Economic Regulation - IATA

EUROPE
United Kingdom – Designated Airports
The UK Civil Aviation Authority currently imposes price
control regulation on four designated airports; the three
London airports privately owned by BAA plus publicly
owned Manchester airport. A price-cap is set for a fiveyear
period at each airport, using a single-till system, along
with a series of service quality standards. Each price-cap
review is automatically submitted to the Competition
Commission for review before it is implemented. The CAA
must assess any recommendations from the Competition
Commission but is not obliged to implement them.
The CPI-X price-cap mechanism has been relatively
successful in improving the efficiency of use of existing
assets, though severe congestion (especially at London
Heathrow) has impacted upon service quality and
highlights the urgent need for appropriate investment.
CPI-X has led to charges at Heathrow below the marketclearing
level, but the system has not itself been a major
constraint on investment, with the planning system and
environmental concerns providing greater barriers.
The UK regulatory framework needs to be flexible enough
to meet a variety of different investment challenges.
Heathrow airport is capacity constrained and needs to
finance major investment in terminal facilities (a new
runway is still under consideration) over a relatively short
period of time. Airlines welcome new investment, such as
Terminal 5, but are concerned that the regulator may be
overly-generous in the size and timing of payments for
the investment. By contrast, Stansted and Manchester
airports have possibly taken advantage of the regulatory
framework to over-invest in the past, on an uncommercial
basis, and airlines are concerned that new investment
may take place at these airports at a higher cost and
earlier than required by users. Too great an incentive
for investment may entail users paying more than they
strictly need to for infrastructure, but too low an incentive
may contribute to capacity bottlenecks.
In response to the challenges, changes to the regulatory
system have been considered and, in some cases,
implemented:
Constructive Engagement (CE).
The CAA has used the current review to encourage
greater consultation between BAA and users, but with
mixed results so far. CE encourages negotiations on
investment plans, as well as traffic projections, service
quality and operating spend. It creates a forum to negotiate
the most appropriate investment and operational plans
for users, but crucially depends on open and transparent
information sharing by all parties. In all cases, but
especially at Stansted, airlines believe the airport has not
provided sufficient information within the CE process.
Investment incentives.
The long-timescale and complexity of major investments
provides a challenge for the regulator in developing
appropriate incentives. The regulator cannot bind
successors to a certain price profile beyond the next
control period, but does need to provide some assurance
that efficient investment will be remunerated. The UK
regulator adopted a dual approach in the 2003 review.
Firstly, it set a (higher) RPI+6.5% profile for Heathrow in
the next control period and referred to it as starting point
for the 2008 review (though not a guaranteed profile) for
the following period. Airlines argued that this was overgenerous
and involved a degree of pre-financing, though
the regulator argued that a much higher (e.g. RPI+12%)
and unsustainable profile would be required in the 2008
review otherwise. Secondly, the regulator set a series of
trigger points for investment, whereby the expenditure
incurred would be added to the regulatory asset base and
begin to receive a return. These trigger points were highlevel
and time specific, though its unclear what impact they
have on ensuring investment is delivered cost-effectively.
Service quality.
The regulatory system can have some adverse impacts
on service quality. In particular, the last 2 to 3 years of
a regulatory period can result in “game-playing”, where
it potentially serves airports more to try and persuade
the regulator than to meet the current needs of its users.
Also, as highlighted by the problems following the August
2006 security alerts, a focus on revenue generation and/
or efficiency in one area, may leave other areas exposed
to poor contingency planning in the event of major shocks.
The CE process is designed to leave scope for contracts
(such as service level agreements) outside of the price
cap for specific levels of service for individual or groups
of airlines. However, the system also needs to ensure
that effective minimum standards of service quality are in
place, with appropriate penalties for failure to meet these
standards.