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.