Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence


Memorandum by the Civil Aviation Authority (NAT 4)

  1.  The CAA is the UK's independent civil aviation regulator, with all civil aviation regulatory functions being integrated within a single specialist body. In 2001 the CAA's functions were extended to include the economic regulation of NATS' licensed subsidiary NATS (En Route) Limited (NERL) and oversight of the NERL Licence from a general regulatory perspective. These new functions were added to the CAA's longstanding functions in relation to aviation safety and airspace regulation and the economic regulation of UK airports and UK-based airlines.

THE CAA'S ECONOMIC REGULATORY AND LICENSING FUNCTIONS

  2.  NATS under the Transport Act 2000, through NERL, is responsible for providing air traffic services to meet the Government's international obligations. The CAA as regulator and licence manager monitors and enforces the licence regime in accordance with the Transport Act. The CAA has set out publicly[1] the policies it expects to pursue in managing the NERL Licence and has consulted on these with NATS, its users and other interested parties.

  3.  In carrying out its regulatory and licence management roles, the CAA has an overriding duty under Section 2 of the Transport Act 2000 to exercise its functions so as to maintain a high standard of safety in the provision of air traffic services. Its other duties under the Act include: furthering the interests of users (broadly defined); promoting licence holders' efficiency and economy; securing that licence holders will not find it unduly difficult to finance activities authorised by their licences; taking account of any UK international obligations notified by, or guidance on environmental objectives given by, the Secretary of State; and imposing on licence holders the minimum restrictions consistent with the exercise of these functions. Other than the overriding safety duty and the subordinate duty with respect to imposing the minimum necessary restrictions, the CAA has discretion to weigh its duties against each other as it considers appropriate where there is a conflict between them.

  4.  The CAA places considerable weight in carrying out its economic regulatory and licensing functions on the development by NERL of effective consultation and decision making with its users. This reflects the existence of a sophisticated and well-informed user base in the form of the airlines whose interests are highly inter-dependent with those of NATS. For such a relationship to work effectively, it is essential that NERL provides its users, including in particular those who are not members of The Airline Group, with a sufficient level and quality of information on its forward looking business and capital investment plans. The Licence sets out the basic requirement on NERL in this regard. Building on this, the CAA aims to ensure that the nature and scope of the information provided to users is sufficient and that the consultation process is itself effective.


THE EXISTING NERL PRICE CAPS FOR 2001 TO 2005

  5.  A key function of the CAA under the Licence is the establishment of the price caps for NERL's UK and Oceanic air traffic services operations. Because the initial price caps for the next five years from 2001 to 2005 needed to be in place in time to inform the bidding process for the NATS' PPP Strategic Partner and ahead of the Transport Act and the Licence coming into effect, these were established by the Government through the then Department for the Environment, Transport and the Regions (DETR). However, given the CAA's prospective role of economic regulator for NERL, the DETR requested its advice on the initial price caps. The CAA gave its advice to the DETR in August 2000. The DETR announced its decision in January 2001 and this was incorporated in the NERL Licence.[2]

  6.  The CAA's advice was based on a standard UK regulatory approach. It emphasised the importance, which the CAA attached to the regulatory framework being both transparent and sustainable if it was to meet the core objectives of the PPP. The general economic regulatory philosophy underpinning the proposed price caps was therefore set out fully in the advice.

  7.  A fundamental aim was to give NERL appropriate incentives to meet demand over the first five years and to do so in a cost efficient manner. In line with one of the key objectives of the PPP the CAA sought also to provide good incentives for NERL to invest in necessary additional capacity and service quality desired by airlines for the longer term. Consistent with maintaining these desirable incentives, the CAA's advice was designed to secure a robust long term regulatory regime in accordance with best regulatory practice.

  8.  The CAA made clear that its advice—again in line with best regulatory practice—took account of external benchmarks and the costs of new capacity. Its aim over the longer term was to move further away from economic regulation through price caps based solely or principally on NERL's own costs, The CAA developed initial benchmark measures which indicated that NERL had high costs in relation to other comparable European air traffic service providers. The CAA also developed initial measures of NERL's short and long run incremental costs of new capacity. However, it recognised that these benchmark and incremental cost measures would require further development before they would be able to bear the full weight of future price caps. Development of the former has been continued by Eurocontrol[3].

  9.  For the initial five year period the CAA proposed price caps based on a standard RPI-X formula. For NERL's UK operations the X factor proposed was RP1-5 for each of the five years. The advice also provided a detailed exposition of the key components of the price caps. These included projections of NERL's demand and operating costs, the estimated value of NERL's assets (the Regulatory Asset Base), the estimated cost of capital and the way in which projected capital expenditure had been treated.

  10.  In the event the DETR decided upon a somewhat looser price cap on the basis that this would help to achieve a smooth transition to the PPP. The caps for the first three years from 2001 to 2003 were set at RP1-2.2, RP1-3 and RP1-4 respectively, with the same RP1-5 as proposed by the CAA in each of the last two years.

NERL'S APPLICATION TO RE-OPEN THE UK ATS PRICE CAP

  11.  NATS has applied to the CAA to re-open the price caps for the remaining three years of the initial five year period. It has proposed that the existing caps of RP1-4, RP1-5 and RP1-5 in 2003, 2004 and 2005 should be replaced by RP1+4, RP1+3 and RP1+2 respectively.

  12.  The CAA's responsibility is to make an independent and thorough analysis of the application in accordance with the duties set out in Section 2 of the Transport Act 2000 and in line with best regulatory practice. The CAA will reach its conclusions based on such analysis of the evidence and arguments submitted by NATS and after consultation with other interested parties.

  13.  The CAA published on third April 2002 the process and timetable it will work to in dealing with NATS' application. This provides for a position statement to be published by the CAA in late May 2002 followed by submissions and, where appropriate, oral presentations from NATS and other interested parties. The aim is to reach a decision or, if necessary make a reference to the Competition Commission, by around the end of July 2002. In the event that the CAA and NATS reach agreement on a particular modification, the CAA would be required under the Transport Act to publish this and take further representations from other interested parties before reaching a final decision by around the end of August 2002.

Civil Aviation Authority

April 2002

APPLICATION FROM NATS (EN ROUTE) LIMITED TO MODIFY THE CAP ON EUROCONTROL CHARGES IN CONDITION 21 OF ITS AIR TRAFFIC SERVICES LICENCE

  1.  The CAA published on 5 February 2002 an application from NATS (En Route) Limited ("NERL") to modify the cap on Eurocontrol charges in Condition 21 of its air traffic services licence. In a note published along with the application the CAA said that it would publish details of its process for handling the application and an indicative timeline. It is now doing so.

  2.  The CAA has been discussing with NERL the technical aspects of the application. Subject to these discussions, the CAA proposes to publish in the second half of May a provisional position statement in response to the application. This will include an analysis by the CAA of the application against its statutory duties set out in section 2 of the Transport Act 2000 together with the CAA's provisional conclusions on whether the application should be approved, in whole or in part, or be refused, in whole or in part.

  3.  Once it has published its provisional position statement the CAA will invite written submissions in response and will allow a period of one month for these. Subject to issues of confidentiality the CAA would expect to publish responses on its website. When it has considered the written responses the CAA plans to invite key industry participants to make oral presentations to a panel comprising a number of members of the CAA Board. It would expect to hold these presentations in late June or early July. The CAA has not reached a final view on the conduct of the presentations but would be minded to conduct them in the presence of all the invited parties but without affording the right of cross-examination. A transcript would be taken and published. This was the procedure used by the CAA during the development of its recommendations to the Competition Commission on future airport price caps under the 1986 Airports Act and which was generally accepted to work well. The circumstances in the present case are, however, different and it might therefore be appropriate to adopt a slightly modified procedure. The CAA would be interested to hear views on this.

  4.  The CAA would expect to announce its decision on NERL's application in the second half of July. There are circumstances in which that decision could give rise to:

    (a)  a reference by the CAA to the Competition Commission under section 12 of the Transport Act; or

    (b)  the publication by the CAA of a proposal to modify conditions in NERL's licence in accordance with section 11(2) of the Transport Act.

  Either of these would be subject to statutory timescales under the Transport Act. Given these timescales it might not be possible if there were to be a reference to the Competition Commission in July for a final decision to be announced before the end of 2002. In the event of it publishing a proposal in July under (b) the CAA would expect to announce a final decision in late August or early September.

  5.  An indicative timeline, taking no account at this stage of subsequent developments under (a) or (b) in the previous paragraph, would be as follows:

    CAA publishes provisional position statement mid to late May

    Written submissions mid to late June

    Oral presentations late June/early July

    CAA decision mid to late July


1   Monitoring and Enforcement of NATS (En Route) Limited (NERL) Licence: Proposed CAA Policies, January 2002 (www.caaerg.co.uk). Back

2   . Air Traffic Services Licence for NATS (En Route) Limited (www.caaerg.co.uk) Back

3   . European Organisation for the Safety of Air Navigation. Back


 
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