[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10057]
[[Page Unknown]]
[Federal Register: April 26, 1994]
_______________________________________________________________________
Part XI
Department of Transportation
_______________________________________________________________________
Federal Transit Administration
_______________________________________________________________________
Private Enterprise Participation; Notice
DEPARTMENT OF TRANSPORTATION
Federal Transit Administration
[Docket No. 93-B]
Private Enterprise Participation
AGENCY: Federal Transit Administration, DOT.
ACTION: Notice of Recision of Private Enterprise Participation
Guidance.
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SUMMARY: On November 26, 1993, the Federal Transit Administration
published a Notice in the Federal Register proposing to rescind its
current guidance on private enterprise participation, which was
believed to be unnecessary, as well as overly restrictive of the
ability of local planning agencies and transit operators to make
rational transportation choices in light of local needs. The agency
provided a 60-day comment period in connection with the Notice. This
final notice announces the agency's decision to rescind the private
enterprise guidance as proposed and presents its statement of policy on
this issue.
DATES: The recisions and statement of policy will be effective 30 days
after the date of publication in the Federal Register.
FOR FURTHER INFORMATION CONTACT: John W. Spencer, Deputy Associate
Administrator, Office of Budget and Policy, Federal Transit
Administration, 202/366-4050; Gregory B. McBride, Deputy Chief Counsel,
Federal Transit Administration, 202/366-4063.
SUPPLEMENTARY INFORMATION:
I. Introduction
On November 26, 1993, the Federal Transit Administration (FTA)
published a Notice of Proposed Recision of Private Enterprise
Participation Guidance (58 FR 62407) (the Notice) in which it sought
public comment on a proposal to rescind its current guidance on the
participation of private enterprise in the provision of mass transit
service. The agency stated its belief that the current guidance is
unnecessary and restricts the ability of local planning agencies and
transit operators to make rational transportation choices in light of
local needs. As discussed in detail below, FTA received a total of 415
comments from the public on its proposal. Although many comments were
not supportive, we found all helpful in the decisionmaking process. In
the end, FTA remains convinced that its proposed course of action
represents responsible public policy that adheres to the statutory
construct and recognizes the appropriate roles to be played by the
entities involved; accordingly, FTA hereby provides final notice to the
public of its decision to rescind its policy statement, ``Private
Enterprise Participation in the (Federal Transit) Program'' (49 FR
41310, October 22, 1984); Circular 7005.1; Chapter X of Circular
9040.1C; and Chapter IV of Circular 9070.1C.
In this final notice, we present FTA's view of the private
enterprise provisions at issue, summarize the comments received in this
docket, respond to the five primary issues raised, and discuss the
policies that will guide FTA action in this arena in the future.
II. Background
In light of the comments received, the background discussion of the
private enterprise provisions in our November Notice bears reiteration
and expansion. As noted there, the principal purpose of the Federal
Transit Act, as amended (FT Act), 49 U.S.C. app. 1601 et seq., is to
assist the development and improvement of mass transportation systems
in metropolitan and rural areas. In sections 3, 9, 16(b)(2), and 18,
Congress has authorized FTA to make funds available to State and local
public bodies for capital acquisition and construction, operating
assistance, and planning activities in connection with mass
transportation projects. Congress has expressed its concern that such
Federal assistance not be used without regard for the interests of
private enterprise. The agency's original authorizing statute, the
Urban Mass Transportation Act of 1964, now the FT Act, contained two
provisions, section 3(e) and the first two sentences of section 4(a),
which expressed this intent. Section 4(a) provided that
[N]o federal financial assistance shall be provided pursuant to
subsection (a)- of section 3 unless the Secretary determines that
the facilities and equipment for which the assistance is sought are
needed for carrying out a program * * * necessary for the sound
economic and desirable development of such area. Such program shall
encourage to the maximum extent feasible the participation of
private enterprise.
(Emphasis added.)
The Federal Public Transportation Act of 1978 deleted this
provision, but added a new section 8 that included subsection (e), now
subsection (o), which provides that ``[t]he plans and programs required
by this section shall encourage to the maximum extent feasible the
participation of private enterprise.''
In section 3(e), as revised by the 1978 Act, Congress has directed
that where an existing mass transportation company is providing
service, FTA may not provide financial assistance to a public body for
the operation of competing or supplemental service, unless it finds
that the relevant transportation improvement program required by
section 8 provides for the participation of private enterprise to the
``maximum extent feasible.''
In South Suburban Safeway Lines, Inc. v. City of Chicago, 416 F.2d
535, 539 (7th Cir., 1969), the court observed that in section 3(e)
Congress seems to have been primarily concerned over the
possibility of public acquisition of private facilities * * *
although competition with and supplementation of existing facilities
are also dealt with.
The legislative history of section 3(e) is consistent with the
court's understanding. In brief, section 3(e) originated in Senate Bill
S.6 (88th Cong., 1st Sess.), one of the bills leading to the Urban Mass
Transportation Act of 1964. The principal sponsor of S.6, Senator
Harrison Williams of New Jersey, indicated that this provision was
intended to further a neutral Federal posture on the question of
whether public or private companies should operate federally assisted
mass transportation services. In discussing the provisions of the bill,
Senator Williams said that
The public would not have to operate the transit facilities and
equipment itself. It could provide for their operation by lease or
other arrangement. Thus, every locality would remain free to choose
public or private operation of its transportation system or any
combination of the two.
109 Cong. Rec. 198 (Daily ed., January 14, 1963) (emphasis added).
In the House of Representatives, an amendment to H.R. 3881 (88th
Cong., 1st Sess.) contained language substantially similar to that
which the Senate had passed. Subsequently, the Senate adopted the House
language, and the provision was signed into law. The debate in the
House revealed that the intent of section 3(e) was to provide fair and
equitable treatment of private providers whose existing operations
might face competition from or acquisition by federally funded transit
systems and to require the Administrator to use his judgment in making
the required findings. 110 Cong. Rec. 14464 (Daily ed., June 25, 1964).
However, the legislative history provides no guidance on how the
required findings are to be made.
The statute does not favor private operations over publicly owned
operations. ``All the statute requires is encouragement of private
participation to the maximum extent feasible. It does not allow private
operators to write their own ticket.'' Westport Taxi Service, Inc. v.
Adams, Civil No. B-76-369 (D.Conn., April 13, 1977), slip opinion at
12; aff'd. in part, rev'd. in part, 571 F.2d 697 (2d Cir. 1978).
At the same time, Congress has made it clear that decisions
regarding mass transportation services to be provided with Federal
assistance are to be made locally. Indeed, section 2(b) of the FT Act
states that one of the fundamental purposes of the Act is
To provide assistance to State and local governments and their
instrumentalities in financing such systems, to be operated by
public or private mass transportation companies as determined by
local needs * * *.
49 U.S.C. app. 1601(b)(3) (emphasis added). Strongly reinforcing this
principle, section 12(d) prohibits FTA from regulating ``in any manner
the mode of operation of any mass transportation system * * *.'' Thus,
the public/private operator choice is to be made at the local level.
This emphasis on local decisionmaking in determining how best to
serve the transportation needs of the local area has been recognized by
the courts:
The statutory scheme of (FTA) emphasizes the large role to be
played by local bodies responsible for urban mass transit * * *.
This reliance on the local or State group is consistent with the
statute's encouragement of local responsibility in urban mass
transportation. The statute does not promote a procedure which
leaves all decisions with the Secretary (of Transportation), but
rather emphasizes local solutions to problems.
Pullman v. Volpe, 337 F. Supp. 432, 438-439 (E.D. Pa. 1970).
The participation of private enterprise in mass transit is
addressed at several points in the current FT Act; most notably,
section 9(f) requires that in developing a proposed program of projects
recipients consult with ``interested parties, including private
transportation providers'' and in developing the final program of
projects recipients particularly consider the ``comments and views * *
* of private transportation providers.'' This activity at the recipient
level is the first step that leads to the planning process under
section 8. In section 8(o) Congress has required that local
transportation plans and programs prepared under section 8 encourage
``to the maximum extent feasible the participation of private
enterprise.'' In section 3(e), Congress has directed that where an
existing mass transportation company is providing service, FTA may not
provide financial assistance to a public body for the operation of
competing or supplemental service, unless it finds that the relevant
transportation improvement program required by section 8 provides for
such private enterprise participation to the ``maximum extent
feasible.'' In section 9(e)(1), Congress extended the requirement of
section 3(e) to the section 9 formula grant program.
The statutory scheme viewed as a whole thus juxtaposes two
potentially competing interests: private enterprise participation and
local determination. By authorizing the Administrator to use his
discretion in making the required finding, Congress has placed
responsibility for resolving any conflicts in the hands of the Federal
agency. Since that finding rests on judgments of ``feasibility,'' which
are made in the first instance in the program of projects developed by
the local metropolitan planning organizations (MPOs), it is apparent
that Congress has vested the agency with broad discretion in carrying
out this responsibility.
Between 1964 and 1984, FTA provided no separate guidance relating
to the participation of private enterprise in mass transportation. FTA
first issued guidance on this issue in a policy statement, ``Private
Enterprise Participation in the (Federal Transit) Program'' (49 FR
41310, October 22, 1984), which set forth the factors FTA would
consider in determining whether a recipient's planning process
appropriately considered the participation of private enterprise. These
factors included consultation with private providers in the local
planning process, consideration of private enterprise in the
development of the mass transit program, the existence of records
documenting the participatory nature of the local planning process, and
the rationale used in determining whether or not to contract with
private operators for transit services.
In 1986, FTA further informally implemented its private enterprise
guidance for sections 3 and 9 recipients in FTA Circular 7005.1
(``Documentation of Private Enterprise Involvement in sections 3 and 9
Programs'') and for sections 16(b)(2) and 18 recipients in Chapter X of
FTA Circular 9040.1C (``Section 18 Program Guidance'') and Chapter IV
of FTA Circular 9070.1C (``Section 16(b)(2) Program Guidance''). These
circulars state clearly that FTA will not condition grants on a certain
level of private enterprise involvement. At the same time, the
circulars outline certain elements and procedures relating to private
enterprise participation that a grantee should use in its planning
process.
Congress has responded twice to FTA's 1984/1986 policy initiative
on private enterprise participation, on both occasions acting to
restrain the agency. First, in the Conference Report accompanying the
Department of Transportation and Related Agencies Appropriations Act,
1987 (Pub. L. 99-464), Congress expressed concern that FTA had exceeded
its discretion by conditioning certain section 9 grants on private
enterprise involvement; section 327 of that Act prohibited such
conditioning of section 9 formula grants.
Second, the Intermodal Surface Transportation Efficiency Act of
1991, Pub. L. 102-240, (ISTEA) amended section 8(i)(5) of the FT Act to
add the following:
The Secretary shall not withhold certification under this
section based upon the policies and criteria established by a
metropolitan planning organization or transit grant recipient for
determining the feasibility of private enterprise ----participation
in accordance with section 8(o) of the Federal Transit Act.
Thus, on the one hand, section 3(e) requires that FTA make a
finding that the MPO has appropriately encouraged private enterprise
participation; on the other, this new provision requires that in
considering whether to certify that an MPO is meeting its obligations
under Federal law, FTA may not consider the process used by the MPO (or
a transit grant recipient) to determine the feasibility of private
enterprise participation. Moreover, the ISTEA Conference Committee
Report states that under section 8(i)(5), ``localities shall be
afforded wide flexibility in establishing criteria to be used in
determining the `feasibility' of private involvement in local
programs.'' Clearly, then, Congress signaled FTA that it is to pay as
significant deference to MPO judgments as to feasibility.
In the Notice, FTA stated that it had reviewed its policy in light
of the statutory background and believed that the 1984/1986 initiatives
should no longer be part of its guidance. The Notice pointed out that
FTA has not generally provided advance notice and opportunity for
comment when adopting or rescinding the circulars it uses to provide
guidance to grantees. FTA invited public comment on the 1984 Policy
Statement and Circular 7005.1 only after their issuance as final
documents. In this proceeding, however, FTA has provided prior notice
of its proposal to change policy consistent with ISTEA to remove
unnecessary Federal direction of local parties' discharge of their
planning responsibilities under the FT Act and to thereby give full
weight to the local decisionmaking process. FTA invited comments on its
proposed action during the 60 days following publication of the Notice.
Before summarizing the comments generally, we will briefly address
two issues. First, a few commenters suggest, in effect, that the
agency's action to rescind the previous policy represents a retreat
from the statute's requirements. We firmly disagree. The participation
of private enterprise in the Nation's transit industry is not only
encouraged by the FT Act, it is essential to the health and success of
that industry. The question addressed in this notice is not whether,
but how, FTA will go about encouraging that participation.
Second, this question is essentially one of policy choices. An
earlier administration chose to play an active Federal role in
restricting the options of MPOs and grantees in their consideration of
private enterprise participation (e.g., requiring the use of a
particular accounting method and mandating route reviews every three
years). The program it developed, based on 20-year-old statutory
provisions previously unelaborated by the agency and adopted without
the benefit of prior notice and comment, can be argued to have been a
fair exercise of the discretion vested in an administrative agency
wrestling with policy choices. But as discussed at greater length
below, the claims of a few commenters that the previous policy had, in
effect, taken on some kind of quasi-statutory status cannot withstand
scrutiny. As the Supreme Court has noted,
An agency to which Congress has delegated policymaking
responsibilities may, within the limits of that delegation, properly
rely upon the incumbent administration's views of wise policy to
inform its judgments. While agencies are not directly accountable to
the people, the Chief Executive is, and it is entirely appropriate
for this political branch of the Government to make such policy
choices * * *
Chevron U.S.A. v. Natural Resources Defense Council, 497 U.S. 837,
865-866 (1984).
In the transportation arena, new State and Federal mandates--the
Americans with Disabilities Act and mandated drug and alcohol testing,
for example--require new programs and services, but the availability of
Federal operating assistance to help pay the costs of these programs
remains limited. Given the increasingly limited funds available, it is
local decisionmakers responsible for meeting the transit needs of the
community who most keenly feel the need to obtain the most transit
service possible with the funds available.
III. Summary of Comments
A. -Overview
Some 415 comments were received in response to the Notice from
commenters representing a variety of views and interests, including
transit systems, private operators, unions, and members of Congress:
--Transit systems and government entities
73
Private operators---
263
--Unions------
55
--Members of Congress----
24
In general, private operators opposed the proposed recision,
arguing that the existing private enterprise policy was effective and
consistent with the FT Act, brought needed competition to the provision
of transit services, and helped lower the cost of those services.
Unions, a number of transit systems, and others, in contrast, took the
view that the current policy needlessly creates paperwork burdens and
reviews that are time consuming and not relevant to privatization
efforts, which should be left to the local decisionmaking process. Many
commenters simply expressed general support for or opposition to the
policies under review.
B. -Summary of Comments by Issue
1. Procedural Objections
While many commenters addressed the substance of the proposal, a
few asserted that the manner in which the agency announced its
proposal, i.e., the Notice of Proposed Recision, was itself flawed.
These commenters noted that the FT Act specifically requires the agency
to follow notice and comment procedures. The fact that an agency uses
the term ``guidance'' or ``guideline'' is not controlling; the status
of such materials as ``rules'' is determined by their binding
character. By rescinding the existing guidance, the commenters contend,
the FTA will effectively create a new ``binding norm'' by establishing
the standards and procedures by which the agency maintains it will
fulfill its statutory obligation to encourage participation of private
transportation companies in transit service. Further, these commenters
argued, the existing guidance clearly is mandatory in nature. Because
such guidance effectively is a rule, they assert, the agency is
obligated to comply with rulemaking procedures before amending or
repealing the guidance. One commenter cited a Supreme Court case to the
effect that an agency changing its course by rescinding a rule is
obligated to supply reasoned analysis for the change beyond that which
may be required when an agency acts in the first instance. In this
regard, commenters also alleged that, contrary to what FTA stated in
its Notice, there is no significant record to show that grantees have
found the existing guidance burdensome.
Another commenter noted that although certain specific protections
and activities are explicitly and implicitly contained in the FT Act,
no process or procedure is prescribed in the statute for the
enforcement of these requirements, which is therefore left to the
rulemaking process. Nor is the agency free to act independent of the
administrative record. The problem with the FTA analysis, asserted this
commenter, is that it has failed to adhere to the requirement that a
nexus exist between the need for changes and the underlying, supportive
facts.
Another commenter argued that the agency had predetermined its
final action on the Notice, notwithstanding its notice and comment
review period. This commenter maintained that the agency's Notice
misstates the private enterprise requirements, the statutory
provisions, and the legislative history. This commenter also argued
that the Notice misrepresents the material in the agency's files, the
agency's interpretations of the current requirements, and the
enforcement history of the program.
On the other hand, many commenters supported the agency's proposal
and the procedure by which it was announced. One argued that much of
the administrative burden imposed by the existing requirements could
have been avoided or alleviated had the policies been subjected to the
Federal Register notice and comment process.
2. Fully Allocated Cost Methodology
The current private enterprise policies require that grantees use a
fully allocated cost methodology when calculating their costs of
providing service for comparison with those of potential private
operators. The Notice indicated, however, that the method was not
always an appropriate gauge of the true cost of providing a particular
service and that FTA believes that in comparing public and private
costs of operating a particular service, a recipient should be free to
use any reasonable accounting method it finds appropriate in a given
setting. A number of commenters particularly supported this aspect of
the Notice. They noted that they long have argued that the criteria and
policies for choosing among public and private providers should be left
to local transit agencies and community planners and that the proper
role for the Federal government should be one of neutrality. The
constraints imposed on local decisionmakers by the fully allocated cost
method resulted in service choices that not only failed to produce
expected cost savings, but resulted in serious service, safety, and
maintenance problems as well, they contended.
One commenter stated that recision of the guidance would enable it
to award contracts consistent with its Board's policy requiring it to
consider only avoidable costs when evaluating the cost-effectiveness of
private carrier proposals. This transit system argued that the
avoidable cost method best measures the true cost savings achieved
through the contracting of service.
One commenter presented an analysis by a Columbia University
professor of a report by a consulting company recommending, on the
basis of a fully allocated cost methodology, that a large transit
system privatize 25 percent of its transit bus service. Contrary to the
cost savings projected in the report, the professor's study, using a
marginal cost analysis, concluded that the proposed privatization
program would produce no savings and, in fact, would cost the transit
agency a considerable sum. Moreover, the commenter argued, the proposal
would result in seriously fragmented service and the associated
organizational, safety, and service problems evidenced in other cities
that privatized on this basis.
Another commenter argued that experience throughout the country
indicates that forced privatization efforts have resulted in
significant cost increases, serious service problems, and ridership and
revenue losses. This submission provided examples of areas where
privatization allegedly increased costs. In one case, an audit showed
that projected savings of 30-40 percent were actually in the 3 to 4
percent range. The commenter contended that because the fully allocated
cost analysis requires public agencies to include their fixed costs as
part of their bottom line as well as costs incurred for buses and
employees, comparisons on this basis are fundamentally flawed. They
contended that fixed costs should not be included among the costs of a
public transit operator because these costs will be incurred regardless
of whether the particular service is offered or not.
On the other hand, some commenters argued in favor of the fully
allocated cost methodology. By standardizing the way costs are counted,
they contended, the fully allocated cost method can reduce
transactional costs, help highlight and eliminate cross-subsidies, and
improve accountability and transparency.
One commenter argued: (1) That permitting public transit agencies
to submit cost of service bids based solely on the short-run marginal
cost of service would result in calculations that ignore the costs of
facilities and rolling stock and assume that the public transit agency
operates its system at the least possible cost; (2) that marginal cost
analysis does not permit the riding public and taxpaying public to
compare the total costs of service for the transit system with and
without the proposed alternative service patterns of providers of
service; (3) that direct comparisons of labor productivity between the
public transit agency and private contractors would be difficult or
impossible since the bases for calculating costs would be different, as
might the reliability and quality of the service in question; and (4)
that fully allocated cost comparisons are intended to permit a
transparent view of the costs of existing and proposed services and the
acquisitions of assets and liabilities that may be relevant.
Another commenter noted that concern about using fully allocated
costs is misplaced in that the disclosure of all costs is designed to
level the playing field in light of Federal and other subsidies
available to public operators. This commenter further noted that the
fully allocated cost method is an analytical baseline, more of a
disclosure than an absolute sum, and that fully allocated costs may be
discounted for costs that cannot be saved when determining the
feasibility of using private contractors.
3. Institutional Barriers
The current policy requires that local authorities ignore local law
when considering the feasibility of using private enterprise in local
transit service. That is, under the current private enterprise policy,
FTA does not recognize, as legitimate barriers to private enterprise
participation, local laws or policy or labor agreements that call for
direct operation of mass transit service. Many commenters maintained
that this position unduly restricts the prerogatives of local officials
and impedes their ability to consider a broad range of transit options.
They also argued that the successful negotiation of collective
bargaining agreements often requires that transit officials be accorded
a maximum degree of bargaining flexibility. The comments in response to
this point varied: unions and certain transit systems argued for
flexibility in light of unique local situations. Private operators
argued in favor of a ``level playing field'' so that local arrangements
are not used to bar private operators from being considered for the
purpose of providing public transit services.
A commenter argued that FTA must balance the two often conflicting
provisions of the FT Act: the section 13(c) labor protection provisions
and the private enterprise provisions. To the extent that FTA reduces
the private enterprise requirements while the 13(c) requirement
continues in full effect, this commenter argued, the balance will
inevitably be altered and riders of public transit will be harmed by
the imbalance.
Another commenter noted that Federal financial assistance
necessarily comes with overriding Federal requirements, e.g.,
procurement rules, that follow the Federal dollar. It is inconsistent,
the commenter contended, for an agency to impose Federal procurement
requirements on grantees, but at the same time to permit them to thwart
the purposes and conditions of Federal assistance merely by agreeing
with third parties such as unions. If, continued the commenter, the
concern about institutional barriers is labor protection, then one must
consider that section 13(c) of the Act contains express provisions for
the protection of labor. If Congress intended to exempt contrary
provisions of labor agreements from the private enterprise mandates of
the Act, it would have done so; breaking down institutional barriers is
a necessary precondition to enabling competition to develop new and
more efficient means to deliver transit services.
On the other hand, others argued against using the transit program
to override State constitutional prohibitions, State and local laws and
referenda, rulings of State regulatory bodies, and local collective
bargaining agreements. This policy, they contended, has had the net
effect of depriving local transportation leaders of the flexibility to
determine to what extent privatization is in the best interest of their
local communities.
Indeed, a member of Congress commented that ``the ISTEA and prior
congressional directives have emphasized that the criteria and policies
for choosing among public and private providers should be left to local
transit agencies and community planners and that the proper role for
the Federal government should be one of neutrality on this essentially
local decision.'' The proposal, the same member noted, ``properly
reflects the emphasis on local decision-making which I and other
architects intended in the ISTEA.'' Similarly, a United States Senator
noted that ``the new language (in the Notice of Proposed Recision)
properly reflects the intent of ISTEA.'' And: ``The ISTEA emphasized
that the criteria for choosing among public and private transit
providers should be left to local transit agencies and community
officials.''
4. Review of Existing Service
The existing private enterprise policy provides that recipients
should review each route every three years to determine whether the
services in question could be more effectively provided by private
operators. FTA noted that this represented a significant burden,
particularly for major transit systems, and indicated that local
authorities should determine the frequency of any such reviews.
Those commenters opposed to this requirement contended that it is
burdensome and unnecessary, while those in favor argued that it forces
systems to review routes on a regular basis, giving private operators
an opportunity to make their case.
One transit system commenter noted that the requirement was ``oddly
redundant'' since all of its service already was provided by the
private sector, and noted that it was a burden because of the
inordinate amount of staff time required to complete the task. A
Senator stated that the agency's proposed action ``wisely reduces
burdensome paper work and other restrictive requirements, while
retaining options of private enterprise participation.''
A large transit system stated that the current requirements entail
a significant administrative burden for many transit agencies with
large and complex route structures, necessitating the diversion of
significant resources to conducting reviews on a three-year cycle.
Another transit operator stated that the requirement places an
inordinate planning burden on it, without any corresponding benefits.
Rather than such a mandated approach, this operator supported route
analysis based on local needs and considerations and noted that it
carries on an ongoing analysis of service levels required to meet
demand.
Commenters supporting this requirement, in contrast, contended that
contracting out has saved significant sums and that the three-year
review period is necessary to realize these savings, as well as for the
agency to satisfy the private enterprise provisions in the statute. One
commenter stated that the three-year review helps to ensure efficiency
and effectiveness in the delivery of transit services. Competition,
this commenter noted, requires periodic review of results. Whatever
FTA's view on three-year reviews of routes, this commenter continued,
the claim that they are burdensome is without foundation.
5. Appeal Process
The private sector circulars provide that both recipients and MPOs
should develop a process for the resolution of disputes with private
operators, with an appeal to FTA available to private operators if they
fail to resolve disputes at the local level. In the Notice, FTA
indicated that since it would be conducting regular reviews of grantee
compliance with planning requirements, a formal appeal process leading
to FTA did not appear necessary, although the agency is always
available to receive reports of planning process failures.
This aspect of the Notice did not generate much specific comment,
but appeared to be included in the general opposition to ``burdensome''
requirements on the part of some commenters, and on the other hand, to
be one of the elements that those in favor of the existing guidance
support.
One commenter noted that, in response to a Freedom of Information
Act (FOIA) request, it was provided with FTA's private sector complaint
decisions: of the twelve complaints, eight were dismissed for failure
to state a cognizable claim; two were remanded for failure to have a
local dispute process; and two included findings of violations with no
penalties imposed. This record, the commenter argued, underscores the
lack of burden created by the FTA appellate process.
IV. FTA Response To Comments
A. Procedural and Legal Adequacy of the Notice
1. Procedural Objections
Several commenters objected to the Notice as failing to meet the
rulemaking requirement of section 12(i)(3) of the FT Act: ``The
Secretary shall propose or implement rules governing activities under
this Act only in accordance with this section except for routine
matters and matters having no significant impact.'' They pointed out
that in the Notice, FTA acknowledged that the proposed recision of its
private enterprise guidance is ``a relatively significant change'';
consequently, they argued, the section 12(i)(3) rulemaking requirement
applies to this proceeding. Section 12 defines a ``rule'' as a
``statement of general or particular applicability designed to
implement, interpret, or prescribe law or policy in carrying out
provisions of this Act'' and requires the following procedures:
(i) Rulemaking procedures.
(1) Procedures.
The Secretary shall provide an agenda listing all areas in which
the Secretary intends to propose rules governing activities under
this chapter within the following twelve-month period. The Secretary
shall publish the proposed agenda in the Federal Register as part of
the Secretary's semi-annual rulemaking agenda which lists rulemaking
activities of (FTA). The Secretary shall also transmit the Agenda
required by the first sentence of this paragraph to [various
committees] on the day that the Secretary's semi-annual rulemaking
agenda is published in the Federal Register.
(2) Views.
Except for emergency rules, the Secretary shall give interested
parties not less than sixty days to participate in any rulemaking
under this chapter through submission of written data, views,
arguments with or without the opportunity for oral presentation,
except when the Secretary for good cause finds that public notice
and comment are unnecessary due to the routine nature or matter or
insignificant impact of the rule, or that an emergency rule should
be promulgated. The Secretary may extend the 60-day period if the
Secretary determines that such a period is insufficient for diligent
persons to prepare comments or that other circumstances justify an
extension of time. An emergency rule shall terminate 120 days after
the date on which it is promulgated.
(3) Limitation.
The Secretary shall propose or implement rules governing
activities under this Act only in accordance with this section
except for routine matters and matters having no significant impact.
The Secretary's most recent semi-annual agenda of rulemaking
activities was published on October 25, 1993 (58 FR 56632). As the
agenda indicates, it was based on reports submitted by the Department's
initiating offices in July 1993, five months prior to the publication
of the Notice and well before the agency had formulated its proposal.
We do not believe that the publication requirement serves to foreclose
FTA's ability to proceed with proposals to amend rules or guidance that
were developed subsequent to the most recently published agenda and
prior to the next. Moreover, as the agenda itself notes, its purpose is
to ``enable the public to be more aware of and allow it to more
effectively participate in the Department's regulatory activity.'' This
objective has been clearly met, as an extraordinarily large number of
commenters have participated in this proceeding. FTA has complied with
the public participation requirement by providing prior notice and a
60-day public comment period. FTA believes that in this proceeding it
has met the requirements of section 12(i).
Two commenters in particular objected to the path FTA has followed,
arguing that FTA should instead conduct a rulemaking proceeding under
the Administrative Procedure Act (APA), 5 U.S.C. 553, that would entail
a notice of proposed rulemaking and provide for public comment. FTA
finds this essentially semantical argument to be without merit. These
commenters identified no procedural defects in the process FTA has
followed, nor did they assert any prejudice to their ability to
meaningfully participate. In short, these commenters simply argue that
FTA's action is legally defective because it titled its November
notice, ``Notice of Proposed Recision * * *,'' instead of ``Notice of
Proposed Rulemaking.'' FTA believes that since it has followed the
notice and comment procedure of section 12(i), the labels used are
irrelevant. We note also that, although the APA requires prior notice
and comment, that requirement does not apply to a matter relating to a
Federal grant program. 5 U.S.C. 553(a)(2).
The objection of these commenters would have been more valid in the
context of the process used to adopt the current policies. In 1984 and
1986, FTA did not provide prior notice and opportunity for comment. If
these commenters believed the policies then issued in final form
without prior notice or comment to constitute a ``binding norm,'' they
could have gone to court asserting the consequent invalidity of the
1984/1986 guidance.
In the past, FTA has issued guidance in the form of statements of
policy and circulars. For example, FTA has issued circulars addressing
third-party procurement, cross-border leasing, and suspension and
debarment. Thus, FTA's 1984/1986 guidance was consistent with its
general practice.
Even if FTA wanted to use the label favored by these commenters--
thus agreeing that action to rescind the 1984/1986 guidance constitutes
rulemaking--it would have faced a certain awkwardness. Issuing a notice
of proposed rulemaking to propose the amendment of a rule generally
refers to something codified in the Code of Federal Regulations. Here,
no such target exists; accordingly, FTA judged that a proposal to
rescind the current nonregulatory guidance, especially when providing
prior notice and comment, would be appropriate and would adequately
serve the evident public interest in this issue.
2. Objections Based on the Record-
Two commenters argued that the Notice fails to state a rationale
for recision of the guidance and is thus legally defective. They cited
Motor Vehicle Manufacturers Association v. State Farm Mutual Insurance,
463 U.S. 29, 42 (1983), in which the Court held that ``an agency
changing its course by rescinding a rule is obligated to supply a
reasoned analysis for the change beyond that which may be required when
an agency acts in the first instance.'' They pointed out that FTA based
its proposal, in part, on its belief that some grant recipients have
found elements of the policy to be burdensome. They noted that in
response to a request for documents under the Freedom of Information
Act, FTA produced few such written grantee complaints. They concluded
that FTA has acted in an arbitrary and capricious manner, since it has
not supplied the ``reasoned analysis for the change'' required by State
Farm.
We note, however, that elsewhere in State Farm, which involved the
National Highway Traffic Safety Administration's (NHTSA) recision of a
passive restraint requirement for automobiles, the Court stated:
Recision of the passive restraint requirement would not be
arbitrary and capricious simply because there was no evidence in
direct support of the agency's conclusion. It is not infrequent that
the available data do not settle a regulatory issue, and the agency
must then exercise its judgment in moving from the facts and
probabilities on the record to a policy conclusion.
---Id. at 44.
The question, then, is not whether FTA has evidence in support of
its belief that grantees find the current policy burdensome. Indeed,
the Court invalidated NHTSA's finding that the passive restraint
requirement was unnecessary not because it lacked supporting evidence,
but because there was substantial evidence to contradict that finding.
Moreover, State Farm involved review of a final rule, and no court has
held that an agency proposal is somehow invalid for lack of a
sufficient record. FTA believes that the record it has developed in
this proceeding fully supports the action it is here announcing.
Here, FTA finds that the weight of the documentary evidence in its
records, including responses of grantees to complaints by private
operators, protests from labor unions representing transit workers, and
documented failures of specific privatization programs to realize cost
savings or improvements in service quality, strongly indicates that the
policy has imposed significant administrative and financial burdens on
recipients, while conferring little measurable benefit on public
transit providers and users. In addition, many comments to this docket
support FTA's judgment.
The current policy was not developed with the benefit of prior
notice and comment and is thus not due the same deference as a rule so
developed, as was the rule at issue in State Farm. In addition, the
effects of the current policy have not been the subject of scientific
study or extensive research. FTA must accordingly base its new approach
to the participation of private enterprise on its experience in
administering the current policy, on the insight developed in this
proceeding, and on recent legislation emphasizing greater local
decisionmaking such as the ISTEA amendment to section 8(i)(5) of the FT
Act. Of course, FTA has broad statutory authority in developing its
approach to implementing the private sector provisions of the FT Act,
``an administrative decision which is essentially an exercise of
discretion.'' South Suburban Safeway Lines, Inc. v. City of Chicago,
416 F.2d 535, 539 (7th Cir. 1969).
In a decision handed down a year after State Farm, the Supreme
Court emphasized the deference that must be given to an agency's
judgments within the agency's field of discretion and expertise. In
Chevron, the Court upheld an Environmental Protection Agency rule under
the Clean Air Act allowing states to treat all pollution-emitting
devices within the same industrial grouping as though they were encased
in a single ``bubble.'' Having determined that Congress had not
expressed any specific intention regarding the applicability of the
statutory provisions in question, the Court decided that the only
question on review was whether or not the agency's interpretation was a
``reasonable one'' in light of the environmental and policy objectives
of the statute. For a unanimous Court, Justice Stevens stated that
An agency to which Congress has delegated policymaking
responsibilities may, within the limits of that delegation, properly
rely upon the incumbent administration's views of wise policy to
inform its judgments. While agencies are not directly accountable to
the people, the Chief Executive is, and it is entirely appropriate
for this political branch of the Government to make such policy
choices--resolving the competing interests which Congress itself
either inadvertently did not resolve, or intentionally left to be
resolved by the agency charged with the administration of the
statute in light of everyday realities.
When a challenge to an agency construction of a statutory
provision, fairly conceptualized, really centers on the wisdom of
the agency's policy rather than whether it is a reasonable choice
within a gap left by Congress, the challenge must fail. In such a
case, federal judges--who have no constituency--have a duty to
respect legitimate policy choices made by those who do.
Id. at 865-866.
Citing Morton v. Ruiz, 415 U.S. 199, 231 (1974), the Court noted
that ``the power of an administrative agency to administer a
congressionally created * * * program necessarily requires the
formulation of policy and the making of rules to fill any gap left,
implicitly or explicitly, by Congress.'' Id. at 844.
In enacting the private enterprise provisions of the FT Act,
sections 3(e), 8(o), and 9(f), Congress did not indicate how they were
to be applied or implemented. Indeed, for the first 20 years, 1964-
1984, the private enterprise provisions were regarded as largely self
executing, as FTA issued neither formal nor informal guidance until
1984 and 1986. Instead, Congress left decisions concerning the
implementation of the provisions to the discretion of the FTA
Administrator. South Suburban at 539.
In the FT Act, Congress made it clear that decisions regarding mass
transportation services to be provided with Federal assistance are to
be made locally; indeed, section 2(b) states that one of the
fundamental purposes of the Act is
To provide assistance to State and local governments and their
instrumentalities in financing such systems, to be operated by
public or private mass transportation companies as determined by
local needs.
49 U.S.C. app. 1601(b)(3)(emphasis added).
Congress further declared that ``[i]t is the purpose of this Act to
create a partnership which permits the local community, through Federal
financial assistance, to exercise the initiative necessary to satisfy
its urban mass transportation requirements.'' 49 U.S.C. app.
1601(a)(emphasis added). This emphasis on local decisionmaking in
determining how best to serve the transportation needs of the local
area has been recognized by the courts:
The statutory scheme of (FTA) emphasizes the large role to be
played by local bodies responsible for mass transit * * *. This
reliance on the local group is consistent with the statute's
encouragement of local responsibility in urban mass transportation.
The statute does not -promote a procedure which leaves all decisions
with the Secretary (of Transportation), but rather emphasizes local
solutions to problems.
Pullman v. Volpe at 438-439.
This original congressional intent that local decisionmakers
determine the feasibility of private enterprise involvement has been
reiterated in a recent amendment to section 8(i)(5) of the FT Act made
by ISTEA, which prohibits FTA from withholding certification of a MPO
on the basis of its private enterprise policies or those of a
recipient. Section 8(i)(5) thus reinforces the fundamental statutory
principle on this issue: local decisionmakers should make the decision
as to whether transit service should be publicly or privately operated.
The recently issued joint FTA/Federal Highway Administration (FHWA)
statewide and metropolitan planning regulations (49 CFR part 613 and 23
CFR part 450) offer an appropriate vehicle for such local
decisionmaking. These regulations require a process for demonstrating
explicit consideration of and response to public views, including those
of private operators of transit service, during the planning and
program development process provided for in 23 CFR 450.212(a)(5) and
450.316(b)(1)(v). FTA believes that these processes will afford private
operators ample opportunity to express their views and comments on the
development of transit programs, while allowing local officials to
encourage the participation of private enterprise to the maximum extent
feasible.
Some commenters questioned the wisdom of FTA's proposed recision of
the current policy, stating that this action would ``cause irreparable
economic harm to the private surface transportation industry.'' They
indicated that recision would impede the statutory goal of developing
responsive and widely accessible transit services. One commenter cited
a report containing data from FTA's section 15 report showing that from
1984 to 1990, contracted revenue miles increased from 2.8 percent of
total mass transit revenue miles to 4.2 percent. However, a close
examination of the report shows both annual increases and decreases
during those years in contracted revenue miles, with no clear trend
apparent. The author notes that overall, ``the numbers indicate that
the extent of contracted bus service is relatively low and the trend
has been stable with only modest increases.'' He also acknowledges that
the report ``does not address performance areas such as safety,
reliability, and overall quality of service.'' The commenter observed
that contracted services, which he claims have been consistently shown
to produce cost savings for local transit agencies, are still a very
small share of the total market. The commenter claimed that ``the
situation would be much worse without the increase in transit services
brought about by the (current) FTA policies and guidance,'' but
provided no evidence for this assertion.
Other commenters cited reports detailing specific experiences of
transit authorities with privatization of bus routes, including one
FTA-funded demonstration project, that resulted in limited or no cost
savings and a decrease in service quality and reliability. They stated
that implementation of FTA's private sector requirements has often
placed an undue and unnecessary burden on staff because of a lack of
interest by private operators or their inability to provide the type of
services required.
Commenters opposed to the recision failed to provide substantive
evidence demonstrating that the current policy has resulted in a
significant increase in private sector involvement in the provision of
mass transit services or assisted in the development and improvement of
mass transit systems; accordingly, FTA cannot agree that recision will
cause financial harm to private operators or prevent the agency from
accomplishing its statutory mission. The evidence presented, even by
commenters opposed to the recision, indicates that the existing
requirements have been of limited effectiveness and questionable
utility in furthering private sector involvement in mass transit. FTA
therefore believes that its decision to allow local authorities to make
their own determinations concerning private enterprise involvement
without rigid Federal mandates is justified by the record before the
agency, reasonable in light of the objectives of the FT Act, and
responsive to the specific provisions of the statute.
Several commenters opposed the recision on the ground that it
represents an abrogation by FTA of its responsibility to enforce the
private sector provisions of the FT Act. They claimed that without the
current requirements, FTA will be unable to ensure the participation of
private enterprise ``to the maximum extent feasible,'' as required by
the statute.
FTA strongly disagrees. As indicated above, the available data do
not demonstrate that the current requirements are effective. In our
view, no commenter has established a causal relationship between the
implementation of the requirements and increased private enterprise
participation. On the other hand, public transit authorities have cited
specific examples of hardship or undue burdens caused by the imposition
of the existing guidance. FTA therefore believes that it is justified
in exercising its administrative and policymaking discretion by
implementing the private sector provisions in a manner consistent with
the statutory scheme and reinforced by ISTEA, i.e., through local
decisionmaking rather than through Federal mandates.
One commenter alleged that FTA did not open the comment period for
this proceeding prepared to evaluate fully and fairly all the comments
submitted, but rather with a fixed and predetermined purpose to
``paper'' its previously decided action. The commenter submitted as
evidence of FTA's prejudgment certain statements made by the
Administrator before a trade association group prior to commencement of
this proceeding, indicating that the agency found the current private
enterprise requirements inappropriate and burdensome and intended to
seek their recision. FTA finds nothing improper in the Administrator's
comments.
In Association of National Advertisers v. FTC, 627 F.2d 1151 (D.C.
Cir. 1979), cert. denied, 447 U.S. 921 (1980), the court ruled that
certain statements made by the Chairman of the Federal Trade Commission
prior to a rulemaking proceeding under the Federal Trade Commission
Improvements Act did not disqualify the Chairman from participation in
or invalidate the proceeding. The court emphasized that the Chairman's
presentation to a trade group of his views on issues later addressed in
the rulemaking was a valid exercise of his policymaking prerogatives:
``The view of a neutral and detached adjudicator is simply an
inapposite role model for an administrator who must translate broad
statutory commands into concrete social policies. If an agency official
is to be effective, he must engage in debate and discussion about the
policy matters before him.'' Id. at 1168-1169. See also, Lead
Industries Ass'n. v. EPA, 647 F.2d 1130, 1179 (D.C. Cir. 1980), cert.
denied, 449 U.S. 1042 (1980); and United Steelworkers of America v.
Marshall, 647 F.2d 1189, 1208-1210 (D.C. Cir. 1980), cert. denied, 453
U.S. 913 (1981).
Indeed, stated the court,
One cannot even conceive of an agency conducting a rulemaking
proceeding unless it had delved into the subject sufficiently to
become concerned that there was an evil or abuse that required
regulatory response. It would be the height of absurdity, even a
kind of abuse of administrative process, for an agency to embroil
interested parties in a rulemaking proceeding, without some initial
concern that there was an abuse that needed remedying, a concern
that would be set forth in the accompanying statement of the purpose
of the proposed rule.
Investigation and policy-making are integral to the total
function just as much as decisionmaking. It is appropriate and
indeed mandatory for agency heads and staff to maintain contacts
with industry and consumer groups, trade associations and press,
congressmen of various persuasions, and to present views in
interviews, speeches, meetings, conventions, and testimony * * *
Nat'l. Advertisers at 1176.
Accordingly, FTA finds that far from impairing the integrity of
this proceeding, the Administrator's remarks cited by the commenter
reflect the agency's valid concern with the current private enterprise
requirements.
B. Review of Existing Service
Circular 7005.1 provides that recipients should review each of
their routes every three years to determine whether that service could
be more effectively provided by private operators. FTA proposed to
eliminate this provision, since reports from grantees indicated that it
entails a significant administrative burden, especially for major
grantees with large and complex route structures, requiring the
devotion of substantial staff time to conducting reviews on an
arbitrary three-year cycle.
Five commenters, one representing private transit providers and
four representing public transit agencies, addressed this issue. The
commenter for the private sector termed an anomaly FTA's
characterization of three-year route review as an undue burden, since
the FT Act calls for Federal review of a grantee's planning processes
every three years. This comment confuses FTA's statutory duty to
conduct triennial reviews to ensure that transit programs comply with
Federal requirements with a nonstatutory, nonregulatory mandate that a
grantee review all routes within its system, even if use of a private
operator is not feasible on its face or if, in fact, no private
operator is available to provide service on these routes. This
commenter also indicated that three-year route review is necessary to
stimulate competition for transit services, but offered no evidence
that the provision has ever been successful in increasing competitive
bidding opportunities.
The four commenters on behalf of transit agencies supported
recision of the provision, agreeing that it requires an inordinate
amount of staff time while producing few corresponding benefits. They
emphasized that the decision of whether to put routes out to
competitive bid should be made by the local transit authority working
with the community and determined in the community's best interest. One
grantee stated that the provision was redundant, since all of its
service is already provided under contract with private operators.
Another agency objected to a Federal mandate, suggesting on-going
analyses of service to assess the cost-effectiveness and appropriate
service levels required to meet demand, with an evaluation of whether
service should be put to competitive bid based on its location, service
area, deadhead miles, ridership level, and relationship to other
services within the region. FTA agrees that use of such factors should
provide some grantees with a more rational basis for determining the
frequency of route reviews than the current mandatory three-year cycle,
which, according to the commenters, is often an empty and time-
consuming exercise.
FTA therefore concludes that the three-year reviews of service
routes provided by Circular 7005.1 should no longer be required.
Instead, FTA encourages grantees to include periodic review of route
service in the consultative process required under section 9(f) of the
FT Act (49 U.S.C. app. 1607a). Grantees should base the frequency of
these reviews on the factors cited above and any other factor a grantee
finds relevant to its local circumstances. FTA believes that route
evaluation using this process will relieve grantees of an undue
administrative burden, while resulting in competitive bidding decisions
that are based on appropriate and meaningful local factors.
C. Fully Allocated Cost Analysis
Circular 7005.1 provides that grantees should use a fully allocated
cost methodology when providing service for comparison with the costs
of potential private operators. The use of this accounting methodology
was intended to ensure that local decisionmakers have considered all
costs associated with the provision of service by a public agency.
In the Notice, FTA pointed out that the experience of many
recipients shows that in the context of their operations, the fully
allocated cost methodology is not always an appropriate gauge of the
true cost of providing a particular service; in some cases, it takes
into account costs already incurred or costs that remain fixed, such as
salaries of senior managers and other personnel who would be on the
recipient's payroll regardless of whether the service was operated by
the recipient. Similarly, FTA has interpreted the current policy to
require that recipients bid fully allocated costs when competing with
the private sector in response to a procurement solicited by a third
party. FTA now concludes that this requirement interferes with maximum
open competition by artificially restricting price competition between
recipients and private enterprise. Moreover, FTA's ``Fully Allocated
Cost Analysis Guidelines'' are set forth in a complex and lengthy
document that imposes a significant administrative burden, especially
on smaller recipients that lack adequate staff resources.
FTA proposed that in comparing public and private costs of
operating a particular service, recipients should be free to use any
reasonable accounting methodology. FTA noted that cost is but one
factor to be used in local decisionmaking and that maximum feasible
participation of private operators may depend on other factors, e.g.,
the ability to maintain quality service, operate in a coordinated
system, and provide an adequate measure of safety.
Several commenters representing private operators and the majority
of those representing public operators addressed this issue. Private
sector commenters, who overwhelmingly opposed the proposed recision,
recalled that the intent of the fully allocated cost methodology is to
measure the true cost of a transit service, taking into account the
direct cost of service as well as the portion of shared costs
attributable to the service in question. They argued that allowing
public operators to use marginal costs in comparative bid situations
results in an unfair comparison of costs, which in the majority of
situations will favor public carriers, and provides a distorted picture
of the real costs of public operators to taxpayers. They stated that
the fully allocated cost methodology is essential to evaluating the
efficiency and effectiveness of capital and operating dollars spent on
transit.
Public transit operators related, however, that practical
experience with the fully allocated cost methodology has produced less
than favorable results. Several pointed out that the FTA guidelines are
extremely complex and difficult to apply, even by trained accounting
staff. They noted that the fully allocated cost methodology is not a
normal analytical tool that has other applications. They stated that
the calculation of ``fully allocated cost'' has caused a great deal of
controversy due to differing opinions about which model truly reflects
the real world in which transit systems operate.
For instance, one grantee related that it spent $28,912 to have a
consultant develop a cost allocation model that was unusable in its
delivered form. Numerous additional staff hours were required before
the model was even marginally useful, and the model must be updated
every year through a cumbersome process. According to the grantee, the
result of this substantial investment has been more expenses due to
litigation brought against it by private providers whose opinion of how
a fully allocated cost model ought to work differed from the grantee's.
In the case of just one challenge by a private operator, the grantee
spent $19,125 to have a consultant audit cost comparisons. This figure
does not include legal fees associated with that complaint.
Some grantees complained that certain private operators have taken
advantage of the fully allocated cost requirement to thwart local
initiatives. One grantee, for example, stated that for 13 years, it
provided demand response service for 80 severely handicapped adults,
taking them from home to their worksite. A private carrier convinced
the mental health agency overseeing the program to put the service out
for bid. Because it was required to include all of its overhead costs
in the bid, the transit agency concluded that it could not compete with
the private operator and chose not to bid. The private operator then
withdrew its original bid and renegotiated a fee structure
approximately 50 percent higher than its original bid. The mental
health agency determined that it could not afford the service and
rejected the bid. As a result, a transit-dependent population, which
had for 13 years been served by the transit agency, is now without any
transit service.
One commenter for the private sector cited a report by a noted
economist who, on the basis of a study of the utilities industry,
advocates the use of a fully allocated cost methodology, since ``years
of experience in the electric power industry have shown that cost
analysis must be the same for both the buyer and the seller of
electricity.''
However, a commenter supporting the recision provided an analysis
of a specific FTA grantee privatization proposal by another economist,
who points out that the use of the FTA-mandated fully allocated cost
methodology often results in a skewed cost comparison. That methodology
requires accounting for all of the grantee's fixed costs, from
implementation of the Americans with Disabilities Act requirements to
police protection of transit property and system planning and
marketing. In contrast, private operators are not charged with
responsibility for managing a regional transportation network and
usually provide only a limited amount of bus service. They are thus
able to submit lower bids that do not necessarily reflect the actual
per-hour cost savings of privatizing service.
Many public transit agencies pointed out that even under the
current guidance, cost is only one factor that grantees may consider in
determining whether or not to privatize service. The participation of
private operators ``to the maximum extent feasible'' may also depend on
the quality, reliability, or the specialized nature of the service they
provide. Several grantees stated that, based on their own specific
local needs, even if the requirements to use the fully allocated cost
methodology and other elements of the current guidance are rescinded,
they will continue to seek proposals for transit service from private
providers.
Given the complexity and difficulty of applying the fully allocated
cost methodology and its dubious value as an analytical tool, FTA
concludes that grantees should no longer be required to use it when
comparing public and private costs of operating a particular service.
Instead, recipients should use any reasonable and generally accepted
accounting method they find appropriate under their local
circumstances. FTA believes that recision of this element will relieve
local officials of an undue administrative burden while increasing
their flexibility to determine whether service is ``to be operated by
public or private mass transportation companies as determined by local
needs,'' consistent with section 2(b) of the FT Act.
D. Local Institutional Barriers
The 1984 Policy Statement and the circulars provide that FTA will
not recognize, as acceptable limitations on private enterprise
participation, local institutional and policy constraints such as local
labor agreements or local laws or policy that call for direct operation
of mass transit service. In the Notice, FTA noted the view of many
grantees that this position unduly restricts the prerogatives of local
officials and impedes their ability to consider a broad range of
transit options. Moreover, the successful negotiation of collective
bargaining agreements often requires that transit officials be accorded
a maximum degree of bargaining flexibility.
Commenters representing the private sector objected to FTA's
proposed recision of this policy. One argued that this proposal, if
adopted, would further entrench institutional barriers, resulting in a
stifled marketplace, steadily declining ridership, and steadily
increasing costs for services. Another noted that Federal financial
assistance necessarily comes with overriding Federal conditions, such
as ADA mandates or environmental quality requirements. Generally
speaking, these commenters maintained that breaking down institutional
barriers is a necessary precondition to enabling competition to develop
new and more efficient means to deliver transit services.
Commenters for the public sector supported FTA's proposal to
recognize that there can be legitimate institutional barriers to
privatization. These commenters stated that FTA's use of the grant
program to override state constitutional prohibitions, state/local laws
and referenda, rulings of state regulatory bodies, and local collective
bargaining agreements has had the net effect of depriving local
transportation leaders of the flexibility to determine to what extent
privatization is in the best interest of their local community. Another
commenter asserted that this aspect of FTA's private enterprise
guidance, and its often vigorous implementation, has encouraged
grantees to renege on or contravene the terms of collective bargaining
agreements concluded under section 13(c) of the FT Act, which mandates
that grantees afford certain protections to transit workers.
One grantee noted that as a result of a recent State Supreme Court
ruling, the contracting out of bus routes is subject to negotiation and
binding arbitration with its labor union. Given that fixed route
service is at the core of the collective bargaining unit's work
function, the grantee stated, the union's concurrence in any decision
to privatize existing fixed route bus service is unlikely.
Another grantee stated that it was adversely affected by this
failure to recognize institutional barriers when, in 1989 and 1990, FTA
refused to make two section 9 grant awards because local requirements
in section 13(c) agreements required the successful proposer to take on
the employees of the outgoing private operators. FTA held that this
successor employer clause was unacceptable under the FT Act because the
provision limited the ability of proposers to submit competitive bids.
The issue was resolved only when Congress adopted special legislation
allowing the particular grantee's use of the successor clause.
Department of Transportation and Related Agencies Appropriations Act of
1991, Public Law 501-516, section 335, and Department of Transportation
and Related Agencies Appropriations Act of 1993, Public Law 102-388,
section 342. A review of FTA files reveals several similar instances in
which grantees were threatened with suspension or withdrawal of FTA
funds because of the existence of local institutional barriers to
private sector participation in their mass transit programs.
A commenter for the private sector noted that the congressional
action mentioned above was limited in applicability to one particular
grantee and argued that one can therefore infer congressional approval
of the overall existing policy. FTA finds that argument entirely
speculative. Congress has never specifically approved this or any other
aspect of the current private enterprise policy. Congress' intervention
in that case is instead consistent with its pattern since 1984 of
allowing FTA discretion in defining and implementing the private sector
provisions, but of curtailing the agency's action when it threatened
local officials' wide discretion in determining the feasibility of
using private operators. FTA believes, moreover, that in view of such
legal and collective bargaining impediments, the requirement that a
grantee ignore institutional barriers to private sector involvement is
not reasonable. It sometimes places grantees in the untenable position
of being required to violate State or local laws, court rulings, or the
terms of their own statutorily mandated collective bargaining
agreements in order to receive funds under the FT Act, which states
that such funds may be used to provide service ``to be operated by
public or private mass transportation companies, as determined by local
needs.'' 49 U.S.C. app. 1601(b)(3). Accordingly, this aspect of the
guidance is an unacceptable restraint on a grantee's statutory
responsibility to determine what level of private sector involvement is
feasible based on particular local factors. FTA further notes that,
like other elements of the current policy, the institutional barriers
provision does not rest on specific statutory authority, but instead
was adopted for policy reasons, without prior notice and comment.
One commenter states that FTA's proposed acceptance of
institutional barriers to private sector involvement is inconsistent
with Executive Order 12893 (January 26, 1994), which provides that
``agencies should work with State and local enities to minimize legal
and regulatory barriers to private sector participation in the
provision of infrastructure facilities and services.'' This commenter
maintains that recision would undermine this policy. The Executive
Order makes it clear, however, that encouragement of private sector
participation, like the other principles of sound infrastructure
management, is to be implemented through efficient State and local
programs. Accordingly, the Executive Order directs that Federal
agencies work with State and local entities to minimize such
institutional barriers, not to mandate that local officials overlook
them. Indeed, by stating that institutional barriers should be
minimized rather than ignored, the Executive Order recognizes that such
barriers exist and must be taken into account by local officials in
determining the feasibility of private sector involvement. FTA finds,
therefore, that recision of its current guidance concerning
institutional barriers to privatization is fully consistent with
Executive Order 12893.
FTA finds that no data demonstrate that the current policy has
resulted in increased private sector involvement and that the current
policy has curbed the ability of local communities to determine which
transit options best meet the needs of their community. FTA believes
that this recision of the previous policy will restore to local transit
officials the flexibility they need to determine to what extent
privatization is feasible without the imposition of a Federal mandate
that has often disrupted the grantmaking process and jeopardized the
balance between Federal and State/local requirements.
E. Appeal Process
The circulars provide that both recipients and MPOs should develop
a process for the resolution of disputes with private operators.
Private operators may appeal to FTA if they fail to resolve their
disputes at the local level. Pursuant to this provision, FTA has
rendered administrative decisions following an investigation of
disputes. In certain of these decisions under the current policy, FTA
has indicated that it would withhold Federal funds from grant
recipients that failed to conform to an FTA determination. In the
Notice, FTA stated that since it will be conducting regular reviews of
grantees' compliance with the planning requirements, a formal appeal
process leading to FTA does not appear necessary.
Commenters for the private sector supported a continued role by FTA
in the private sector complaint process. One commenter stated that by
proposing to do away with the appeal process, FTA is showing that it
will not enforce the statutory requirements of the FT Act. Another
noted that of the 12 private enterprise complaints brought to FTA since
the current private sector policy was adopted, eight were dismissed
outright because the grantee had committed no procedural error, two
resulted in remands to the grantee, and in all but one other case, the
grantee's decision was upheld. This, argues the commenter, ``is not a
record of heavy-handed federal interference in local decisionmaking.''
FTA agrees that the appeal process has not played a significant
role in furthering the private enterprise provisions of the FT Act. The
figures cited by this commenter reveal that the process has in fact
resulted in lengthy and cumbersome delays (FTA has taken up to two
years to decide certain matters) and has had little impact on the local
decisionmaking process or on the level of private sector involvement. A
review of FTA records indicates that in the one case in which a grantee
was cited for a violation of the private enterprise provisions and
ordered to reopen a certain route to private sector bids, no private
operator submitted a bid to provide service on the route.
FTA therefore concludes that the appeal process has been a
fruitless exercise. Periodic FTA reviews should ensure that grantees
are in compliance with the planning requirements for local
participation without needless Federal intrusion and additional
paperwork and administrative burdens on both grantees and FTA. FTA will
therefore eliminate the appeal to FTA. However, FTA notes that the
agency may investigate and take action in the case of any failure by a
grantee or MPO to follow Federal requirements. Since private enterprise
participation in the planning process is mandated by ISTEA and the new
metropolitan and statewide planning regulations (49 CFR part 613 and 23
CFR part 450), FTA will monitor and investigate any apparent failures
by grantees and MPOs to follow the procedures set out in their own
local planning process.
V. FTA's Final Action
In keeping with congressional intent that FTA carefully respect the
prerogatives of local decisionmakers with regard to the participation
of private enterprise in the provision of mass transit, FTA is
rescinding its 1984 Policy Statement (49 FR 41310, October 22, 1984),
Circular 7005.1, Chapter X of Circular 9040.1C, and Chapter IV of
Circular 9070.1C. The recision of this guidance will become effective
thirty days after publication of this notice.
FTA's recision of the current guidance is based on its judgment
that the requirements it imposes, while ineffective, have unduly
infringed on the decisionmaking authority that local officials are
entitled to exercise under the FT Act. FTA believes that this recision
is within the broad limits of its authority under the FT Act, that it
is, in fact, ``an administrative decision which is essentially an
exercise of discretion.'' South Suburban at 539. FTA's action in this
matter represents a policy choice, one it believes to be reasonable and
valid in light of its review of the agency's experience in
administering the current provisions over the past ten years and fully
within the limits of its policymaking discretion. The Supreme Court has
affirmed the authority of an agency to make policy choices within the
scope of its statutory delegation. Chevron at 865-866.
In rescinding these requirements, we emphasize that the agency
continues to support the participation of private enterprise; indeed,
we believe that the applicable requirements--the section 9(f) process
and the new section 8 planning requirements--represent a comprehensive
and thorough approach to the consideration of private enterprise at the
local level, consistent with requirements of the FT Act.
We first stress the continuing significance of the section 9(f)
process as described in FTA Circular 9030.1A, during which key
decisions regarding private enterprise participation are made. Pursuant
to chapter IV of that Circular, each recipient:
Makes available to the public information concerning the
amount of funds available under section 9 and the program of projects
that the recipient proposes to undertake with such funds;
Develops a proposed program of projects concerning
activities to be funded in consultation with interested parties,
including private transportation providers;
Publishes the proposed program of projects in sufficient
detail and in such a manner as to afford affected citizens, private
transportation providers, and as appropriate, local elected officials
an opportunity to examine its content and to submit comments on the
proposed program of projects and budget and on the performance of the
recipient; and
Affords an opportunity for a public hearing to obtain the
views of citizens on the proposed program of projects.
The Circular further provides that in preparing the final program
of projects to be submitted to the FTA, the recipient consider the
views and comments of private transportation providers and, if
appropriate, modify the proposed program of projects and budget.
The second leg of the agency's implementation of the private
enterprise provisions involves the planning regulations recently issued
jointly by FTA and the Federal Highway Administration (FHWA). Sections
1024, 1025, and 3012 of ISTEA amended the FT Act by revising section 8
to require a continuing, comprehensive, and coordinated transportation
planning process in metropolitan areas and States. ISTEA makes
fundamental changes to the traditional planning and programming
criteria for project selection in metropolitan areas. There is
heightened emphasis on environmental and intermodal values, financial
constraint in plans and transportation improvement programs (TIPs), and
greater public participation in local decisionmaking. Moreover, the
rules are designed to facilitate State and local compliance with the
Clean Air Act conformity requirements for nonattainment areas through
the development and adoption of the plans and TIPs.
In addition, the statewide planning regulation requires that States
consider all modes of transportation--surface, air, water--in
developing plans and programs that can serve all areas of a State
efficiently and effectively. Implementing ISTEA, the rule calls for
public participation in statewide planning and programming and for
State agencies to more closely coordinate their efforts with all other
interested parties, public and private.
Thus, with FHWA, FTA has amended the metropolitan planning
regulations at 23 CFR part 450 and has issued new statewide planning
regulations to carry out the directives of ISTEA. These rules apply to
all MPOs serving urbanized areas with a population of at least 50,000,
State transportation agencies, and publicly operated transit agencies.
The rules provide for the development of transportation plans and TIPs
and for the selection of projects to be funded under title 23 U.S.C.
and the FT Act in metropolitan areas and States. Because of the
significance of these new rules, FTA and FHWA are undertaking a
comprehensive outreach effort to explain the new requirements to
States, metropolitan planning organizations, transit operators, and
private entities.
Sections 450.316(b) and 450.212 of the metropolitan planning rule
set out detailed and extensive requirements regarding public
participation in the development of transportation plans by statewide
agencies and MPOs. These provisions require that private operators be
provided with timely information about transportation issues and an
opportunity to comment throughout the transportation planning process.
They also require that interested parties be provided with access to
technical and policy information used in the development of plans and
TIPs, as well as open public meetings where matters related to transit
programs are being considered.
In short, under this framework the private enterprise provisions
now involve a dual effort: first, at the local transit system level by
means of the section 9(f) consultative process discussed above, and
second, at the expanded metropolitan planning level, which through the
ISTEA and its implementing regulations has become the critical point
where transportation decisions will be made.
FTA believes that the section 9(f) and section 8 requirements will
provide an adequate basis for the finding required under section 3(e)
before FTA may provide financial assistance to a public body for the
operation of service that competes with or supplements service provided
by an existing mass transportation company, i.e., that the program of
projects required to be developed by MPOs by section 8 provides for the
participation of private enterprise to the maximum extent feasible.-
FTA's findings will be based on such criteria as the efforts a
grantee or MPO has made to notify and consult with the private sector
in its section 8 or section 9(f) planning process; the effect of public
mass transit service proposals on existing private mass transit
operators; and any other steps or processes the grantee or MPO has
taken to encourage private sector involvement. FTA believes that such
factors will allow it to determine whether the program developed under
section 8 involves the private sector ``to the maximum extent
feasible,'' given particular local circumstances, both in connection
with grant making sections 3, 9 and 18.
Sections 450.316(b) and 450.212 provide that before submitting a
proposed program of projects to FTA for certification, a State or MPO
must assure that citizens, affected public agencies, representatives of
transportation agency employees, private providers of transportation
and other interested parties have been given full and open access to
the decisionmaking process. In ISTEA Congress signaled its intent that
FTA should defer to the local decisionmaking process with regard to the
participation of private enterprise by adding the following to section
8(i)(5):
The Secretary shall not withhold certification under this
section based upon the policies and criteria established by a
metropolitan planning organization or transit grant recipient for
determining the feasibility of private enterprise participation in
accordance with section 8(o) of the Federal Transit Act.
Accordingly, in making a finding under section 3(e) when making a
specific grant, FTA will rely on its previous certification of the
transportation planning process developed under section 8, unless it
has noted deficiencies in that process related to private enterprise
participation. In addition, FTA will conduct periodic Federal planning
management reviews to ensure that all the planning requirements of
section 8 are being met by recipients of FTA funds. Furthermore, FTA
will monitor compliance with the private enterprise provisions of the
FT Act as part of the annual audits and triennial reviews mandated by
section 9.
Dated: April 21, 1994.
Gordon J. Linton,
Administrator.
[FR Doc. 94-10057 Filed 4-25-94; 8:45 am]
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