Background and Summary Reforms to the framework for the economic regulation of airports
4.The House of Commons Transport Committee’s 2006 report The Work of the Civil Aviation Authority recommended that the DfT should carry out a review of the CAA, including the central elements of the framework for the economic regulation of airports as set out in the Airports Act 1986 (the “AA 1986”) (report available at: www.publications.parliament.uk/pa/cm200506/cmselect/cmtran/809/80902.htm).
5.In 2008, the Government announced that such a review would take place and would be informed by advice from an independent panel of experts. The panel’s recommendations were published in December 2009, following a public consultation in March 2009 (http://www.dft.gov.uk/pgr/aviation/airports/reviewregulatioukairports/expertpanelopinion) and (http://webarchive.nationalarchives.gov.uk/20110720190543/http:/www.dft.gov.uk/consultations/archive/2009/ukairports/index.html) and (http://webarchive.nationalarchives.gov.uk/+/http:/www.dft.gov.uk/pgr/aviation/airports/reviewregulatioukairports/decisiondocument/pdf/decisiondocument.pdf).
6.Advice from the expert panel, and the response to the public consultation, supported the case for reform of the framework for the economic regulation of airports, and in December 2009 the previous Government published its decision document which set out the case for reform in this area.(1)
7.In the Queen’s Speech of May 2010, the Government announced its intention to reform the framework for the economic regulation of airports. In Written Ministerial Statements in July 2010 and March 2011, the Government provided Parliament with further detail on the direction of the reforms, and the intention to bring forward legislation. A draft Bill was published on 23 November 2011 to give the House of Commons Transport Committee the opportunity to consider the Government’s legislative proposals before they were brought before Parliament. The Committee’s Report was published in its Thirteenth Report of Session 2010-2012 on the 19 January 2012.(2)
8.In most sectors of the economy, the degree of competitive rivalry between firms and the threat of competition law is sufficient to protect consumers from the risk of firms exploiting their market power, for example by charging unreasonably high prices or by providing unreasonably low levels of service quality.
9.However in some sectors of the economy – typically those which used to be state-owned monopolies and where circumstances limit the prospect for effective competition – economic regulation is needed to protect consumers. Such regulation has typically capped the prices that dominant firms can charge in order to promote efficiency, while providing them with a fair return on their investments. In the UK economic regulation is carried out by independent expert regulators in the following sectors: gas and electricity (Ofgem), water (Ofwat), telecoms and post (Ofcom), rail (Office of Rail Regulation) and airports and air traffic services (CAA).(3)
10.The previous legislative framework for airport economic regulation was established for Great Britain under Part 4 of the AA 1986 and for Northern Ireland under the Airports (Northern Ireland) Order 1994 (No. 426 (N.I.1)). Under that regulatory framework the Secretary of State was responsible for deciding which airports should be “designated” for price cap regulation.(4) The CAA was then responsible for regulating these airports by setting the maximum amount the airport operator could charge airlines over a five year period.
11.Consultations on reforming this regulatory framework illustrated that the aviation industry, the regulator and other stakeholders believed the previous regime was burdensome, disproportionate and in need of reform. The Competition Commission concluded in its 2009 report BAA airports market investigation: A report on the supply of airport services by BAA in the UK (5) that the previous legislative framework distorted competition between airlines by adversely affecting the level, specification and timing of investment and the appropriate level and quality of service to passengers and airlines.
12.It was widely considered that the previous framework for airport economic regulation did not meet the standards expected from a modern regulatory regime. The previous regime would not permit the CAA to introduce alternative forms of regulation - for example by monitoring prices and regulating certain aspects of service quality - even if this would benefit passengers and reduce costs for industry.
13.Reform to the framework of the economic regulation of airports was also prompted by the significant changes that have taken place in the aviation sector since the enactment of the AA 1986, including large increases in passenger volumes, the expansion of regional airports and entry by low-cost airlines.
14.The economic regulation measures contained in this Act are intended to provide the CAA with a clear primary duty to further the interests of passengers and owners of cargo in the provision of airport operation services and, where appropriate, promote competition in those services; to provide a more flexible and targeted set of regulatory tools (including a licensing regime); to make the CAA’s decisions more accountable through a system of appeals; and to reduce unnecessary regulatory and central government involvement.
15.The Act also grants the CAA powers to enforce competition law by enabling the CAA to exercise powers concurrently held with the Office of Fair Trading (OFT). These powers include the enforcement of competition law in relation to the provision of airport operation services sector and the ability to make market investigation references to the Competition Commission in relation to the provision of airport operation services. A number of economic regulators (including the CAA for air traffic services only) have concurrent powers with the OFT in respect of sectors which fall within their responsibility. These sectors include telecommunications, gas, electricity, water and sewerage, and railway services.