Economic Regulation - IATA

04 - Economic Regulation 25
The regulatory framework must contain effective and
credible institutions to implement regulatory decisions
and a neutral body to which both airline users and the
regulated infrastructure company can appeal to if there
is a dispute. These institutions represent the necessary
components of the regulatory framework and must
be consistent with the key regulatory principles of
independence and transparency.
However, regulation is, by its nature, time-dependent
and location-dependent. Different time periods and
different airports or ANSPs offer different objectives and
challenges. As such, once an appropriate institutional
framework is established, the regulatory process itself
must also allow for a degree of flexibility to ensure
regulatory decisions are optimal for each regulated
company and for each regulatory period.
A CREDIBLE REGULATORY FRAMEWORK
The regulatory framework must have credibility amongst
the regulated companies and their airline users in terms
of the fairness and robustness of decisions and the threat
of penalties in the event of poor performance. Therefore,
the institutional framework should reflect the following
key factors:
Independence of direct control from government
departments or airport authorities.
Independence relates to the operational freedom of the
regulatory body. In most cases, governments will set
broad regulatory objectives, along with personnel and
administrative budgets. However, once specific objectives
(or statutory duties) and the level of resources are set,
the regulator should then be allowed to make decisions
on an independent basis.
Transparency and consultation.
Transparency is a requirement of ICAO policies and
recommendations and is a fundamental part of a country’s
obligation under the International convention. It is required
for both the process by which regulatory decisions are
made and for the expenditure and investment plans of
the regulated company. Information on key historic and
forecast performance indicators, business strategies and
planned investments should be available for consideration.
Airline users and other stakeholders should be consulted
on these proposals and given the opportunity to comment
on them and to propose alternative courses of action.
A neutral dispute settlement mechanism.
Once a regulatory decision is reached, both the regulated
company and its users should have the right to appeal
against the decision to a neutral body. Typically the neutral
body will be the national competition authority 7 . This
provides an additional safeguard within the framework
against regulatory failure, with the risk that the regulatory
body itself can reach sub-optimal decisions. In most
existing regulatory frameworks, the neutral appeal body
is the national competition policy authority. In the case
of the UK, each airport or ANSP regulatory price-cap
review is automatically referred to the UK Competition
Commission for consideration before it is finalised,
sometimes with significant changes made to the initial
regulator’s decision 8 .
Enforceable penalties for poor performance.
Effective regulation also requires a credible threat of
penalty measures in the event of regulatory targets not
being met. In other words, the regulated company must
believe that penalties will be enforced if it is shown to
have abused its market power. As discussed further
in chapter 6, in Australia and New Zealand this has not
been the case. Both Auckland and Sydney airports have
been shown to have used their market power within
a light-handed regulatory regime, yet the supposed
threat of a return to tighter price-cap regulation has not
been enforced.
7
This neutral body will have a different term of reference to the airport or ANSP regulator and therefore can adopt a different approach. For
example, for Australian airports the Productivity Commission is focused on economic efficiency, but the ACCC’s role is focused more on the
effects on consumers. Alternatively, an appeal body may review a regulator’s decision solely on the basis of law and facts presented.
8
For example, in its consideration of the UK CAA’s proposals for the 2003-08 price-cap for the designated UK airports, the Competition
Commission opposed the CAA’s proposals to move from single-till to dual-till regulation on the basis that it could not be justified on economic
efficiency or public interest grounds. However, the Competition Commission also proposed regulating the three London airports as a system,
which was not implemented by the CAA who regulated each airport on an individual basis.