Victorian rail access regime, the model would require the Governor-in-Council to declare the basic rail infrastructure and services to be subject to the regime. The Commission’s

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preliminary view is that all of the initial declared rail transport services would fall under the first tier negotiate/arbitrate framework.

However, if circumstances changed and the Commission believed that a declared rail transport service had become a ‘major freight corridor’ (as defined in Draft Recommendation 6.1) then there may be merit in the Commission having the discretion to determine whether it was a ‘major freight corridor’ and whether a mandatory undertaking should apply. The exercise of this discretion would be subject to conducting a public consultation process.

Draft recommendation 6.2

Initially, none of the facilities proposed to be declared represent ‘major corridors’ for the purposes of Draft recommendation 6.1(b).

Before exercising this discretion, the Commission should be required to conduct a public consultation on the question. What terminal services should be covered by the regime?

The range of terminal services provided in Victoria can be divided into three categories. The first category includes train control functions, including train movements, within a terminal. The second category of services includes lifting services at the terminal and temporary container storage, which are necessary parts of using the terminal. The third category, covers ancillary services such as shunting, wagon maintenance and storage, which a user may not necessarily need to use when acquiring other terminal services.

Under a light-handed rail access regime, terminal services in the first two categories would necessarily be subject to the regime if the terminal were to be declared. Services in the third category could be made subject to the regime on a case-by-case basis if so declared or determined, having regard to the configuration and business model of the terminal, or whether such services are provided exclusively by one party.

There may be merit in the Commission having the discretion to determine whether ancillary services should be included under the regime. The exercise of this discretion would be subject to conducting a public consultation process on the question.

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Draft recommendation 6.3

There are some shortcomings with the current declaration orders because the infrastructure from which rail transport services are provided is defined in terms of leases held by specific railway track managers which can change. There is a risk that the services may no longer be declared if the parties to a lease change, or the name of a lease changes, or some of the tracks that are subject to a lease change. Since the introduction of the VRAR, all of these circumstances have occurred.

This has led to uncertainty over whether some services remain covered under the VRAR. For example, some rail infrastructure has passed out of V/Line’s Regional Infrastructure Lease into leases held by ARTC. Some of these lines have not yet been incorporated in ARTC’s interstate access undertaking with the ACCC, and for those lines, no access regime is currently in place.

This situation gives rise to considerable uncertainty because there are no requirements obliging ARTC to include the transferred tracks into its interstate access undertaking. The Commission’s preliminary view is that the uncovered lines held by ARTC should continue to be included in the VRAR until such time as ARTC includes them in an undertaking with the ACCC, at which time they should automatically be excluded from the VRAR.

A second shortcoming is the ability of the Minister to apply the VRAR to a wide range of rail infrastructure and rail transport services that are not covered by other access regimes, such as tram tracks, rolling stock or infrastructure maintenance services. This gives rise to a potential inconsistency with other rail access regimes. Furthermore, some of these services may not meet the coverage criteria in the CPA. This could give rise to difficulties in the certification process, because the NCC would need to have regard to this risk when considering its compliance with the CPA.

To remedy this: • The VRAR could be amended so that certain ‘associated infrastructure’ and non-core access services are excluded from the access regime. • The criteria for declaring rail transport services to be 'declared rail transport services' under the RCA should be amended to reflect more closely the criteria set out in the CPA and the TPA for declaring services to be subject to an access regime.

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Draft recommendation 6.4

Intra-state rail lines transferred to ARTC should remain covered by the VRAR until such time as they are included in an undertaking approved by the ACCC.

The types of services potentially covered by the regime should be more tightly defined so that it cannot be applied, for example, to tram tracks or to rolling stock.

6.5.2 Regulation of operational matters

Under the current VRAR, the Commission is required129 to develop and publish a number of Commission Instruments, such as those dealing with negotiation processes, provision of information to the Commission and ring fencing. These are discussed in more details below (section 6.5.4). Others govern the access provider's allocation of capacity and the management of its rail network – the capacity use rules and network management rules. Access providers are required to comply with these rules and to establish • protocols for train path allocation procedures and reallocation of unused paths, and • an Operating Handbook encompassing protocols for train control activities, short-term scheduling and planning, managing operational conflicts, dealing with network blockages and emergencies, possessions, communications, safe working systems and rolling stock interface standards.

Some of the other light-handed access regimes applying to comparable rail networks, such as in NSW and SA, do not include network management functions in the access regime itself. On the other hand, the WA regime is an example of a light-handed regime which has such requirements. WestNet Rail is required to have have its Train Management Guidelines and a Statement of Train Path Policy approved by the regulator. WestNet is vertically-integrated because it is a wholly- owned subsidiary of Australian Railroad Group Pty Ltd (ARG). The ARTC undertaking establishes broad network management principles for the interstate network, although it is not vertically integrated.

The NCC has said on this subject:

The resolution of capacity issues is a critical matter in the negotiation of access to services. In rail, for example, capacity issues are more closely linked to train path allocation (that is, the

129 RCA, Part 2A, Division 2.

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timetabling and the use of various sections of the track) and network management principles. Access seekers need to negotiate a suitable train path, day-to-day network management and mechanisms for reallocating unused train paths. Transparent mechanisms that are open to independent scrutiny are needed to assure market participants that capacity issues are resolved in a manner that promotes competitive outcomes. Such an approach is especially important if the access provider also operates a vertically affiliated entity.130

The broader issues regarding network management and capacity allocation are discussed in detail in chapter 8, which addresses the concept of a ‘one-stop-shop’ for rail access to be responsible for dealing with applications for access to the Victorian rail network and certain terminals, allocating capacity and undertaking some network management functions.

However, in the absence of rail infrastructure providers having vertically affiliated freight operations, the successful administration of the Victorian rail access regime arguably does not require the capacity use rules and the network management rules to form part of the access regime itself.

Instead the RCA may simply require access providers to maintain such protocols that meet certain statutory requirements, but these need not be subject to approval by the Commission. The Commission would then retain the power to satisfy itself that the obligations have been met.

The key obligations of access providers remain relevant, namely: • prohibition of the access provider unreasonably favouring itself or another person over any other person when carrying our either a relevant capacity allocation activity or relevant network management activity131 • requirement to maintain and publish protocols for train path allocation and reallocation of unused paths which:

o requires a user (including any affiliate of the access provider) to surrender unutilised or under-utilised train paths allocated to them132 (i.e. the ‘use it or lose it’ principle)

o establishes rules for managing conflicts with respect to freight train paths

o is consistent with the principle of passenger priority • to maintain and publish an Operating Handbook encompassing protocols for train control activities, short-term scheduling and planning, managing operational conflicts, dealing with network blockages and emergencies, possessions, communications, safe working systems and rolling stock interface standards.

130 NCC (May 2009), p.36. 131 See s.38T(4)(b) & s.38U(3)(b) of the RCA. 132 See s.38T(2)(b) of the RCA.

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Further consideration would need to be given to these issues if the Government were to adopt the proposal for a one-stop-shop for rail access in Victoria. This is because the one-stop-shop proposal contemplates that a single entity would be responsible for dealing with applications for access to the Victorian rail networks and certain terminals. Its roles would include allocating capacity and undertaking some network management functions. Because it would be allocating train movements to different rail networks and terminals, this would mean an additional dimension of issues in relation to non-discrimination – in this case as between different managers of rail and terminal infrastructure – who in some cases may be vertically affiliated with above-rail operators (e.g. terminal managers). In these circumstances, the capacity use rules and the network management rules are likely to be more important, as they would establish the parameters within which the one- stop-shop would be required to operate when allocating network capacity and managing the network on a day-to-day basis. A requirement for the Commission to approve protocols for capacity allocation and train management may be appropriate in those circumstances. However, this need not form part of the access regime. It might form part of the specific governance arrangements for the one- stop-shop.

Draft recommendation 6.5 The existing requirement that the Commission make Capacity Use Rules and Network Management Rules be replaced by high level statutory obligations on the access provider to: • transparently establish protocols for capacity allocation and network management (retaining the ‘use it or lose it’ principle), and • not to discriminate between users when carrying out those activities. If the one-stop-shop concept were adopted by Government then it may be appropriate for the Commission to approve protocols for capacity allocation and train management in those circumstances. However, this need not form part of the access regime.

6.5.3 Access undertakings

Under the ‘first tier’ form of regulation, the negotiate/arbitrate model permits access providers to set their own prices and adopt their preferred method for calculating prices subject to the pricing principles (see section 6.5.5). The regulator’s role in relation to prices only arises in the context of resolving access disputes or if an access provider submits a voluntary access undertaking for approval. Voluntary access undertakings

Some light-handed access regimes, such as the channel access regime, allow access providers to submit a voluntary access undertaking to the regulator for approval. Although access providers are often required to include pricing terms and conditions in their voluntary access undertakings which must be approved by the regulator (e.g. the ARTC interstate undertaking), in some cases the prices in a voluntary undertaking may not be subject to approval by the regulator. Instead, all

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prices remain subject to the dispute resolution process contained in the undertaking.

For example, in its recent approval process of grain handling undertakings process the ACCC said of its approach:

Given the circumstances in which GrainCorp has submitted its proposed Undertaking, the ACCC is of the view that a prescriptive regulatory approach including ex ante price setting is not warranted, and that a less prescriptive publish-negotiate-arbitrate approach is appropriate133.

As another example, under the 'light regulation' gas access regime, access providers who submit a voluntary access undertaking to the AER for approval are not required to include price terms and conditions. Once approved though, the access provider is required to comply with that access undertaking. The NCC has described the ‘light regulation’ model under the National Gas Law as employing:

regulatory methods that do not control prices directly, but emphasise commercial negotiation and information transparency, with regulatory intervention through the right to the arbitration of disputes, being retained as a default.

...

Light regulation may provide timelier and lesser cost outcomes than full regulation. Where negotiations are successful light regulation is likely to result in reduced front end costs and delay. However, if a negotiation is unsuccessful additional time will be required in order to resolve an access issue and back end costs are likely to be higher.

In some cases, an access provider may prefer that the regulator approve prices in a voluntary undertaking to reduce the risks of costs at a later date arising from dispute resolution processes over prices.

For this reason, it may be of practical benefit, where an access provider has submitted a voluntary proposed access undertaking for approval, for the access provider to apply and for the Commission to have the scope to elect to either approve indicative reference prices included in the access undertaking (and thereby bound by that approval in any future access dispute), or to adopt the “publish/arbitrate/negotiate” approach under which the reference prices would not be approved ex ante, but instead be subject to the dispute resolution process.

Once an access undertaking is approved by the Commission it should be binding on an arbitrator of an access dispute in the same way as s.38ZZD of the RCA currently requires that the Commission must not make a dispute resolution decision that is inconsistent with a binding access arrangement.

133 ACCC (2009) GrainCorp Operations Limited, Port Terminal Access Undertaking, Further Draft, p.99.

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Given this, there are principles established in the CPA that must be taken into account by an arbitrator of an access dispute (namely clauses 6(4)(i) and (j)), which by implication are also relevant principles for the Commission when approving a voluntary access undertaking. This requirement is already met by s.38ZI of the RCA.

In the Commission’s view the following requirements are appropriate for voluntary access undertakings (in addition to, or in place of, requirements in s.38X of the RCA): • the form of the undertaking should be similar to the ARTC access undertaking to facilitate the objective of national consistency • it must include indicative terms and conditions of access to reference services but need not specify standing offer terms and conditions (consistent with the ARTC undertaking), and • it should have a nominated expiry date between three and ten years (the latter being the term of ARTC’s interstate undertaking).

Once approved by the Commission, the access providers would be required to comply with their access undertakings for the duration of the term. The Commission should be able to revoke a voluntary access undertaking if it finds that the access provider has not complied with it. Mandatory access undertakings

Where a declared facility meets the definition of a ‘major corridor’ and the Commission adopts the ‘second tier’ form of regulation, the Commission would require the relevant access provider to submit an access undertaking for approval in respect of those lines or services. As stated, the access undertaking should be similar to the ARTC undertaking, which contains indicative prices and other terms and conditions of access to reference services. These terms and conditions would be subject to the Commission’s approval.

Under Queensland's rail access regime, for example, the Queensland Competition Authority can require access providers to maintain an access undertaking approved by the Authority. The Authority can impose such a requirement on access providers where the Authority considers that an access provider has market power in the relevant market for rail transport services, and that there is a net benefit in requiring that access provider to maintain an access undertaking. The access undertaking must set out general terms and conditions for the negotiation of access arrangements and contains reference tariffs for certain rail transport services.

Where an access undertaking is mandatory, the principle of consistency with the ARTC undertaking suggests that the Commission should not have the ability to adopt the “publish/arbitrate/negotiate” approach under which the reference prices would not be approved ex ante.

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Draft recommendation 6.6 For either a voluntary and mandatory access undertaking, the undertaking should (in addition to, or in place of, requirements in s.38X of the RCA): • have a form similar to the ARTC access undertaking • include indicative terms and conditions of access to reference services, and • have a nominated expiry date between three and ten years. The Commission will consider on application whether it will accept a voluntary undertaking based on the “publish/arbitrate/negotiate” approach (whereby reference prices are not approved ex ante, but remain subject to the dispute resolution process).

6.5.4 Negotiation frameworks

A fundamental requirement of access regimes is that the form of regulation be proportionate to the overall balance of bargaining power and information asymmetry, such that there is a reasonable expectation that access seekers will be able to obtain access on fair and reasonable terms under the regime. The NCC considers that commercial negotiation provides:

a cornerstone in determining access outcomes. Commercial negotiation allows parties to reach mutually beneficial agreements.134

To support the effectiveness of negotiation, an effective access regime should: • require the access provider to use reasonable endeavours to accommodate the requirements of an access seeker • provide appropriate price guidance – e.g. pricing principles or methodologies (discussed in section 6.5.5 below) • establish a process whereby relevant information will be provided by an access provider to an access seeker to permit informed decisions135 • appropriately deal with interoperability issues and interconnection • provide incentives for improving service quality, including the publication of performance indicators • require separate accounts for access activities and, where relevant, ring fencing • ensure protection of the confidential information of the access seeker • prohibit the owner or another user hindering of access to a service by a user • provide for enforceability of access rights, and

134 NCC (May 2009), p.31 135 NCC (May 2009), p.39

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• ensure regulatory intervention promotes commercial outcomes and is administered by an independent economic regulator with transparent regulatory processes. Reasonable endeavours

The VRAR ensures access providers use reasonable endeavours to accommodate an access seeker in the following ways: • The RCA prohibits an access provider from engaging in conduct that hinders or prevents an access seeker from entering into an access agreement (s.38ZZS). • The Negotiation Guidelines require that access providers and access seekers act in good faith when following the procedures in the Guidelines. • The Capacity Use Rules require an access provider to use all reasonable endeavours to allocate to an access seeker any train path requested by the access seeker in an access application (clause 2(b)). • The Negotiation Guidelines establish explicit negotiation processes that require the access provider to respond to access requests within specified periods, and establish a negotiation protocol establishing reasonable time periods within which negotiation should be conducted, and alternative dispute resolution processes if the parties are unable to agree, among other things.

However, the Negotiation Guidelines only have effect in the context of establishing access arrangements.136 The access provider does not have an ongoing responsibility to comply with the Negotiation Guidelines.137 This is because the processes in the Negotiation Guidelines should be reflected in a binding access arrangement. Under Draft Recommendation 6.1, the requirement for access providers to have a binding access arrangement would no longer apply. Therefore, unless compliance with the Negotiation Guidelines was an obligation of access providers, the reasonable endeavours obligations would be significantly weakened.

In the Commission’s view, this is a sufficient reason for the Negotiation Guidelines to be retained in the VRAR, and for compliance with the Negotiation Guidelines to be included as an explicit obligation of an access provider.

Under Draft Recommendation 6.5, the Capacity Use Rules would be replaced by certain access provider obligations. In order to maintain the ‘reasonable endeavours’ obligations, if Draft Recommendation 6.5 is adopted, the RCA should expressly include an obligation for access providers to use all reasonable endeavours to accommodate an access seeker’s application for a train path.

136 See s.38ZF(2)(b)(v), s.38ZO(3)(e) and s.38ZP(3)(e). 137 See RCA Part 2A, Division 6 (Access Provider Obligations).

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Draft recommendation 6.7 The Negotiation Guidelines should be retained and the VRAR should require: • compliance with the Negotiation Guidelines as an ongoing obligation of access providers • access provider to use all reasonable endeavours to allocate to an access seeker any train path requested by the access seeker in an access application. Transparency, interoperability and reasonable endeavours

Information provision, transparency requirements, interoperability and interconnection are all addressed in the Negotiation Guidelines.

However, the Negotiation Guidelines do not include a requirement to publish performance measures, such as entry and exit times, track quality and speed restrictions, as suggested by the NCC.138 At present the access arrangements contain requirements to publish performance measures, but if the obligation to maintain access arrangements is removed then there would be no remaining obligation of this kind.

The Commission’s preliminary view is that the publication of performance indicators is an important element in enabling access seekers to be informed about the quality of services provided and therefore support effective commercial negotiation, transparency and efficient planning and resource utilisation in the rail industry more generally.

Draft recommendation 6.8

The Negotiation Guidelines should be amended to include a requirement for access providers to publish appropriate performance indicators. The Guidelines should specify those indicators.

Account keeping and ring fencing

Account keeping and ring fencing provisions are useful to include in a light-handed rail access regime. Account keeping and ring fencing provisions appear in the national gas pipeline access regime, but in a much abbreviated form.

There is scope to have more abbreviated provisions in the Act in relation to Account Keeping. The Victorian grain handling regime, for example, includes a short provision requiring access providers to maintain certain financial and accounting records and to provide them to the Commission on demand. This could be supplemented by a Guideline issued by the Commission should the need arise to expand upon the principles contained in the Act. This may have the benefit of

138 NCC (May 2009), p.37.

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being less prescriptive concerning the Commission’s formulation of the account keeping requirements.

Given that there is currently little vertical integration in the Victorian rail industry, the Ring Fencing Rules are not applied to any access providers. The regime could include a statutory requirement for access providers to maintain separate accounting records for access activities, and provide the ability for the Commission to make Ring Fencing Rules, but need not make those rules mandatory.

Draft recommendation 6.9

The current requirement for the Commission to issue Account Keeping Rules and Ring Fencing Rules should be replaced by:

• statutory obligations for access providers to maintain separate accounting records for access activities • to provide financial records to the Commission on demand, and • an ability for the Commission to make record keeping guidelines (including specifying appropriate cost allocation principles) or Ring Fencing Rules if it considers them to be needed.

Confidential information

The VRAR contains clear principles governing the protection of confidential access seeker and access provider information. An access provider must not: (a) use information given to them by an access seeker or a user in confidence other than solely for a relevant purpose (b) disclose information given to them by an access seeker or a user in confidence without the written consent of the access seeker or the user (c) submit for approval of the Commission a system and business rules for handling confidential information, and (d) maintain the system and business rules as approved.

Obligations (a) and (b) also apply to access seekers with respect to access provider information.

These obligations are appropriate. However, an alternative that may be sufficient would be to: • replace obligation (d) with an obligation to maintain a system and business rules for handling confidential information which is fit for its purpose, and • replace obligation (c) with an ability for the Commission to audit the system and business rules for handling confidential information, and the access provider’s compliance with it, at any time.

This alternative may be more suited to the ex post regulatory principle that is employed in the Commission’s recommended form of access regulation.

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Draft recommendation 6.10

Hindering of access

Access regimes generally impose an obligation on access providers and users not to engage in conduct with the purpose of, or that has the effect of, preventing or hindering access by another person to the access provider's services. The VRAR prohibits an access provider hindering access by an access seeker to a declared rail transport service, or hindering an existing user from using a declared rail transport service it is entitled to, or hindering interconnection.139 Although the VRAR does not include a prohibition on a user hindering access by another user, the Commission’s preliminary view is that the ‘use it or lose it’ principle in the Capacity User Rules, retained under Draft Recommendation 6.5, adequately addresses this requirement.

If a light-handed rail access regime were implemented in Victoria, it should retain the access provider obligation not to prevent or hinder access, as required in an effective State-based access regime. Enforcement

The effectiveness of the access rights will depend importantly on the enforceability of those rights. The NCC requires that an access regime must have credible enforcement mechanisms, such as through arbitration or regulation. For some types of breaches, such as hindering or obstructing the regulator, there should be an effective penalty regime and ability to seek an injunction against the action.

The enforcement regime in the RCA includes: • an access seeker or a user may seek arbitration by the Commission of an alleged non-compliance by an access provider with its obligations, including hindering access, not complying with the pricing principles or negotiation guidelines or an approved access arrangement • a party may bring civil proceedings against another party in regard to non- compliance with the statutory provisions of the VRAR, and • in regard to a penalty provision, the Commission may apply to the Supreme Court for an penalty order and/or an injunction or declaratory relief directing the party to cease the contravention, remedy it or prevent its reoccurrence.

139 s38ZZS of the RCA.

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If an access dispute decision of the Commission is not complied with, a party to the dispute can apply to the Supreme Court to enforce the decision and compensate the applicant for damages.

The VRAR therefore provides for adequate enforceability of access rights.

The enforceability of the access regime is supported by the ability of the regulator to monitor compliance with the regime. For example, if there is a voluntary access undertaking in place, the Commission should be able to monitor compliance by an access provider with its undertaking. This will require a suitable level of transparency as well as adequate information gathering powers (as discussed above).

6.5.5 Pricing Principles

At present the VRAR contains an ex ante pricing regime. The Pricing Order establishes Pricing Principles and the Commission has published a Rail Access Pricing Guideline consistent with those principles. These together establish the basis on which access providers may calculate the access prices established in an approved access arrangement.

The pricing principles were described in section 2.2.4. The Pricing Order includes general pricing principles, a revenue cap, freight and passenger cost allocation principles and floor-ceiling pricing principles (limited in their application to terminal services and non-reference services).

Like the Negotiation Guidelines, the Pricing Order only has effect through the access arrangement approval process. Compliance with the pricing Order is not an ongoing obligation of an access provider under Part 2A, Division 6 of the RCA (Access provider Obligations).

The RCA also establishes a ‘non-discriminatory’ pricing rule – an obligation for access providers not to calculate prices differently for different access seekers if the services are the same (s.38ZZY). This obligation applies at all times.

The usefulness of many of the elements of the Pricing Order can be questioned for the following reasons: • Since the Pricing Order was made, the ESC Act has been amended and now contains a set of pricing principles that the Commission must apply in respect of any dispute resolution decision. These principles are broadly similar to the general pricing principles in the Pricing Order. Retaining both sets of similar but slightly different principles provides confusing guidance to access providers and to the Commission in its dispute resolution role. • Although the Pricing Order specifies a revenue cap, none of the access providers under the VRAR has yet come close to meeting or exceeding the revenue cap. Although rail access regimes in comparable networks in NSW and WA both have revenue cap mechanisms, the experience with the VRAR to date indicates that it would not be necessary in a light-handed regulatory regime.

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However, the following aspects of the Pricing Order should be retained within the VRAR: • the principle established for allocating costs between passenger and freight services.140 Retaining this principle would provide for greater consistency over time in pricing and avoid unnecessary uncertainty over the fundamental principles relevant to freight access pricing, and • the floor-ceiling pricing principles that currently apply to only selected services. 141 These are fundamental principles of economically efficient pricing. Since economic efficiency is an objective of the access regime, this principle should be applied to all declared services. This would provide for greater consistency with negotiate/arbitrate access regime in other States such as SA, WA and NSW. The floor price should be adjusted if there are Government contributions.

Under a light handed regulatory regime the pricing principles should apply as ongoing access provider obligations, rather than only taking effect in the course of establishing an access arrangement.

Draft recommendation 6.11

The following pricing principles should apply:

• The prohibition of different pricing between access seekers if the service provided is the same should be retained. • The general access pricing principles in s.35C of the ESC Act should apply. • The principles of allocating costs between passenger and freight services should be retained. • The principle of floor-ceiling price limits should be applied to all declared rail transport services. The floor price should be adjusted if there are Government contributions. The pricing principles should apply as ongoing access provider obligations. The remaining elements of the Pricing Order should not be retained.

140 The costs allocated to passenger services are: (i) those reasonably expected efficient costs directly attributable to the operation of passenger trains, … and (ii) a share of the reasonably expected costs of providing declared rail transport services to users of passenger services not directly attributable to passenger services or freight services, proportionate to the use of the rail infrastructure for passenger services and freight services (Pricing Order clause 4.3(a)). 141 The floor-ceiling pricing principles require that the price for a service should (a) at least cover the directly attributable or incremental costs of providing the service, and (b) not recover more than the stand alone costs of providing that service (Pricing Order clause 4.5).

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6.5.6 Access disputes

A dispute resolution framework within an access regime is a fall-back arrangements that the parties can rely on if they are unable to successfully negotiate a commercial agreement or if they are unable to agree on a commercial arbitrator. A mechanism for resolving access disputes is a vital part of a light- handed access regime and would form a significant part of the proposed framework.

The dispute resolution procedures and processes are thoroughly documented in the Commission’s ‘Rail Access Dispute Resolution Guideline’. Broadly speaking, they provide a sound and effective basis for resolving access disputes. However, the following discussion examines whether it meets all of the requirements of the CPA.

Some of the important aspects of a dispute resolution framework relevant to an assessment by the NCC of its effectiveness include: • the independence of the arbitrator • the procedural powers of the arbitrator and procedural fairness • the principles guiding decision making by the arbitrator • the appropriateness of any constraints on the arbitrator or any discretions not to hear certain types of disputes, and • the enforceability of decisions. Independence

A regulator may be the arbitrator, but the NCC considers that if this is the case there should be: • ring fencing of the regulator’s regulatory and arbitration functions • established processes and procedures that the regulator can follow in conducting arbitrations separately from regulatory functions • an option for parties to a dispute to require the regulator to appoint an arbitrator who has not been substantially involved in regulation of either party, and • an independent administrative appeals process.

While the VRAR provides for an independent appeals process142, it does not at present provide parties to an access dispute with an option to require the Commission to appoint another arbitrator. This appears to be a shortcoming that could potentially impair its effectiveness.

The Rail Access Dispute Resolution Guideline establishes a process for conducting arbitrations, but could usefully be amended to include procedures for ring fencing of the Commission’s arbitration functions from its regulatory functions.

142 RCA, s.38ZZQ.

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Procedural powers and procedural fairness

The arbitration process should engender confidence among the parties. The Rail Access Dispute Resolution Guideline explains how disputes will be managed and demonstrates that the procedural powers of the Commission are appropriate. Principles to guide decision making

The arbitrator must have explicit guidance to take into account all of the principles in clause 6 of the CPA and other relevant principles and obligations under the access regime. Decisions should not be inconsistent with regulatory guidelines or any approved access undertaking. These requirements are all suitably addressed within the RCA at sections 38ZZB, 38ZZC, 38ZZD, and 38ZZG.

If provision is made for the Commission to appoint another arbitrator, then the Act will need to ensure that the same statutory provisions apply to that arbitrator. Constraints on the arbitrator & discretions

In some access regimes, there may be constraints imposed on the matters that an arbitrator can determine in relation to an access regime dispute, such as reference tariffs. The NCC has stated that:

Where an access regime constrains the arbitrator from ruling on key access terms, such as reference tariffs, the Council considers that clause 6(4)(g) is satisfied if an independent economic regulator initially set such access terms in accordance with effective regulatory processes.143

Accordingly the VRAR requires that access dispute decisions must not be inconsistent with an access arrangement (or undertaking in the proposed framework).

It is implied by the NCC’s statement that unless the prices or other terms and conditions have already been approved by the regulator (e.g. as part of an access undertaking approval), the access regime should not constrain the arbitrator from determining the prices or other terms and conditions when resolving an access dispute. The proposed access framework does not include any constraint of this kind.

Some regimes may also provide the arbitrator with the discretion not to determine disputes in certain circumstances. For example, in the VRAR the Commission is not required to determine disputes that are vexatious, trivial, misconceived or lacking in substance. In the channel access regime the Commission may refuse to make a determination if it is satisfied that the channel operator has complied with its obligations under the Port Services Act, the terms and conditions of access do not constitute a taking advantage of a substantial degree of market power, and having regard to its regulatory objectives. Such a provision may have the benefit of reducing the costs to parties where there are manifestly insufficient grounds to the

143 NCC (2009), ‘Certification of State and Territory Access Regimes: A Guide to Certification under Part IIIA of the Trades Practices Act 1974 (Cth),p.43.

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dispute. While this kind of discretion might be considered for the VRAR, it is unlikely to be of significant practical importance given the short timeframes provided for resolving access disputes under the VRAR. Enforceability of decisions

The enforcement arrangements ensure the arbitrator’s decision is binding on the parties to the dispute. The enforceability of dispute resolution decisions made by the Commission has been addressed above. In the case of an alternative arbitrator appointed by the Commission, the enforcement provisions under the Commercial Arbitration Act may be relevant.

Draft recommendation 6.12

The following changes be made to the dispute resolution framework in the RCA:

• Provision that an alternative arbitrator may be appointed by the Commission at the request of the parties to a dispute, with appropriate amendments to ensure the alternative arbitrator is provided with guidance to adhere to the same principles as the Commission, and to ensure enforceability of the determination. • The Rail Access Dispute Resolution Guideline should be amended to include procedures for ring fencing of the Commission’s arbitration functions from its regulatory functions.

6.5.7 Regular review

The NCC requires that an access regime should include periodic reviews to assess whether regulation needs to cover a particular service or facility or whether the form of regulation continues to be appropriate.

This principle recognises that markets change and evolve over time, which can affect the efficiency and effectiveness of regulation.144

Further, the outcomes of these reviews should not automatically override any existing contractual rights.

The RCA contains no provision for a scheduled review, and the present review has been undertaken at the direction of the Minister under Part 5 of the ESC Act.

144 Ibid, p.38.

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Draft recommendation 6.13

The RCA should include a schedule for periodic reviews of the VRAR.

6.5.8 Treatment of interstate issues

There are two key requirements with respect to treatment of interstate issues. Firstly, where a service is subject to access regimes in more than one state or territory, then those regimes: • should be consistent, and • provide for a single application and negotiation process, a single dispute resolution body and a single body responsible for enforcement.

Secondly, a state or territory access regime may be ineffective if it has undue influence beyond the border of that state or territory.

In regard to the Victorian intra-state rail network there are three rail lines that cross the NSW border: • the Oaklands line from Yarrawonga on the border to Oaklands in NSW • the Tocumwal line that crosses the Murray River to Tocumwal just over the border, and • the line from Echuca on the border to Deniliquin in NSW (the line from Barnes to Moulamein has been closed).

None of these lines are covered by NSW access regulations and none connect directly to the remainder of the NSW rail network at the present time. One of these lines, Yarrawonga to Oaklands, is now managed by ARTC but is not included in interstate access undertaking to the ACCC.

These observations suggest that there are no issues of overlapping access regimes at the present time. Furthermore, the access regime does not represent undue influence because trains travelling on those lines do not have alternative destinations in NSW, and hence no question of influencing the direction of transportation can arise.

Draft recommendation 6.4 assists to ensure that the likelihood of such conflicts or overlaps arising in future is minimised because it has the effect that intra-state rail lines operated by ARTC that become covered by an ACCC-approved access undertaking would automatically cease to be covered by the VRAR. In some circumstances, if an intra-state rail line were upgraded to a ‘major corridor’ then it might be transferred to the ARTC145, and hence draft recommendation 6.4 would provide a mechanism for transitioning access regulation to Commonwealth jurisdiction for that line. Hence the recommendations already made are sufficient to ensure compliance with this requirement.

145 e.g. the Seymour to Tocumwal corridor is one of the options being considered for the proposed inland railway between Melbourne and Brisbane.

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6.5.9 Overall balance and effectiveness Does it support national consistency?

Chapter 4 describes the key features of the other State-based rail access regimes in Australia, as well as the ARTC Access Undertaking. It also highlights material differences between the regimes. The option described above for a light-handed rail access regime differs in a number of respects from the other State-based regimes and the ARTC model. However, generally speaking, the two-tier framework provides for a maximum degree of alignment with these other regimes.

The negotiate/arbitrate model most closely resembles the negotiate/arbitrate regimes currently applying in South Australia, south-western Western Australia, New South Wales and Tasmania. Where a voluntary, or mandatory, undertaking applies within the proposed framework it would be required to closely resemble the ARTC access regime. Requirements to be an effective access regime

If the VRAR is retained, then the CIRA agreement commits the Victorian government to seek certification of the regime by 2010. For this process to successfully result in certification, the scope and form of the VRAR must satisfy the criteria for certification as an ‘effective access regime’ contained in clause 6 of the CPA. Chapter 5 considered the coverage of the VRAR and consistency with the principles in the CPA was one of the considerations in forming the recommendations about coverage. This chapter has considered the form of the regime in terms of the CPA requirements. In making such an assessment it needs to be recognised that the CPA is not prescriptive in regard to the form of regulation to be employed. The NCC has stated:

There may be a range of appropriate approaches available to a state or territory government in incorporating a principle, and that where a state or territory access regime adopts a reasonable approach to the incorporation of a principle, the regime can be taken to have reasonably incorporated the principle as required by clause 6(3)146

The holistic effectiveness of the regime is influenced by whether: • regulation is applied to circumstances where the benefits can reasonably be expected to outweigh the costs (addressed in chapter 5) • the form of regulation is proportionate to the regulatory problem that is being addressed (addressed in this chapter), and • the objectives of the access regime have been suitably framed (addressed in chapter 7).

146 NCC (May 2009), ‘Certification of State and Territory Access Regimes: A Guide to Certification under Part IIIA of the Trades Practices Act 1974 (Cth)’, p.18.

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The recommended regime is one which gives primacy to commercial negotiation that facilitates efficient outcomes whilst recognising the benefits of a light handed approach that minimises the costs of compliance. The pricing principles provide appropriate guidance in relation to efficient pricing without being prescriptive in the manner in which prices would be set. The dispute resolution process is designed to provide a last resort to regulatory determination, but with the emphasis on ensuring the incentives to parties reaching commercial agreement are not weakened.

The foregoing draft recommendations are therefore expected to ensure that the rail access regime will be effective.

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7 REGULATORY OBJECTIVES

Key points • The objectives of the access regime will be important to its effectiveness as a State-based access regime. • Some potential improvements are identified which would ensure greater consistency with the CPA and with the Victorian government’s freight strategy.

In Chapter 5 the Commission reached the preliminary conclusion that the rail access regime should be retained, and should cover rail infrastructure used by freight trains, and the on-dock rail terminals in the Swanson Dock precincts. In Chapter 6, the Commission reached the preliminary conclusion that a light-handed rail access regime, if based on a negotiate/arbitrate model and containing some of the elements of the current ARTC access regime, would appear to be a reasonable and satisfactory alternative to the current VRAR. If there is a case for continuing regulation, the Terms of Reference requires that the Commission must consider the on-going relevance of the existing VRAR objectives.

This chapter considers the regulatory objectives by comparison with relevant objectives of the National Access Framework as well as Victorian Government freight policy objectives. Comparison is also made against some rail access regimes in other jurisdictions. Some amendments to the existing objectives are considered to be warranted.

7.1 Introduction

In its 2002 review of the National Access Framework, the Productivity Commission emphasised that:

Clear specification of objectives is fundamental to all regulation. It is particularly important where there is scope for divergence between the intent of regulation and the interpretation of its operational criteria. More specifically, for access regimes to function efficiently, clear objectives are needed to promote:

o decisions that are well targeted to the identified problem and which minimise unintended side effects;

o greater certainty for current and prospective facility owners, access seekers and other interested parties;

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o consistency among policymakers, the judiciary and those responsible for implementation and enforcement; and

o regulatory accountability. The regulatory objectives are particularly important in providing guidance to regulatory decision-making and therefore have an important influence on the effective operation of the regime. They are likely to be an important consideration of the NCC during a certification process.

7.1.1 The current objectives

As discussed in section 1.2 of this report, the RCA (s.38F) sets out the objectives the Commission must seek to realise when carrying out its regulatory functions under the VRAR. In summary, these are: • to ensure access seekers have a fair and reasonable opportunity to be provided declared rail transport services, and • to promote competition in rail transport services so as to achieve an increase in the use of, and efficient investment in, rail infrastructure.

In addition, the Commission’s regulatory objectives in s.8 of the ESC Act are also applicable. When carrying out its regulatory functions it must promote the long term interests of Victorian consumers, and while doing so must have regard to the price, quality and reliability of essential services. Section 8A of the ESC Act also lists a range of other matters the Commission must have regard to when seeking to realise its objectives, including among other things: • efficiency in the industry and the incentives for long term investment • the financial viability of the industry, and • the degree of, and scope for, competition in the industry, including countervailing market power and information asymmetries.

Since the VRAR was enacted, the ESC Act has been amended by the inclusion of Part 3A (Third Party Access Regimes), which includes an objects clause (s.35A):

This objective is identical to clause 6(5)(a) of the CPA. Section 35B states that Part 3A – including this objective – applies to any regulated industry that has an access regime.

7.2 Discussion of key issues

The following questions appear to be essential to a consideration of the ongoing relevance of the objectives: • whether stakeholders consider the objectives to be effective • how they compare to other State-based rail access regimes

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• the extent to which the objectives in s.38F of the RCA and sections 8 and 38A of the ESC Act are complementary, and whether there is redundancy or an excessive degree of conflict between these objectives • whether the objectives are consistent with the principles in the CPA • whether the objectives are consistent with the Government’s freight and logistics policies, and • whether they have the right overall emphasis.

7.2.1 Stakeholder views

Stakeholders have offered a number of views in regard to the objectives of the access regime.

Asciano indicated that the VRAR objectives are not fully consistent with the objectives in the National Access Framework:

The VRAR objectives focus on providing access seekers with a fair and reasonable opportunity to access declared services and promoting competition rather than focussing on promoting efficiency in the operation of, use of and investment in relevant infrastructure.147

The ACRFD felt that the objectives of access regulation in the National framework are too narrowly focussed on economic efficiency, and do not take sufficient account of community and environmental sustainability objectives.

Wakefield felt that the objectives are, on the whole, still relevant although it similarly felt that environmental considerations may need to be given greater weight.

V/Line was supportive of the objective of promoting competition in rail freight transport services but noted that the scope for such competition to emerge will be circumscribed by market constraints and the ‘lack of sufficient high volume regional freight to underpin a commercially viable freight railway’ in the State.

In summary, the main issues raised by stakeholders are whether they are consistent with the principles in the CPA, and whether they have the right overall emphasis – both are discussed below.

7.2.2 Comparison with other rail access regimes

The VRAR objectives may be compared to some of the other State-based rail access regimes. In the South Australian Railways (Operations and Access) Act 1997 the objects in s.3 apply to the whole Act, including Part 2 (Construction and operation of railways). The key objectives that appear most directly relevant to the access regime are: • to facilitate competitive markets in the provision of railway services

147 Asciano submission on the Issues Paper, p.8.

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• to promote the efficient allocation of resources in the rail transport segment of the transport industry, and • to provide access to railway services on fair commercial terms and on a non- discriminatory basis. The Western Australian Government Railways (Access) Act 1998 states the functions and powers of the regulator but does not contain an objects clause. The Queensland rail access regime is established under Part 5 of the Queensland Competition Authority Act 1997. The object is stated in s.69E, and is identical to clause 6(5)(a) of the CPA. Overall, the objectives stated in the South Australian legislation may be usefully considered as alternatives to those presently in s.38F of the RCA.

7.2.3 Are the objectives compatible with each other?

The three sets of objectives to which the Commission must have regard each have a slightly different, but overlapping, focus: • the objects clause in Part 3A of the ESC Act focuses on economically efficient resource allocation in the regulated industry and promotion of competition in dependent markets • the objectives in s.38F have a greater focus on promoting competition in a specific (although important) dependent market, namely rail transport services, and to the policy objective of achieving an increased use of rail freight, and • the Commission’s regulatory objective in s.8 of the ESC Act has a more general focus on the public interest.

Section 35A of the ESC Act is in the same terms as clause 6(5)(a) of the CPA and s.8 of the ESC Act also expresses very general objectives. As a result, it is the objectives of s.38F of the RCA that are rail-specific.

In many ways these objectives complement one another. However, the objectives in s.38F are relatively complex in their interaction and in some cases overlap. This gives rise to the risk that the objectives provide insufficiently clear guidance to the decision maker, or provide flexibility for the decision maker to draw on different objectives at different times. This may lead to inconsistency in decision making.

For example, s.38F(b) of the RCA contains the objective of promoting competition in rail transport services so as to achieve an increase in the use of, and efficient investment in, rail infrastructure. Section 35A of the ESC Act, on the other hand, contains the objective of promoting the economically efficient operation of, use of and investment in, the infrastructure by means of which services are provided, thereby promoting effective competition in upstream and downstream markets. Both provisions address investment in infrastructure and the promotion of competition. However, the objective in s.38F of the RCA treats investment in infrastructure as an end-result (achieved by the promotion of competition), whereas the ESC Act treats investment in infrastructure as a means to an end (the outcome being effective competition).

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One option would be to remove the specific objectives in s.38F and instead refer to the objectives in sections 8 and 38A of the ESC Act. If specific objectives are to be retained in the RCA, they could be expressed in s.38F as follows: • The objective in s.38F(a) ‘to ensure access seekers, and any other person the Commission may want to be provided declared rail transport services, have a fair and reasonable access opportunity to be provided declared rail transport services’ can be interpreted as imposing a duty on the Commission rather than expressing an objective. A duty is an action the Commission is required to do whereas an objective is an outcome that the Commission, through its activities, seeks to accomplish. A more appropriately expressed objective might be:

o ‘to facilitate access to declared rail transport services on fair and reasonable commercial terms’. • The objective in s.38F(b) appears to be a compound of different objectives, for example, encouraging competition and promoting investment in infrastructure. In order to avoid the overlap between s.38F(b) and s.35A of the ESC Act, it may be desirable for s.38F(b) to list each objective separately, so that each stands alone. For example, to draw broadly from the SA legislation, separate objectives might be:

o ‘to facilitate competitive markets in the provision of rail industry services’

o ‘to promote the efficient allocation of resources, including efficient investment, in the rail industry’.

Some stakeholders also suggest that ‘to facilitate the financial viability of the rail industry’ might also be explicitly included in the objectives in the RCA, although it might be argued that this is a matter the Commission must in any case have regard to under s.8A of the ESC Act.

In summary, the key issue for the Commission to address is whether the specific objectives in s.38F of the RCA should be removed – so that the Commission instead has regard to those in the ESC Act – or whether they should be recast to provide greater clarity and compatibility with the objectives in the ESC Act and other State-based rail access regimes.

7.2.4 Are they consistent with the CPA?

As mentioned, s.35A of the ESC Act reproduces clause 6(5)(a) of the CPA. Hence consistency with the CPA will be achieved if all of the other objectives of the VRAR are compatible. The issues relating to compatibility were discussed in the previous section. In short, s.8 appears to be compatible because it is a broad public interest test, and public interest tests are both explicit and implicit throughout the National Access Framework.

In order to ensure that the objectives as a whole are clearly consistent with the CPA: • s.38F should specify that the objectives in that section are in addition to s.35A of the ESC Act, as well as s.8 of that Act. This would make it explicit

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that the Commission has the CPA objects clause as one of its objectives in all of its regulatory decision making, and • the objectives in the ESC Act should be expressed to take precedence over the objectives in the RCA. To this end the words '(but subject to s.5(2) of [the ESC] Act)' should be removed.

7.2.5 Are they consistent with current policy?

Freight Futures, released in December 2008, may represent the Victorian Government’s current and most relevant policy directions for the freight network. It indicates the goals of: • maintaining and improving the efficiency of the freight network • ensuring the availability of sufficient capacity through better utilisation or through new infrastructure, and • enhancing the sustainability of the freight network by enhancing public safety and minimising environmental and amenity impacts.

Eight objectives are listed to support these goals: a) facilitate the efficient movement of freight in Victoria b) reduce the cost and improve the reliability of supply chains c) manage and mitigate any adverse impacts of freight planning and operations on communities and the environment d) optimise the use of existing network infrastructure e) provide appropriate priority for freight on the network in the context of competing demands f) plan and deliver new network infrastructure in a timely manner g) identify and protect freight network options where necessary to ensure future capacity, flexibility and certainty, and h) provide a policy environment that encourages private sector investment.

Most notably the references to ‘efficiency’ within these objectives refer to the efficiency of freight transportation and the freight network as a whole. Efficiency within this context may be interpreted as economic efficiency. Typically three types of economic efficiency are distinguished: • technical or productive efficiency – the use of resources in the technologically most efficient manner to obtain maximum productivity • allocative efficiency – the efficient employment of productive resources among alternative uses so as to produce the optimal mix of output, and • dynamic efficiency – the economically efficient use of scarce resources over time.

The freight policy statement is mode neutral and there is no implication in the freight policy objectives that the increased use of rail freight is an explicit objective. However, there is an objective of optimising the use of existing network infrastructure. Optimisation is a more general objective typically related to

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allocative efficiency and in particular managing demand to ensure that appropriate use is made of existing infrastructure, i.e. ensuring the right mode is used for the right task.

The emphasis in s.38F(b) on achieving an increase in the use of rail infrastructure presupposes that utilisation of rail infrastructure is less than optimal from an economic efficiency perspective. It may be more appropriate to replace the current s.38F(b) with the two objectives set out in section 6.2.3 above.

7.2.6 Do they have the right emphasis? Sustainability

The ACRFD was of the view that both the VRAR objectives and the Government’s freight policy objectives are deficient because they do not encompass community and environmental sustainability generally, and they do not specifically include the sustainability of the rail freight industry as an objective.

With regard to community and environmental sustainability considered broadly, the Victorian Auditor-General has established certain principles for measuring and reporting on sustainability and has encouraged public sector agencies to re- examine their current performance measurement and reporting practices.148

With regard to the Commission’s regulatory role, it may be argued that the public interest test in s.8 of the ESC Act encompasses this objective because it appears to be consistent with, and indeed central to, the long term interests of Victorian consumers. It is possible that if the ESC Act were to be amended, the principle of environmental, social and economic sustainability could be included in the matters that the Commission must have regard to when seeking to achieve its objectives, listed in s.8A of the Act.

However, the Commission is not a policy maker, and when it undertakes its regulatory roles it has regard to policy but cannot establish policy principles or define policy objectives. Where there are differing environmental, social and economic externalities associated with alternative transport modes, then measures that might be adopted to penalise or compensate parties in order to efficiently take these externalities into account would represent policy responses. For example, the subsidies made available to some rail industry participants may be designed to compensate for environmental, amenity or other social benefits associated with using rail for freight transport. These are policy decisions.

In some circumstances the regulator may be given specific policy direction to permit regulated businesses to recover the costs of community service obligations (CSOs) through higher prices. For example, the Competition Principles Agreement clause 2(4)(b) states that when oversighting Government Business Enterprises a regulator should have the objective of:

148 Auditor General Victoria (2004) ‘Beyond the Triple Bottom Line: Measuring and Reporting on Sustainability’.

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efficient resource allocation but with regard to any explicitly identified and defined community service obligations imposed on a business enterprise by the Government or legislature of the jurisdiction that owns the enterprise. While this general principle potentially has application in an industry in which some access providers are Government Business Enterprises, the circumstances in which it might apply seem to differ significantly from those of the Victorian rail industry.

However, under the prevailing Pricing Order the Commission must, when making any decisions on prices (e.g. in the context of resolving an access dispute), take into account any contributions towards capital or operating costs made by the government or another party. This includes explicitly funded CSOs. Thus, these decisions are given factors which the Commission must take into account, but has no policy input into in performing its regulatory role.

In summary, the Commission’s preliminary view is that s.8 of the ESC Act is a broad public interest test which encompasses the community and environmental sustainability issues raised by ACRFD. Whether the matters the Commission must have regard to under s.8A warrant amendment to specifically incorporate social, environmental and economic sustainability is a question that could usefully be given further consideration, but does not appear to be central to this Review.

Similarly, financial sustainability of the rail freight industry, to the extent it is a relevant consideration, could also fall under the public interest test of s.8 of the ESC Act. Adopting sustainability of the industry as a specific objective could lead to unintended consequences and put the protection of certain elements of the rail freight industry in conflict with other objectives focused on achieving competitive freight markets. Competition

Although competition is generally considered to be a relatively effective means of promoting economic efficiency, particularly allocative efficiency, some stakeholders are of the view that the exclusive rights to operate freight trains on the rail network might be preferred because of the relatively low freight densities and the inability of the market to sustain multiple rail competitors. Exclusive rights could be allocated by means of a franchising process in return for certain price/service commitments. Such a model has sometimes been used for new infrastructure facilities such as greenfields pipelines to supply country towns.

A further alternative model is for a non-exclusive arrangement, in which access to the network is auctioned. King has suggested that such a model would be appropriate to price and allocating capacity on rail networks, particularly when rail capacity is scarce.149 IPART has specifically formulated such a model for application to vehicle booking slots at container ports.150 This approach is given

149 See King (2002), ‘Access –what where and how?’, submission to Review of the National Access Framework, p.30. 150 IPART (2008) ‘Reforming Port Botany’s Links with inland transport’, see chapter 7.

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greater consideration in the context of the discussion of the one-stop-shop concept in chapter 8.

Most stakeholders to this Review attached considerable importance to maintaining and facilitating above-rail competition. The notion of an exclusive franchise arrangement would be incompatible with the application of a third party access regime, and would require the removal of declaration of the relevant facilities in those circumstances. The promotion of competition is consistent with a central theme in microeconomic reform of network industries. For example, Newbery stated:

The key innovation that makes a difference to performance is to introduce competition into the services provided over the network. This may be done either by vertical separation or by liberalizing access to the network. Vertical separation has the advantage that given adequate competition, regulation can be confined to the network.151

These considerations suggest that the current emphasis on facilitating competition in the regulatory objectives of the access regime seems to continue to be appropriate.

7.3 Conclusions

The foregoing discussion suggests the following preliminary conclusions about the Commissions regulatory objectives under the VRAR.

Firstly, it is essential to ensure that the objectives as a whole are clearly consistent with the CPA, and to give effect to this s.38F should refer to s.38A of the ESC Act in addition to s.8 thereby making explicit that the Commission has the CPA objects clause as one of its objectives. Furthermore, the RCA objectives should not have primacy over the ESC Act objectives. Second, any other objectives included in s.38F must be entirely compatible with the ESC Act objectives, and they should be simplified to: • avoid compounding several objectives into one • be cast as objectives rather than duties • promote consistency with current freight an logistics policies by, if necessary, referring to optimising the use of rail infrastructure rather than an increased use of rail infrastructure, and • retain the objective of facilitating competition.

Some possible revised objectives for s.38F have been identified that the Commission seeks specific comment on.

151 Newberry (2001) ‘Privatisation, Restructuring, and Regulation of Network Utilities’, p.3.

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Draft recommendation 7.1 The objectives in s.38F of the RCA should not prevail over the objectives in s.8 and s.38A of the ESC Act in the event that there is considered to be a conflict between the objectives.

Draft recommendation 7.2

The Commission seeks comment on the merits of replacing the existing objectives in s.38F of the RCA with the following: • to facilitate access to declared rail transport services on fair and reasonable commercial terms • to facilitate competitive markets in the provision of rail industry services • to promote the efficient allocation of resources (including efficient investment) in the rail industry and the optimal use of existing rail infrastructure.

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8 A ONE-STOP-SHOP

Key points • This chapter considers possible options for a one-stop-shop to improve access arrangements and is intended to stimulate comment from stakeholders. • The chapter defines the problems that a one-stop-shop might address, identifies the spectrum of functions that might be undertaken by a one- stop-shop, which include clearinghouse functions, train control, system planning performance management and monitoring, access pricing and track management, and discusses possible governance arrangements. • The Commission seeks further information and perspectives from stakeholders on these matters.

At the present time the Commission is the regulator of train path allocation, train control and other network management activities through the requirements under the Network Management and Capacity Use Rules that access providers must submit protocols for all such activities to the Commission for its approval. In this Review the Commission is contemplating that these Network Management and Capacity Use Rules, in all of their detail, need not form part of the access regime under a light-handed regulation framework. If so, then it is legitimate to consider whether any other form of regulation or governance, perhaps not part of the access regime itself, should nevertheless be considered in relation to these activities. The Commission's advice to the Minister would not be complete if it omitted these considerations noting that the terms of reference direct it to have regard to factors that affect the efficient operation of the rail industry. For these reasons, the Commission feels that it is appropriate to consider whether any other regulatory or governance frameworks are relevant to train path allocation, train control and other network management activities under a light-handed VRAR.

This chapter identifies options and seeks comment from stakeholders in regard to one of the institutional reforms recommended by the Fischer Review, namely a “one-stop-shop” for track access. A one-stop-shop is intended to simplify the process of obtaining access for train operators, and the purpose of this chapter is to explore that concept and how it might improve access for freight trains.

There are different views about the precise role and functions of a one-stop-shop. Fundamentally, however, the one-stop-shop concept is about minimising the number of contractual and operational interfaces for access seekers in order to reduce the costs of obtaining access. In practice, this generally means a single

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provider of freight train scheduling services and possibly also of train control and other ancillary services. A one-stop-shop also aligns with a “clearinghouse” concept where the requirements of all access seekers are dealt with centrally and in a co-ordinated and contemporaneous fashion according to an agreed set of protocols. Possible options for a one-stop-shop, or “clearinghouse”, for the Victorian rail network are explored in this chapter.

It is possible to apply the one-stop-shop concept more broadly across the relevant supply chains. For instance, when co-ordinating logistics from mines or silo to ship in the case of export minerals and grain, or factory gates to end customer in the case of general freight. However development of such options is beyond the scope of this Review. Instead, the focus is on optimising rail access arrangements and minimising the costs of obtaining access.

Most submitters to this review strongly supported the notion of a one-stop-shop for rail access, although at least one submitter was of the view that it would be impractical to implement. Several of the submitters recommended that in creating a one-stop-shop, the train control and track access functions be structurally separated from V/Line, and questioned whether V/Line’s role as both access provider and passenger service operator is consistent with facilitating rail freight.

Under the current access regime, each access provider is required to maintain protocols governing the management of that access provider's rail network and to carry out train control operations in accordance with those protocols. Access providers are also required to maintain communications protocols with other access providers, so as to be able to exercise network operational control more efficiently and to provide a more consistent and cohesive response to issues affecting the entire Victorian rail network. Given the reforms to the access regime contemplated in this report, it is relevant to consider what institutional arrangements would replace these operating protocols, and how to improve the efficient operation of the access regime for freight trains.

The central purpose of this chapter is to seek detailed stakeholder comment on the merits of the options discussed.

8.1 What is the one-stop-shop concept seeking to address?

8.1.1 The access regime in practice

As the Fischer Review noted:

[A] significant issue facing rail freight operators is negotiating with different track providers for access agreements, train paths and train priority.152

Each network is subject to the operational control of its access provider. The number of access providers in Victoria means that access seekers may be

152 The Victorian Rail Freight Network Review (December 2007) ‘Switchpoint: The Template for rail Freight to Revive and Thrive!’, p.61.

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required to execute multiple access agreements in order to operate freight trains to different parts of the State. In practice, an above-rail operator may be required to enter into two or more access agreements with different access providers in order to transport freight by rail from one part of Victoria to an intermodal terminal such as a port.

Freight that is transported from the country network through the metropolitan network travels on two different networks operated by two different access providers. If that freight is transported to a container terminal at a port, it may enter the rail network of a third access provider. The consequences for the above rail operator can be illustrated using the example of a containerised cargo that travels from Gippsland to a port in Melbourne.

Cargo that is transported from Gippsland to Melbourne through the country rail network is subject to the access arrangement of V/Line. The rail freight operator would be required to enter into an access agreement with V/Line in order to obtain access to the country rail network. If the cargo is transported through metropolitan Melbourne, the rail freight operator would be required to enter into an access agreement with Connex (or, after 1 December 2009, MTM). If the destination of the cargo is the Dynon Intermodal terminal, then an access agreement with VicTrack is required. Thus in this example one train journey requires the freight operator to enter into three access agreements with three different access providers and to be subject to the train path allocation policies and network management protocols of three different entities.

There are several implications for the above rail operator. First, the above-rail operator is required to negotiate and conclude multiple access agreements, and this entails cost and time. Each of the approved access arrangements sets out a process for the parties to follow when an access seeker makes a request for access to the network of the access provider. This process requires both parties to exchange information about the access provider's network and the access seeker's rolling stock, among other things, before negotiating the terms and conditions of access. Although access providers are obliged to maintain standard terms and conditions of access, the initial negotiation process can be time-consuming and costly for access seekers and access providers alike.

Second, each access agreement is subject to a unique set of terms and conditions, with the result that the rail freight operator is exposed to different liabilities during the single journey. These liabilities can be financial, for example, if each access provider requires the freight operator to provide performance security in order to obtain access to the access provider's network.153 Given that the pro forma access agreements maintained by each access provider contain different terms, users are expected to accept different risk allocations at different stages of a single rail freight journey. For example, under the pro forma access agreement offered by the metropolitan network operator, a user can be liable to pay a financial penalty if the user's train causes delays to passenger services on the network. Similarly, the country network operator may close a line in a broader range of circumstances

153 For example, in its submission to this review El Zorro raised concerns about the requirement for a Performance Bond for its operations on the metropolitan network.

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than the metropolitan network operator. Risk management becomes more important for users in this context.

Third, the rail freight operator relies on the close co-ordination among the access providers at the entry and exit points of each network in order to manage the movement of trains between the networks. This applies both to the allocation of train paths and the day-to-day train control operations. The freight operator seeks access to train paths that allow efficient passage through and between the different access providers' rail networks. This may be more difficult to achieve if the operator must negotiate access with multiple entities. In practice, the efficient operation of the VRAR depends on access providers managing that interface effectively. For this reason, stakeholders have recommended that V/Line coordinates the booking of full-journey train paths, including across the networks of other access providers.

8.1.2 Availability of train paths

Although there are only a few capacity constraints on the regional rail network – largely associated with lack of passing loops on certain lines – a freight train journey is most often to a port terminal or to a central terminal in the Dynon precincts. Close to the destination, freight trains may face train path availability constraints. Indeed users of the Melbourne metropolitan network are faced with increasing hurdles to access as the number of passenger services on the network increases.

The number of passenger train services in Melbourne has increased since the commencement of the VRAR and is expected to increase further over the next 12 months. The greater frequency of suburban trains has created more congestion on the metropolitan rail network. This, in turn, limits the number of train paths available for freight trains on the network and places greater pressure on access providers when exercising operational control. The Fischer Review noted that some freight operators are virtually restricted to operating services overnight, when passenger services do not operate.154 Rail freight operators require access to train paths to facilitate efficient movements between the various access providers' rail networks. This is becoming more difficult to achieve where a rail freight operator seeks access to the metropolitan rail network, because of the increasing frequency of suburban train services.

Access by rail freight operators to the regional rail network is likewise affected by the passenger services on the Victorian regional fast rail network as well as track closures, speed restrictions and rail infrastructure maintenance activities. Each of these issues has an impact on the allocation of train paths outside the metropolitan network, and also has a knock-on effect for the metropolitan network. Track

154 Connex has advised the Commission that there is currently available capacity for approximately two freight train paths per hour (each way) overnight and approximately one per hour (each way) through the day, but only within the interpeak period, on the Dandenong and Frankston rail lines. In addition Connex expects a significant growth in interpeak services for passenger operation during the day in the next few years and this will further restrict the available paths for freight movements. (As MTM is the franchisee for the Melbourne metropolitan rail network from 30 November 2009 these availability estimates are subject to MTM's operating plans.)

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closures in regional Victoria, for example, may delay the arrival of trains at the entry point of the metropolitan network. This, in turn, requires close co-ordination between the network management teams of the access providers, in order to minimise the effects of the delays on the operation of trains on the network.

As congestion on the metropolitan network increases, so does the scope for delay. Any proposal that aims to address the challenges of obtaining access to the Victorian rail network needs to be responsive to the demands of effective network management.

8.1.3 The MFTN

The Victorian government’s freight strategy has as one of its central elements the development of a Metropolitan Freight Terminal Network (MFTN). It is envisaged that the urban intermodal terminals will be serviced by port rail shuttles which will transfer containers to and from the wharfs to these outer-urban rail terminals located adjacent to major industrial centres in the west, north and south east.

A port shuttle operation would require far more intensive use of train control activities than existing freight operations. The economics of short haul rail are particularly challenging, and the utmost efficiency would need to be achieved in rolling stock utilisation and terminal efficiency if such a system were to have any prospect of achieving viability. The port shuttle operations are likely to be complex, with locomotives possibly working with multiple consists in order to maximise the continuous operation of locomotives during each driver shift. The high risk that delays can cause knock-on affects detrimental to the efficiency of the entire system will mean that there will be low tolerances for error and intensive use of train control from terminal to terminal.

In short, if rail Intermodal terminals are to have any realistic prospect of being successfully implemented, then a new paradigm for train operational control is likely to be essential.

8.1.4 Interdependency along the rail supply chain

As IPART has observed, rail supply chains display a high degree of sequential activity along a supply chain, such that the efficiency of the activities carried out at one point in the chain are strongly influenced by the timeliness, reliability and quality of activities carried out upstream. It is quite different to the road transport industry, which is characterised by an atomistic and adaptable structure, in which efficiency is relatively unaffected by other supply chain elements.155

In the rail industry, the efficiency and competitiveness of the terminal operator is strongly influenced by the efficiency of the train operator, of the rail infrastructure provider and of other terminal operators. Each party has a considerable sunk investment, and the returns achievable on those investments will depend on the efficiency of all of the elements of the supply chain. This in turn is likely to be

155 IPART (March 2008), pp.94-95.

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strongly impacted by its weakest link, choke points or poor performing elements of the chain.

Notwithstanding this interconnectedness there is typically a low degree of coordination in the rail supply chain. This is evident from the following casual observations: • although train operators, rail infrastructure managers and terminal operators all have a stake in marketing rail services, rail industry participants have advised this Review that there is very little coordination between these parties (if any) for the purpose of marketing rail services to freight owners. Thus Meyrick and Associates have observed that there ‘is little marketing effort evident by rail’156 • unlike road freight transport, the rail freight industry needs to enhance its competitiveness in part through efficient improvements to rail infrastructure. However, there does not appear to be a body that is responsible for long- term system planning and forecasting of rail freight on the intrastate network, and very little activity of this kind appears to be carried out. Nor is there any equivalent to the Port Botany Rail Team in NSW157 (which has functions of coordinating supply chain improvements) • aside from certain data collected by the Bureau of Industry Transport and regional Economics (BITRE)158, there is currently little rail freight data collection or performance measurement being carried out by the rail industry. • apart from piecemeal programs, there doesn’t appear to be any effective process to encourage greater interoperability of equipment and communications systems, and • submissions to this Review suggest that there is no fully effective rail industry ‘voice’ on broad issues facing the industry in Victoria.

8.1.5 Summary

The one-stop-shop concept may have relevance if there is sufficient scope to: (a) reduce the complexity and duplication of requests for access and provide rail freight operators with greater certainty that their access applications are dealt with quickly and fairly (b) facilitate the efficient allocation of train paths (whilst preserving the principle of passenger priority, where applicable) (c) provide a fully efficient interface between rail facilities (for greater reliability) and between access seekers and access providers (for greater efficiency in the allocation of risk)

156 Meyrick & Associates 2006, ‘National Intermodal Terminal Study: Final Report’, p.26. 157 The Port Botany Rail Team membership includes Sydney Ports Corporation; rail access providers ARTC and RailCorp; train operators Independent Rail, Patrick PortLink, POTA, SouthSpur, and Freightliner; and stevedores DP World and Patrick. 158 Bureau of Transport and Regional Economics (2007) ‘Australian Transport Statistics 2007’.

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(d) improve the overall efficiency of the Victorian rail industry.

Question 8.1

How significant are the underlying problems that the one-stop-shop concept seeks to address?

8.2 Options for implementing a one-stop-shop

As mentioned, the notion of a ‘one-stop-shop’ means different things to different stakeholders.

One concept is for a single entity to be responsible for providing train paths and setting prices for freight trains, regardless of the number of track managers (see the submission by ACRFD). Another concept is for the ‘one-stop-shop’ to have the responsibility for all below-rail functions, including the management of the regional rail network (a view expressed by El Zorro).

8.2.1 Introduction to the options Structural or functional options

The Commission has identified three functional options for comment by stakeholders: • a single body to negotiate access agreements, allocate train paths and possibly carry out financial settlements in relation to freight services, whether on behalf of the access providers or as an independent entity – a ‘clearinghouse’ for freight access • an independent body responsible for train path allocation, financial settlements, train control, standards setting, performance monitoring and future system planning – all of which are the functions of an ‘independent system operator’ (ISO)159, and • a body that combines the train path and train control functions with infrastructure management responsibilities – a fully vertically separated below-rail access provider. Each of these options is described in the following sections. First, however, the scope of the infrastructure to be covered by the one-stop-shop is discussed briefly.

159 The concept of an ISO arose within the electricity market from the need to provide non- discriminatory access to transmission networks, but has been used in a number of other industries. Examples include international ATM networks, agricultural cooperatives (e.g. CBH as a cooperative of farmers has similarities to an ISO) and financial markets (e.g. ASX Ltd is an independent operator of financial markets in Australia). The Australian Energy Market Operator (AEMO) has an ISO role for the national gas wholesale market and transmission pipeline system.

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Scope of operations - terminals

The one-stop-shop could have responsibility for scheduling slots within rail terminals in addition to train paths on railways, and could likewise manage rail movements into and out of rail terminals as well as across the networks. This is similar to ARTC’s management of rail movements at the East and West Swanson rail terminals, and VicTrack’s management of rail movements in the Dynon Intermodal terminal.160

Thus, the one-stop-shop would manage requests for access to the sidings and services provided at certain terminals, including services at marshalling yards. Its advantage is that a train path scheduled for a train to pass along a network cannot really be divorced from the time slot scheduled for the train at the terminal at the end of its journey, or from the terminal at the end of the return journey. The train needs to be scheduled over a complete cycle.161

However, the Commission does not anticipate that this arrangement would apply to all terminals, as there may be some entirely privately held and operated terminals that do not participate in the one-stop-shop arrangement.

The terminals subject to third party access regulation and those terminals that elect to operate under an 'open access' or ‘multi-user’ business model may be the terminals that come within the clearinghouse arrangements. For example, terminals involved in serving port shuttle operations may need to be part of the one-stop-shop arrangement. Scope of operations – railway tracks

There are three alternatives regarding the rail network over which a one-stop-shop might operate: • Intra-state: Under this option, the one-stop-shop would operate over those parts of the Victorian rail network to which the VRAR applies and which provide declared rail transport services.162 • Whole-of-Victoria: The one-stop-shop would operate over both the interstate and intrastate networks for freight rail services. (In this case the clearinghouse would presumably be ARTC.) • Future Priority Freight Rail Network: A third option is for the one-stop-shop to operate over a subset of rail lines on the intra-state network. This might comprise the parts of the intra-state rail network mostly used by freight trains

160 It is not anticipated that a clearinghouse would apply to container lifting operations at terminals. 161 This is unlike a truck which books a time slot at the ocean terminal for loading and unloading and then moves freely along the road system. The analogous train ‘slot’ is an end-to-end train path and rail terminal window. 162 The clearinghouse would not apply to ARTC track itself. The Commission notes that V/Line has a number of sidings that are attached to ARTC track but that are not subject to the ARTC lease. The Commission considers that there is scope for the clearinghouse to apply to those sidings, provided that the rail transport services provided by means of those sidings are declared to be declared rail transport services.

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and only lightly used by passenger services (if at all), and might provide an avenue for giving priority to freight trains.

Question 8.2

Are the options identified appropriate ones? What other options should be considered?

8.3 Possible functions of a one-stop-shop

The most minimal set of functions are those of a clearinghouse, which would manage only the allocation of network capacity and train paths to access seekers. It would not exercise any significant operational control over rolling stock movements or the provision of terminal services (with the exception of any railway tracks or sidings it manages in its own right). Network management and train operational control and day-to-day management of terminal services would largely remain with access providers.

Other functions could be added to this, to make its role similar to that of an Independent Systems Operator (ISO). The possible additional functions include: • operational train control • long-term system planning and forecasting, including assessment of future capacity adequacy, emerging bottlenecks, and capital expenditure needed • data collection, performance measurement and reporting163 • standards setting in relation to rolling-stock or terminal equipment, track or communications systems for the purpose of improving interoperability and system efficiency (rather than minimum safety standards), and • market operation, billing and settlement.

Finally, if the one-stop-shop were to have responsibility for below-rail track management, maintenance and investment, it would effectively be a vertically separated track access provider model similar to that of ARTC.

This section considers these possible functions in turn.

8.3.1 Clearinghouse functions

A clearinghouse would provide a central interface that handles access applications and communicates with users. This could include the following key features:

163 It is important to differentiate ISO roles from other cooperative or central administration roles that are sometimes carried out in the rail industry, but which are not consistent with the roles of an ISO. For example, in the UK, 26 train operating companies have established the Association of Train Operating Companies which is a coordinating body which owns a common brand, National Rail, and organises the common ticketing structure. This is a cooperative marketing endeavour and does not seem to be comparable or compatible with an ISO function.

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• a registered user system — access seekers would be required to pre-register with the central clearinghouse and satisfy the requirements of each access provider with respect to safety, provision of performance security, rolling stock requests, etc. • a centralised request system — access seekers would submit requests for train paths or nominated terminal services to the clearinghouse • a centralised dispatch system — the clearinghouse would notify users of the results of their request for access, and • a 'real time' update system — access providers would be able to notify the clearinghouse of any planned or unplanned outages on any part of the network, and the clearinghouse would notify access seekers and users accordingly.

As an example, ARTC has negotiated wholesale access agreements with WestNet and RailCorp. In these situations, the train operator only deals with ARTC and the access agreement is between the operator and ARTC. ARTC and WestNet/RailCorp exchange information about how the network is to be used and agree on a common set of data. For example, WestNet provides ARTC with information on the available “slots” in the schedule. When an access seeker approaches ARTC, WestNet is advised of the projected extra capacity usage.

The clearinghouse is permitted to allocate train paths only within the slots made available. Access seekers would sign up to terms of access agreed with the clearinghouse, who would then allocate train paths in response to the access seekers' request for access and the applicable allocation priority principles. This kind of arrangement can be strengthened by imposing a ‘use it or lose it’ rule on access providers to ensure the release of the available train paths.

This arrangement imposes a discipline on all of the parties (the train operator, ARTC and WestNet) to comply with the agreed schedules. It differs from the current Victorian rail network, in which the access providers retain considerable room for “changing one’s mind” about schedules at short notice, a luxury that encourages poor planning. Keeping the number of access managers (as distinct from access providers) to a minimum is in the best interests of “tight” planning, train operator satisfaction and overall efficient operation.

There are broadly two transactional models: • where the clearinghouse is a retailer contracting directly with access providers for access and then on-selling capacity to access seekers, and • where the clearinghouse is an agent for the access providers. Access seekers still enter into agreements with the access providers.

The first of these models is that used by ARTC and WestNet. The issues it raises concern the identity of the counterparty to the 'standard' access agreement and the capacity of the clearinghouse to deal with non-standard requests for access. In the ARTC/WestNet case a number operators have decided to deal direct with the WestNet and by-pass the one-stop-shop option, although this may not be solely a function of shortcomings in the clearinghouse model.

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In a context where there are multiple access providers, if this option is to be considered seriously, it would require access providers to offer a more or less standard or similar set of terms of access to manage risks borne by the clearinghouse. Ultimately, the clearinghouse may be constrained in its ability to negotiate terms and conditions of access that are specific to the needs of individual access seekers. Issues of liability are likely to be important. For example, if a user damaged rail infrastructure, the user's access contract is with the clearinghouse, not the access provider. Unless the clearinghouse contracts as the access provider's agent, the access provider has no direct recourse against the user.

Asciano stated in its submission that ‘to effectively control its business, it needs a direct relationship, including contractually, with the access provider’. It highlighted that the access providers may make operational or infrastructure decisions that have the capacity to make or break a service and without any direct relationship with the access provider it would be unable to influence such decisions. This suggests that any clearinghouse should contract as the access provider's agent only.

Under the agency model, access seekers might be required to execute access agreements with the track managers, but each access agreement would include an acknowledgment that the clearinghouse allocates train paths in response to access requests. Where there are multiple track managers, this may not simplify the transactions to be entered into by the access seeker, or address the possible mismatch of terms and conditions and risk allocation on different networks utilised on a single train journey.

The clearinghouse is analogous to a vehicle booking system (‘VBS’) for road transport access to port terminals. IPART has thoroughly examined the merits of an independent VBS operator for Port Botany. IPART concluded that the independent body could not determine the number of slots on offer, as it would have insufficient information and would impinge on terminal operations. On the other hand, it could simply book and allocate slots to trucking companies. However, IPART queried whether this arrangement would be more efficient than the service stevedores could achieve if there were greater transparency requirements regarding the rules, operation and performance of the VBS.164 The efficiency gains may depend on the ability to reduce transaction costs where there are multiple access providers associated with providing individual track access services.

Question 8.3

What are the merits of the clearinghouse model? Would it provide any efficiency improvement over what the access providers could achieve themselves with clear operating rules?

What are the practical limitations of this model?

164 IPART (March 2008), p.75.

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8.3.2 Train control

Train control is a discrete function within rail network managers’ businesses that can be outsourced, although it is generally considered a ‘core’ function and carried out in-house. Where there are several operationally separated networks the management of the interface points can cause duplication of resources between the two networks. In a region the scale of Victoria it is reasonable to expect that train control could be carried out over a wider area than the Metropolitan area, and there is likely to be no technological impediment to the integration of the metropolitan and regional train control functions.

However current technology for train control in Victoria does not provide for accurate real-time information on the position of trains on the network. This can lead to inefficiency in managing the available capacity in circumstances where there are potential train conflicts. A more integrated train control function may have a greater incentive to adopt newer technology.

On the other hand, integrating the train control functions of the metropolitan passenger services with other networks may be problematic given the franchise arrangements, including the Operational Performance Regime. The regime places a high emphasis on train control as a risk management tool, which may create disincentives for outsourcing the train control function.

Question 8.4

Would there be benefit in a more integrated train control? If so, how might that be accomplished? What would be the impediments?

8.3.3 System planning

The ISO model typically provides for a cooperative approach to system planning which is familiar in supply chain contexts such as the Hunter Valley Coal Logistics Team and the Port Botany Rail Team (PBRT).165 A planning framework of this kind provides scope for a greater degree of synchronisation of investments along the supply chain to maximise its overall efficiency.

The Hunter Valley Coal Logistics Chain Team operates in New South Wales and is responsible for planning coal exports from the Hunter Valley. It co-ordinates a 'capacity management forum' that meets approximately quarterly. The forum allows members of the Team — including track access providers, freight rail operators and coal exporters — to consult on issues such as capacity constraints and maintenance planning. If a clearinghouse operates an integrated interface for allocating capacity, there may be scope for industry stakeholders to consult in a

165 The current PBRT membership consists of: Sydney Ports Corporation (port manager); Australian Rail Track Corporation and RailCorp (rail access providers); Independent Rail, Patrick PortLink, POTA, SouthSpur and Freightliner (rail operators); DP World and Patrick (stevedores); and Australian Customs Service and 1-Stop (subject matter experts). The PBRT is assisted by a Reference Group consisting of: Australian Logistics Council, Infrastructure Australia, Ministry of Transport and Australian Quarantine Inspection Service.

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more structured fashion about network capacity, capacity constraints and maintenance scheduling.

However the Commission notes that the examples discussed above demonstrate that there are other ways of establishing such coordination which need not be related to the activities of a one-stop-shop.

Question 8.5

Would there be benefit in greater supply chain planning coordination? How should this be achieved? Are there other models to a one-stop-shop that might be preferable?

8.3.4 Performance measurement & monitoring An example of the performance measurement and monitoring function is provided by Sydney Ports Corporation’s role within the PBRT. The PBRT was formed following a recommendation by IPART to establish a cooperative body of rail- orientated industry organisations involved in the supply chain with the aim of increasing the efficiency of the supply chain. Sydney Ports Corporation provides leadership to the group and improves transparency through the monitoring and reporting of performance against service standards. The industry participants are responsible for implementing improvements and developing supply chain business rules. SPC has indicated it will take more direct control over setting business rules, performance standards and penalties if the cooperative approach is not successful.

Question 8.6

Would there be benefit in performance measurement and target setting for the rail industry in Victoria? What would be the most appropriate body or cooperative structure for such a role?

8.3.5 Standards setting

The Australasian Railway Association (ARA) is active in the area of seeking to improve interoperability of rail network systems. However, it may have insufficient influence to drive a substantial rate of progress in this field.

Question 8.7

Would there be any benefit in a one-stop-shop having responsibility for setting standards?

8.3.6 Access pricing

Train path allocation in Victoria is largely based on administrative protocols. Other allocation systems use prices as the basis of allocation and it cannot be assumed that the administrative approach is preferable to the price-based approach. For example, Professor King has proposed that rail access pathing and pricing should

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be co-determined through an auction process166. The potential benefits of an auction process are that: • in theory it would allocate train paths efficiently to those who value them most, thus enhancing economic efficiency • it would appear to deal with the problem of establishing market bearable prices automatically through the auction process • it may provide greater transparency and clearer financial signals that would assist in decision making on the prioritisation of line maintenance or keeping lines open.

The auction model proposed by Professor King would be undertaken periodically, and the reserve price would be the same as the floor price under the pricing principles (i.e. the short-run marginal cost). King stated:

The design of the auction process will clearly be critical to the successful allocation of track access. The auction will involve multiple rounds of bidding, as in standard auctions of wireless spectrum. The auction needs to allow participants to ‘build up’ complete journeys from rail sections. This means that the regulator needs to determine the relevant individual rail sections to be auctioned, both geographically and by time of day, day of week and possibly time of the year. It also means that the multiple rounds of the auction need to determine current highest bids by considering both the bids placed over complete journeys and bids over smaller track sections. In essence an auction algorithm will, at any round of the auction, determine the maximum value (in terms of the consistent current bids) of all the track sections of the railway in aggregate. Such an algorithm can easily be designed for a computer.167

IPART has recently proposed an auction-based pricing scheme for VBS slots at Port Botany. There would be two types of VBS slots – ‘firm’ slots which the truck operator has a fixed entitlement to use, and ‘interruptible’ slots, for which there is no entitlement. (These are broadly analogous to scheduled and ‘ad hoc’ train paths in rail). Only firm slots would be sold via the auction model, while interruptible slots would continue under the current pricing arrangement (i.e. by a standard booking fee).

Question 8.8

Does train path auctioning have any relevance for rail freight access in Victoria? If so, what would be the benefits over the existing pricing arrangements?

166 King, S.P. (2002) ‘Access – what where and how’, pp.30-33. 167 King (2002), p.31

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8.3.7 Track management

If a one-stop-shop were to have the function of track management then it might take one of the following forms, for example:

• a track manager that is vertically separated from above-rail operations such as ARTC, or

• a track maintenance and train control function such as ARTC carries out for the Rail Infrastructure Corporation in NSW.

The merits or otherwise of vertical separation of railways from above-rail operations has had a great deal of consideration in policy debate over many years. In its 2006 report ‘Road and Rail Freight Infrastructure Pricing’ the Productivity Commission observed that vertical separation may constrain the scope for cost recovery through efficient price discrimination and impose an impediment to efficient operations or investment.168

In an environment where subsidies are important the key considerations may be somewhat different. The works to be carried out may be specified by the government and the pricing strategies may also be constrained by regulation or toward policy objectives. As such, there may no longer be a close linkage between market outcomes and investment strategies. The track managers role may be confined to minimising the costs of a given asset management plan.

In its submission to the Fisher Review, the Commission expressed the view that once an appropriate program of works has been formulated:

Competitive outsourcing and efficient contract forms will assist in efficient procurement. It can be expected that all of most maintenance and capital work would be outsourced to the private sector under competitively tendered or alliance contracts. (Train control could also be outsourced.) However the track manager would need to retain sufficient expertise in-house to monitor the performance of its contractor.169

The economies of scale of a maintenance contract is likely to be a key consideration in realising the aim of minimising costs. Under an efficient set of transactions, risks will be allocated to those parties best able to manage them.

Question 8.9

What would the benefits be of a vertically separated track manager? If this were the preferred option, would there be any realistic alternative to ARTC management?

168 p.346. 169 Essential Services Commission (August 2007) ‘Submission to the Rail Freight Network review’, p13.

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8.4 Implementation issues

8.4.1 Governance mechanisms

The structures and how industry participates in the activities of the ISO may depend on whether the ISO is an industry cooperative, or whether it is established by government. In the USA many electricity pools have been formed cooperatively by industry participants, with governance structures that carefully balance the interests of the members, and with no government role. 170 To draw on industry expertise, ISO Boards may have an Advisory Committee, and to resolve disputes they may have an Arbitration Committee. Market operating rules and protocols are usually regulator-approved.

In Australia, the AEMO is an independent member-based not-for-profit organisation, which includes both government and private members.171 AEMO operates under the governance arrangements. • the Board has nine skills-based non-Executive Directors and the Chief Executive Officer. 172 At least three but not more than six Directors must have industry experience173 • the Directors are appointed by the Ministerial Council on Energy (MCE) on advice from a Board Selection Panel and in accordance with an MCE Protocol. The Board Selection Panel’s recommendations must be approved by the Members before being submitted to the MCE.174 • The Board’s responsibilities are defined by both Commonwealth and state government acts and by MOUs that set out AEMO’s roles and responsibilities.175

The AEMO governance model is of particular interest because it is designed for a wider role than simply managing market transactions and settlements and includes operations and planning. It is also designed to utilise industry expertise while maintaining independence. The membership of and controls exercised by government is notable given that government is a key stakeholder in the rail industry, including through ownership of some industry participants

170 Hogan W.W., Cullen Hitt C., Schmidt J. (1996) ‘Governance Structures for an Independent System Operator’. 171 Its members include the state governments of Queensland, New South Wales, Victoria, South Australia and Tasmania, the Australian Capital Territory and the Commonwealth. Private members include Australia’s major energy generators, wholesalers and retailers. Source: http://www.aemo.com.au/aboutaemo.html 172 http://www.aemo.com.au/aboutaemo.html 173 Constitution clause 7.1 (http://www.aemo.com.au/corporate/0000-0012.pdf) 174 Constitution clause 7.3 (http://www.aemo.com.au/corporate/0000-0012.pdf) 175 http://www.aemo.com.au/aboutaemo.html

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Question 8.10

Would there be any benefits from a rail network ISO? Does the Victorian rail industry have enough scale to support the functions of an ISO?

8.4.2 Regulatory oversight

Many ISO’s are subject to some form of regulatory oversight. Regulation can include ensuring capacity allocation is compliant with the rules and possibly the resolution of access disputes involving the ISO and an access seeker. However, the ISO structure is designed to ensure that any need for regulation would be minimised.

Question 8.11

What would be the regulatory implications, if any, of an ISO?

8.5 Concluding comments

This chapter outlines a range of functions that could be undertaken by the one stop shop advocated by the Fischer Review. The Commission is concerned to identify that factors that affect the efficiency of rail freight access, and to identify whether and how a one stop shop might contribute improvements.

The options are concerned with practical aspects of access, and have the potential to address areas where there are gaps in the functions being performed by industry players.

In identifying possible options, the Commission has sought to identify the range of issues involved and potential difficulties in implementation. At this stage, the Commission is seeking comments, rather than providing its views.

The Commission seeks stakeholder comments on the options considered for a one-stop-shop, as well as the issues involved and potential difficulties in implementing such a proposal.

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APPENDIX A TERMS OF REFERENCE

Essential Services Commission Act 2001

Part 5 Inquiry and Report

Notice of Reference – Victorian Rail Access Regime

Pursuant to section 41 of the Essential Services Commission Act 2001, I, Tim Holding MP Minister for Finance, WorkCover and the Transport Accident Commission, hereby direct the Essential Services Commission (‘the Commission’) to conduct an inquiry into the effectiveness of the Victorian Rail Access Regime.

Background

At the 10 February 2006 meeting of the Council of Australia Governments (COAG), the Commonwealth, State and Territory Governments signed the Competition and Infrastructure Reform Agreement (CIRA), which among other things, requires each jurisdiction to submit all state-based access regimes to the National Competition Council for certification.

In March 2007, the Victorian Government released its response to the Victorian Competition and Efficiency Commission’s final report on transport congestion – Making the Right Choices: Options for Managing Transport Congestion. In its response, the Government indicated that it would ask the Commission (in conjunction with the Department of Transport) to review the rail access regime.

In December 2007, the Victorian Government released the report of the Rail Freight Network Review – Switchpoint: the Template for Rail Freight to Revive and Thrive! – led by Tim Fischer. The review recommended that the Victorian Government simplify its rail access regime and determine the ongoing role of the Commission in rail freight access following the recent changes in lease arrangements.

Responding to this report recently, the Government affirmed its intention to review the rail access regime in Freight Futures: Victorian Freight Network Strategy for a More Prosperous and Liveable Victoria, released on 8 December 2008.

Specific Terms of Reference

The review will examine, report on, and make recommendations in relation to:

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i. Whether a Victorian rail access regime is still required given the current and likely future structure of the industry, and having regard to the costs and benefits of economic regulation. ii. If continuing the access regime is recommended: a. whether the current objectives for the Victorian Rail Access Regime (VRAR) remain relevant, and if not, what new objectives the VRAR should adopt; b. what services the VRAR should regulate; and c. what form the regulation of those services should take.

In conducting its review, the Commission is to have regard to factors that affect the efficient operation of the Victorian rail industry, including market conditions, the Government’s investment in, and funding of, rail infrastructure and the rail industry and the Government’s policies and priorities for the rail freight network.

In conducting its review, the Commission is to have regard to: i. the objectives set out in section 38F of the Rail Corporations Act 1996 and section 8 of the Essential Services Commission Act 2001, and the matters which the Commission must have regard to as specified in section 8A of the Essential Services Commission Act 2001 (ESC Act); ii. relevant principles in the Competition Principles Agreement and Part 3A of the ESC Act; and iii. Victoria’s obligations under the Competition and Infrastructure Reform Agreement.

Review Process

The Review will be conducted independently by the Victorian Essential Services Commission (ESC) under s.41(1) of the Essential Services Commission Act 2001, which requires that: “The Commission must conduct an inquiry into any matter which the Minister by written notice refers to the Commission under this Part”.

In conducting the Review, the Commission will also have regard to the objectives under ss.8 and 8A and Part 3A of the Essential Services Commission Act 2001.

The specific design and conduct of the review process will be determined by the ESC and publicised at the outset of the review. However, it is envisaged that the process will include the following key elements: • preparation and dissemination of a discussion/issues paper as a basis for informing stakeholders and the general public about the purpose and nature of the review and the key matters to be addressed; • invitation and receipt of written submissions; • preparation and dissemination of a draft report for public comment; and

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• preparation and submission of a final report and recommendations to the Minister for consideration by the Government.

Timetable

Review to commence by end June 2009

Draft report to be submitted by end October 2009

Final report to be submitted by end January 2010

TIM HOLDING MP Minister for Finance, WorkCover and the Transport Accident Commission Date: 26/06/2009

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APPENDIX B SUBMISSIONS RECEIVED

Business Date received Alliance of Councils for Rail Freight Development 11 August Asciano 14 August BlueScope Steel 17 August El Zorro 6 August Port of Melbourne Corporation (confidential) 14 August P&O Trans Australia 12 August Victorian Farmers Federation 19 August Victorian Freight and Logistics Council 21 August V/Line Passenger 12 August Wakefield Transport Group (public) 19 August Wakefield Transport Group (confidential) 19 August

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APPENDIX C CPA CLAUSE 6 PRINCIPLES

6.(1) Subject to subclause (2), the Commonwealth will put forward legislation to establish a regime for third party access to services provided by means of significant infrastructure facilities where:

(a) it would not be economically feasible to duplicate the facility;

(b) access to the service is necessary in order to permit effective competition in a downstream or upstream market;

(c) the facility is of national significance having regard to the size of the facility, its importance to constitutional trade or commerce or its importance to the national economy; and

(d) the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist.

(2) The regime to be established by Commonwealth legislation is not intended to cover a service provided by means of a facility where the State or Territory Party in whose jurisdiction the facility is situated has in place an access regime which covers the facility and conforms to the principles set out in this clause unless:

(a) the Council determines that the regime is ineffective having regard to the influence of the facility beyond the jurisdictional boundary of the State or Territory; or

(b) substantial difficulties arise from the facility being situated in more than one jurisdiction.

(3) For a State or Territory access regime to conform to the principles set out in this clause, it should:

(a) apply to services provided by means of significant infrastructure facilities where:

(i) it would not be economically feasible to duplicate the facility;

(ii) access to the service is necessary in order to permit effective competition in a downstream or upstream market; and

(iii) the safe use of the facility by the person seeking access can be ensured at an economically feasible cost and, if there is a safety requirement, appropriate regulatory arrangements exist; and

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(b) reasonably incorporate each of the principles referred to in subclause (4) and (except for an access regime for: electricity or gas that is developed in accordance with the Australian Energy Market Agreement; or the Tarcoola to Darwin railway) subclause (5).

There may be a range of approaches available to a State or Territory Party to incorporate each principle. Provided the approach adopted in a State or Territory access regime represents a reasonable approach to the incorporation of a principle in subclause (4) or (5), the regime can be taken to have reasonably incorporated that principle for the purposes of paragraph (b).

(3A) In assessing whether a State or Territory access regime is an effective access regime under the Trade Practices Act 1974, the assessing body:

(a) should, as required by the Trade Practices Act 1974, and subject to section 44DA, not consider any matters other than the relevant principles in this Agreement. Matters which should not be considered include the outcome of any arbitration, or any decision, made under the access regime; and

(b) should recognise that, as provided by subsection 44DA(2) of the Trade Practices Act 1974, an access regime may contain other matters that are not inconsistent with the relevant principles in this Agreement.

(4) A State or Territory access regime should incorporate the following principles:

(a) Wherever possible third party access to a service provided by means of a facility should be on the basis of terms and conditions agreed between the owner of the facility and the person seeking access.

(b) Where such agreement cannot be reached, Governments should establish a right for persons to negotiate access to a service provided by means of a facility.

(d) Any right to negotiate access should include a date after which the right would lapse unless reviewed and subsequently extended; however, existing contractual rights and obligations should not be automatically revoked.

(e) The owner of a facility that is used to provide a service should use all reasonable endeavours to accommodate the requirements of persons seeking access.

(f) Access to a service for persons seeking access need not be on exactly the same terms and conditions.

(g) Where the owner and a person seeking access cannot agree on terms and conditions for access to the service, they should be required to

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appoint and fund an independent body to resolve the dispute, if they have not already done so.

(h) The decisions of the dispute resolution body should bind the parties; however, rights of appeal under existing legislative provisions should be preserved.

(i) In deciding on the terms and conditions for access, the dispute resolution body should take into account:

(i) the owner's legitimate business interests and investment in the facility;

(ii) the costs to the owner of providing access, including any costs of extending the facility but not costs associated with losses arising from increased competition in upstream or downstream markets;

(iii) the economic value to the owner of any additional investment that the person seeking access or the owner has agreed to undertake;

(iv) the interests of all persons holding contracts for use of the facility;

(v) firm and binding contractual obligations of the owner or other persons (or both) already using the facility;

(vi) the operational and technical requirements necessary for the safe and reliable operation of the facility;

(vii) the economically efficient operation of the facility; and

(viii) the benefit to the public from having competitive markets.

(j) The owner may be required to extend, or to permit extension of, the facility that is used to provide a service if necessary but this would be subject to:

(i) such extension being technically and economically feasible and consistent with the safe and reliable operation of the facility;

(ii) the owner's legitimate business interests in the facility being protected; and

(iii) the terms of access for the third party taking into account the costs borne by the parties for the extension and the economic benefits to the parties resulting from the extension.

(k) If there has been a material change in circumstances, the parties should be able to apply for a revocation or modification of the access arrangement which was made at the conclusion of the dispute resolution process.

(l) The dispute resolution body should only impede the existing right of a person to use a facility where the dispute resolution body has considered whether there is a case for compensation of that person and, if appropriate, determined such compensation.

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(m) The owner or user of a service shall not engage in conduct for the purpose of hindering access to that service by another person.

(n) Separate accounting arrangements should be required for the elements of a business which are covered by the access regime.

(o) The dispute resolution body, or relevant authority where provided for under specific legislation, should have access to financial statements and other accounting information pertaining to a service.

(p) Where more than one State or Territory access regime applies to a service, those regimes should be consistent and, by means of vested jurisdiction or other cooperative legislative scheme, provide for a single process for persons to seek access to the service, a single body to resolve disputes about any aspect of access and a single forum for enforcement of access arrangements.

(5) A State, Territory or Commonwealth access regime (except for an access regime for: electricity or gas that is developed in accordance with the Australian Energy Market Agreement; or the Tarcoola to Darwin railway) should incorporate the following principles:

(a) Objects clauses that promote the economically efficient use of, operation and investment in, significant infrastructure thereby promoting effective competition in upstream or downstream markets.

(b) Regulated access prices should be set so as to:

(i) generate expected revenue for a regulated service or services that is at least sufficient to meet the efficient costs of providing access to the regulated service or services and include a return on investment commensurate with the regulatory and commercial risks involved;

(ii) allow multi-part pricing and price discrimination when it aids efficiency;

(iii) not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher; and

(iv) provide incentives to reduce costs or otherwise improve productivity.

(c) Where merits review of decisions is provided, the review will be limited to the information submitted to the original decision-maker except that the review body:

(i) may request new information where it considers that it would be assisted by the introduction of such information;

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(ii) may allow new information where it considers that it could not have reasonably been made available to the original decision- maker; and

(iii) should have regard to the policies and guidelines of the original decision-maker (if any) that are relevant to the decision under review.

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APPENDIX D COSTS OF REGULATION

An assessment of the costs of regulation depends in part on the form of regulation being considered. There are some forms of regulation which impose higher costs than others – a key aspect of the distinction between ‘light-handed’ and ‘heavy- handed’ regulatory frameworks. Therefore the costs need to be considered for each of these two broad alternatives approaches.

The Commission’s approach to identifying the costs of the VRAR is to seek to quantify each of the following types of costs:176 • administrative costs for Government and compliance costs for business • constraints on the scope for infrastructure providers to deliver and price their services efficiently • reduced incentives to invest in infrastructure facilities, and • inefficient investment in related markets. Administrative and compliance costs

The Commission’s administrative costs are associated with designing, administering and enforcing the regulation framework. These costs include staff hours of employees of the Commission, technical experts and other consultants, and advertising and publication costs associated with stakeholder consultation.

The administrative costs shown in Table D.1 are estimated from the Commission’s costs allocation system, but do not include allocated corporate overheads.

Table D.1 ESC administrative cost estimates Year Cost ($) 2005-06 1,184,693 2006-07 409,431 2007-08 167,820 2008-09 300,605 Average 515,637 Source: ESC

176 Productivity Commission, September 2001, Review of the National Access Regime, Inquiry Report.

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Table D.1 shows the Commission’s costs in each year of the VRAR. Over the four year period of the administrative costs averaged approximately $515,000 per annum (excluding any allocated overheads). There were a number of special factors that increased the costs associated with administering the VRAR: • high initial implementation costs of the VRAR in 2005-06, associated with establishing regulatory instruments and guidelines and approving initial access arrangements for several access providers • further implementation costs in 2006-07 with the approval of certain operating protocols, accounting templates and the establishment of a dispute resolution guideline, and • approval of several variations to access arrangements, over the period from 2006-07 to 2007-08 and renewal of several access arrangements in 2008-09.

If the implementation costs of the VRAR in 2005-06 are excluded, then the average annual administration costs were approximately $300,000 per annum in the following years.

These costs of administering the VRAR are considerably higher than the administration costs of the Grain Handling and Storage Access Regime (GHSAR) and the ports price monitoring framework – both of which have been assessed in recent reviews carried out by the Commission. • the average annual costs of administering the GHSAR were estimated at $80,000 over a four-year period. The Commission’s adjusted estimate, including only one review every five years, was approximately $60,000 per annum.177 • in the ports price monitoring framework the average costs of administration over a four year period were estimated to be $60,000 per annum.178

Notwithstanding these special factors, the underlying reason for the much higher administrative costs of the VRAR when compared to the ports or grain handling regulation regimes is that it is a much more heavy-handed form of regulation.

Compliance costs

The Commission does not have any estimate of regulatory compliance costs for rail access providers available to it. An indicative estimate would be: • in 2005-06, similar costs in total to those incurred by the Commission • in subsequent years, total costs for all access providers in the order of $200,000 per annum.

These compliance cost estimates may be compared to compliance costs for ports under the ports monitoring framework which have been estimated to be

177 Essential Services Commission 2009, Review of Victorian Grain Handling and Storage Access Regime: Final Report, May, pp.68-69. 178 Essential Services Commission 2009, Review of Victorian Ports Regulation: Final Report, June, p.121.

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approximately $140,000 per annum in total for five port bodies .179 The compliance costs for bulk handlers under the GHSAR have been estimated to be zero.180

Arbitration costs

The costs associated with resolving access disputes include the costs borne by each of the parties to the dispute, as well as the costs incurred by the Commission, which are recovered from the parties to the dispute at its conclusion. To date no disputes have occurred under the VRAR, so there is insufficient basis for assessing these costs. Furthermore, although these costs are potentially a cost of regulation, it is difficult to separate them from the conduct of parties or from other commercial dispute-related costs that might otherwise have been incurred. For these reasons, dispute resolution costs have not been included in this assessment.

Other stakeholder costs

Stakeholders, including access seekers and government, incur costs making submissions to the Commission in its periodic consultations. In the recent review of ports regulation, the Commission estimated such costs to amount to approximately $20,000 per annum in total based on an assumed cost of $100,000 every five- yearly review. These costs may be somewhat higher in the rail regulation framework due to the greater number of consultation processes. Since the typical cycle of access arrangement renewal is three-yearly, these costs are assumed to be approximately $30,000 per annum under this regime.

Impacts on economic efficiency

Regulation may impact on economic efficiency by distorting business strategies, constraining the ability of infrastructure providers to deliver and price their services efficiently, reducing incentives to invest in regulated infrastructure, or distorting investment incentives in related markets.

For example, the regulatory framework may have discouraged V/Line or Connex from pursuing more innovative or market-oriented terms and conditions, for example they might have adopted a more economically efficient pricing structures. This kind of efficiency loss cannot be quantified because the existence or extent of possible efficiencies that could have been captured is unknown.

It is less likely that the regulatory framework has discouraged investment because: • Asciano indicated in its submission that its investment decisions have not yet been affected by the access regime • investments on the regional rail network are directly funded by the State and/or Commonwealth governments, and this funding is presumably unaffected by the access regime.

179 Essential Services Commission 2009, Review of Victorian Ports Regulation: Final Report, June, p.121. 180 Essential Services Commission 2009, Review of Victorian Grain Handling and Storage Access Regime: Final Report, May, p. 69.

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Looking forward there are risks that investments in infrastructure may be impeded or delayed if heavy-handed forms of regulation continue to be employed, or if there were a considerable degree of uncertainty regarding changes to the regulatory rules. For example, an important uncertainty for V/Line is the risk that Asset Management Plans ‘approved’ by the Department of Transport may be inconsistent with track standards in the access arrangement approved by the Commission. Costs of certification

The cost of obtaining certification of the VRAR also needs to be included. This would involve the cost of amending the existing regime (over and above the cost of repealing it), the cost of preparing the application to the NCC and a follow-up submission to the NCC’s draft decision, as well as the opportunity cost of Victorian Government staff in managing Victoria’s application and of NCC staff involved in conducting the process. In the Commission’s 2009 review of the Victorian Grain Handling and Storage Access Regime, the total cost of $350,000 was assumed, and the same estimate may be relevant in the present context. The Commission annualised this estimate to approximately $30,000 per annum.

Conclusions

The overall quantifiable costs of the VRAR for both the Commission and access providers, if regulation were to continue in its current heavy-handed form, are estimated to be approximately $560,000 per annum. In addition there are unquantifiable costs associated with the risk that investment may be deterred or inefficiently prioritised as a result of the regulatory regime.

To put the costs in context, $560,000 per annum is slightly less than 20 cents per tonne or between 3 and 4 per cent of intra-state access revenues181.

If light handed regulation were to apply to the same number of businesses, the overall quantifiable costs would be approximately halved. Furthermore, the risk of efficiency losses arising from distortions to investment or maintenance activity would be considerably reduced. If fewer access providers are covered under the regime, the costs will be further reduced.

181 Based on assumed intrastate access revenues of $15 million and a task of around 3 million tonnes in an average year.

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APPENDIX E EXAMPLES OF LIGHT HANDED ACCESS REGIMES

This Appendix reviews two examples of light-handed access regimes in Australia from industries other than rail.

Victorian port services regime

Division 4 of Part 3 of the Port Services Act 1995 (Vic) establishes an access regime for port users to obtain access to declared channels. The access regime (which has not been activated through declaration of channels at this time) sits alongside a price monitoring framework, which covers a range of port services in addition to shipping channels, such as berthing, buoying, short term storage and cargo marshalling facilities. (i) Regulation of access providers and requests for access

The access regime in the Port Services Act applies to channels declared by the Governor in Council (section 58). Channel operators must be licensed in order to provide prescribed services (section 63A). Channel operators must provide access to those services on fair and reasonable terms and conditions (section 59). In addition, channel operators must: • use all reasonable endeavours to meet the requirements of persons seeking access (section 59(2)(a)); • give a formal proposal of terms and conditions must be given within 30 business days of receiving a request (section 59(2)(b)); and • not hinder access to persons exercising a reasonable right of access (section 61(1)).

However, a channel operator may vary terms and conditions of access according to the actual and opportunity costs to the channel operator (section 59(3)). (ii) Access undertakings ('general access determinations')

Like access providers under the Victorian grain handling regime, channel operators can submit an access undertaking ('general access determination') governing access to one or more prescribed channels to the Commission for approval (section 63). If the Commission accepts the proposed access undertaking it creates a standard set of terms and conditions on which the channel operator provides access to the services described in the undertaking. Under the price monitoring regime, the channel operator must publish a Reference Tariff Schedule that contains a 'standing offer' of terms and conditions upon which the channel operator will make prescribed services available to port users. Port users may purchase port services on the terms and conditions in the Reference Tariff

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Schedule, or seek to negotiate other terms and conditions with the channel operator according to their requirements. (iii) Dispute resolution

The Commission has similar dispute resolution powers in relation to the channel access regime as it has under the Victorian grain handling and storage regime. The Commission has the power to resolve disputes between access seekers and channel operators if: • the channel operator has not made a formal proposal within the specified time (section 60(1)); • the parties cannot agree on the terms and conditions of access (section 60(2)); or • the access seeker considers that the channel operator has engaged in conduct that has the purpose of hindering access (section 61(2)).

The Commission may refuse to hear access disputes in certain circumstances (section 60(8)) and a party aggrieved by that decision may appeal as if the decision were a determination under section 55(1)(c) of the ESC Act (section 60(8A)). If the Commission agrees to hear the dispute, the Commission must determine the dispute within 90 days after receiving the application, although this period may be extended by up to 45 days (section 60(7) and (7A)). The Commission must not make a determination if the Commission considers that the determination would substantially impede the rights of access of another person (section 60(4)).

In hearing an access dispute, the Commission may give directions in relation to the dispute, including in relation to confidential or commercially sensitive information (sections 63AB and 63AC). An aggrieved party may appeal against certain requirements issued by the Commission during the dispute resolution process (section 63AD).

The channel operator and the access seeker must bear the Commission's costs of hearing the dispute equally (section 60(9)).

The Commission's power to hear and determine disputes is limited if a general access determination or access undertaking is in force in respect of the channel operator (section 63(5)). Where such an access undertaking is in force, the Commission's dispute resolution role is limited to instances where the Commission determines that the access undertaking does not deal with the matters in dispute or where the access undertaking confers specific powers on the Commission (section 63(5)).

Although the Commission is not required to consult with any third party when making a dispute resolution determination, the Commission has memoranda of understanding with certain port operators under which the Commission undertakes to consult with those port operators when making such a determination. (The intention of the MOUs is to provide for co-ordination between the Commission’s regulatory functions relating to channel access, and the regulatory functions of the Harbour Masters in the control of shipping movements in port waters.)

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(iv) Commission's general powers and channel operators' obligations

Under Part 3 of the Port Services Act the Commission has a general power to make price determinations (section 54). The Commission also has the power to specify standards and conditions of service and supply in respect of prescribed services, after, in respect of some services, consulting with the Director of Maritime Safety (section 55).

Channel operators must prepare and maintain financial and business records in respect of their channel and related services and make those records available to the Commission as and when the Commission requires (section 56).

National gas pipeline access regime and light regulation

The national gas pipeline access regime, established under the National Gas Law and National Gas Rules, contains a light-handed access regime for gas pipelines. It also contains a full regulation access regime. Some pipelines are 'designated pipelines' and, as a result, are subject to the full regulation regime. Other pipelines can be made subject to the light-handed regime. (i) Light regulation of pipelines

The regime establishes a process for access providers (called 'service providers') to apply to the National Competition Council (NCC) for a determination that the pipeline should be subject to the light-handed access regime (called 'light regulation') (sections 110, 111 and 112). When making a determination whether a particular pipeline should be subject to light regulation, the NCC must consider matters such as the effect of light regulation on the likely costs to be incurred by an efficient access provider (called a 'service provider'), efficient users and prospective users and the likely costs of end users (section 122). Point-to-point transmission pipelines with a small number of users who have countervailing market power are more likely to be made subject to light regulation. (ii) Access arrangements

An access provider of a pipeline that is subject to light regulation may, but is not obliged to, submit a limited access arrangement to the Australian Energy Regulator (AER) for approval (section 116). A limited access arrangement must contain non- price terms and conditions of access such as capacity requirements, expiry dates and key performance indicators, but is not required to contain price terms (section 2; rule 45). The access arrangement must be accompanied by access arrangement information, that is, information reasonably necessary for access seekers and users to understand the background to the access arrangement and to understand the basis and derivation of the various elements of the access arrangement (rule 42). Light regulation pipelines are not subject to upfront regulation of reference tariffs. (iii) Regulation of access providers

Limited access arrangements may include an expiry date (rule 45(1)(i)).

Regardless whether a pipeline subject to light regulation has an access arrangement or not, the access provider must not:

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• engage in conduct with the purpose of hindering or preventing access of another person to a pipeline service by means of the access provider's pipeline (section 133); • engage in price discrimination unless it is conducive to efficient service provision (section 136); and • enter into or give effect to associate contracts that have an anti-competitive effect or that are inconsistent with the competitive parity rule (sections 147 and 148).

Access providers must comply with ring fencing obligations. In particular, an access provider must not carry on a 'related business', that is, the business of producing, purchasing or selling natural gas (section 139). However, a related corporation to the access provider may do those things. The AER may require access providers to comply with additional ring fencing requirements and may exempt certain access providers from ring fencing requirements (sections 142– 146). Access providers must also prepare and keep separate accounts for each covered pipeline (section 141). (iv) Dispute resolution

The AER may hear and determine access dispute for both price and non-price terms and conditions of access in relation to pipelines the subject of light regulation (whether or not the pipeline is covered by an access arrangement). This includes disputes where the access seeker and access provider are unable to agree one or more aspects of access to the pipeline service provided by the access provider (sections 181 and 182).

If the AER considers that the resolution of the access dispute requires another person to do something, or if another person applies to be joined to the dispute (and the AER agrees that that person has sufficient interest), those persons are also a party to the access dispute (sections 183).

The AER may decline to hear or determine a dispute in certain circumstances, for example, where the AER considers that the matter the subject of the dispute is expressly or impliedly dealt with under an access agreement or other agreement between the access seeker or prospective access seeker and the access provider (section 186).

When hearing an access dispute, the AER may require the parties to engage in alternative dispute resolution, such as mediation or conciliation (section 185). Hearings are conducted in private unless the parties agree that all or part of it may be conducted in public (section 196). In hearing the access dispute, the AER is not bound by the rules of evidence and may inform itself about any relevant matter in any way it thinks appropriate (section 198). The AER may also give directions and orders, take evidence on oath and make costs orders (parties are otherwise required to bear their own costs) (sections 199–207). The AER also has the power to consolidate the hearing of joint access disputes (sections 208–212).

As mentioned in section 3.2(c) above, when deciding disputes, the AER may determine price and non-price terms and conditions of access, which may include setting revenue and prices for pipeline services (section 193). The AER may agree

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to vary a dispute resolution determination on application by any party to the determination (section 194) and may enforce a determination through injunctions (section 271).

When hearing an access dispute, the AER is not bound by the rules of evidence, but has the power to compel witnesses to attend and answer questions and can require evidence to be given on oath (sections 198, 200, 201, 202 and 203).

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