Is American Experience on Airport Price Regulation Relevant?

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ARTICLE: ACCC ex-boss Fels slams airport monopolies

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Some time ago, Australia deregulated its airports from price competition. Now, the Australian Competition and Consumer Commission (ACCC) issued its periodic monitoring report on airports. That study found that airports were charging higher prices and providing lower service. The former Chair of ACCC assessed that these infrastructure facilities are “wonderful monopolies.” He also concludes that reregulation is the remedy.

Any economist would categorize airports as classical “natural monopolies” in that the service provided does not benefit from more than one source. The notion of competing airfields serving the same market is intuitively a bad idea from both general public interest and safety perspectives. The potential for monopoly behavior should have been addressed before deregulation and Mr. Fels’ retrospective comment is not that surprising.

When the UK passed legislation that allowed London Heathrow to be privatized, a price mechanism was established called RPI +/- “X.” The system is subject to a lot of regulatory ruminations and debate.

Regulation, as exposed in Dr. Alfred Kahn’s tome on the subject, involves governmental efforts to replicate the marketplace. He also found that the regulatory body, by definition, interposes its judgments with the resolution of supply and demand forces.

Reregulation requires the reassertion of that intrusive governmental involvement and a difficult exercise to try to recapture all of the data and market dynamics. To regulate even on a micro basis, the government must collect massive number of data points on capital and operating expense as well as all sources of revenue. These figures must be obtained for all of the facilities in the system. That is a lot of information to track on a real time basis.

The US experience may not be relevant to Australia. But assuming that there is some merit to designing some mechanism to address Australia’s monopoly problem, a short review of the US experience may be interesting.

The American airports have never been subjected to the detailed rate regulation that the airlines had under the CAB. The US Congress enacted a brilliantly simple control mechanism for a natural monopoly, 49 USC §47107 (b) (FAA manual), known as the diversion rule. That statute/regulation requires that “profits” earned on an airport can only be consumed on airport. That restriction has limited the incentive for the municipal/state owners to charge uber rates. The diversion rule does not let them “export” dollars when revenues are greater than costs; so there is no real incentive to extract that additional revenue.

That is not to say that this term is self-executing. The FAA audits consume considerable time and effort. The US mechanism appears to be more effective and efficient. It might work Down Under.

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