REVIEW OF THE VICTORIAN RAIL ACCESS REGIME: FINAL REPORT€¦ · Review of the Victorian Rail Access Regime Contents 5 CONTENTS CHAIRPERSON’S INTRODUCTION 3 CONTENTS 5 GLOSSARY

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REVIEW OF THE VICTORIAN RAIL ACCESS REGIME: FINAL REPORT

VOLUME I: FINDINGS AND RECOMMENDATIONS

FEBRUARY 2010

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.

An appropriate citation for this paper is:

Essential Services Commission 2010, Review of the Victorian Rail Access Regime

Final Report: Volume I Findings and Recommendations, February.

Essential Services Commission

Victoria

Review of the Victorian Rail

Access Regime

Chairperson’s Introduction 3

CHAIRPERSON’S INTRODUCTION

The Minister for Finance has asked the Commission to undertake thisReview of the

Victorian Rail Access Regime. The purpose of the Review is to advise the Minister

as to whether to retain the rail access regime and if so in what form, 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. Significant changes were made to

the access framework in 2006, prior to the below-rail infrastructure reverting to

public ownership.

Since that time, several important changes have occurred in the Victorian rail

industry. There is also a national agenda to simplify and achieve greater national

consistency of rail access regimes. The Victorian Government is committed to seek

certification of the Victorian rail access regime as an effective State-based access

regime before the end of 2010.

This Final Report presents the Commission's recommendations on all of the

matters under review. These considerations have benefited from consultation with

stakeholders, workshops, public hearings and written submissions.

There was a relatively high degree of consensus among stakeholders concerning

the continued application of access regulation to rail infrastructure, but differing

views in relation to the coverage of rail terminals. The major changes to the

Commission’s conclusions from the Draft Report have been to narrow the

application of access regulation to one terminal, South Dynon, and to recommend

monitoring of all of the remaining terminals in the Dynon and port precincts.

The Commission’s main recommendations are:

• the 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 lighter-handed regime

• a negotiate/arbitrate framework should be applied, but access providers

should retain the ability to submit an access undertaking voluntarily

• the access regime should apply to the South Dynon rail terminal which

continues to be a significant infrastructure facility due to its key role in

interstate containerised rail freight

• The access regime should be supplemented by monitoring of certain other

rail terminals in the Dynon and port precincts. These include the Dynon

Intermodal terminal, and the rail terminals situated on East and West

Swanson Docks and Victoria Dock. All of these have existing access

obligations under leases but most are not currently subject to regulation.


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Chairperson’s Introduction 4

The Commission has also considered the implementation and transitional issues

associated with its recommendations.

Volume I of this report summarises the Commission’s recommendations and

highlights a number of related issues that were raised by stakeholders during the

consultation process. The Commission has released a separate volume that

provides a more comprehensive explanation of its analysis and its findings and

responses received from stakeholders. A third volume comprises supplementary

background information and more technical analysis related to the review.

Dr Ron Ben-David

Chairperson


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Contents 5

CONTENTS

CHAIRPERSON’S INTRODUCTION 3

CONTENTS 5

GLOSSARY 6

THE COMMISSION’S FINDINGS 9

1. Background 10 1.1 Policy context 10 1.2 Current rail access regime 10 1.3 Victorian freight rail industry 11 1.4 Comparative rail access regimes 12 2. The need for continuing economic regulation 13 2.1 Commission’s approach 13 2.2 Case for regulating train infrastructure services to passenger trains 13 2.3 Case for regulating rail infrastructure services to freight trains 14 2.4 Case for regulating access to certain terminals 15 3. Form of economic regulation 18 3.1 Type of regulation 18 3.2 Elements of the rail access regime to be modified 20 3.3 The monitoring regime for certain terminals 25 4. Relevance of the existing VRAR objectives 27 5. Other matters for consideration 29 5.1 Network performance standards 29 5.2 One-stop-shop 30 6. Implementation 33


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Glossary 6

GLOSSARY

Access agreement An agreement between an access provider and an access

seeker for the provision of one or more declared rail transport services.

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.

Container A reusable steel rectangular box for carrying cargo.

Declaration Order An Order of the Governor in Council pursuant to s.38I of

the Rail Corporations Act 1996 (Declaration of rail transport services).

Declared rail transport

service

A rail transport service declared under a Declaration

Order.

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.


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Glossary 7

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

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

Pricing Order or Pricing

Principles Order

An Order of the Governor in Council pursuant to s.38J of

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 corridor A rail network running from one location to another.

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.

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.

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.

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


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Glossary 8

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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The Commission’s Findings 9

THE COMMISSION’S FINDINGS

The Essential Services Commission (Commission) is the independent economic

regulator of the Victoria rail sector under the Rail Corporations Act 1996 (RCA).

Part 2A of the RCA establishes a Victorian Rail Access Regime (VRAR). The

current VRAR came into effect on 1 January 2006.

On 26 June 2009, the Minister for Finance asked the Commission to undertake a

review of the VRAR. The Terms of Reference require us 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 such regulation should take and

o whether the current objectives for VRAR remain relevant, and if

not, what new objectives the VRAR should adopt.

This Final Report sets out our final recommendations on these matters and reflects

the views and issues raised by stakeholders through public consultation.


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1. Background

1.1 Policy context

In carrying out this review, we have had regard to relevant government policies and

objectives related to the rail industry and economic regulation.

Of most relevance is the Government’s recent policy statement Freight Futures,

and although not formally adopted as policy, the findings of the 2007 Rail Freight

Network Review (or ‘Fischer Review’).1

Freight Futures contains the following policy objectives:

• 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.

Among other things, the Fischer Review recommended that the Victorian

Government:

• provide 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 and

• adopt a simpler access regime, and consider the Commission’s ongoing

role in rail freight access.

Relevant government objectives related to economic regulation are set out in the

Competition and Infrastructure Reform Agreement (CIRA). This agreement,

between all Australian governments requires a simpler and consistent national

system of rail access regulation with 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 should conform to clause 6 of the CPA

and be submitted for certification before the end of 2010.

1.2 Current rail access regime

The services currently regulated under the VRAR include:

• rail network 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.

1 The Victorian Rail Freight Network review (December 2007) ‘Switchpoint: The Template for

Rail Freight to Revive and Thrive!’


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The access providers subject to regulation under the regime are:

• V/Line Passenger, the manager of the regional rail network

• MTM (which replaced Connex), the manager of the metropolitan rail

network

• Asciano, the manager of the South Dynon Terminal and

• VicTrack and POTA, the managers of the Dynon Intermodal terminal with

VicTrack also managing the North Dynon Agents’ Sidings.

Under the VRAR, each access provider is required to have an access arrangement

approved by the Commission which contains:

• the terms and conditions (including price) for the provision of each

reference service

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

reference services

• a procedure for making, assessing and determining access applications

and

• the term of the access arrangement.

Access arrangements must also conform to a Pricing Order2, which prescribes the

pricing principles that an access provider must apply when charging for access.

Commission Instruments establish the rules applying to access providers and

cover a broad range of activities: account keeping, ring fencing, the use of

capacity, network management and the framework for access negotiation. There

are also rules for handling confidential access seeker and user information.

The VRAR contains a dispute resolution framework in which the Commission

arbitrates disputes notified to it by either an access seeker or an access provider.

The dispute resolution framework provides a 'last resort' mechanism.

1.3 Victorian freight rail industry

The Victorian freight rail industry comprises the following networks and terminals:

• the metropolitan and the regional intrastate rail networks

• a number of terminals for loading or unloading freight and/or transferring

freight between road and rail transport located in the Dynon precincts, the

Port of Melbourne and regional Victoria and

• metropolitan intermodal terminals (IMTs) in Altona/Laverton and Somerton.

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 to port or domestic terminals. Containerised freight

2 Rail Network Pricing Order 2005.


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consists mainly of agricultural and processed products and is typically transported

to the Port of Melbourne Corporation (PoMC) from regional industries and IMTs.

Recent developments

Since the current access regime was introduced in 2006 there have been a

number of important changes in the structure of 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.

1.4 Comparative rail access regimes

It is apparent that some aspects of the VRAR differ fundamentally from other rail

access frameworks operating in Australia. The Victorian regime is more

prescriptive than most other state-based regimes and the majority of declared

services (terminals aside) are not priced by reference to a 'floor-ceiling test' as in

other regimes.


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2. The need for continuing economic regulation

2.1 Commission’s approach

We have considered whether the Victorian rail access regulation is still required

given the present and anticipated future state of the rail industry and whether any

other services or facilities should be subject to the regime.

Two criteria are relevant when considering these matters:

• 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.

Regulation is likely to be beneficial where there is scope for the misuse of market

power, weak incentives to improve efficiency and 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 infrastructure facilities where:

• it would not be economically feasible to duplicate

• 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 access seeker can be ensured at an

economically feasible cost and

• the facility is ‘significant’ to the State or regional economy.

2.2 Case for regulating train infrastructure services to passenger

trains

In 2009, the Victorian 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 contractual arrangement between the parties

removes the need for an independently administered access regime.

In these circumstances we can see no purpose to the continued operation of the

Passenger Network Declaration Order.


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Recommendation 1

Rail infrastructure services provided by MTM to V/Line, and by V/Line to itself,

for passenger services should cease to be declared services.

2.3 Case for regulating rail infrastructure services to freight

trains

Our analysis of the rail market suggests that the rail supply chain in Victoria does

not have sustainable market power against road transport alternatives. This is

further evidenced by the subsidies currently provided by the Victorian Government

towards maintaining both the regional and metropolitan rail networks.

In the interstate freight market, a degree of market power exists in long haul freight

tasks (eg. between Melbourne and Perth or Brisbane). This is relevant to terminals

primarily serving the interstate market, such as South Dynon (discussed in section

3.1.3 below), but not to intra-state rail infrastructure.

The assessment of the rail supply chain as a whole indicates that the benefits of

the access regulation do not extend to preventing the exercise of market power

through excess price levels. Rather, the following benefits exist:

• It promotes above-rail competition, providing greater certainty for regional

industries to efficiently access export markets and greater confidence in

rail based supply chains. Passenger service providers have low incentives

to provide freight access because of its relatively small contribution to

revenue. Track owners have the potential to hinder access for freight trains

and the maintenance of neutrality between competing train operators.

• An appropriately designed access arrangement will reduce transaction

costs for market participants.

• Above-rail competition will reduce the risk of vertically integrated

stevedore/terminal/rail operators capturing benefits from rail subsidies as

economic rents.

• It facilitates regional development and partly ameliorates concerns about

the impact on community amenity (as well as change to local

infrastructure) from greater truck use.

• Access regulation has a valuable role in facilitating access by freight

operators to the rail network and hence in facilitating competition in above-

rail freight operations, particularly where track operation and passenger

service provision is vertically integrated. In turn, above-rail competition is

an important factor for enhancing the efficiency of above rail services.

Although the costs associated with light-handed regulation are relatively modest,

there are significantly higher costs to heavy-handed regulation. It is expected that

the costs of light-handed regulation would be outweighed by the expected benefits.

On this basis, we conclude that there is net benefit to retaining access regulation


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and continuing the coverage of rail infrastructure services, albeit in a more light

handed manner.

We believe that rail infrastructure services on the regional rail network and parts of

the metropolitan network meet the necessary conditions 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

• it would appear to be uneconomical for another party to develop a

competing rail infrastructure facility to provide similar services to freight

trains given the current excess capacity on the regional rail network and

the high cost and constraints to constructing additional capacity in

metropolitan areas and

• access to the below-rail networks is necessary to permit effective

competition in the above-rail freight market.

Recommendation 2

The VRAR should be retained in a more light-handed form.

Recommendation 3

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 declared facilities.

2.4 Case for regulating access to certain terminals

Intermodal rail terminals are an integral part of the rail freight supply chain. Freight

transported by rail must access a terminal at the ‘rail head’ and at the end of the

journey. Access to certain key or ‘hub’ terminals can be a necessary pre-condition

for effective competition in above-rail markets.

Our analysis has found that the following important features of terminals can give

rise to monopoly bottleneck conditions:

• Intra-state rail freight is dominated by the export of goods from regional

Victoria. Terminal accessibility at the key port delivery points is vital to

permit effective competition in above rail markets especially with

containerised freight. The two on-dock terminals adjacent to the stevedore

terminals at Swanson Dock have strong locational advantages over any

alternative terminals in off-dock locations for transfer of export containers

to the stevedore terminals. Consequently, these two terminals currently


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handle almost all of Victoria’s intra-state containerised rail freight. These

on-dock terminals are controlled by train operators Asciano and POTA.

• Rail terminals have strong economies of scale. 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. The only interstate rail terminal

of this scale in Victoria at the present time is South Dynon, which handles

the great majority of interstate containerised rail freight in Victoria. The

SCT terminal in Altona is a relatively small terminal designed for handling

palletised freight transported in vans, rather than containers. Currently the

Dynon Intermodal terminal has limited quantities of interstate containerised

freight. Given economies of scale, the sustainability of potential

competitors such as Dynon Intermodal is uncertain.

These market structures suggest that the scope for contestability of key terminal

services remains limited or questionable at present. In addition, the operators of

the Swanson Dock terminals and the South Dynon terminal are vertically

integrated. These conditions increase the risk that competition in above rail

services could be constrained by access to these terminals unless effective access

rights are in place.

Our assessment is that there is benefit in ensuring effective access to certain

terminals where this is necessary to ensure effective competition between train

operators in the intra-state or interstate rail markets. These benefits are considered

to be significant for the South Dynon and the on-dock East and West Swanson

terminals.

There is limited National Competition Council (NCC) precedent related to the

certification of access to rail terminal infrastructure. In the NCC’s recent decision to

declare the Tasmanian Railway Network, terminals formed part of the declared

services, but there was no discussion regarding those terminals.3

In regard to the applicability of the national access framework:

• South Dynon terminal appears to meet the test that access is necessary to

enable effective competition in the interstate line haul containerised freight

market. This is because the operator is vertical integrated, and it has not yet

been economically duplicated. Some uncertainty remains as to whether this

will be the case in future because it depends on Government plans for

Dynon Intermodal terminal and the remainder of the Dynon precincts. On the

basis of existing and foreseeable market conditions and terminal capacity

expansion opportunities, our assessment is that South Dynon cannot yet be

economically duplicated.

• The Dynon Intermodal terminal currently handles relatively small volumes

and would be unlikely to meet the criteria for ‘significant infrastructure

facilities’.

3 National Competition Council 2007, Final recommendation: Application for declaration of a

service provided by the Tasmanian Railway Network, Melbourne.


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• The East and West Swanson terminals have many of the characteristics of

monopoly bottleneck facilities. This is because they have localised

competitive advantages, a high proportion of intra-state freight using these

facilities, and vertical integration of terminal operators with rail haulage

operations. These bottleneck characteristics are expected to be further

accentuated by planned closures of connecting roads within the port, and

the Government’s foreshadowed port truck access levy. On the other hand a

recent rail terminal has been established by Westgate Ports at Victoria Dock,

which will provide an alternative on dock terminal slightly further from the

stevedore terminals.

Our overall conclusions on whether to regulate terminals are:

• There is a net public benefit to applying effective access obligations to the

key or ‘hub’ terminals that must be accessed by export/import container

trains or by long haul interstate trains. The benefits from competition in

above-rail services cannot be effectively realised without such access

obligations.

• Access regulation should continue to apply to the South Dynon terminal for

an interim period, until Government strategies for developing other efficient-

scale terminals are more advanced.

• The East and West Swanson terminals, Westgate Ports and the Dynon

Intermodal terminal should be monitored by the Commission. Such

monitoring should be designed to ensure that the operators’ existing

leasehold obligations are effective in enabling above rail competitors to

access the terminals on fair and reasonable terms and conditions.

Recommendation 4

South Dynon terminal should remain covered by the VRAR (under a light-

handed framework) and the Dynon Intermodal terminal and the North Dynon

Agents’ Sidings should no longer be covered.

Recommendation 5

The Dynon Intermodal Terminal (with the North Dynon Agents’ Sidings), the

East and West Swanson rail terminals and the Westgate Ports Victoria Dock

rail terminal should all be subject to monitoring of terms and conditions

(including price) by the Commission in regard to existing contractual access

obligations.


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3. Form of economic regulation

Where regulation is recommended, the Terms of Reference require the

Commission to recommend the form that regulation should take. There are two

levels at which this question needs to be addressed: the overall type of regulation

and the detailed elements of the framework required to establish a light-handed

regime.

3.1 Type of regulation

There are varying approaches to economic regulation that are generally presented

on a spectrum from 'light handed' to 'full regulation'. In selecting among the

alternatives:

• The degree of prescription in the form of regulation is usually related to the

degree of market power. Approaches such as formal price controls are

commonly used where an access provider has substantial market power.

• Vertical integration will also influence the incentives an access provider has

to exercise market power, and hence the appropriate form of regulation.

• Lighter handed models may be preferable where the market is transitioning

from conditions of substantial market power to more competitive conditions,

but where competition is not yet fully effective.

To assess the likely effectiveness of alternative forms of regulation, we have

considered prevailing market circumstances, institutional context, dynamic

considerations and stage of market development.

As discussed above, there is limited pricing power for rail access providers on the

Victorian intra-state rail networks. We have concluded that a light-handed form of

regulation would be most appropriate for both rail infrastructure and South Dynon

terminal.

We have had regard to stakeholders’ views on the form of access regulation.

Stakeholders’ views were divided between:

• those (which included access providers) preferring the current framework

to continue, perhaps with some modifications

• the view from current train operators that the ARTC undertaking would be

appropriate and is more light-handed than the existing framework and

• some who suggested a more light-handed negotiate/arbitrate framework

(eg. Wakefield).

There was less comment from stakeholders about the form of regulation that

should apply to terminals and more focus on transparency and equity between

operators.

An effective access regime must, at a minimum, have effective negotiation and

dispute resolution frameworks and information disclosure requirements. These are

dominant features of a basic negotiate/arbitrate framework.


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We have concluded that the negotiate/arbitrate model would be an appropriate

form of light-handed access regulation for the VRAR. Such a regime could have a

two-tier system of regulation:

(a) The first tier could establish a basic negotiate/arbitrate access regime that

would apply to all declared rail track infrastructure services and basic terminal

services at declared terminals. (Under the Commission’s recommendations the

terminal services at the South Dynon rail terminal would remain declared). The

Commission would resolve disputes. 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 transport services declared to be national

‘major corridors’. Affected access providers would be obliged to maintain an

approved access undertaking. The form of the undertaking should be similar to

the ARTC undertaking. If the access provider were ARTC, then it would be

able to satisfy the mandatory access undertaking requirement by submitting

the undertaking to the ACCC instead of the Commission. A process needs to

be established for determining when a facility becomes a ‘major corridor’.

Recommendation 6

The VRAR be amended to provide a two tier system of regulation for declared

rail track services:

(a) the first tier should apply to all declared rail transport services. The default

form of regulation should be a negotiate/arbitrate framework and access

providers should be able to submit a voluntary access undertaking to the

Commission for approval

(b) the second tier should apply to all declared rail transport services

designated as ‘major corridors’, thus obliging the access provider to submit

an access undertaking to the Commission for approval. 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.


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Recommendation 7

No declared facilities should be designated as ‘major corridors’ for the purposes

of recommendation 6 at this stage.

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 public consultation on the question.

3.2 Elements of the light-handed rail access regime

We have examined whether elements of the VRAR would need to be modified to

implement a light-handed regime and to meet the requirements for certification.

Defining the scope of the regime

An important requirement of an effective access regime is that the services that are

subject to the regime are well defined and we have identified a number of

improvements in this regard.

Recommendation 8

The declared terminal services at South Dynon should include only necessary

services such as train control functions, lifting services at the terminal and

temporary container storage. Ancillary services do not need to be declared.

Recommendation 9

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 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

definition of 'access provider' should be clarified to include providers of declared

rail transport services who are not otherwise required to be accredited under

Part 5 of the Rail Safety Act.

The criteria for declaring rail transport services to be 'declared rail transport

services' under the Rail Corporations Act 1996 should be amended to reflect

more closely the criteria set out in the CPA and the Trade Practices Act 1974

for declaring services in the context of a State-based access regime.


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Regulation of operational matters

We have considered whether the existing elements of the VRAR relating to the

regulation of operational matters are too prescriptive, and specifically whether

Network Management and Capacity Use Rules are needed. The NCC has

emphasised that resolving capacity issues is a critical matter for negotiating access

to services. Users such as Asciano expressed the view that the existing network

management protocols and capacity allocation processes provide certainty about

how potential operational conflicts between passenger and freight trains will be

managed. For these reasons, we support the ongoing application of these rules.

Recommendation 10

The requirement that the Commission make Capacity Use Rules and Network

Management Rules should continue in order to ensure that access providers:

• establish transparent protocols for capacity allocation and network

management (retaining the ‘use it or lose it’ principle) and

• do not discriminate between users when carrying out those activities.

Access undertakings

Within the recommended framework there will be scope for access providers to

submit a voluntary access undertaking. If any intrastate rail lines were to become

‘major corridors’ then a mandatory access undertaking would apply.

The ARTC undertaking is less prescriptive than access arrangements in the RCA

at present, containing only indicative pricing (rather than standing offers) for the

key reference services. The CIRA suggests that the ARTC undertaking should be

used as the model for rail access undertakings (with vertical integration issues

appropriately addressed).

Recommendation 11

For either a voluntary or 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.

Provisions of the RCA requiring or enabling the Commission to make an access

arrangement in certain circumstances should not apply where an access

undertaking is not mandatory.

Negotiation frameworks

The Negotiation Guidelines play an important role in establishing requirements for

the process of obtaining access. The existing negotiation framework is suitable for


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mandatory access arrangements. Certain additions are recommended to ensure

that it remains effective within the recommended negotiate/arbitrate framework.

The NCC has also suggested that effective access frameworks should include a

requirement to publish performance measures that will inform access seekers

about service quality.

Recommendation 12

The Negotiation Guidelines should be retained and the VRAR should require:

• compliance with the Negotiation Guidelines as an ongoing obligation of

access providers

• access providers to use all reasonable endeavours to allocate to an

access seeker the capacity requested by the access seeker in an

access application.

Recommendation 13

The Negotiation Guidelines should be amended to include requirements for

access providers to:

• publish standard or indicative terms and conditions of access to

reference services (as defined in the RCA)

• publish appropriate performance indicators. The Guidelines should

specify those indicators (or a minimum set of indicators).

To simplify the access regime we recommend some rationalisation of the

Commission Instruments relating to account keeping and ring fencing. The

obligations for access providers and access seekers to maintain confidentiality of

information should remain unchanged in substance. However, under the proposed

negotiate/arbitrate framework, some changes of process are recommended.

Rather than being linked to submitting a mandatory access arrangement (as at

present), an access provider should be required to have an approved system and

business rules for handling confidential information at all times, irrespective of

whether the default negotiate/arbitrate framework or a voluntary undertaking

applies.


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Recommendation 14

The current statutory 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

• an ability for the Commission to establish record keeping guidelines

including specifying appropriate cost allocation principles and the form

of annual regulatory accounts (or Ring Fencing Rules if an access

provider were to become a vertically integrated freight rail operator)

and

• statutory obligations for access providers to provide financial records to

the Commission in accordance with the Guideline

Recommendation 15

The present requirement that an access provider submit a system and business

rules for handling confidential information to the Commission for approval at the

same time as submitting an access arrangement be replaced by:

• an obligation for the access provider to have at all times a system and

business rules for handling confidential information which has been

approved by the Commission and

• an explicit provision for the Commission to audit it and the access

provider’s compliance with it, at any time.

The existing obligation for access providers not to hinder access is considered to

be a fundamental element of an effective negotiation framework.

Recommendation 16

The existing obligation of access providers not to hinder or prevent access, in

s.38ZZS of the RCA, should be retained.

Pricing principles

Currently, pricing principles are established in the Pricing Order and the Rail

Access Pricing Guideline. Our assessment is that many of the aspects of the

Pricing Order and the Guideline will no longer be needed in the recommended light

handed regulation framework. Further, pricing principles should apply to access

providers at all times and not only when they are putting forward an access

arrangement for approval. We recommend replacing the Pricing Order and the Rail

Access Pricing Guideline with some broad pricing principles specified within the

RCA. These pricing principles should be consistent with those in the national

access regime.


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Recommendation 17

The following pricing principles should apply to declared rail transport services:

• Differential pricing between access seekers if the service provided is the

same should be prohibited.

• General access pricing principles in s.35C of the ESC Act should apply.

• Cost allocation principles between passenger and freight services should

be retained.

• Floor-ceiling price limits should be applied to all declared rail transport

services with floor prices adjusted for Government contributions.

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

Access disputes

The dispute resolution framework within the VRAR is sound. However, we

recommend certain changes to address the NCC’s expectations about ring fencing

arbitration processes conducted by regulators, and the scope for parties to elect an

alternative arbitrator.

Recommendation 18

The following changes should be made to the dispute resolution framework in the

RCA:

• There should be scope for an alternative arbitrator to be appointed by the

Commission at the request of the parties to a dispute. Appropriate

amendments should be made to provide the alternative arbitrator with

guidance including the need to adhere to the same principles as the

Commission, to apply the same timeframes and to ensure enforceability of

the determination.

• The Rail Access Dispute Resolution Guideline should be amended to

include procedures for ring fencing the Commission’s arbitration functions

from its regulatory functions.

Regular review

A scheduled regular review of the ongoing need for regulation is a requirement of

effective access regimes.


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Recommendation 19

The RCA should include a schedule for periodic reviews of the VRAR every five

years. The scope of the review should encompass both access regulation and price monitoring within the rail industry.

Treatment of interstate issues

There are no issues of overlapping State-based access regimes at present.

Overall balance and effectiveness

The NCC considers the ‘effectiveness’ of an access framework in terms of its

overall balance and suitability for the circumstances in which it is applied. The

recommended framework 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 with the emphasis on ensuring the incentives to parties reaching

commercial agreement are not weakened. The recommendations we have made

are expected to ensure that the rail access regime will be effective.

3.3 The monitoring regime for certain terminals

The recommended price monitoring framework for the Dynon Intermodal terminal

and the rail terminals within the port precincts should not form part of the VRAR.

Instead they should be given effect through the Commission’s general price

regulation powers under the ESC Act.

The CIRA accepts that price monitoring is a suitable form of regulation for services

that are in a transitional regulatory state – where more formal regulation is being

contemplated, when moving away from more heavy handed regulation or where

greater transparency would be of benefit to competition in the industry. We

recommend a form of price monitoring that is similar to the Commission’s current

framework for Victorian ports.


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Recommendation 20

The recommended price monitoring framework to be established for the rail

terminal services at Dynon (including DIT and the North Dynon Agents’

Sidings), the East and West Swanson rail terminals and the Westgate Ports

Victoria Dock rail terminal should include:

• a requirement that service providers maintain transparency in setting

standard or indicative tariffs (the tariffs themselves would not be subject

to regulatory approval)

• the same pricing principles that apply under the VRAR

• provision of necessary information to the Commission

• an ability for the Commission to investigate complaints (subject to a

complaint handling procedure)

The Commission would be unable to enforce conduct or take action in

response to access or pricing issues that arose, but could make

recommendations to Government.


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4. Relevance of the existing VRAR objectives

The RCA includes objectives the Commission must seek to achieve 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

• promote competition in rail transport services so as to achieve an increase

in the use of, and efficient investment in, rail infrastructure.

We have been asked to consider whether these objectives remain appropriate.

Since the current VRAR was enacted, objects clauses have been incorporated into

the national access framework and s.35A of the ESC Act. These have emphasised

promoting the economically efficient operation of, use of and investment in the

infrastructure, thereby promoting effective competition in upstream and

downstream markets.

We have had regard to the following questions:

• whether stakeholders consider the objectives to be effective

• how they compare to other State-based rail access regimes

• 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 significant 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.

Stakeholders offered a number of views about the objectives of the access regime

and commented specifically on their consistency with the CPA principles, and

whether they had the right overall emphasis.

We examined these matters and reached the following conclusions in regard to the

regulatory objectives under the VRAR.


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Recommendation 21

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.

Recommendation 22

Replace the existing objectives in s.38F of the RCA with the requirements to:

• facilitate access to declared rail transport services on fair and

reasonable commercial terms

• facilitate competitive markets in the provision of rail industry services

• promote the efficient resource allocation of resources (including efficient

investment) in the rail industry and the optimal use of existing rail

infrastructure.


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5. Other matters for consideration

5.1 Network performance standards

V/Line’s present operations on the freight-only network and regional passenger rail

network are subject to two sets of arrangements that govern network performance

standards:

• For the passenger network, the standards are set out in the Operating

Performance Regime (OPR) which forms part of the franchise

arrangements agreed with the Director of Public Transport (Director). An

Asset Management Plan (AMP) submitted to the Director also sets out

some arrangements related to network maintenance standards.

• For the freight network, V/Line’s current access arrangement defines

standards for Average Maximum Operating Speeds (AMOS).

V/Line expressed significant concerns about the potential for inconsistencies

between these two sets of obligations. It requested the Commission to consider the

arrangements under which it operates relating to network maintenance and

subsidies. V/Line maintained that the Commission should not have a role of

approving changes to the freight network performance standards or line closures.

Other stakeholders were also concerned about network performance standards.

We have observed that the process by which V/Line engages the Director in

relation to its AMP for the freight network does not define a performance standard

for the freight network over the three year minimum term of an access

arrangement. In the absence of a defined standard, it will fall to the Commission to

approve the network performance standard in an access undertaking (having

regard to the level of funds available to V/Line including any subsidy) in

consultation with the Director. However, if a performance standard for freight

networks was determined or endorsed by the Director, then the Commission would

take that standard as a given when considering an access undertaking.

V/Line’s broader concerns in relation to the current planning and funding process

merit further consideration. Any alternative framework would need to: focus on

providing V/Line with incentives to incur economically efficient costs and maintain

specified standards on the freight network developed in consultation with industry;

provide market participants with greater certainty; enable the network manager to

promote efficient maintenance procurement practices; and ensure taxpayers

receive value for money.

Matter for Consideration 1

The Government consider streamlining arrangements to establish and

implement freight network performance standards.


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5.2 One-stop-shop

Stakeholders also had significant concerns about the vertical integration of track

management and passenger train operations which they considered would not be

fully effective in facilitating freight rail. We have given some thought to alternative

forms of train path administration including the notion of ‘one-stop-shop’ for track

access.

Rail freight operators face significant complexity in negotiating access agreements

with different track providers and a complex set of commercial and operational

conditions. The one-stop-shop concept is primarily intended to improve the

coordination of the rail supply chain from an operational and planning perspective.

This should reduce the costs of obtaining access and improve the efficiency of

supply chain performance.

The Victorian Government’s freight strategy of developing of a network of urban

intermodal terminals serviced by port rail shuttles would require a far more

intensive use of train control activities than existing freight operations. PoMC’s

submission emphasises that a new paradigm for train operational control is likely to

be necessary.

In the draft report, we identified three options:

• a single clearinghouse for freight access, which would 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

• an independent system operator (ISO) for train path allocation, financial

settlements, train control, standards setting, performance monitoring and

future system planning and

• a fully vertically separated below-rail access provider that combines the

train path and train control functions with infrastructure management

responsibilities.

Similarly there are a range of options for functional activities and possible

governance structures, particularly in relation to the ISO options.

Stakeholders supported some form of ISO for the Victorian rail system to improve

the efficiency of rail supply chain performance. There was less stakeholder support

for the clearinghouse or fully vertically separated options. Stakeholders recognised

that the ISO concept would need further examination.


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The Government should consider undertaking further analysis of the rail

corridor planning, performance monitoring and supply coordination issue.

The review should consider whether:

• in the short-term, one of the existing rail access providers (eg. V/Line or

ARTC) should take on a clearinghouse role for freight trains on the

regional and metropolitan rail networks and

• over the medium term there would be benefit in establishing an

Independent System Operator.

5.3 Stakeholder comments on broader issues

During the course of this review, stakeholders expressed a range of concerns

about the rail freight industry and key initiatives that should be actively considered.

Many of these issues were outside the scope of this review but are raised here for

the Minister’s information.

The current state of the rail industry and the need to facilitate freight on rail

The main concerns raised by stakeholders were:

• rail currently transports only about two per cent of Victoria’s freight

• there is a need to achieve ‘a modal share in transport less dominated by

road’ having regard to social and safety issues, and the ‘very poor level of

environmental sustainability of road versus rail transport’

• there is an important local amenity issue for townships located on road

routes used by trucks and the cost to the community of road safety issues

and

• ‘the gradual abandonment of the rail network in favour of road transport’

will shift costs from the State to local governments.

A common approach to rail and road pricing

The main concerns raised by stakeholders in regard to pricing were:

• a common model for road and rail access pricing should be developed in

Victoria, accompanied by a simple and effective access regime that would

apply to both road and rail infrastructure

• rail access charges for freight trains are approximately four times the level

of access charges for trucks on the road network per net tonne of freight;

at a maximum rail charges should be twice those of road

• lower access price for freight trains might apply for a transitional or

developmental period of approximately five years and

• the high road safety human costs and the costs of road wear and tear

associated with road freight transport.


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The Commonwealth Government’s current review of Australia’s Future Tax System

is expected to make recommendations on reforms to the federal and state road

user charge framework with respect to congestion pricing and mass-distance and

location based pricing for trucks.4 The application of such a framework should have

regard to the compatible, but broader, issue of congestion (or time-of-use) charging

for freight.


The Government consider possible approaches to, and implementation options

for, congestion charging for freight (both road and rail freight) within a revised

road user charging model in Victoria.

Views about network configuration and rail gauges

The main concerns raised by stakeholders were:

• the network configuration and rail gauges are sub-optimal

• VFLC was in favour of the standardisation of a ‘core freight network’ – ie. a

subset of the current freight lines, and the Alliance of Councils for Rail

Freight Development (ACRFD) also advocated standardisation of Victorian

rail freight lines and

• ACRFD suggested some of the Bronze lines will in future be found

uneconomic. As an alternative to closure they might be offered to local

government and community operators following the Canadian model of

community involvement for the management of some lightly used lines.

4 Australian Financial Review, 13 January 2010.


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6. Implementation

The recommended changes to the Victorian rail access regime would require

substantial revision to Part 2A of the RCA to implement the light-handed regulatory

principles, including the negotiate/arbitrate provisions, voluntary undertakings and

price monitoring.

Documents

REVIEW OF THE VICTORIAN RAIL ACCESS REGIME: FINAL REPORT€¦ · Review of the Victorian Rail Access Regime Contents 5 CONTENTS CHAIRPERSON’S INTRODUCTION 3 CONTENTS 5 GLOSSARY