Case Study C8: The new airport pricing regime
In privatising Australia's major airports, the Australian Government recognised that some airports had significant market power which they could potentially use to inefficiently raise prices for their services above the levels that would prevail in a more contestable market. Accordingly, privatisation was accompanied by the introduction of price regulation at all capital city airports and some regional airports. Initially, a price capping regime was in force.
Since 2002, a light-handed price regulatory approach (i.e. price monitoring rather than price capping) has been applied. A light-handed approach has several purposes. It provides greater scope for the airports to price, invest and operate efficiently. It allows members of the community to scrutinise prices and market outcomes and provides evidence of unjustifiable price increases, should they occur. It also acts as a curb on the potential abuse of market power, and encourages negotiated pricing outcomes based on efficient costs and an adequate return on capital.
Towards the end of 2005, the Department conducted an internal review to inform the Australian Government on aspects of the light-handed approach that had worked effectively and areas that could be improved. In April 2006, the Productivity Commission was tasked with reviewing the price regulatory regime.
There were 80 public submissions and 11 presentations to the Productivity Commission's review. In its submission to the inquiry, the Department stated its conclusion that the light-handed approach had been successful but there was room for improvements: specifically, there should be a stronger deterrent against airports abusing their market power.
The Productivity Commission's report, Review of Price Regulation of Airport Services, was published in December 2006. The report supported the continuation of the light-handed approach with some reinforcement of the framework. The review findings were that some market constraints on the airports' natural monopoly powers had not been as strong as initially envisaged; some non-price terms and conditions were unsatisfactory; and commercial relationships between some airports and their airline customers were strained.
In response to the Productivity Commission's report, in April 2007 the Australian Government announced that the light-handed price monitoring regime would be continued at five major airports-Adelaide, Brisbane, Melbourne, Perth and Sydney-and modified and strengthened. Canberra and Darwin airports were removed from the price monitoring regime on the basis that they have low to moderate market power and their passenger numbers are lower than at some other airports that are not currently monitored. The government also noted that the new regime strongly encourages the airports and their customers to further develop commercial relationships while ensuring that regulatory oversight of airports with significant market power continues. The regime encourages parties to work together to secure access to airport services, without harming incentives for investment, innovation and productivity improvement. The government's response can be found on the Department's website, at www.dotars.gov.au/aviation/airport/planning/airport_pricing.aspx.