User fee concerns surge at Delhi, Mumbai airports, and the TDSAT order behind it

Following the July 1 order by TDSAT, which is also the appellate tribunal for airport economic regulatory matters, AERA and a few airlines moved the Supreme Court (SC), challenging the tribunal’s order and seeking a stay on its implementation. The matter is listed to be heard by the apex court on Wednesday. Sources indicated that the Ministry of Civil Aviation (MoCA) would support AERA in the appeal, given the undesirable consequence of high airfares at these two hub airports in the country. Notably though, it was a 2011 letter from MoCA to AERA that helped the airport operators win the TDSAT ruling.

The dispute and TDSAT’s latest order

The TDSAT on July 1 ruled that the formula used by AERA to determine the tariff for Mumbai and Delhi airports in the first control period (April 2009-March 2014) was erroneous, and directed the regulator to recalculate it using the formula that the tribunal deemed correct. Specifically, the bone of contention was the computation of the hypothetical regulatory asset base (HRAB), essentially the value of airport assets when the control period began. AERA started determining airport tariffs only in 2009, therefore, it needed to compute the HRAB for determining future tariffs.

HRAB is essentially a notional value used to initialise the regulatory base—assets meant to earn revenue. The HRAB had to be calculated to have a regulatory base estimate for 2008-09, the last year before the first control period under AERA’s regulatory oversight. Before that, it was under MoCA. Given that the airport-specific data for the period before the first control period was inadequate, as the Airports Authority of India (AAI) had a common book of assets instead of airport-specific asset books, computing the HRAB was essential to determine airport tariffs.

When AERA was holding consultations for determining the tariffs back in 2011 and 2012, airport operators Delhi International Airport (DIAL) and Mumbai International Airport (MIAL) had suggested that the HRAB calculation should include both aeronautical revenue as well as non-aeronautical revenue (single-till mechanism), and that it should be calculated by back-solving the target revenue formula mentioned in the State Support Agreement (SSA) that was inked between the government and the operators when the two airports were privatized in 2006.

Aeronautical revenue is what airports earn from aircraft-related services. This revenue comes from landing fees and passenger service charges, among others. Non-aeronautical revenue comes from commercial activities like retail, parking, and advertising at the airport.

AERA, however, did not consider non-aeronautical revenue in calculating the HRAB and did not fully agree with the calculation methodology. The consequent tariff order was challenged by the airport operators before the TDSAT in 2013, but the tribunal dismissed their appeals. They also knocked on the SC’s doors, but failed to get a favourable ruling there as well.

In December 2023, they filed miscellaneous applications before the SC. The apex court then remanded the matter to TDSAT, asking the tribunal to provide the correct interpretation of the relevant portion of the SSA and analyse whether the single-till mechanism should have been used to compute the HRAB. Importantly, the SC also asked TDSAT to evaluate MoCA’s role in tariff determination by AERA for the first five years. The TDSAT has now ruled that AERA should have included non-aeronautical revenue in the computation, and the HRAB should have been calculated by back-solving the target revenue formula as per the SSA.

A 2011 letter from MoCA

The key basis of the TDSAT’s July order was a letter that went from MoCA to AERA in May 2011, and the tribunal’s interpretation of it as a direction to the regulator. In that letter, MoCA had guided AERA on tariff determination, saying that HRAB should be computed by back-solving the target revenue formula, or deriving HRAB from known values like revenue, costs, and tax by solving the prescribed target revenue formula backwards. According to the tribunal, AERA disregarded that letter even as it should have taken it as a direction from the ministry.

“After a lapse of approximately 13 years from communication of MoCA dated 24.05.2011, now the respondents (AERA) cannot deny the contents of the letter which was given in the form of direction to AERA,” the TDSAT order read. The tribunal noted that since AERA’s oversight on tariffs started from April 2009, it was in MoCA’s jurisdiction to decide how HRAB was to be calculated as the ministry was determining the tariff for 2008-09.

Furthermore, the TDSAT ruled that AERA should have used the single-till methodology—including aeronautical as well as non-aeronautical revenue in determining the tariff—instead of excluding the non-aeronautical revenue from the HRAB computation. This was because AAI and MoCA had applied the same methodology in 2008-09 when the two airports were still under their operational control. The tribunal also noted that the SSA also prescribed the “prevailing tariff and revenues”, which should have been interpreted by AERA as the single-till regime given that it was in force at the time.

MoCA, however, does not want tariffs to go up at the two airports, and is likely to back AERA when the matter is heard by the SC, it is learnt.