Review of the Western Australian Rail Access Regime 17 November 2017 Aurizon Operation’s submission to the Western Australia Treasury Department Issues Paper Table of Contents Executive Summary .................................................................................................................. 4 Aurizon Operations in Western Australia .................................................................................. 5 Improving the effectiveness of the Western Australian Rail Access Regime ............................. 6 Aurizon submissions to the WA Access Code Review ......................................................... 7 Aurizon’s experience with the Code ..................................................................................... 7 Lessons from the CBH negotiations..................................................................................... 8 Areas for improvement ........................................................................................................ 9 Balance of power in access negotiations .................................................................................. 9 Reform Option 1. Make the non-discrimination requirements mandatory for all access negotiations whether executed inside or outside of the Code. ................................. 9 Reform Option 2. Part 5 instruments apply regardless of whether or not an access agreement is negotiated inside or outside of the Code .......................................... 11 Reform Option 3. Allow a negotiation which commences outside the Code that is brought within the Code to progress straight to arbitration provided the nature of the access rights sought remains unchanged. ............................................................... 13 Additional matters .............................................................................................................. 14 Removing barriers to negotiation ............................................................................................ 15 Reform Option 4. Reversing the onus to require that the railway owner must specify what, if any, extensions/expansions are required to accommodate the proposal ............................................................................................................................. 16 Reform Option 5. Reversing the onus to require that the railway owner demonstrate whether a proposal can or cannot be accommodated on the rail network and whether a proposed extension/expansion is technically and economically feasible and safe .......................................................................................... 16 Removing other barriers. Floor and Ceiling Cost Determinations ..................................... 17 Improving accountability within the access regime.................................................................. 18 Reform Option 6. Providing for more regular and consistent reporting of the railway owner’s compliance with all of the Part 5 instruments ............................................ 18 Reform Option 7. Require the railway owner to publicly report on a regular basis on the progress of access applications. ............................................................................. 19 Reform Option 8. Requiring the railway owner to publicly report on a regular basis on service quality matters. ........................................................................................ 19 Aurizon Operation’s submission to the Western Australia Treasury Department Issues Paper 2 Reform Option 9. Allow for merits review of regulatory decisions made under the Code. ........................................................................................................................... 20 Reform Option 10. Include Final Recommendation 4 from the ERA’s 2011 Code Review ............................................................................................................................... 21 Facilitating timely and efficient expansion of the network ........................................................ 21 Reform Option 11. Apply a high level set of principles to guide the expansion process in an access negotiation. ...................................................................................... 22 Reform Option 12. Include a detailed expansion process in the Code. .............................. 23 Reform Option 13. Allow a proposal of an extension or expansion to be made at any time after making the initial proposal. .......................................................................... 23 Alignment of pricing mechanisms with the regime’s objectives ............................................... 23 Reform Option 14. Application of Indicative Tariffs ........................................................... 24 Reform Option 15. Replace the GRV approach with an Established Asset Value ............. 26 Expanding the Guidelines for the Negotiation of Prices ..................................................... 28 Effective regulation of marginal freight routes ......................................................................... 29 Interactions with the National Access Regime ........................................................................ 30 Aurizon Operation’s submission to the Western Australia Treasury Department Issues Paper 3 Review of the Western Australian Rail Access Regime Executive Summary Aurizon Operations (Aurizon) welcomes the opportunity to respond to the Department of Treasury’s consultation paper (Issues Paper) on the review of Western Australian Rail Access Regime (WARAR). While the Railways (Access) Code 2000 (the Code) has been subject to periodic five yearly review in accordance with the requirements of the Railways (Access) Act 1998 (the Act) this consultation process represents the first significant review of the overall performance of WARAR. Aurizon has a significant presence in the Western Australia rail freight market following its acquisition of the Australian Railroad Group (ARG) in 2006. Since the acquisition Aurizon has expanded its operations in iron ore and bulk freight operations in regional Western Australia. Aurizon has also made significant investments in locomotives and facilities to support the state’s regional employment and export earnings outcomes. Aurizon has not made an application for access pursuant to the Code since its acquisition of ARG. Aurizon constructively engages Arc Infrastructure to develop rail freight prices and operations to provide competitive service offerings to its customers. Nevertheless, the current operation of the WARAR does not provide for a balanced negotiation given the significant investments that have been made in rollingstock and facilities. The financial performance and sustainability of these operations is dependent on a fair and reasonable price and terms of access. Therefore, while Aurizon may not have made application for access under the Code, the Code and its effectiveness provide an essential safeguard to Aurizon and its customers in securing efficient rail freight services. The Issues Paper canvasses a range of issues previously identified by stakeholders over successive reviews of the Code by the Economic Regulatory Authority (ERA). The matters discussed in the Issues Paper and the reform options to be considered demonstrate that the Department of Treasury has a clear understanding of stakeholder concerns with the access regime. Aurizon is largely supportive of the prospective reform options as being consistent with the following outcomes: Establishing a framework which provides a more balanced negotiation between the access seeker and the access provider through increased transparency and recourse to timely and effective arbitration; Ensuring the access regime operates consistently and fairly across all market participants and an access seeker does not obtain a less favourable outcome compared to another access seeker/holder for a similar service by seeking access under the Code; The access regime provides for increased levels of performance, including through the disclosure of performance metrics and cost transparency to allow for greater levels of industry self- regulation allowing the market to hold the access provider accountable with the regulator focusing on ongoing compliance with the regime; The access regime provides effective controls, oversight and accountability of vertically integrated service providers and internal access charges are maintained based on a regulator approved methodology; Aurizon Operation’s submission to the Western Australia Treasury Department Issues Paper 4 The pricing principles supports the ability for an efficient rail operator to trade profitably in the rail haulage market on a sustained basis subject to achieving the revenue adequacy outcomes of the access provider; The access regime facilitates flexibility in the provision of access, including the negotiation of variations to an existing access agreement, to improve the productivity and efficiency of rail operations in order to lower costs and improve competitiveness; and The scope of negotiation is reduced through the publication of an indicative access agreement that has been endorsed by the regulator following a consultation process. Aurizon has limited its response to the Issues Paper to only those matters that Treasury indicated an intention to address through the legislative reform process and where those matters are relevant to improving the efficacy of the regime for markets