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Final report on Christchurch International Airport

Commission issues final report on Christchurch International Airport

13 February 2014

The Commerce Commission has released its final report to the Ministers of Commerce and Transport on the effectiveness of the information disclosure regulation in relation to Christchurch International Airport. This report completes the review of each of the three airports regulated under Part 4 of the Commerce Act, required by section 56G of the Act.

“Overall, information disclosure regulation appears to have had little influence on Christchurch Airport’s conduct or performance”, said Commerce Commission deputy Chair Sue Begg.

“Given the charges that Christchurch Airport has set, which were based on a 20 year pricing approach, our conclusion is that information disclosure regulation is not limiting excessive profits.”

Christchurch Airport’s proposed prices over the 20 years from 2012 to 2032 target a return of 8.9%, which is higher than the Commission’s view of an acceptable return of between 7.6% and 8.5% for that period. While its target return for the current five year period falls within an acceptable range of returns, its price setting behaviour for that period appears to have been primarily influenced by demand-related considerations (such as the Canterbury earthquakes) rather than by information disclosure regulation.

“We also found that there was a lack of transparency in Christchurch Airport’s approach to setting prices. Christchurch Airport has signalled its commitment to improve transparency, which we welcome,” said Ms Begg.

“The way Christchurch Airport structures its prices is likely to promote efficiency. However, information disclosure regulation has not been as effective as we would have expected it to have been at this time. The level of quality experienced by consumers at Christchurch Airport reflects their demands, and innovation levels appear to be appropriate. Information disclosure does not appear to have had an additional impact in this case,” said Ms Begg.

The review does not make any recommendations about whether regulation other than information disclosure should apply to Christchurch Airport (or whether information disclosure should continue to apply). This is outside of the scope of the review required by the legislation.

The full report is available at http://www.comcom.govt.nz/section-56g-reports/.

Background

What is information disclosure regulation?

Information disclosure is the most light-handed type of regulation available under Part 4 of the Commerce Act 1986. Wellington, Auckland and Christchurch International Airports are subject to information disclosure regulation. Information disclosure regulation requires certain information to be disclosed publicly by the suppliers of goods or services regulated under Part 4. Information disclosed includes financial statements, asset values and valuation reports, prices and pricing methodologies, plans and forecasts, and quality performance statistics.

The information required to be disclosed is set out in a determination made under s 52P of the Commerce Act. We determined the Commerce Act (Specified Airport Services Information Disclosure) Determination 2010 on 22 December 2010. It took effect on 1 January 2011.

For more information on the disclosure requirements, including our reasons, visit http://www.comcom.govt.nz/airports-information-disclosure/

What are input methodologies?

Input methodologies are the upfront rules and processes of regulation set by the Commission which underpin Part 4 regulation. For example, input methodologies concern things such as the valuation of assets, the treatment of taxation, the allocation of costs, and the cost of capital. We first published input methodologies for Auckland, Christchurch and Wellington Airports in December 2010.

To set information disclosure requirements, we are required to apply the relevant input methodologies. The airports, on the other hand, only have to apply our input methodologies for information disclosure purposes. Our input methodologies did not, and continue to not, apply to the airports’ powers and functions under the Airports Authorities Act 1966 (AAA), which includes setting charges/prices for airport services.

Christchurch Airport, among others, challenged a number of the Commission’s input methodologies in the High Court. We have considered the implications on all of our section 56G reports of the 12 December 2013 High Court decision in the input methodology merits appeals. The Court in substance confirmed our input methodologies for the regulated airport services, however, there was one specific change relating to the date land valuations for the purposes of establishing the initial regulatory asset base should be undertaken (ie, 1 July 2010, rather than 1 July 2009). Consultation with interested parties confirmed that the Court’s ruling on this matter does not require a change to our conclusions for any of our section 56G reports.

For more information on input methodologies, including our reasons, visit http://www.comcom.govt.nz/input-methodologies-2/

Which airport services are regulated?

Information is required to be disclosed about only some of the services provided by the three airports. The services are: aircraft and freight activities, airfield activities and specified passenger terminal activities (refer s 56A(1) of the Commerce Act). Each of these services is defined in section 2 of the AAA. These definitions are quite broad and include non-exhaustive lists of the types of activity that are considered to fall within each of these categories. Section 56A(1)(d) of the Commerce Act provides for other airport services to be regulated under Part 4, if required. At present other services, such as car-parking and retail, are not regulated under Part 4.

Prior to information disclosure regulation under Part 4, these airports were subject to information disclosure regulation under the AAA.

What is our task under s 56G of the Commerce Act?

Section 56G(1) requires the Commission to review the information disclosed under information disclosure regulation and report to the Ministers of Commerce and Transport on how effectively that regulation is promoting the Part 4 purpose. We are to carry out this review and report to the Ministers as soon as practicable after a supplier sets any new price for an airport service regulated under Part 4 of the Commerce Act in or after 2012. We must consult with interested parties in preparing our reports.

What is the purpose of Part 4?

The purpose of Part 4 is to promote the long-term benefit of consumers. It does this by promoting outcomes that are consistent with outcomes that are produced in competitive markets such that Christchurch Airport:

• has incentives to innovate and invest, including in replacement, upgraded, and new assets; and
• has incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
• shares with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and
• is limited in their ability to extract excessive profits.

ENDS

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