Status Quo and Problem
6. The intention behind the 1997 introduction of the disclosure regulations for airports was to explicitly help guard against the possibility of monopoly pricing, and to help to better inform the statutory consultation process.24 The current information disclosure regulations are ineffective in this regard.
7. Many airports, particularly larger airports, have strong natural monopoly characteristics. This enables them to set prices above those that would prevail in a workably competitive market. Whilst other smaller airport companies are strictly speaking, natural monopolies, few if any have market power, and most only have one airline customer, Air New Zealand, which has substantial countervailing negotiating power. Also, the recent review of the Commerce Act did not receive any comment. Consequently we have limited information on the nature of and extent of the problem and possible solutions for the regulation of smaller airports.
8. The 2002 Commerce Commission inquiry undertook extensive analysis and found that Auckland Airport was earning excessive rents and if the regulatory regime remains unchanged this would continue. The Commission estimated that forecast excess returns would be $27 million over the six years from 2002.25 These forecasts did not include any potential revaluation gains that may have occurred in relation to land. To the extent that there would have been revaluations, these excess returns are likely to have been understated.
9. The Commission also stated that while any countervailing power by airlines might constrain airport behaviour at the margin, it was unlikely to be sufficient by itself, to prevent exercise or even abuses of market power. The Minister of Commerce in making her decision not to impose control, at the time, based her decision on analysis that overall efficiency costs were negative and consumer benefits were relatively low. Notably, in assessing the costs of regulation the assumption was that the form of regulation was price cap regulation which is a high cost form of regulation, and the only form of regulation then available under the Commerce Act.
10. Since 2002, the regulatory regime for airports has not changed, and it is likely that the substantive analysis of market power undertaken in this inquiry is no less relevant.
11. The current regime lacks the requisite guidance around what information is required to facilitate effective negotiations between airports and users on the level of charges. This is likely to be a significant contributing factor (along with the lack of guidance) in the contention and litigiousness of the current regime.26 The information provided is also generally insufficient to help the regulator or officials to determine whether excessive prices are being charged.
12. A 2001 review by Arthur Andersen Consulting for the Ministry of Transport found that the lack of clarity and specificity in the disclosure regulations meant that none of the disclosures would allow an interested party to understand the price-setting process to such an extent as to make a meaningful assessment for example, of the appropriateness of cost allocations.
13. The current disclosure regime does not specify enough level of detail to determine whether airports are over-recovering or not. Some of the crucial components in assessing whether airport user charges are excessive or not are the input methodologies relating to how the value of the asset base is calculated (including how asset revaluations gains are treated), and how common costs are allocated. The disclosure regulations do not specify any clear requirement in respect of the appropriate methodologies that should be used by airports. The lack of specificity also contributes to contention, for example which assets should be included in the asset base for aeronautical pricing purposes.
14. The statutory requirement is to consult, not to negotiate. Because airports have the right to make investment decisions and set charges unilaterally (after consultations) it is inevitable, absent an independent dispute resolution mechanism, or credible and timely threat of heavier handed regulation, that airports will tend to make decisions in their own interests. Again the lack of pricing principles and binding input methodologies mean that these are a major source of contention between larger airports and airlines, along with the outcomes of consultation.
15. Furthermore, the current disclosed information is not monitored or reported on at the departmental or regulator level. Thus, whether or not an airport is over-recovering based on the information disclosed is not compiled and presented by an independent body.
Status Quo
16. The option of taking no further action specifically on airport regulation, but let the proposals relating to the regulatory control provisions of the Commerce Act take effect was considered.
17. This option does not resolve the problems discussed above associated with inadequate information. Also, when compared to the preferred option, it does not provide additional checks on the misuse of market power and will not help facilitate effective negotiation between airports and airport users.
18. The threat of further regulatory action under the Commerce Act is likely to be a weak vehicle for constraining airports' market power without an effective means of measuring and monitoring the information disclosed by the airport. Instead a costly inquiry would be needed to determine whether there are grounds for economic regulation.
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