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