‘, or is likely to acquire,’ and insert
‘had for a period of at least 24 months’.
It is a pleasure to serve for the first time on a Committee that you are chairing, Mrs Riordan. The amendment is designed to probe the Government’s real views on deregulation and the regulatory burden. I know what the Government’s rhetoric is—that they are removing one existing regulation for every one that they introduce and that they are reducing the regulatory burden. However, this Bill as a whole seems to be increasing the regulatory burden.
I shall just go through a few of the questions that the Minister answered during pre-legislative scrutiny. She is always straightforward with her answers, and I have the greatest respect for her, but I think that she is getting the regulatory impact assessment and the regulatory burden wrong. In response to recent questions about the air travel organisers’ licence, which is covered later in the Bill, the Minister made it clear that her preference was for a market solution to the ATOL problem, but in fact we have extended regulation.
When the Minister was recently before the Transport Committee on the draft Bill, I asked her in Q162 whether the Bill was deregulatory. She replied:
“The regulatory impact demonstrates that this new regulatory system will cost considerably less for airports to operate.”
She then brought in her official, but in answer to Q163, she repeated:
“The assessment we have done is that this will cost airports and airlines less to operate than the current system”.
That is clear.
When I checked with Manchester Airports Group about the regulatory impact, it was clear that in its estimate there would be an increased regulatory burden of £274,500, which is not a huge amount for an airport the size of Manchester airport, but it represents a huge percentage increase in the regulatory burden. That is not the main thrust of the amendment, but I am talking generally about regulation. I can give the Minister the calculations if she wishes. We may come back to that later in the Bill. It is not so much the figure, which I accept is not huge, but the fact that it is an increase, and there are increases elsewhere in the system. East Midlands airport has done a similar calculation for me, which also shows an increase of a third in the regulatory burden.
The amendment is a very strong deregulatory proposal, and I have not plucked it out of thin air. I refer the Minister to the original report from the 2005-06 Transport Committee, “The Work of the Civil Aviation Authority”. Paragraph 128 on page 45 states:
“We recommend that the Government review the continuing need for the designation of airports subject to economic regulation by the CAA as a matter of principle, and that it publish an assessment of the relative merits of this approach compared to the use of standard competition legislation to regulate the abuse of dominant position by airports. The Government should consider de-designating Manchester and Stansted as a first step.”
It goes on to say, not as a recommendation, but in supporting script:
“This review should be informed by experiences in other countries, such as Australia, where price controls were removed in 2002.”
That recommendation forms the basis of the amendment. Remember: it was a Committee with a significant Labour majority and the report received all-party support. For a more modest basis for the amendment, when I asked the Minister in the Transport Committee why there should not be deregulation of airports other than Heathrow, she said that it was not in the passengers’ interests. The principle of the amendment is to say, “Let’s try it first.”
The core issue in the Bill is a market test that decides which airports will be regulated under the Bill. If one looks in detail at what is happening in the marketplace, one can see huge amounts of competition. Since Manchester airport was deregulated—in 2009, I think—there has been greater efficiency, greater effectiveness and greater economy, because it is in serious competition with Liverpool airport, Robin Hood airport, Birmingham airport and Stansted airport. It is also in competition with European hubs, albeit at a minor level compared to the larger British airports such as Heathrow, because it has intercontinental flights.
The same case can be made for the London airports in a way that was more difficult to make in 2006, when the original recommendation was made, because BAA then was one body. Since 2006, Gatwick airport has been sold and there is a recommendation—opposed by BAA—to sell Stansted airport. However, if one looks at the market in the south-east of England, one sees that Gatwick airport is competing with Heathrow; one has only to talk to the owners of Gatwick to realise that. If Stansted becomes separate from BAA, it will compete with both Gatwick and Heathrow; it will compete more for the point-to-point low-cost carriers and the package carriers than for other carriers, but it will compete. There will be a three-way competition.
More importantly, however, as I mentioned during the previous discussion, Heathrow is in a fight for its life against airports such as Charles de Gaulle, Schiphol, Frankfurt, Copenhagen and Madrid, whose Governments have had the sense to allow them to expand and increase collectively by far more runways than there are in the south-east of England. So the amendment is saying, “Let’s have 24 months, look at how the market works and see whether the Minister’s contention—that it is for the benefit of passengers to carry on with the current regulation—is right, or whether it is actually for the benefit of passengers to allow the market to determine the charges.”
I am curious about how my hon. Friend arrived at the period of 24 months. Is it because of an examination of the Select Committee’s early report, and the recommendations that he mentioned, or is it because of some economic instrument that he has come across?
It was slightly better than an estimate off the top of my head. I thought that if we were going to see whether the passenger was going to suffer or benefit, we would need to go through two annual cycles, because airports really work on a summer season and a winter season; even an airport such as Heathrow, which is essentially full, works on that seasonal basis. That was where the 24-month period came from. It could be 36 months. This is a probing amendment, so the period could be varied; it could be for two years and then it could be extended by two years if there were no problems. There are lots of different ways of doing things, but it is worth looking at the free market competitive solution rather than having the CAA determine which airports are to be regulated.
I note that to put in that 24-month period, my hon. Friend has chosen to delete the words, “is likely to acquire”. Can he say a little more about why it is important to delete those words? My question is meant to be helpful; I apologise if it is not.
The amendment is really a vehicle for testing this debate. The clause is basically saying that airports that are dominant in their market, or that are likely to acquire that market domination, should be regulated. The reason why the amendment would delete the word “acquire” is that we do not know what is happening; let us first have a look at what the market is doing.
The Bill has all the hallmarks of a Bill that the Labour Government were putting through in detail, but it has not been examined as thoroughly as it should be. Otherwise, we would not be told that parts of it are removing burdens from airports when they are clearly putting burdens on airports.
I also want to talk a little about having a free market solution and about the scarce economic resource that the two runways at Heathrow are. How the previous regulatory system worked was, in many ways, perverse. The runways at Heathrow airport are an incredibly scarce resource and, because a lot of people go through Heathrow, it is easy to achieve a return on capital expenditure, so the price over many years has been driven down. So Heathrow gets more and more crowded, even after the building of terminal 5.
In the previous review at Heathrow, the cost limit was only RPI plus 7.5%, which, given the size of terminal 5 —it was £5 billion or some such huge figure—is a small percentage increase after years and years of landing charges being forced down by a perverse formula.
Similarly, at Gatwick the cost limit is RPI plus 2%, and at Stansted there is no increase whatever. So Gatwick is below real inflation and Stansted is a good deal below inflation because the cost limit is at zero. Would it not have been more sensible, particularly at Heathrow, to allow airports to charge more? They are a scarce resource and some aeroplanes with grandfather rights have been landing there for a long time at relatively low charges, which is not the best way to determine how we run the south-east airports.
I do not want to repeat our earlier debate on whether there should be a third runway at Heathrow. Clearly, I, like other members of the Committee, think there should be, but for now there will not be one. So what does one do about trying to keep British aviation as eminent as it is in world aviation? That is difficult if we are not going to build more runways and we do not have the right to control where airlines go, but it seems to me that there are three possible reforms related to the amendment.
First, the real economic cost could be charged for landing at Heathrow. Secondly, we could consider the allocation of slots, because there are still some small planes using slots at Heathrow airport because they have grandfather rights. There is a grey market in those slots that needs to be regulated and made transparent so that the market can determine what is the best aeroplane to land at Heathrow in terms of who is willing to pay.
If that were done, the unjustified criticism levelled by Ken Livingstone and Boris Johnson that there is no need for a third runway at Heathrow would disappear. They say that there are still charter flights going out of Heathrow to Tenerife, or wherever, which is because a plane or airline that has had a slot for 10 or 20 years can keep it. It would be much easier for the country to get the best use out of Heathrow airport and the runways if we had a market solution through both regulation and the allocation of runway slots.
Even for 24 months, are passengers going to be terribly vulnerable? One has to remember that, although the Civil Aviation Authority had previously been the only economic regulator of airports, since European directive 2009/12/EC the 10 largest airports in the United Kingdom have been regulated from Europe. Even though I have argued for this amendment, which would take all the airports in the United Kingdom out of economic regulation by the CAA, there would be a more general European level of regulation, which, if people were worried about protection for passengers and airlines, would be there.
I hope that that has given the Government something to think about, because I think—I know—that Conservative MPs go back to their constituencies and complain about gold-plating legislation and unnecessary regulation. Government Members should think hard about this Bill, because it seems that it increases the regulatory burden. There is a way through this, without very much risk—to have a free-market solution to at least some of the problems of the south-east.
This is not some wild idea; it went through an all-party Select Committee some years ago. I have had personal discussions with people from airports—not in the past 12 months, but over a number of years—about a situation where we have a surplus of runways throughout the country, but a scarcity of runways in the south-east. As we cannot direct planes as to where they will land, it would be sensible to look for a market solution, rather than more regulation.
It is a pleasure to follow the hon. Gentleman and his interesting proposal, which has some even more interesting economic analysis.
The usual rationale for a regulator is monopoly power, as we see here with airports. Left to themselves, one might expect those airports to set their price at a rate that maximises their monopoly profits at a level significantly above marginal cost. The gains to the operator of the airport from that extra profit are greater than the losses to the consumer, because of how they are priced.
When we come to airports, however, and the experience of both the air traveller and the freight owners, the charge at the airport is just one relatively small part of the overall price of the air fare and of the overall experience in terms of their use of the aviation industry. Giving the CAA a single duty in the Bill to promote and act in the consumer’s best interest, be that the passenger or the freight owner, is not necessarily set against what the hon. Member for Blackley and Broughton has described.
When one looks at the users of Heathrow and the business use—the relatively high fares in business class, the types of destination that people are going to and the long-haul nature of many of the flights—we see that if we could get better reliability at Heathrow, that would be a gain to those users far greater than the charge that might be added.
We could see a regime where, for instance, the CAA thought that the consumer interest was that there should be an element of spare capacity at Heathrow and that prices were being held down or that that was being stopped from happening. If the CAA allowed those landing charges to rise significantly in terms of proportion, but not so significantly in terms of the overall cost of the air ticket and the value to the user, we might see a regime where there was more spare capacity and more resilience at Heathrow.
Were some of the flights to which the hon. Gentleman referred to move away from Heathrow—be they charters or flights to lower-value destinations or some prestige destinations, or ones that have just grandfathered and happen to have always been from there—that would lead to a greater amount of excess capacity and we could see other airports come in. That could be, for example, Gatwick, with a potential second runway beyond 2019, or Birmingham, which has a lot of existing capacity and which will be connected in by HS2, so that it will be 30 minutes to Old Oak Common or 40 minutes to Euston. That could lead to a more market-orientated system.
The CAA is a regulator respected by most or all hon. Members. Can that regulator not be allowed to focus on consumer interests? If the consumer interest at Heathrow is not having the lowest possible landing charge, but having a more resilient and reliable airport to serve the needs of “just in time” for freight, and reliable quality transport and timing for business operators, the CAA might hear what the hon. Member for Blackley and Broughton said and, in promoting the interests of the consumer and the freight owners, take those views into account.
I was going to make these remarks in a stand part debate, but they will fit naturally here. The clause uses the definition of what triggers a regulation as “substantial market power” as opposed to dominance. As the hon. Member for Blackley and Broughton said, a lot of the regulation on airports now is from the European Union. EU directives on competition refer to dominance and not substantial market power in the way they drive their tests. Here we are legislating with regard to the CAA using the term “substantial market power”.
There is a subtle difference between the meanings of dominance and substantial market power. We may end up with more airports getting regulated using the test we are proposing rather than the one we could have proposed. There is also some uncertainty in the definition as it flies backwards and forwards through the Bill. Although we use “substantial market power” in clause 6 to define where we need regulation, in clauses 3 and 5 we go back to “dominant”. Clause 5 is titled “Dominant areas and dominant airports” and clause 3 mentions “dominant airport”. It is almost as if we have switched from “substantial market power” to “dominant” and back again.
It is instructive to read some of guidance issued by the Office of Fair Trading. Recognising that the EU directives talk of “dominant”, it talks about market power being a useful way of determining what is dominant. The CAA’s own final competition assessment guidelines talk about substantial market power being an abuse of a dominant position. We seem to be exchanging terms. It may be much clearer just to go for a definition of dominance, which has a clear definition in the EU treaties. I think all players in the industry understand what the test is.
To illustrate that, the OFT’s guidance sets out that the European Court has said that if an entity has a market power of more than 50% it will be assumed to have dominance and therefore regulation could apply. OFT says further that if the market share is more than 40% there might be a need for regulation. I do not think that any airport other than Heathrow has more than 40% market share. Gatwick is probably the closest to that, although I doubt whether it has that percentage in any segment. I think it has some 23% of the UK holiday market, 15% of the UK business market—nowhere near that dominance threshold of 40% or 50%.
Looking at London or the south-east, obviously the percentages are much higher, but they still do not get anywhere near the 50% test that would trigger automatic dominance. When the CAA publishes its preliminary assessments of substantial market power, it carries out a long exercise on Gatwick and Stansted to try to work out if it can justify regulating either of those airports. It goes through every segment of travel and area to try to get to a threshold where it can apply the regulation. Perhaps I should not say “try to get to a threshold”. However, it appears to start from a position that those airports are regulated, and appears to want to keep them that way. I agree with the hon. Member for Blackley and Broughton and my hon. Friend the Member for Rochester and Strood that we should regulate airports only where is a definite need to do so, and where there is a real advantage to the user, rather than looking to regulate unless we can find a way out of it. When reflecting on the Bill, I urge the Minister to consider whether, either accidentally or deliberately, using the definition of substantial market power rather than dominance will give the CAA more freedom to regulate airports than we intend.
Let us consider the scenario in which East Midlands airport has more than 40% of the UK freight market—a scenario that could trigger such issues. Moving freight at airports is incredibly easy. I suspect that all airports move freight—it simply has to be driven a few extra miles down the road before it goes on a plane. I cannot see any need for regulation in such circumstances; we certainly could not say that that constituted market dominance. However, when we start applying different factors in choosing markets, segments and areas, a scenario could arise in which we attempt to regulate, and the last thing any of us wants is the CAA to decide in a few years’ time that it is time to regulate a few more airports to justify its existence. Using the word “dominance” would give a clearer definition and would be consistent with the European treaty. All the operators in the industry would have a clearer definition of the rules they have to apply.
I am grateful to members of the Committee for their contributions to the debate on the amendment, especially the hon. Member for Blackley and Broughton, who tabled it. He has great expertise in aviation and his input on such matters in Parliament is much valued. I cannot support his amendment for various reasons that I shall share with the Committee. I shall also deal with some of his broader points, and I am grateful for his explanation that the amendment is essentially probing, rather than likely to be pressed to a Division.
In effect, the amendment would raise the bar to test whether an airport was subject to economic regulation under clause 6. The three tests it would amend are well understood and broadly accepted by the industry. The significant change proposed to the wording of test A could, in practice, mean that airports that should be subject to economic regulation fall outside the CAA’s remit. Of course, I agree that we should not regulate airports when doing so is unnecessary, overly burdensome or not in the passengers’ interests. However, such matters are dealt with properly under the current wording of clause 6.
There is a real risk that an airport could abuse its market position to the detriment of passengers if the amendment were accepted. If there were a real risk of an airport abusing its market position, we should give the CAA the necessary powers to protect the interests of passengers. It would not be in passengers’ interests to require the CAA to wait for at least two years before it was able to act under chapter 1 of the Bill. If a regulatory regime were justified, it would be important to ensure that it could be applied in a timely way. To be effective, we should give the CAA the power to intervene proactively and speedily when the tests set out under the clause are met. I am worried that the amendment would leave passengers and freight owners unprotected for a protracted period.
I turn to the broader points made by the hon. Member for Blackley and Broughton. When debating regulation with him, I keep finding myself in the peculiar position of opting for an approach that is more regulatory than his. It is a demonstration that, while the coalition is absolutely firm on the need to minimise unnecessary burdens on business, we accept that proportionate regulation has its place and can achieve important goals—in this case, the protection of passengers and owners of cargo from exploitation by airports that enjoy substantial market power.
The hon. Gentleman began by considering the cost impact of the Bill as a whole. Our estimate in our published impact assessment is that, over 20 years, the Bill will reduce economic regulation costs in the aviation industry by about £160 million. There will be a small additional cost, the present value of which would be £10 million, meaning a net reduction over the 20 years, in present value terms, of £150 million. I note the estimate the hon. Gentleman gave in relation to Manchester. Of course, we strive to minimise burdens on business, but we believe that overall the Bill will reduce costs for the aviation industry, which is one of its benefits.
I welcome the input of the Manchester Airports Group. Manchester airport is not only a high quality airport and an important part of the north of England’s economy; it is also proactively involved in debates on airport policy generally. It has done extremely well with its pilot of security scanners, for example. It is always good to have the input of Manchester airport.
The hon. Gentleman argued that it might be more sensible to rely on general principles of competition, rather than having a specific regime for airports. In the test set out in clause 6, we build in a protection whereby resort to specific airport economic regulations is justified only where the CAA can conclude not only that the benefits will outweigh the costs, but that the mechanisms available under general principles of competition law will not be sufficient.
The hon. Gentleman seemed anxious about the possibility of extension of regulation, and expressed concern that Gatwick and Stansted continue to be regulated when there is a debate about whether they should be. Under both the present and what we hope will be the future system, it is open at any time for any airport that is currently regulated to ask for a review. Another advantage, which I hope will provide some reassurance to the hon. Gentleman, is that the current regime is very binary—one is either subject to a five-yearly price cap or not. There are almost no other options available to the regulator. One advantage of the proposed changes is that they give the regulator a spectrum of options, depending on the seriousness of the problem. They could involve such measures as price monitoring. That will give the CAA the flexibility to have regard to and use measures that are potentially more proportionate than a heavy-handed, once-every-five-years set of price controls.
The hon. Gentleman referred to the competitive pressure on regional airports. I agree that that is so—not least in these difficult economic times—and that, to an extent, Heathrow faces competition from other European hubs. The thrust of the Bill is to get those decisions out of the political arena—currently, they are taken by the Secretary of State, albeit with advice from the CAA—and give them to an independent regulator. That will be fairer and will take the politics out of the system.
The Bill provides for transitional arrangements, so that airports that are currently regulated can be carried over automatically into the new system. As there is considerable overlap with the substantial market power test—that is one of the reasons why we selected this provision: it reflects current practice—there must be a strong likelihood that the application of that test under the new regime will be broadly similar to its application under the current regime. It is therefore likely that the airports that are currently regulated will continue to be regulated, but, as I have said, that is for the CAA to decide. At any time, those airports can come forward with a request to be deregulated.
Another specific problem with the amendment is that it might be inconsistent with the airport charges directive. The hon. Member for Blackley and Broughton made some interesting points about slots. However, he will appreciate that the House’s options regarding slots are somewhat limited, as this matter is determined by European law and governed by an independent organisation, as required by European law. The airports package currently being discussed in Brussels gives us the opportunity to look at related issues, so I will take his contribution on board in those future discussions.
I should like to deal now with the points made by my hon. Friend the Member for Amber Valley, which were also referred to on Second Reading, about the interaction of the terms “dominance” and “substantial market power”. The first thing I need to emphasise is that “dominance” in this context is not used in the same way as in general competition law. Here, it has a specific meaning. There are a number of reasons why we have opted to focus the test on “substantial market power”. The previous Government consulted on the test and received a broadly positive response on the retention of “substantial market power”. It is based, crucially, on the designation criteria that the Secretary of State currently uses, so we are not heading into uncharted territory.
As I mentioned in relation to the point made by the hon. Member for Luton South, there are established decisions on this matter already, so we are seeking to maintain a degree of continuity. The industry is familiar with a “substantial market power” test and how it works. We carefully considered the distinction between the two terms as progress was made in drafting the Bill, and the decision was taken not to equate “substantial market power” with “dominance” in the sense that it is used elsewhere in competition law rules.
I hope that provides some clarity, and I ask Members to oppose the amendment if it is not withdrawn.
This is a probing amendment and I will withdraw it, but there is enough in the debate about it for us to return to it in a different form on Report.
I should like to reply to two or three of the points that have been made. The hon. Member for Rochester and Strood argued that perhaps if the CAA looked creatively at the interests of the passenger at Heathrow, it would get the regulation right. What matters to many of the passengers at Heathrow is reliability. Reliability is just not possible when both runways are being used at about 99% capacity. The people there do an extraordinarily good job to get so many planes in and out every day, but things go wrong—planes come in without fuel; there are delays of one sort or another. It is not always possible to get complete reliability when the runways are used at that level.
The purpose of my amendment is to point out that it is not simply a question of whether the Bill is more burdensome and to ask whether the CAA can really stand in the place of the consumer—the passenger who pays for the air ticket. We have assumed in all the debates so far that there is a homogenous passenger and that it is the same if that passenger is flying from Liverpool using Ryanair or is a filthy rich banker flying first class to New York. Clearly, their interests would not be the same.
When I fly Ryanair from Liverpool, I know it will be cheap and cheerful. It is pretty reliable, low cost and I get where I want to go. I have never been a filthy rich banker, but from time to time, usually when other people have been paying, I have travelled business or first class—a new expense—and one expects and wants a different service. Reliability is important.
The hon. Gentleman has more faith than I do in the CAA’s or any bureaucracy’s ability to distinguish between those demands. The market is much more segregated than between the Ryanair passenger and the extremely rich person who can purchase a ticket.
I have no great faith in bureaucracy. What is special is the structure of the market. Were the price charged to the airlines by the airport operator at Heathrow to rise, it is not clear in an economic analysis that that would harm the end consumer. It is at least as likely that it will simply reduce the value of the slot. It is the scarcity of slots that allows the airlines their monopoly power in pricing. If the cost to them rises, the cost to the consumer might stay the same, but the value of the slot will fall. Because more money is going in, it might benefit the consumer in that way.
That is a different and significant point about how a full market solution might work. We are only partly there, but I understand what the hon. Gentleman says. It is a powerful point.
The hon. Member for Amber Valley shared, I think, my scepticism about the interventions that the CAA might make. Maybe it was a trite debating point, but it shows the power that the CAA could have if it were to start talking about where coffee, hot dogs or whatever are sold. It is a relatively small point, and I do not think that it is likely to happen in the real world, but it represents the fact that the CAA, under the Bill, can intervene more often and more regularly in the airports. Hopefully, it will understand passengers’ needs, which often differ; I doubt it, having dealt with the CAA. It is good at many things, but I am not sure that it would be able to stand in the place of the passenger. That has never been tested, as this is a new Bill.
Although if we are to have an economic regulator, it makes sense for it to intervene when there is a problem, the Bill gives the regulator the power to intervene too often and, frankly, in a burdensome and nuisance-causing way. If a bureaucracy is given a power, the worry must be that it will use it. It certainly worries me a lot that we are transferring from a costly, double-edged process held once every five years to something that could happen fairly regularly. We are relying a lot on the good will of the CAA.
That brings me to the Minister’s first point about the process leaving passengers vulnerable for 24 months if things go pear-shaped. Again, I am not wedded to 24 months. The point of the amendment is to reverse the process. Any assessment of substantial market power or dominance will always have a theoretical basis, whereas if we let the market rule and let Heathrow, with only two runways, do what it can to compete with Frankfurt, Charles de Gaulle and so on, it might go mad, price itself out of the market and do awful things. However, I doubt that the people who run Heathrow would do that.
The Minister makes a sensible case: if something awful happens and intervention is needed, and considering how the market really behaves, we should give somebody the power to intervene quickly, whether it is the Secretary of State or the CAA. I accept that general point, but I still argue that it would be interesting to test the market in a world where airports and airlines compete very differently from how they competed 30 years ago. It would be interesting to try that.
Does the hon. Gentleman agree that a slightly perverse outcome of making BAA sell Gatwick and Stansted is that we end up with all three airports still being regulated, on the basis that they somehow have a dominant position over the market in London and the south-east? It is a bit of a nonsense, but looking at what the CAA has published, that seems to be what it wants to achieve.
I could not agree more. As the hon. Gentleman heard in the comment that I read out from the 2006 report, the Transport Committee was looking then, as a first step to getting more competition within the London markets, at taking Stansted out of BAA’s ownership, so deregulating it, or, effectively, not economically regulating it. It is very strange for the Competition Commission to suggest breaking up BAA—a sensible thing to do; the Transport Committee has been recommending that since 1998—and then say, “We will still regulate you as though you weren’t dominant.” The hon. Gentleman is right; why create a competitive situation but still keep control of the charges? It is a nonsensical response to that agenda.
I will withdraw the amendment, but I hope we can return—if not with exactly the same amendment—to the issue of whether the Bill is burdensome, and potentially gives too much power to the CAA to interfere. It is one thing, as the Minister says, to take it out of the political arena, but another to create a bureaucracy in which there is no democratic control on it if things go wrong. I am worried about that issue and certainly think it worthy of further discussion on Report. However, I beg to ask leave to withdraw the amendment.
It will be useful to dwell for a moment on the substantial market power test. It is envisaged that in conducting the market power test, the CAA will take due account of all applicable guidelines and recommendations relating to the analysis of markets and market power that have been produced by the UK and European competition authorities.
As I said, “substantial market power”, in test A of clause 6, is the term in the current criteria used by the Secretary of State, when designation decisions are made over whether an airport should be subject to price control. It is well understood and accepted in that context. The previous Government consulted on the wording of that limb and other limbs of the test for whether an airport should be subject to economic regulation. In light of that consultation, we do not see a reason to change the wording.
In carrying out test A, the CAA expects to follow the guidelines published by the Office of Fair Trading and the European Commission for the assessment of market power. Those are generic guidelines for use in any industry and provide a useful starting point for assessing the degree of competition faced by an airport. To work out the most appropriate regulatory activity, the CAA undertakes economic analysis of the degree of market power held by the airports in question.
The core matters that the CAA will be examining are the standard issues looked at in competition assessment—not only by the CAA, but by the OFT and other competition regulators. Essentially, the CAA will be looking at whether the airport can act independently of its competitors or customers, and whether the airport delivers sustainable, high quality and good-value services, as would exist in a well-functioning, competitive market.
In general terms, assessing the degree of market power involves the evaluation of two main issues. First, there is the degree to which passengers, cargo owners and airlines can reduce their use of the airport if they do not consider the price-service offering to be reasonable. The ability of customers to go elsewhere, or to switch some or all of the business away from the airport, is likely to depend on a number of factors, which a competition assessment seeks to explore in a structured manner. Secondly, the CAA will need to consider whether the extent to which customers are likely to switch away from the airport will be sufficient to discipline its pricing, service quality and investment decisions.
Substantial market power can allow airports to raise prices, deliver inadequate levels of service quality and scale back investment. That can harm consumers by, among other things, limiting airlines’ ability to offer passengers choice and value. I leave the Committee with an example that might indicate that the continued economic regulation of airports is justified. When the cold snap hit, unregulated airports such as Manchester and Newcastle seemed to make a much better fist of their response than Heathrow did. Passengers continue to need protection, and we must ensure that the CAA has effective powers to protect them.