3ULFH 5HJXODWLRQRI $LUSRUW6HUYLFHV 'UDIW5HSRUW 7KLVLVDGUDIWUHSRUW SUHSDUHGIRUIXUWKHUSXEOLF FRQVXOWDWLRQDQGLQSXW 7KH&RPPLVVLRQZLOOILQDOLVH LWVUHSRUWWRWKH*RYHUQPHQW DIWHUWKHVHSURFHVVHVKDYH WDNHQSODFH Commonwealth of Australia 2001 This work is subject to copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra, ACT, 2601. Publications Inquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: [email protected] General Inquiries: Tel: (03) 9653 2100 or (02) 6240 3200 An appropriate citation for this paper is: Productivity Commission 2001, Price Regulation of Airport Services, Draft Report, Melbourne, August. The Productivity Commission The Productivity Commission, an independent Commonwealth agency, is the Government’s principal review and advisory body on microeconomic policy and regulation. It conducts public inquiries and research into a broad range of economic and social issues affecting the welfare of Australians. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Information on the Productivity Commission, its publications and its current work program can be found on the World Wide Web at www.pc.gov.au or by contacting Media and Publications on (03) 9653 2244. Opportunity for further comment You are invited to examine this draft report and provide comment on it within the Commission’s public inquiry process. Written responses should be received by the Commission on or before Friday, 19 October 2001. The Commission would appreciate receiving submissions to be presented at the public hearings at least a week prior to the particular hearings. After submissions have been received the final report will be prepared. Public hearings commence at 9.00am and have been arranged as follows: Public hearing dates and venues* Location Date Venue Sydney Monday, 15 October 2001 Australian Business Centre 140 Arthur Street North Sydney Melbourne Tuesday, 16 October 2001 Productivity Commission Wednesday, 17 October 2001 Level 28, 35 Collins Street Thursday, 18 October 2001 Melbourne * Subject to change – see accompanying circular. Commissioners For the purposes of this inquiry and draft report, in accordance with section 40 of the Productivity Commission Act 1998 the powers of the Productivity Commission have been exercised by: Professor Richard Snape Presiding Commissioner Dr Neil Byron Commissioner OPPORTUNITY FOR III FURTHER COMMENT Terms of reference I, ROD KEMP, Assistant Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby refer Prices Regulation of Airports to the Commission for inquiry and report within 12 months of receipt of this reference. The Commission is to hold hearings for the purpose of the inquiry. Background 2. During 1997 and 1998, long-term leases (50 years with an option to renew for a further 49 years) were sold over seventeen airports previously operated by the Federal Airports Corporation, to private sector operators. In July 1998 two wholly Australian Government-owned companies were formed to acquire leases over the four Sydney basin airports (Sydney, Bankstown, Camden, Hoxton Park) and Essendon airport. 3. All 22 of the leased airports are regulated under the Airports Act 1996 and twelve of the airports (Adelaide, Alice Springs, Brisbane, Canberra, Coolangatta, Darwin, Hobart, Launceston, Melbourne, Perth, Sydney and Townsville) are currently subject to prices regulation under the Prices Surveillance Act 1983. 4. Except for Sydney Airport, the prices regulation of the airports comprises a CPI-X price cap on declared aeronautical services, prices monitoring of aeronautical related services, and special provisions for necessary new investment at airports. At Sydney Airport aeronautical services are subject to prices surveillance and aeronautical related services are subject to price monitoring. The arrangements are administered by the Australian Competition and Consumer Commission. 5. In establishing the current prices regulations in 1997, the Government announced that the arrangements would only apply for the first five years of operation of the lease. Subsequent regulation would be determined after a review of the arrangements before the end of the first five year period, with the review to be based on the premise that the price caps applied to aeronautical services will no longer operate. 6. The purpose of this inquiry is to examine whether new regulatory arrangements, targeted at those charges for airport services or products where the airport operator has been identified as having most potential to abuse market power, are needed to ensure that the exercise of any such power may be appropriately counteracted. IV TERMS OF REFERENCE Scope of Inquiry 7. The Commission is to report on whether there is a need for prices regulation of airports, and the appropriate form of any prices regulation, taking into account the following principles: (a) the CPI-X price cap applied to aeronautical charges during the first five year period of private ownership will no longer operate; (b) future prices regulation should be applied to those aeronautical services and those airports where airport operators have most potential to abuse market power; (c) airport operators may propose to the inquiry alternative approaches to prices regulation which would provide equal or better protection to users; (d) prices regulation should minimise compliance costs on airport operators and the Government; (e) prices regulation should promote the efficient operation of airports; (f) prices regulation should facilitate benchmarking comparisons between airports, competition in the provision of services within airports (especially protecting against discrimination in relation to small users and new entrants), and commercially negotiated outcomes in airport operations; and (g) the Commission may recommend more effective forms of prices regulation than are currently in place, where this may be necessary. 8. In making its recommendations, the Commission is to: (a) review the operation of the existing prices regulation of airports; (b) identify the rationale for any future prices regulation at airports; (c) identify relevant alternatives to the current arrangements, including the prices oversight arrangements at relevant airports in other countries, and the extent to which these alternatives would achieve the rationale in (b); (d) analyse and, as far as practical, quantify the benefits, costs and economic and distributional impacts of the current arrangements and the alternatives identified in (c); (e) identify the different groups, including the travelling public, likely to be affected by the current prices oversight arrangements and the alternatives identified in (c); and (f) list the individuals and groups consulted during the review and outline their views. TERMS OF V REFERENCE 9. In undertaking the review, the Commission is to advertise nationally, consult with key interest groups and affected parties, and produce a report. 10. The Government will consider the Commission’s recommendations, and the Government’s response will be announced as soon as possible after the receipt of the Commission’s report. ROD KEMP 21 December 2000 VI TERMS OF REFERENCE Contents Opportunity for further comment III Terms of reference IV Abbreviations and explanations XIII Key messages XIV Overview XV Draft recommendation and findings XXXIX Draft recommendation XXXIX Draft findings XL Requests for information XLV 1 Introduction 1 1.1 Terms of reference 1 1.2 Background to the current inquiry 2 1.3 The Commission’s approach 4 1.4 Conduct of the inquiry 6 2 Australian airports and their markets 7 2.1 Airport facilities and services 7 2.2 Australian airports 9 2.3 The airport business at core-regulated airports 13 2.4 The airport business at other Australian airports 35 3 The regulatory environment 37 3.1 Price regulation 37 3.2 Access regulation 47 3.3 Other relevant regulation for airports subject to price regulation 53 3.4 Regulation of airports not subject to price regulation 65 CONTENTS VII 4 Assessing the need for price regulation of airport services: some preliminary issues 69 4.1 Why regulate prices of airport services? 69 4.2 Potential efficiency and distributional effects of monopoly pricing 72 4.3 Principles of efficient pricing of airport services 77 4.4 Principles of good regulation 83 5 Market power of airports 85 5.1 Introduction 85 5.2 Airports and barriers to entry 87 5.3 Price elasticity of demand for an airport’s services 96 6 Market power in particular airport services 129 6.1 Introduction 129 6.2 Aircraft movement facilities 130 6.3 Passenger processing facilities 131 6.4 Lounge space 133 6.5 Landside vehicle facilities 135 6.6 Aircraft refuelling 143 6.7 Maintenance facilities 147 6.8 Flight catering facilities 149 6.9 Freight handling and ground service equipment storage sites 150 6.10 Freight facility sites and buildings 151 6.11 Waste disposal facilities 151 6.12 Administrative office space 152