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

Similar documents
BUDGET ECONOMIC AND FISCAL POSITION REPORT

Jemena Electricity Networks (Vic) Ltd

(1 + Nominal Yield) = (1 + Real Yield) (1 + Expected Inflation Rate) (1 + Inflation Risk Premium)

Gas Distribution Services Default Price-Quality Path Determination 2013 [2013] NZCC 4

Appendix B: DETAILS ABOUT THE SIMULATION MODEL. contained in lookup tables that are all calculated on an auxiliary spreadsheet.

Effective from 1 April Version 1.0

Problem Set 1 Answers. a. The computer is a final good produced and sold in Hence, 2006 GDP increases by $2,000.

Secretary-General of the European Commission, signed by Mr Jordi AYET PUIGARNAU, Director

Documentation: Philadelphia Fed's Real-Time Data Set for Macroeconomists First-, Second-, and Third-Release Values

Advanced Forecasting Techniques and Models: Time-Series Forecasts

Macroeconomics. Part 3 Macroeconomics of Financial Markets. Lecture 8 Investment: basic concepts

CHAPTER CHAPTER26. Fiscal Policy: A Summing Up. Prepared by: Fernando Quijano and Yvonn Quijano

4452 Mathematical Modeling Lecture 17: Modeling of Data: Linear Regression

An Introduction to PAM Based Project Appraisal

Introduction. Enterprises and background. chapter

2. Remittances, other than dividends, by business entities to be made against invoices consistent with bills of entry collected by ZRA.

COMMISSION WORKING DOCUMENT

VERIFICATION OF ECONOMIC EFFICIENCY OF LIGNITE DEPOSIT DEVELOPMENT USING THE SENSITIVITY ANALYSIS

NASDAQ-100 DIVIDEND POINT INDEX. Index Methodology

Stock Market Behaviour Around Profit Warning Announcements

SHB Brent Crude Oil. Index Rules. Version as of 22 October 2009

Effect of Probabilistic Backorder on an Inventory System with Selling Price Demand Under Volume Flexible Strategy

The Concept of Generational Accounts (GA) in Comparison with National Transfer Accounts (NTA)

Forecasting with Judgment

The macroeconomic effects of fiscal policy in Greece

Market and Information Economics

An Incentive-Based, Multi-Period Decision Model for Hierarchical Systems

R e. Y R, X R, u e, and. Use the attached excel spreadsheets to

Dynamic Programming Applications. Capacity Expansion

DOES EVA REALLY HELP LONG TERM STOCK PERFORMANCE?

EVA NOPAT Capital charges ( = WACC * Invested Capital) = EVA [1 P] each

Supplement to Models for Quantifying Risk, 5 th Edition Cunningham, Herzog, and London

Memorandum of Understanding

If You Are No Longer Able to Work

An Analysis of Trend and Sources of Deficit Financing in Nepal

The Economic Impact of the Proposed Gasoline Tax Cut In Connecticut

Rules for the EDHEC IEIF Commercial Property Index (France)

SEB Commodity Indices. Index Rules

A Decision Model for Investment Timing Using Real Options Approach

Portfolio investments accounted for the largest outflow of SEK 77.5 billion in the financial account, which gave a net outflow of SEK billion.

Information Document Capacity Market Auction Guidelines ID #[xxxx-xx]

Comments on Marrying Monetary Policy with Macroprudential Regulation: Exploring the Issues by Nakornthab and Rungcharoenkitkul

A Method for Estimating the Change in Terminal Value Required to Increase IRR

PRESS RELEASE EURO AREA ECONOMIC AND FINANCIAL DEVELOPMENTS BY INSTITUTIONAL SECTOR - FIRST QUARTER August 2012

GUIDELINE Solactive Bitcoin Front Month Rolling Futures 5D Index ER. Version 1.0 dated December 8 th, 2017

GUIDELINE Solactive Gold Front Month MD Rolling Futures Index ER. Version 1.1 dated April 13 th, 2017

Fundamental Basic. Fundamentals. Fundamental PV Principle. Time Value of Money. Fundamental. Chapter 2. How to Calculate Present Values

Watch out for the impact of Scottish independence opinion polls on UK s borrowing costs

1. FIXED ASSETS - DEFINITION AND CHARACTERISTICS

2. Quantity and price measures in macroeconomic statistics 2.1. Long-run deflation? As typical price indexes, Figure 2-1 depicts the GDP deflator,

A Note on Missing Data Effects on the Hausman (1978) Simultaneity Test:

Bond Prices and Interest Rates

Stylized fact: high cyclical correlation of monetary aggregates and output

Ch. 1 Multinational Financial Mgmt: Overview. International Financial Environment. How Business Disciplines Are Used to Manage the MNC

Aid, Policies, and Growth

This specification describes the models that are used to forecast

LIDSTONE IN THE CONTINUOUS CASE by. Ragnar Norberg

CURRENCY CHOICES IN VALUATION AND THE INTEREST PARITY AND PURCHASING POWER PARITY THEORIES DR. GUILLERMO L. DUMRAUF

Ch. 10 Measuring FX Exposure. Is Exchange Rate Risk Relevant? MNCs Take on FX Risk

Reconciling Gross Output TFP Growth with Value Added TFP Growth

Inventory Investment. Investment Decision and Expected Profit. Lecture 5

Chapter Outline CHAPTER

STATIONERY REQUIREMENTS SPECIAL REQUIREMENTS 20 Page booklet List of statistical formulae New Cambridge Elementary Statistical Tables

Capital Strength and Bank Profitability

You should turn in (at least) FOUR bluebooks, one (or more, if needed) bluebook(s) for each question.

Macroeconomics. Typical macro questions (I) Typical macro questions (II) Methodology of macroeconomics. Tasks carried out by macroeconomists

CHAPTER CHAPTER18. Openness in Goods. and Financial Markets. Openness in Goods, and Financial Markets. Openness in Goods,

Economics 602 Macroeconomic Theory and Policy Problem Set 9 Professor Sanjay Chugh Spring 2012

Description of the CBOE S&P 500 2% OTM BuyWrite Index (BXY SM )

Core issue: there are limits or restrictions that each policy-setting authority places on the actions of the other

Li Gan Guan Gong Michael Hurd. April, 2006

Review of Network Economics

The Impact of Interest Rate Liberalization Announcement in China on the Market Value of Hong Kong Listed Chinese Commercial Banks

INSTITUTE OF ACTUARIES OF INDIA

Subdivided Research on the Inflation-hedging Ability of Residential Property: A Case of Hong Kong

a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?

Macroeconomics II THE AD-AS MODEL. A Road Map

Output: The Demand for Goods and Services

UCLA Department of Economics Fall PhD. Qualifying Exam in Macroeconomic Theory

Parameters of the IRB Approach. 1. Class of exposures to central governments and central banks, exposures to institutions or corporate exposures

THE CALCULATION OF CYCLICALLY ADJUSTED BALANCES AT BANCO DE PORTUGAL: AN UPDATE*

ANSWER ALL QUESTIONS. CHAPTERS 6-9; (Blanchard)

Comparison of back-testing results for various VaR estimation methods. Aleš Kresta, ICSP 2013, Bergamo 8 th July, 2013

Exam 1. Econ520. Spring 2017

Service producer price index (SPPI) for storage and warehousing Industry description for SNI group SPPI report no 14

Online Appendix to: Implementing Supply Routing Optimization in a Make-To-Order Manufacturing Network

MA Advanced Macro, 2016 (Karl Whelan) 1

CENTRO DE ESTUDIOS MONETARIOS Y FINANCIEROS T. J. KEHOE MACROECONOMICS I WINTER 2011 PROBLEM SET #6

FORECASTING WITH A LINEX LOSS: A MONTE CARLO STUDY

PROFIT, PRODUCTIVITY, PRICE AND QUALITY PERFORMANCE CHANGES IN THE ENGLISH AND WELSH WATER AND SEWERAGE COMPANIES

GDP: Production and Income Data published since 1947

Labor Cost and Sugarcane Mechanization in Florida: NPV and Real Options Approach

Issues in the Measurement of Capital Services, Depreciation, Asset Price Changes and Interest Rates

Proposed changes to the compilation of zone aggregates for monetary aggregates and other variables in the OECD Main Economic Indicators publication

Contracts and Market Power in Price-regulated Power Industries

Technological progress breakthrough inventions. Dr hab. Joanna Siwińska-Gorzelak

Services producer price indices for Market research and public opinion polling

Macroeconomics II A dynamic approach to short run economic fluctuations. The DAD/DAS model.

Industry Profitability Dispersion and Market-to-book Ratio

(ii) Deriving constant price estimates of GDP: An illustration of chain-linking

Transcription:

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://www.ofwa.gov.uk/aprix/ofwa/publish.nsf/aachmensbytile/ 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://www.eer.co.uk/download/eerolling.pdf 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 -.

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. 00. 5. 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 006-09 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 006-0. i is zero if n is less han n. *

9. Define he regulaory period 006-09 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 006-0 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.

Table: Example of he Calculaion of an Opex Incenive Allowance (IA) for a Regulaory Period 00-5 OPEX Regulaory Period 006-0 Regulaory Period 0-5 Financial year 005 006 007 008 009 00 0 0 0 04 05 4 5 Regulaory assumpion 75 70 65 65 60 55 Adjused acual expendiure 65 55 50 40 0? Ouperformanc e (OP) - 5 5 5 0? OP (seing negaive o zero) - 5 5 5 0? Incremenal OP in 006 (i 06 ) 5 5 5 5 5 5 6 Incremenal OP in 007 (i 07 ) 0 0 0 0 0 0 7 Incremenal OP in 008 (i 08 ) 0 0 0 0 0 0 8 Incremenal OP in 009 (i 09 ) 5 5 5 5 5 5 9 Incremenal OP in 00 (i 0 ) - - - - - - 0 Incenive Allowance (IA) 0 5 5 5 0 4. 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://www.caa.co.uk/docs5/ergdocs/nasdecisionmarch0.pdf. 4

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. 5 6. 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. 6 7. 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 005. 5 See CP/004, page 80. 6 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 006-009 in regard o a VSS scheme. 5