Posts tagged #Bronwyn McDonald

Airports not exercising market power – Productivity Commission

February 2019

The Productivity Commission today released its draft report on the Economic Regulation of Airports. 

We recently prepared analysis for Australia’s major airports and showed that airports have not been exercising market power in aeronautical, car parking or ground access services.

The draft report finds that existing airport regulation benefits the community and remains fit for purpose, and agrees with our analysis that Australia’s four major airports have not systematically exercised market power.

In aeronautical services, airports are constrained by the countervailing power of airlines, and generate “returns sufficient to promote investment while not earning excessive profits”. Prices at airport car parks are “not the result of market power”, but reflect the high opportunity cost of land near airport terminals, and act as signals to manage demand and reduce congestion. Airports are constrained in car parking by the myriad ways to access the airport.

The PC also finds that the current approach to regulation works well and wholesale changes are not justified. Instead, it recommends updating the current monitoring regime so that airports include more detail in their cost and revenue reporting to assist in future assessments on the effectiveness of regulation.

The PC is now accepting feedback on the draft report ahead of the final report in June.

The HoustonKemp team advising Australia’s major airports included Greg, Luke, Brendan, Sarah, Bronwyn, Alyse and Nick.

Airport market power ‘fact check’

September 2018

Today the ACCC submitted to the Productivity Commission’s inquiry into airport regulation that the current price monitoring regime is not effective in constraining airports’ market power, and that increased regulatory intervention is required (see here). But the ACCC’s evidence for the exercise of market power is thin: an assertion as to rising average revenues per passenger and quality of service metrics that remain ‘stable’. Substantial new investment in runway and terminal capacity has been overlooked, and the ACCC’s average revenue per passenger metric is heavily distorted by the changing mix of international and domestic passengers.

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HoustonKemp analysis for the Australian Airports Association (see here) shows a very different picture. The long term profitability of aeronautical services provided at each of the four monitored airports show no signs of market power, with returns on investment over ten years all converging to within the range of weighted average cost of capital estimates previously adopted by the ACCC itself and New Zealand’s Commerce Commission.

We look forward to the Productivity Commission’s evidence-based analysis.

Posted on September 18, 2018 and filed under Reports.

Airport market power – taking off or pie in the sky?

August 2018

Greg, Luke, Sarah, Bronwyn and Nick recently advised Australia’s four major airports as part of the Productivity Commission’s inquiry into airport regulation. We analysed the extent to which the airports have market power in car parking and ground access, and whether they have used any such power.

Our analysis shows that, despite the ACCC’s repeated claims of “very high” profit margins (see here), the airports do not appear to be exercising market power in the provision of car parking or ground access services. Indeed, car parking prices appear to be explained to a significant extent by locational rents and convenience premiums, which are key elements of efficient pricing.

The airports are materially constrained in car parking by off-airport car parking operators and the availability of many other transport options with a diverse range of features and prices. The airports also have a strong incentive to maximise the number of visitors accessing the airport, since ground access revenues tend to represent only a small proportion of total airport revenue.

Our reports can be found here: Brisbane Airport, Melbourne Airport, Perth Airport and Sydney Airport.

Posted on September 11, 2018 and filed under Reports.

Queensland’s declaration triple-header takes shape

July 2018

The three, newly minted, economic criteria governing the ‘declaration’ of infrastructure services under Part IIIA of the Competition and Consumer Act 2010 (CCA) are being given a thorough work out in an unprecedented, triple-header declaration review being undertaken by Queensland’s Competition Authority (QCA).

In the 23 year history of the Competition and Consumer Act 2010 (CCA) framework for third party access, no infrastructure service in Queensland has been formally assessed against the declaration criteria. Side-stepping the national regime, the state of Queensland deemed three services to be declared and developed bespoke regimes for the economic regulation of their terms of access. Those declared services are:

  • below rail services provided by Aurizon’s central Queensland coal network;
  • coal handling services provided at Dalrymple Bay coal terminal (DBCT); and
  • below rail services provided by Queensland Rail’s network, comprising all Queensland’s rail lines other the coal network operated by Aurizon.

Following legislative change in 2010, the declared status of each these services is set to expire in September 2020, and the QCA is charged with undertaking a review and recommending whether each should continue to be declared. The Queensland Treasurer will be the ultimate decision-maker, upon recommendation from the QCA.

Source: Shutterstock

Source: Shutterstock

The declaration criteria to be applied by the QCA are essentially the same as those under the national access regime set out in the CCA, but with two important procedural distinctions. First, the declaration review body (normally, the independent National Competition Council) is the same as that which regulates the services concerned. A QCA recommendation that any of the services should no longer be declared would see it voting to discontinue a substantial portion of its existing functions. Expect close scrutiny of the QCA’s reasoning for any hint of self-interest.

Second, there is no right for interested parties to seek merit-based review of the Treasurer’s decision. In contrast, most declaration decisions made under the national regime have been referred for merits review by the Competition Tribunal and, in several instances, judicial review by the Full Federal Court. On three occasions, critical elements of the declaration regime have been decided by the High Court. Expect close scrutiny of the QCA’s reasoning (or, if different, that of the Treasurer) for any hint of procedural or legal irregularity.

Source: Dalrymple Bay Coal Terminal Pty Ltd

Source: Dalrymple Bay Coal Terminal Pty Ltd

The Queensland process presents complex issues, each to be assessed against new criteria. The service providers have all contended their particular service should no longer be declared, but each cites different combinations of criteria that are said not to be satisfied:

  • Aurizon contends that its continued declaration does not satisfy the criterion (d) net public interest test, citing evidence of ‘regulatory failure’ under the present regime;
  • DBCT Management maintains that its service does not satisfy the material promotion of competition test under criterion (a), the criterion (b) natural monopoly test, and that its continued declaration is not in the public interest, as required by criterion (d); and
  • Queensland Rail contends that its heavily subsided services do not satisfy declaration criteria (a) or (d), that competition from road may mean its rail lines do not satisfy the criterion (b) natural monopoly test, and that five of its eight rail systems do not meet the Queensland significance test under criterion (c).

All four criteria must be satisfied for a declaration recommendation to be made.

The various submissions from service providers and users are supported by legal opinions and expert economic reports, as well as a second round of further material submitted in response to the first. Come late July, the QCA will slip into ‘regulatory purdah’ to consider all the material, with its eagerly awaited, precedent-setting draft decision anticipated by December 2018.

HoustonKemp’s economic experts are advising DBCT Management and Queensland Rail throughout the declaration review, and have filed four expert reports for consideration by the QCA.