PRICE REGULATION OF AIRPORTS - PRINCIPLES WITH AUSTRALIAN APPLICATIONS

This paper analyses the various issues that are likely to arise with p rice regulation of privately owned airports. It begins with a brief ba ckground on Australian airports, and a review of regulatory experience elsewhere. Issues which can create problems for price regulation incl ude congestion, noise and other externalities, quality degradation and underinvestment, and the choice of the initial price level. Price reg ulation limits the use of prices as rationing devices where congestion is present. Efficient handling of congestion can be reconciled with p rice caps if the regulator determines the appropriate congestion/capac ity trade off, and supervises allocation of slots, e.g. through auctio ns or creating a market for slots. Noise externalities can be handled through noise charges set by a regulator who may also be called upon t o resolve capacity/noise trade offs. Resolving the problem of quality degradation and underinvestment is inherently difficult, and may need to involve active participation in investment decisions by the regulat or and airlines. The difficulties of setting initial price levels aris e from conflicts in ensuring that existing assets are utilised efficie ntly, and that prices give efficient signals for future investment. Re gulatory design issues, dealing with whether pure price caps or mixed regulatory rules are superior, are examined in the airport context. Th e paper concludes with a brief examination of the price regulatory reg ime as announced by the Australian government. (C) 1997 Elsevier Scien ce Ltd. All rights reserved.