Alternative Options
19. In addition to the status quo there were four options considered for the regulation of airports:
- Do further work through an independent consultancy study or a Commerce Commission inquiry to identify whether there is a problem, and make recommendation on the best solution;
- Make a decision now to impose an improved information disclosure regime and a negotiate/arbitrate regime (for international airports) under the revised Commerce Act; and
- Make a decision to impose price control under the current Commerce Act on major international airports.
- Make a decision now to improve the information disclosure regime and undertake price monitoring, with further work to be undertaken in 2008/2009 on whether additional regulation is required (Preferred option);
Option a: Do further work through an independent consultancy study or a Commerce Commission inquiry to identify whether there is a problem, and make recommendation on the best solution
20. The benefits of this option is that it provides for a full review process to consider the nature of the problem to be addressed, the magnitude of this, and the options available to address this. It would also be fully consistent with Government statements on quality regulation being based on evidence and rigorous analysis.
21. Commissioning an independent review by a consultancy firm or the Commission on whether airports are overpricing and whether there would be net benefits in introducing further regulation and the best type of regulation, would cost up to $500,000 and take around six months. A "full blown" inquiry under Part 4 of the Commerce Act by the Commission could take about 18 months to two years and cost around $2 million.
22. While there are advantages of taking additional time to identify more evidence and undertake further analysis this will not necessarily lead to a different or better outcome. There is sufficient information from previous reviews, as well as in submissions made on the review of the Commerce Act, regarding the inadequacy of current information disclosure regime and thus it is unlikely that a full-blown review undertaken in the near future will reveal any significantly or materially different issues that have not been raised previously. Thus, it may just lengthen the process for making a decision for little further benefit. Therefore this option was discarded.
Option b: Make a decision now to impose an improved information disclosure regime and a negotiate/arbitrate regime (for international airports) under the revised Commerce Act.
23. The benefits of the improved information disclosure regime under this option would be the same as set out below in the preferred option (option d), though it can be argued that this would better facilitate effective negotiation.
24. A negotiate/arbitrate regime should provide incentives for parties to negotiate a settlement, and parties would be able to customise settlements to meet their own circumstances. As a result, it could improve relationships between suppliers and customers. The arbitrator/regulator is only involved if parties fail to agree – this reduces costs compared to an option such as price control. Also, over time, parties should get better at predicting arbitrated outcomes, which will again speed up settlement processes.
25. The risks of such a regime are that parties look to the end-game (i.e. arbitration) and position themselves to get the best outcome from the arbitration. This may not be conducive for constructive commercial negotiations. The design issues such as the process for invoking arbitration would be important in limiting vexatious and/or trivial requests for arbitration. Should arbitration be too easily invoked, it could become the default form of regulation, rather than a form of regulation only resorted to after constructive commercial engagement.
26. Some airports also expressed concern that a negotiate/arbitrate regime would stall and frustrate investment, and pointed out that arbitration can be complicated where there are multiple services and parties. As a result, it could be difficult to get the agreement of all parties, which would mean that arbitration/regulation is inevitable.
27. To mitigate the risk of incumbent airlines refusing to pay for capital investment that would encourage or facilitate increased competition by new entrant airlines, it would be proposed that arbitration be required to consider the benefits to end consumers of investment in facilities reasonably required to improve competition among airlines. Arbitration under the Commerce Act would also be subject to guidance from a proposed regulatory specific purpose statement that explicitly refers to incentives to invest.
28. Additional costs of arbitration are difficult to estimate as it will depend on the scope of any arbitration. A rough estimate would be an average of $300,000 per arbitration. This allows for 40 days27 for an arbitrator at $3000/day, plus $100,000 for specialist assistance, plus $80,000 for travel, accommodation, administration and sundries.
29. On balance, given the potential risks and costs associated with the negotiate arbitrate model it is considered that further work on whether an alternative regulatory regime to the proposed information disclosure regime is necessary.
Option c: Make a decision to impose price control under the current Commerce Act on major international airports
30. It is considered that price control sold not be considered without a full inquiry. It is a relatively high cost option when compared to the status quo and preferred option (option d). Also, unlike information disclosure does not have the benefit of the interested parties, who generally have better information about how best to run their business than the regulator, being able to negotiate the best outcome for both parties.
Preferred Option
Option d - Make a decision now to improve the information disclosure regime and undertake price monitoring, with further work to be undertaken in 2008/09 on whether additional regulation is required (preferred option).
31. This option would involve moving the regulation of Auckland, Wellington and Christchurch airports into the information disclosure and monitoring regulatory regime provided for under the amended Commerce Act. Under this provision, the Commerce Commission would be required to develop binding guidelines and methodologies, including pricing principles, for the information disclosure regime and to undertake price monitoring with published analysis.
32. This option would involve moving the regulation of Auckland, Wellington and Christchurch airports into the information disclosure and monitoring regulatory regime provided for under the amended Commerce Act. Under this provision, the Commerce Commission would be required to develop binding guidelines and methodologies, including pricing principles, for the information disclosure regime and to undertake price monitoring with published analysis.
33. This regime would be along similar lines to the Australian regime for larger airports whereby the Australian regime provides pricing principles, information disclosure, and price monitoring and reporting by the ACCC. In most other OECD countries, larger privatised international airports are subject to some form of price cap regulation.
34. The advantage of this option is that it significantly improves the value and relevance of the information disclosed. Providing for specification of input methodologies would provide better information to guide consultations between airlines and airports and pricing decisions. The proposed regulatory specific statement under the Commerce Act would also provide guidance on desired regulatory outcomes. This, together with providing an explicit role of monitoring and reporting by the Commission should also create a more credible threat of heavier-handed regulation if prices are shown to be excessive. Improved information disclosure will also allow the regulator to identify whether regulation should be removed.
35. Specification of binding input methodologies would also remove much of the contention under the current regime. This reduces the scope for dispute which could mean settlements are reached quicker, less costly and there are greater incentives to improve commercial relationships.
36. 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. This would allow airports and airlines and other customers to reach commercial agreements taking in to account efficiency, productivity, investment and other issues while providing clear guidance to assist commercial negotiations
37. The application of this regime can occur under either the Airports Authorities Act or the Commerce Act. On balance the preferred option is move the regulatory regime for the setting of airport charges by Auckland, Wellington and Christchurch airports into the Commerce Act. The regulatory provisions of the Commerce Act are specifically designed to address monopoly pricing issues and the proposed regulatory specific purpose statement will guide decisions about appropriate/desired regulatory outcomes. The Commerce Act will also provide for cross-sectoral consistency has processes and tests/criteria for further inquiries on whether more (or less) regulation is warranted.
38. The main one-off costs for the Commission to prepare input methodologies for information disclosure is estimated at $1.4 million with ongoing costs for administering the information disclosure regime of $400,000 per annum.28 These costs would be able to be recovered by levy on the three relevant airports. Airports and airlines would continue to incur the costs of consultation and litigation. Costs for airports and airlines are likely to be lower than currently as a result of fewer disputes about methodologies.
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