Report from BusinessDesk by Paul McBeth
Wellington International Airport, which is co-owned by Infratil and Wellington City Council, is extracting excessive profits by targeting higher returns than it should, according to the Commerce Commission.
The transport hub is likely to recover between $38 million and $69 million more than it needs to for a reasonable return between 2012 and 2017, the antitrust regulator said in a final report to Commerce Minister Craig Foss and Transport Minister Gerry Brownlee. The commission thinks a reasonable return is 7.1 percent to 8 percent, whereas the airport is projected to make returns of between 12.3 percent and 15.2 percent, it said.
“The excessive profits are largely attributable to Wellington airport valuing its land higher than we think it should, and Wellington airport targeting a higher return than appropriate for its circumstances,” deputy chair Sue Begg said in a statement. “We consider that the regime (of stricter information disclosure) has not been effective in limiting Wellington airport’s ability to extract excessive profits.”
The regulator is required to report to the ministers as soon as possible after an airport, as a regulated monopoly, sets new prices. The final report was delayed from a late December date after the draft determination was published in November.
The airport is challenging the regulator’s input methodologies, which may prompt a rethink, the commission said.
The review doesn’t make any recommendations on what regulation should apply to Wellington airport, as that’s outside the scope required by law. Wellington Airport has previously been accused of price gouging in the setting of its air service charges, with national carrier Air New Zealand flagging a $200 million lift in landing fees over the coming five years.
The review found Wellington Airport has improved its service quality and how it structures its prices, and said there was an appropriate level of innovation at the gateway. The information disclosure regime couldn’t measure the efficiency of its operational expenditure, and needed a longer timeframe in looking at the effectiveness of the airport’s investment.
News from Commerce Commission
The Commerce Commission’s final report on Wellington International Airport Ltd points to excessive profits. The report, on the effectiveness of the information disclosure regulatory regime under Part 4 of the Commerce Act, finds that the regime has not limited the ability of the Airport to make excessive profits.
The Commission is required to report to the Ministers of Commerce and Transport on how well information disclosure regulation is promoting the purpose of regulation for each of the regulated airports. The Wellington airport report released today confirms the Commission’s draft conclusion and is the first of three – other reports will follow for Auckland and Christchurch airports later this year.
“We have found that the information disclosure regime is effectively promoting innovation, quality and pricing efficiency by the airport. However we consider that the regime has not been effective in limiting Wellington airport’s ability to extract excessive profits,” said Commerce Commission Deputy Chair Sue Begg.
“Based on our analysis, Wellington airport is likely to recover between $38 million and $69 million more from consumers between 2012 and 2017 than it needs to make a reasonable return. We think a reasonable return is 7.1% to 8.0%. Wellington airport’s expected return is 12.3% to 15.2%,” said Ms Begg.
“The excessive profits are largely attributable to Wellington airport valuing its land higher than we think it should, and Wellington airport targeting a higher return than appropriate for its circumstances,” said Ms Begg. “Our assessment of returns has been based on the relevant input methodologies, which were known to Wellington airport before it set its prices for the period 2012-2017,” she said.
Ms Begg noted that Wellington airport is challenging the Commission’s input methodologies in the High Court and the Commission may update its report to Ministers depending on the outcome of that hearing.
The review does not make any recommendations about what regulation should apply to Wellington airport in future (or whether information disclosure should continue to apply). This is outside of the scope of the review required by the legislation.
The full report on Wellington airport is available at http://www.comcom.govt.nz/section-56g-reports/
The Commission is required to provide its report to the Ministers in respect of each of the regulated airports as soon as practicable after any new price for a regulated service has been set. Wellington airport set new prices on 1 March 2012.
What is information disclosure regulation?
Information disclosure is the most light-handed type of regulation available under Part 4 of the Commerce Act. Wellington, Auckland and Christchurch International Airports are subject to information disclosure regulation. Information disclosure regulation requires certain information to be disclosed publicly by the suppliers of goods or services regulated under Part 4. Information disclosed includes, among others, financial statements, asset values and valuation reports, prices and pricing methodologies, plans and forecasts, and quality performance statistics.
The information required to be disclosed is set out in a determination made under s 52P of the Act. We determined the Commerce Act (Specified Airport Services Information Disclosure) Determination 2010 on 22 December 2010. It took effect on 1 January 2011.
For more information on the disclosure requirements, including our reasons, visit http://www.comcom.govt.nz/airports-information-disclosure/
What are input methodologies?
Input methodologies are the upfront rules and processes of regulation set by the Commission which underpin Part 4 regulation. For example, input methodologies concern things such as the valuation of assets, the treatment of taxation, the allocation of costs, and the cost of capital. We first published input methodologies for Auckland, Christchurch and Wellington Airports in December 2010.
To set information disclosure requirements, we are required to apply the relevant input methodologies. The airports, on the other hand, only have to apply our input methodologies for information disclosure purposes. Our input methodologies did not, and continue to not apply to the airports’ powers and functions under the Airports Authorities Act 1966 (AAA), which includes setting charges/prices for airport services.
For more information on input methodologies, including our reasons, visit http://www.comcom.govt.nz/input-methodologies-2/
Which airport services are regulated?
Information is required to be disclosed about only some of the services provided by the three airports. The services are: aircraft and freight activities, airfield activities and specified passenger terminal activities (refer s 56A(1) of the Commerce Act). Each of these services is defined in section 2 of the AAA. These definitions are quite broad and include non-exhaustive lists of the types of activity that are considered to fall within each of these categories. Section 56A(1)(d) of the Commerce Act provides for other airport services to be regulated under Part 4, if required. At present other services, such as car-parking and retail, are not regulated under Part 4.
Prior to information disclosure regulation under Part 4, these airports were subject to information disclosure regulation under the AAA.
What is our task under s 56G of the Commerce Act?
Section 56G(1) requires the Commission to review the information disclosed under information disclosure regulation and report to the Ministers of Commerce and Transport on how effectively that regulation is promoting the Part 4 purpose.
What is the purpose of Part 4?
The purpose of Part 4 is to promote the long-term benefit of consumers. It does this by promoting outcomes that are consistent with outcomes that are produced in competitive markets such that Wellington Airport:
• has incentives to innovate and invest, including in replacement, upgraded, and new assets; and
• has incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
• shares with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and
• is limited in their ability to extract excessive profits.