NO.024

JOINT PRESS RELEASE

MINISTER FOR TRANSPORT & REGIONAL SERVICES
TREASURER

 

PRODUCTIVITY COMMISSION REPORT ON AIRPORT PRICE REGULATION

The Treasurer and the Minister for Transport and Regional Services today released

the Productivity Commission’s final report on Price Regulation of Airport Services,

and also announced the Government’s response to the report.

The Government has accepted the Commission’s recommendation that Sydney, Melbourne,

Brisbane, Perth, Adelaide, Canberra and Darwin airports be subject to price

monitoring for five years. These arrangements will take effect from 1 July 2002.

An independent review will be carried out towards the end of the five-year period

to ascertain the need for future airport price regulation.

“The Government’s response has taken into account the interests of airports,

airport users and the travelling public,” Mr Costello and Mr Anderson said.

“The price monitoring arrangements will provide airports with greater scope

to undertake efficient aeronautical investments and more flexibility to respond

to a changing aviation environment.

“The major airports have a strong commercial incentive to encourage passenger

growth and maximise non-aeronautical revenue. Nevertheless, the Government will

initiate a review if there is evidence of unjustifiable price increases. This

would be in addition to the statutory protection given to stakeholders under

the Trade Practices Act 1974.”

The Ministers noted that the Government reserved the right to re impose price

controls if it were found that airport operators were abusing their market power

by unjustifiably raising prices.

Mr Anderson noted that these new arrangements would not impact on regional

airline operations into and out of Sydney. They will continue to be guaranteed

reasonable access to Sydney airport under the slot management system and with

a prohibition on any increases in aeronautical charges that exceed the Consumer

Price Index.

“We would like to thank the Productivity Commission and all those who

provided submissions and assistance to the review,” the Ministers said.

The Government’s response to the report is available at http://www.treasurer.gov.au

and http://www.dotrs.gov.au.

Background

The Commission was asked in December 2000 to examine whether there is an ongoing

need for price regulation of airports. The Commission’s final report was provided

to the Government on 25 January 2002.

Melbourne, Brisbane and Perth airports are currently subject to a CPI-X price

cap. Sydney airport is subject to prices notification (where it is required

to notify the ACCC of any proposed price increases). These arrangements will

expire on 30 June 2002. Adelaide, Canberra and Darwin airports have been subject

to price monitoring since October 2001. This arrangement will continue, with

some minor modifications.

CANBERRA

13 May 2002

Contact:

Paul Chamberlin	Niki Savva
Mr Anderson’s Office	Mr Costello’s Office
(02) 6277 7680	(02) 6277 7340

---

GOVERNMENT RESPONSE TO THE PRODUCTIVITY COMMISSION REPORT ON PRICE REGULATION

OF AIRPORT SERVICES

Recommendation 1: For Sydney, Melbourne, Brisbane and Perth airports,

price caps and prices notification arrangements should be replaced by mandatory

price monitoring arrangements for a probationary five-year period, as outlined

in Option B.

• Airports-specific prices monitoring arrangements could be incorporated

  either in the Airports Act 1996 (Airports Act) or the Trade Practices Act

  1974 (TP Act), but should be consistent with any generic price-monitoring

  provisions that may be introduced into the TP Act following the Commission’s

  separate review of the Prices Surveillance Act 1983 (PS Act).

In the event that the Government opted for a stricter form of price regulation

at these four airports, Option A should apply such that:

• annual price caps of the form CPI-X continue for five years at Melbourne,

  Brisbane and Perth airports. Price caps should be set to reflect the efficient

  costs of providing aeronautical services in the long run, on a dual-till basis.

  Price caps should be complemented by price monitoring of some ‘aeronautical-related’

  services; and

• for a capacity-constrained Sydney Airport, prices should not be required

  to fall in real terms. Regulation should comprise either prices notification

  or a price cap of the form CPI-X, with X set at zero. Price increases should

  be allowed to reflect peak-period demand and to accommodate necessary investment.

Response: The Government supports the introduction of price monitoring

for Sydney, Melbourne, Brisbane and Perth airports, as outlined in Option B.

The current airport pricing arrangements were intended to be transitional,

with a review to be held before the end of five years to determine what form

of prices oversight should apply in the future. The Commission’s review concluded

that Sydney, Melbourne, Brisbane and Perth airports have considerable market

power in some aeronautical services. However, due to commercial constraints,

the potential for abusing that power does not warrant a heavy-handed regulatory

regime.

The Government considers that lighter-handed regulation of airports is now

appropriate. In particular, it appears that airport operators have strong commercial

incentives to increase passenger throughput, and have facilitated the entry

of new airlines to the market. As a safeguard, the Commission proposes that

the price monitoring arrangements in Option B would only apply for a probationary

period of five years. A review would be conducted towards the end of this period

to determine whether there have been unjustifiable price increases that warrant

reimposition of price controls. The threat of possible re-regulation will encourage

negotiated pricing outcomes based on efficient costs and an adequate return

on capital.

However, the Government will also maintain a reserve right to bring forward

the review, or conduct a separate review, if it appears that there have been

unjustifiable price increases. Where a review indicates that there is evidence

of unjustifiable price increases, the Government could decide to re-introduce

price controls. (Further detail on the review process is set out in the response

to Recommendation 6.)

A lighter-handed approach provides greater scope for airports to price, invest

and operate efficiently. Price monitoring enhances market transparency by allowing

the community to scrutinise prices and market outcomes, and can also assist

the competitive process, without resort to heavy-handed price controls.

The Commission also recommends that airports-specific price monitoring be consistent

with any generic price monitoring provisions. The Government considers that

prices monitoring for airports should draw on generic prices surveillance provisions,

rather than requiring airport-specific measures.

Recommendation 2: For Adelaide, Canberra and Darwin airports, mandatory

price monitoring of aeronautical services and some ‘aeronautical-related’ services

(as outlined under Option B) should continue for five years. (Airport-specific

price-monitoring arrangements could be incorporated either in the Airports Act

or the TP Act, but should be consistent with any generic price-monitoring provisions

that may be introduced into the TP Act following the Commission’s separate review

of the PS Act.)

Response: The Government supports this recommendation.

The Commission found that Adelaide, Canberra and Darwin airports are likely

to have a moderate degree of market power in some airport services that warrants

ongoing price monitoring, at least as a transitional measure. The Government

supports this approach. This would continue the arrangements applying since

the 5 October 2001 amendments to the prices oversight framework that removed

these airports from price cap regulation.

Recommendation 3: Quality monitoring of regulated services (as outlined

under Option B) should continue at all airports subject to price regulation;

that is, at Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra and Darwin

airports.

Response: The Government supports this recommendation.

The Government agrees that quality of service monitoring is a useful adjunct

to price monitoring, as it helps to ensure that airport operators are not obtaining

improved productivity through running down assets or reducing their standards

of service below levels reasonably expected by stakeholders. Quality monitoring

of regulated services may also identify whether airports are investing appropriately,

for example, by upgrading infrastructure or investing in new facilities to improve

levels of service or facilitate increased demand.

The Commission has also suggested that quality of service indicators be reviewed,

to ensure that the monitored services remain within the control of airport operators.

The Government supports this approach but notes that benchmark comparisons between

airports is facilitated by an overall view of service quality. The Commission

also proposes that quality of service outcomes be published on an annual basis

as part of the broader reporting requirements under price monitoring. The Government

agrees that these outcomes should also be taken into account in the review of

airport price regulation, which is to be completed towards the end of the five

year regulatory period (see Recommendation 6).

Recommendation 4: Neither price monitoring nor price caps should

be reintroduced for Alice Springs, Coolangatta, Hobart, Launceston and Townsville

airports. The Airports Act should be amended so that these airports are no longer

designated as ‘core-regulated’ airports.

Response: The Government agrees that neither price caps nor price

monitoring should be re-introduced to Alice Springs, Coolangatta, Hobart, Launceston

and Townsville airports, but wishes to reserve its position in regard to removing

the financial and quality of service reporting obligations applying to them.

As the Commission found that Alice Springs, Coolangatta, Hobart, Launceston

and Townsville airports all have low market power, the Government considers

that price monitoring or price caps for these airports is no longer required.

As ‘core regulated’ airports, they are subject to a number of general regulatory

provisions in the Airports Act that concern the management and operation of

the leased Federal airports. It is appropriate that those provisions should

continue to apply. The Government understands, however, that the intention of

the Commission’s recommendation is to eliminate the obligation on these airports

to report financial and quality of service information under Parts 7 and 8 of

the Act. In that regard, the Government proposes that this requirement be reviewed

against its policy objectives and, as part of a broader review of the Act, to

consider further whether this information should continue to be provided.

Recommendation 5: Commercial agreements should be encouraged and

assisted (for example, by providing guidelines regarding coverage) under price-monitoring

arrangements, or price caps, if they were retained at some airports.

Response: The Government supports this recommendation in principle

and it was always the Government’s intention that airports and stakeholders

should commercially negotiate pricing outcomes on aeronautical and aeronautical-related

services.

The Government agrees that there is merit in supporting the development of commercial

agreements. However, it is not clear that the Government needs to, or should,

play a role in preparing guidelines for the conduct of those negotiations or

the content of particular agreements that may take various forms and cover any

variety of matters. The Government is conscious of the costs that would arise

from a highly prescriptive regulatory process and considers that it is the parties

affected that are best placed to determine these matters in a manner that suits

their particular operational needs.

In the event that commercial agreement cannot be concluded in relation to access

terms and conditions, the access provisions in Part IIIA of the TP Act provide

recourse to arbitration for determining those conditions for ‘declared’ services.

The Government is, however, prepared to assist airports and airport users develop

industry guidelines for commercial agreements should that be required.

Recommendation 6: Price regulation of airports should be reviewed

towards the end of the five-year regulatory period. The review should be independent

and public. Its objective should be to ascertain the need for any future price

regulation of airports (including price monitoring or more stringent price regulation).

In making its assessment, the review should be guided by principles of efficient

pricing plus several other criteria set out under Option B. Agreed review criteria

should be spelt out at the beginning of the regulatory period.

Other airports should be included in the review only where there was prima

facie evidence of persistent misuse of market power (namely, evidence of inefficient

prices, poor quality etc).

Response: The Government supports this recommendation, but reserves

the right to bring forward a review if there is a strong indication that an

airport has unjustifiably increased its prices.

The Government supports the Commission’s recommendation that there be an independent

review towards the end of the five year regulatory period to assess the need

for continued price regulation. Sufficient time needs to be given for the airports

and stakeholders to bed down a commercially negotiated operating environment.

In that regard there is an expectation that airport operators will implement

transitional arrangements that are mindful of the impacts on the industry from

adopting efficient pricing principles, and will negotiate with stakeholders

a path by which they may be achieved over time.

As indicated in the response to Recommendation 1, however, the Government considers

that it should reserve the right to bring forward the review, or conduct a separate

review, if it appears that an airport operator has unjustifiably increased prices.

The Government would only consider re-introducing price controls on an airport

if it formed the view that the airport had operated in a manner inconsistent

with the following principles.

Review Principles

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.

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.

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.

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.

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.

The Government considers that the principles outlined above will also form

the basis of the future five year review, taking into account intervening industry

developments.

The Government agrees with the Commission’s recommendation that the five year

review only cover those airports that will be subject to price monitoring, unless

there are compelling reasons to include additional airports in the review.

Recommendation 7: All airports should be subject to the generic provisions

of the National Access Regime in Part IIIA of the TP Act. An airport-specific

access regime should be considered only if procedural improvements, such as

scope for multilateral arbitrations, are not made to the National Access Regime.

Response: The Government supports the application of the generic

provisions of Part IIIA to airports.

The existing airport-specific access regime, as set out in s.192 of the Airports

Act, was introduced as a transitional measure to streamline the access processes

under the TP Act as they apply to the newly privatised airports. The intention

was that the arrangements under s.192 would ultimately expire, and that airports

would be subject to the generic access provisions of the TP Act. Little use

has been made of the declaration provisions and, in view of this, Sydney airport

will be sold into the Part IIIA generic regime.

There is no compelling case made for the airports-specific access provisions

to be continued and the Government agrees that all airports should be subject

to the generic access provisions of Part IIIA of the TP Act. Part IIIA contains

mechanisms for ‘declaring’ access to a service, and includes arbitration and

enforcement mechanisms in the event that the access provider and seeker cannot

agree on terms and conditions of access. Part IIIA also includes provision for

access providers to submit undertakings to the ACCC that specify the terms on

which access will be made available to third parties. Combined with the Part

IV provisions of the Act, Part IIIA provides protection for access seekers that

have been unreasonably denied access to services eligible under the legislation.

Some parties have raised concerns as to the operation of the Part IIIA provisions.

The Government has under consideration the Commission’s recommendations to improve

the operation of Part IIIA.

Recommendation 8: Prior to implementation of the chosen regulatory

approach, airports and airlines should be consulted on the practicalities of

the proposed regulation and made aware of its various requirements, in order

to reduce uncertainty and the potential for disputation. In particular, bidders

for Sydney Airport should have a clear picture of the regulatory framework for

that facility so that expected future airport charges can be factored adequately

into the sale price.

Response: The Government supports the intentions of this recommendation.

As a matter of course the Government consults with industry stakeholders when

considering changes to the operation of the regulatory environment. The Government

will be consulting with interested parties on the details for implementing the

regulatory measures and, in particular, on proposed information-reporting requirements

for the purposes of price monitoring. On the matter of the future regulatory

approach, the Government has taken into account the views of industry players

who have contributed to the deliberations of the Commission in the making of

its recommendations.

The Government is mindful of the fact that bidders for Sydney Airport should

have a clear position on the proposed economic regulatory framework. Accordingly,

the Government’s response has been announced so that the prices oversight arrangements

to apply are understood by bidders and can be taken into consideration in formulating

final bids for Sydney Airport.