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Andrew Harding certainly has a way of concentrating people's minds.
The Aurizon chief executive has confirmed an estimated 20 million tonnes of Queensland coal shipments are threatened by a decision to align the way his rail network will work with the way his coal network regulator says it should.
The January 30 group email Aurizon sent to the 20 core customers of its mission-critical coal rail network was both a declaration of war on Queensland's competition regulator and a potentially self-defeating clarion for support from the state's coal sector.
Last year the state's coal miners exported 207 million tonnes of coal that generated $36 billion in revenue for those that dug it up and $3.4 billion in royalties for the state. The lost throughput Harding has flagged represents about 10 per cent of last year's volumes. Based on current buoyant pricing for metallurgical and thermal coal, the exports surrendered to the regulator's decision would be worth about $US3 billion ($4 billion). That level of income loss would imply a loss to the state of about $500 million in royalty revenue, according to the Queensland Resources Council.
"It is not Aurizon's job to subsidise the coal industry in Queensland," says Andrew Harding. AP
Aurizon's coal business in Queensland is a business of two controversially integrated wings. The former state-owned entity that was released to public ownership in 2011 currently owns 2670km of railway track that connects coal mines across and beyond Australian coal's nirvana, the Bowen Basin, to five export terminals at three regional ports. And Aurizon also owns a very large fleet of trains and wagons that makes a lot of money carrying that coal hither and thither.
So it is both a service provider and a monopoly network operator that is required to offer access to its downstream competitors.
Like most natural monopolies, the network part of Aurizon is responsible to a regulator that sets the price of accessing the tracks. In Aurizon's case, the regulator is the Queensland Competition Authority.
Late on Friday December 15 the QCA issued a draft decision on the revenue that Aurizon would be able to extract from the network over the four years from June 2017. At every level of the metrics that the QCA uses to set Aurizon's regulated income, the draft was much worse than anyone expected. The QCA took a very conservative view of Aurizon's weighted average cost of capital, of the risk weighting of deploying that capital and a very odd view of how Aurizon should prioritise a lower than requested maintenance investment.
If draft translates into reality (and history says it will), then Aurizon will be able to bank on a maximum network revenue of $3.9 billion over that four-year period rather than the $4.9 billion it had proposed.
But, strangely enough, it is the QCA's apparently arcane reprioritisation of maintenance spending that has caused more immediate shocks to both Aurizon and its customers.
The way Aurizon sees it, the QCA's draft declares that the rail operator should prioritise maintenance over production. Aurizon says it prefers to repair and sustain its tracks at times that suit the schedules of those moving coal down the lines. The QCA regards that flexibility is an indulgence that generates an inflated maintenance budget.
Having digested that view and assessed the retrospective and future price of the cost-recovery dilution recommended in the QCA's December draft, Aurizon quickly decided to bring itself into rapid alignment with the regulator's view on maintenance.
So it was that January's curt missive was sent to big coal. Coal trains will now have to stop to allow routine maintenance.
Aurizon reckons that will reduce system capacity by 20 million tonnes, though Harding says that remains a best guess. Apparently, for pretty obvious reasons, Aurizon's modelling is not built to address the potential of a wind-back on the flexibility that drives systemic efficiency.
Harding's logic runs that the QCA's decision has retrospectively reset his priorities and that means he is already carrying the cost of the changed maintenance task. And he warned that there would be "further basic changes" in the way the system works "to ensure that our risk tolerance is aligned with our returns".
"It is not Aurizon's job to subsidise the coal industry in Queensland," an obviously frustrated and feisty Harding commented to analysts during Monday's profit briefing.
(For the record, the result was steady to good and the record interim dividend of 14 cents a share served to amplify Harding's commitment to drive yield while he manufactures growth options.)
"Our job is to be a very good rail service that satisfies our customer. December saw our highest ever customer satisfaction score. We thought we were on a good path and we got sideswiped. And it [December] was also a record month by volume, which I thought would be a very good thing."
"The process is broken," he commented later. "They go with consultants every time – they mostly ignore what we say."
Pressed on whether there was any chance that the QCA might reassess its position between now and a year-end final decision, Harding said:
"The draft decision is not a thought bubble. It is not some guys that get together in a pub and draw up an idea on the way of working on a beer coaster. They have spent millions of dollars developing the position. I know. I see the invoices. In the end the point of this is that they are just fundamentally wrong."
Harding made it clear enough that he reckons the time has come for reassessment of the capacity of the QCA to fulfil the legislated responsibilities of its oversight of Aurizon. The next official date for a formal review of the QCA's performance is not due until 2021. But Harding seems in no mood to wait until then.
"There are seven factors they have to consider [under the terms of the legislation]," he said. "One of them is the efficient operation of the rail service, another is the successful operation of our business. We are meant to conduct business and be rewarded for it for doing it efficiently. None of that appears apparent in the current decision."
But the fact that Aurizon has moved at least six months before QCA's final decision and has done so without any serious consultation with its customers are two obvious sectoral bugbears.
For its part Aurizon has no obvious regret for either the move or the manner of its dissemination. Instead it is warning that there is more to come yet.
"We didn't give detail to the customers in significant advance of the decision we made, nor will we in relation to further changes that we have to make," Aurizon Network boss Mike Richards said on Monday. "We need to make them [decisions] now and, as Andrew said, we will make them as soon as we can."
Aurizon's customers receive this rapid progress to system capacity erosion as a recovery of an operational arrogance that they were beginning to believe had been lost. First evidence suggests that, far from developing the consensus for regulatory reform that Aurizon needs, the move has once again polarised operator and customer.
"This latest announcement shows Aurizon is willing to use its power as the monopoly operator of the network and further highlights why the regulatory process needs to be followed to maintain a level playing field," the QRC chief executive, Ian Macfarlane, declared on Monday.
According to Macfarlane, the industry is "extremely disappointed' that Aurizon had decided to "pre-empt the regulatory process by moving to change its maintenance program before the QCA process is completed".
No one, least of all Aurizon, should imagine that Macfarlane's views are not born of coal industry anger. Several of the network's major customers offered me damning appraisals of Aurizon's decision in the wake of Harding's assault on the QCA. After offering certain endorsement of the QCA process, one of Aurizon's bigger customers went on to offer a carefully manicured precis of some of the the independent analysis relied on by the QCA in December's draft decision.
Among the critical gems in a report prepared by GHD Advisory was the claim that there had "been no improvement in efficiency[of maintenance] over nearly 20 years, except for FY2017".
"It would appear to indicate that AN [Aurizon Network] was not aware of its own cost trends in FY2017. This, in and of itself, is a strong indicator that the CQCN [Central Queensland Coal Network] is not a 'well run' railway."
This article first appeared on www.afr.com
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