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Aurizon has antagonised coal miners by announcing plans to be less "flexible" in carrying out maintenance on its central Queensland rail network to compensate for a drop in regulator-approved revenues in its networks business.
Aurizon, which reports interim results on Monday, has sent a letter to users of the rail network telling them it cannot not wait for a final decision from the Queensland Competition Authority before making changes to the way it carries out maintenance.
The QCA released a draft decision in December stating the maximum allowable revenue the rail group could earn between July 1, 2017, and June 30, 2021, was $3.9 billion – nearly $1 billion less than what Aurizon believes it should be allowed.
Aurizon claims the QCA has made "fundamental errors" and is appealing the decision, but in the meantime plans to change the way it manages its rail tracks.
"Aurizon Network cannot wait for the final decision before implementing some of the changes stipulated in the QCA's draft decision that could have serious commercial impacts on our business," Michael Riches, the executive in charge of Aurizon's networks business, said in an email to customers.
"As a result, we will progressively introduce changes to align our operating practices and business decisions with the requirements of the QCA's draft decision. Initially, Aurizon Network will be implementing a change to the planning and execution of planned maintenance and capital works."
Instead of undertaking maintenance activities when it suits coal haulage customers to avoid disrupting their businesses, Aurizon plans to undertake maintenance at fixed times, which could lead to tracks being shut down and trains stopped.
It argues that its previous flexible procedures were identified by the QCA as an "inefficient maintenance practice".
'The industry won't be distracted by this'
"As such, Aurizon Network needs to change its practices so as to prioritise adherence to the initially formulated plan for planned maintenance and capital works, in the manner advocated by the QCA and its consultants," Mr Riches said.
Queensland Resources Council chief executive Ian Macfarlane said the industry group was concerned that "a process" be followed before Aurizon made decisions that could hurt the performance of the supply chain.
"By suggesting that it will introduce changes to the maintenance program, which will result in a degradation of the supply chain performance, Aurizon is attempting to pressure the industry into moving away from the tried and trusted QCA process," Mr Macfarlane said.
"The industry won't be distracted by this and asks Aurizon to explain its maintenance regime to QCA as part of the ongoing regulatory process.
"By doing this, both sides can be confident of the rigour of the process and the optimisation of tonnages on the coal freight corridors."
The resources council is examining whether the QCA's decision is appropriate given the low risk profile of Aurizon's networks business and low interest rates. It wants Aurizon to prove that the QCA has made errors before making maintenance changes.
Aurizon is worried about spending hundreds of millions of dollars on maintenance that it won't be able to recover when the QCA makes its final decision.
'We have little choice'
It says the draft decision said Aurizon should spend less on maintenance than the previous regulatory period for a rail network that is 20 per cent bigger and which is forecast by the QCA to transport 15 per cent more coal over the four-year regulatory period.
"The QCA draft decision indicates that our maintenance should be at the lowest possible cost regardless of the impact on the supply chain and the consequential reduction in volumes," a spokesman told The Australian Financial Review.
"We understand the economic importance of the coal supply chain and that aligning our operating maintenance with the QCA draft decision it will have implications for network throughput," the spokesman said.
"But we have little choice. Aurizon cannot delay changes to its operating practices and business decisions where it won't receive appropriate return under the draft decision nor can we take risk that investors are not prepared to support."
The rail group's shares have not recovered losses incurred since the unexpected QCA ruling, with the stock closing on Friday at $4.60, down 15 per cent compared with its levels before Aurizon disclosed the draft decision on December 18.
Aurizon is under pressure to continue cutting costs as its growth options dwindle. The company said on Friday it had abandoned a loan request to the Northern Australia Infrastructure Facility to build a railway to Adani's proposed $16.5 billion Carmichael coal mine amid uncertainty over whether the project would go ahead.
Aurizon has been in talks with miners in the Galilee Basin for years over building rail tracks into the region. Potential rail customers include GVK Hancock Coal, which is backed by Gina Hancock, and Clive Palmer's Waratah Coal as well as Adani. But none of the companies' proposed mines are actually under construction.
Aurizon is also getting rid of its intermodal business and the group is also likely to lose its most valuable iron ore haulage contract, with US group Cleveland-Cliffs, after the miner said it was likely to shut down its Western Australian iron ore operations due to losses.
This article first appeared on www.afr.com
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