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Airports expecting price control?

  • August 31st, 2011

Have the airports decided that price control may be inevitable, and they might as well be hung for a sheep as for a lamb? Are they gambling on getting a major pricing increase in before control cuts in, so they start from a higher base?

Why else would they go for price increases that are so far above what the Commerce Commission has signalled as the appropriate level?

At present they are only subject to disclosure regulation. But the Commission's announced input methodology for regulated disclosure could be simply converted to price control. The Stuff report quotes Air New Zealand CEO Rob Fyfe as surprised that Wellington airport had been "quite so flagrant in their disregard" of the commission's guidelines.  

If Wellington Airport has adopted what it describes as its actual cost of capital of 11.3 per cent a year, when the Commerce Commission methodology says an appropriate figure for airports is 7.8 per cent,  the gloves are clearly off.

The airports, and the lines companies and other bodies appealing against the Commission's announced methodologies may be counting on tying the courts up in procedural knots for the foreseeable future, so that the new methodologies are not applied. The new  merits review regime in the Commerce Act was supposed to prevent such gaming of the law for companies subject to price control (making it theoretically profitless by applying methodologies under challenge in the interim).

Perhaps the monopolies believe they have found ways to persuade the Courts to sidestep that anti-gaming provision.

Or perhaps for the airports at least there is a more simple calculation. The report mentions Court hearings in October. They are on the Commission's procedures, not the substantive methodology decision. It is now likely there will not be an outcome to substantive argument before 3rd quarter 2012. And then there will be appeals. So a methodology that Parliament meant to apply from 2010 could be in limbo for years to come.

Perhaps the airports calculate that price control is unlikely to be imposed while the methodology remains under challenge. They could feel that they should go for broke in pricing while they have the Commission tangled in court.  This theory would make sense of procedural challenges and advocacy for long delayed hearings, after an initial argument to the courts that airport matters demanded quick resolution, so much so that they should be separated out from appeals against methodologies for other sectors, and heard by a separate court.

The early airport position and their later arguments have not hung well together. The theory above would explain the discrepancy.

Disclosure – Franks & Ogilvie is acting for user/consumer parties (represented by MEUG) in appeals against the Commission's announced input methodologies.


  • Kiwiwit
  • August 31st, 2011
  • 2:27 pm

Monopolistic infrastructure providers in this country such as the airports, power companies, NZ Post, etc., have stumbled on a tried and true formula for increasing value (and by “value” I really mean executive bonuses).

Firstly, you revalue (i.e. inflate) your assets. Then you complain that now you aren’t making an adequate return on capital, so you put up your prices. Then, surprise, surprise, your assets are worth more because of the increased return so you have to revalue your assets again. Then you complain that you aren’t making an adequate return on capital…

Pretty easy, really, especially as many of the assets we are talking about were paid for in the distant past by the taxpayer or ratepayer.

  • Philob
  • September 13th, 2011
  • 10:52 pm

Wellington airport is already charging a toll on arriving passengers. The taxis pass-on the rents they pay for their stands at $6 or $7 a ride; and private cars have to pay for "parking" ie stopping to pick up passengers.

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