1. Policy options for modulation of charges in SES Workshop Workstream C June 2015

2. | Objectives for modulation of charges 2 Incentivise economically efficient decisions Capable of being understood by airlines, ANSPs and other industry stakeholders The scheme should not have the effect of increasing ANSP revenues Scheme administration costs should be proportionate to the benefits Workable from the perspective of all stakeholders, possible to implement without any serious dislocation Economic efficiency Intelligibility Revenue neutrality Minimal administration costs Credibility

3. | Workstream C – Incentivising equipage with SESAR technology 3

4. | Modulation of charges – Terms of Reference 4 Provide an overview and to analyse the use of modulation of charges in other network industries to incentivise technology changes. Task C1 Develop a detailed and practical scheme for the modulation of charges to incentivise on- board equipage of SESAR technology. Task C2 Assess the feasibility to distribute public funds that are foreseen for early on-board equipage of SESAR technology to airspace users via a (temporary) reduction of user charges. Task C3 Assess the impact of modulation of charges to incentivise early on-board equipage of SESAR technology on other policy objectives and other key performance areas. Task C4

5. | Modulation of charges – lessons learnt from ERTMS 5  ERTMS is a rail control and command technology to allow better interoperability and safety across European railways; It has a track-side component to be provided by infrastructure managers and a train-based component  There has been some significant issues regarding the ERTMS baselines but the technology is at a mature stage  Potential for delays in deployment in spite of defined implementation dates in EC legislation and a European Coordinator who acts at a high political level  Need for incentives to support the deployment of ERTMS  A number of options considered (levy, discount, combination). The better option remains a scheme providing discounts to incentivise rail operators to fit ERTMS on- board

6. | Modulation of charges – lessons learnt from Datalink 6  Need for a strong and robust CBA prior to adopting regulations and deadlines  Need for clear and understandable provisions and clauses with flexibility  Provisions should not be based on speculative lifecycles  A single regulatory framework is preferable  Certification specifications are required prior to adopting regulations, EASA and NSAs need to be able to prepare and address all certification issues  Need for validation/investigation collaboration from the start of deployment  Strong project management and monitoring is required  Optimisation of deployment of ground infrastructure (perhaps at FAB level)  Benefits for early adopters must be higher  Incentive scheme for early adopters is required  Need for ongoing consultation

7. | Modulation of charges – specific objectives of a scheme  Overcome the last mover advantage and ‘close the gap’ for airspace users  Cost Benefit Analysis negative for some ATM functionalities and in particular AF6  Airspace users expected to pre-finance investments before they can realise benefits  Benefits for airspace users are sometimes less significant than for others  Scheme should aim to reach critical mass (defined as 45% of flights operating in Europe equipped by 1 January 2026)  Revenue neutrality principle needs to be respected 7

8. | Modulation of charges – key considerations  Should not incentivise airspace users to make investments that they would have made anyway  Should be introduced at a time when investment costs incurred by airspace users are at their highest – maximum cash flow impact  Maximum compensation of airspace users (i.e. 100% of costs) should be considered – operational benefits for airspace users low/unproven  Careful monitoring to ensure that airspace users are not over-compensated  Balance between level of discount and length of scheme  Airspace users should not receive benefits before they can demonstrate that they have equipped their aircraft 8

9. | Summary of business case assumptions  Based on data sources and analysis  Sensitivity analysis conducted on results 9

10. | Modulation of charges – Proposed scheme (1) 10 Blue line: Costs of equipping aircraft; Purple line: operational benefits; Green line: Incentive scheme;  AF6 considered (fuel, CO2 savings and ANS productivity gains) requiring coordinated implementation  Value of the incentive payments would be € 73 million (2012 real terms, discounted to 2014), delayed deployment increase to €93-99 million depending on assumptions

11. | Modulation of charges – Proposed scheme (2) 11  Captures ANSP productivity gains  Although in principle different, the timing profile means the outcome may not be that different to (1) above

12. | Modulation of charges – financial incentives available for SESAR  CEF - some provisions for financial incentives for SESAR  Two mechanisms in CEF: financial instruments and grants  Financial instruments: targeted at the private sector through debt instruments and ‘risk-sharing instrument for loans and guarantees.’  Envelope for grants may be up to €1.3 billion for on-board components and €1.7 billion for ground components  Co-funding rates for grants are up to 20% for on-board and up to 50% for ground (85% in Cohesion countries)  Strict rules attached to CEF - tenders must follow procedures and likely to be costly  Access to grants may be an issue 12

13. | Modulation of charges – options for a modulation of charges scheme  Option A: Providing additional external funding to support at least some of the reduction in charges for SESAR-equipped flights  Option B: Balancing any reduction in charges for SESAR-equipped flights with increases for non-equipped flights 13

14. | Modulation of charges – Evaluation of the scheme options Presentation datePresentation title: Insert > Header & Footer and Apply to All14 Option A External funding of equipped flights Option B Non-equipped flights fund equipped flights Economic efficiencyPossible, provided that costs of providing incentives do not exceed industry benefits of AF6 IntelligibilityRelatively simple to understandPotentially complex (calibrate discount/levy rates, introduce mechanism to ensure revenue neutrality) Revenue/cost neutrality Can be OK if there is access to appropriate funding In principle OK, but complex administration Administration costsRelatively simple to administer through CRCO. Potentially complex to administer. CRCO’s systems and information would be good starting point. CredibilityPotentially credible. Extensive stakeholder consultation required Not regarded as credible by stakeholders.

15. | Modulation of charges – stakeholders’ views  All agreed need to learn from datalink experience  Ground and air based co-ordination essential  Some strong resistance to idea of discount and levy scheme from some stakeholders  Considered both direct funding and modulation of charges may be needed  Current billing systems managed by CRCO would be the best to manage modulation of charges.  Some implementation issues to tracking billing to status of aircraft (equipped or unequipped). Presentation datePresentation title: Insert > Header & Footer and Apply to All15

16. | Modulation of charges - conclusions 16  Based on PCP, AF6 is the most appropriate functionality for the purpose of incentivisation.  Based on an evaluation of options (discount, levy, combination), we assess the discount is the best option.  Other sources of funding need to be investigated (EIB etc.), as the current funding options do not necessarily support in full the necessary recovery of investments.  There remains considerable scepticism from stakeholders – in particular based on the experience of datalink.

17. | Modulation of charges - recommendations  Preparation of a statement of principles to underpin the design of a modulation of charges scheme: drawing on the lessons of Data Link  AF6 to be subject to an independent review, commissioned as appropriate, in order to validate the associated costs and benefits  Any scheme for incentivising the adoption of SESAR technology should be a discount only scheme  Through incentive scheme airspace users should not receive any more in incentive payments than is necessary to ensure that they equip their aircraft with the required technology  Appropriate compensation is considered to airspace users in the event that they are unable to derive material benefits from equipping of aircraft due to a failure on the part of ANSPs to undertake sufficient investment on the ground;  the Commission investigates other funding sources (EIB, etc) 17

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