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Level 2, 35 Spring St Melbourne 3000, Australia Telephone +61 3 9651 0222
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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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
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
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
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
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
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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
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
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The Commission’s Findings 10
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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Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 11
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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Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 12
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 13
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 14
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
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 15
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
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 16
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 17
• 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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 18
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.
Essential Services Commission
Victoria
Review of the Victorian Rail
Access Regime
The Commission’s Findings 19
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.
Essential Services Commission
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Review of the Victorian Rail
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The Commission’s Findings 20
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.
Essential Services Commission
Victoria
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Access Regime
The Commission’s Findings 21
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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Review of the Victorian Rail
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The Commission’s Findings 22
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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Victoria
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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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Victoria
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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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Victoria
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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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Victoria
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Matter for Consideration 2
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.
Matter for Consideration 3
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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Victoria
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The Commission’s Findings 33
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.