112718646

ATTACHMENT D

EFFECTS ON INVESTMENT IN INFRASTRUCTURE AS A RESULT OF THEMULTI-USER NATURE OF A PRODUCTION SYSTEM AND ACCESS REGULATION

Background

1. BHPBIO has provided extensive submissions to the Council in the BHPBIO Submissionon the relative efficiencies of dedicated, integrated, non-regulated, single-userinfrastructure and multi-user, regulated infrastructure.1

2. BHPBIO seeks to supplement those submissions with the recent relative experiences atDarymple Bay Coal Terminal (DBCT) and Hay Point Coal Terminal (HPCT).

Summary

3. DBCT and HPCT are adjacent export coal terminals. DBCT is a multi-user, regulatedinfrastructure coal system while HPCT is part of a fully integrated coal production systemnot subject to access regulation.

4. In response to the recent large surge in global demand for coal, each of DBCT and HPCTproposed expansions to capitalise on increased sales. As each terminal was operating atcapacity, significant investment was required to increase throughput. However,commitment to invest in infrastructure has been noticeably slower at DBCT than at HPCT.The principal reasons for this delay are clear:

(a) the multi-user nature of DBCT (as opposed to HPCT's fully integrated system); and

(b) "time consuming" and "cumbersome"2 regulatory intervention.

As a result of the delay, significant losses have been (and continue to be) suffered in termsof demurrage and lost sales. A graphical depiction of the relative experiences at DBCTand HPCT is provided below.3

5. In addition to the delay in investment to respond to the surge in global demand, it is clearthat the multi-user nature of the DBCT results in significant operational inefficiencieswhich are avoided at HPCT.

1 For example, see generally the BHPBIO Submission at paragraphs 85 to 108 and the CRA Economic Report atsections 2.3.3, 2.3.5 and 4.4).

2 See Infrastructure Taskforce Report, p2.

3 The estimate of A$550million in demurrage costs in 2005 was calculated before the introduction of the QueueManagement System at DBCT. The Queue Management System has reduced demurrage and queues but has notresulted in any increase in sales and has effectively disguised the issue.

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6. The experiences at DBCT and HPCT equally apply to iron ore export infrastructure.

Delays in Investment

Multi-user nature of system

7. That the multi-user nature of DBCT has caused a delay in investment in response to thesame strong increase in demand in the world coal markets4 is uncontroversial.

(a) HPCT has significant advantages to "fast-track" expansions in capacity in responseto increases in demand as a result of being wholly-owned. This attribute is notshared by DBCT. In this regard, Merrill Lynch has recognised that "BMA [BHPBilliton Mitsubishi Alliance] has the upper hand vs peers as it has its wholly ownedHay Point terminal which appears easily expandable by 20mtpa to 55mtpa".5

4 In recent years, there has been a significant increase in the global demand for steel, particularly from China. In turn,steel making by the BF/BOF process has increased. Metallurgical coke is a critical input in the BF/BOF process. As aresult, there has been strong growth in demand for metallurgical coal and in particular high quality metallurgical coal.

5 Merrill Lynch, BHP Billiton – BMA coking coal site visit – the sky's the limit, 2 June 2005, p2.

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(b) Prime Infrastructure (Prime),6 the leaseholder of DBCT, and third party coalproducers attempted to reach commercial agreement as to the terms and conditionsof accessbefore the final decision of the Queensland Competition Authority(QCA) was due, but were unable to do so.7 The QCA recognised that "it is alwaysopen to the coal companies and Prime to come to an accommodation" but noagreement was reached.8

(c) Ed Willet, Commissioner of the ACCC, recently said:

"In the case of Dalrymple Bay Coal Terminal, while capacity constraints appear to havearisen mainly as a result of continuing unexpected high global demand for coal, it appearsthat capacity expansion is not proceeding because of a substantial difference between whatusers are willing to pay and the price the coal terminal owners are seeking before theyundertake that expansion."9

8. Further, the recent independent findings10 of the Australian Government Senior OfficialsGroup (AGSOG)11 in analysing Australia's export coal transport infrastructure,12 support theconclusion that the multi-user nature of the DBCT has caused delays in investment toexpand capacity to meet increased demand and consequently resulted in significantfinancial losses. One of AGSOG's major findings in respect of "Investment" concerns atDBCT was the existence of:

"Disputes over responsibility for investment delay, efficiency improvements and expansion plans."13

6 On 1 July 2005, Prime Infrastructure changed its name to Babcock and Brown Infrastructure, following a restructureapproved at the general meeting of security holders held on 11 May 2005: ASX announcement, "Prime Infrastructurebecomes Babcock and Brown Infrastructure", 1 July 2005. However, in this attachment the name "Prime" is used forconsistency and to avoid confusion with references to "Prime" made by the QCA in its decision in relation to DBCT,and other relevant documents.

7 Australian Financial Review, "Coal firms close to deal", 24 February 2005, p6.

8 Australian Financial Review, "Who's to blame for these ports in a storm", 26-27 February 2005, p21.

9 2005 Energy Summit Sydney, "Where the Australian energy sector is heading", 17 March 2005.

10 AGSOG,Delivering Reliable Australian Coal Exports to the World : Coal Transport Infrastructure, 2005 (theCoalReport), a copy of which isattachedto this Attachment. The findings in the Coal Report equally apply to iron oreexport infrastructure.

11 AGSOG is comprised of members of the Departments of Industry, Tourism and Resources, Foreign Affairs andTrade and Transport and Regional Services

12 In 2004, there was considerable concern in respect of bottlenecks caused by increased global demand for coal at theport of Newcastle and ports in Queensland, the potential impact on coal exports, Australia's internationalcompetitiveness and incentives to invest in Australia's export infrastructure. AGSOG was established "to conduct anindependent analysis of coal transport infrastructure issues related to the coal industry including establishing bettercoal supply chains" : The Coal Report at p89. AGSOG was also established to address the growing concerns toimprove efficiency and capacity to meet the surge in demand and resolve the long shipping queues at DBCT.

13 The Coal Report at p8.

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9. AGSOG found that where there is a multi-user facility, timely expansion of infrastructureis difficult unless there is effective consultation and cooperation between producers andinfrastructure service providers aimed at developing agreed forecasts.14 This is because:

"Ownership arrangements and structural impediments are key issues that have affected individualcoal service providers’ decision to invest in infrastructure.

To date investment in critical transport infrastructure has often occurred in a less than optimalfashion often focussed on individual points of the supply chain. A key consideration for improvinginfrastructure efficiency is that any future development plans are done in a coordinated timelymanner and in a way that does not negatively impact on capacity. This will require mine, rail andport operators to share information that in the past may have been seen as ‘commerciallysensitive’."15

10. AGSOG acknowledged that effective coordination between various participants andstakeholders could address this problem but observed that "[t]here are majorcommunication difficulties along [the Dalrymple Bay] coal chain."16 Consistent with thisreality, there would be significant costs and time delays in implementing systems to ensureeffective coordination and logistics management between various users. In contrast,AGSOG observed that "[v]ertically integrated coal supply chains, by their nature, haveinternal communication systems from mine to port which provide for efficient schedulingand investment decisions."17

Regulatory intervention

11. It is clear that there have been delays in capacity expansions at DBCT as a result of theregulatory process.

(a) The regulatory process, from Prime's initial undertaking to the QCA's final decisiontook 22 months. The uncertainty created by the regulatory process and the resultinginefficiencies (ie. deterrence and delay to invest) were clearly recognised by Prime'sManaging Director, Mr Chris Chapman, 18 months into the regulatory process:

"The boom in global coal demand represents an enormous economic opportunity forAustralia. To meet this demand one of our most important export facilities, Queensland'sDalrymple Bay Coal Terminal, needs to be expanded. But this valuable opportunity couldbe under threat. The economics underpinning further investment in the DBCT hinge on thelevel of charges our customers, the coalminers, pay for access to the facility and the lengthof time they are willing to contract.

. . .

Any capacity expansion is a major engineering project with long lead times. Like anybusiness, Prime needs to be paid a commercially viable price for its services and have

14 For example, see The Coal Report at p20, in relation to the findings of ABARE in a detailed survey of Hunter Valleycoal producers and transport infrastructure providers.

15 The Coal Report at p40.

16 The Coal Report at p8.

17 The Coal Report at p23.

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confidence that further volumes will be sufficient to justify the estimated $850 millionrequirement to lift capacity to the volumes being indicated.

. . .

If the expansion was uneconomic in light of the QCA's determination, and given the risks, itwould be commercially irresponsible to invest the sums necessary.

. . .

Prime would be taking huge risks to commit itself without knowing the final determinationfrom the QCA on access charges . . .

. . .

If the QCA confirms its draft proposal, then uncertainty will continue to hang over theupgrading. A realistic rate would ensure the speediest possible upgrading of the terminalto enable the miners to fully exploit the buoyant demand for coal. It would be a win-win forboth sides, as well as for Queensland and the nation."18

(b) The Queensland Government has recognised the regulatory impact in itssubmission to the QCA on 30 November 2004, stating that the proposed terminalexpansion process under the draft decision "may not result in a timely andappropriate expansion of the terminal", and that "decisions which lead to lowerrates of return can result in under investment, with far greater consequences for theeconomy than any costs associated with slightly higher prices to consumers."19

12. One of AGSOG's major findings in respect of "Investment" concerns at DBCT was that:

" Finalisation of DBCT access fees for new investment has delayed expansion plans."20

13. AGSOG also found in relation to DBCT:

"Investment and innovation has not occurred in time to meet demand, and future expansion plansare on hold pending the outcome of the QCA decision. Much of the concern has centred aroundpricing and capacity expansion incentives in the draft access undertaking."21

. . .

18 Australian Financial Review, 9 February 2005. See also ABC Tropical North Queensland, "Dalrymple Bay backlogcontinues", http://www.abc.net.au/tropic/stories/s1314517.htm (2 March 2005):"Prime Infrastructure GeneralManager of Operations, Greg Smith, says they're waiting on a decision by the Queensland Competition Authoritybefore they commit to the expansions required to improve throughput".

19 Queensland Government,Submission in response the QCA's draft decision in relation to the Dalrymple Bay CoalTerminal Draft Access Undertaking(30 November 2004). The Queensland Treasurer Terry Mackenroth also statedthat"the reality is the QCA is now dealing with coming down with a regulated price. It'll then be up to the companiesif they want to pay that price, andif Prime can afford to expand, they will (emphasis added).": ABC Tropical NorthQueensland, "Dalrymple Bay backlog continues", http://www.abc.net.au/tropic/stories/s1314517.htm (2 March 2005).

20 The Coal Report at p8.

21 The Coal Report at p48. See also p8, which states that "[c]oncern that decisions on investing and/or operatinginfrastructure are affected by regulated pricing that constrains rates of return" is a "transport infrastructure issue"facing the Dalrymple Bay coal supply chain.

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"Expansions are now running some 5-10Mtpa and some 12-18 months behind industry demand. Atcurrent prices, every million tonne shortfall in capacity at DBCT is costing in excess of $100 millionper annum in lost export revenue. This is in addition to the substantial additional costs associatedwith bottlenecks at the port - demurrage penalties are currently running at a rate exceeding $300million pa."22

14. It is clear that commercial parties who both stand to gain from increased investment incapacity expansion at a time of expanding future demand and high prices, should be able toreach an agreement on win/win access and pricing arrangements.23 AGSOG found howeverthat "what has occurred in some cases has been either of the parties seeking some form ofregulatory arbitration / decision through a Government body which further delaysinvestment decisions."24

The resulting costs due to delay in investment

15. As recognised by AGSOG, "Australia cannot afford poor and uncoordinated infrastructuredecisions that impose high costs on the community."25 That is, it would be contrary to thepublic interest if infrastructure decisions are uncoordinated.

16. However, the bottleneck at DBCT has seriously affected the investment incentives anddecisions of parties which rely upon port facilities. For example, potential new mines inthe Bowen Basin have reportedly been delayed due to uncertainty in relation to DBCTaccess.26 Further, coal producers have been "turning away new sales from markets such asChina and India."27 In addition, some coal producers have opted to avoid DBCT byexporting production through alternative coal terminals such as the Abbot Point Coal

22 The Coal Report at p51.

23 The Coal Report at p39.

24 The Coal Report at p39. This was also recognised by the QCA in its final decision on the DBCT Draft AccessUndertaking in which it alludes to the possibility of gaming by parties: see pagev of the QCA Final DecisionDalrymple Bay Coal Termnal Draft Access Undertaking, April 2005.

25 The Coal Report at p5.

26 DBCT Pty Ltd,Submission in support of authorisation for proposed queue management system at Dalrymple BayCoal Terminal, 5 April 2005, p22. For example, see ABC Tropical North Queensland, "Dalrymple Bay backlogcontinues", http://www.abc.net.au/tropic/stories/s1314517.htm (2 March 2005):"[Macarthur Coal's Chairman KeithDe Lacy] said they were looking at opening six new mines in the northern part of the Bowen Basin to produce cokingcoal, but will weigh up their options, given the problems at Dalrymple Bay". See alsoAustralian Financial Review,"Macarthur says port capacity holds it back", 24 February 2005, p20:"…Macarthur had the potential to produce800,000 extra tonnes of coal, which it would be unable to export because of a lack of port capacity… [Shane Stephan,vice president for strategy and corporate development at Macarthur Coal] said that the company was pursuing arange of expansion opportunities…But it was delaying plans to mine coking coal deposits near its existing minesbecause of the lack of capacity at Dalrymple Bay". See also "Port Delays hamper miners expansion", www.abc.net.au,25 February 2005.

27 The Age, "Prime time angers coal exporters", 23 March 2005:"Speaking at a Melbourne briefing yesterday, [KenTalbot, managing director of Macarthur Coal] said problems at [Dalrymple Bay] were severe enough for theproducers to be turning away new sales from markets such as China and India".

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Terminal, but have incurred substantially higher transport costs in doing so.28 Thecompetitiveness and reputation of the Australian coal industry (particularly in the BowenBasin) has also been damaged on the basis of ongoing uncertainty as to the volume andtimeliness of product delivery.

17. There has been considerable media and political attention given to the queue of up to 50bulk carriers waiting for coal through DBCT.29 This can be compared to HPCT'soperations:

"DBCT's site surrounds the Hay Point terminal, built more than a decade earlier and now calledBHP Billiton Mitsubishi Alliance. The two terminals are similar. But there are only four or fiveships waiting to dock at Hay Point's huge berths. The rest of the 50-strong armada is waiting to pullup at the three berths owned by DBCT . . .".30

18. Vessels were reported as waiting off Dalrymple Bay between 23 and 30 days to be loaded,compared to a "normal" waiting time of three to five days31. The costs of demurrage havebeen estimated to be as high as $550m.32 BMA net demurrage costs at HPCT for the yearending June 2005 represents one fifth of net demurrage at DBCT.

19. At current prices, the foregone revenue in coal sales due to a 12 month delay to an 8mtpaexpansion is approximately A$1,000 million.33

28 Abbot Point Coal Terminal is 200km further north than DBCT and can only transport 3,000 tonne trains incomparison to the 9,500 tonne capacity of a typical train to DBCT: seeAustralian Financial Review, “Macarthur skirtsbottleneck”, 15 March 2005. See also DBCT Pty Ltd,Submission in support of authorisation for proposed queuemanagement system at Dalrymple Bay Coal Terminal, 5 April 2005, p21.

29 Australian Financial Review, "Long haul to solve export block", 11 April 2005, pp1, 4; ABC Tropical NorthQueensland, "Dalrymple Bay backlog continues", http://www.abc.net.au/tropic/stories/s1314517.htm (2 March 2005);The Age, "Prime time angers coal exporters", 23 March 2005;Asia Pulse, "Costello wants Dalrymple Bay dispute toend", 12 April 2005. Given current forecasts and capacity, it has been predicted that the queue may continue to growduring 2005: DBCT Pty Ltd,Submission in support of authorisation for proposed queue management system atDalrymple Bay Coal Terminal, 5 April 2005, p21. As noted above, the Queue Management System has now beenintroduced at DBCT.

30 Australian Financial Review, "Long Haul to solve export bottleneck", 11 April 2005, pp1, 4.

31 Australian Financial Review, "Long haul to solve export block", 11 April 2005, pp1, 4.

32 This figure excludes any detention charges paid by offshore coal consumers and any flow on impact of the queue onfreight rates: DBCT Pty Ltd,Submission in support of authorisation for proposed queue management system atDalrymple Bay Coal Terminal, 5 April 2005, p21. See alsoAustralian Financial Review, "Long haul to solve exportblock", 11 April 2005, pp1, 4:"The delays will cost the miners as much as $500m in penalty payments this year". Asnoted above, this estimate was calculated before the introduction of the Queue Management System.

33 The Queensland Government has also emphasised that"[t]he economic impact of a delay in the timely provision ofcoal supply infrastructure in Queensland would be significant, particularly in the current global coal market": seeQueensland Government,Submission in response the QCA's draft decision in relation to the Dalrymple Bay CoalTerminal Draft Access Undertaking, 30 November 2004.

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Inefficiencies and costs due to multi-user nature of system

20. There are substantial inefficiencies that arise as a result of operating multi-user systems.For example, in relation to coal supply chains, each service provider typically designs itsoperations around its own requirements, rather than the needs of the chain as a whole.34

Lack of coordination in scheduling coal movements between mines and loading on shipscan constrain the coal chain and contribute to costly bottlenecks, and these inefficienciescan impact significantly on coal chains that are running at or near full capacity.35

21. In comparison with the HPCT (where BMA integrates the operations of its 100 per centowned terminal and mines), "multi-user terminals require additional coordination betweenmine operators and service providers, such as in the Dalrymple Bay coal chain, to minimisethe bottlenecks this chain is currently facing".36

22. In addition, AGSOG has recognised that:

"...issues of 'national interest' including consistency, reducing uncertainty, timeliness andappropriate investment incentives can go beyond the specific terms and conditions for future accessin sectoral infrastructure. As demonstrated in the case of DBCT, the failure so far of commercialnegotiations for third party access and the time taken to develop a specific regulated access regimeis imposing huge additional costs on industry and on Australia's export performance".37

Case Study of Dalrymple Bay v Hay Point

23. There are two adjoining export facilities at Hay Point in Queensland, DBCT and HPCT,which are used to export metallurgical coal, and in the case of DBCT, some thermal coal(see Figures 1 and 2). The following table provides a brief summary of each of DBCT andHPCT:

34 The Coal Report at p21.

35 The Coal Report at p21.

36 The Coal Report at p21.

37 The Coal Report at p46-47.

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DBCT HPCT

Commencement of operations 1983 1971

Ownership/Management Owned by DBCT Holdings38

and operated by DBCT PtyLtd39 under contract to the

lessee Prime

Owned by BMA andoperated by Hay Point

Services Pty Ltd

Type of facilities Multi-user Single-user

Use of facilities Coal is contracted to beshipped from 13 mines in

the Bowen Basin40 (seeFigures 3 and 4)

Coal is shipped from 6BMA managed mines in the

Bowen Basin41 (seeFigure 5)

Export of coal in FY04 43.6mt 33.9mt

Access regulation Yes (see below) No

Regulatory process

24. In March 2001, the coal handling services of DBCT were declared under theQueenslandCompetition Authority Act 1997(Qld) .42 The terminal was declared "[i]n response toconcerns that the lease would be acquired by an entity that may have little interest inexpanding the facility and at the same time may exploit its market power"43. These

38 The Queensland government, through DBCT Holdings, owns the terminal: see the QCA,Final decision – DalrympleBay Coal Terminal draft access undertaking, April 2005, p1.

39 DBCT Pty Ltd is currently owned by the following terminal users: Blair Athol Coal Pty Ltd [Rio Tinto], Anglo Coal(Capcoal Management) Pty Ltd, Anglo Coal (Moranbah North Management) Pty Ltd, BHP Mitsui Coal Pty Ltd,Mount Isa Mines Limited [Xstrata], Burton Coal Pty Ltd [Peabody], and Foxleigh joint venturers. See: DBCT Pty Ltd,Submission in support of authorisation for proposed queue management system at Dalrymple Bay Coal Terminal, 5April 2005, p17.

40 Blair Athol, Hail Creek, German Creek, Moranbah North, Oaky Creek, Burton, North Goonyella, Foxleigh,Coppabella, Moorvale, Riverside, South Walker Creek and Millennium Moranbah. Nine companies own the 13 mines:see the QCA,Final decision – Dalrymple Bay Coal Terminal draft access undertaking, April 2005, p6.

41 These include Goonyella, South Walker Creek, Peak Downs, Saraji, Norwich Park and Gregory Crinum.

42 Queensland Competition Authority Amending Regulation (No 1) 2001(Qld), s4 (notified in the gazette on 23 March2001). Given the ownership and leasing arrangements, the access obligations are separated between the facility owner,DBCT Holdings and the access provider DBCT Pty Ltd.

43 The QCA,Draft decision: Dalrymple Bay Coal Terminal- Draft access undertaking, October 2004, pviii. See alsothe QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p1:"As part of therestructuring process leading up to the lease of the terminal, the Queensland government declared the coal handlingservices of the terminal for third party access under Part 5 of the QCA Act".

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concerns seem to have arisen following the decision of the Queensland government togrant a 50 year lease (with 49 year option) for the facility.44

25. On 20 June 2003, Prime45 submitted to the QCA a draft access undertaking for DBCT. Thedraft access undertaking set out Prime's proposed future standard terms and conditions(including tariffs to be charged) upon which access to DBCT services would be offered toaccess seekers (ie. DBCT users). Among other things, the draft access undertakingproposed a 35% increase in the Terminal Infrastructure Charge (TIC ) from $2.08/tonne to$2.77/tonne46. The TIC was based on an asset value of $1084m, a weighted average cost ofcapital of 10.5%, corporate overheads of around $4m per annum, and a standardcalculation of tax payable but with a minor discount to reflect the sharing of some taxbenefits with the terminal users47.

26. In October 2004, the QCA released a draft decision on the access undertaking, which setthe TIC at $1.53/tonne48, a 26.4 percent reduction in the prevailing rate of $2.08/tonne.49

The draft decision also proposed an Annual Revenue Requirement (ARR) (ie. revenue cap)of $72.8 million50, with Prime bearing no volume risk51.

44 DBCT was originally developed by the Queensland government, in conjunction with the four original mines, with aview to encouraging development of the Bowen Basin coal fields. In September 2001, the Queensland Government,through a wholly owned entity DBCT Holdings, awarded a long-term lease for DBCT (50 year term with a 49 yearoption) to a consortium led by international investment bank Babcock and Brown for approximately $630 million.DBCT subsequently became the foundation asset of Prime Infrastructure when it was floated on Australian StockExchange in June 2002, with the leasehold interest in the DBCT being transferred to Prime Infrastructure upon listing.

45 The undertaking was submitted by DBCT Management Pty Ltd (a wholly owned subsidiary of Prime InfrastructureManagement), on behalf of DBCT Holdings: see the QCA,Draft decision: Dalrymple Bay Coal Terminal- Draftaccess undertaking, October 2004, pvii.

46 See the QCA,Draft decision: Dalrymple Bay Coal Terminal- Draft access undertakingOctober 2004, pxi.

47 While the DBCT User Group did not propose an alternative estimate of a reference tariff, its submission clearlyestablished its view that the reference tariff should be considerably lower than the existing price. For instance, theDBCT User Group indicated the asset value could be as low as $460m, the weighted average cost of capital should be7.3%, and corporate overheads should be in the order of $2m per annum: see the QCA,Draft decision: DalrympleBay Coal Terminal- Draft access undertaking, October 2004, ppxi-xii.

48 The TIC was indexed to increase by 2.5% p.a.

49 See also Prime Infrastructure, ASX announcement, "Queensland Competition Authority – Draft determination onDBCT – Powerco takeover offer update", 17 October 2004.

50 This figure was to grow annually at 2.50% over the five year regulatory reset period to $80.4 million in 2008/09.The determination was based on a Depreciated Optimised Replacement Cost (DORC) for DBCT of $824 million, anda Weighted Average Cost of Capital (WACC) of 8.2% based on a risk free rate of 5.84%: see also Prime Infrastructure,ASX announcement, "Queensland Competition Authority – Draft determination on DBCT – Powerco takeover offerupdate", 17 October 2004.

51 The QCA also set an effective regulatory period of 5.5 years from 1 July 2004 to 31 December 2009. See alsoPrime Infrastructure, ASX announcement, "Queensland Competition Authority – Draft determination on DBCT –Powerco takeover offer update", 17 October 2004.

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27. Following the QCA's draft decision, extensive submissions were made by various parties inthe industry52.

28. On 20 April 2005, the QCA released its final decision setting the terminal user charge at$1.72/tonne, well above the $1.53/tonne proposed in the draft ruling. The finaldetermination provided for an ARR of $87.3 million in 2004/05 (a $14.5 million increaseover the draft determination), increasing annually to $96.4 million in 2008/0953. Oncompletion of the regulatory period (ie. 31 December 2009), the ARR will be reassessed bythe QCA.54

29. Prime has announced that it expects to submit an amended draft access undertaking,conforming with the QCA's final decision, by 30 June 2005.55 Importantly, the accessundertaking will only apply to access negotiations occurring after the date the accessundertaking is approved. The existing user agreements (other than two CustomerAgreements signed in June and July 2004), provided for certain charges to be reviewedfrom 1 July 2004, with the matter to be referred to the QCA for arbitration where theparties are unable to reach agreement. On 1 April 2004, each user referred a price reviewdispute to the QCA for arbitration, with the QCA yet to announce a decision56. Thisarbitration has subsequently been delayed with parties yet to reach mutual agreement.

30. In the absence of a clear capital expenditure program in the access undertaking lodged withthe QCA in 2003, or subsequently proposed in response to the draft decision, the QCA hasstated that the final decision includes a framework that facilitates terminal expansions57.Specifically, DBCT Management can apply to the QCA for a pre-approval of expansion

52 For example, submissions in response to the QCA's draft decision were made by Aitken, ANZ, APIA, AusCID, Clift,DBCT Holdings Pty Ltd, DBCT Users Group, Energex, Ergon, Fodora, GasNet, In Tempore, Prime Infrastructure, QR,QTC, Queensland Government, Queensland Resources Council and Stanfield.

53 The ARR was based on a Depreciated Optimised Replacement Cost (DORC) for DBCT of $850 million, and aWeighted Average Cost of Capital (WACC) of 9.02% based on a risk free rate of 5.84% (ie. the WACC is a 3.18%premium over the risk free rate): see also Prime Infrastructure, ASX Announcement, "Dalrymple Bay Coal TerminalDraft Access Undertaking – QCA releases its final determination", 20 April 2005.

54 "The QCA is also prepared to undertake that once the QCA agrees that new capital expenditure will enter the assetbase, [the QCA] will not seek to optimise the investment in the future, unless: the QCA’s initial decision to include theinvestment into the RAB [regulated asset base] was on the basis of information provided by DBCT Management thatit knew to be false or misleading at the time it provided the information; demand has deteriorated to such an extent thatregulated prices on an un-optimised asset would only further serve to exacerbate the decline in demand and theassociated revenue impacts for DBCT Management; or it subsequently became clear that there was a possibility ofactual (not hypothetical) by-pass": Prime Infrastructure,Prospectus and product disclosure statement, 23 May 2005,p44. See also QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p46.

55 See also Prime Infrastructure,Prospectus and product disclosure statement, 23 May 2005.

56 Prime has stated that despite the non-application of the QCA’s regulatory determination to the existing DBCT Usercontracts, it is expected that any decision reached by the QCA in its role as arbitrator will be heavily influenced by andis likely to reflect the regulatory determination made by the QCA: Prime Infrastructure, ASX Announcement,"Dalrymple Bay Coal Terminal Draft Access Undertaking – QCA releases its final determination", 20 April 2005.

57 The QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p1.

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capacity costs, or lodge with the QCA a tender approval request. The QCA is prepared toautomatically approve expansion proposals where58:

(a) the expansion path is consistent with a Master Plan approved by DBCT HoldingsPty Ltd;and

(b) 60% of the proposed expansion is subject to firm contractual commitments;and

(c) 60% of other users do not oppose the expansion.

31. Should these tests be met, the QCA will then approve costs associated with such a capacityexpansion, provided that it is satisfied that the expansion costs are efficient (if the pre-approval of expansion cost route is followed), or DBCT Management has demonstratedthat the capacity expansion costs are the result of a tender process, previously approved bythe QCA.59 Expansion proposals that do not meet these criteria will be considered by theQCA on their merits.60

32. In any case, it is still unclear how the expansion tonnage will be allocated between theusers, given their competing demands.

Announced expansions and timing

33. Each of DBCT and HPCT have announced capacity expansions in response to the recentincrease in global demand.

34. Prime has stated that "[b]ased on DBCT Customer indications of future capacityrequirements at DBCT, Prime Infrastructure's assessment is that an expansion of DBCTbeyond 60 Mtpa is required"61. Prime has identified three potential phases to an expansion.Phase 1 would lift DBCT capacity to 68 Mtpa, has an earliest completion date of July 2007and an estimated cost of A$400 million.62 Phase 2 would lift DBCT capacity to 75–80

58 See the QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p1.

59 See also Prime Infrastructure,Prospectus and product disclosure statement, 23 May 2005, p44.

60 However, the Authority indicates in its decision that it will approve any prudent expansion proposal: see the QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p1.

61 See Prime Infrastructure,Prospectus and product disclosure statement, 23 May 2005, p18. Note that Prime iscurrently undertaking a "Short Gain Expansion" to increase capacity from 56 Mtpa to 60 Mtpa. The Short GainExpansion involves the optimisation of various components of DBCT’s operation and the replacement of the RL1Reclaimer that collapsed in February 2004. Commissioning of the new RL1 Reclaimer and completion of theoptimisation projects by the end of January 2006, will increase DBCT’s capacity to 59 Mtpa. An additional 1 Mtpawill be added upon completion of departure path dredging works at DBCT by Ports Corporation Queensland in July2006. The Short Gain Expansion of DBCT has a capital budget of A$28.3 million (funded from equity previouslyraised under an A$90 million placement conducted in March 2005): see Prime Infrastructure,Prospectus and ProductDisclosure Statement, 23 May 2005.

62 Cost is inclusive of allowances for escalation and capitalised financing charges: see Prime Infrastructure,Prospectus and Product Disclosure Statement, 23 May 2005, p42.

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Mtpa, has a completion date between August 2008 and February 2009, dependent on theduration of the Environmental Impact Assessment Studies, and has an estimated cost ofA$370 million.63 Phase 3 would lift DBCT capacity to 80–85 Mtpa, has an earliestcompletion date concurrent with Phase 2, and has an estimated cost of A$120 million.64

Prime has stated that:

"Prime Infrastructure is currently progressing the detailed planning of the Phase 1 Expansion.However the final scope of any expansion at DBCT (i.e. Phase 1 only; Phase 1 and 2 only; orPhases 1, 2 and 3) will depend on the level of contracted sustainable DBCT CustomerDemand.".65

35. In addition, the above proposed expansion at DBCT and the associated change in operatingarrangements are likely to require significant further investment in the rail system toaccommodate more uneven railings.

36. HPCT's most recent planned capacity expansion from 34.5mtpa to approximately 40mtpais likely to be completed around Quarter 3 2006, approximately a year earlier than DBCT'sproposed Phase 1 capacity expansion of similar volume.

List of Figures in relation to Dalrymple Bay and Hay Point

Figure 1: Dalrymple Bay Coal Terminal66

63 Cost is inclusive of allowances for escalation and capitalised financing charges: see Prime Infrastructure,Prospectus and Product Disclosure Statement, 23 May 2005, p42.

64 Cost is inclusive of allowances for escalation and capitalised financing charges: see Prime Infrastructure,Prospectus and Product Disclosure Statement, 23 May 2005, p42.

65 Prime Infrastructure,Prospectus and product disclosure statement, 23 May 2005, p18.

66 Source:Master Plan 2002, DBCT Management draft access undertaking, Volume 2- see the QCA,Final decision:Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p7.

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Figure 2: Hay Point Coal Terminal67

67 Source: BMA,Australian Analysts Tour – BHP Billiton Mitsubishi Alliance Presentation, 2 June 2005, p88,available at http://www.bhpbilliton.com/bbContentRepository/Presentations/BHPBillitonBMAPart2.pdf.

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Figure 3: Queensland Coal Infrastructure68

68 Source:Queensland Department of Natural Resources and Mines, Queensland Coal industry review 2001-2002 -see the QCA,Final decision: Dalrymple Bay Coal Terminal- Draft access undertaking, April 2005, p5.

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Figure 4: Operating Coal Mines in the Bowen Basin69

69 Source: www.bowenbasin.cqu.edu.au (see DBCT Pty Ltd,Submission in support of authorisation for proposedqueue management system at Dalrymple Bay Coal Terminal, 5 April 2005, p16).

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Figure 5: BHP Billiton Mitsubishi Alliance Coal Logistics Chain70

70 Source: BMA,Australian Analysts Tour – BHP Billiton Mitsubishi Alliance Presentation, 2 June 2005, p87,available at http://www.bhpbilliton.com/bbContentRepository/Presentations/BHPBillitonBMAPart2.pdf.

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