One step closer: the Queensland Competition Authority's draft decision on Aurizon Network's Standard User Funding Agreement

On 10 August 2017, the Queensland Competition Authority (QCA) published its draft decision on Aurizon Network Pty Ltd's proposed form of Standard User Funding Agreement (SUFA) under Aurizon Network's 2016 access undertaking (UT4). The QCA's decision was to reject Aurizon Network's proposed form, with the QCA providing an alternative form (Clayton Utz acted for the QCA).

What is the Queensland Competition Authority considering?

The QCA is an independent statutory authority established under the Queensland Competition Authority Act 1997 (QCA Act) to promote competition as the basis for enhancing efficiency and growth in the Queensland economy. Its primary role is to ensure that monopoly businesses operating in Queensland, particularly in the provision of key infrastructure, do not abuse their market power through unfair pricing or restrictive access arrangements. This includes the regulation of third party access to the central Queensland Coal Network (CQCN).

The SUFA is a suite of pro forma agreements designed to provide a credible alternative for parties, other than Aurizon Network, to finance the costs of railway expansions in the CQCN to meet access seekers' capacity requirements and facilitate increased access to the CQCN. The need for a SUFA arose as industry stakeholders were concerned about Aurizon Network's unwillingness to fund network expansions at the regulated rate of return.

The background to Aurizon Network's proposed SUFA

The form of SUFA framework has been steadily developed since 2011. By 2014, it was clear from stakeholder submissions that Aurizon Network and the other stakeholders could not develop an effective SUFA framework that would be suitable for all access-seekers. Given the importance placed on a SUFA framework by stakeholders in expanding the CQCN's capacity, the QCA reviewed it to determine what changes would produce a workable, bankable and credible SUFA, which in this context means:

• Workable: the SUFA documents are sufficiently clear and certain, provide an appropriate allocation of risk and can be executed by all parties without negotiation if necessary.
• Bankable: third party financing (that has recourse only to the SUFA assets and rights) can be obtained to finance the SUFA as otherwise its utility would be limited to those users with the financial capacity to absorb the risk associated with the SUFA.
• Credible: the SUFA structure does not create such risks and uncertainties for users and potential financiers, or overlay such unnecessarily high transaction, tax or finance costs on an expansion project, that the SUFA can never be a credible alternative to Aurizon Network undertaking the expansion itself.

In 2016, the QCA published its final decision in respect of SUFA under UT3. Key principles reflected in the framework were that it should:

• ensure roles and responsibilities are clearly defined and that risk, and the consequence thereof, are allocated to the party that controls the risk.
• simplify the construction process through the expansion process, preapproval process and construction contract, and accepted Aurizon Network was best placed to take responsibility for and control of construction of the SUFA infrastructure.
• provide security over, and certainty in respect of, cash flows and allow for third party financing.

These principles have been continued into the current draft decision.

QCA's draft decision and the next steps forward

Aurizon Network’s proposed form of SUFA accepted a number of the features of a SUFA framework in the QCA’s June 2016 final decision in respect of SUFA under Aurizon Network's then current access undertaking (UT3). However, Aurizon Network’s proposed form also included positions that differed from the QCA’s June 2016 final decision in respect of a range of matters.

In the QCA's view, Aurizon Network's proposed form had the effect of shifting the allocation and management of risk in Aurizon Network's favour and, as a result, was considered not to be appropriate, having regard to the assessment criteria in section 138(2) of the QCA Act.

In its draft decision, the QCA stated that it was conscious of the need for the SUFA framework to provide a genuine alternative to facilitate CQCN expansions when Aurizon Network will not expand the CQCN at the regulated rate of return. The QCA considered that the lack of a genuine alternative may reinforce perceptions regarding Aurizon Network's monopoly power. It further considered that the SUFA framework in its draft decision provided an effective alternative finance and construction package that was appropriate having regard to the assessment criteria, and which provided for access seekers to achieve their capacity requirements.

The QCA's draft decision included that:

• Aurizon Network should be obliged to achieve the agreed or determined capacity associated with an expansion, and to rectify and/or pay liquidated damages for failing to meet that obligation.
• Aurizon Network should be provided with security in respect of its financial exposure if there is an early termination of the construction contract under which the expansion is delivered.
• A dispute over the completion of schedules to the SUFA construction contract is a dispute regarding access, so division 5 of Part 5 of the QCA Act would apply.
• The SUFA template should be able to be amended through negotiations to give effect to a specific type of finance and financing structure. Any disagreement should be subject to a binding dispute resolution under division 5 of Part 5 of the QCA Act.
• Aurizon Network should not seek a fee, in the form of an operating and performance risk allowance under a SUFA, which was in excess of its regulated allowances.

The QCA is seeking written submissions to its draft decision by 5 pm, 15 September 2017.