NO.016

PRODUCTIVITY COMMISSION TO REVIEW PRICE REGULATION OF AIRPORTS

The Treasurer, Peter Costello, and the Minister for Transport and Regional Services, Warren Truss, today announced that the Productivity Commission will be undertaking a public inquiry into current arrangements for the price regulation of airports.

The Treasurer noted that this inquiry is consistent with the Government’s commitment to review current arrangements prior to the end of the five-year price monitoring regime.

In 2002, the Government replaced the system of price caps at Australia’s major airports Adelaide, Brisbane, Canberra, Darwin, Melbourne, Perth and Sydney with price and quality of service monitoring. The Government considered this approach would provide greater scope for airports to price, invest and operate efficiently.

The Government announced that price monitoring would be introduced for a period of five years to 30 June 2007, during which time the current arrangements would be reviewed.

Minister Truss said that the Productivity Commission will consider whether airport operators have acted in a manner inconsistent with the Government’s Review Principles developed in response to the Commission’s 2002 inquiry into Airport Price Regulation. The Commission will also be asked to make recommendations regarding the development of future regulatory arrangements.

The Productivity Commission will be asked to commence the nine month inquiry on 6 April. The terms of reference for the inquiry will be available on the Commission’s website from that date. Details of the scope of the inquiry can be found below.

The Productivity Commission will shortly invite expressions of interest from anyone wanting to participate in the review. The Treasurer encouraged anyone with any interest in the inquiry to make a submission to the Commission.

To register interest in the inquiry, visit the Productivity Commission website at www.pc.gov.au.

CANBERRA

30 March 2006

Contact:

REVIEW OF PRICE REGULATION OF AIRPORT SERVICES

Background

In 2002, the Government introduced a light-handed approach to price regulation of airport services with market power in line with recommendations made by the Commission in its 2002 Report on Airport Price Regulation. Under the Government’s policy, price notification and price caps under the Prices Surveillance Act were discontinued for all airports (with the exception of regional air services at Sydney airport), and price monitoring for Adelaide, Brisbane, Canberra, Darwin, Melbourne, Perth, and Sydney airports was introduced for a five year period and with a review of the arrangements to be conducted at the end of this period. The Government reserved the right to bring forward the review if there was evidence of unjustifiable price increases.

The purpose of this inquiry is to examine the effectiveness of the current light-handed regulatory regime for airport pricing and to advise on any changes to the regime.

Scope of Inquiry

1. The Commission is to report on whether airport operators have acted in a manner consistent with the Government’s Review Principles and on effectiveness of the current form of prices regulation of airports having regard to the objectives that the regulatory regime should:
   1. promote the economically efficient operation of airports;
   2. minimise compliance costs on airport operators and the Government; and
   3. facilitate commercially negotiated outcomes in airport operations, benchmarking comparisons between airports and competition in the provision of services within airports (especially protecting against discrimination in relation to small users and new entrants).
2. In undertaking its assessment, the Commission is to have regard to the Government’s Review Principles which are:
   1. At airports without significant capacity constraints, efficient prices broadly should generate expected revenue that is not significantly above the long-run costs of efficiently providing aeronautical services (on a ‘dual-till’ basis). Prices should allow a return on (appropriately defined and valued) assets (including land) commensurate with the regulatory and commercial risks involved.
   2. Price discrimination and multi-part pricing that promotes efficient use of the airport is permitted. This may mean that some users pay a price above the long-run average costs of providing aeronautical services, whereas more price-sensitive users pay a price closer to marginal cost.
   3. At airports with significant capacity constraints, efficient peak/off-peak prices may generate revenues that exceed the production costs incurred by the airport. Such demand management pricing practices should be directed toward efficient use of airport infrastructure and, when not broadly revenue neutral, any additional funding that is generated should be applied to the creation of additional capacity or undertaking necessary infrastructure improvements.
   4. Quality of service outcomes should be consistent with user’s reasonable expectations, and consultation mechanisms should be established with stakeholders to facilitate the two way provision of information on airport operations and requirements.
   5. It is expected that airlines and airports will primarily operate under commercial agreements and in a commercial manner, and that airport operators and users will negotiate arrangements for access to airport services.
3. The Commission is to review aeronautical asset revaluation practices and dispute resolution mechanisms at each of the price monitored airports and advise on improvements that would be consistent with the Government’s Review Principles.
4. In making its recommendations on future price regulation arrangements for airport services, the Commission is to:
   1. have regard to its findings on the behaviour of airport operators and airlines and the effectiveness of the existing prices and quality of service monitoring of airports;
   2. identify relevant alternatives to the current arrangements and the extent to which these alternatives would better achieve the Government’s objectives in privatising the airports and moving to a light-handed pricing regulatory regime;
   3. analyse and, as far as practical, quantify the benefits, costs (including compliance costs) and economic and distributional impacts of the current arrangements and the alternatives identified in b).
5. To the extent applicable the Commission is to have regard to:
   1. the Australian Competition Tribunal’s decision of 9 December 2005 to declare the airside services at Sydney Airport and subsequent consideration of this matter by the Federal Court; and
   2. the outcomes of the Council of Australian Government’s (COAG) 2005 review of National Competition Policy.