Economic Regulation - IATA

Setting the scope
for Economic Regulation
An economic regulatory framework can take many
forms. There is no “one size fits all” framework that would
be applicable to every case. Indeed, the design of an
efficient and effective framework for an airport or
ANSP is influenced by its location, circumstances and
any social or economic policy objectives (e.g. the need
for new investment) set by governments or other third
parties. Nevertheless, there are certain factors that should
be taken into account:
Market contestability.
Regulation does involve costs (both in terms of
resources and its impact on economic behaviour), so
its implementation must weigh the potential benefits
against these costs. All airports and ANSPs must be
subject to ICAO principles in setting user charges, including
transparency, consultation and cost-relatedness.
For airports, independent economic regulation
should also be an industry standard, but one where in
exceptional cases the Government (or the regulator)
can use a market contestability test to exempt some
airports from detailed price regulation (though not from
the ICAO principles) if they face sufficient competitive
power or are small operators in relation to the relevant
market. Economic regulation should exist for all airports
unless (i) they fall below a threshold level based on their
size relevant to the market, or (ii) in an exceptional case,
they are above the threshold level, but a market
contestability test demonstrates that they face sufficient
competitive constraints to prevent them from exploiting
any market power.
However, in the case of (ii), it is also important to ensure
that a clear process is established for the test to be
reviewed, especially after a change of ownership, and for
economic regulation to be re-imposed if conditions have
changed.
As such, the framework should be flexible enough to
adapt to different objectives. It should recognise the
trade-off between the scope of regulation and the
administrative burden. A flexible and effective framework
makes regulatory decisions where necessary but also
acts as an independent mediator where interests are
best served through fair and transparent negotiations
between users, airports and ANSPs.
Credibility and independence.
The regulatory framework must have credibility amongst
the regulated companies and their users in terms of
the fairness and robustness of decisions and the threat
of penalties in the event of poor performance. Ensuring
that the regulator is independent from government
departments and control is an important step in achieving
credibility. Transparency and consultation are also key
factors. The framework should also feature a neutral
dispute settlement mechanism, where appeals can be
made against the regulator’s decisions and assessed
by a separate body, such as the national competition
policy authority.
Clear definition of the principles of regulation.
An economic regulator should be established with
clear objectives, or statutory duties and then provided
with the operational independence to meet these
principles. Experience of light-handed regulation
systems in Australia and New Zealand has shown that
with only vague principles for the framework and no
clear definition of what an exploitation of market power
would involve, the credibility and effectiveness of the
system is undermined. The lack of clarity encourages
price monitored firms to push the potential limits as far
as possible, at the expense of economic efficiency.
The scope and flexibility of regulation.
Economic regulation will be most effective on an
individual airport or ANSP basis, given the difference
in circumstances or objectives for each regulated firm
– for example, a capacity constrained airport will primarily
need new investment, an inefficient airport will primarily
need improved productivity. However, regulation is, to
some extent, time-dependent, with different periods
offering different objectives and challenges.