NATS (En Route) Plc /CAA Regulatory Appeal Final report 23 July 2020 © Crown copyright 2020 You may reuse this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government- licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Members of the Competition and Markets Authority who conducted this appeal Kirstin Baker (Chair of the Special Reference Group) Susan Hankey Paul Muysert Chief Executive of the Competition and Markets Authority Andrea Coscelli The Competition and Markets Authority has excluded certain information from this published version where not in the public domain. The omissions are indicated by ‘’. Contents Page Summary .................................................................................................................... 1 Background ................................................................................................................ 1 Our approach to the reference .............................................................................. 4 Whether a failure to set a price control and impose the appropriate modifications operates, or may be expected to operate, against the public interest .................. 4 Whether the effects adverse to the public interest could be remedied by modifications to the licence conditions ................................................................. 5 Service Delivery Targets ................................................................................. 6 Traffic Forecasts .............................................................................................. 6 Opex ................................................................................................................ 7 Capex .............................................................................................................. 8 Non-regulated income ................................................................................... 10 Pensions ........................................................................................................ 11 Oceanic ......................................................................................................... 11 Cost of Capital ............................................................................................... 12 Overall assessment of the price control ......................................................... 13 Our final determination ........................................................................................ 14 Introduction ......................................................................................................... 15 Background ......................................................................................................... 17 The NATS Group ................................................................................................ 17 Overview of NATS company structure ........................................................... 17 NERL ............................................................................................................. 18 Industry background ........................................................................................... 19 Air traffic control (ATC) .................................................................................. 19 Air traffic controllers (ATCOs) ........................................................................ 20 Trends in air traffic movements (prior to COVID-19 pandemic) ..................... 21 Other relevant context for RP3 ........................................................................... 21 Airspace modernisation ................................................................................. 21 Airspace Modernisation Strategy ................................................................... 22 Airspace Change Organisation Group (ACOG) ............................................. 23 Upgrading of IT systems and technology ...................................................... 23 ADS-B ........................................................................................................... 24 Other regulatory decisions ............................................................................. 24 Regulatory environment ...................................................................................... 24 International and supra-national regulation ................................................... 25 UK regulation ................................................................................................. 26 The price control ................................................................................................. 28 RP3 price review ................................................................................................. 29 RP3 process .................................................................................................. 29 CAA approach to RP3 ................................................................................... 29 NERL’s reasons for rejecting CAA RP3 Decision .......................................... 30 Impact of COVID-19 pandemic ........................................................................... 32 Impact of COVID-19 on NERL operations ..................................................... 32 Measures taken to mitigate impact of COVID-19 ........................................... 33 Involvement of third parties ................................................................................. 35 The reference and the legal framework .............................................................. 36 The reference ..................................................................................................... 36 Statutory Duties .................................................................................................. 37 i The CMA’s approach .......................................................................................... 38 The CAA’s view ............................................................................................. 38 NERL’s view .................................................................................................. 38 Our approach................................................................................................. 39 Failure to set a price control and the public interest ............................................ 41 Introduction ......................................................................................................... 41 Main Parties’ views ............................................................................................. 42 Our assessment .................................................................................................. 43 Our conclusion .................................................................................................... 44 Structure of the rest of our final determination .................................................... 44 Our approach to COVID-19 ................................................................................ 46 Introduction ......................................................................................................... 46 Responses to provisional findings....................................................................... 47 CAA’s view .................................................................................................... 47 NERL’s view .................................................................................................. 47 Third parties’ views ........................................................................................ 48 CMA provisional assessment of appropriate approach to COVID-19 post reference ............................................................................................................ 51 Responses to our consultation ............................................................................ 52 Our final conclusions ........................................................................................... 53 Service quality and environmental targets and incentives .................................. 56 Introduction ......................................................................................................... 56 CAA RP3 Decision .............................................................................................. 57 Service quality targets ................................................................................... 57 Service quality incentives .............................................................................. 58 3Di environmental target ............................................................................... 58 3Di incentives ................................................................................................ 59 Overall financial incentives ............................................................................ 59 RP2 incentive outturns .................................................................................. 59 NERL’s view ....................................................................................................... 59 CAA’s view .......................................................................................................... 61 Other evidence...................................................................................................