Economic Regulation - IATA

LIGHT-HANDED REGULATION
(PRICE MONITORING)
An alternative, more light-handed approach to regulation
is to use a system of price-monitoring rather than pricecaps
among airports with actual or potential market
power. Price monitoring regimes have been adopted in
New Zealand and, since 2002, in Australia.
Price monitoring adopts a backward-looking view on
actual price and service quality changes to assess
whether market power has been exploited. Therefore,
one of the key advantages of a price monitoring system,
as opposed to price-cap regulation, is that it requires
significantly less resources and avoids the asymmetrical
information problems associated with projecting future
efficient cost levels. In addition, one of the key arguments
used in Australia is that price monitoring allows airports
or ANSPs more flexibility to respond to external shocks
and to avoid any significant volatility in their profit levels.
However, by its nature, a light-handed price monitoring
system also has some disadvantages or uncertainties:
No clear incentive for efficiency.
Under a price monitoring scheme the objective for an
airport or ANSP is to show that it has not made excessive
use of its market power, not that it has delivered costs and
service quality and an efficient and optimal level. In effect,
airports and ANSPs can continue to operate at inefficient
levels as long as prices are not altered significantly from
current levels.
Firms may not believe that governments wish to go to
the expense of establishing or re-establishing a pricecap
regime and, instead, will accept minor changes in
the event of poor performance. The example of New
Zealand, where Auckland Airport was found to have
charged excessive prices but no regulatory change was
made, demonstrates a lack of a credible sanction.
Unclear impact on new investment.
The implementation of price monitoring has been
justified in some cases as a means of providing greater
commercial freedom for airports or ANSPs to undertake
new investment. However, while airports and ANSPs may
feel more comfortable to invest in light of future returns,
there is little influence within the system to ensure that
the investment is timely and in accordance with user
needs.
Light-handed regulation does provide the advantage of a
lower regulatory cost burden, both in terms of time and
expenditure. However, as highlighted from the advantages
above, the potential benefits from price monitoring are
also likely to be significantly lower than with price-cap
regulation.
Light-handed regulation critically rests on an effective
sanction and clear criteria for triggering such a sanction.
Experience so far shows that these conditions are not
met in practice.
Exploitation of market power not defined.
In the Australian and New Zealand cases there is no
clear definition under the price monitoring regimes of
what an exploitation of market power would involve. If the
definition revolves around differences between a firm’s
own prices and costs it simply reverts to a cost-plus, rateof-return
system. If it relates to excessive profits, it may
actually deter efficiency improvements and encourage
lazy, monopolistic behaviour. In either case, the lack of
clarity encourages monitored firms to push the potential
limits as far as possible.
Sanctions may not be effective or credible.
In order for price monitoring to influence behaviour
there needs to be an effective sanction in the event
that market power is judged to have been exploited.
Typically, the sanction proposed is a move to tighter pricecap
regulation. However, this sanction may not be viewed
as credible or time-consistent by the monitored firm and,
therefore, the system has no control on market power.