Options - Enhanced regulation
Independent regulation features in all of the sector case studies considered in this report:
UK Civil Aviation Authority (CAA)
The scope of these regulators’ powers varies considerably, with the SRWC representing a comparatively light touch version of regulation compared to the economic regulation provided by the latter three bodies.
In all instances the regulatory function provides an independent perspective on the performance of their respective sectors, something the ferries sector in Scotland does not currently benefit from.
We have sought to outline how the role of a commissioner or regulator, as well as the introduction of a Regulated Asset Base, could be applied in the context of the CHFS network.
This section sets out the options we have considered around enhanced regulation on the CHFS network. Each option has been assessed within section 7 of this report.
Commissioner or Regulator Model
A commissioner or regulator (the two terms are used interchangeably in this report) could be introduced to assume some of the responsibilities currently belonging to TS with regards to the ferries sector, as well as providing an independent perspective on the sector’s needs.
The potential extent of the commissioner’s responsibilities is wide ranging:
At a minimum, the commissioner could assume responsibility for monitoring the operator’s and / or CMAL’s performance against Government objectives.
The commissioner could have the power to penalise sector participants who systematically fail to deliver against these objectives.
The commissioner could also have a co-ordinating role, facilitating information sharing for the benefit of the sector.
The role of the commissioner could potentially be more extensive and include setting price caps and approving major capital spend, as WICS does for the water for the water sector in Scotland.
The commissioner would fulfil these functions for all ‘regulated’ routes, regardless of whom the operator is. Regulated routes could include those that are strategically important, e.g. lifeline, where there is an absence of competition, or where Government oversight / control is otherwise limited.
A commissioner would be appointed by the SG for a fixed term. During this term the commissioner would discharge their responsibilities in a manner consistent with the overarching policy framework set by the SG. It is important that the commissioner would be independent of the Government.
This diagram includes an overview of the corporate structure in place should a commissioner be introduced.
CMAL and DML are government bodies wholly owned by Scottish Ministers. CFL, a subsidiary of DML, receives /subsidy via Transport Scotland. CMAL receives vessel loans and harbour grants from Transport Scotland. Scottish Ministers provide policy direction to an independent commisioner who is responsible for regulating specific ‘regulated routes’.
The text below includes the roles and responsibilities of the Tripartite should a commissioner or regulator model be introduced. We have assumed the commissioner or regulator would have the following remit:
Approvement of major capital spend
Oversight of port infrastructure
Monitoring operator compliance with the contract.
Procurement of operating contract
Harbour / ports operations
Harbour / ports ownership
Procurement of operating contract
BC Ferry Commission
The Coastal Ferry Act established the Office of the Commissioner to regulate operators providing core ferry services under the Coastal Ferry Services Contract. Currently BC Ferries is the only operator subject to this regime. There are a further eight unregulated routes operated by independent ferry contractors that service small and remote communities.
The Commissioner serves for a six to eight year term and is appointed by the Province. They are supported in their activities by the Deputy Commissioner and rely on consultants to undertake projects. Their responsibilities include:
Establishing price caps for designated routes (set at a level sufficient to maintain / renew vessels)
Regulating the reduction of service and discontinuance of routes
Monitoring adherence to the Coastal Ferry Services Contract
Authorising major capital expenditures
Conducting performance reviews with the support of consultants
Water Industry Commission for Scotland
WICS is a non-departmental public body with statutory responsibilities. It is the economic regulator for the Scottish water industry and acts independently of Ministers. WICS is responsible for setting price caps for each six year regulatory control period, facilitating competition in the retail water market and monitoring Scottish Water’s performance with specific reference to customer service, investment, costs and leakage.
Regulated Asset Base Model
To attract private sector investment into the port and harbour infrastructure specifically, the sector could draw inspiration from utilities in the UK. In these sectors, which are characterised by significant fixed infrastructure, the regulator is responsible for estimating the value of the fixed infrastructure (the “Regulated Asset Base”) and a weighted average cost of capital (WACC). This responsibility is in addition to the regulator / commissioner functions set out under the previous option. The Regulated Asset Base is multiplied by the WACC to establish a regulated return on capital that is sufficient to attract private sector investment. This return on capital is reflected in the price limits that the regulator sets for each control period.
The key consideration of the Regulated Asset Base model is the financing of current and future assets by the private sector. As such, this option would only be relevant in the event that port and harbour infrastructure were disposed of to the private sector. Ensuring a return on investment is necessary for utilities that rely on private investment and cannot draw on Government funding. (Note that under this proposed option the vessels would remain under CMAL’s ownership and outside the RAB regime, whereas the port and harbour infrastructure is privately owned and subject to the RAB regime).
CFL is regulated by an independent regulator appointed by Scottish Ministers. CMAL and CFL respectively receive vessel loans and subsidy from TS. Private operator(s) of port and harbour infrastructure collect a harbour fee from CFL. The Regulator regulates the return available to the private owner(s) of the fixed infrastructure. The ownership structure of CMAL and CFL are similar to those of the Regulator Model.
The text below includes the respective roles and responsibilities should a Regulated Asset Base be introduced.