Today the Civil Aviation Authority (CAA) published for consultation its initial proposals for the price caps for NATS (En route) plc's (NERL's) Eurocontrol and Oceanic businesses for the control periods beginning 1 January 2006 and 1 April 2006 respectively. Firm proposals will be published for further consultation in May 2005.
The CAA's proposals flow from its statutory duties under the Transport Act 2000 which encompass the interests of users, efficiency and economy and financeability but all subject to maintaining a high standard of safety.
The CAA's package of proposals is intended to:
- provide NATS with continued regulatory certainty by maintaining the key planks of the regulatory framework, including particularly the volume sharing arrangement agreed in 2003;
- reduce unnecessary and avoidable risk, for instance through removing aircraft weight, which is unrelated to the costs NATS incurs, from the determinants of NATS revenue (this will not affect the charging regime mandated by Eurocontrol);
- incentivise investment through a cost of capital which recognises the realities of NATS' business and, in particular, is grounded in the actual debt costs that NATS is projected to pay;
- incentivise operational efficiency recognising that, while there are opportunities for cost reduction, the evidence produced by this review suggests that NATS' operating cost performance is more comparable to its European counterparts than previous studies have suggested.
A key element of this package is the price cap on the Eurocontrol business where it is proposed that the average maximum allowed revenue in 2006 is set at the equivalent of 58.1p/km, which represents a 7.8% reduction on the equivalent allowance in 2005. This is set to reduce to 51p/km by the end of CP2 as shown in the following table.
Implied maximum unit allowance (p/km, 2003/04 prices)
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
CAA’s projection | 63.1 | 58.1 | 56.4 | 54.5 | 52.7 | 51.0 |
Year on year change | -7.8% | -3.0% | -3.3% | -3.3% | -3.3% |
For NATS' Oceanic business, the CAA's initial proposals are for a reduction in prices of 4.06% in 2006/07, following by annual reductions of 4%.
Dr Harry Bush, CAA Group Director, Economic Regulation, said:
"Over recent years NATS has improved its cost and service quality performance. Today's proposals build on this progress by continuing to incentivise delay improvement and cost reduction - to the benefit of airline users and their passengers. They also provide NATS with regulatory certainty by endorsing key aspects of the regulatory framework, notably the volume sharing arrangement introduced in 2003.
"A key challenge for NATS over the next control period to 2011 will be implementation of ambitious investment plans. The CAA's recommendations on the cost of capital and the framework for capital spending are intended to incentivise NATS to get on with the job. But it is important it is done efficiently. The CAA has therefore challenged NATS to review its capital spending plans to ensure that they are robust and achievable. It will also be working with NATS on a number of initiatives to improve the efficiency of capital spending and transparency to users.
"Today's price control proposals represent a stretching target for NATS but one that has to be seen in the context of the contribution to it that will be made by continuing traffic growth. They are also but one part of an overall package intended to provide NATS with the certainty it needs to deliver long term improvements and investment, the incentives to improve performance, and an overall platform for future development. For users this should deliver better service at a lower cost, and greater transparency about future plans and performance."
Publication of the CAA's proposals follows the consideration of responses from the aviation industry to the CAA's March consultation document on its approach to the review. At the request of the airlines, the CAA has extended its proposed timetable for the review. The CAA's firm proposals will now be published in May (previously March) 2005 and the final decision will be made by the end of December (previously October) 2005.
The CAA has asked for comments on its initial proposals by 28 February 2005.
The paper can be found at www.caa.co.uk in the 'Economic' section.
For further information contact Chris Mason on: 0207 453 6026.
