30 April 2013 2013 Draft Access Undertaking Volume 3: Maximum Allowable Revenue and Reference Tariffs Contents 1 INTRODUCTION.......................................................................................................................18 2 MAXIMUM ALLOWABLE REVENUE AND REFERENCE TARIFFS ......................................19 2.1 UT4 volume forecasts.......................................................................................................20 2.2 Summary of proposed MAR for UT4 ...............................................................................21 2.3 Summary of reference tariffs ...........................................................................................23 2.4 Key drivers of UT4 tariffs .................................................................................................30 2.5 Relativity of proposed UT4 tariffs to other industry cost drivers ................................32 3 OPENING ASSET VALUE........................................................................................................34 3.1 Process..............................................................................................................................34 3.2 Matters impacting the value of the RAB .........................................................................34 3.3 Summary of UT3 roll-forward ..........................................................................................37 3.4 UT4: Opening Asset Values.............................................................................................38 4 BALLAST CLEANING IMPAIRMENT CHARGES ...................................................................40 4.1 Introduction.......................................................................................................................40 4.2 Background.......................................................................................................................40 4.3 Overview of Aurizon Network’s UT4 approach ..............................................................44 4.4 The causes and prevention of coal fouling ....................................................................45 4.5 Issues associated with the impact of coal fouling ........................................................54 4.6 Implications for Aurizon Network....................................................................................56 4.7 UT4 proposal.....................................................................................................................66 5 OTHER UT3 REVENUE ADJUSTMENTS................................................................................70 5.1 Scope .................................................................................................................................70 5.2 UT3 capital expenditure ...................................................................................................70 5.3 Reconciliation of audit costs...........................................................................................74 5.4 UT4 End of Period Assessment costs ............................................................................75 5.5 Gladstone Area take or pay .............................................................................................75 5.6 Take or pay dispute ..........................................................................................................78 6 RETURN OF CAPITAL.............................................................................................................79 6.1 Framework issues.............................................................................................................80 6.2 UT1 and UT2 Economic Lives..........................................................................................84 6.3 UT3 Depreciation Outcome..............................................................................................85 Volume 3: Maximum Allowable Revenue and Reference Tariffs 2 6.4 Issues for UT4 ...................................................................................................................85 6.5 Options analysis ...............................................................................................................94 6.6 UT4 proposal...................................................................................................................101 7 RETURN ON CAPITAL...........................................................................................................102 7.1 Overview..........................................................................................................................103 7.2 Framework issues...........................................................................................................103 7.3 Risk-free rate...................................................................................................................127 7.4 Gearing ............................................................................................................................128 7.5 Debt margin.....................................................................................................................128 7.6 Market risk premium.......................................................................................................132 7.7 Equity beta.......................................................................................................................136 7.8 Gamma.............................................................................................................................144 7.9 Inflation............................................................................................................................146 7.10 Assessing the reasonableness of the proposed estimates........................................147 7.11 Summary: proposed return on capital..........................................................................148 8 CAPITAL EXPENDITURE ......................................................................................................151 8.1 Introduction.....................................................................................................................152 8.2 Scope ...............................................................................................................................152 8.3 Details of major growth projects ...................................................................................153 8.4 Upgrades and renewals..................................................................................................160 8.5 Projects not included in the Capital Indicator..............................................................182 8.6 Interest During Construction.........................................................................................183 8.7 Summary..........................................................................................................................184 9 MAINTENANCE EXPENDITURE ...........................................................................................186 9.1 Scope ...............................................................................................................................187 9.2 Methodology and assumptions.....................................................................................187 9.3 UT4 proposal...................................................................................................................189 10 OPERATING EXPENDITURE.................................................................................................190 10.1 Scope ...............................................................................................................................193 10.2 System wide and regional costs ...................................................................................193 10.3 Transmission connection costs....................................................................................243 10.4 Electricity on-selling costs ............................................................................................248 10.5 Risk and insurance.........................................................................................................256 10.6 Working capital ...............................................................................................................273 10.7 Tax depreciation .............................................................................................................278 Volume 3: Maximum Allowable Revenue and Reference Tariffs 3 APPENDIX A – LIST OF TABLES AND FIGURES ......................................................................279 APPENDIX B – AURIZON HOLDINGS LIMITED FUNCTIONAL SUPPORT AREAS .................282 APPENDIX C – MARKETABLE RESERVES AT 1 JULY 2013 ...................................................291 APPENDIX D – SYSTEM ALLOCATIONS ...................................................................................293 Volume 3: Maximum Allowable Revenue and Reference Tariffs 4 Glossary 2010 Undertaking Aurizon Network’s current Access Undertaking, approved by the QCA on 1 October 2010, together with any subsequent changes approved by the QCA 2013 Undertaking Aurizon Network’s Draft Access Undertaking due to commence on 1 July 2013 CQCN Central Queensland Coal Network CQCR Central Queensland Coal Region CRIMP Coal Rail Infrastructure Master Plan DAAU Draft Amending Access Undertaking DORC Depreciated Optimised Replacement