page 1 Working together for a shared future 17 December 2008 Mr EJ

							                                                                     Working together for a shared future
17 December 2008




Mr EJ Hall
Chief Executive
Queensland Competition Authority
GPO Box 2257
BRISBANE QLD 4001


Dear John

The Queensland Resources Council (QRC) welcomes the opportunity to provide this submission to
the Queensland Competition Authority in order to assist the assessment of QR Network’s proposed
coal Western System reference tariffs contained in the 2009 draft access undertaking (2009 DAU).

After consideration of the additional material provided for stakeholder comment, relating to
maintenance costs and capital expenditure, QRC provides the following response.

    Western System Reference Tariffs
QRC’s submission of 14 November 2008 outlined the QRC’s views regarding the proposed Western
System tariff of $22.07 /’000gtk. In particular, QRC considered that:
-   The methodology used by QR Network to establish a ceiling price for the Western System was
    inappropriate, and in the absence of an appropriate ceiling price there is insufficient justification
    for the proposed tariff increase.
-   An alternative methodology must be developed which leads to a reasonable tariff for the 2009
    Undertaking, and establishes a baseline methodology which can be readily applied for the
    establishment of new tariffs in subsequent regulatory periods.


The additional information provided by QR Network regarding capital and maintenance costs
reinforces the QRC’s concerns regarding QR Network’s proposal, as is discussed below.


    Maintenance Costs
QRC’s key concerns regarding the proposed maintenance costs are:
-   The costs were developed prior to the impacts of the global financial crisis and are therefore no
    longer appropriate. Section 2.2 of QR Network’s submission (“Continuation of Cost Pressures”)
    notes the cost pressures which applied during recent years and suggests that “these pressures
    are not set to abate in UT3”. QR Network notes that the main sources of pressure on input costs
    are “labour, consumables, fuel and accommodation”. In regard to these items, QRC notes that:




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         Fuel prices have reduced substantially since the period during which QR Network developed
         its initial cost estimates. For example, the Shell Terminal Gate Price for automotive diesel in
         Brisbane is currently (as at 16 December ) 32% lower than the average for June 2008.
         QR Network suggests that the cost pressures in regard to labour are partly a result of the
         relevant skills also being in high demand by the mining industry. Recent company
         announcements surrounding reductions in employment throughout Queensland indicate that
         this source of cost pressure is unlikely to be as significant as was expected at the time of the
         development of the cost estimates.

-   The nature of the planned maintenance activities is very specific to the line section from
    Rosewood to Macalister. The particular characteristics of this section or rail infrastructure, such
    as the poor quality of track and the nature of the Toowoomba Range crossing, create
    maintenance requirements and high costs which would not be expected in sections of track of
    better quality, such as in the metropolitan network. Yet by applying the same $/’000 gtk charge to
    the use of the metropolitan network, QR Network implicitly recovers a similar (high) maintenance
    charge for coal carrying train services in the metropolitan system.
    This is inappropriate given QR Network’s statement that “coal specific maintenance and capital
    expenditure activities do occur in the Metropolitan system as the axle load of coal trains is greater
    than for passenger services, however as the track is constructed and maintained to a level for
    passenger safety and ride comfort these expenditures are minimal”. This issue is discussed
    further in the following section relating to capital expenditure and capital charges.
-   QR Network seeks tariffs which are based on actual costs plus a 15% margin to be paid to a
    related party. QR Network has not demonstrated that these costs are efficient. We refer to our
    comments in the 14 November submission regarding the payment of internal margins and
    suggest that if a ‘cost-plus’ approach is allowed (rather than an assessment of efficient costs),
    then QR Network should be required to test the competitiveness of the service offered by QR
    Services by seeking alternative offers in the market. This should involve a transparent process in
    which third parties have a genuine opportunity to win the business.
-   QR Network proposes the allocation of maintenance costs to coal and non-coal traffic on the
    basis of Gtks, while a number of costs would seem to be related more to train path utilisation or to
    be unrelated to train weight (for example, fencing repairs, signage, fire and vegetation control,
    crossing maintenance, telecommunications and signalling maintenance, structures including
    structures supporting road over rail crossings). In addition, it is not clear from the information
    provided by QR Network if the proposed adjustment for non-coal has been made to the proposed
    maintenance costs.
-   QRC is unable to determine whether the maintenance proposed is consistent with the valuation
    of the existing assets within the proposed ceiling price (that is, does the asset valuation reflect an
    asset in poor condition).
-   QRC remains uncertain as to the basis of allocation of operating costs to coal traffics operating
    on the Western System. QR Network’s previous submission (Western System Coal Tariff
    Development, page 29), states that “the allocation of costs to Western System coal was based on
    the average of the system-wide standard cost allocator for the Moura and Newlands systems. It
    is not clear how this proposed average was developed (in terms of the total expenditure or
    method of allocation – tonnes, train paths gross tonne kilometres, or something else).
    Furthermore, it is not clear how these costs have been apportioned to non-coal traffics.
    Capital expenditure and capital charges
QRC’s key concerns regarding the proposed capital costs are:
-   The costs were developed prior to the impacts of the global financial crisis and are therefore likely
    to overestimate input costs (noting that there is no equivalent of the central Queensland capex
    carry-over mechanism in the Western System).
-   The capex planned is specific to the line section from Rosewood to Macalister and QR Network
    has described the coal-specific capital expenditure in the metropolitan system as being “minimal”.
    Yet by applying the same $/’000gtk charge to the use of the metropolitan network, QR Network is
    effectively applying a similar capex allowance to the use of the metropolitan system.
-   Section 3 of QR Network’s paper on Western System Maintenance Costs explains the
    ‘maintenance and capex interrelationship’. The nature of the capex being undertaken, such as
    replacement of timber sleepers with concrete, is such that future maintenance costs should be
    reduced. Given that maintenance costs are allocated to both coal and non-coal traffic, QRC
    suggests that an allocation of capex to non-coal traffic is appropriate where this capex reduces
    future maintenance costs.
-   QRC’s concerns regarding the inclusion of related party margins in capital costs are discussed in
    our November 14 submission.
-   QRC is unable to determine whether the capex proposed is consistent with the valuation of the
    existing assets within the proposed ceiling price.


    Way forward
As was suggested in QRC’s submission of 14 November, QRC seeks substantial consultation
between QR Network, the QCA and the QRC at the earliest possible opportunity to discuss the
approaches to develop a robust Western System reference tariff. This discussion should include
possible approaches such as:
-   Coal traffic paying the same contribution to common costs as other traffic in the Western System,
    plus capital and maintenance costs which are specific to coal (noting that the return on capital
    implicit in this, or any other, methodology should be based on a WACC which reflects current
    market parameters and QR Network’s risk profile in the Western System).
-   Coal traffic paying a tariff derived using:
         for the Rosewood to Macalister section: the methodology proposed by QR Network, noting
         that this still requires assessment of a proper DORC and of coal specific capex,
         maintenance costs and opex for this section.
         plus
         for the use of the metropolitan system, an incremental maintenance cost (AT1 equivalent).
         This is consistent with the approach used for non-coal traffic (as the ‘incremental’ traffic task)
         in Central Queensland. This approach also reflects:
                -   QR Network’s statement that coal-specific maintenance and capital expenditure in
                    the Metropolitan system is minimal.
              -    That, with the exception of rail assets at the port, the existing metropolitan asset
                   base relates to capital expenditure incurred for non-coal traffic. This is
                   demonstrated by the fact that coal traffic is unable to run during peak passenger
                   periods (that is, no capacity beyond that required for passenger services has been
                   provided).

Given the significant increase proposed to apply to Western System reference tariffs, industry
appreciates the opportunity to provide this submission to the QCA. If you wish to discuss any of the
issues raised in this submission, please do not hesitate to contact Russell Silver-Thomas, Industry
Policy Adviser on (07) 3295 9560 to discuss.




Yours sincerely




Michael Roche
Chief Executive