Mr Alan Hopkins
Carbon Markets Section
Emissions Trading Division
Department of Climate Change
GPO Box 854
Canberra ACT 2601

CPRS_auctions@climatechange.gov.au

Dear Mr Hopkins

Re -   Deferred payment arrangements for the Carbon Pollution Reduction Scheme auction

Caltex Australia Limited welcomes the opportunity to comment on the discussion paper outlining issues associated with Government provision of deferred payment arrangements at the CPRS auction.   Because Caltex must purchase permits for its customers' emissions as well as its own emissions, it will be Australia's largest single purchaser of emission permits so has a vital interest in the effectiveness of the CPRS.

Deferred payment arrangements would allow successful bidders to make final payments for permits over some specified time period and would reduce the impact on industry cash flows that would arise from immediate settlement.  The CPRS has the potential to greatly increase business debt, risk and cost.  Caltex's comments on the discussion paper identify a number of shortcomings with the proposed design and outlines options to mitigate these negative impacts.

Background

Caltex is the largest refiner and marketer of petroleum products in Australia with operations in all states and territories. Caltex has achieved the leading market share for supply of transport fuels and is the number one convenience store operator through its national retail network. It has an estimated market share of more than 30 per cent of the major transport fuels sold nationally.

Caltex accounts for around 35 per cent of the nation's oil refining capacity. It owns and operates two of Australia's seven oil refineries - at Kurnell in Sydney and Lytton in Brisbane.  Between them the Caltex refineries have the capacity to process 244,000 barrels (about 39 million litres) of crude oil per day.

Caltex produces mostly high-value transport fuels which contribute to the growth of the economy and provide significant employment.  The two refineries directly employ 874 Caltex employees and around 550 contractor employees.  For major maintenance and other projects the numbers can escalate to an additional 1,200 workers bringing the total number of workers to about 2,600.

Caltex refineries will spend an average of $100 million per year over the next three years on capital expenditure and approximately $60 million per year on the major maintenance projects that are required regularly in all oil refineries.

Stakeholder Feedback Request Number 1

Please provide any comments regarding the development of the Australian or foreign markets for AEUs and whether financial service providers have the ability to provide deferred payment in the absence of Government intervention.

The key issue is not the ability of financial service providers to provide for deferred payment but the cost of doing so and the balance sheet implications.  The imposition of an upstream point of obligation requires companies to finance the purchase of permits through increased debt or possibly an equivalent financial liability.  This is not only disproportionately costly relative to the cost of a company's own emission permits but may be difficult to arrange, particularly when economic conditions are poor and credit is tight.  By providing deferred payment for current permit vintages, this impost could be substantially reduced.

Stakeholder Feedback Request Number 2

Please provide comments on whether the advantages and disadvantages of deferred payment provided by Government have been adequately captured.

The potential benefits of the deferred payment arrangements were set out in relation to the auction of future vintages only.  However, there would be substantial benefits from deferred payment arrangements in relation to current vintages as discussed above.

The first benefit outlined in Section 1.3 is that 'deferred payment allows cash constrained bidders to more easily participate in future vintage auctions'.

An example provided in Section 1.5 outlined that final payment for a 2012 permit would be due on or before 25 June 2011, that is 18 months in advance of the surrender date. This payment timing provides limited cashflow benefit.

If the above circumstances are changed to purchasing 2014 vintage permits in 2010, a non-refundable deposit (which is yet to be quantified by the Government and may be substantial) will be paid in 2010 being four years in advance of the surrender date. The balance of the 2014 vintage permits will be paid in June 2013, 18 months in advance of the surrender date. This provides limited working capital or cashflow benefits for purchases of future vintage permits, due to the requirement to pay so far in advance of earning revenue for the activity generating the emissions.

Additionally, for income tax purposes companies are currently able to immediately deduct legally incurred liabilities in the tax reporting year. Under the CPRS, the cost of AEUs on hand at year end is not recognised as an immediately deductible liability unless the permit has been sold or surrendered to the Government. This is inconsistent with the treatment of other costs.

In the above example, Caltex would be required to bear the burden of paying the deposit in one year, three years later paying the balance of the AEU cost and only in the subsequent year (2014) being able to claim the deduction. This would impact cash flow and financing costs including interest.

Caltex proposes closer alignment of the deferred payment date with the surrender date so that revenue inflows could be aligned with the timing of expenditure. Similarly, the deposit and the final payment of the AEU should be able to be deducted in the tax reporting year in which the expense was incurred.

The second benefit outlined in the discussion paper was that the deferred payment arrangements would be likely to encourage participation at auction.  Caltex is of the view that the deferred payment arrangements, as proposed, would not encourage participation at the auctions as the working capital and cash requirements are not significantly improved through the proposed arrangements.  It is also difficult to identify the benefits to small to medium enterprises.

Stakeholder Feedback Request Number 3

Please provide comments on the appropriateness of deferred payment and the options put forward.

The deferred payment arrangement discussion paper does not contemplate the option of deferred payment for current vintage permits.  Caltex believes this is a serious deficiency in CPRS policy.

Whilst the White Paper stated a position that liable entities will have ample opportunity to manage their permit purchases in line with their revenue flow, liable entities with upstream liability such as Caltex will be required to secure permits throughout the year from most if not all auctions in order to fully meet their liabilities.

Depending on permit price, the average monthly expenditure on permit price could be in the order of $100M per month, and as per Section 1.2.3 will be required to be paid within a few days of auction close.

The chart below shows the historical Caltex peak debt compared with debt facilities ie the borrowing limit.  Introducing $100M per month additional debt would significantly reduce the ability of Caltex to maintain headroom against debt facilities should the payment be due at the highest debt commitment time.  This headroom is required to maintain a prudent financial position and meet the requirements of lenders.

Note: Peak debt is the maximum daily debt through the year. Debt facilities include committed facilities as at March 2009.

Caltex proposes an alternative payment arrangement based on monthly auctions, with weekly settlements for one quarter of the permits purchased. However, the weekly settlement should not occur on Mondays, which are the business days when excise is due to be paid. This would minimise working capital and cashflow impacts on affected upstream fuel suppliers.

Yours sincerely

SIGNED

Frank Topham
Manager Government Affairs & Media