Suggested Template for Rolling Schemes for inclusion in the future price regulation of Dublin Airport

Transcription

1 Suggesed Templae for Rolling Schemes for inclusion in he fuure price regulaion of Dublin Airpor. In line wih sandard inernaional regulaory pracice, he regime operaed since 00 by he Commission fixes in advance he levels of maximum prices ha will apply for each regulaory period. Firms hen have a clear financial incenive o reduce coss below he forecas levels (which, wih oher daa, were used o compue he price caps). Since wihin-period cos reducions do no lead o corresponding price reducions, he regulaed firm keeps he benefis of any cos savings in he form of increased profis. For he subsequen regulaory period, he regulaor akes accoun of any cos savings revealed during he regulaory period jus ended.. As is well known, under his approach, he lengh of ime for which a firm keeps he benefi of savings declines wih he passage of each year of he regulaory period. Savings by he firm (over and above any ha were forecased and so incorporaed ino he price caps) in he firs year, are reained o he end of he regulaory period, and hus (generally speaking) for five years. Savings made in he second year are also reained o he end of he regulaory period; bu his is now jus four years. Thus he incenive o make cos savings weakens during he price conrol period.. A number of regulaors have overcome his arbirary aenuaion of savings incenives by mainaining a uniform reward for cos savings over he complee regulaory period. The mehods used have come o be known as rolling incenives mechanisms because hey roll forward for a defined inerval he reward for cos savings, regardless of wheher he firm makes he savings early or lae in he regulaory period. Deails of a possible scheme, based on he approach of he UK waer regulaor (Ofwa) are summarised below. 4. The Commission wishes o inroduce such a rolling incenive scheme for Dublin Airpor, o apply o operaing coss. This would allow he DAA o reain efficiency savings in excess of regulaory assumpions of opex for five years, irrespecive See Annex A of he March 999 Ofwa paper MD45 The Framework for Seing Prices available a hp:// annexa.pdf/$file/annexa.pdf. See also he more comprehensive, hough also more complex, rolling scheme proposed by Europe Economics in Rolling Schemes in Price Conrol Reviews, June 00, available a hp:// Or for six years if opex daa, o allow he compuaion of a price cap se o commence in year, were available on an audied basis only for he year -.

2 of when such savings are made. The savings would be reained via an incenive allowance, which would be calculaed by he rules such as hose se ou below. Noe ha a rolling incenive mechanism and incenive allowance will only affec he price caps for Dublin Airpor from he sar of he nex regulaory period, i.e The Commission also favours he inroducion of a rolling scheme in respec of commercial revenues as well as for capial expendiure. In he laer case, where he design of such a mechanism would be complex, careful analysis and indusry consulaion would need o precede he inroducion of a rolling efficiency scheme. 6. By is naure, a rolling incenive scheme compares a company s forecas opex wih is acual opex; he difference (if he acual is below he forecas) is deemed o be an efficiency improvemen. Such a scheme can only operae as inended on he basis of a robus forecas of a firm s operaing coss; oherwise differenials measure forecas errors as well as efficiencies. 7. A robus opex forecas is no a presen available for Dublin Airpor. Considerable uncerainy aaches o he DAA s invesmen programme and budge a he airpor. Because new faciliies impac on he operaing coss a hose faciliies, capex uncerainy implies opex uncerainy. Therefore, he Commission has been unable o inroduce a rolling incenive scheme as par of his Deerminaion. Noneheless, possible rules for such a scheme are se ou in his Annex in order o faciliae engagemen by ineresed paries wih a view o incorporaing a rolling scheme ino he Dublin Airpor price regulaory regime a he nex pracical opporuniy. The views of ineresed paries are herefore acively sough on he possible scheme oulined below. 8. Define he regulaory period as financial years 006, 007, 008, and 009, and regulaory period 00-4 [?] as financial years 00, 0, 0, 0, and 04. For any financial year, R is he regulaory assumpion of OPEX for financial year, difference beween R and C is he acual OPEX in financial year, n is he C (ou-performance) in financial year or zero if he difference is negaive, i is he incremenal ou-performance in financial year relaive o ha achieved in all previous years in he same five-year price review period: i = n n (.8) * where n is he highes previous level of ou-performance achieved in any * year in he Regulaory Period i is zero if n is less han n. *

3 9. Define he regulaory period as financial years 006, 007, 008, and 009. There is an exra consrain on i, where he sum of i for all he firs four financial years in Regulaory Period should be he level of ouperformance achieved in he fourh year: i + = (.9) 06 i07 + n09 0. This consrain ensures ha he incremenal ou-performance feeding ino he incenive allowance (IA) is genuine and susainable ou-performance ha should be rewarded.. IA is he incenive allowance for financial year, which canno be less han zero since all i are, by definiion, a leas zero. The incenive allowances for Regulaory Period 0-5 are calculaed as: (.0) i06 + i07 (.) i07 (.) i08 IA 4 = i 09 (.) IA = 0 (.4) 5. The company herefore reains he benefi of each incremenal ou-performance for a oal of six years.. To illusrae, an example of calculaing IA for a Regulaory Period 0-5 a he ime of nex price review is given by he Table below.

4 Table: Example of he Calculaion of an Opex Incenive Allowance (IA) for a Regulaory Period 00-5 OPEX Regulaory Period Regulaory Period 0-5 Financial year Regulaory assumpion Adjused acual expendiure ? Ouperformanc e (OP) ? OP (seing negaive o zero) ? Incremenal OP in 006 (i 06 ) Incremenal OP in 007 (i 07 ) Incremenal OP in 008 (i 08 ) Incremenal OP in 009 (i 09 ) Incremenal OP in 00 (i 0 ) Incenive Allowance (IA) The UK Civil Aviaion Auhoriy (CAA) has employed a varian on he Ofwa rolling efficiency scheme for he regulaion of Naional Air Traffic Services (NATS). Under ha scheme, he incremenal allowances are calculaed as before, and heir presen value is added o he regulaory asse base a he sar of he following price conrol period. A he ime of he esablishmen of is scheme, he CAA also envisaged he developmen of safeguards o mainain he relaive incenives for opex versus capex efficiencies, and o avoid arbirary disorion o he iming of expendiures. 5. An issue ha is parly relaed o a rolling opex efficiency scheme concerns he up-fron coss o a company (he redundancy paymens ) associaed wih a saff severance scheme, such as he former Aer Riana s Volunary Severance Scheme See paragraphs 6.9 o 6.44, and Par 5 of Annex 4, o he CAA repor of March 00 on he NATS Applicaion o Re-Open he Euroconrol Charge Conrol a hp:// 4

5 announced in he company s 00 Annual Repor. 4 The former Aer Riana, and laerly he DAA, has argued o he Commission ha he forecas of he operaing coss of Dublin Airpor should include provision for he up-fron coss of he company s VSS. For example, a he ime of he -Year Review, he Aer Riana submission proposed ha airpor charges be adjused upwards o ake accoun of he cos of he company s VSS. In is subsequen deerminaion, he Commission rejeced he former Aer Riana s represenaions, on he grounds ha he redundancy programme is an endogenous maer o he regulaed firm and including is coss in he price cap a his ime would considerably weaken he incenive effecs of he price cap In is submission on he draf 005 deerminaion, he DAA repeaed is view ha, in principle, were he company in he fuure o engage in a furher VSS, he associaed up-fron coss should be funded hrough he price cap: Adequae provision mus be made o cover he coss associaed wih he operaion of a volunary severance scheme wihin he regulaory Deerminaion if headcoun reducions are assumed The Commission noes ha an opex rolling efficiency scheme, by giving he company he benefi for a full regulaory period of any recurring savings from a VSS, would increase he incenive for he DAA o pursue opex efficiencies, including by means of a fuure VSS. More generally, he Commission envisages ha i will analyse, and adop policy regarding, he appropriae reamen of upfron VSS coss in he conex of fuure engagemen wih he indusry on rolling efficiency schemes, wih a view o he regulaory regime being such as o give he regulaed firm srong incenives o pursue efficiency. 4 The DAA scheme involved a oal nominal cos of 0.9 million and saw 5 persons leave he employmen of Dublin Airpor by he end of See CP/004, page The DAA expressed his view on page 0 of heir response o Commission Paper CP/005, s July 005. The DAA did no supply he Commission wih any forecass or esimaes of he coss ha i migh be expeced o incur in in regard o a VSS scheme. 5