Option Three: Make a Decision to Improve the Information Disclosure Regime and Undertake Price Monitoring
37. This option involves requiring the Commerce Commission to (a) develop guidelines and methodologies, including pricing principles, for information disclosure and (b) undertake price monitoring (with published analysis). The costs of the regime would be recovered by levy on the regulated companies. The specifications of the information disclosure regime are set out in the accompanying paper (paragraphs 43-44 and section F of Appendix B);
38. There is sufficient information available from the 2002 Commission inquiry and submissions made by the aviation section relating to the market power at AIAL, WIAL and CIAL to justify introducing enhanced information disclosure and price monitoring for these airports. There is insufficient information available to make such a decision for other airports. As such this option considers applying information disclosure and price monitoring to AIAL, WIAL and CIAL only.
39. The advantages of this option are that it significantly improves the value and relevance of information disclosed, and provides guidelines that would be taken into account by airports in their consultations. Furthermore, by providing more useful regulatory information on airport pricing, and an explicit monitoring role for the Commerce Commission, it improves the credibility of the threat of regulation if prices are excessive.
40. Specification of binding input methodologies for information disclosure would also remove one of the biggest sources of contention under the current regime which could mean that commercial settlements are reached quicker and there are greater incentives to improve commercial relationships. There may be litigation on the first set of input methodologies but this is likely to be no more so than under the current regime. Over time, however, with binding input methodologies there should be fewer disputes and litigation over these matters.
41. The input methodologies required for robust information disclosure (such as asset valuations, revaluations, and allocation of common costs) would be binding, while methodologies such as pricing principles and how to calculate WACC (which are required for monitoring and analysis) would be in the form of guidelines.
42. With regard to pricing principles, we propose that the Commission develops a set of high-level pricing principles. The Australian Government has published some pricing principles for assessing airport performance. The Australian Government gives regard to these principles when monitoring prices, and a consistent failure to produce results consistent with these principles may trigger more detailed scrutiny and potentially more regulation. Along the same lines, we propose that the Commerce Commission monitors airports having regard to the principles it develops and the prices of services supplied in markets where the airports have high degrees of market power.
43. Notably under the revised Commerce Act, input methodologies developed by the Commission would be subject to industry consultation and merits review. This would provide ample opportunity for parties to feed into the final approach to input methodologies that would apply to major international airports. There are also processes for reviewing and amending input methodologies to allow these to evolve as appropriate over time.
44. Provision of pricing principles, including guidelines on WACC, and binding input methodologies will remove the flexibility for regulated companies to "set prices as they see fit." However, this is a critical part of addressing issues relating to constraining the scope for natural monopolies to exercise market power, and a crucial part of the proposal to enhance the regime.
45. Without pricing principles and binding input methodologies there will be little or no regulatory value of information disclosure. We also note that to some extent, there are already guidelines on input methodologies for airports, in terms of the methodologies used by the Commission in its 2002 inquiry. These have largely been an area of contention with uncertainty about whether they should be used or not and when. Thus, if input methodologies are non-binding, this would be akin to the status quo, which is unsatisfactory.
46. 46 The main cost (levy-funded) would be a one-off cost for the preparation of input methodologies of $1.4 million6 and an on-going cost for price monitoring, estimated at an average of $400,000 a year.7 Overall regulatory compliance costs for airports and airlines are likely to be lower than currently as a result of reducing the areas for dispute.
47. This type of regulatory regime is similar to the price monitoring regime for larger airports in Australia. However, the Australian regime differs in a few respects in that:
- airport asset values were frozen this year by the government at 1 July 2005 levels for pricing purposes. This takes one of the main areas of contention (asset valuations and treatment of asset valuation gains) between airports and airlines off the table. We propose instead that binding input methodologies be developed and set by the Commission in consultation with the industry, as consistent with the proposals relating to the regulatory control provisions of the Commerce Act.
- the Productivity Commission undertakes a comprehensive review of the Australian price monitoring regulatory regime every five years. The Australian Minister of Transport will also be required to consider annually, on the basis of an ACCC price monitoring report, whether to ask airports to "show cause" why they should not be regulated.8 These two triggers for potentially re-imposing price control on airports are likely to be important in ensuring a timely and credible threat in constraining the scope for exercise of airports' market power. We also propose that the Commerce Commission would be required to undertake periodic reviews after airports set charges, starting from the price reset in 2012, on major international airports' compliance with its pricing principles, the effectiveness of the price monitoring regime and whether further regulation is warranted.
48. The other benefit of enhanced information disclosure and price monitoring is that additional regulation (or removal of regulation) could also be identified and considered in a timely manner.
49. Treasury considers that this option would satisfy policy objectives in responding to current concerns and the need for further information before considering additional benefits in additional interventions. There is value in implementing enhanced information disclosure and requiring the Commerce Commission to monitor information supplied by airports, reporting on the state of markets for airport services. A record of information on market performance would usefully inform later analysis of whether there might be any need for further regulatory interventions, such as a negotiate/arbitrate regime.
50. An enhanced information disclosure regime as set out above could be provided for either under the Commerce Act 1986 or the AAA.
51. On balance, MED and MOT consider that an enhanced information disclosure regime would be best introduced under the proposed revised Commerce Act to provide cross-sectoral consistency, rather than amend the AAA. Providing for regulation of major international airports under the revised Commerce Act also has the advantage of having direct reference to a regulatory specific purpose statement that would provide guidance on appropriate regulatory outcomes as well as processes and criteria for removing airports from price monitoring or subjecting them to further regulation. There are no such provisions under the AAA.
52. Given all of the arguments set out above, we (Ministers of Commerce and Transport) are of the view that introducing enhanced information disclosure and price monitoring for major international airports under the Commerce Act is the preferred option. We consider that input methodologies (excluding WACC) should be binding and merits reviewable. We also consider that the Commerce Commission should be required to develop pricing principles and guidelines on WACC to assist in its evaluation and reporting of airport performance.
53. Whilst we propose that the information disclosure regime for the major international airports be moved from the AAA to the Commerce Act, we consider that the requirement to consult as set out in the AAA be retained and continue to apply to the major international airports. We expect that an enhanced information disclosure regime together with the proposed requirement that the Commerce Commission monitor compliance and report on whether further regulation is needed would provide useful regulatory information and would influence how consultation processes are undertaken.
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