Regulation in markets facing uncertainty: The case of Australia

This paper explores the ways in which economic regulation accommodates uncertainty through an examination of experience of regulation in Australia against a background discussion of literature on regulatory risk and principles for good regulation. Regulation, typically in the form of incentive based price caps, often applies to aviation infrastructure, such as major airports and air navigation services. At the same time, the demand for aviation infrastructure services is uncertain and subject to external shocks. Two case studies in economic regulation of aviation infrastructure are examined. They cover a period of volatile demand associated with the collapse of a major domestic airline which coincided with the September 11 terrorist attacks in the US. One case study involves the application of price caps to newly privatized airports during 1997-2002. The other case study examines the development of a long term price path for air navigation services over 2002 to 2004. The case studies illustrate the important role played by regulatory design. The paper concludes that the design of the regulatory framework has an important role in ameliorating the risks associated with uncertainty.