Principles of Good Airport Regulation

Stuart Holder

Associate Director, London

Lisbon

22 November 2005

2

Why Regulate Charges?

Traditional view – stop monopolists from over-charging

– only applies where airports have market power

– protection for airlines and other airport users

But regulation also protects investors

– from political intervention for lower charges / higher quality

– from unreasonable pressure from users, media, etc

A clear framework for establishing tariffs facilitatesinvestment, and so is good for everyone!

3

What Can Go Wrong?

Too much risk and uncertainty

– at project inception – will be priced into initial bid

– during operation – messy arguments, discourages investment, etc

Profits are too high

– pressure (from airlines / politicians / media) to change contract

Profits are too low

– discourages future investment / innovation

– risk of bankruptcy (disruptive, and discourages private investment)

4

How to Regulate Charges

Allowable tariffs set out in concession contract

– but could also use separate legal instruments

Many options for reviewing tariffs over time

– purely mechanical formula (eg CPI, possible volume term)

– reviews confined to certain issues (eg traffic volumes, future capex)

– general review, but some parameters fixed (eg rate of return)

– automatic vs discretionary reviews

Risk allocations need to be sensible, efficient,affordable, clear and sustainable

5

Hot Topic: Single or Dual Till?

Do profits from commercial activities lead to lower airport charges?

Yes = Single till– lower, more efficient, charges at uncongested airports

No = Dual till– may be more appropriate for congested airports

– strong investment incentives + long term view to commercial activities

– higher proceeds from any privatisation

No obvious “right” answer, and hybrid options exist.But difficult to change once one approach is in place

6

How to Make Regulation Better

Ensure regulator has adequate skills and resources– many failings are from poor decisions, rather than a poor framework

– consider effective use of regulatory boards?

– ensure adequate funding

Ensure regulatory framework provides:– a clear basis for setting tariffs

– an effective appeals mechanism

– transparency, and effective participation

These will help ensure the regulator uses hisdiscretion sensibly

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Stuart Holder

NERA Economic Consulting15 Stratford PlaceLondon W1C 1BE+44 20 7659 8584stuart.holder@nera.com