Economic Regulation - IATA

01 - Economic Regulation 11
The focus of economic
regulation
An effective economic regulatory framework will focus
on the following aspects:
Incentives for efficiency.
An effective regulatory structure should look to provide
clear incentives for an airport or ANSP to improve
their operating efficiency. Price-cap regulation (e.g.
CPI‐X) offers an effective mechanism for improving the
efficiency and productivity of existing assets. However,
it must look to mitigate the risks of regulatory “gameplaying”
in advance of each review and of decisions made
on the basis of historic rather than potential costs, that
simply provide the regulated firm with a rate-of-return
on their incurred costs. In addition, effective regulation
should ensure that the allowable rate-of-return and the
asset base on which this is earned truly reflect the capital
invested and the risks incurred by the regulated firm.
The mutual benefits
of good regulation
A well-designed and effective framework can provide
benefits for both users and for regulated companies.
An incentive-led process helps to improve efficiency,
often through consultation with users who experience
several aspects of service quality and can provide
constructive help.
It can also improve the business investment planning
process, delivering capital investment in accordance
with the needs of existing users while also safeguarding
the rights of potential new users. Independent and
transparent economic regulation can reduce uncertainty
on both sides, helping to reduce investor risks and
financing costs.
Incentives for capital investment.
Major investment 1 decisions need to be based on a
long-term strategic plan that involves the input of all
stakeholders, including airports, users and governments.
However, the existence and nature of economic
regulation can provide appropriate incentives for timely
and cost-effective investment. Sometimes, investment
can be constrained by external factors, such as planning
or environmental constraints. Nevertheless, an effective
regulatory structure should provide clear incentives to
expand or modernise capacity where necessary, and to do
so in consultation with airline users. Greater transparency
is needed in developing and agreeing investment plans
with users in order to avoid excessive or “gold-plated”
investments. Airline users should only pay for investments
once they are in operational use.
Service quality standards.
For airports and ANSPs, market power can also arise
on the service quality side, where several dimensions
of the quality provided by the infrastructure provider
(e.g. terminal services, system delays) have a direct impact
on the quality of service an airline is able to provide to its
customers. As such, economic regulation should cover
both price and service quality aspects, ensuring that
targets on the price side are not simply met by lowering
service quality standards below acceptable levels.
1
A distinction should be made between compulsory investments from safety and security regulations, small-scale investments for day-to-day
operations and necessary new investment (NNI) set out in a long-term strategy agreed between all stakeholders. The term “investment” used
in this document refers to NNI unless otherwise stated.