Price Control Study of Airfield Activities: A Critique for Auckland International Airport
1 August 2001
By Greg Houston and Carol Osborne
Auckland International Airport Limited, New Zealand's major international and domestic airport, commissioned NERA to evaluate the Commerce Commission's preliminary recommendation that airfield services at the airport should be subject to price control. This involved an assessment and critique of the analysis upon which the Commerce Commission had based its preliminary conclusions.
The Commerce Commission's analysis largely consisted of modelling work, which suggested the airport had earned excess profits in the past and would continue to do so if unchecked, and estimates of the efficiency benefits of price control, which indicated such regulation would be welfare enhancing.
NERA's assessment of the Commerce Commission's analysis was that it was based on flawed economics and carried out with insufficient accuracy and rigour. NERA's report concludes that the Commerce Commission has not made a reasonable case to support its preliminary recommendation.
Auckland Airport also sought a supporting statement from Dr. Alfred E. Kahn, the Robert Julius Thorne Professor of Political Economy, Emeritus, Cornell University, and Special Consultant to NERA. Dr Kahn's statement addressed the specific issue of whether assets currently in development should be included in the asset base for pricing purposes. The statement argues that such inclusion is appropriate on the grounds that this better mimics forward-looking marginal cost pricing.
