Annexure II - AERA

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NER A Economic Consulting "Given the different local circumstances and fast-changing conditions, with respect to airport ownership and management, as well as regulatory regime, there are likely to be a range ofdifferent appropriate treatments ofnonaeronautical income by sirports" (Emphasis added)" Common reading of these words would indicate that, in emphasising the importance that airport charges are able to ensure the full cost recovery of providing airport services, ICAO does not indicate explicitly which approach might be considered more appropriate to reach cost recovery. On this issue, ICAO recognises that the more appropriate approach to be followed in determining how costs are to be shared and at what extent revenues from non-aeronautical activities shall be taken into account, can not be identified per se, but it should be determined case-by-case, on the basis of the specific factors of each airport. Therefore, neither single till nor dual till or hybrid till are recommended or supported by ICAO. On the contrary, the regulatory till recommended by ICAO should be defined for each airport on the basis of characteristics and peculiarities of the single airport. As a consequence the conclusions drawn by AERA, according to which "single till is recommended or supported by ICAO,,6and that, consequently, this approach shall be adopted for all major Indian airports in an indiscriminate way, arise from an incorrect interpretation ofICAO policies. More specifically, ICAO, in emphasising the need for airport to recover its full economics costs associated with provision of airport services and in recognising that different treatments ofnon aeronautical income may apply to different airports, indicates that: "In general, three approaches have been used to describe how an airport recovers the full costs associated with the sirport and its essential nonaeronautical services. These approaches are commonly refereed to as: a) single till (sometimes referred to as the "residual" approach; b) dual till (sometimes referred to as "compensatory "); and c) hybrid till. "(Emphasis addedr' The above quotation confirms that, in laying down guidelines on methods to allocate nonaeronautical revenues to an airport's cost base, ICAO recognises the possibility to adopt different approaches, which range from a single till (where aeronautical costs are adjusted to reflect non-aeronautical revenues that accrue to the airport) to a dual till (where no adjustment is made to the aeronautical costs to adjusted to reflect non-aeronautical revenues that accrue to the Idem, page 4-15. AERA (2011), Order No. 13/2010-11 , In the Matter ofReguletory Philosophy and Approach In Economic Regulation of Airports Operators, par. 5.32. Idem, par. 4.55. Annexure II-B CP No. 9/2013-14/T-12023(14)/1/2012- Tariff- Vol - III Annexure II-B Page 20 of 51 3
NERA Economic Consultinq airport), Between these two extremes, also an intermediate approach (i.e, an hybrid till) may be followed. Appendix A provides a description of these three different regulatory till approaches. The fact that ICAO explicitly mentions different approaches to be adopted by regulators in tariff determinations, and that these approaches range from a single till to a dual till, confirms that AERA's interpretation ofICAO policies - according to which the single till is the only regulatory till which comply with ICAO guidelines - is not correct. We also believe that , in few cases, AERA's conclusions may represent a twist ofICAO principles. For example, in order to demonstrate that "it is clear from harmonium construction that ICAO guidelines indicate that non aeronautical revenues should be either used for funding investment need (capex) of aeronautical activities or to defray aeronautical charges", AERA mentions the following extracts from ICAO's documentsr' " When determining contributions from non aeronautical revenues, high priority should be given to the investment needs ofairports [...]. It may be appropriate for airports to retain non aeronautical revenues rather than lise such revenues to defray charges. However, there is no requirement for airport to do so and, in appropriate circumstances, there may be solid grounds for charges to be lower, consistent with Doc 9082,9 It is interesting noting that AERA adds emphasis to the last sentence ("However, there is no requirement for airport to do so and, in appropriate circumstances, there may be solid grounds for charges to be lower, consistent with Doc 9082'). Complete reading of the entire paragraph (and not of the single sentence) would indicate that, in general (i.e, in most cases), ICAO policies specifically state that it may be appropriate for airports to retain non-aeronautical revenues, rather than to use such revenues to defray charges. However, in some specific circumstances (i.e. in some cases), ICAO recognises that it may be appropriate for airports to deem a full or partial use of non-aeronautical revenues to defray aeronautical charges as appropriate or necessary to increase their competitiveness. Therefore, emphasis added by AERA on the second sentence instead of the first one unavoidably leads reader to misinterpretations of ICAO principles. In the past, the issue on which regulatory till approach should be regarded as consistent with international practice and, in particular, with ICAO policies and guidelines, has been discussed for a long time . AERA (20 II), Order No, 13120I0-11, In the Matter ofRegutntory Philosophy and Approach In Economic Reguletton of Airports Operators, par. 5.23. ICAO (2006), Airport Economics Manual (Doc. 9562/2) , page 4-15. Annexure II-B CP No. 9/2013-14/T-12023(14)/1/2012- Tariff- Vol - III Annexure II-B Page 21 of 51 4
Page 1 and 2: Annexure II-B CP No. 9/2013-14/T-12
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Annexure II - AERA

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