Economic Regulation - IATA

06 - Economic Regulation 43
New Zealand
The high cost of regulation itself.
Price-cap regulation was considered to be too intrusive
and too much of a financial burden. The ACCC had a
detailed involvement; it could collect information on costs,
profits and prices and report publicly on the results of its
findings. However, the system could have been altered
rather than removed in order to minimise regulatory costs
while still taking account of the benefit it can provide to
all stakeholders.
The price monitoring regulatory regime is based upon
the PC’s assessments of airport market power. These
assessments focus primarily on the ability for airlines,
or their passengers, to substitute away from the
services provided by the airport (towards another airport,
another destination or another mode of transport). The
reasonableness of charges is typically assessed with
reference to costs incurred, providing poor incentives for
cost minimisation. Price monitoring does allow the effects
of external events to be taken into account, but this can
be more of a one-way process, with little incentive for
airports to pass on any positive external impacts to users.
Price monitoring has reduced regulatory costs, but at the
expense of higher user charges and unjustified upward
revaluations of asset bases at several of the airports.
While well below true monopoly levels, user charges
are undoubtedly higher than they would have been
under tighter regulation, especially at Sydney airport.
The government still has the right to re-impose pricecap
regulation in the event of poor performance, but the
definition of poor performance has not been made clear.
The threat also does not appear to be credible. Despite
clear evidence of price rises, the PC argues that there has
been no misuse of market power without fully explaining
at what level market power would be considered to have
been misused. The consistent failure to provide definitive
criteria for market power and its misuse undermines the
credibility of the system.
In the late 1990s the New Zealand government partiallyprivatised
Auckland and Wellington airports and changed
the structure of Christchurch airport to operate on a full
commercial basis. A light-handed price monitoring regime
was introduced at the time of these changes. However,
the government does retain the right to implement
price-cap regulation at its discretion. The system is also
supported by a number of other domestic regulations
that impact upon airports (e.g. the Commerce Act).
The light-handed regulatory regime has turned out to
be both controversial and costly. Airlines have frequently
been forced to take legal action over actions by airports.
In addition, as in Australia, the system does not have a
credible threat in the case of abuse of market power.
The NZ Commerce Commission recommended in 2002
that Auckland airport should face price-cap regulation.
However, no change has been made, with the proposal
rejected by the NZ Commerce Minister in 2003 on the
grounds of too high a cost for regulation.
Under the current system, Auckland airport generates
exceptional profits both on a regional and global
comparison. Its Earnings Before Interest and Taxation
(EBIT) margin was 66% in its fiscal year 2006, by far the
highest EBIT level among the top 50 airports in the world.
In addition, it has revalued its asset base and used its
market power to increase airline charges. If fully applied,
airline charges could increase by over 50%, despite
using the same assets and with no change in efficiency
or service quality.
Indeed, the vague principles on which light handed
regulation is based create a strong risk that the system
will revert to a cost-plus type of regulation, reducing
the incentives for efficiency improvements 20 . This is
an important consideration for other governments in
the region who are considering implementing a similar
system, such as Papua New Guinea and Fiji.
20
See P. Forsyth, “Airport Policy in Australia and New Zealand: Privatisation, Light Handed Regulation and Performance”, presented at the
Fundacion Rafael del Pino conference, Madrid, September 2006.