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Thursday 29 July, 2004

Civil Aviation Auth.

CAA Publishes Review

Civil Aviation Authority
29 July 2004



CAA PUBLISHES REVIEW OF RESPONSES TO ITS CONSULTATION DOCUMENT ON THE ISSUES FOR
THE NATS PRICE CONTROL REVIEW


The CAA has published today its review of the responses to its consultation
document published on 30 March 2004 which launched the review of the price
controls on NATS from 2006 onwards and sought views from interested parties on
the CAA's proposed approach to the review.  In the document published today the
CAA identifies the main issues raised by those who responded to the earlier
consultation and explains how the CAA will be taking these into account in its
work programme going forward to the publication of indicative proposals planned
for November 2004.

The CAA has reached no definitive conclusions on the future price controls at
this stage.  However, its analysis of the responses to the consultation lead it
to the view that it should adopt the following approach towards the key issues
identified for the review:

  • The existence of a direct user interest in NATS through the shareholding
    of the Airline Group and other governance arrangements should help towards
    aligning the interests of NATS and its users but is not, of itself,
    sufficient to persuade the CAA to adopt a more relaxed approach towards the
    setting of future regulatory controls.

  • The CAA will need to take account of NATS' capital structure when
    assessing  the risks that NATS should bear in any revised price controls.

  • The CAA will consider whether to extend charge control to London Terminal
    Approach. Beyond this, there was no user support to extend the scope of
    price regulation to any other parts of NATS' business that are not already
    subject to controls.

  • Currently 50% of NATS revenues are fixed and 50% are tied to a measure of
    volume.  The CAA will explore the appropriate volume risk for NATS going
    forward although, consistent with previous CAA policy statements, it does
    not therefore expect to revert to a position where NATS bears 100% of the
    volume risk.

  • At present, a small part of NATS revenues is linked to its annual average
    delay performance.  The CAA will explore how service quality incentives can
    be sharpened and better targeted, for example by imposing a proportionately
    larger penalty on longer delays.  It will also consider whether, in
    practice, revenues could be partly linked to measures other than delays and
    whether the publication of a wider set of key performance indicators for
    NATS, without a direct link to revenues, could also help to improve service
    quality.

  • The CAA sees benchmarking as a potentially useful source of information
    about NATS' costs to inform the price control review, recognising that the
    outputs from such studies cannot be used mechanistically to arrive at an
    allowance for operating costs.

  • The CAA will explore the scope for developing appropriate incentives for
    efficient and timely capital investment by NATS.

  • The CAA expects to use the Capital Asset Pricing Model as the basis for
    determining an appropriate cost of capital for NATS.


The planned timetable for the review going forward is as follows:

November 2004: Publication of a consultation paper setting out the CAA's initial
conclusions on the policy issues together with indicative price control
proposals.

March 2005: Publication of a consultation paper setting out the CAA's firm
proposals including a specification of the price control conditions.

July 2005: Publication of a formal proposal, under section 11 of the Transport
Act 2000, to modify licence conditions.

October 2005: Publication of the CAA's final decision.

January 2006: New Eurocontrol price cap takes effect.

April 2006: New Oceanic price cap takes effect.


The document can be seen at www.caa.co.uk/erg click on 'News'.



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