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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