David - the CAA has wide discretion in the form of regulation. It is not restricted to applying the cost-plus approach that has been used since 1987. It has considered other approaches (eg see Appendix 1 of
http://www.caa.co.uk/docs/5/Q6PolicyUpdate.pdf) but has so far stuck to the old approach.
A better approach might be to set price caps based on international benchmarks, and then apply mandatory investment/service standards. That would then give the airport operator a lasting incentive to be innovative and efficient. There would no doubt be lots of practical difficulties but surely something needs to change from the current approach.
This and other alternatives could be applied without new legislation, and I can't see that EC/EU interference would be a problem.