London Airports (Price Regulation) (Hansard, 25 July 1986)

§ Mr. Moore

In January 1986 the then Secretary of State for Transport appointed National Economic Research Associates (NERA) to assist in the development of a price regulation formula. I have today published its report. This endorses the approach outlined in the Airports Policy White Paper (Cmnd. 9542) that airport charges should not be allowed to increase by more than the rate of inflation less some fixed amount, x, representing a targeted increase in productivity.

This system of price regulation will support the aims for privatisation by providing real incentives for private sector management to increase efficiency. It will also provide reassurance for airport users against abuse of monopoly.

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The price regulation formula will form a key condition of the initial permissions to levy charges that the Secretary of State will grant to each of the British Airports Authority's London airports under Part IV of the Airports Act 1986.

There will be an overall RPI-x formula applying across the BAA's London airport system, allowing some flexibility for adjustment of charges between the three airports. However, the Government intend to place some contraints on this rebalancing between Heathrow and Gatwick in order to provide some assurance to the users of these airports. It will not place any constraints on price rises at Stansted (other than the system-wide formula), since the BAA will need to raise charges there to a level which reflects the cost of the new development, in order that a proper return is achieved on the new investment and losses are progressively eliminated.

NERA queries the need to make Stansted subject to price regulation in the first quinquennium. But in view of the concerns which have been expressed about Stansted I consider it appropriate to designate Stansted, making it subject to mandatory conditions.

The Government recognises the case for some restraint on the levels of off-peak charges, as recommended by NERA, and will consider whether this should be included in the initial price regulation conditions.

Airport charges will be regulated by reference to an average of a number of independent forecasts of the Retail Price Index for the forthcoming year. Any inadequacies in the forecast will be corrected when out-turn figures are available. After weighing NERA's views about the application of the formula, I have concluded that the RPIx limit should apply to the average revenue yield per passenger: this flexible approach avoids creating incentives to price inefficiency which might be offered by the alternative approach of applying the formula to a basket of revenue-weighted tariff items.

The determination of the numerical value of x will take account of a wide range of factors including forecasts of traffic growth and the costs of developments to meet that growth. The Government are minded to accept NERA's recommendation that x should not vary with traffic growth during the quinquennium.

Since NERA completed its report, the BAA has suggested that the formula should be adjusted if it has to incure additional costs as a result of increased national security standards at airports. Because changes in security standards are outside the BAA's control the Government accept in principle that an adjustment is reasonable, provided the BAA has a continued incentive to implement security standards economically. The Government are therefore minded to agree that the permitted rate of change of charges should include an adjustment in respect of verified cost changes brought about by variations in the security standards imposed by Government.

Details of the first price formula, including the value of x, will be announced nearer to the time of flotation of BAA.

Copies of the NERA report have been placed in the Libraries of both Houses.