CAA consultation on whether airlines will pay £10 million (or more) per year of Heathrow’s planning costs
The issue of how much Heathrow can pass the costs of its expansion onto airlines is much disputed. Airlines such as IAG have been vociferous in refusing to pay for anything up-front. The amount Heathrow can charge airlines is laid down by the CAA, which has now put out a consultation on this subject. There are three categories of cost. Category A is lobbying, advertising etc, to get the runway approved. The CAA says Heathrow must pay this itself. Then Category B costs are those incurred to obtain planning permission through the development consent order, for the runway etc. It is Category B costs the CAA is consulting about. (Category C costs are those of actually building the added capacity – and may include costs like buying up thousands of properties in the villages. The treatment of these costs is not yet agreed by the CAA). The CAA consultation is proposing that of the Category B costs (ie. planning costs) Heathrow can get back £10 million per year from airlines through higher costs. For planning costs of over £10 million per year, the CAA propose these would be capitalised and rolled into HAL’s existing Regulatory Asset Base (RAB). These costs would then be be paid by a “risk-sharing mechanism” between airlines and Heathrow. If HAL succeeds in getting planning consent, they can get 105% of the costs over £10 million per year back through higher charges to airlines. If they do not get planning consent, they can only get 85% back. The consultation on this ends on 12th December. Details below.
Recovery of Category B costs by Heathrow Airport
The new document CAP 1469 sets out our final proposals on the recovery of costs associated with obtaining planning permission for new runway capacity at Heathrow Airport.
We have also published CAP 1470, formal notice to allow Heathrow Airport Limited to recover £10 million of Category B costs per year for new runway expansion.
More details and information on how to submit your views to us are available at consultations.caa.co.uk. We are accepting responses to both until the 6th December 2016.
8.11.2016 (CAA website)
The recovery of costs associated with obtaining planning permission for a new northwest runway at Heathrow Airport: final proposals
November 2016 (CAA)
Below are some extracts from the document:
Category A costs are defined as “Airports Commission-related and associated lobbying costs incurred by an airport operator or Heathrow Hub Limited. These are costs that we consider will, in general, be incurred before a Government policy decision on the location of capacity expansion is made.” and
“most Category A costs will not be recoverable, but some costs could be re-categorised as Category B if a strong and clear case is made by HAL that the information submitted for the planning process is not materially different to that submitted to the Airports Commission.”
Category B costs are costs “associated with Heathrow Airport Limited (HAL) seeking to obtain planning permission for the development of a new northwest runway at Heathrow Airport.” These are costs “incurred by an airport operator after a Government policy decision on the location of new capacity and are directly connected with and solely for the purposes of seeking planning consent through the DCO (development consent order) process. We stressed that Category B costs must be strictly additional to any costs already included in the Q6 allowance as well as being efficiently incurred.”
[ Q6 originally expires on 31 December 2018. We consulted on extending Q6 for one year, so
that it will expire on 31 December 2019. The notice of proposed modification to HAL’s licence to that effect is available at www.caa.co.uk/CAP1459. ]
Category C costs are defined as costs “incurred by an airport operator, typically after planning permission is granted, in connection with implementation and construction of new capacity, up to entry-into-operation.”
2.1 In our July 2016 consultation, we set out our initial proposals on the treatment of costs associated with obtaining planning permission for new runway capacity. The broad principles were:
planning costs are defined as those incurred by the successful
airport promoter following a government policy decision on location
and attributed to activities necessary for it to conduct the planning
costs up to £10 million per year will be recoverable by the airport
operator through an increase in airport charges;
costs that are incurred over £10 million per year can be recovered by
the airport operator subject to them being efficiently incurred and
there being risk-sharing arrangements in place; and
risk-sharing agreements to cover the risk that planning permission is
not granted, rescinded or withdrawn.
1.1 This consultation document sets out our final proposals on the regulatory treatment of the costs associated with Heathrow Airport Limited (HAL) seeking to obtain planning permission for the development of a new northwest runway at Heathrow Airport. These are termed Category B costs (or planning costs).
1.2 The charges that HAL can levy on airlines to recover these Category B costs are subject to economic regulation under the terms of a licence granted by the CAA under the Civil Aviation Act 2012 (the Act).
Summary of CAA’s final proposals
1.3 Our final proposal is that Category B costs should be defined as costs which are directly connected with, and solely for the purposes of, seeking planning consent through the Development Consent Order (DCO) process.
1.4 We propose that up to £10 million per year of efficient Category B costs can be recovered from higher airport charges either in the year they are expected to be incurred (or two years later for 2016 and 2017 through the K factor in the Price Control Condition). This proposal is subject to a separate consultation. [ Available at: www.caa.co.uk/CAP1470. ]
1.5 Category B costs incurred over £10 million per year should be capitalised and rolled into HAL’s existing Regulatory Asset Base (RAB). These costs should be clearly identified within the RAB in order to allow the CAA and stakeholders to track and scrutinise the level of costs incurred.
1.6 Category B costs over £10 million per year should be subject to the following cost recovery arrangements:
A 105 / 85 risk-sharing mechanism, which allows a 5% addition to
costs incurred if a DCO is granted, but limits recovery to 85% of the
costs incurred if a DCO is not granted.
Planning costs in the RAB recovered gradually over 15 years,
including a return to cover the weighted average cost of capital
(WACC) [ie. something akin to interest . AW note] at the level determined in the Q6 settlement and irrespective of the outcome of the planning process.
Cost recovery to HAL via charges to airlines to commence only after
the outcome of the DCO process is known.
1.7 All Category B costs incurred, including costs up to and above the £10 million per year threshold, will be subject to an efficiency test. The Independent Fund Surveyor (IFS) will provide an ongoing assessment of the efficiency of all Category B costs incurred.
1.8 We reserve the right to decide that HAL will be able to recover less than 85% of the Category B costs incurred, if there is clear and compelling evidence that HAL has unilaterally withdrawn from the planning process.
1.9 HAL should make materials and reports produced for the planning process available to the CAA, the airline community and other stakeholders as soon as practicable. HAL should consult with the airline community at the outset on the rules and principles for classifying any information as confidential and how this should be shared with stakeholders.
1.13 Our initial proposal said that costs in the pRAB should be recovered over a 10 year depreciation period where the DCO is granted, with a shorter period suggested where the DCO is not granted. We maintain the view that our estimate of 10 years is reasonable, but given the uncertainty over the life of a quasi-intangible asset such as planning permission, we are content to extend the depreciation period from 10 to 15 years, to reflect
the responses from many of the airlines that this period is too short.
1.16 Our view remains that the risk-sharing principle and the specific 105/85 parameters are appropriate. We note airlines’ view that they should not bear any Category B cost risks because of their limited control over the planning process. However, we consider that our proposal that 85% of costs can be recovered is a balanced proposition, as well as being more favourable to airlines than previous regulatory treatments. For Heathrow Terminal 5 and the (aborted) second runway at Stansted, we (ex-ante) allowed 100% of efficiently incurred planning costs to be recovered from higher airport charges to airlines
1.19 Our initial proposal was that cost recovery should only start when the result of the planning process is known. HAL argued that cost recovery should start as soon as or shortly after they are incurred, whereas the airlines wanted cost recovery to start only when new capacity comes into operation. Our package of proposals mean that the majority of Category B costs will be recovered after the runway is open.
1.20 We welcome views on the final proposals set out in this document. Having already reflected carefully on responses to our initial proposals, we would especially welcome any new evidence and arguments.
1.21 Comments should be sent to firstname.lastname@example.org by no later than 17:00 on Monday 12 December 2016.
We cannot commit to take into account representations after this date.
1.22 We expect to issue our decision on the regulatory treatment of costs associated with obtaining planning permission for a new northwest runway at Heathrow Airport in January 2017.
1.23 If you would like to discuss the issues raised in this document before the
December deadline please contact Stephen Gifford (email@example.com).
The principles of a risk-sharing arrangement
5.1 We said that the principle behind the introduction of a risk-sharing mechanism was to ensure that both GAL/HAL and the airlines bear some risk in the event that planning permission was not granted, was rescinded or was withdrawn.
5.2 We considered that risk-sharing means that stakeholders will be incentivised to be part of the process and to help ensure that Category B costs are minimised as much as possible. HAL will also be encouraged to engage positively with local communities and other stakeholders to maintain support for expansion and efficiency. We also said that airlines should bear some of the planning risks, as they would stand to benefit from expansion.
5.4 LACC/AOC [ London (Heathrow) Airline Consultative Committee/Airport Operators
Committee ] argued that airport operator should not be rewarded for performing its core function and that airlines should not be held accountable for risks associated with failure, as they have no control over planning and political risks.
5.8 VAA [Virgin Atlantic ] welcomed the risk allocation mechanism, but is concerned that the
level of risk apportioned to the airport is not enough, and argued that the airport operator is in the most appropriate position to bear the risk of planning failure. VAA made the point that our statement that ‘airlines stand to benefit’ from expansion does not apply to all airlines.
3.18 We continue to define Category C costs as construction costs incurred by HAL. We will consider the merits of developing a specific policy on preplanning construction costs, which would be on an accelerated timetable and before the overall approach to the economic regulation of Category C costs is devised. Pre-planning construction costs cover preliminary works, enabling construction, property relocations, land acquisition, blight and
hardship. Stakeholder views and our response is outlined in Appendix B.
B.15 We note the significant magnitude of Category C costs could be incurred before a planning decision and the need to offer early regulatory certainty on their treatment.
B.16 Pre-planning construction costs could cover preliminary works, enabling construction, property relocations, land acquisition, blight and hardship. These costs could be treated in a similar fashion to the way the costs of capital projects are handled in Q6.
B.17 We are considering developing a policy on pre-planning construction costs as a separate Category C cost and on an accelerated timetable (i.e. before we propose the regulatory treatment of the majority of Category C costs which are incurred after planning permission is granted).
There is also
Notice of proposed modification to Heathrow Airport Limited’s Economic Licence to allow for an annual recovery of £10 million of Category B costs for a new northwest runway
A couple of extracts:
2.9 In our view, the retention of the £10 million pass-through is in the interests of users as it incentivises the airport operator to start work on securing planning permission immediately after a government announcement of its preferred location of new capacity and before a risk-sharing mechanism is put in place. We believe that additional runway capacity in south-east England will benefit current and future air passengers and cargo owners, and we consider that incentivising HAL to start the process of obtaining planning permission is an important first step in delivering new capacity.
2.10 The £10 million threshold will not reduce the incentive for the airport operator to act in an economical and efficient manner. Planning costs are expected to be significantly more than £10 million a year, and any costs above this threshold will be subject to a risk-sharing mechanism.