Economic Regulation - IATA

04 - Economic Regulation 27
REGULATION BY INDIVIDUAL
AIRPORT OR ANSP
Economic regulation will be most effective on an individual
airport or ANSP basis, with the decisions made on a basis
appropriate to the key objectives in each case. It should
reflect the difference in circumstances or objectives for
each regulated entity – for example, a capacity constrained
airport will primarily need new investment, an inefficient
airport will primarily need improved productivity.
System regulation, that sets a price cap for more than
one airport or ANSP, can lead to sub-optimal decisions.
Users at one airport may face higher charges in order to
cross-subsidise users at an another airport in the system.
Alternatively, a company that is constrained in investing at
one airport may do so at another even if the commercial
returns are not feasible.
Cross-subsidisation is neither economically or
operationally efficient. For example, evidence has
shown that BAA has previously used its market power
at Heathrow airport to develop new capacity at Stansted
airport, well in advance of when it was needed, even
though it was not commercially justified 10 . The use of
an airport’s own asset base and risk profile to set its
allowable return reduces the ability of an airport owner to
subsidise premature or gold-plated investment either at
the airport or elsewhere within its group.
Nevertheless, regulation at an individual entity level
does not mean a separate regulator for each entity. The
significant resources and expertise involved in airport
and ANSP economic regulation mean that there are
economies of scale from having a single national aviation
regulator to conduct reviews of each individual entity
or, in the case of small countries, a national regulator of
utility industries that includes regulatory jurisdiction over
airports and ANSPs.
A “supra-national” regulator (e.g. one Europe-wide aviation
regulator) is likely to be less efficient, potentially reducing
average regulatory costs but also weakening the focus on
the objectives and efficiency targets within each country.
However, as discussed in the next section, a “supranational”
forum can be useful in terms of benchmarking
regulatory performance and sharing best practice.
REGULATORY BENCHMARKING
Regulatory frameworks, like the companies they
regulate, will benefit from a performance assessment.
This can minimise the risk of regulatory failure and
provide an incentive for improved performance. As such,
an international or regional forum can provide a useful
role in benchmarking performance and in sharing new
approaches to regulation and established best practice
techniques. Benchmarking could assess the progress
made by Governments in ensuring that an appropriate
and independent regulatory framework is established. It
could also assess the performance of regulators once in
place, though with a focus on efficiency and investment
outcomes rather than specific price-cap or service quality
targets.
The European gas and electricity market provides an
example of regulatory benchmarking. The European
Commission produces an annual scorecard on each
country’s progress in liberalising its gas and electricity
markets and in regulating distribution networks. It
“names and shames” those countries that are slow in
implementing liberalisation and whose markets are not
efficient or not cost-effective. A forum is also established
for European gas and electricity regulators to meet
regularly and to share best practice.
A similar structure can be envisaged for the airport and
ANSP sector. This is particularly relevant for Europe in
light of a proposed airport charges directive, but could
also apply to other regions. In the European case, the
key is ensuring that the directive is both strong (focusing
on the need for greater efficiency and cost-effective
investment) and appropriate (covering only airports or
ANSPs that can exercise market power). However, once
a directive is in place, procedures can be established to:
• Provide annual reports on the functioning of the airport
market and the implementation of the directive.
• Name and shame the countries that have not fully
implemented the directive and whose airport markets
are not efficient and cost effective.
• Publish benchmark costs and charges. If the airports
or ANSPs disagree with the figures they should
publicly explain why.
• Establish a European airport and ANSP regulators
group.
10
Starkie, D (2004), “Testing the Regulatory Model: The Expansion of Stansted Airport”, Fiscal Studies, vol.25, no.4.