Economic Regulation - IATA

expectations set by the regulator without full knowledge
of the true cost base. In that case, it is appropriate to use
the new, lower cost level as the base for the next review
period. However, to encourage further performance
improvements, the system should have some scope for
allowing exceptional efficiency gains to be recognised
and rewarded in future period.
Potential rather than actual costs.
The regulator needs to ensure that the profile for each
regulatory period is based upon potential improvements
rather than simply an extrapolation of trends in actual
costs. Though a resource intensive process, the
assessment of potential costs can provide significant
efficiency benefits. If the system reverts to actual costs
as the benchmark, the incentive for firms to minimise
future costs is weakened.
Appropriate cost-of-capital allowance.
The cost-of-capital return allowed needs to be a true
reflection of the financing costs of the firm. If the
allowed return is greater than the actual cost-of-capital,
it increases the incentive for firms to add to their capital
base (the Aversch-Johnson effect) regardless of user
needs, as it increases their profits. This effect has been
seen in several UK utility sectors, where firms have used
cheap debt (as interest rates fell) to boost their asset
base 23 .
As discussed in chapter 5, price-cap regulation, subject
to adjustments to address the issues above, does offer a
clear process for improving productive efficiency. It can
also provide sufficient incentives for dynamic efficiency
(see chapter 8) while supplementing alternative
mechanisms to improve allocative efficiency where
capacity is constrained (see below).
BENCHMARKING
Regular and accurate performance assessments are
required to assess the progress made in delivering
efficiency improvements and the potential for further
gains. Though airports, ANSPs and their regulatory
frameworks are heterogeneous – each with different
objectives and challenges – there are common standards
that allow for the benchmarking of performance.
Benchmarking can be of benefit to the regulators
themselves, allowing them to minimise the risk of
regulatory failure and to share best practice. Chapter 4
discussed how an international or regional forum can be
developed for regulators (following the example of the
gas and electricity sectors in the EU). This could assess
the progress of governments in ensuring an appropriate
regulatory framework is established as well as the
outcomes for efficiency and investment delivered under
each system.
However, benchmarking is also of benefit at the individual
airport and ANSP level, assessing how each performs
across a range of criteria against a relevant peer group.
These criteria can cover a range of cost and service
quality indicators, reflecting the interaction between the
two areas.
IATA has developed a performance benchmarking model
for major airports and ANSPs, from which it openly shares
information during charges negotiations (see Annex B
for further details).
The model is based upon published information, with the
requirement on airports and ANSPs to provide alternative
evidence if they do not agree with the published figures.
Other forms of regulation are less clear in their impact
upon efficiency, with some potentially providing little
incentive for improvement. However, all are typically less
resource-intensive than price-cap regulation. Rate-ofreturn
regulation contains little clear incentive for cost
minimisation, with costs being reimbursed regardless
of their level and this creates an incentive for excessive
investment. Price monitoring requires competition, airline
power or a credible threat in order for incentives for cost
minimisation to exist, though experience has shown this
typically not to be the case. Contract negotiations can
provide clear targets for efficiency improvements and
risk-sharing, though depend crucially on the willingness
of both parties to enter into open and fair negotiations.
23
See OXERA, (May 2006), “The Future of Infrastructure Regulation”,
Conference, London