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Tuesday 30 March, 2004

Civil Aviation Auth.

REVIEW OF NATS PRICE CONTROLS

Civil Aviation Authority
30 March 2004


News Release



30 March 2004



CAA LAUNCHES CONSULTATION ON NATS' PRICE CONTROLS FROM 2006


The Civil Aviation Authority (CAA) has embarked on a review of the price
controls on NATS (En route) plc (NERL), which are due to expire in the next two
years.  Today the CAA's initial consultation document on the price controls that
should apply to NERL from 2006 onwards was published.


This seeks views from interested parties, including NERL and its users, on the
CAA's proposed approach to the review, and on the main issues it has identified
to determine the scope, level and nature of the price caps on NERL's Eurocontrol
and Oceanic businesses.  In July 2004 a brief report on the key issues raised in
response to this consultation will be published.  The CAA's indicative proposals
are expected in November 2004, and firm proposals in March 2005.


NERL has only recently undergone a detailed interim review of its Eurocontrol
price control, the conclusions of which were published in March 2003.  Against
this background, the CAA intends to carry out a review that is consistent with
the commitments made by the CAA in its regulatory policy statement in March
2003, and well-targeted towards the issues that matter most to users.  Subject
to maintaining a high standard of safety, the CAA's aim is to enable NATS to
deliver to airlines and passengers the performance that they need,
cost-effectively.


Among the key issues are:

  • setting the allowance for operating expenditure: in setting this
    allowance, how much weight can be attached to benchmarking with other air
    traffic control service providers and how much placed on the analysis of
    NERL's business plan?
  • designing the price control: how should NERL's maximum allowed revenue be
    calculated?  Should it more closely reflect the structure of NERL's costs,
    for instance, by taking more account of the costs of serving complex
    airspace?
  • setting long-term incentives: how can NERL best be incentivised to invest
    in the level, type and timing of investments that meet users' requirements?
  • setting short-term incentives: how can NERL best be incentivised to
    deliver appropriate service quality, and how far does the current emphasis
    on reducing average delay meet users' requirements?


The CAA also seeks views on the context for the review, specifically on the
effects of NERL's ownership structure and of NERL's financial structure.


As its starting point, the CAA has taken the objectives set out in the Transport
Act 2000.  Subject to maintaining a high standard of safety, these are:

  • to further the interests of users;
  • to promote efficiency and economy by NERL;
  • to secure that NERL will not find it unduly difficult to finance its
    activities;
  • to take account of the UK's international obligations;
  • to take account of the Government's environmental objectives where these
    are notified to the CAA.


Dr Harry Bush, CAA Group Director, Economic Regulation, said: 'The CAA plans to
carry out a well-targeted review that will focus effort on areas that will add
value to the business and matter most to users, and we are using this
consultation document to set the scene. At this stage no firm conclusions have
yet been reached.  The CAA welcomes contributions from those parties affected by
the issues raised by this review.'


The consultation paper covers the main price control, which applies to charges
levied by NERL's Eurocontrol business, which ceases on 31 December 2005, and the
control on charges levied by NERL's Oceanic business, which expires on 31 March
2006.


The CAA has asked for comments on its paper by Friday 4 June 2004.


The paper can be found at www.caa.co.uk in the 'Economic' section.


Notes to Editors

1.  On 16 January 2004 the CAA published the review timetable that it expected
    to follow.

This timetable is:

March 2004     Publication of an initial consultation paper seeking views on the 
               major issues for the review.

July 2004      Publication of a brief report on the key issues raised in 
               response to the March 2004 consultation.

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

March 2005     Publication of a consultation paper setting out the CAA's more 
               developed conclusions including a specification of the price 
               control conditions.

July 2005      Publication of a formal proposal under section 11 of the 
               Transport Act 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.

Today's document is the first to be published in the timetable above.


2.  The CAA currently applies two separate price controls to NERL's Eurocontrol
and Oceanic businesses.  The Eurocontrol business provides air traffic services
to aircraft using controlled UK airspace.  In 2003, the Eurocontrol business
served around 2 million flights, which corresponded to 8.7 million Chargeable
Service Units (CSUs).  It charged the equivalent of £45.55 per CSU, and
recovered a revenue of £390.6m.


The Oceanic business is a much smaller business than the Eurocontrol. It
provides air traffic control services for the North Eastern quadrant of the
Atlantic.  In 2002/03, the Oceanic business served 331,000 flights.  It charged
aircraft £55.27 per flight, and recovered £19 million in revenue.



3.  The current price controls were initially set by the then Department for the
Environment, Transport and the Regions and took effect from 1 January 2001.
Following the financial downturn in the aviation industry and the effects of
September 11 2001, and the significant and unanticipated reduction in traffic
(particularly transatlantic) volumes, NATS applied to the CAA in February 2002
for an increase in its charges.  After a revised application and an extensive
CAA consultation the CAA published a revised cap in October 2002 of RPI-2 for
the period 2003-05.  In March 2003 a package of measures was put in place to
secure the financial future of NATS, which included £130 million in capital from
the Government and BAA.  The overall package came to be known as the Composite
Solution.




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