CC report on BAA airport price controls

Competition Commission report (90 pages, PDF, plus appendices) on the price controls for London's Heathrow and Gatwick airports from 1 April 2008.

The report recommends a level of prices based on the following main parameters:

The report recommends against an Ofwat-style operating expenditure rolling incentive:

[3.14] ... The CAA raised the option of an ‘opex roll-over’ which would allow BAA in such cases to continue to receive the benefits of opex reductions in the subsequent review. BAA could, for example, be allowed to retain the benefit of cost savings for a full period of five years, regardless of when it made them during the regulatory cycle. One airline argued against that approach, suggesting that the formula should itself be set on the basis of a ‘real opex challenge’. In our view, any such approach may need to be symmetric, to provide an equal discouragement to cost increases; it would also increase significantly the complexity of the price control, and would be likely to require difficult accounting judgements to implement it in order to distinguish efficiency improvements from other cost (or accounting) factors. [3.15] We recommend that there should be no such opex roll-over.

The report rejects the idea of indexing the allowed return on capital on a measure of market interest rates:

[F.16] We consider the crucial question is who in the industry is best placed to manage interest rate risk. [...] We considered that companies rather than consumers are in a better position to manage the risk of changes in interest rates [...]

With regard to public interest conditions, the report suggests a strengthening of quality of service regulation and financial incentives.

On the Journeypay levy for taxis serving Heathrow, the report notes the complaints and states that:

[6.65] ... We have not received sufficient evidence to suggest a course of conduct against the public interest, but the cost basis used in the setting of taxi charges in general could be included in the consideration of the appropriate basis for allocating costs to which we referred in paragraph 4.166.

There are no proposals for financial ring-fencing or restrictions on borrowings or distributions, because the Commission considered that:

[6.20] ... The arrangements under the refinancing are outside the scope of our public interest jurisdiction in this quinquennial review because the refinancing has yet to take place.

Various access and competition issues, e.g. those involving independent car park operators, are also deferred to the market investigation.

Final decisions on price controls and public interest conditions are to be made by the CAA.

For further information or advice please contact Franck Latrémolière.

Filed under CAA, Competition Commission, Price controls.

Reckon LLP is an economics consultancy with expertise in data analysis, economic regulation and competition law.

About Reckon